UMAC Unusual Machines Inc

Table of Contents

 

As filed with the Securities and Exchange Commission on September 11, 2024

 

Registration No. 333-_____

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

 

Unusual Machines, Inc.

(Exact name of Registrant as specified in its charter)

 

Nevada		3663		66-0927642
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

4677 L B McLeod Rd

Suite J

Orlando, FL 32811

(855) 921-4600

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

Allan Evans
Chief Executive Officer
Unusual Machines, Inc.

4677 L B McLeod Rd

Suite J

Orlando, FL 32811

(855) 921-4600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Michael Harris, Esq.
Edward Schauder, Esq.
Nason, Yeager, Gerson, Harris & Fumero, P.A.
3001 PGA Boulevard, Suite 305
Palm Beach Gardens, Florida 33410
(561) 686-3307

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act of 1934.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

The information in this Prospectus is not complete and may be changed. The Selling Stockholders may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is declared effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

 

 

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 2024

 

UNUSUAL MACHINES, INC.

PROSPECTUS

 

7,080,038 Shares of Common stock

 

 

On August 21, 2024, Unusual Machines, Inc. (“Unusual Machines” or the “Company”) entered into two Exchange Agreements with two third-party accredited investors (each, a “Principal Selling Stockholder” and together the “Principal Seller Stockholders”), under which each Principal Selling Stockholders exchanged their respective 8% Promissory Notes (the “Old Notes”) for new 4% Convertible Promissory Notes (the “New Notes”), with an aggregate principal amount of $3,000,000. The New Notes reduced the outstanding principal amount previously owed by the Company by an aggregate of $1,000,000.

 

Pursuant to the terms of the Exchange Agreements, each Principal Selling Stockholder exchanged its Old Note for (i) the New Note, (ii) 105 shares of the newly-designated Series C Preferred Stock (the “Series C”), based on an exchange price of $1.59 per common share into which the Series C Preferred Stock is convertible into (the share price at the close of the market on August 20, 2024). The 105 Series C is convertible into 315,000 shares of the Company’s common stock, and (iii) five-year warrants exercisable for 315,000 shares of the Company’s common stock with an exercise price of $1.99 per share, subject to adjustments as set forth in the warrants (the “Warrants”).

 

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. 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”). In connection with the consummation of the IPO, we issued our underwriter, Dominari Securities, LLC (the “Representative Selling Stockholder”) a warrant to purchase 62,500 shares of our common stock (the “Representative Warrant”).

 

This Prospectus relates to the offering and resale by the Principal Selling Stockholders, of 7,017,538 shares of our common stock (the “Principal Selling Stockholder Shares”) comprised of (i) 630,000 shares issuable upon the full conversion of the Series C, (ii) 630,000 shares issuable upon the full exercise of the Warrants, (iii) 1,507,538 shares issuable upon the full conversion of the New Notes, and (iv) 4,250,000 shares issuable upon the full conversion of the Company’s Series A Convertible Preferred Stock that is also held by the Principal Selling Stockholders that they acquired from Red Cat on July 22, 2024 in a private transaction. This Prospectus also relates to the offering and resale by the Representative Selling Stockholder of 62,500 shares (the “Representative Shares”) of our common stock issuable upon the exercise of the Representative Warrant.

 

We are obligated to register the Principal Selling Stockholders Shares pursuant to a Registration Rights Agreement that we entered into with each Principal Stockholder on August 21, 2024. Pursuant to an Underwriting Agreement entered into by the Company and the Representative Stockholder on February 13, 2024, we are obligated to register the Representative Shares. In this Prospectus we refer to the Principal Selling Stockholders and the Representative Selling Stockholders collectively as the “Selling Stockholders” of up to 7,080,038 shares of our common stock (the “Shares”). The Principal Selling Stockholder Shares and the Representative Shares are also collectively referred to herein as the “Securities.”

 

The Company is not selling any securities in this offering, and therefore will not receive any proceeds from the sale of the Securities by the Selling Stockholders.

 

We have agreed to pay the expenses of the registration of the Shares offered and sold under the Registration Statement by the Selling Stockholders. Each Selling Stockholder will pay any commissions or discounts applicable to the Shares it sells.

 

Our common stock is traded on the New York Stock Exchange American (“NYSE American”) under the symbol “UMAC.” On September 10, 2024, the last reported sale price of our common stock on the NYSE American was $1.67.

 

Investing in our securities involves various risks. See “Risk Factors” beginning on page 6 of this Prospectus for a discussion of information that should be considered in connection with an investment in our securities.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this Prospectus is ___________ __, 2024

 

 

 

 

Table of Contents

 

	Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	ii
PROSPECTUS SUMMARY	1
THE OFFERING	3
RISK FACTORS	6
USE OF PROCEEDS	35
DIVIDEND POLICY	35
DETERMINATION OF OFFERING PRICE	35
CAPITALIZATION	35
SELLING STOCKHOLDERS	36
PLAN OF DISTRIBUTION	38
BUSINESS	40
PROPERTIES	44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	45
MANAGEMENT	53
CORPORATE GOVERNANCE	55
EXECUTIVE COMPENSATION	59
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	63
RELATED PARTY TRANSACTIONS	63
PRINCIPAL STOCKHOLDERS	65
DESCRIPTION OF OUR SECURITIES	66
LEGAL MATTERS	68
EXPERTS	68
WHERE YOU CAN FIND MORE INFORMATION	68
INDEX TO FINANCIAL STATEMENTS	69

 

You should rely only on information contained in this Prospectus. We have not authorized anyone to provide you with information that is different from that contained in this Prospectus. The Selling Stockholders are not offering to sell or seeking offers to buy securities in jurisdictions where offers and sales are not permitted. We are responsible for updating this Prospectus to ensure that all material information is included and will update this Prospectus to the extent required by law.

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Prospectus, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Prospectus are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology.

 

Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

	·	The market and sales success of our existing and any new products;
	·	our ability to raise capital when needed and on acceptable terms;
	·	the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months;
	·	our ability to make acquisitions and integrate acquired businesses into our company;
	·	our limited operating history;
	·	our ability to attract and retain qualified employees and key personnel;
	·	our ability to manage our rapid growth and organizational change effectively;
	·	changes in the political and regulatory environment and in business and economic conditions in the United States and globally;
	·	geopolitical conflicts in Ukraine and Israel;
	·	our ability to develop and maintain our brand cost-effectively; and
	·	the other factors set forth in “Risk Factors” beginning on page 6 of this Prospectus.

 

You should read this Prospectus and the documents we have filed as exhibits to the Registration Statement, of which this Prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. You should not assume that the information contained in this Prospectus or any prospectus supplement is accurate as of any date other than the date on the front cover of those documents.

 

Risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from those expressed or implied in our written or oral forward-looking statements may be found in this Prospectus under the heading “Risk Factors.”

 

Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this Prospectus particularly our forward-looking statements, by these cautionary statements.

 

 

 

 

PROSPECTUS SUMMARY

 

Background of Unusual Machines

 

Unusual Machines is a Nevada corporation originally incorporated in Puerto Rico 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 IPO of 1,250,000 shares of common stock at a public offering price of $4.00 per share. The shares of common stock are traded on the NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark and Rotor Riot from Red Cat.

 

The Business Combination & Business Overview

 

Under the terms of Share Purchase Agreement with Red Cat, (the “Purchase Agreement”), 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 $2.0 million promissory note (the “Original 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. On July 22, 2024, the Company finalized the working capital adjustment as stipulated in the Purchase Agreement, which resulted in an increase in the overall purchase price by an additional $2.0 million. The Company agreed to increase the principal amount of the Original Note for the working capital adjustment, which increased the total Note Payable to $4.0 million.

 

Fat Shark is a leader in designing and manufacturing ultra-low latency first-person-view (“FPV”) video goggles for drone pilots, which it markets towards retail distributors including Rotor Riot.

 

Rotor Riot is a rapidly growing e-commerce marketplace, backed by the largest community of FPV drone pilots in the world and retails FPV drones and goggles, parts, tools, drone components, and accessories manufactured by third-parties.

 

Unusual Machines specializes in the production and sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a strong curated retail channel in the FPV drone market segment. Unusual Machines intends to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for customers that require a domestic supply chain including the United States Department of Defense.

 

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 $54.6 billion by 2030, with the commercial market growing at a 7.7% 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 vertically integrate the production of drone parts. The Company believes that very promising, private companies (such as those the company will likely target) 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.

 

 

 

 

First Person View (FPV) Market Segment

 

Fat Shark and Rotor Riot principally operate in the FPV segment of the drone industry. This segment focuses on drones piloted with wearable display devices. These are head mounted displays (“HMDs”) or goggles for drone pilots. These goggles give pilots FPV perspective to control their drone in flight. 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 into specially designed goggles worn by the pilot. The image is transmitted via radio (traditionally analog but increasingly digital) to the pilot. The drone remote control unit, the drone, and the FPV goggles 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 newer market segment characterized by the use cases emerging in the Ukrainian conflict.

 

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 business from just B2C sales to B2B sales of drone components.

 

On August 7, 2024, Unusual Machines became listed on the United States Department of Defense’s Blue UAS Framework for drone parts. Following that key achievement, Unusual Machines launched commercial sales of its Brave F7 Flight Controller which was the first flight controller for first-person view drones to be listed. As of September 9, 2024, we had purchase orders for approximately 7,000 Brave 7s including 6,600 from an overseas customer.

 

Unusual Machine’s business strategy includes (i) increasing its overall customer base with its products and rapid adoption; (ii) investing in new products and IP, starting with the Fat Shark and Rotor Riot acquisitions that were completed with our IPO, (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, (iv) enhancing the company’s products to improve the integration of third-party solutions, and (v) seeking strategic partnerships and sponsorships with companies that want access to the FPV community.

 

For more information, see “Business” beginning on page 40 of this Prospectus.

 

 

 

 

 

 

 

 

THE OFFERING

 

Issuer		Unusual Machines, Inc., a Nevada corporation
Securities offered by the Selling Stockholders		A total of 7,080,038 shares of our common stock. This includes 7,017,538 shares of common stock which we refer to herein as “Principal Selling Stockholders Shares,” and (ii) 62,500 shares of common stock which we refer to herein as “Representative Shares”. See “Selling Stockholders” beginning on page 36 for more information.
Total common stock outstanding after the resale offering(1)		13,265,021 shares of common stock.
Use of Proceeds		We will not receive any proceeds from the sale of the Securities covered by this Prospectus.
Risk Factors		Investing in our common stock involves a high degree of risk. For a discussion of factors to consider before deciding to invest in our common stock, you should carefully review and consider the “Risk Factors” beginning on page 6 of this Prospectus.

  

(1)

The number of shares of our common stock to be outstanding after this resale offering assumes (notwithstanding any beneficial ownership limitations) that:  (i) 630,000 Shares are issued upon the full conversion of the Series C, (ii) 630,000 Shares  are issued upon the full exercise of the Warrants, (iii) 1,507,538 Shares are issued upon the full exercise of the New Notes to the extent that the Principal Selling Stockholder exercise their right to voluntarily convert their New Notes,  (iv) 4,250,000 Shares are issued  upon the full conversion of the Company’s Series A Convertible Preferred Stock, and  (v) 62,500 Shares are issued upon the exercise in full of the Representative Warrant. Excludes the following:

 

	·	250,000 shares of our common stock issuable upon conversion of outstanding Series B preferred stock (the “Series B”); and
	·	Future equity grants to our officers and independent directors. See “Executive Compensation”.

 

Summary Risk Factors

 

Our business and an investment in our common stock are subject to numerous risks and uncertainties, including those highlighted in this “Risk Factors” section below. Some of these risks include:

 

Risks Related to our Business and Financial Condition

 

	·	Because the Company had a very limited operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in us is highly speculative.
	·	Fat Shark and Rotor Riot incurred net losses since their acquisition by Red Cat and may fail to achieve or maintain profitability.
	·	The Company may be unable to repay its indebtedness.
	·	We may begin to amortize our intangibles, which will result in a non-cash charge going forward and until we do a valuation, the amount is uncertain and the future charge may or may not be material.
	·	If the proceeds of the prior IPO are insufficient to meet our working capital needs, and if we are then not able to obtain sufficient capital, we may be forced to limit the scope of our operations.
	·	If we lose key personnel, it may adversely affect our business.
	·	Conflicts of interest involving our board of directors (“Board”) and other parties could materially harm our business.
	·	If we are unable to attract new customers or maintain and grow Fat Shark and Rotor Riot existing customer relationships in a manner that is cost-effective, our revenue growth could be slower than we expect and our business may be harmed.
	·	Future operating results and key metrics may fluctuate significantly from period-to-period due to a wide range of factors, which makes our future results difficult to predict.
	·	Any failures of or damage to, attack on or unauthorized access to our information technology systems or facilities or disruptions to our continuous operations, including the systems, facilities or operations of third parties with which we do business, such as resulting from cyber-attacks, could result in significant costs, reputational damage and limits on our ability to conduct our business activities.
	·	Our failure to effectively manage our growth could harm our business.
	·	If we are unable to attract, integrate and retain additional qualified personnel, including top technical talent, our business could be adversely affected.

 

 

 

 

Risks Related to Our Sale of Drone-Related Products and Operations in the Drone Industry

 

	·	We operate in an emerging and rapidly evolving industry which makes it difficult to evaluate our business and future prospects.
	·	We face competition from larger companies that have substantially greater resources which challenges our ability to establish market share, grow the business, and reach profitability.
	·	The development and manufacture of FPV goggles encompasses several complex processes and several steps of our production processes are dependent upon third party vendors, supply chains, the availability of printed circuit boards (“PCBs”), optics, and certain chips. Any change in availability of these components, manufacturing or design partners could result in delivery interruptions, which could adversely affect our operating results.
	·	Several steps of our production processes are dependent upon certain critical machines and tools which could result in delivery interruptions and foregone revenues.
	·	We may not be able to procure necessary key components for our products or may produce or purchase too much inventory.
	·	We may not be able to keep pace with technological advances; and we depend on advances in technology by other companies.
	·	Lack of long-term purchase orders and commitments from customers may lead to a rapid decline in sales.
	·	Our products require ongoing research and development and may experience technical problems or delays, which could lead the business to fail.
	·	If we are involved in litigation, it could harm our business or otherwise distract management.
	·	Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation, including due to our high reliance on online and social media platforms, would likely adversely affect our business and operating results.
	·	Future growth and ability to generate and grow revenue and achieve or maintain profitability may be adversely affected if our marketing initiatives are not effective in generating sufficient levels of brand awareness.
	·	Future acquisitions could disrupt our business and adversely affect our operating results, financial condition and cash flows.
	·	If we incur any future impairment in the carrying value of our goodwill asset or write-off of our general intangibles, it could depress our stock price.
	·	Product quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.

 

Risks Related to Intellectual Property Protection

 

	·	If third-party intellectual property infringement claims are asserted against us, it may prevent or delay our product development and commercialization efforts and have a material adverse effect on our business and future prospects.
	·	We may depend on intellectual property rights including patent rights that have not yet been and may not be obtained by us, and our intellectual property rights and proprietary rights may not adequately protect our products.
	·	If we lose our rights under our third-party technology licenses, our operations could be adversely affected.
	·	Significant inflation could adversely affect our business and financial results.

 

Risks Related to Government Regulation of Our Operations and Industry

 

	·	Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies by us, our customers, or others who use our products, or limitations put on the use of unmanned aircraft systems, or “UAS,” in response to public privacy or safety concerns, may prevent us from expanding the sales of our drone solutions in the United States.
	·	Rising threats of international tariffs, including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.
	·	We are or may become subject to governmental export and import controls, economic sanctions and other laws and regulations that could subject us to liability and impair our ability to compete in international markets.
	·	If the courts uphold the SEC’s climate change rules, we will incur additional costs which may materially and adversely affect our operating results and financial condition.
	·	If we fail to comply with U.S. and foreign laws related to privacy, data security, and data protection, it could adversely affect our operating results and financial condition.

 

 

 

Risks Related to Our Common Stock

 

	·	Because the Purchase Price for Fat Shark and Rotor Riot exceeded an independent valuation that Red Cat received for the enterprise value of the target companies, you may lose all or part of your investment.
	·	The market price of our shares of common stock is subject to fluctuation.
	·	Our stock price may be and has been volatile, which could result in substantial losses to investors.
	·	An active trading market for our common stock may not develop.
	·	Because our sole remedy under the Purchase Agreement in the event of any breaches of representations and warranties is to cancel some or all of the 125,000 shares of our common stock held by Mr. Jeffrey Thompson, the value of such shares may be an insufficient remedy.
	·	We are incurring significant additional costs as a result of being a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.
	·	Our failure to maintain effective disclosure controls and internal controls over financial reporting could have an adverse impact on us.
	·	Because our common stock is listed on NYSE American, we are subject to additional regulations and continued requirements.
	·	Our Board may authorize and issue shares of new classes of stock that could be superior to or adversely affect current holders of our common stock.
	·	If we raise capital in the future, it may dilute our existing stockholders’ ownership and/or have other adverse effects on us, our securities or our operations.
	·	Common stock eligible for future sale may adversely affect the market price.
	·	If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our common stock, the market price for our common stock and trading volume could decline.
	·	We and our investors face the implications of our status as an emerging growth company under the federal securities laws and regulations.
	·	We have never paid dividends and we do not expect to pay dividends for the foreseeable future.
	·	Our Articles of Incorporation contains certain provisions which may result in difficulty in bringing stockholder actions against or on behalf of the Company or its affiliates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Investors should carefully consider the following Risk Factors before deciding whether to invest in the Company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of our securities could decline.

 

Risks Related to our Business and Financial Condition

 

Because the Company had a very limited operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in us is highly speculative.

 

We completed our acquisitions of Fat Shark and Rotor Riot simultaneously with the closing of our IPO in February 2024. Both companies, prior to the completion of the acquisitions, were operated by Red Cat since their acquisition by Red Cat in 2020. While the management of each company is expected to remain, no Red Cat officer, other than Dr. Allan Evans who became our Chief Executive Officer in December 2023, is joining us. Our management team will be headed by our executive officers including Andrew Camden, our new Chief Operating Officer who joined us from Rotor Riot together with individuals from Fat Shark and Rotor Riot, and our operations going forward are therefore subject to ordinary integration risks where two companies and two cultures are combined. Further, we may not accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us, and, therefore, we may fail to make accurate financial forecasts. Our current and future expense levels are based largely on our budgeted plans and estimates of future revenue. Similarly, if we are able to raise additional funds in future financing transactions, we may use a portion of those proceeds to acquire other operating businesses in our industry or in related industries to facilitate strategic growth and build our market presence and revenue potential. If we do acquire one or more businesses in the future, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which could then force us to curtail our business operations or plan of operations or acquisitions.

 

Additionally, our current revenue projections are based largely on customer and partner relationships and contracts that are still the subject of negotiation, the results of which remain uncertain. In addition to having no experience as a public company, our new operations will be subject to the risk of a lack of diversification, as today we are limited to drone products designed for consumer or recreational use rather than military or industrial applications. In the future, we may diversify our products beyond the consumer and recreational use but the timeline and success of those efforts are uncertain. Our new subsidiaries will lack the support they previously had in terms of their product development and production efforts, as they can no longer access the more vertically integrated resources that were available to them at Red Cat. The risk of this occurring will intensify if a recession occurs in the U.S. or global economy, as our future business is aimed at consumers whose spending patterns will likely decline as a result of inflation and the prospect of an economic downturn.

 

Fat Shark and Rotor Riot must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages of operations, integration and growth process. Due to these contingencies, we may be unable to achieve or maintain profitability in some or all of our business segments in a timely manner or at all.

 

Fat Shark and Rotor Riot have incurred net losses since their acquisition by Red Cat and may fail to achieve or maintain profitability.

 

Since their acquisition by Red Cat in 2020, Fat Shark and Rotor Riot incurred net losses for each reported quarter with the exception of Fat Shark which reported a small net income in the quarter ended July 31, 2022. Further, Unusual Machines was formed in July 2019 and has not conducted any active business. Following our acquisition of Fat Shark and Rotor Riot, their operations constitutes our business. Further, Fat Shark had lower revenues in fiscal year 2023 compared to fiscal year 2022, and Rotor Riot had higher net losses in fiscal year 2023 compared to fiscal year 2022, and generally experiences fluctuating revenue as a result of recurring seasonal sales cycles. We will need to generate higher revenues and control operating costs in order to attain profitability. There can be no assurances that we will be able to do so or to reach profitability.

 

 

 

 

We expect to continue to incur losses for the foreseeable future and we expect costs to increase in future periods as we expend substantial financial and other resources on, among other things:

 

	·	researching, developing, producing and distributing new products;
	·	sales and marketing, which will require time before these investments generate sales results;
	·	general and administrative expenditures, including significantly increasing expenses in accounting and legal fees related to the increase in the sophistication and resources required for public company compliance and other needs arising from the growth and maturity of the Company;
	·	competing with other companies that are currently in, or may in the future enter, the markets in which we compete;
	·	maintaining high customer satisfaction and ensuring product and service quality;
	·	developing our indirect sales channels and strategic partner network;
	·	maintaining the quality of our technology infrastructure;
	·	establishing and increasing market awareness of our Company and enhancing our brand;
	·	maintaining compliance with applicable governmental regulations and other legal obligations, including those related to intellectual property and drones; and
	·	attracting and retaining top talent in a competitive labor market.

 

These expenditures may not result in additional revenue or the growth of our business in the manner or to the extent anticipated or intended or at all. If we fail to grow revenue or to achieve or sustain profitability, our business, financial condition, results of operations, and prospects could be materially adversely affected and the market price of our common stock could be adversely affected.

 

The Company may be unable to repay its indebtedness

 

On August 21, 2024, the Company entered into two Exchange Agreements with the Principal Selling Stockholders, under which each Principal Selling Stockholder exchanged their respective Old Notes for the New Notes, with an aggregate principal amount of $3,000,000. Each New Note bears interest at 4% annually with interest payable monthly and the principal due on November 30, 2025. In the event of a qualified financing of debt or equity where the Company receives net proceeds of $5.0 million in one or more related transactions, the Investors may require the Company to repay the New Notes with accrued interest thereon in cash. The New Notes are convertible at any time by the holder into common stock at $1.99 per share (125% of the closing bid price on August 20, 2024). Upon an event of default, the Investors may require the Company to convert the New Notes into shares of our common stock, subject to beneficial ownership limitations set forth in the New Notes, at a conversion price equal to the 10% discount of the average three day VWAP, as defined in the New Notes, prior to the conversion date.

 

In order to repay the New Notes we will need to expend proceeds, obtain additional debt financing, or refinance the New Notes. There is no guarantee that any refinancing or debt financing will be successful or on favorable terms. Any additional convertible debt or equity financings may be dilutive to our stockholders, and such dilution may be significant based upon the size of such financing. Further, because of our lack of operating history, we may be unable to generate enough capital to fulfill the obligations under the New Notes issued to Principal Selling Stockholders. If we fail to repay the New Notes, each Principal Selling Stockholder may exercise all rights and remedies owed to it under their New Note, including conversion of their New Note. If any Principal Selling Stockholder converts their New Note, our stockholders will experience dilution.

 

 

 

 

If the proceeds from the IPO are insufficient to meet our working capital needs, and if we are then not able to obtain sufficient capital, we may be forced to limit the scope of our operations.

 

We expect that our existing cash and net proceeds received from our recent IPO will be sufficient to meet our working capital needs for at least 12 months. However, our future business is aimed at consumers who face inflation and the possibility of a recession. Accordingly, we may require substantial additional working capital.

 

There can be no assurance that our businesses will reach profitability. If adequate additional debt and/or equity financing is not available on reasonable terms or at all, then we may not be able to continue to develop our business activities, and we will have to modify our business plan. These factors could have a material adverse effect on our future operating results and our financial condition.

 

Our ability to raise financing through sales of equity linked securities depends on general market conditions and the demand for our common stock. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt transactions often include restrictive covenants that could limit our ability to engage in strategic transactions, acquire complimentary businesses, or adjust to changing market environments as quickly or efficiently as we otherwise would or at all. Further, if adequate financing is not available or is unavailable on acceptable terms, we may find we are unable to fund our planned expansion, continue offering the Fat Shark and Rotor Riot products, take advantage of acquisition opportunities, develop or enhance or products, or to respond to competitive pressures in the industry which may jeopardize our ability to continue operations.

 

If we lose key personnel, it may adversely affect our business.

 

Our future success depends in large part on the continued contributions of our executive officers, members of senior management and other key personnel, particularly Dr. Allan Evans, our Chief Executive Officer. Dr. Evans’ leadership, knowledge and experience in the drone industry is expected to be crucial to our business plan and any future successes and progress we experience. The loss of Dr. Evans’ services would therefore materially adversely affect our business and prospects. As a condition to the consummation of the IPO, we obtained “key person” insurance for Dr. Evans but not for any other officers or employees. Our executive officers, senior management and key personnel are all employed on an at-will basis, which means that they could terminate their employment with us at any time, for any reason and without notice. The loss of any of our key management personnel could significantly delay or prevent the achievement of our development and strategic objectives and adversely affect our business.

 

Conflicts of interest involving our Board and other parties could materially harm our business.

 

Our Board on which we heavily depend are or may become involved in other endeavors giving rise to conflicts of interests that are adverse to the Company. See “Management” and “Corporate Governance.” Mr. Jeffrey Thompson, a member of our Board, also has significant roles and interests in the drone industry outside our Company. These arrangements could cause him to be unable or decline to devote sufficient time and attention to our Company at the expense of these other ventures, and/or to face a conflict of interest, financial or otherwise, adverse to us and in favor of these other ventures. Accordingly, from time-to-time our directors may not devote sufficient time and attention to our affairs, which could have a material adverse effect on our operating results, and there can be no assurance that other conflicts of interest will not arise from their other business ventures, any of which could materially and adversely impact our business. The two Principal Selling Stockholders acquired their securities in privately negotiated agreements with Mr. Thompson prior to the consummation of the IPO as well recently in private transactions with Red Cat where Mr. Thompson is Chief Executive Officer.

 

In addition, the primary contract manufacturer for Fat Shark headsets is Shenzhen Fat Shark Co Ltd. (the “Supplier”), a company located in China which is majority-owned by Molly Mo, who is the wife of Greg French, founder and former owner of Fat Shark prior to its acquisition by Red Cat. Mr. French is no longer affiliated with Fat Shark.

 

 

 

 

Finally, Rotor Riot offers a variety of drone products through its website, which includes a number of product offerings from competitors in the drone industry. While these relationships have enabled us to generate revenue, by virtue of their involvement in the sale of drones and drone-related products these customers also have interests that are adverse to ours, and may determine to reduce their expenditures on our products in the future and/or to vertically integrate their operations to reduce or eliminate their reliance on our products.

 

Any of the foregoing developments could result in materially adverse consequences to our Company, results of operations and financial condition.

 

If we are unable to attract new customers or maintain and grow Fat Shark and Rotor Riot existing customer relationships in a manner that is cost-effective, our revenue growth could be slower than we expect and our business may be harmed.

 

To increase our revenue following the acquisition of Fat Shark and Rotor Riot, we must add new customers, upsell to our existing customers, enhance our products with features that set us apart from our competitors, and effectively develop and market new products that enable us to maintain and expand our brand and market share. Demand for our products is affected by a number of factors, many of which are beyond our control. Additionally, the projections and estimates about the future success and growth of the drone industry and demand for drone-related products such as ours, could prove to be incorrect, in which case our results of operations and prospects will decline. For example, if a recession occurs in the U.S. or global economy, we expect that consumer spending, particularly for non-essential goods such as our drone products which are largely focused on recreational uses, may decline, limiting our ability to attract or maintain a sufficient customer base to achieve or maintain the revenue we seek in the development and sale of our products. Even if we do attract customers, the cost of new customer acquisition may prove so high as to prevent us from achieving or sustaining profitability.

 

Our future success also depends on our ability to increase the use of our products and solutions within and across our existing customers and future customers. While we believe there is a significant opportunity to further expand within Fat Shark and Rotor Riot’s existing customer base, including due to our planned employment of a “land-and-expand” business model in which we plan to establish relationships with new customers and grow those relationships over time by providing high quality products and services, our growth prospects depend on our ability to persuade customers to buy more product, and if we fail to do so, our business goals and prospects may not be achieved to the extent sought or anticipated or at all.

 

Future operating results and key metrics may fluctuate significantly from period-to-period due to a wide range of factors, which makes our future results difficult to predict.

 

Our operating results and key metrics could vary significantly from quarter-to-quarter as a result of various factors, some of which are outside of our control, including:

 

	·	the expansion or contraction of our customer base and the amount of product ordered;
	·	the size, duration and terms of our contracts with both existing and new customers, including distributors we contract with particularly as to Fat Shark’s sale of FPV goggles;
	·	seasonality of sales at Rotor Riot which generally has experienced higher sales volumes in October – December than in other three-month periods as a result of holiday purchases and its e-commerce focus;
	·	sales cycles which fluctuate and often include delays between the end of one product or solution’s cycle and the launch of a new product or solution to replace or supplement the prior offering, which for example significantly impacts Fat Shark’s sales as it improves upon and launches new products and shifts focus away from older products;
	·	the introduction of products and product enhancements by competitors, and changes in pricing for products offered by us or our competitors;
	·	customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors or otherwise;

 

 

 

 

	·	changes in customers’ budgets;
	·	the amount and timing of payment for expenses, including infrastructure, research and development, sales and marketing expenses, employee benefit and stock-based compensation expenses;
	·	costs related to the hiring, training and maintenance of our employees;
	·	any future impact from COVID-19, including any long-term or pervasive effects of the virus or other viruses;
	·	any future impact from the ongoing geopolitical military conflict (including the war in Israel, the Russian war in Ukraine, tensions between China and Taiwan, and other unrest in the Middle East);
	·	supply chain issues particularly due to Fat Shark’s reliance on one related party Chinese supplier;
	·	political unrest affecting our relationship with China and future tariffs;
	·	our lack of a long-term agreement with our suppliers which can affect the availability of parts and future costs;
	·	changes in laws and regulations or other regulatory developments that impact our business;
	·	the timing and extent of the growth of our business; and
	·	general economic and political conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers operate.

 

Any one of these or other factors discussed elsewhere in this Prospectus may result in fluctuations in our operating results, meaning that quarter-to-quarter comparisons may not necessarily be indicative of our future performance.

 

Any failures of or damage to, attack on or unauthorized access to our information technology systems or facilities or disruptions to our continuous operations, including the systems, facilities or operations of third parties with which we do business, such as resulting from cyber-attacks, could result in significant costs, reputational damage and limits on our ability to conduct our business activities.

 

Our operations will depend on information technology infrastructure and computer systems, both internal and external, to, among other things, record and process customer and supplier data, marketing activities and other data and functions and to maintain that data and information securely. In recent years, several organizations have suffered successful cyber-attacks launched both domestically and from abroad, resulting in the disruption of services to customers, loss or misappropriation of sensitive or private data and reputational harm. If we are subject to a cyber-attack, we could suffer a similar breach or suspension in the future. Further, we may be unaware of a prior attack and the damage caused thereby until a future time when remedial actions cannot be taken. Cyber-threats are often sophisticated and are continually evolving. We may not implement effective systems and other measures to effectively identify, detect, prevent, mitigate, recover from or remediate the full diversity of cyber-threats or improve and adapt such systems and measures as such threats evolve and advance in their ability to avoid detection.

 

 

 

 

A cyber-security incident, or a failure to protect our technology infrastructure, systems and information and our customers, suppliers and others’ information against cyber-security threats, could result in the theft, loss, unauthorized access to, disclosure, misuse or alteration of information, system failures or outages or loss of access to information. The expectations of our customers and regulators with respect to the resiliency of our systems and the adequacy of our control environment with respect to such systems may increase as the risk of cyber-attacks, and the consequences of those attacks become more pronounced. We may not be successful in meeting those expectations or in our efforts to identify, detect, prevent, mitigate and respond to such cyber-incidents or for our systems to recover in a manner that does not disrupt our ability to provide products and services to our customers or product personal, private or sensitive information about our business, customers or other third parties.

 

In July 2023, the Securities and Exchange Commission (the “SEC”) approved final rules requiring public companies to report material cybersecurity incidents and disclose their cybersecurity risk management, strategy and governance. The new rules will require us to enhance our cybersecurity compliance efforts and have the effect of causing us to expend funds to prevent material cybersecurity incidents and begin making cybersecurity-related periodic and annual disclosures.

 

Specifically, the new rules impose a new Form 8-K disclosure requirement about material cybersecurity incidents within four business days after we determine that a cybersecurity is material. Annually we will be required to disclose in our 10-K our processes, if any, to assess, identify and manage material risks from cybersecurity threats including whether we have hired third parties in connection with the processes. We also will be required to disclose whether any risks from cybersecurity threats have or are materially reasonably likely to materially affect us. Finally we must describe our Board’s oversight of risks from cybersecurity threats and management’s role in assessing and managing these risks. We expect to incur material additional compliance and reporting costs, including monitoring, collecting, and analyzing data concerning cyber-security incidents and evaluating and preparing the required disclosure. We may also be required to incur third party compliance costs.

 

The failure to maintain an adequate technology infrastructure and applications with effective cyber-security controls could impact operations, adversely affect our financial results, result in loss of business, damage our reputation or impact our ability to comply with regulatory obligations, leading to regulatory fines and sanctions. We may be required to expend significant additional resources to modify, investigate or remediate vulnerabilities or other exposures arising from cyber-security threats. Failing to prevent or properly respond to a cyber-attack could expose us to regulatory fees or civil liability, cause us to lose customers or suppliers, prevent us from offering our products including due to resulting regulatory action, impair our ability to maintain continuous operations, and inhibit our ability to meet regulatory requirements.

 

Our failure to effectively manage our growth could harm our business.

 

Businesses, including development stage companies such as ours which often grow rapidly, may have difficulty managing their growth. These challenges are exacerbated in circumstances such as ours following a recent acquisition of operating businesses. We intend to expand the number and types of products we sell as we grow, if and as capital becomes available. Further, because of our reliance on consumer spending which depends on novelty and social trends, and the rapid and constant technologically advancements that characterize our industry, we are subject to periodic sales cycles, and we will therefore need to replace and regularly introduce on a timely basis new products and technologies, enhance existing products, and effectively stimulate customer demand for new products and upgraded or enhanced versions of our existing products. Similarly, because our product offerings are largely dependent on others’ drone-related products and activities, we may need to adjust or update as third parties advance or alter their technology and activities. If we are able to successfully develop, produce and market our products, we will likely need to incur additional expenditures and expand our personnel with additional employees and consultants who are capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully.

 

 

 

 

The replacement and expansion of our products is expected to place a significant strain on our management, operations and engineering resources. Specifically, the areas that are strained most by these activities include the following:

 

	·	New Product Launches: With the changes in and growth of our product portfolio, we will experience increased complexity in coordinating product development, manufacturing, and shipping. As this complexity increases, it places a strain on our ability to accurately coordinate the commercial launch of our products with adequate supply to meet anticipated customer demand and effectively market to stimulate demand and market acceptance. We may experience delays in our operations or product development or production efforts. If we are unable to scale and improve our product launch coordination, we could frustrate our customers and reduce or delay product sales;
	·	Existing Products Impacted by New Introductions: The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing our existing products in anticipation of the new products and potentially lead to challenges in managing inventory of existing products. We may also provide price protection to some of our retailers as a result of our new product introductions and reduce the prices of existing products. Granting these rights exposes us to greater risk of operational losses, as they limit our ability to react and adapt to changing economic conditions, such as rising costs caused by supply chain shortages. If we fail to effectively manage new product introductions, our revenue and ability to become profitable may be harmed; and
	·	Forecasting, Planning and Supply Chain Logistics: With the changes in and growth of our product portfolio, we will experience increased complexity in forecasting customer demand, in planning for production, and in transportation and logistics management. If we are unable to scale and improve our forecasting, planning, production, and logistics management, we could frustrate our customers, lose product sales or accumulate excess inventory.

 

The drone industry relies on limited sources to supply certain components and materials used in the manufacturing of drones. Our intention is to purchase certain components from suppliers based in the United States, which may lead us to pay higher prices, or select parts from a more limited number of suppliers relative to our competitors, which would adversely impact our gross margin and operating results. Our operating results could be materially adversely impacted if our suppliers do not provide the critical components used to assemble our products on a timely basis, at a reasonable price, and in sufficient quantities.

 

Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate delivery of components for our products. All of the components that go into the manufacturing are sourced from third-party suppliers.

 

Some of the key components used to manufacture our products come from a limited or single source of supply, or by a supplier that could potentially become a competitor. Our contract manufacturers generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules.

 

If we lose access to components from a particular supplier or experience a significant disruption in the supply of products and components from a current supplier, we may be unable to locate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely affected. In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity or elect not to meet our needs as they allocate components to other customers. Developing suitable alternate sources of supply for these components may be time-consuming, difficult and costly, and we may not be able to source these components on terms that are acceptable to us, or at all, which may adversely affect our ability to meet our development requirements or to fill our orders in a timely or cost-effective manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with the supplier’s quality control, responsiveness and service, financial stability, labor and other ethical practices, and if we seek to source materials from new suppliers, there can be no assurance that we could do so in a manner that does not disrupt the manufacture and sale of our products.

 

 

 

 

Our reliance on single source, or a small number of suppliers involves a number of additional risks, including risks related to supplier capacity constraints, price increases, timely delivery, component quality, failure of a key supplier to remain in business and adjust to market conditions, delays in, or the inability to execute on, a supplier roadmap for components and technologies; and natural disasters, fire, acts of terrorism or other catastrophic events, including global pandemics.

 

Certain components and services necessary for the manufacture of our products are available from only a limited number of sources, and other components and services are only available from a single source. Our relationship generally is on a purchase order basis and these firms do not have a contractual obligation to provide adequate supply or acceptable pricing to us on a long-term basis. These suppliers could discontinue sourcing merchandise for us at any time. If any of these suppliers were to discontinue its relationship with us, or discontinue providing specific products to us, and we are unable to contract with a new supplier that can meet our requirements, or if they or such other supplier were to suffer a disruption in their production, we could experience disruption of our inventory flow, a decrease in sales and the possible need to re-design our products. Any such event could disrupt our operations and have an adverse effect on our business, financial condition and results of operations. Several new and alternative suppliers have begun offering components suitable for use in our products. With new tooling and electronics, any one of these alternative components could be incorporated into our products but our costs could be higher, they may offer less performance, and, as a result, make our products too costly and less desirable.

 

If we are unable to attract, integrate and retain additional qualified personnel, including top technical talent, our business could be adversely affected.

 

Our future success depends in part on our ability to identify, attract, integrate and retain highly skilled technical, managerial, sales and other personnel, particularly as we attempt to expand our operations and further develop and market our products. We face intense competition for a limited number of qualified individuals with the requisite skills and experience from numerous other companies, including other software and technology companies, many of whom have greater financial and other resources than we do. These companies also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than those we have to offer. In addition, new hires often require significant training and, in many cases, take significant time before they achieve full productivity. We may incur significant costs to attract and retain qualified personnel, including significant expenditures related to salaries and benefits and compensation expenses related to equity awards, and we may lose new employees to competitors or other companies before we realize the benefit of our investment in recruiting and training them. Moreover, new employees may not be or become as productive as we expect, as we may face challenges in adequately or appropriately integrating them into our workforce and culture. In addition, as we move into new geographies, we will need to attract and recruit skilled personnel in those areas. We have limited experience with recruiting in geographic areas outside of the United States, and may face additional challenges in attracting, integrating and retaining international employees. If we are unable to attract, integrate and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, our business will be adversely affected.

 

Risks Related to Our Sale of Drone-Related Products and Operations in the Drone Industry.

 

We operate in an emerging and rapidly evolving industry which makes it difficult to evaluate our business and future prospects.

 

The drone industry is relatively new and is growing rapidly. As a result, it is difficult to evaluate our business and future prospects. We cannot accurately predict whether, and even when, demand for our products will increase, if at all. The risks, uncertainties and challenges encountered by companies operating in emerging and rapidly growing industries include:

 

	·	generating sufficient revenue to cover operating costs and sustain operations;
	·	acquiring and maintaining market share;
	·	attracting and retaining qualified personnel;

 

 

 

 

	·	successfully developing and commercially marketing new products;
	·	complying with development regulatory requirements;
	·	the possibility that favorable estimates or projections prove to be incorrect;
	·	responding effectively to changing technology, evolving industry standards, and changing customer needs or requirements; and
	·	accessing the capital markets to raise additional capital, on reasonable terms, if and when required to sustain operations or to grow the business.

 

As such, our current expectations and projects about future events and trends may be different from the actual results. Furthermore, if we are unable to address any of the above challenges successfully, our business, financial condition, results of operations, and prospects may be adversely affected by such failure.

 

We face competition from larger companies that have substantially greater resources which challenges our ability to establish market share, grow the business, and reach profitability.

 

The drone industry is attracting a wide range of significantly larger companies which have substantially greater financial, management, research and marketing resources than we have. The drone hardware and parts and components spaces are dominated by larger Chinese companies such as SZ DJI Technology Company, Ltd and T-Motor. With respect to our FPV products, current and potential future competitors also include a variety of established, well-known diversified consumer electronics manufacturers such as Samsung, Sony, LG Electronics (LGE), HTC, Lenovo, Epson, Yuneec, Boscam, Eachine, Walkera, SkyZone, MicroLED and large software and other products companies such as Alphabet Inc. (Google), Microsoft, Facebook and Snap. The large number of smaller and/or private companies focused on drone solutions also have competitive advantages over us which we may struggle to overcome, particularly as we seek to further establish and grow our customer base. Our competitors may be able to provide customers with different or greater capabilities than we can provide, including technical qualifications, pricing, and key technical support. Many of our competitors may utilize their greater resources to develop competing products and technologies, leverage their financial strength to utilize economies of scale and offer lower pricing, and hire more qualified personnel by offering more generous compensation packages. On the other hand, other small business competitors may be able to offer more cost competitive solutions or may be able to adapt more quickly to market developments due to lower overhead costs, leveraging of their professional relationships and networks, geographic or specialty focuses or greater flexibility inherent in smaller operations and a lower number of personnel.

 

Among product and service features that drive competition in our industry are breadth of product line, quality and durability of products, stability, reliability and reputation of the provider, along with cost. Quantity discounts, price erosion, and rapid product obsolescence due to technological improvements are therefore common in our industry as competitors strive to retain or expand market share. The Company’s ability to compete effectively will depend on, among other things, the Company’s pricing models, quality of customer service, development of new and enhanced products and services in response to customer demands and changing technology, reach and quality of sales and distribution channels and capital resources. Competition could lead to an inability to sustain sales levels, a reduction in the rate at which the Company adds new customers, a decrease in the size of the Company’s market share and a decline in its customers and revenue. In order to secure sales, we may have to offer comparable products and services at lower pricing, which could adversely affect our operating margins. Our inability to compete effectively against these larger companies could have a material adverse effect on our business, financial condition and operating results.

 

 

 

 

The development and manufacture of FPV goggles encompasses several complex processes and several steps of our production processes are dependent upon third party vendors, supply chains, the availability of PCBs, optics, and certain chips. Any change in availability of these components, manufacturing or design partners could result in delivery interruptions, which could adversely affect our operating results.

 

As we continue to develop our products, we must progress through the complex and challenging processes involved in the technology and designs on which Fat Shark and Rotor Riot products are founded. Fat Shark and Rotor Riot rely on third party suppliers for the resources needed to navigate these processes and expect to continue to rely on such parties when we reach the manufacturing and marketing stages. Our reliance on third-party manufacturers and service providers will entail risks to which we may not be subject if our future operations were more vertically integrated, including:

 

	·	the ongoing supply chain shortages, and any future supply chain and logistics challenges that we or our vendors may face in the future, including due to the reliance on lithium-ion batteries and other materials for our products;
	·	the inability to meet any product specifications and quality requirements consistently;
	·	a delay or inability to procure or expand sufficient manufacturing capacity;
	·	discontinuation or recall of products or component parts;
	·	manufacturing and product quality issues related to scale-up of manufacturing;
	·	costs and validation of new equipment and facilities required for scale-up;
	·	a failure to comply with applicable regulatory and safety standards in the U.S. and foreign markets in which we or our collaborators operate;
	·	the inability to negotiate manufacturing and service agreements with third parties under commercially reasonable terms;
	·	the possibility of breach or termination or nonrenewal of agreements with third parties in a manner that is costly or damaging to us;
	·	we do not always execute definitive written agreements with our vendors, particularly those located in China, which exposes us to possible disputes concerning the existence or terms of our agreements and our intellectual property rights;
	·	the reliance on a few sources, and sometimes, single sources for raw materials and components, such that if we cannot secure a sufficient supply of these product components, we cannot manufacture and sell products in a timely fashion, in sufficient quantities or under acceptable terms;
	·	the lack of qualified backup suppliers for any raw materials currently purchased from a small number of source suppliers;
	·	operations of our third-party manufacturers, suppliers or service providers could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the party;
	·	carrier disruptions or increased costs beyond our control;
	·	possible misappropriation of our proprietary technology; and
	·	failing to deliver products under specified storage conditions and in a timely manner.

 

 

 

 

Given our early stages, our product technology and manufacturing processes are evolving, which can result in production challenges and difficulties. We may be unable to produce our products in sufficient quantity and quality to maintain existing customers and attract new customers. In addition, we may experience manufacturing problems which could result in delays in delivery of orders or product introductions. Any of these events could lead to production and marketing delays or failure or impact on our ability to successfully commercialize our products. If we fail to contract with third parties on favorable terms, coordinate with and supervise their services and contributions to our processes, and leverage those relationships to deliver quality products in a timely manner to customers, we could experience reductions or delays in revenue, reputational harm and diminished brand recognition, higher than expected expenses, or other adverse developments that would materially harm our business.

 

Several steps of our production processes are dependent upon certain critical machines and tools which could result in delivery interruptions and foregone revenues.

 

Fat Shark currently has no equipment redundancy to manufacture its products, meaning we will rely on a limited number of machines to perform a large quantity of steps in the manufacturing and assembly processes. Rotor Riot is limited by the number of personnel it has on staff to assemble custom drones. This may, among other things, delay delivery timelines or reduce our revenue and accounts receivable, and/or force us to rely more heavily on third parties to meet customer deadlines or volume demands, either of which will adversely affect our results of operation and ability to achieve and maintain profitability. If we experience any significant disruption in manufacturing, a serious failure of a critical piece of equipment, or an inability to hire personnel, we may be unable to supply products to our customers in a timely manner. Interruptions in our manufacturing could be caused by us or our partners including but not limited to equipment problems, the introduction of new equipment into the manufacturing process or delays in the delivery of new manufacturing equipment. Lead-time for delivery, installation, testing, repair and maintenance of manufacturing equipment can be extensive. We can provide no assurances that we will not lose potential sales or be able to meet production orders due to future production interruptions in our manufacturing lines.

 

We may not be able to procure necessary key components for our products or may produce or purchase too much inventory.

 

The drone industry, and the electronics industry as a whole, can be subject to business cycles. During periods of growth and high demand for products, we may not have adequate supplies of inventory on hand to satisfy customers’ needs. Furthermore, during these periods of growth, our suppliers may also experience high demand and, therefore, may not have adequate levels of the components and other materials that the Company requires to manufacture products so that it can meet customers’ needs. Our inability to secure sufficient components to produce products for customers, or similar challenges faced by the drone manufacturers we serve, could negatively impact our sales and operating results. We may choose to mitigate this risk by increasing the levels of inventory for certain key components assuming we have available cash resources. Increased inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail to materialize or if there are negative factors impacting our customers’ end markets. Such a risk becomes especially prevalent during a recession and market downturn. If we purchase too much inventory, we may have to record additional inventory reserves or write-off the inventory, which could have a material adverse effect on our gross margins and on our results of operations.

 

We may not be able to keep pace with technological advances; and we depend on advances in technology by other companies.

 

The drone industry in general, and the market for the sale of drone hardware and component parts in particular, continues to undergo significant changes, primarily due to technological developments. Because of the rapid growth and advancement of technology, shifting consumer tastes and the popularity and availability of other forms of activities, it is impossible to predict the overall effect these factors could have on potential revenue from, and profitability of the drone industry. The development of both drone-related software and hardware is a costly, complex and time-consuming process, and investments in product development often involve a long wait until a return, if any, can be achieved on such investment. We might face difficulties or delays in the development process that will result in our inability to timely offer products that satisfy the market, which might allow competing products to emerge during the development and certification process. We anticipate making significant investments in research and development relating to our products and technology, but such investments are inherently speculative and require substantial capital expenditures. Any unforeseen technical obstacles and challenges that we encounter in the research and development process could result in delays in or the abandonment of product commercialization, may substantially increase development costs, and may negatively affect our results of operations. In the time it takes to develop or improve upon a product, that product may become obsolete.

 

 

 

It is impossible to predict the overall effect these factors could have on our ability to compete effectively in a changing market, and if we are not able to keep pace with these technological advances, then our revenues, profitability and results from operations may be materially adversely affected. It is impossible to predict the overall effect these factors could have on our ability to compete effectively in a changing market, and if we are not able to keep pace with these technological advances, then our revenues, profitability and results of operations may be materially adversely affected. However, if we struggle to adapt to an industry-shifting technological advancement or competitor offerings that render our products relatively less attractive or obsolete, including due to competitive pressures we face relative to other drone companies, it could have a material adverse effect on our business.

 

Further, we rely on and will continue to rely on components of our products that are developed and produced by other companies over which we have limited control. The commercial success of certain of our planned future products will depend in part on advances in these and other technologies by other companies, and our ability to procure them from such third parties in a timely manner and on economically feasible terms. We may, from time-to-time, contract with and support companies developing key technologies in order to accelerate the development of such products for our specific uses. Such activities might not result in useful technologies or components for us.

 

Lack of long-term purchase orders and commitments from customers may lead to a rapid decline in sales.

 

Customers issue purchase orders or use our e-commerce site solely at their own discretion, often shortly before the requested date of shipment. Both our distributor relationships through Fat Shark and our online sales through Rotor Riot entail short-term contracts under which customers are generally able to cancel orders (without penalty) or delay the delivery of products on relatively short notice, regardless of whether or not we are in default under our agreements. The online business involves retail customers who are not likely to be repeat customers unless a need arises for updated hardware or software solutions offered by us, which may not occur on a frequent basis, resulting in lack of reliable recurring revenue in that part of our business. In addition, current customers may decide not to purchase products for any reason. If those customers do not continue to purchase products, sales volume could decline rapidly with little or no warning.

 

We cannot rely on long-term purchase orders or commitments to protect from the negative financial effects of a decline in demand for products. Fat Shark and Rotor Riot typically plan production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Fat Shark resellers issue purchase orders but they have options to reschedule or pay cancellation fees. The uncertainty of product orders makes it difficult to forecast sales and allocate resources in a manner consistent with actual sales. Moreover, expense levels and the amounts invested in capital equipment and new product development costs are based in part on expectations of future sales and, if expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. As a result of lack of long-term purchase orders and purchase commitments, and long product development lead times, we may experience a rapid decline in sales.

 

As a result of these and other factors, investors should not rely on revenues and operating results for any one quarter or year as an indication of future revenues or operating results. If quarterly revenues or results of operations fall below expectations of investors or public market analysts, the price of our common stock could fall substantially.

 

Our products require ongoing research and development and may experience technical problems or delays, which could lead the business to fail.

 

Our future research and development efforts will remain subject to all of the risks associated with the development of new products based on emerging and innovative technologies, including, for example, unexpected technical problems or the possible insufficiency of funds for completing development of these products. If technical problems or delays arise, further improvements in products and the introduction of future products could be adversely impacted, and we could incur significant additional expenses and the business may fail. Additionally, we may deploy significant capital or human resources towards developing or improving upon a product, only for such efforts fail to yield the results we hoped for or intended, which would materially adversely affect our financial condition. This is an acute risk given the relatively new and evolving nature of the drone industry, and constant entrance of new market participants attempting to compete with us. Similarly, if we invest in product research and development efforts and a competitor brings a similar product to market before us, or alleges an infringement of their intellectual property, our ability to market the product or compete effectively could be lost. Any such development could materially harm our business.

 

 

 

 

If we are involved in litigation, it could harm our business or otherwise distract management.

 

If we become a party to a substantial, complex or extended litigation, it could cause us to incur large expenditures and could distract management. For example, lawsuits by licensors, consumers, employees or stockholders or litigation with federal, state or local governments or regulatory bodies could be very costly and disrupt business. As described elsewhere in these Risk Factors, our operations and products, as well as those of our customers, collaborators and product end-users, come with the inherent possibility of lawsuits arising from product liability, property damage and personal injury, breach of contract and product warranty claims, intellectual property infringement, regulatory violations and sanctions, and data privacy issues, any of which can result in costly and time-consuming litigation which would divert our limited human and capital resources and could cause other adverse impacts on our business such as reputational harm and loss of future business. While disputes from time-to-time are not uncommon, we may not be able to resolve such disputes on terms favorable to us which could have a material adverse impact on our results of operations and financial condition.

 

Among other things, claims could be brought against us if use and misuse of our products causes personal injury or death. If a consumer causes damage to a person or property using our drone, we as a reseller of the drone could be sued for selling an allegedly defective product. The possibility that the foregoing events occur from events involving our products is particularly high, because we supply technology used in the operation of drones which is relatively novel and are frequently operated at high speeds and altitudes, and often in densely populated areas and/or by individuals who lack a high level of experience operating them. These characteristics increase the probability that injury or damage to personal property might occur, even absent a defect. Additionally, because Fat Shark’s products are used as ancillary or supplemental components of a drone’s functions, we may become involved in disputes arising from a third party’s actions or products that utilize its technology, even if we were not the direct cause of the issue. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources.

 

Product liability claims might be brought against us by customers, civilians or private entities or others using or otherwise coming into contact with our products. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. Regardless of merit or eventual outcome, product liability claims may cause:

 

	·	impairment of our business reputation;
	·	costs due to related litigation especially since we do not have product liability insurance;
	·	distraction of management’s attention from our primary business;
	·	substantial monetary awards to claimants or civil penalties imposed by governments;
	·	regulatory scrutiny and product recalls, withdrawals or labeling, marketing or promotional restrictions; and
	·	decreased demand for our products.

 

We anticipate the risk of product liability and other claims related to our products and their uses will grow as our products begin to be used. We are unable to predict if we will be able to obtain or maintain insurance for such claims. Insurance coverage is becoming increasingly expensive. We do not have such insurance and we may not be able to obtain it at a reasonable cost or in sufficient amounts to protect us against losses due to liability. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, would adversely affect our results of operations and business.

 

 

 

 

Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation, including due to our high reliance on online and social media platforms, would likely adversely affect our business and operating results.

 

We believe that maintaining and enhancing Fat Shark and Rotor Riot brand identity, and our reputation are critical to our relationships with customers and strategic partners and to our ability to attract new customers and strategic partners. We also believe that the importance of our brand recognition and reputation will continue to increase as competition in our market continues to develop. Our success in this area will depend on a wide range of factors, some of which are beyond our control, including the following:

 

	·	the efficacy of our marketing efforts;
	·	our ability to obtain new customers and retain and/or expand sales or upsell to existing customers;
	·	our ability to maintain high customer satisfaction;
	·	the quality and perceived value of our products;
	·	our ability to obtain, maintain and enforce patents and trademarks and other indicia of origin, including those we expect to obtain through the acquisition of Fat Shark and Rotor Riot, will be critical to our business plan;
	·	our ability to successfully differentiate from competitors’ products;
	·	actions of competitors and other third parties;
	·	our ability to provide customer support and professional services;
	·	positive or negative publicity;
	·	litigation or regulatory related developments.

 

Any of the foregoing developments or an inability to navigate these or other challenges to establish and grow our brand recognition and current and future product popularity could materially adversely affect us.

 

In addition, particularly with respect to Rotor Riot, we are highly dependent on online social media platforms such as Facebook, Instagram and YouTube to advertise our products, market our brand and develop and maintain customer loyalty. Each of these platforms requires that users adhere to strict terms and conditions governing content, communications and other activities on their platform, which are generally heightened for commercial uses such as ours. If we or third parties such as drone pilots who Rotor Riot uses to market our products online fail to adhere to these requirements, we could be limited, restricted or banned from some or all uses, which would materially adversely affect our business.

 

 

 

 

Future growth and ability to generate and grow revenue and achieve or maintain profitability may be adversely affected if our marketing initiatives are not effective in generating sufficient levels of brand awareness.

 

Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing efforts, including our ability to:

 

	·	create awareness of brands and products;
	·	convert awareness into actual product purchases;
	·	effectively manage marketing costs (including creative and media) in order to maintain acceptable operating margins and return on marketing investment; and
	·	successfully offer to sell products or license technology to third-party companies for sale.

 

Planned marketing expenditures are unknown and may not result in increased total sales or generate sufficient levels of product and brand name awareness. We may not be able to manage marketing expenditures on a cost-effective basis.

 

Future acquisitions could disrupt our business and adversely affect our operating results, financial condition and cash flows.

 

We may make acquisitions that could be material to our business, operating results, financial condition and cash flows. Our ability as an organization to successfully acquire and integrate technologies or businesses is unproven. Acquisitions involve many risks, including the following:

 

	·	an acquisition may negatively affect our operating results, financial condition or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;
	·	We may incur substantial costs and deploy a significant amount of time and other resources towards a prospective transaction that does not close, either of which could materially harm our financial condition;
	·	we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, contracts, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;
	·	an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;
	·	an acquisition may result in a delay or reduction of customer purchases for both us and the company we acquired due to customer uncertainty about continuity and effectiveness of service from either company;
	·	we may encounter difficulties in, or may be unable to, successfully sell any acquired products;
	·	an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;
	·	the potential strain on our financial and managerial controls and reporting systems and procedures;

 

 

 

 

	·	potential known and unknown liabilities associated with an acquired company, including due to a non-disclosure or failure to identify such liabilities during the due diligence process prior to closing an acquisition;
	·	if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants;
	·	the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions;
	·	to the extent that we issue a significant amount of equity or convertible debt securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and
	·	managing the varying intellectual property protection strategies and other activities of an acquired company.

 

We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to successfully integrate the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving integration, could have a material adverse effect on our business, operating results, financial condition and cash flows.

 

If we incur any future impairment in the carrying value of our goodwill asset or write-off of our general intangibles, it could depress our stock price.

 

As of June 30, 2024, we had $19,666,087 of estimated goodwill and intangible assets on our balance sheet. Goodwill and intangible assets must be evaluated for impairment annually or more frequently if events indicate it is warranted. If the carrying value of a reporting unit asset exceeds its current fair value, the goodwill asset is considered impaired. Events and conditions that could result in impairment in the value of our goodwill and intangible assets include, but are not limited to, significant negative industry or economic trends, significant decline in the Company’s stock price for a sustained period of time, significant decline in market capitalization relative to net book value, limited funding that could delay development efforts, significant changes in the manner of use of the assets or the strategy for the Company’s overall business, or safety issues that surface during development efforts, or the end of our product life cycles that will result in impairment of goodwill. We may in the future be required to record impairment charges to write-off goodwill and intangible assets which is also related to our acquisition of Fat Shark and Rotor Riot. Our stock price could be negatively impacted should future impairments of our goodwill and/or intangible assets occur. A valuation will be performed related to the closing of the Business Combination based on final assets acquired and liabilities assumed and final amounts of goodwill and other intangibles will be determined. To the extent that we may be required to write-off the value of our goodwill and/or our intangibles assets, our stock price could be adversely affected.

 

Product quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.

 

The products that we sell could contain defects in design or manufacture. There can be no assurance we will be able to detect and remedy all defects in the hardware we sell, which could result in product recalls, product redesign efforts, loss of revenue, reputational damage and significant warranty and other remediation expenses. Similar to other mobile and consumer electronics, our products have a risk of overheating in the course of usage or upon malfunction. Any such defect could result in harm to property or in personal injury. If we determine that a product does not meet product quality standards or may contain a defect, the launch of such product could be delayed until we remedy the quality issue or defect. The costs associated with any protracted delay necessary to remedy a quality issue or defect in a new product could be substantial.

 

 

 

 

Fat Shark and Rotor Riot generally provide a one-year warranty on all of our products, except in certain European countries where it can be two years for some consumer-focused products. The occurrence of any material defects in our products could expose us to liability for damages and warranty claims in excess of our current reserves, and we could incur significant costs to correct any defects, warranty claims or other problems. In addition, if any of our product designs are defective or are alleged to be defective, we may be required to participate in a recall campaign. In part due to the terms of our warranty policy, any failure rate of our products that exceeds our expectations may result in unanticipated losses. Any negative publicity related to the perceived quality of our products could affect our brand image and decrease retailer, distributor and consumer confidence and demand, which could adversely affect our operating results and financial condition. Further, accidental damage coverage and extended warranties are regulated in the United States at the state level and are treated differently within each state. Additionally, outside of the United States, regulations for extended warranties and accidental damage vary from country-to-country. Changes in interpretation of the regulations concerning extended warranties and accidental damage coverage on a federal, state, local or international level may cause us to incur costs or have additional regulatory requirements to meet in the future in order to continue to offer our support services. Our failure to comply with past, present and future similar laws could result in reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our business and financial condition.

 

Estimated future product warranty claims may be based on a variety of factors including the expected number of field failures over the warranty commitment period, the term of the product warranty period, and the costs for repair, replacement and other associated costs. Because of the foregoing or other contingencies, these estimates could prove to be incorrect, such that our warranty obligations are higher than anticipated. Our warranty obligations may be affected by product failure rates, claims levels, material usage and product re-integration and handling costs. Should actual product failure rates, claims levels, material usage, product re-integration and handling costs, defects, errors, bugs or other issues differ from original estimates, we could end up incurring materially higher warranty or recall expenses than we anticipate, which would materially adversely affect our business.

 

Risks Related to Intellectual Property Protection

 

If third-party intellectual property infringement claims are asserted against us, it may prevent or delay our product development and commercialization efforts and have a material adverse effect on our business and future prospects.

 

Companies in the consumer electronics, wireless communications, semiconductor, AI, IT, and display industries steadfastly pursue and protect intellectual property rights, often times resulting in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patents or other intellectual property rights. Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. If we are forced to defend against infringement claims, we may face costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement are unwarranted.

 

Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are pursuing product development and sales. As the consumer electronics and drone industries expand and more patents are issued, the risk increases that our current and future products may be subject to claims of infringement of the patent rights of third parties. Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to inventions, materials, engineering designs, or methods of manufacture related to the design, use or manufacture of our products. Because patent applications can take many years to issue, there may be patent applications currently pending that may later result in patents that our products may infringe upon. Third parties may obtain patents in the future and claim that use of our technologies or those of third parties with which our technologies are integrated infringes on these patents. If any third-party patents were to be held by a court to cover the manufacturing process of any of our products, or any of the characteristics or related components thereof, the holders of any such patents may be able to block our ability to commercialize such product unless we obtained a license under the applicable patents, or until such patents expire. Similarly, if any third-party patents were to be held by a court to cover aspects of our or our customers’ or strategic partners’ products or processes, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product unless we obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all.

 

 

 

 

Parties making intellectual property claims against us may obtain injunctive or other equitable relief, which could block our ability to further develop and commercialize one or more of our products. Defense of these claims, regardless of their merit, involves substantial litigation expense and diversion of our management’s attention from our business.

 

If we are unsuccessful in defending against patent infringement claims in any jurisdiction where such a dispute arises, our products could be found to infringe on the intellectual property rights of others. If a claim of infringement against us succeeds, we may have to pay substantial damages, possibly including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure. The financial harm caused by any such development with respect to intellectual property disputes and litigation will be heightened to the extent we do not possess, acquire or maintain adequate insurance coverage for these contingencies now or in the future. Further, if there is a successful claim of infringement against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, it could materially adversely affect our business.

 

We may depend on intellectual property rights including patent rights that have not yet been and may not be obtained by us, and our intellectual property rights and proprietary rights may not adequately protect our products.

 

Our commercial success will depend substantially on the ability to obtain patents and other intellectual property rights and maintain adequate legal protection for products in the United States and other countries. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that these assets are covered by valid and enforceable patents, trademarks, copyrights or other intellectual property rights, or are effectively maintained as trade secrets. With the closing of our IPO in February 2024, we have 12 issued patents, including four issued in the United States, and nine pending patent Applications, including two pending in the United States which were assigned to a wholly-owned subsidiary of the Company by UAV Patent Corp. (“UAV”) a wholly-owned subsidiary of Red Cat, in each case with a non-exclusive, non-sublicensable royalty free perpetual license back to UAV for Red Cat and its present and future subsidiaries to make, use and sell products subject to such assigned patents and applications solely with respect to military and defense drone applications.

 

We will apply for patents covering our products, services, technologies, and designs, as we deem appropriate. We may fail to apply for patents on important products, services, technologies or designs in a timely fashion, or at all. We do not know whether, and there can be no assurance that, any of our patent applications will result in the issuance of any patents. Even if patents are issued, they may not be sufficient to protect our products, technologies, or designs. Our existing and future patents may not be sufficiently broad to prevent others from developing competing products, technologies, or designs. Intellectual property protection and patent rights outside of the United States, particularly in China, are even less predictable. As a result, the validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:

 

	·	we were the first to conceive, reduce to practice, invent, or file the inventions covered by each of our issued patents and pending patent applications;
	·	others will independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies, services or designs;
	·	any patents issued to us will provide us with any competitive advantages, or will be challenged by third parties;
	·	we will develop additional proprietary products, services, technologies or designs that are patentable; or
	·	the patents of others will have an adverse effect on our business.

  

 

 

 

The patents we own or license and those that may be issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages. Moreover, third parties could practice our inventions in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technology where patented. Such third parties may then try to import products made using our inventions into the United States or other territories. We cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth, validity and enforceability of the claims upheld in our and other companies’ patents. Further, patents have a limited lifespan. In the United States, the natural expiration of a patent is 20 years after it is filed, although various extensions may be available. The life of a patent, and the protection it affords, is limited. When the patent life has expired for a product, we will become vulnerable to competition from competitors attempting to replicate the technology that was formerly patent protected. Further, if we encounter delays such as due to regulatory approvals, the time during which we will be able to market and commercialize a product under patent protection could be reduced.

 

Unauthorized parties may attempt to copy or otherwise use aspects of our processes and products that we regard as proprietary. While we plan to enter into written agreements with certain of our employees and consultants with terms designed to protect our intellectual property rights, there cannot be any assurance that these provisions will provide us with the protection sought. Further, any third parties with whom we do not execute such agreements, such as certain of our suppliers, could attempt to dispute our intellectual property rights or misappropriate our technology or trade secrets. Policing unauthorized use of our proprietary information and technology is difficult and can be costly, and our efforts to do so may not prevent misappropriation of our technologies. We may become engaged in litigation to protect or enforce our patent and other intellectual property rights or in International Trade Commission proceedings to abate the importation of goods that would compete unfairly with our products and, if unsuccessful, these actions could result in the loss of patent or other intellectual property rights protection for the key technologies on which our business strategy depends.

 

We also rely in part on unpatented proprietary technology, and others may independently develop the same or similar technology or otherwise obtain access to our unpatented technology. We plan to require employees, contractors, consultants, financial advisors, suppliers, and strategic partners to enter into confidentiality and intellectual property assignment agreements (as appropriate), but these agreements may not provide sufficient protection for our trade secrets, know-how or other proprietary information.

 

The laws of certain countries do not protect intellectual property and proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions including China, we may be unable to protect our products, services, technologies and designs adequately against unauthorized third-party copying, infringement or use, which could adversely affect our competitive position. To protect or enforce our intellectual property rights, we may initiate proceedings or litigation against third parties. Such proceedings or litigation may be necessary to protect our trade secrets or know-how, products, technologies, designs, brands, reputation, likeness, authorship works or other intellectual property rights. Such proceedings or litigation also may be necessary to determine the enforceability, scope and validity of the proprietary rights of others. Any proceedings or lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Additionally, we may provoke third parties to assert claims against us, which could invalidate or narrow the scope of our own intellectual property rights. We may not prevail in any proceedings or lawsuits that we initiate and the damages or other remedies awarded, if any, may be significant. The occurrence of any of these events may adversely affect our business, financial condition and operating results.

 

We will register for certain of our trademarks in several jurisdictions worldwide. In some jurisdictions where we will apply to register our trademarks, other applications or registrations may exist for the same, similar, or otherwise related products or services. If we are not successful in arguing that there is no likelihood of confusion between our marks and the marks that are the subject of the other applications or registrations owned by third parties, our applications may be denied, preventing us from obtaining trademark registrations and adequate protection for our marks in the relevant jurisdictions, which could impact our ability to build our brand identity and market our products and services in those jurisdictions. Whether or not our application is denied, third parties may claim that our trademarks infringe their rights. As a result, we could be forced to pay significant settlement costs or cease the use of these trademarks and associated elements of our brand in the United States or other jurisdictions.

 

 

 

 

Even in those jurisdictions where we are able to register our trademarks, competitors may adopt or apply to register similar trademarks to ours, may register domain names that mimic ours or incorporate our trademarks, or may purchase keywords that are identical or confusingly similar to our brand names as terms in Internet search engine advertising programs, which could impede our ability to build our brand identity and lead to confusion among potential customers of our products and services. If we are not successful in proving that we have prior rights in our marks and arguing that there is a likelihood of confusion between our marks and the marks of these third parties, our inability to prevent these third parties from using our marks may negatively impact the strength, value and effectiveness of our brand names and our ability to market our products and prevent consumer confusion.

 

If we lose our rights under our third-party technology licenses, our operations could be adversely affected.

 

Our current or future products may depend in part on technology rights licensed from third parties. We could lose our exclusivity or other rights to use the technology under our licenses if we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors may terminate a license upon our breach and have the right to consent to sublicense arrangements. If we were to lose our rights under any of these licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market, and may even lose the ability to commercialize certain products or technologies completely. Either of these results could substantially decrease our revenues.

 

Further, to the extent we need to obtain licenses from third parties to advance our research and development efforts or commercialize or improve upon our products, we may fail to obtain these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize those products, which could harm our business significantly.

 

The licensing and acquisition of third-party intellectual property rights is a competitive practice, and companies that may be more established, or have greater resources than we do, may also be pursuing strategies to license or acquire third-party intellectual property rights that we may consider necessary or attractive in order to develop and commercialize our products. More established companies may have a competitive advantage over us due to their larger size and cash resources or greater hardware or software development, production and commercialization capabilities. We may not be able to successfully complete such negotiations and ultimately acquire the rights to the intellectual property surrounding product candidates that we may seek to acquire, in which case our business could be harmed.

 

Significant inflation could adversely affect our business and financial results.

 

The high rate of inflation and resulting pressures on costs and pricing of business such as ours focused on the manufacture and sale of electronics products could adversely impact our business and financial results. While inflation has created some salary pressure with our employees who wish to mitigate the impact of inflation, we have not yet suffered inflationary pressures in procurement. A rise in inflation can adversely affect us by increasing our operating costs, including by increasing the costs of materials, freight and labor, which have already been under pressure due to supply chain constraints and the effects of the COVID-19 pandemic and the shortage of chips. The Company has not identified, planned or taken any actions to mitigate inflationary pressures. Further, in the U.S. the Federal Reserve has responded by increasing interest rates to combat inflation, however such increases may result in a reduced demand for our products and/or an economic downturn. In a highly inflationary environment, or any recession or economic downturn that may result, we may be unable to adjust our business is a manner that adequately addresses these challenges, and these developments could materially adversely affect our business, results of operations and financial condition.

 

 

 

 

Risks Related to Government Regulation of Our Operations and Industry

 

Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies by us, our customers, or others who use our products, or limitations put on the use of unmanned aircraft systems, or “UAS,” in response to public privacy or safety concerns, may prevent us from expanding the sales of our drone solutions in the United States.

 

The regulation of UAS and drone solutions and component parts such as those we offer is subject to substantial change, with regulators including potential alterations, enhancements and additions to existing laws and regulations, and the ultimate treatment is uncertain. A substantial majority of our products are subject to drone-related regulations enforced by the FAA, either directly or due to their inclusion in UAS offered by third parties. Further, even if some of our operations or products are not directly subject to such regulations, Fat Shark’s customers’ operations of UAS that includes our products and technology are subject to those regulations, and their failure to comply will adversely affect our ability to sell to them in the future. Further, adverse regulatory actions such as enforcement proceedings affecting customers and other third parties with which we do business can also adversely affect us, even if the violation or harm alleged did not arise from our conduct or products. Generally, under current FAA regulations the failure to register a UAS, including model aircraft, in accordance with these rules may result in regulatory and criminal sanctions. The FAA may assess civil penalties up to $33,333. Criminal penalties include fines of up to $250,000 and/or imprisonment for up to three years. However, the FAA and other government bodies and agencies are considering changes to address the drone industry, which is relatively new and rapidly evolving. In addition, there exists public concern regarding the privacy and safety implications of the use of UAS. This concern has included calls to develop explicit written policies and procedures establishing usage limitations. We cannot assure you that the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the adoption of UAS and related products and technologies in certain markets. These developments, and any additional regulatory or other burdens imposed on our business and industry due to public health and safety or other concerns presently faced by the drone industry, could harm us and our customers and suppliers by increasing compliance costs and restricting our operations and product offerings and uses, which could materially adversely affect us.

 

Rising threats of international tariffs, including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.

 

We are heavily dependent on Chinese imports for our products and operations. For example, a substantial majority of Rotor Riot’s products are manufactured, directly and indirectly, using Chinese vendors. Fat Shark’s primary contract manufacturer is Shenzhen Fat Shark Technology Ltd. (“Supplier”), which is located in Shenzhen, China and provides product manufacturing services, including raw material procurement. The majority owner of this entity is the wife of Fat Shark’s founder. We do not have any written agreements with the Supplier and rely only on purchase orders. In addition, Fat Shark’s principal contract manufacturer is located in China. We do not have any written agreements with our other suppliers in China. We rely only on purchase orders. There are inherent risks and uncertainties regarding the enforcement of our rights with respect to our oral agreements and purchase orders. Should our suppliers in China fail to honor our oral agreements and purchase orders we will not have any recourse against such suppliers under Chinese law. The legal system in China and the enforcement of laws, rules and regulations in China can change quickly and the Chinese government may intervene or influence the operations of our suppliers which would adversely impact our business insofar as we would have to seek other suppliers outside of China and such suppliers would most likely charge us more for our products. Rising threats of international tariffs, including tariffs applied to goods traded between the U.S. and China, could materially and adversely affect our business and results of operations. Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding the possibility of instituting tariffs on the foreign imports of certain materials and products. During this trend, the U.S. and China imposed tariffs or announced proposed tariffs to be applied in the future to certain of each other’s exports. Beginning in 2019, the Trump administration imposed tariffs on imports of electronics products, including drones and component parts, of up to 25%. These tariffs apply to the vast majority of Rotor Riot’s and Fat Shark’s respective inventory, and Rotor Riot has in the past been, and either or both entities may in the future be, forced to implement price increases to adjust to the higher costs of production and sale, which imposes the risk of reduced demand for such products and lower sales and resulting revenue. Further, we do not know if the Biden administration or any subsequent administration will implement any, or alter current tariffs, in a manner adverse to us. These tariffs or any further costs or restrictions imposed on products that we import, could require us to raise our prices, which may result in the loss of customers and harm our business, particularly since we rely on consumer spending and our products are typically considered non-essential, and purchases are therefore highly price sensitive.

 

In addition, changes in political conditions in China and changes in the state of China-U.S. 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. In addition, because of our involvement in the Chinese market, any deterioration in political or trade relations might cause a public perception in the U.S. or elsewhere that might cause our business to become less attractive. Such an impact could adversely affect our revenues and cash flows.

 

 

 

 

We are subject to a number of supply risks concerning our Brave7 Flight Controller which could adversely impact our ability to deliver such products to the United States Department of Defense and commercial customers.

 

We purchase our Brave7 Flight Controllers from a privately-held United States based manufacturer pursuant to a purchase order for the initial order of 10,000 units. We are subject to a number of risks including:

 

	·	We do not have a supply agreement requiring the manufacturer to produce a specified volume per year;
	·	Of the initial 10,000 units, one overseas customer elected to purchase 6,600 controllers;
	·	The manufacturer expects to deliver the 10,000 controllers to us over a seven-month period which increases the likelihood we may be unable to meet a large order from one or more customers;
	·	Beyond the 10,000 units, we have no assurances on future pricing which means future costs could adversely affect our marketing and future gross margins;
	·	Because we have no non-compete from the manufacturer, it could manufacture controllers for our competitors;
	·	We have no representations from the manufacturer on its intellectual property ownership of the controllers; and
	·	Because we are not the manufacturer, we are subject to a number of risks including timely deliveries and quality control.

 

We are or may become subject to governmental export and import controls, economic sanctions and other laws and regulations that could subject us to liability and impair our ability to compete in international markets.

 

While we understand Fat Shark and/or Rotor Riot have had minimal sales outside of the U.S., we expect to seek to market our products outside of the U.S. The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies. Our products are subject to U.S. export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our products must be made in compliance with these laws. Furthermore, U.S. export control laws and economic sanctions prohibit the provision of products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we take precautions to prevent our products from being provided to targets of U.S. sanctions, our products, including our firmware updates, could be provided to those targets or provided by our customers despite such precautions.

 

Further, the manufacture and sale of our products in certain states and countries may subject us to environmental and other regulations. For example, many of Fat Shark and Rotor Riot’s products rely on electricity generated by lithium-ion batteries, which implicate a variety of environmental and other regulations designed to control the production, use, and transportation of hazardous materials such as lithium and other components and minerals deployed in these batteries. In addition, the increasing global focus on climate change, including greenhouse gas (“GHG”) emissions, has resulted in legislative and regulatory efforts to address the causes and impacts of climate change, and any new and more strict laws and regulations to reduce GHG emissions and address other aspects of climate change, including carbon taxes, cap and trade programs, GHG reduction requirements, requirements for the use of green energy, and changes in procurement requirements, may result in increased operational and compliance obligations, which could adversely affect our financial condition and results of operations.

 

Our failure to obtain required import or export approval or to comply with other applicable domestic or international laws and regulations for our products or operations could harm our international and domestic sales and adversely affect our revenue, or could subject us to costly proceedings, penalties or damages and negative publicity.

 

 

 

 

If the courts uphold the SEC’s climate change rules, we will incur additional costs which may materially and adversely affect our operating results and financial condition.

 

In March 2024, the SEC enacted comprehensive Climate Change Rules. Third parties immediately filed a lawsuit challenging the legality of these Rules and a federal Court of Appeals has issued a stay which means the SEC cannot presently enforce these Rules. If ultimately the Courts uphold these Rules, compliance will require us to spend material sums to be able to comply once they become applicable to us. Because of our small size, the additional costs may have a material adverse effect upon our future operating results and financial condition.

 

If we fail to comply with U.S. and foreign laws related to privacy, data security, and data protection, it could adversely affect our operating results and financial condition.

 

We, either directly or through our customers, collaborators or end-users of our products, are or may become subject to a variety of laws and regulations regarding privacy, data protection, and data security. This includes the European Union’s (“EU”) General Data Protection Regulation (the “EU GDPR”) and the United Kingdom’s General Data Protection Regulations (the “UK GDPR”) as a result of our sales in the EU. These laws and regulations are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly with respect to foreign laws. The application of these laws and regulations can arise from our e-commerce platform, social media activities, drone technology and applications, relationships with third parties and their operations, or from other activities we undertake now or that we may undertake in the future. Data privacy and protection regulations are frequently broad in terms of scope of the information protected, activities affected, and geographic reach.

 

In particular, there are numerous U.S. federal, state, and local laws and regulations and foreign laws and regulations regarding privacy and the collection, sharing, use, processing, disclosure, and protection of personal data. Such laws and regulations often vary in scope, may be subject to differing interpretations, and may be inconsistent among different jurisdictions. For example, the GDPR includes operational requirements for companies that receive or process personal data of residents of the EU that are broader and more stringent than those previously in place in the EU and in most other jurisdictions around the world. The GDPR includes significant penalties for non-compliance, including fines of up to €20 million or 4% of total worldwide revenue. Additionally, in June 2018, California enacted the California Consumer Privacy Act (the “CCPA”). In November 2020, the CCPA was amended by Proposition 24, the California Consumer Privacy Act, which extends the CCPA. The CCPA requires covered companies to provide California consumers with new disclosures and will expand the rights afforded consumers regarding their data. Fines for noncompliance may be up to $7,500 per violation. The costs of compliance with, and other burdens imposed by, the GDPR, CCPA, and similar laws may limit the use and adoption of our products and services and/or require us to incur substantial compliance costs, which could have an adverse impact on our business.

 

Since the CCPA was enacted, the U.S. currently has at least 20 states – California, Colorado, Connecticut, Delaware, Indiana, Iowa, Kentucky, Maryland, Minnesota, Montana, Nebraska, New Hampshire, New Jersey, Oregon, Rhode Island, Tennessee, Texas, Utah and Virginia, that have comprehensive data privacy laws in place, or enacted comprehensive data privacy laws set to soon take effect. An additional seven states have enacted narrower privacy laws – Florida, Maine, Michigan, Nevada, New York, Vermont, and Washington. So far during the 2024 legislative cycle, at least four states have introduced comprehensive privacy bills that address a range of issues, including protecting biometric identifiers and health data, or governing the activities of specific entities. However, this patchwork approach to privacy legislation could pose compliance and liability risks for companies that have multistate operations. Proposed and enacted bills in various states have similar rights in preexisting privacy legislation but differ in implementation and enforcement. In June 2024 the American Privacy Rights Act of 2024 was introduced in the U.S. House of Representatives and was subsequently referred to the House Committee on Energy and Commerce has and is not yet adopted. As introduced, this proposed legislation would establish requirements for how companies handle personal data by, among other things, limiting the collection, processing, and transfer of personal data, prohibiting companies from transferring individuals’ personal data without their affirmative express consent, establishing a right to access, correct, and delete personal data, requiring companies to provide individuals with a means to “opt out” of the transfer of non-sensitive covered data and the right to opt out of the user of their personal information for targeted advertising, requiring companies to implement security practices aimed at protecting personal data, and imposing enforcement actions and the possibility of civil proceedings for violations. Proposed federal legislation, like the American Privacy Rights Act of 2024, will likely continue to be debated and, at some point, may be enacted in some form.

 

 

 

 

We intend to strive to comply with all applicable laws, policies, legal obligations, and industry codes of conduct relating to privacy, data security, and data protection. Our limited resources may adversely affect our compliance effort. Given that the scope, interpretation, and application of these laws and regulations are often uncertain and may be in conflict across jurisdictions, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us, customers, or third-party vendors or end-users involved with our products to comply with our privacy or security policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personal data, may result in governmental enforcement actions, litigation, or negative publicity, and could have an adverse effect on our operating results and financial condition.

 

Governments are continuing to focus on privacy and data security, and it is possible that new privacy or data security laws will be passed or existing laws will be amended in a way that is material to our business. Any significant change to applicable laws, regulations, or industry practices regarding the personal data of our employees, agents or customers could require us to modify our practices and may limit our ability to expand or sustain our salesforce or bring our products to market. Changes to applicable laws and regulations in this area could subject us to additional regulation and oversight, any of which could significantly increase our operating costs and materially affect our operating results and financial condition.

 

Risks Related To Our Common Stock

 

Because the Purchase Price for Fat Shark and Rotor Riot exceeds an independent valuation that Red Cat received for the enterprise value of the target companies, you may lose all or part of your investment.

 

In connection with the acquisition, we paid Red Cat the Purchase Price of $22.1 million to acquire Fat Shark and Rotor Riot comprised of (i) $1.1 million in cash, (ii) the $4.0 million Note issued by the Company to Red Cat after the working capital adjustment, and (iii) $17.0 million of the Company’s common stock. In November 2020, Red Cat acquired Fat Shark for a purchase price of $8.4 million and in January 2020, Red Cat acquired Rotor Riot for a total purchase price of $2.0 million. In connection with the transaction, Red Cat received a valuation from a valuation expert engaged by Red Cat that estimated that Fat Shark and Rotor Riot had a combined enterprise value range of $5.1 million to $5.7 million, as of November 30, 2022. While the Purchase Price was negotiated in good faith between our Chief Executive Officer at that time and an independent special committee of the Red Cat Board, the Company does not intend to obtain an independent valuation on the assets and liabilities assumed. We anticipate to perform a valuation during the third quarter of 2024 based on final assets acquired and liabilities assumed to determine the final amounts of goodwill and other intangibles. See also the “Risk Factors – If we incur any future impairment in the carrying value of our goodwill asset or write-off our general intangibles, it could depress our stock price.” Accordingly, if the Company’s management is unsuccessful in implementing its growth strategy to grow its business to justify what it is paid for the Purchase Price, it is possible that an investor may lose all or part of its investment.

 

The market price of our shares of common stock is subject to fluctuation.

 

The market price of shares of our common stock may fluctuate and has fluctuated significantly in response to factors, some of which are beyond our control, including:

 

	·	our ability to integrate the operations of Fat Shark and Rotor Riot;
	·	the announcement of new products by our competitors;
	·	our ability to obtain patents for our products and defend our intellectual property from misappropriation and competitive use;
	·	progress and publications of the commercial acceptance of similar technologies to those we utilize;
	·	our ability to grow the revenues of Fat Shark and Rotor Riot and achieve consistent profitability;
	·	our ability to execute our business plan;

 

 

 

 

	·	actual or anticipated variations in operating results;
	·	additions or departures of key personnel including our executive officers;
	·	business disruptions caused by natural disasters and uncontrollable events such as severe weather conditions or geopolitical turmoil;
	·	cyber security attacks or data privacy issues involving our products or operations;
	·	announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, significant contracts, or other material developments that may affect our prospects;
	·	adverse regulatory developments;
	·	the possibility of a recession or market down-turn; or
	·	general market conditions including factors unrelated to our operating performance

 

Recently, the stock market, in general, has experienced extreme price and volume fluctuations due to, among other factors, concerns involving inflation, the Federal Reserve interest rate increases, supply chain shortages, recession fears, and geopolitical turmoil including the war in Ukraine and Israel. The current prolonged delay in providing new aid to Ukraine and Israel are evidence of the political uncertainties. Continued market fluctuations could result in extreme market volatility in the price of our common stock which could cause a decline in the value of our common stock below its recent price.

 

Our stock price may be volatile, which could result in substantial losses to investors.

 

In addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading volume for our common stock (including any stock-run ups or price declines) may change for a variety of other reasons, not necessarily related to our actual operating performance. The capital markets have experienced extreme volatility particularly with small public companies with relatively smaller public floats that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute to future volatility.

 

Factors that could cause the market price of our common stock to fluctuate significantly include:

 

	·	the results of operating and financial performance and prospects of other companies in our industry;
	·	strategic actions by us or our competitors, such as acquisitions or restructurings;
	·	announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;
	·	the public’s reaction to our press releases, other public announcements, and filings with the SEC;
	·	lack of securities analyst coverage or speculation in the press or investment community about us or market opportunities in the drone industry;
	·	changes in government policies in the United States and, as our international business increases, in other foreign countries;
	·	changes in earnings estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results of operations to meet those expectations;
	·	market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
	·	changes in accounting standards, policies, guidance, interpretations or principles;
	·	any lawsuit involving us or our products;
	·	arrival and departure of key personnel;
	·	sales of common stock by us, our investors or members of our management team; and
	·	changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.

 

 

 

 

Any of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock (including stock run ups or price declines) and could seriously harm the market price of our common stock, regardless of our operating performance. This may prevent you from being able to sell your shares at or above the price you paid for your shares, if at all. In addition, following periods of volatility in the market price of a company’s shares, shareholders often institute securities class action litigation against that company. Our involvement in any class action suit or other legal proceeding could divert our senior management’s attention and could adversely affect our business, financial condition, results of operations and prospects.

 

An active trading market for our common stock may not develop.

 

Prior to the IPO, there was no public market for our common stock. The IPO price for our common stock was determined through negotiations with the underwriters. Although our common stock trades on the NYSE American, an active trading market for our shares may never develop or be sustained following this IPO. If an active market for our common stock does not develop, it may be difficult to sell our common stock without depressing the market price for the common stock, or at all.

 

Because our sole remedy under the Purchase Agreement in the event of any breaches of representations and warranties is to cancel some or all of the 125,000 shares of our common stock held by Mr. Jeffrey Thompson, the value of such shares may be an insufficient remedy.

 

The Purchase Agreement contains representations and warranties made by Red Cat and Mr. Jeffrey Thompson, Red Cat’s Chief Executive Officer. Based upon negotiations with Red Cat and its counsel, we agreed that Mr. Thompson, one of our founders, and a member of our Board, will backstop Red Cat’s indemnification obligations under the Purchase Agreement in the event we claim Red Cat and/or Mr. Thompson have breached any of their respective representations and warranties contained in the Purchase Agreement, as amended, with 125,000 shares of our common stock held by Mr. Jeffrey Thompson (after giving effect to the 1-for-2 reverse stock split). Such shares will not be placed into escrow. Red Cat has no liability for such breaches by it. That means if the value of such shares held by Mr. Thompson is not at least equal to our damages, we will not have a remedy sufficient to permit us to recoup all of our damages. The only exception is fraud. Although we negotiated this limited remedy in good faith, it is possible that the shares held by Mr. Thompson may not be sufficient in which case such breach may adversely and materially affect our common stock price.

 

We are incurring significant additional costs as a result of being a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

 

With the completion of our IPO, we are incurring increased costs associated with corporate governance requirements that will become applicable to us as a public company, including rules and regulations of the SEC under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Customer Protection Act of 2010, and the Securities Exchange Act of 1934 (the “Exchange Act”), as well as the rules of NYSE American. These rules and regulations are expected to significantly increase our accounting, legal and financial compliance costs and make some activities more time consuming, including due to increased training of our current employees, additional hiring of new employees, and increased assistance from consultants. The SEC’s new cybersecurity rules and if upheld the new climate change rules will increase our compliance costs. We also expect these rules and regulations to make it more expensive for us to maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board or as executive officers. Furthermore, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs. In addition, our management team will need to devote substantial attention to interacting with the investment community and complying with the increasingly complex laws pertaining to public companies, which may divert attention away from the day-to-day management of our business, including operational, research and development and sales and marketing activities. Increases in costs incurred or diversion of management’s attention as a result of becoming a publicly traded company may adversely affect our business, prospects, financial condition, results of operations, and cash flows.

 

 

 

 

Our failure to maintain effective disclosure controls and internal controls over financial reporting could have an adverse impact on us.

 

We are required to establish and maintain appropriate disclosure controls and internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock. In our Form 10-K for the year ended December 31, 2023, we reported that we did not maintain effective disclosure controls or internal controls over financial reporting and in our Form 10-Q for the six months ended June 30, 2024, we reported that we had not remediated those material weaknesses. Investors may not purchase or hold our common stock as a result of these failures, which may result in lower prices.

 

Because our common stock is listed on NYSE American, we are subject to additional regulations and continued requirements.

 

With the completion of our IPO in February 2024, we are required to meet the continued listing standards for NYSE American. If we fail to meet NYSE American’s listing standards, our common stock may be delisted. NYSE American requires that the average closing price of its listed common stock remain above $1.00 over a 30 consecutive day period, in order to remain listed. In addition, to maintain a listing on NYSE American, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements. If we are unable to satisfy these requirements standards, our common stock could be subject to delisting. Delisting would have a negative effect on the price of our common stock and would impair your ability to sell our common stock when you wish to do so.

 

Our Board may authorize and issue shares of new classes of stock that could be superior to or adversely affect current holders of our common stock.

 

Our Board has the power to authorize and issue shares of classes of stock, including preferred stock that have voting powers, designations, preferences, limitations and special rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights without further shareholder approval which could adversely affect the rights of the holders of our common stock. In addition, our Board could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing common stockholders.

 

Any of these actions could significantly adversely affect the investment made by holders of our common stock. Holders of common stock could potentially not receive dividends that they might otherwise have received. In addition, holders of our common stock could receive less proceeds in connection with any future sale of the Company, in liquidation or on any other basis.

 

If we raise capital in the future, it may dilute our existing stockholders’ ownership and/or have other adverse effects on us, our securities or our operations.

 

If we are required to raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership may decrease, and these stockholders may experience substantial dilution. Additionally, the issuance of additional shares of common stock or other securities could result in a decline in our stock price. Further, if we are required to raise additional funds by issuing debt instruments, these debt instruments could impose significant restrictions on our operations, including liens on our assets and negative covenants prohibiting us from engaging in certain transactions or corporate actions that may have the effect of limiting our ability to pursue our business strategy and growth objectives.

 

 

 

 

Common stock eligible for future sale may adversely affect the market.

 

We entered into a registration rights agreement with each Principal Selling Stockholder under which the Company agreed to file a registration statement on Form S-1 to register the common stock, within 30 days of August 21, 2024 and to use its commercially reasonable efforts to have such registration statement declared effective 60 days (or 75 days if such registration statement is reviewed by the SEC) after filing the registration statement. The Registration Statement covers the sale of an aggregate of 7,017,538 common shares comprised of (i) 630,000 shares issuable upon the full conversion of the Series C, (ii) 630,000 shares issuable upon the full exercise of the Warrants, (iii) 1,507,538 shares issuable upon the full exercise of the New Notes, and (iv) 4,250,000 shares issuable upon the full conversion of the Company Series A Convertible Preferred Stock that is also held by the Principal Selling Stockholders. Pursuant to an underwriting agreement with the Representative, we also agreed to register 62,500 Representative Shares of our common stock issuable upon the exercise of the Representative Warrant.

 

Upon registration, the Registrable Securities, subject to certain beneficial ownership limitations, will be freely-tradable. The following discussion refers to the public sale of our common stock by our other stockholders beginning after expiration of the lockup agreement all of our officers, directors and 5% shareholders have entered into. From time-to-time after the expiration of the lock-up period, our stockholders may be eligible to sell all or some of their common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933 (the “Securities Act”), subject to certain limitations. In general, Rule 144 provides that any non-affiliate of the Company who has held restricted common stock for at least six months, is entitled to publicly sell their restricted stock, provided that the Company stays current in its SEC filings. Affiliates, which would include an officer, director or other person in control of the Company may sell after a six month holding period from the date of purchase) with the following restrictions: (i) the Company is current in its SEC filings, (ii) the holders comply with certain manner of sale provisions, (iii) the holders file a Form 144, and (iv) the holders comply with volume limitations limiting the sale of shares within any three-month period to the greater of (1) a number of shares that does not exceed 1% of the total number of outstanding shares, or (2) the average weekly trading volume computed over a four week period. A person who has ceased to be an affiliate at least three months immediately preceding the applicable sale and who has owned such shares of common stock for at least six months may sell the shares under Rule 144 without regard to any of the limitations described above except for the current public information requirement.

 

Future sales of substantial amounts of our common stock in the public market, or the anticipation of these sales, could materially and adversely affect market prices prevailing from time-to-time, and could impair our ability to raise capital through sales of equity or equity-related securities. In addition, the market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales may occur.

 

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our common stock, the market price for our common stock and trading volume could decline.

 

The trading market for our common stock will be influenced by research or reports that industry or securities analysts publish about our business. We do not currently have any analysts publish research reports about us, and we cannot assure you that any will. If analysts do, and one or more analysts who cover us downgrade our common stock, the market price for our common stock would likely decline. This Prospectus covers the resale of the Acquisition Shares and other shares of common stock by the Selling Stockholders.

 

We and our investors face the implications of our status as an emerging growth company under the federal securities laws and regulations.

 

We qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we have elected to take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include but are not limited to: reduced disclosure obligations regarding executive compensation in periodic reports, proxy statements and registration statements; and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

 

 

 

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least $1.235 billion; (b) the last day of our fiscal year following February 16, 2029; (c) the date on which we have, during the preceding three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur as of the end of any fiscal year if the market value of our common stock that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 

We have never paid dividends and we do not expect to pay dividends for the foreseeable future.

 

We intend to retain earnings, if any, to finance the growth and development of our business and do not intend to pay cash dividends on shares of our common stock in the foreseeable future. The payment of future cash dividends, if any, depend upon, among other things, conditions then existing including earnings, financial condition and capital requirements, restrictions in financing agreements, business opportunities and other factors. As a result, capital appreciation, if any, of our common stock, will be your sole source of gain for the foreseeable future.

 

Our Articles of Incorporation contains certain provisions which may result in difficulty in bringing stockholder actions against or on behalf of the Company or its affiliates.

 

Section 7 of our Articles of Incorporation provides that the internal affairs of the Company, including stockholder derivative actions, shall be brought exclusively in the courts located in Clark County, Nevada. To the extent that any such action asserts a claim under the Exchange Act, that claim must be brought in federal court. Section 7 also provides that the United States federal courts generally shall have exclusive jurisdiction over claims brought under the Securities Act, the effect of which is that an action under the Securities Act with respect to the Company may only be brought in the federal courts, whereas absent such provision the federal and commonwealth courts would otherwise have concurrent jurisdiction over such a matter. Any claim seeking relief under the Exchange Act may only be brought in federal court. Further, Section 7 also provides for the United States District Court for the District of Nevada as the exclusive venue for any cause of action under either the Securities Act or the Exchange Act, meaning such federal court is the only court in which such a case may be brought and heard. These provisions may have the effect of precluding stockholders from bringing suit in their forum or venue of choice. Further, these provisions may give rise to a potential ambiguity as to which courts – commonwealth or federal – should preside over certain cases such as cases with overlapping claims under both Nevada corporate law and the Securities Act and the rules and regulations thereunder. While the Supreme Court of Delaware has upheld a charter provision designating federal courts as the exclusive forum for actions brought under the Securities Act, it is unclear how a court in Nevada, might rule. Therefore, an investor seeking to bring a claim against or on behalf of the Company or its affiliates under Nevada law or the federal securities laws may be forced to litigate their case in a court which poses geographic or other hardships, and could face uncertainty as to which jurisdiction and venue the case will ultimately be heard in, which may delay, prevent or impose additional obstacles on the investor in such litigation. Investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder, and there is uncertainty as to whether a state or federal court would enforce this charter provision.

 

 

 

 

USE OF PROCEEDS

 

This Prospectus relates to the Shares that may be offered and sold from time-to-time by the Selling Stockholders. We will not receive any proceeds upon the sale of the Shares by the Selling Stockholders in this offering See “Plan of Distribution” elsewhere in this Prospectus for more information.

  

DIVIDEND POLICY

 

We have never declared nor paid any cash dividends on our common stock, and currently intend to retain all our cash and any earnings for use in our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends on our common stock will be at the discretion of the Board and will be dependent upon our consolidated financial condition, results of operations, capital requirements and such other factors as the Board deems relevant. 

 

DETERMINATION OF OFFERING PRICE

 

Each Selling Stockholder will determine at what price(s) such Selling Stockholder may sell the Securities, and such sales may be made at prevailing market prices, or at privately negotiated prices.

 

CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2024:

 

	·	on an actual basis;
	·	on a pro forma basis to give effect to (i) the cancellation of 4,250,000 shares of common stock and issuance of 4,250 shares of Series A preferred stock, and (ii) the reduction  of $1.0 million of the note payable in exchange for  210 shares of Series C  convertible into 630,000 shares of or our common stock.
	·	on a pro forma basis as adjusted basis to give effect to (i) the full conversion of 4,250 shares of Series A  into 4,250,000 shares of common stock, (ii) the full conversion of 50 shares of Series B  into 250,000 shares of common stock,  (iii) the full conversion of 210 shares of Series C  into 630,000 shares of common stock, (iv) the full exercise of the Warrants into 630,000 shares of our common stock,  and (v) the full conversion of the New Notes into 1,507,538 shares of our common stock. The pro forma adjustments do not take into account certain beneficial ownership limitations contained in the Series A, Series B, Series C, the Warrants and the New Notes.

 

The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the adjustments outlined above are subject to change. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments” on page 45 of this Prospectus and our consolidated financial statements and related notes included elsewhere in this Prospectus. The following table assumes the cancellation of 4,250,000 shares of our common stock, and excludes the 62,500 warrants issued to the Representative of the underwriters at the closing of the IPO.

 

 

 

 

		As of June 30, 2024 (Presented in $ except for share numbers)
		Actual				Pro forma (1)				Pro forma as adjusted (2)
Long term debt		$	4,000,000			$	3,000,000			$	–
Par value of preferred stock			0.01				0.01				0.01
Series A Convertible Preferred Stock, 0 shares issued and outstanding as of June 30, 2024			–				43				–
Series B Convertible Preferred Stock, 50 shares issued and outstanding as of June 30, 2024			1				1				–
Series C Convertible Preferred Stock, 210 shares issued and outstanding as of June 30, 2024			–				2				–
Par value of common stock			0.01				0.01				0.01
Common stock, 10,411,240 shares issued and outstanding as of June 30, 2024; pro forma as adjusted reflects 13,265,021 shares issued and outstanding			104,113				61,612				134,287
Additional paid in capital			26,518,993				27,561,449				30,488,820
Accumulated deficit			(6,651,286	)			(6,651,286	)			(6,651,286	)
Total stockholders’ equity		$	19,971,821			$	20,971,821			$	23,971,821
Total capitalization		$	23,971,821			$	23,971,821			$	23,971,821

 

	(1)	Reflects (i) the cancellation of 4,250,000 shares of common stock and issuance of 4,250 shares of Series A preferred stock, and (ii) conversion of $1.0 million of the note payable into 210 shares of Series C Convertible Preferred Stock.
	(2)	Reflects and gives effect to pro forma (1) adjustments and (i) the conversion of 4,250 shares of Series A Convertible Preferred Stock into 4,250,000 shares of common stock, (ii) the conversion of 50 shares of Series B Convertible Preferred Stock into 250,000 shares of common stock, (iii) the conversion of 210 shares of Series C Convertible Preferred Stock into 630,000 shares of common stock and (iv) the full exercise of warrants  into 630,000 shares of common stock, and (iv) full conversion of the New Notes into 1,507,538 shares of our common stock and reducing our debt by the remaining $3.0 million.

 

SELLING STOCKHOLDERS

 

We are registering the Shares in order to permit the Selling Stockholders to offer the Shares for resale from time-to-time. Except for the ownership of our securities, and as otherwise provided below, the Selling Stockholders have not had any material relationship with us within the past three years.

 

The table below lists the Selling Stockholders and other information regarding the beneficial ownership of the shares of common stock by each of the Selling Stockholders. The second column lists the number of shares of common stock beneficially owned by each of the Selling Stockholders, based on its ownership of the shares of common stock immediately prior to this offering.

 

 

 

 

The third column also lists the Shares being registered by this Prospectus for resale by the Selling Stockholders.

 

The Selling Stockholders may sell all, some or none of their Shares in this offering. See “Plan of Distribution.”

 

Name of Selling Stockholders		Shares of Common Stock Beneficially Owned prior to this Offering				Shares Offered by this Prospectus				Shares of Common Stock Beneficially Owned After this Offering				Percentage of Shares of Common Stock Beneficially Owned After this Offering (1)
Eleven Ventures LLC (2)			426,538				3,793,135	(3)			101,538				0.8%
Titan Multi Strategy Fund I Ltd. (4)			325,000				3,225,000	(5)			–				–%
Dominari Securities LLC (6)			45,250				45,250	(7)			–				–%
Revere Securities LLC (8)			8,750				8,750	(9)			–				–%
R.F. Lafferty & Co. (10)			8,500				8,500	(11)			–				–%

 

*	Less than 1%
(1)	Percentages are based on 13,265,021 shares of common stock outstanding as of the date of this Prospectus and assumes the Selling Stockholders’ Shares offered by this Prospectus are sold.
(2)	The 426,538 shares represents 101,538 shares of common stock which are not offered for sale by this Prospectus and 325,000 Shares issuable upon conversion of any of the New Note or Series C or exercise of the Warrants subject in all cases to a 4.99% beneficial ownership limitation. The Eleven Ventures LLC is managed by Eleven Managers LLC. Hartley Wasko is the sole manager of Eleven Managers LLC. Accordingly, Eleven Managers LLC and Hartley Wasko are each deemed to have beneficial ownership of Eleven Ventures LLC. The business address of Eleven Ventures LLC is 463 Adams Street, Denver, CO 80206.
(3)	Comprised of (i) 2,318,000 Shares issuable upon the full conversion of the Series A, (ii) 315,000 Shares of common stock issuable upon the full conversion of the Series C, (iii) 315,000 Shares issuable upon the full exercise of the Warrants and (iv) 845,135 Shares issuable upon the full conversion of the New Note.
(4)	The 325,000 Shares issuable upon conversion of  any of the New Note, the Series C or exercise of the Warrants, subject in all cases to a 4.99% beneficial ownership limitation. Titan Multi Strategy Fund I Ltd. is managed by Jonathan Honig. The business address for Titan Multi Strategy Fund I Ltd. is 5825 Windsor Court, Boca Raton, FL 33496.
(5)	Comprised of (i) 1,932,000 Shares issuable upon the full conversion of the Series A and (ii) 315,000 Shares issuable upon the full conversion of the Series C, (iii) 315,000 Shares issuable upon the full exercise of the Warrants and (iv) 662,403 Shares issuable upon the full conversion of the New Note.
(6)	Dominari Securities LLC is managed by CEO, Kyle Wool with a business address of 725 Fifth Avenue, 23rd Floor, New York, NY 10022
(7)	Represents 45,250 Shares issuable upon the full exercise of the Representative’s Warrant.
(8)	Revere Securities, LLC is managed by CEO, Bill Moreno with a business address of 560 Lexington Avenue, 16th Floor, New York, NY 10022
(9)	Represents 8,750 Shares issuable upon the full exercise of the Representative’s Warrant.
(10)	R.F. Lafferty & Co. is managed by CEO Henry Hackel with a business address of 40 Wall Street, 29th Floor, New York, NY 10005.
(11)	Represents 8,500 Shares issuable upon the full exercise of the Representative’s Warrant.

 

Material Relationships with Selling Stockholders

 

Dominari Securities LLC served as an underwriter and Representative of the Company in connection with the Company’s IPO that was consummated on February 16, 2024.

 

 

 

 

PLAN OF DISTRIBUTION

 

Each Selling Stockholder of the Shares offered hereby and any of their pledgees, assignees and successors-in-interest may, from time-to-time, sell any or all of their Shares on the principal trading market or any other stock exchange, market or trading facility on which Shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling Shares offered hereby:

 

	·	ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
	·	block trades in which the broker-dealer will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
	·	purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
	·	an exchange distribution in accordance with the rules of the applicable exchange;
	·	privately negotiated transactions;
	·	settlement of short sales;
	·	in transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such Shares at a stipulated price per share;
	·	through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
	·	a combination of any such methods of sale; or
	·	any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell the Shares offered hereby under Rule 144 or any other exemption from registration under the Securities Act, if available, rather than under this Prospectus.

 

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of Shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2121; and in the case of a principal transaction a markup or markdown in compliance with FINRA Rule 2121.

 

In connection with the sale of the Shares offered hereby or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of our common stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of our common stock short and deliver Shares offered hereby to close out their short positions, or loan or pledge shares of common stock covered hereby to broker-dealers that in turn may sell the shares. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of Shares offered by this Prospectus, which Shares such broker-dealer or other financial institution may resell pursuant to this Prospectus (as supplemented or amended to reflect such transaction).

 

 

 

 

The Selling Stockholders and any broker-dealers or agents that are involved in selling the Shares offered hereby may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the Shares offered hereby.

 

The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the Shares offered hereby. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

We agreed to keep the Registration Statement of which this Prospectus forms a part effective until the earlier of (i) the date on which the Shares offered hereby may be resold by the Selling Stockholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for us to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the Shares offered hereby have been sold pursuant to the Registration Statement of which this Prospectus forms a part or Rule 144 under the Securities Act or any other rule of similar effect. The Shares offered hereby will be resold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the Shares offered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the Shares offered hereby may not simultaneously engage in market making activities with respect to the Shares for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of the Shares by the Selling Stockholders or any other person. We will make copies of this Prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this Prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BUSINESS

 

Background of Unusual Machines

 

Unusual Machines is a Nevada corporation, with our principal place of business in Orlando, Florida. The Company was originally incorporated in Puerto Rico and reincorporated as a Nevada corporation on April 22, 2024.

 

Initial Public Offering

 

On February 16, 2024, we closed our IPO for the sale of 1,250,000 shares of common stock, at a public offering price of $4.00 per share. The IPO generated gross proceeds of $5.0 million and net proceeds of approximately $4.5 million. We incurred and paid additional direct offering costs prior to the close of the IPO of $0.1 million during the six months ended June 30, 2024, and $0.5 million during the year ended December 31, 2023. We used $1.0 million of proceeds to pay for the acquisition of Fat Shark and Rotor Riot as discussed below.

 

Acquisition of Fat Shark and Rotor Riot

 

Under the terms of the Purchase Agreement, the Company purchased from Red Cat its Rotor Riot and Fat Shark subsidiaries for $20.1 million comprised of (i) $1.1 million in cash, (ii) a $2.0 million promissory 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.

 

Simultaneous with the closing of our IPO, on February 16, 2024, we closed the acquisitions of Fat Shark and Rotor Riot.

 

On July 22, 2024, we finalized the working capital adjustment as stipulated in the Purchase Agreement, which resulted in an increase in the overall purchase price by an additional $2.0 million. We agreed to increase the principal amount of the original note for the working capital adjustment, which increased the total Note Payable to $4.0 million. In addition, we agreed to extend the maturity date of the promissory note to November 30, 2025. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments” on page 45 of this Prospectus for a discuss on the sale of the promissory note from Red Cat to the Principal Selling Stockholders and the New Notes issued in the aggregate principal amount of $3.0 million on August 21, 2024 in exchange for such promissory note.

 

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 $54.6 billion by 2030, with the commercial market growing at a 7.7% 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 vertically integrate the production of drone parts. The Company believes that very promising, private companies (such as those the company will likely target) 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.

 

 

 

 

First Person View (FPV) Market Segment

 

Fat Shark and Rotor Riot principally operate in the FPV segment of the drone industry. This segment focuses on drones piloted with wearable display devices. These are head mounted displays (“HMDs”) or goggles for drone pilots. These goggles give pilots FPV perspective to control their drone in flight. 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 into specially designed goggles worn by the pilot. The image is transmitted via radio (traditionally analog but increasingly digital) to the pilot. The drone remote control unit, the drone, and the FPV goggles 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 newer market segment characterized by the use cases of drones in the wars in Ukraine and Israel.

 

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 business from just B2C sales to 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 products and IP, starting with the Fat Shark and Rotor Riot acquisitions that were completed with our IPO, (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, (iv) enhancing the company’s products to improve the integration of third-party solutions, and (v) seeking strategic partnerships and sponsorships with companies that want access to the FPV community.

 

The approval of our Brave7 Flight Controller to the Blue UAS Framework marked a key step for Unusual Machines to expand into the B2B sector. Following that approval in August 2024, we agreed to sell 6,600 units to an overseas customer.

 

Customers

 

Revenues for Fat Shark are principally generated through distributors and for Rotor Riot online through its e-commerce site, www.rotorriot.com. Both Fat Shark and Rotor Riot market their products and services to recreational and professional drone pilots and hobbyists.

 

Competition

 

Rotor Riot 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. Other competitors include GetFPV and Lumenier. Race Day Quads is a larger, direct competitor in the FPV sector. Rotor Riot competes against these competitors by leveraging its visibility on the internet through its Facebook page which has more than 43,000 followers and its Rotor Riot YouTube channel which has more than 277,000 subscribers. We believe 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.

 

Fat Shark also competes with DJI along with other FPV headset companies including Skyzone FPV, Orqa, and HD Zero. The Fat Shark brand has been synonymous with FPV headsets since the emergence of the market in 2008. Fat Shark continues to compete through partnerships with other FPV companies and a focus on manufacturing and product quality.

 

 

 

 

Suppliers

 

Rotor Riot purchases inventory from approximately 50 suppliers although 57% of this inventory is purchased from four vendors. The two most critical components are electronics and frames. Approximately 95% of Rotor Riot’s inventory is purchased directly from Chinese vendors, all of which could be subject to varying tariffs. The United States has continuously increased tariffs since 2019, which Rotor Riot is currently subject to and range from 2% to 25%. These tariffs increase the cost of goods which reduces the company’s profit margins.

 

Fat Shark has sources over 90% of its components and inventory from a single Chinese supplier, Shenzhen Fatshark Co. Ltd. See “Related Party Transactions” for additional information. We source our Brave7 Flight Controller from a U.S. based manufacturer. See “Risk Factors” at page 6.

 

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.

 

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 U.S. 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 10 % of the drones sold by Rotor Riot are below the weight threshold required to register. The remaining 90% have more functionality, are more likely to be used for commercial purposes, and therefore, should be registered.

 

 

 

 

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 new climate change rules will likely increase our compliance costs.

 

Employees and Human Capital Resources

 

As of the date of this Prospectus, the Company has 15 full-time employees. In addition, our Chief Executive Officer is a full-time consultant through an entity he controls.

 

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 Company owns the intellectual property and all rights associated with them.

 

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	29/610,543	7/13/2017		UNMANNED AERIAL VEHICLE
Canada	Issued	179088	1/11/2018		UNMANNED AERIAL VEHICLE
China	Issued	201830008387.4	1/11/2018		UNMANNED AERIAL VEHICLE
EU	Issued	4665040	1/12/2018		UNMANNED AERIAL VEHICLE
Korea	Issued	30-2018-1689	1/11/2018		UNMANNED AERIAL VEHICLE
United States	Issued	15/684,814	8/23/2017		UNMANNED AERIAL VEHICLE
Canada	Abandoned	3009413	6/26/2018		UNMANNED AERIAL VEHICLE
China	Pending	201810895541.3	8/8/2018		UNMANNED AERIAL VEHICLE
EU	Pending	EP18179512.1	6/25/2018		UNMANNED AERIAL VEHICLE
United States	Issued	29/610,554	7/13/2017		PRINTED CIRCUIT BOARD
Canada	Issued	179089	1/11/2018		PRINTED CIRCUIT BOARD
China	Issued	201830008494.7	1/11/2018		PRINTED CIRCUIT BOARD
EU	Issued	4665032	1/12/2018		PRINTED CIRCUIT BOARD
Korea	Issued	30-2018-1690	1/11/2018		PRINTED CIRCUIT BOARD
China	Pending	201810324925.X	4/12/2018		SINGLE-PANEL HEAD-MOUNTED DISPLAY
EU	Pending	19159958.8	3/4/2019		SINGLE-PANEL HEAD-MOUNTED DISPLAY
United States	Issued	16/002,200	6/7/2018		SINGLE-PANEL HEAD-MOUNTED DISPLAY
China	Pending	202010150301.8	3/6/2020		APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST-PERSON VIEW HEADSET
United States	Published	17/187,838	2/28/2021		APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST-PERSON VIEW HEADSET
United States	Pending	29/783,966	5/17/2021		HEADSET
China	Pending	202130741102.X	11/11/2021		VR GLASSES
Canada, European Union Countries, Japan, United Kingdom	Pending	Not yet assigned	11/12/2021		HEADSET

 

 

 

 

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 U.S. and abroad.

 

Country	Status	Trademark	Reg. No.	Reg. Date.	App. No.	App. Date.	Class	Next Deadline
US	Registered	ROTOR RIOT	5,175,159	4/4/2017	87/074,341	6/16/2016	16, 25, 35, 41	AOU due 4/4/2023
Australia	Registered	ROTOR RIOT	1814854	4/18/2017	1814854	12/9/2016	16, 25, 35, 41	Renewal due 12/9/2026
Canada	Registered	ROTOR RIOT	TMA1013525	1/22/2019	1813182	12/8/2016	16, 25, 35, 41	Renewal due 1/22/2034
EU	Registered	ROTOR RIOT	016152688	5/14/2017	016152688	12/12/2016	16, 25, 35, 41	Renewal due 12/12/2026
UK	Registered	ROTOR RIOT	UK00916152688	5/14/2017	UK00916152688	12/12/2016	16, 25, 35, 41	Renewal due 12/12/2026
US	Registered	Rotor Riot Logo	5,175,160	4/4/2017	87/074,378	6/16/2016	16, 25, 35, 41	AOU due 4/4/2023
Australia	Registered	Rotor Riot Logo	1814855	4/18/2017	1814855	12/9/2016	16, 25, 35, 41	Renewal due 12/9/2026
Canada	Registered	Rotor Riot Logo	TMA1013624	1/22/2019	1813183	12/8/2016	16, 25, 35, 41	Renewal due 1/22/2034
EU	Registered	Rotor Riot Logo	016152837	5/14/2017	016152837	12/12/2016	16, 25, 35, 41	Renewal due 12/12/2026
UK	Registered	Rotor Riot Logo	UK00916152837	5/14/2017	UK00916152837	12/12/2016	16, 25, 35, 41	Renewal due 12/12/2026

 

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 our resources to create new drone technologies and solutions. 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.

 

Legal Proceedings

 

From time to time, we are involved in various disputes, claims, suits, investigations, and legal proceedings arising in the ordinary course of business. We believe that the resolution of current pending legal matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows. Nonetheless, we cannot predict the outcome of these proceedings, as legal matters are subject to inherent uncertainties, and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

Properties

 

We own no real estate properties. With the closing of our IPO, our principal place of business is located in Orlando, Florida at the Rotor Riot facility. In October 2023, Rotor Riot signed a five-year lease for a 6,900 sq. foot facility in Orlando, FL. We currently anticipate that the current leased space will be sufficient to support our current and future needs. In addition, we have an executive office located at 15 Ave. Muñoz Rivera, Suite 2200, San Juan, Puerto Rico 00901 which we sublet from Red Cat on month-to-month basis.

 

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited and unaudited financial statements (prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)) and related notes included elsewhere in this Prospectus. The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Prospectus, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Unusual Machines, Inc. and its subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted.

 

Recent Developments

 

Nevada Reincorporation

 

On April 22, 2024, we completed the change of our place of incorporation from Puerto Rico to Nevada.

 

Finalization of Working Capital Adjustment

 

On July 22, 2024, we finalized the working capital adjustment as stipulated in the Purchase Agreement, which resulted in an increase in the overall purchase price by an additional $2.0 million. We agreed to increase the principal amount of the original note for the working capital adjustment, which increased the total Note payable to $4.0 million. In addition, we agreed to extend the maturity date of the Original Note to November 30, 2025. Red Cat then sold the New Notes to the Principal Selling Stockholders on July 22, 2024.

 

Series A Convertible Preferred Stock

 

Effective July 16, 2024, we filed a Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock with the Nevada Secretary of State. On July 22, 2024, Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s common stock for 4,250 shares of the Company’s newly designated Series A. Red Cat then sold the Series A to the Principal Selling Stockholders on July 22, 2024.

 

See, “Description of Our Securities - Series A Convertible Preferred Stock” for more information about our Series A.

 

Series C Convertible Preferred Stock

 

 Effective August 21, 2024, we filed a Certificate of Designations, Preferences and Rights of the Series C Convertible Stock with the Nevada Secretary of State. On August 21, 2024 we entered into two Exchange Agreements with two Principal Selling Stockholders, under which each Principal Selling Stockholder exchanged their respective Old Notes for the New Notes, with an aggregate principal amount of $3,000,000. The New Notes reduced the outstanding principal amount previously owed by the Company by an aggregate of $1,000,000.

 

Pursuant to the terms of the Exchange Agreements, each Principal Selling Stockholder exchanged its Old Note for (i) the New Note, (ii) 105 shares of the newly-designated Series C, based on an exchange of $1.59 per common share into which the Series C Preferred Stock is convertible into (the share price at the close of the market on August 20, 2024). The 105 Series C is convertible into 315,000 shares of the Company’s common stock, and (iii) five-year Warrants exercisable for 315,000 shares of the Company’s common stock with an exercise price of $1.99 per share, subject to adjustments as set forth in the Warrants.

 

See, “Description of Our Securities - Series C Convertible Preferred Stock” for more information about our Series C.

 

 

 

 

Unusual Machines Results of Operations

 

Years Ended December 31, 2023 and 2022

 

Revenue

 

During the years ended December 31, 2023 and 2022, we did not generate any revenues and as such did not incur any cost of goods sold.

 

Operating Expenses

 

During the year ended December 31, 2023, we incurred research and development expenses totaling $0 compared to $91,325 for the year ended December 31, 2022, resulting in a decrease of $91,325 or 100%. Prior to the acquisition targets of Rotor Riot and Fat Shark, our primary focus was to create a US made camera sensor, which we no longer pursued after we signed our purchase agreement to acquire Rotor Riot and Fat Shark.

 

During the year ended December 31, 2023, we incurred general and administrative expenses totaling $2,377,862 compared to $1,079,715 for the year ended December 31, 2022, resulting in an increase of $1,298,147 or 120.2%. The increase primarily relates to stock compensation expense of $600,000 related to shares issued for services during 2023 and increased legal expenses and professional fees related to the business combination and for preparation of becoming a public company.

 

Net Loss

 

Net loss for the year ended December 31, 2023, totaled $2,383,462 compared to $1,171,777 for the year ended December 31, 2022, resulting in an increase of $1,211,685 or 103%. The increase in net loss relates to $600,000 in stock compensation expense and the increase in general and administrative expenses as we start to build out our operations for the business combination and becoming a public company.

 

Unusual Machines Cash Flows

 

Years Ended December 31, 2023 and 2022

 

Operating Activities

 

Net cash used in operating activities was $1,776,552 during the year ended December 31, 2023 compared to net cash used in operating activities of $1,189,191 during the year ended December 31, 2022, representing an increase of $587,361 or 49.4%. This increase in net cash used primarily resulted from our increase in net loss of $1,211,685, changes in other working capital of $20,554 offset by non-cash expenses of $604,715.

 

Investing Activities

 

Net cash used in investing activities was $3,164 during the year ended December 31, 2023 compared to net cash provided by investing activities of $40,647 during the year ended December 31, 2022, representing an overall decrease of $43,811 or 108%. The cash used in investing activities during 2023 related to purchasing computer equipment. The cash provided by investing activities during 2022 primarily related to a related party receivable for $45,222 being paid back, offset by the purchase of computer equipment of $4,575 during the year.

 

 

 

 

Financing Activities

 

Net cash used in financing activities totaled $424,933 during the year ended December 31, 2023 compared to net cash provided by financing activities of $462,075 during the year ended December 31, 2022, resulting in a decrease in a change in net cash by financing activities of $887,008 or 192%. The decrease is related to proceeds received from exempt private offerings of our common stock in 2022 that were not received in 2023 and the change in deferred offering costs related to our IPO of $337,108.

 

Results of Operations – Three Months Ended June 30, 2024 compared to the Three Months Ended June 30, 2023

 

Revenue

 

During the three months ended June 30, 2024 we generated revenues totaling $1,411,124 compared to $0 during the three months ended June 30, 2023, representing an increase of $1,411,124 or 100%. We did not generate any revenues until the closing of the acquisitions of Fat Shark and Rotor Riot on February 16, 2024. The majority of our revenue during the quarter relates to completed and fulfilled product sales during the period through our Rotor Riot retail channel and from our B2B wholesale through Fat Shark. We also generated $112,500 related to our Rampage event, which is an annual event held in May.

 

Cost of Goods Sold

 

During the three months ended June 30, 2024, we incurred cost of goods sold of $1,022,684 compared to $0 during the three months ended June 30, 2023, resulting in an increase of $1,022,684 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs.

 

Gross Margin

 

During the three months ended June 30, 2024, our gross margin was $388,440 compared to $0 during the three months ended June 30, 2023, resulting in an increase of $388,440 or 100%. Our gross margin, as a percentage of sales, totaled 28% during the three months ended June 30, 2024, compared to 0% during the three months ended June 30, 2023. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the period and the margins we generated during the quarter are in line with our expectations and normal operating margins.

 

Operating Expenses

 

During the three months ended June 30, 2024, operations expenses totaled $213,772 compared to $0 during the three months ended June 30, 2023, resulting in an increase of $213,772 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any operations expenses. Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses.

 

During the three months ended June 30, 2024, research and development expenses totaled $10,282 compared to $0 for the three months ended June 30, 2023, resulting in an increase of $10,282 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any research and development expenses during 2023. Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component manufacturing to the United States.

 

 

 

 

During the three months ended June 30, 2024, sales and marketing expenses totaled $386,332 compared to $0 for the three months ended June 30, 2023, resulting in an increase of $386,332 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any sales and marketing expenses. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses. In addition, we incurred approximately $143,000 in expenses related to our Rampage event, which is an annual event held in May.

 

During the three months ended June 30, 2024, general and administrative expenses totaling $1,349,587 compared to $434,917 for the three months ended June 30, 2023, resulting in an increase of $914,670 or 210%. The increase relates to stock compensation expense during quarter that we did not have in the previous year, increase in expenses related to closing the IPO including legal and accounting fees, additional transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.

 

Net Loss

 

Our net loss for the three months ended June 30, 2024, totaled $1,612,238 compared to $435,298 for the three months ended June 30, 2023, resulting in an increase in net loss of $1,176,940 or 270%. The increase in net loss primarily relates to stock compensation expense taken during the period, in addition to the increase in general and administrative expenses related to closing the IPO and the increased operations and sales and marketing expenses we incurred since the acquisition from Fat Shark and Rotor Riot. This was partially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot. In the third quarter of 2024, we expect that we may begin to amortize our intangibles, which will result in a non-cash charge going forward. Until we do a valuation, the amount is uncertain and the future charge may or may not be material.

 

Results of Operations – Six Months Ended June 30, 2024 compared to the Six Months Ended June 30, 2023

 

Revenue

 

During the six months ended June 30, 2024 we generated revenues totaling $2,030,039 compared to $0 during the six months ended June 30, 2023, representing an increase of $2,030,039 or 100%. We did not generate any revenues until the closing of the acquisitions of Fat Shark and Rotor Riot on February 16, 2024. Revenues relate to completed and fulfilled product sales during the period through our Rotor Riot retail channel and from our B2B wholesale through Fat Shark. We also generated $112,500 related to our Rampage event, which is an annual event held in May.

 

Cost of Goods Sold

 

During the six months ended June 30, 2024, we incurred cost of goods sold of $1,437,432 compared to $0 during the six months ended June 30, 2023, resulting in an increase of $1,437,432 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs.

 

Gross Margin

 

During the six months ended June 30, 2024, our gross margin was $592,607 compared to $0 during the six months ended June 30, 2023, resulting in an increase of $592,607 or 100%. Our gross margin, as a percentage of sales, totaled 29% during the six months ended June 30, 2024, compared to 0% during the six months ended June 30, 2023. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the period and the margins we generated during the quarter are in line with our expectations and normal operating margins.

 

 

 

 

Operating Expenses

 

During the six months ended June 30, 2024, operations expenses totaled $326,094 compared to $0 during the six months ended June 30, 2023, resulting in an increase of $326,094 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any operations expenses. Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses.

 

During the six months ended June 30, 2024, research and development expenses totaled $27,078 compared to $0 for the six months ended June 30, 2023, resulting in an increase of $27,078 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any research and development expenses during 2023. Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component manufacturing to the United States.

 

During the six months ended June 30, 2024, sales and marketing expenses totaled $543,390 compared to $0 for the six months ended June 30, 2023, resulting in an increase of $543,390 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any sales and marketing expenses. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses. In addition, we incurred approximately $143,000 in expenses related to our Rampage event, which is an annual event held in May.

 

During the six months ended June 30, 2024, general and administrative expenses totaling $2,353,761 compared to $1,612,440 for the six months ended June 30, 2023, resulting in an increase of $741,321 or 46%. The increase relates to increased expenses related to closing the IPO including legal and accounting fees, additional transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.

 

Net Loss

 

Our net loss for the six months ended June 30, 2024, totaled $2,718,240 compared to $1,613,202 for the six months ended June 30, 2023, resulting in an increase in net loss of $1,105,038 or 69%. The increase in net loss primarily relates the increase in general and administrative expenses related to closing the IPO with additional increase in expenses for operations and sales and marketing expenses we incurred since the acquisition from Fat Shark and Rotor Riot. This was partially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot. In the third quarter of 2024, we expect that we may begin to amortize our intangibles, which will result in a non-cash charge going forward. Until we do a valuation, the amount is uncertain and the future charge may or may not be material.

 

Cash Flow Analysis

 

Prior to the closing of our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cash inflows from operations and all cash outflows related to our activities related to our IPO. Our future cash flows from operating activities will be significantly impacted by revenues received, our investment in sales and marketing to drive growth, and general and administrative expenses related to operating a public company. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.

 

Operating Activities

 

Net cash used in operating activities was $2,181,840 during the six months ended June 30, 2024, compared to net cash used in operating activities of $1,022,861 during the six months ended June 30, 2023, representing an increase of $1,158,979 or 113%. This increase in net cash used primarily resulted from our increase in net loss of $1,105,038 and an increase in prepaid expenses of $253,424, other assets of $173,054 and non-cash expenses of $158,206, offset by a decrease in inventory of $152,566 and an increase in accounts payable and accrued expenses of $417,478.

 

 

 

 

Investing Activities

 

Net cash used in investing activities was $852,801 during the six months ended June 30, 2024 compared to net cash used in investing activities of $4,837 during the six months ended June 30, 2023, representing an increase of $847,964 or 100%. This increase in net cash used related to the $1,000,000 of cash used in the Purchase Agreement related to Fat Shark and Rotor Riot, offset by $147,199 in cash acquired as compared to $4,837 used for purchase of computer equipment during 2023.

 

Financing Activities

 

Net cash provided by financing activities totaled $4,362,313 during the six months ended June 30, 2024, compared to net cash used in financing activities of $223,579 during the six months ended June 30, 2023, resulting in an increase in net cash provided by financing activities of $4,585,892. The increase primarily relates to proceeds received from our IPO of $5,000,000, offset by change in deferred offering costs and other IPO related expenses of $414,108.

 

Liquidity and Capital Resources

 

As of June 30, 2024, we had current assets totaling $5,116,963 primarily consisting of cash balances of $2,222,445, inventory of $1,638,038 and prepaid expenses and deposits for inventory of $1,074,403. Our current liabilities as of June 30, 2024 totaled $931,200, primarily consisting of accounts payable and accrued expenses of $786,598 and customer deposits and other current liabilities of $144,602. Our net working capital as of June 30, 2024 was $4,185,763.

 

On February 16, 2024, we completed our IPO for the sale of 1,250,000 shares of common stock at a public offering price of $4.00 per share for gross proceeds of $5.0 million. After paying certain underwriting discounts and commissions, business combination cash payment and other expenses related to the IPO, we retained approximately $2.9 million in net proceeds.

 

As of September 10, 2024, we have approximately $1.5 million in cash. We believe that the net proceeds from our February 2024 IPO and existing cash balances will be sufficient to fund our current operating plans through at least the next 12 months. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate. We do not anticipate any significant cost increases post the Fat Shark and Rotor Riot and with consideration of the combined companies’ net low and cash position, we expect we will have sufficient working capital to support our operations for at least 12 months.

 

On July 22, 2024, we issued the New Notes following our agreement with Red Cat on the Working Capital Adjustment increasing the principal amount of such Note by $2,000,000 and extending the maturity date of such Notes to November 30, 2025. On August 21, 2024 we entered into two Exchange Agreements with the Principal Selling Stockholders, under which each Principal Selling Stockholder exchanged their respective Old Notes for the New Notes, with an aggregate principal amount of $3,000,000. The New Notes are convertible at any time by the holder into common stock at $1.99 per share (125% of the closing bid price on August 20, 2024). In addition, and upon an event of default, the Investors may require the Company to convert the New Notes into shares of our common stock, subject to beneficial ownership limitations set forth in the New Notes, at a conversion price equal to the 10% discount of the average three day VWAP, as defined in the New Notes, prior to the conversion date. Unless the Principal Selling Stockholders exercise their voluntary conversion rights which will result in dilution to our shareholders, we will need to either (a) raise additional capital, (b) refinance the New Notes, or (c) seek an extension of the maturity date of the New Notes. If we are unable to raise capital or explore such other options when needed or on acceptable terms, we may default under the obligation pursuant to the New Notes, or be forced to delay, reduce or eliminate certain operational efforts.

 

 

 

 

Critical Accounting Policies and Estimates

 

Our financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

 

Fair value of assets acquired and liabilities assumed in business combination

 

The Fat Shark and Rotor Riot acquisitions are accounted for as a business combination under ASC 805. We recognized the assets acquired and liabilities assumed at fair value as of the date of acquisition. We have not yet completed our evaluation of the fair value for determining the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period. The fair value will be determined based on assumptions used in valuations and estimates determined by management, which are subjective.

 

Impairment of goodwill and long-lived assets

 

Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets from acquired business are recognized at fair value on the acquisition date. We are continuing our evaluation of the fair value of the assets acquired and liabilities assumed from the Fat Shark and Rotor Riot acquisition, and we have not yet determined the unallocated purchase price between goodwill and other intangible assets. Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired.

 

Valuation of Inventory

 

Our policy for valuation of inventory requires us to evaluate the net realizable value of our inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence. We may be required to record inventory write-downs if actual inventory values are less favorable than those estimates by management.

 

 

 

 

Stock Based Compensation

 

Certain employees have received grants of common shares in our company. These awards are accounted for in accordance with guidance prescribed for accounting for equity-based compensation. Based on this guidance and the terms of the awards, the awards are equity classified.

 

The fair value of each award is determined using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option. The expected volatility was determined considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available from the St. Louis Federal Reserve Bank with a term equal to the expected life of the option. The expected life of the option was estimated based on a mid-point method calculation.

 

In addition, the Company issued shares of our common stock in 2023 to consultants for services performed. Prior to our IPO in February 2024, we were a private company with no active public market for our common stock. Therefore, we have periodically determined the overall value of our company and the estimated per share fair value of our common equity at their various dates and valuations based on a per share valuation using the private funding transactions as an estimate. These values and estimates are subjective.

 

Recently Issued Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MANAGEMENT

 

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 Chief Executive Officer of the Company, led to his appointment as a director.

 

 

 

 

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.

 

 

 

 

CORPORATE GOVERNANCE

 

Composition of our Board

 

Our Board 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

 

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.

 

 

 

 

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.

 

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 Dr. 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 – integrating the acquisition of Fat Shark and Rotor Riot 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.

 

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 4677 L B McLeod Rd, Suite J, Orlando, FL 32811, 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 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.

 

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 American, to recoup “excess” incentive compensation, if any, earned by current and former executive officers as determined by the Board in accordance with the definition in Section 10Dof the Exchange Act 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).

 

In addition, under our 2022 Equity Incentive Plan we generally grant equity awards to our officers, employees and independent directors which provide for clawback of profits and cancellation of awards in the event the grantee engages in certain wrongful conduct

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

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.

 

 

 

 

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.

 

On April 30, 2024, the Company issued 937,249 restricted shares of common stock to executive officers and board members of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through February 14, 2025.

 

On May 2, 2024, the Company issued an additional 40,650 of restricted shares of common stock to Allan Evans, the Company’s CEO related to an agreed upon reduction of salary. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan.

 

Employment Agreements

 

Consulting Agreement for the Services of Dr. Allan Evans, Chief Executive Officer

 

On December 4, 2023, the Board appointed Allan Evans as the Company’s Chief Executive Officer. On April 30, 2024, the Board approved the Company entering into a two-year Management Services Agreement (the “Consulting Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of Mr. Evans, whereby the Consultant will cause Mr. Evans to perform his services as the Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Mr. Evans by the Company in connection with his performance of such services. The Consulting Agreement allows Mr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Consulting Agreement, Mr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities similar to a biotech company which is engaged in active research and/or the overseeing of clinical trials. The Consultant will cause Mr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations activities; (iii) to report to the Board; (iv) to perform services for such subsidiaries of the Company as may be necessary.

 

 

 

 

The Consultant receives a $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restricted common stock, which Mr. Evans is deemed to beneficially own indirectly. The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan and is subject to the Consultant executing the Company’s standard Restricted Stock Agreement. The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that Mr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code.

The Company and Mr. Evans previously entered into an Offer Letter dated November 27, 2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023. The Consulting Agreement terminates and replaces the Offer Letter dated November 27, 2023.

 

The primary differences will be that we will not withhold federal income taxes from Dr. Evan’s compensation but will report his compensation on Form 1099 rather than W-2. He also will not participate in our health insurance plan or receive other benefits limited to employees.

 

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 the IPO, he received 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. Although the grant was to become effective 30 days following the closing of the Fat Shark and Rotor Riot acquisition, no grant has occurred.

 

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.

 

 

 

 

Employment arrangement with Andrew Camden, Chief Operating Officer

 

Our Board appointed Mr. Camden, Chief Operating Officer on March 4, 2024, and agreed to pay him a salary of $150,000 per year pursuant to an oral agreement. His base salary was increased to $200,000 per year effective September 1, 2024.

 

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.

 

On April 30, 2024, the Company issued the non-employee directors listed in the table below restricted shares of our common stock under the Company’s 2022 Equity Incentive Plan. The shares are fully vested and were granted for services as a member of the board of directors and, where applicable, committee chair or committee membership. The directors also received a cash grant during the quarter of $16,250 for committee members and $15,000 for non-committee members.

 

Director	Fair Value Per Share	Amount of Restricted Common Stock	Aggregate Fair Value
Cristina Colon	$1.2	27,083	$32,500
Sanford Rich	$1.2	27,083	$32,500
Robert Lowry	$1.2	27,083	$32,500
Jeffrey Thompson	$1.2	25,000	$30,000

 

On July 30, 2024, the Company issued the non-employee directors listed in the table below the equity portion of their quarterly compensation. Each of the directors received a vested restricted stock grant for services as a director (and where applicable, committee member) during the quarter ended June 30, 2024. The shares of restricted common stock were subject to each director executing the Company’s standard Restricted Stock Agreement, which occurred on July 29, 2024. The fair value per share was based on the quoted trading price as of the close of the market as of July 17, 2024.

 

Director	Fair Value Per Share	Amount of Restricted Common Stock	Aggregate Fair Value
Cristina Colon	$1.79	6,052	$10,833
Sanford Rich	$1.79	6,052	$10,833
Robert Lowry	$1.79	6,052	$10,833
Jeffrey Thompson	$1.79	5,587	$10,000

 

The directors also received a cash grant for the quarter of $5,416.67 for committee members and $5,000 for non-committee members.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Our common stock issued is quoted on the NYSE American under the symbol “UMAC.” On September 10, 2024, the last reported sale price of our common stock on the NYSE American was $1.67.

 

Stockholders

 

As of September 6, 2024, there were approximately 974 holders of record of our common stock. These numbers are based on the actual number of holders registered at such date and does not include holders whose shares are held in “street name” by brokers and other nominees.

 

Dividends

 

We have never paid a cash dividend on our common stock since inception. The payment of dividends may be made at the discretion of our Board, and will depend upon, but not limited to, our operations, capital requirements, and overall financial condition.

 

We do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the Board may consider relevant. We intend to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business. If we do not pay dividends, our common stock may be less valuable because a return on your investment will occur only if our stock price appreciates.

 

RELATED PARTY TRANSACTIONS

 

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 April 30, 2024 (“Grant Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services as the Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant agreed to cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations activities; (iii) to report to the Company’s board of directors; (iv) to perform services for such subsidiaries of the Company as may be necessary.

 

 

 

 

The Consultant receives a $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restricted common stock. The fair value of the shares was $585,600 based on the $1.20 quoted trading price on the Grant Date and will be recognized over the service period (see below). The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan. The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that Dr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code. The Company and Dr. Evans previously entered into an Offer Letter dated November 27, 2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023. The Agreement terminates and replaces the Offer Letter dated November 27, 2023.

 

In February 2024, the Company completed the acquisitions to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO.

 

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. 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.

 

 

 

 

PRINCIPAL STOCKHOLDERS

 

The following table sets forth information regarding the beneficial ownership of our common stock as of September 10, 2024 by (i) each person, entity or group (as that term is used in Section 13(d)(3) of the Exchange Act) 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., 4677 L B McLeod Rd., Suite J, Orlando Florida, 32811.

 

The percentages below are calculated based on 6,184,983 shares of common stock issued and outstanding as of September 10, 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:
		Common Stock				553,650			8.95%
Brian Hoff		Common Stock				293,000			4.74%
Jeffrey Thompson		Common Stock				359,087			5.81%
Sanford Rich		Common Stock				45,435			0.73%
Robert Lowry		Common Stock				33,135			0.54%
Cristina Colón		Common Stock				37,962			0.61%
All executive officers and directors as a group (7 persons)		Common Stock				1,373,269			22.2%
Other 5% Holders
Gordon Holmes (1)		Common Stock				362,500			5.86%

 

The numbers and percentages outstanding in these columns, exclude:

 

	·	62,500 shares of our common stock issuable upon the full 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.
	·	4,250,000 shares of our common stock, issuable upon full conversion of Series A preferred stock. The Series A preferred stock can be converted to common stock upon written notice to the Company subject to certain ownership blockers.
	·	250,000 shares of our common stock, issuable upon the full conversion of Series B preferred stock. The Series B preferred stock can be converted to common stock upon written notice to the Company.
	·	630,000 shares of our common stock, issuable upon the full conversion of Series C preferred stock. The Series B preferred stock can be converted to common stock upon written notice to the Company.
	·	630,000 shares of our common stock, issuable upon the full exercise of warrants to the Principal Stockholders
	·	1,507,538 shares issuable upon the full conversion of the New Notes.
	·	Future equity grants to our executive officers, Chief Financial Officer and independent directors. See “Executive Compensation.”
	(1)	Based upon the Company’s stock transfer records as of September 5, 2024.

 

 

 

 

DESCRIPTION OF OUR SECURITIES

 

Our authorized capital stock consists of 500,000,000 shares of common stock, par value $0.01 per share, of which 6,184,983 shares are outstanding as of September 10, 2024, and 10,000,000 shares of “blank check” preferred stock, par value $0.01 per share, of which no shares are outstanding, other than the Series A, Series B Convertible Preferred Stock, and Series C, described below, as of the date of this Prospectus.

 

The following description summarizes the material terms of our securities, which does not purport to be complete and is qualified in its entirety by reference to our Articles of Incorporation, and the Certificates of Designation setting forth the terms of our Series A, Series B Convertible Preferred Stock, and Series C, each of which are filed as an exhibit to the Registration Statement of which this Prospectus is a part, and to the applicable provisions of Nevada law, including the Nevada Revised Statutes.

 

Common Stock

 

The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of outstanding common stock entitled to vote in any election of directors may elect all of the directors standing for election, subject to any voting rights of any preferred stock. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends as may be declared by the Board out of funds legally available therefor. Upon the liquidation, dissolution or winding up of the Company, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive rights and no right to convert their common stock into any other securities. Our common stock has no redemption or sinking fund provisions. The rights, preferences and privileges of the holders of the common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock that the Board may designate and issue in the future. All outstanding shares of common stock are fully paid and non-assessable.

 

“Blank Check” Preferred Stock

 

Pursuant to our Articles of Incorporation, our Board has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock, in one or more series. Our Articles of Incorporation provide that our Board has the authority, without further action by the shareholders, to designate and issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon the preferred stock. Preferred stock may be designated and issued without authorization of shareholders unless such authorization is required by applicable law, the rules of the principal market or other securities exchange on which our stock is then listed or admitted to trading.

 

Our Board may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes could, under some circumstances, have the effect of delaying, deferring or preventing a change in control of the Company.

 

Series A Convertible Preferred Stock

 

We have 4,250 outstanding shares of Series A as of the date of this Prospectus. Each share of Series A is convertible into 1,000 shares of our common stock at the election of the holder The Series A ranks senior to both the Company’s common stock and any other series of preferred stock with respect to the preferences as to dividends, distributions, and payments, upon the liquidation, dissolution, and winding up of the Company. Each share of Series A may be converted into 1,000 shares of the Company’s common stock. The Series A has a conversion beneficial ownership limitation of 4.99%, or 9.99% upon election of the holder upon at least 61 days written notice to the Company. The Series A has no voting rights, except as required by law and as expressly provided in the Certificate of Designations, Preferences, and Rights of the Series A Convertible Preferred Stock (the “Series A COD”). The Series A COD became effective on July 17, 2024.

 

 

 

 

Series B Convertible Preferred Stock

 

We have 50 outstanding shares of Series B as of the date of this Prospectus. Each share of Series B is convertible into 5,000 shares of our common stock at the election of the holder, subject to a 4.99% beneficial ownership limitation which may be increased to up to 9.99% upon 61 days’ written notice from the holder. The Series B is non-voting and has no other special rights other than the conversion feature.

 

Series C Convertible Preferred Stock

 

We have 210 outstanding shares of Series C as of the date of this Prospectus. Each share of Series C is convertible into 3,000 shares of our common stock at the election of the holder The Series C has a beneficial ownership limitation of 4.99%, or 9.99% upon election of the holder of the Series C upon at least 61 days written notice. The terms of the Certificate of Designations, Preferences, and Rights of the Series C Convertible Preferred Stock (the “Series COD”) The Series C COD prohibit the Company from effectuating any conversion of the Series C to the extent such Series C holder or any of its affiliates would beneficially own over 19.9% of the Company’s common stock outstanding as of August 21, 2024, or such lesser percentage as determined by the NYSE American, until the Company receives stockholder approval, if required by the NYSE American. The Series C COD became effective on August 21, 2024.

 

Anti-Takeover Effects of Provisions of our Articles of Incorporation, our Bylaws, and Nevada Law

 

Certain provisions in our Articles of Incorporation and Bylaws summarized below may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the market price for the shares held by stockholders.

 

Advance Notice Requirements for Director Nominations.

 

Our Bylaws will provide that stockholders seeking to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder’s notice generally must be delivered to and received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting; provided, that, in the event that the date of such meeting is advanced more than 30 days prior to the anniversary of the preceding year’s annual meeting of our stockholders, a stockholder’s notice to be timely must be so delivered not later than the close of business 10 days following the earlier of (i) the day on which notice of the date of the annual meeting was mailed or (i) the day public disclosure of the date of the annual meeting was made. In the case of a special meeting of the stockholders called for the purpose of electing directors, a stockholder’s notice to be timely must be so delivered not later than the close of business 10 days following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. Our Bylaws also will specify certain requirements as to the form and content of a stockholder’s notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual meeting of stockholders.

 

Special Meeting Limitations

 

Under our Bylaws, unless otherwise provided by law or our Articles of Incorporation, special meetings of the stockholders may be called only by (i) the Chairman of our Board; (ii) our Chief Executive Officer or President; or (iii) a majority of our Board.

 

 

 

 

Jurisdiction and Venue

 

Section 7(a) of our Articles of Incorporation provides that lawsuits involving the Company and its internal affairs, including derivative actions brought on behalf of the Company by its stockholders under Nevada law, be governed by the laws of Nevada and providing that resulting proceedings be heard exclusively in the courts located in Clark County, Nevada, which may make actions against or on behalf of the Company more difficult to litigate by stockholders. Similarly, Section 7(b) of our Articles of Incorporation provide the United States federal courts with exclusive jurisdiction over claims brought under the Securities Act. The effect of this provision is that an action under the Securities Act with respect to the Company may only be brought in the federal courts, whereas absent such provision the federal state courts would otherwise have concurrent jurisdiction over such a matter. Further, Section 7(c) provides for the United States District Court for the District of Nevada as the exclusive venue for any cause of action under either the Securities Act or the Exchange Act, meaning such federal court is the only court in which such a case may be brought and heard.

 

These provisions, together with provisions of the Nevada Revised Statutes, could have the effect of delaying, deferring or preventing an attempted takeover or change of control of the Company, or making such an attempt more difficult. Additionally, while the Delaware Supreme Court has upheld a similar provision, it remains unclear how a Nevada court would interpret and whether it would enforce some of these provisions, resulting in added uncertainty. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder, and that there is uncertainty as to whether a state or federal court would enforce these charter provisions.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is Equity Stock Transfer whose address is 237 West 37th Street, Suite 602, New York, New York 10018, and whose telephone number is (212) 575-5757.

 

LEGAL MATTERS

 

The validity of the securities being offered by this Prospectus will be passed upon for us by Nason, Yeager, Gerson, Harris & Fumero, P.A.

 

EXPERTS

 

The consolidated financial statements of the Company as of December 31, 2023 and 2022 included in this Prospectus have been so included in reliance on the report of Salberg & Company, P.A. an independent registered public accounting firm, which includes an explanatory paragraph about the Company’s ability to continue as a going concern, given on the authority of said firm as experts in auditing and accounting.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC this registration statement on Form S-1 under the Securities Act with respect to the shares of common stock being offered by this Prospectus. This Prospectus, which constitutes a part of this registration statement, does not contain all of the information in this registration statement and its exhibits. For further information with respect to us and the common stock offered by this Prospectus, you should refer to this registration statement and the exhibits filed as part of that document. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to this registration statement. Each of these statements is qualified in all respects by this reference.

 

With the completion of the IPO, we are now subject to the informational requirements of the Exchange Act and will file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings, including the registration statement, at the SEC’s website at www.sec.gov. We also maintain a website at https://unusualmachines.com/investors and you may access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained on, or that can be accessed through, our website is not a part of this Prospectus. You may also request a copy of these filings, at no cost, by writing or telephoning us at: Unusual Machines, Inc., 4677 LB McLeod Rd., Suite J, Orlando, FL 32811 or contacting us at +1 855-921-4600.

 

 

 

 

UNUSUAL MACHINES, INC.

INDEX TO FINANCIAL STATEMENTS

 

 

Page

 

Unusual Machines, Inc. Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID #106)	F-1
Balance Sheets at December 31, 2023 and 2022	F-2
Statement of Operations for the years ended December 31, 2023 and 2022	F-3
Statement of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022	F-4
Statement of Cash Flows for the years ended December 31, 2023 and 2022	F-5
Notes to Financial Statements	F-6

 

Unusual Machines, Inc. Unaudited Interim Financial Statements
Consolidated Condensed Balance Sheets at June 30, 2024 and December 31, 2023	F-25
Unaudited Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2024 and 2023	F-26
Unaudited Consolidated Condensed Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2024 and 2023	F-27
Unaudited Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2024 and 2023	F-28
Notes to Unaudited Consolidated Condensed Financial Statements	F-29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of:

Unusual Machines, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Unusual Machines, Inc. (the “Company”) as of December 31, 2023 and 2022, the related statements of operations, changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

 

Restatement

 

As discussed in Note 9 to the financial statements, the 2023 and 2022 financial statements, as originally audited by a predecessor auditor, have been restated to correct certain errors.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined there were no critical audit matters.

 

 

/s/ Salberg & Company, P.A.

 

SALBERG & COMPANY, P.A.

We have served as the Company’s auditor since 2024

Boca Raton, Florida

August 9, 2024

 

  

 

 

Unusual Machines, Inc.

Balance Sheets

 

		December 31,
		2023				2022
		(As restated – Note 9)				(As restated – Note 9)
ASSETS
Current assets:
Cash		$	894,773			$	3,099,422
Other current assets			120,631				39,375
Total current assets			1,015,404				3,138,797
Property and equipment, net			1,254				3,690
Deferred offering costs			512,758				87,825
Other assets			–				100,000
Total non-current assets			514,012				191,515
Total assets		$	1,529,416			$	3,330,312
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses		$	114,497			$	131,931
Total current liabilities			114,497				131,931
Stockholders’ equity:
Series B preferred stock - $0.01 par value, 10,000,000 authorized and 190 and 140 shares issued and outstanding at December 31, 2023 and 2022, respectively			2				1
Common stock - $0.01 par value, 500,000,000 authorized and 3,217,255 and 3,392,250 shares issued and outstanding at December 31, 2023 and 2022, respectively			32,173				33,923
Additional paid in capital			5,315,790				4,714,041
Accumulated deficit			(3,933,046	)			(1,549,584	)
Total stockholders’ equity			1,414,919				3,198,381
Total liabilities and stockholders’ equity		$	1,529,416			$	3,330,312

 

See accompanying independent auditor’s report and notes to the financial statements.

 

 

 

 

 

 

 

 

 

 

Unusual Machines, Inc.

Statements of Operations

 

 

		Year Ended December 31,
		2023				2022
		(As restated – Note 9)				(As restated ‐ Note 9)
Revenue		$	–			$	–
Cost of goods sold			–				–
Gross profit			–				–
Operating expenses:
Research and development			–				91,325
General and administrative			2,377,862				1,079,715
Depreciation and amortization			5,600				885
Total operating expenses			2,383,462				1,171,925
Loss from operations			(2,383,462	)			(1,171,925	)
Other income:
Interest income			–				148
Total other income			–				148
Net loss before income tax			(2,383,462	)			(1,171,777	)
Income tax benefit (expense)			–				–
Net loss		$	(2,383,462	)		$	(1,171,777	)
Net loss per share attributable to common stockholders
Basic and diluted		$	(0.72	)		$	(0.29	)
Weighted average common shares outstanding
Basic and diluted			3,307,118				4,051,205

 

 

See accompanying independent auditor’s report and notes to financial statements.

 

 

 

 

 

Unusual Machines, Inc.

Statements of Changes in Stockholders’ Equity (As restated – Note 9)

For the Years Ended December 31, 2023 and 2022

 

		Series B, Preferred Stock								Common Stock								Additional Paid-In				Accumulated
		Shares				Value				Shares				Value				Capital				Deficit				Total
Balance, December 31, 2021			–			$	–				4,036,000			$	40,360			$	4,257,605			$	(377,807	)		$	3,920,158
Issuance of common stock for cash			–				–				56,250				563				449,437				–				450,000
Conversion to preferred stock			140				1				(700,000	)			(7,000	)			6,999				–				–
Net loss			–				–				–				–				–				(1,171,777	)			(1,171,777	)
Balance, December 31, 2022			140			$	1				3,392,250			$	33,923			$	4,714,041			$	(1,549,584	)		$	3,198,381
Issuance of common shares for services			–				–				75,005				750				599,250				–				600,000
Conversion to preferred shares			50				1				(250,000	)			(2,500	)			2,499				–				–
Net loss			–				–				–				–				–				(2,383,462	)			(2,383,462	)
Balance, December 31, 2023			190			$	2				3,217,255			$	32,173			$	5,315,790			$	(3,933,046	)		$	1,414,919

 

 

See accompanying independent auditor’s report and notes to financial statements.

 

 

 

 

 

Unusual Machines, Inc.

Statements of Cash Flows

 

		Year Ended December 31,
		2023				2022
		(As restated – Note 9)				(As restated – Note 9)
Cash flows from operating activities:
Net loss		$	(2,383,462	)		$	(1,171,777	)
Depreciation			5,600				885
Stock compensation expense			600,000				–
Change in assets and liabilities:
Accounts receivable			–				945
Other assets			18,744				(139,375	)
Accounts payable and accrued expenses			(17,434	)			120,131
Net cash used in operating activities			(1,776,552	)			(1,189,191	)
Cash flows from investing activities
Related party receivable			–				45,222
Purchases of property and equipment			(3,164	)			(4,575	)
Net cash provided by (used in) investing activities			(3,164	)			40,647
Cash flows from financing activities:
Proceeds from common stock receivable			–				99,900
Issuance of common stock			–				450,000
Deferred offering costs			(424,933	)			(87,825	)
Net cash provided by (used in) financing activities			(424,933	)			462,075
Net increase (decrease) in cash			(2,204,649	)			(686,469	)
Cash, beginning of year			3,099,422				3,785,891
Cash, end of year		$	894,773			$	3,099,422
Supplemental disclosures of cash flow information:
Cash paid for interest		$	–			$	–
Cash paid for income tax		$	–			$	–

 

 

See accompanying independent auditor’s report and notes to financial statements.

 

 

 

 

Unusual Machines, Inc.

Notes to Financial Statements

For the Years Ended December 31, 2023 and 2022

 

 

Note 1 – Organization and nature of business

 

Unusual Machines, Inc. (“the Company”) is a Nevada corporation engaged in the commercial drone industry. The Company was a Puerto Rican corporation when it closed its IPO, as defined below. On April 22, 2024, the Company reincorporated as a Nevada corporation.

 

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 (“IPO Price”). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (“Red Cat”). See Note 8 for additional details.

 

Note 2 – Summary of significant accounting policies

 

Basis of Accounting

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material. The financial statements include some amounts that are based on management’s best estimates and judgments. Significant estimates in 2023 and 2022 include stock compensation and deferred tax assets.

 

Cash

 

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at December 31, 2023 or December 31, 2022.

 

The Company maintains cash deposits at a financial institution that is insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. At December 31, 2023 and December 31, 2022, the Company had approximately $0.6 million and $2.8 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests.

 

Deferred offering costs

 

The Company deferred direct incremental costs associated with its ongoing initial public offering (“IPO”). The Company capitalized $424,933 and $87,825 during the years ended December 31, 2023 and 2022, respectively. Total deferred offering costs were $512,758 as of December 31, 2023. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation and preparation of the IPO. After consummation of the IPO in February 2024, total deferred offering costs of $640,445 were recorded as a reduction to additional paid-in capital generated as a result of the offering.

 

 

 

 

Note Receivable

 

At December 31, 2021, the Company had a loan receivable due from Rotor Riot LLC, a related party, of $45,222. The loan did not bear interest. The amount was fully repaid in 2022.

 

Property and equipment, net

 

Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets of three years.

 

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures

 

The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

  

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

The guidance establishes three levels of the fair value hierarchy as follows:

 

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

 

The Company’s financial instruments mainly consist of cash, current assets, accounts payable and accrued expenses. The carrying amounts of cash, current assets, accounts payable and accrued expenses approximates fair value due to the short-term nature of these instruments.

 

Revenue Recognition

 

The Company will recognize revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:

 

Step 1: Identify the contract with a customer;

Step 2: Identify the performance obligations in the contract;

Step 3: Determine the transaction price;

Step 4: Allocate the transaction price to the performance obligations in the contract; and

Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.

 

The Company did not have any revenue during the years ended December 31, 2023 and 2022.

 

 

 

 

Research and Development

 

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs, materials, and a proportionate share of overhead costs.

 

Income Taxes

 

The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.

 

The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.

 

Stock-Based Compensation

 

Stock options are valued using the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. The Company recognizes forfeitures as they occur. The fair value of stock grants is based on our stock price on the date of grant. Compensation costs are recognized on a straight-line basis over the service period which is the vesting term.

 

Net Loss per Share

 

Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.

 

Recent Accounting Pronouncements

 

In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment’s profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption.

 

In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.

 

 

 

 

 

Note 3 – Other Assets

 

Other current and non-current assets at December 31 included:

 

Schedule of other assets		2023				2022
Current assets:
Prepaid insurance		$	20,631			$	39,375
Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions			100,000				–
Total current assets		$	120,631			$	39,375
Non-current assets:
Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions		$	–			$	100,000
Total non-current assets		$	–			$	100,000

 

Note 4 – Property and equipment, net

 

Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically assessed for impairment. Property and equipment as of December 31 was as follows:

 

Schedule of property and equipment		2023				2022
Computer equipment		$	7,738			$	4,575
Accumulated depreciation			(6,484	)			(885	)
Total property and equipment, net		$	1,254			$	3,690

 

Depreciation expense totaled $5,600 and $885 for the year ended December 31, 2023 and 2022, respectively.

 

Note 5 – Earnings Per Share and Stockholders’ Equity

 

Earnings per Share

 

Basic net loss per share is computed by dividing net loss, which is allocated based upon the proportionate amount of weighted average shares outstanding, to each class of stockholder’s stock outstanding during the period. For the calculation of diluted net loss per share, net loss per share attributable to common stockholders for basic net loss per share is adjusted by the effect of dilutive securities, including awards under our equity compensation plans.

 

Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include 950,000 and 700,000 shares of Series B Preferred Stock, as converted as of December 31, 2023 and 2022, respectively.

 

Preferred Stock

 

The preferred stock par value is $0.01. The Series B preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company.

 

 

 

 

On December 13, 2022, the Company issued 140 Series B preferred shares in connection with the cancellation of 700,000 shares of common stock.

 

On June 1, 2023, the Company issued an additional 50 Series B preferred shares in connection with the cancellation of 250,000 shares of common stock.

 

Series B preferred shares outstanding at December 31, 2023 totaled 190 which are convertible into 950,000 shares of common stock.

 

Series B preferred shares outstanding at December 31, 2022 totaled 140 which are convertible into 700,000 shares of common stock.

 

Common Stock

 

The common stock par value is $0.01.

 

2023 Transactions

 

On March 7, 2023, the Company issued 75,000 shares of common stock to an investment banking firm (“Revere”) as a fee for the termination of the January 2023 engagement with Revere. These shares were allocated by Revere to some of the Company’s existing shareholders. The Company recorded $600,000 of stock compensation expense related to the issuance of the shares valued at $8.00 per share, which was based on the most recent private sale of common stock for the Company.

 

On July 10, 2023, the Company’s Board of Directors approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock. In accordance with Staff Accounting Bulletin Topic 4.C, the Company has given retroactive effect to reverse stock split. In addition and in accordance with FASB ASC 260, Earnings Per Share, the Company has retroactively adjusted the computations of basic and diluted share calculations.

 

2022 Transactions

 

The Company issued 56,250 shares of common stock during the year ended December 31, 2022 for gross proceeds of $450,000.

 

The Company received $99,900 of proceeds in 2022 related to stocks issued as of December 31, 2021, which was recorded as a subscription receivable asset at December 31, 2021.

 

On December 14, 2022, the Company amended its Articles of Incorporation to, among other things, increase the number of authorized shares of common stock from 90,000,000 to 500,000,000.

 

Note 6 – Business Combination

 

Fat Shark and Rotor Riot

 

On November 21, 2022, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”), as amended, with Red Cat Holdings, Inc. (“Red Cat,”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, pursuant to which the Company agreed to purchase Red Cat’s consumer business consisting of Fat Shark Holdings, Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) (the “Business Combination”) for a total of $20.1 million (the “Purchase Price”). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties. The Purchase Price was comprised of (i) $1.1 million in cash, (ii) a $2.0 million promissory note issued by the Company to Red Cat, and (iii) $17.0 million of the Company’s common stock and subject to certain working capital adjustments. See Note 10 – Subsequent Events for additional information.

 

 

 

 

Note 7 – Related Party Transactions

 

In November 2022, the Company 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 and also the current Chief Executive Officer of Red Cat, 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 from February 16, 2024, 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. Our prior Chief Executive Officer, Mr. Brandon 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 February 2024, the Company completed the acquisitions to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO.

 

Note 8 – Income Taxes

 

The Company was incorporated and based in Puerto Rico, as of and for the years ended December 31, 2023 and 2022. As such, the Company is not subject to taxation by the United States as Puerto Rico has its own taxing authority. Since inception, the Company has incurred net losses in each year of operations. The current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which the Company applied a full valuation allowance, resulting in no current provision for income taxes.

 

As of December 31, 2023 and 2022, the Company had gross net operating losses of approximately $3.9 million and $1.5 million, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $0.7 million and $0.3 million, respectively, calculated using the base Puerto Rico corporate tax rate of 18.5%. Since the Company has not generated revenue or operating profit since inception, the Company has applied a full valuation allowance against our deferred tax assets as of December 31, 2023 and 2022. Since the Company has reincorporated as a Nevada corporation in April 2024, the use of net operating losses may be limited. A reconciliation of income taxes at the effective statutory rate and the provision for income taxes was as follows:

 

Effective income tax rate		2023				2022
Puerto Rico statutory rate			18.5%				18.5%
Effects of:
State and local taxes			–%				–%
Change in valuation allowance			(18.5)%				(18.5)%
Effective rate			–%				–%

 

The Company continuously monitors its current and prior filing positions in order to determine if any unrecognized tax positions should be recorded. The analysis involves considerable judgement and is based on the best information available. For the periods ended December 31, 2023 and 2022, the Company is not aware of any positions which require an uncertain tax position liability.

 

 

 

 

Note 9 – Restatement of Previously Issued Financial Statements

 

On April 16, 2024, the Company changed their independent PCAOB-registered accounting firm and terminated its engagement with their prior auditor. On May 3, 2024, the Securities and Exchange Commission (“SEC”) issued an order that instituted a cease-and-desist against the Company’s previous auditor, which stated that all necessary Exchange Act Filings presented must be audited by a qualified, independent, PCAOB-registered public accountant. As a result, the Company’s previously issued financial statements for the years ended December 31, 2023 and 2022 were required to be re-audited.

 

The Company engaged a new, an independent and registered accounting firm, to re-audit the Company’s previously issued financial statements. During the Company’s re-audits, it was noted that certain transactions were not recorded in the correct period, certain accounts should have been classified as a non-current asset rather than a current asset, stock compensation expense of $600,000 related to the March 7, 2023 common stock issuance was not recorded and deferred offering costs were classified as an operating activity rather than a financing activity. Expenses totaling $81,800 were originally recorded in 2022 but related to 2021 expenses and expenses totaling $10,993 were originally recorded in 2023 but related to 2022 expenses.

 

With this restatement, the transactions previously recorded in the incorrect period have been updated to the correct period, classifications on the balance sheet and cash flow statement have been corrected and the stock compensation previously not recorded has been properly recorded.

 

The following presents reconciliations of the impacted financial statement line items as filed to the restated amounts as of December 31, 2023 and 2022 and for the years then ended. The previously reported amounts reflect those included in the Original Filing of our Annual Report on Form 10-K as of and for the years ended December 31, 2023 filed with the SEC on March 22, 2024. These amounts are labeled “As Filed” in the tables below. The amounts labeled “Restatement Adjustments” represent the effects of these restatements due to the timing differences, balance sheet reclassifications and stock compensation expense.

 

 

Restatement schedules

Balance Sheet as of December 31, 2023
		As Filed				Restatement Adjustments				As Restated
ASSETS
Current assets:
Cash and cash equivalents		$	894,773			$	–			$	894,773
Deferred offering costs			512,758				(512,758	)			–
Other current assets			120,631				–				120,631
Total current assets			1,528,162				(512,758	)			1,015,404
Non-current assets:
Property and equipment, net			1,254				–				1,254
Deferred offering costs			–				512,758				512,758
Other assets			–				–				–
Total non-current assets			1,254				512,758				514,012
Total assets		$	1,529,416			$	–			$	1,529,416
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses		$	114,497			$	–			$	114,497
Total current liabilities			114,497				–				114,497
Stockholders’ equity:
Series B preferred stock , par			2				–				2
Common stock, par			32,173				–				32,173
Additional paid in capital			4,715,790				600,000				5,315,790
Accumulated deficit			(3,333,046	)			(600,000	)			(3,933,046	)
Total stockholders’ equity			1,414,919				–				1,414,919
Total liabilities and stockholders’ equity		$	1,529,416			$	–			$	1,529,416

 

 

 

 

 

 

 

 

Statement of Operations for the Year Ended December 31, 2023
		As Filed				Restatement Adjustments				As Restated
Revenue		$	–			$	–			$	–
Cost of goods sold			–				–				–
Gross profit			–				–				–
Operating expenses:
Research and development			–				–				–
General and administrative			1,788,855				589,007				2,377,862
Depreciation and amortization			5,600				–				5,600
Total operating expenses			1,794,455				589,007				2,383,462
Loss from operations			(1,794,455	)			(589,007	)			(2,383,462	)
Other income:
Interest income			–				–				–
Total other income			–				–				–
Net loss before income tax			(1,794,455	)			(589,007	)			(2,383,462	)
Income tax benefit (expense)			–				–				–
Net loss		$	(1,794,455	)			(589,007	)		$	(2,383,462	)
Net loss per share attributable to common stockholders
Basic and diluted		$	(0.54	)			(0.18	)		$	(0.72	)
Weighted average common shares outstanding
Basic and diluted			3,307,118				–				3,307,118

 

 

 

 

 

 

 

Statements of Changes in Stockholders’ Equity – As Filed – For the Year Ended December 31, 2023
		Series B, Preferred Stock								Common Stock								Additional Paid-In				Stocks to be				Accumulated
		Shares				Value				Shares				Value				Capital				Issued				Deficit				Total
Balance, December 31, 2022			140			$	1				3,392,250			$	33,923			$	4,714,041			$	–			$	(1,538,591	)		$	3,209,374
Issuance of common shares for services			–				–				75,005				750				(750	)			–				–				–
Conversion to preferred shares			50				1				(250,000	)			(2,500	)			2,499				–				–				–
Net loss			–				–				–				–				–				–				(1,794,455	)			(1,794,455	)
Balance, December 31, 2023			190			$	2				3,217,255			$	32,173			$	4,715,790			$	–			$	(3,333,046	)		$	1,414,919

 

Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Year Ended December 31, 2023

Series B, Preferred Stock

Common Stock

Additional Paid-In

Stocks to be

Accumulated

Shares

Value

Shares

Value

Capital

Issued

Deficit

Total

Balance, December 31, 2022

–

$

–

–

$

–

$

–

$

–

$

(10,993

)

$

(10,993

)

Issuance of common shares for services

–

–

–

–

600,000

–

–

600,000

Conversion to preferred shares

–

–

–

–

–

–

–

–

Net loss

–

–

–

–

–

–

(589,007

)

(589,007

)

Balance, December 31, 2023

–

$

–

–

$

–

$

600,000

$

–

$

(600,000

)

$

–

 

Statements of Changes in Stockholders’ Equity – As Restated – For the Year Ended December 31, 2023
		Series B, Preferred Stock								Common Stock								Additional Paid-In				Stocks to be				Accumulated
		Shares				Value				Shares				Value				Capital				Issued				Deficit				Total
Balance, December 31, 2022			140			$	1				3,392,250			$	33,923			$	4,714,041			$	–			$	(1,549,584	)		$	3,198,381
Issuance of common shares for services			–				–				75,005				750				599,250				–				–				600,000
Conversion to preferred shares			50				1				(250,000	)			(2,500	)			2,499				–				–				–
Net loss			–				–				–				–				–				–				(2,383,462	)			(2,383,462	)
Balance, December 31, 2023			190			$	2				3,217,255			$	32,173			$	5,315,790			$	–			$	(3,933,046	)		$	1,414,919

 

 

 

 

Statement of Cash Flows for the Year Ended December 31, 2023
		As Filed				Restatement Adjustments				As Restated
Cash flows from operating activities:
Net loss		$	(1,794,455	)		$	(589,007	)		$	(2,383,462	)
Depreciation			5,600				–				5,600
Stock compensation expense			–				600,000				600,000
Change in assets and liabilities:
Accounts receivable			–				–				–
Deferred offering costs			(424,933	)			424,933				–
Other current assets			18,744				–				18,744
Accounts payable and accrued expenses			(6,441	)			(10,993	)			(17,434	)
Net cash used in operating activities			(2,201,485	)			424,933				(1,776,552	)
Cash flows from investing activities
Purchases of property and equipment			(3,164	)			–				(3,164	)
Net cash used in investing activities			(3,164	)			–				(3,164	)
Cash flows from financing activities:
Deferred offering costs			–				(424,933	)			(424,933	)
Net cash used in financing activities			–				(424,933	)			(424,933	)
Net increase (decrease) in cash			(2,204,649	)			–				(2,204,649	)
Cash, beginning of year			3,099,422				–				3,099,422
Cash, end of year		$	894,773			$	–			$	894,773
Supplemental disclosures of cash flow information:
Cash paid for interest		$	–			$	–			$	–
Cash paid for income tax		$	–			$	–			$	–

 

In addition, amounts were restated in the following footnote:

 

Note 5 – Earnings Per Share and Stockholders’ Equity

 

 

 

 

Balance Sheet as of December 31, 2022
		As Filed				Restatement Adjustments				As Restated
ASSETS
Current assets:
Cash and cash equivalents		$	3,099,422			$	–			$	3,099,422
Deferred offering costs			87,825				(87,825	)			–
Other current assets			139,375				(100,000	)			39,375
Total current assets			3,326,622				(187,825	)			3,138,797
Non-current assets:
Property and equipment, net			3,690				–				3,690
Deferred offering costs			–				87,825				87,825
Other assets			–				100,000				100,000
Total non-current assets			3,690				187,825				191,515
Total assets		$	3,330,312			$	–			$	3,330,312
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses		$	120,938			$	10,993			$	131,931
Total current liabilities			120,938				10,993				131,931
Stockholders’ equity:
Series B preferred stock , par			1				–				1
Common stock, par			33,923				–				33,923
Additional paid in capital			4,714,041				–				4,714,041
Accumulated deficit			(1,538,591	)			(10,993	)			(1,549,584	)
Total stockholders’ equity			3,209,374				(10,993	)			3,198,381
Total liabilities and stockholders’ equity		$	3,330,312			$	–			$	3,330,312

 

 

 

 

 

Statement of Operations for the Year Ended December 31, 2022
		As Filed				Restatement Adjustments				As Restated
Revenue		$	–			$	–			$	–
Cost of goods sold			–				–				–
Gross profit			–				–				–
Operating expenses:
Research and development			91,325				–				91,325
General and administrative			1,150,522				(70,807	)			1,079,715
Depreciation and amortization			885				–				885
Total operating expenses			1,242,732				(70,807	)			1,171,925
Loss from operations			(1,272,732	)			70,807				(1,171,925	)
Other income:
Interest income			148				–				148
Total other income			148				–				148
Net loss before income tax			(1,242,584	)			70,807				(1,171,777	)
Income tax benefit (expense)			–				–				–
Net loss		$	(1,242,584	)		$	70,807			$	(1,171,777	)
Net loss per share attributable to common stockholders
Basic and diluted		$	(0.31	)		$	0.02			$	(0.29	)
Weighted average common shares outstanding
Basic and diluted			4,006,007				45,198				4,051,205

 

 

 

 

 

 

 

Statements of Changes in Stockholders’ Equity – As Filed – For the Year Ended December 31, 2022
		Series B, Preferred Stock								Common Stock								Additional Paid-In				Stocks to be				Accumulated
		Shares				Value				Shares				Value				Capital				Issued				Deficit				Total
Balance, December 31, 2021			–			$	–				3,776,000			$	37,760			$	2,268,240			$	1,892,065			$	(296,007	)		$	3,902,058
Issuance of common stock for cash			–				–				316,250				3,163				2,438,802				(1,892,065	)			–				549,900
Conversion to preferred stock			140				1				(700,000	)			(7,000	)			6,999				–				–				–
Net loss			–				–				–				–				–				–				(1,242,584	)			(1,242,584	)
Balance, December 31, 2022			140			$	1				3,392,250			$	33,923			$	4,714,041			$	–			$	(1,538,591	)		$	3,209,374

 

Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Year Ended December 31, 2022
		Series B, Preferred Stock								Common Stock								Additional Paid-In				Stocks to be				Accumulated
		Shares				Value				Shares				Value				Capital				Issued				Deficit				Total
Balance, December 31, 2021			–			$	–				260,000			$	2,600			$	1,989,365			$	(1,892,065	)		$	(81,800	)		$	18,100
Issuance of common stock for cash			–				–				(260,000	)			(2,600	)			(1,989,365	)			1,892,065				–				(99,900	)
Conversion to preferred stock			–				–				–				–				–				–				–				–
Net loss			–				–				–				–				–				–				70,807				70,807
Balance, December 31, 2022			–			$	–				–			$	–			$	–			$	–			$	(10,993	)		$	(10,993	)

 

Statements of Changes in Stockholders’ Equity – As Restated – For the Year Ended December 31, 2022
		Series B, Preferred Stock								Common Stock								Additional Paid-In				Stocks to be				Accumulated
		Shares				Value				Shares				Value				Capital				Issued				Deficit				Total
Balance, December 31, 2021			–			$	–				4,036,000			$	40,360			$	4,257,605			$	–			$	(377,807	)		$	3,920,158
Issuance of common stock for cash			–				–				56,250				563				449,437				–				–				450,000
Conversion to preferred stock			140				1				(700,000	)			(7,000	)			6,999				–				–				–
Net loss			–				–				–				–				–				–				(1,171,777	)			(1,171,777	)
Balance, December 31, 2022			140			$	1				3,392,250			$	33,923			$	4,714,041			$	–			$	(1,549,584	)		$	3,198,381

 

 

 

 

 

 

Statement of Cash Flows for the Year Ended December 31, 2022
		As Filed				Restatement Adjustments				As Restated
Cash flows from operating activities:
Net loss		$	(1,242,584	)		$	70,807			$	(1,171,777	)
Depreciation			885				–				885
Change in assets and liabilities:
Accounts receivable			945				–				945
Deferred offering costs			(87,825	)			87,825				–
Other current assets			(24,153	)			(115,222	)			(139,375	)
Accounts payable and accrued expenses			120,938				(807	)			120,131
Net cash used in operating activities			(1,231,794	)			42,603				(1,189,191	)
Cash flows from investing activities
Related party receivable			–				45,222				45,222
Purchases of property and equipment			(4,575	)			–				(4,575	)
Net cash provided by (used in) investing activities			(4,575	)			45,222				40,647
Cash flows from financing activities:
Proceeds from common stock receivable			–				99,900				99,900
Issuance of common stock			549,900				(99,900	)			450,000
Deferred offering costs			–				(87,825	)			(87,825	)
Net cash provided by financing activities			549,900				(87,825	)			462,075
Net increase (decrease) in cash			(686,469	)			–				(686,469	)
Cash, beginning of year			3,785,891				–				3,785,891
Cash, end of year		$	3,099,422			$	–			$	3,099,422
Supplemental disclosures of cash flow information:
Cash paid for interest		$	–			$	–			$	–
Cash paid for income tax		$	–			$	–			$	–

 

 

 

 

 

Note 10 – Subsequent Events

 

Fat Shark and Rotor Riot Acquisition

 

On February 16, 2024, the Company closed on the acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the “Business Combination”). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties.

 

The Company specializes in the production and sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a strong curated retail channel in the FPV drone market segment. This Business Combination is a realization of the Company’s strategy to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for customers that require a domestic supply chain.

 

The Business Combination was based on a share purchase agreement (the “Purchase Agreement”) that was executed on November 21, 2022. From November 21, 2022 to February 16, 2024, the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments. Under the terms of the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $1.0 million in cash and a cash deposit of $0.1 million made in 2022, (ii) issuance of a $4.0 million 18 month promissory note to Red Cat after a working capital adjustment made in July 2024, and (iii) the issuance of 4,250,000 shares of the Company’s common stock, which represented approximately 48.66% of the outstanding common stock of the Company on February 16, 2024, after the effect of the issued shares (collectively the “Consideration Paid”). The Company has currently valued the Red Cat common stock at $4.00 per share which represents the IPO price of the Company’s common stock on February 15, 2024. Accordingly, the value of the Consideration Paid is equal to $22,100,000.

 

The acquisitions met the definition of a business combination under ASC 805, Business Combinations, and therefore the assets acquired and liabilities assumed are accounted for at fair value. The Company has not completed its evaluation of the fair value of assets acquired and liabilities assumed of Fat Shark and Rotor Riot for the purpose of its 2024 fiscal year financial reporting and as such has not fully determined the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period.

 

The following represents the fair value allocation of Fat Shark and Rotor Riot Purchase Price:

Cash		$	147,200
Accounts receivable (approximates contractual value)			6,798
Inventories (on hand and prepaid)			2,611,583
Other current assets			10,892
Right of use asset - operating			378,430
Other long-term assets			59,426
Goodwill and intangible assets (unallocated purchase price)			19,666,086
Total assets			22,880,415
Accounts payable and accrued liabilities			287,544
Customer deposits			114,441
Operating lease liability – current and long-term			378,430
Total liabilities			780,415
Total purchase price		$	22,100,000

 

 

 

 

Initial goodwill and intangible assets relate to Fat Shark and Rotor Riot being FPV market leaders and their well-known and established brands within the industry. Combining these entities and their existing customer base along with Unusual Machines strategy of extending to B2B sales of drone components will provide strategic advantage. The Company will evaluate the amount of goodwill and intangibles that are expected to be deductible for tax purposes once the unallocated purchase price is finalized.

 

The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and Rotor Riot at the beginning of each period are as follows. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share data):

 

		For the Year Ended								For the Year Ended
		December 31, 2023								December 31, 2022
		As Reported				Proforma (unaudited)				As Reported				Proforma (unaudited)
Revenue		$	–			$	4,682			$	–			$	4,890
Gross profit/(loss)			–				549,739				–				784
Loss from operations			(2,383	)			(5,005	)			(1,172	)			(2,572	)
Other expense			–				56				0				36
Net loss		$	(2,383	)		$	(5,061	)		$	(1,172	)		$	(2,608	)
Net earnings per share:
Basic		$	(0.72	)		$	(0.58	)		$	(0.29	)		$	(0.27	)

 

This unaudited consolidated pro forma financial information is presented for informational purposes only. The unaudited consolidated pro forma adjustments are based on preliminary estimates, information available and certain assumptions, and may be revised as additional information becomes available. In addition, the unaudited pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.

 

The unaudited pro forma financial information for the periods presented includes adjustments to: 1) eliminate intercompany revenue and associated cost of sales for sales of product from Fat Shark to Rotor Riot, 2) to adjust fair value for certain Fat Shark inventory as if the acquisition had occurred as of the beginning of the respective periods and 3) to include acquisition related expenses in 2023 that were incurred in 2024.

 

Nevada Reincorporation

 

On April 19, 2024, the Company entered into an Agreement and Plan of Merger with its wholly owned subsidiary, Unusual Machines, Inc., a Nevada corporation (“UMAC Nevada”), pursuant to which the Company agreed to merge with and into UMAC Nevada with UMAC Nevada continuing as the surviving corporation in the merger. The merger was consummated on April 22, 2024. As a result, the Company reincorporated from Puerto Rico to Nevada.

 

 

 

 

Management Services Agreement

 

On April 30, 2024 (“Grant Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant will cause Dr. Evans to perform his services as the Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant will cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations activities; (iii) to report to the Company’s board of directors; (iv) to perform services for such subsidiaries of the Company as may be necessary.

 

The Consultant will receive a $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restricted common stock. The fair value of the shares was based on the quoted trading price on the Grant Date and will be recognized over the service period (see below). The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan. The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that Dr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code. The Company and Dr. Evans previously entered into an Offer Letter dated November 27, 2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023. The Agreement terminates and replaces the Offer Letter dated November 27, 2023.

 

Equity Incentive Plan Issuances

 

On April 30, 2024, the Board of the Company approved the grant of restricted shares of common stock to the following executive officers of the Company set forth on the table below in such amounts and with vesting set forth opposite their respective names. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan. The shares of restricted stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that any executive officer is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code. On May 2, 2024, the Board of the Company approved another grant of restricted shares of common stock to Mr. Evans (through 8 Consulting LLC) in exchange for a $50,000 per year fee reduction. The fee disclosed above is after the $50,000 credit. The fair value per share was based on the quoted trading price as of the close of the market as of the different grant dates and the value will be recognized over the period the shares are subject to forfeiture (see below).

 

Executive Officer	Amount of Restricted Common Stock	Vesting	Fair Value Per Share	Aggregate Fair Value
Allan Evans through 8 Consulting LLC	488,000	Fully vested	$1.20	$585,600
Allan Evans through 8 Consulting LLC	40,650	Fully vested	$1.23	$50,000
Brian Hoff	293,000	50% vested and 50% vests on January 1, 2025	$1.20	$351,600
Andrew Camden	50,000	Fully vested	$1.20	$60,000

 

 

 

 

In addition, on April 30, 2024, the Board of the Company approved the grant of fully vested restricted shares of common stock to the following directors of the Company set forth on the table below, in such amounts set forth opposite their respective names, for their services as a director and, where applicable, as a Committee Chair. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan. The fair value per share was based on the quoted trading price as of the close of the market as of the grant date.

 

Director	Fair Value Per Share	Amount of Restricted Common Stock	Aggregate Fair Value
Cristina Colón	$1.20	27,083	$32,500
Robert Lowry	$1.20	27,083	$32,500
Sanford Rich	$1.20	27,083	$32,500
Jeffrey Thompson	$1.20	25,000	$30,000

 

On July 30, 2024, the Board of the Company issued non-employee directors set forth in the table below, the equity portion of their quarterly compensation. Each of the directors received a vested restricted stock grant for services as a director (and where applicable, committee member) during the quarter ended June 30, 2024. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan and was subject to each director executing the Company’s standard Restricted Stock Agreement, which occurred on July 29, 2024. The fair value per share was based on the quoted trading price as of the close of the market as of July 17, 2024. The directors also received a cash grant for the quarter of $5,416.67 for committee members and $5,000 for non-committee members.

 

Director	Fair Value Per Share	Amount of Restricted Common Stock	Aggregate Fair Value
Cristina Colón	$1.79	6,052	$10,833
Robert Lowry	$1.79	6,052	$10,833
Sanford Rich	$1.79	6,052	$10,833
Jeffrey Thompson	$1.79	5,587	$10,000

 

Working Capital Adjustment

 

On July 22, 2024 the Company finalized its working capital adjustment related to the acquisitions of Fat Shark and Rotor Riot for an additional $2.0 million and a total Purchase Price of $22.1 million. The additional $2.0 million was added to the existing note payable for a total of $4.0 million and extended the maturity date to November 30, 2025 and the goodwill and intangible assets was increased by $2.0 million.

 

Series A Convertible Preferred Stock

 

Effective July 16, 2024, the Company filed a Certificate of Designations, Preferences and Rights of the Series A Convertible Stock with the Nevada Secretary of State. On July 22, 2024, Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s common stock, par value $0.01 per share for 4,250 shares of the Company’s newly designated Series A Convertible Preferred Stock (the “Series A”). Red Cat then sold the Series A and the New Notes to two investors on July 22, 2024.

 

 

 

 

 

 

 

Unusual Machines, Inc.

Consolidated Condensed Balance Sheets

		June 30, 2024				December 31, 2023
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	2,222,445			$	894,773
Inventory			1,638,038				–
Prepaid inventory			1,074,403				–
Other current assets			182,077				120,631
Total current assets			5,116,963				1,015,404
Non-current assets:
Property and equipment, net			912				1,254
Deferred offering costs			–				512,758
Operating lease right-of-use assets			356,965				–
Goodwill and intangible assets			19,666,087				–
Other non-current assets			59,426				–
Total non-current assets			20,083,390				514,012
Total assets		$	25,200,353			$	1,529,416
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses		$	786,598			$	114,497
Operating lease liabilities			62,482				–
Deferred revenue			82,120				–
Total current liabilities			931,200				114,497
Long-term liabilities
Promissory note			4,000,000				–
Operating lease liabilities – long term			297,332				–
Total liabilities			5,228,532				114,497
Commitments and contingencies (See note 12)			–				–
Stockholders’ equity:
Series B preferred stock - $0.01 par value, 10,000,000 authorized and 50 and 190 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively			1				2
Common stock - $0.01 par value, 500,000,000 authorized and 10,411,240 and 3,217,255 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively			104,113				32,173
Additional paid in capital			26,518,993				5,315,790
Accumulated deficit			(6,651,286	)			(3,933,046	)
Total stockholders’ equity			19,971,821				1,414,919
Total liabilities and stockholders’ equity		$	25,200,353			$	1,529,416

 

See accompanying condensed unaudited notes to the consolidated condensed financial statements.

 

 

 

 

Unusual Machines, Inc.

Consolidated Condensed Statement of Operations

For the Three and Six Months Ended June 30, 2024 and 2023

(Unaudited)

		Three months ended June 30,								Six months ended June 30,
		2024				2023				2024				2023
														(Restated – Note 13)
Revenues		$	1,411,124			$	–			$	2,030,039			$	–
Cost of goods sold			1,022,684				–				1,437,432				–
Gross Margin			388,440				–				592,607				–
Operating Expenses
Operations			213,772				–				326,094				–
Research and development			10,282				–				27,078				–
Sales and marketing			386,332				–				543,390				–
General and administrative			1,349,587				434,917				2,353,761				1,612,439
Depreciation and amortization			171				381				342				763
Total operating expenses			1,960,144				435,298				3,250,664				1,613,202
Operating loss			(1,571,704	)			(435,298	)			(2,658,057	)			(1,613,202	)
Other Expense
Interest expense			40,534				–				60,183				–
Other Expense			40,534				–				60,183				–
Net loss		$	(1,612,238	)		$	(435,298	)		$	(2,718,240	)		$	(1,613,202	)
Net loss per share attributable to common stockholders
Basic and diluted		$	(0.16	)		$	(0.13	)		$	(0.34	)		$	(0.47	)
Weighted average common shares outstanding
Basic and diluted			10,040,741				3,384,837				8,053,299				3,398,470

 

See accompanying condensed unaudited notes to the consolidated condensed financial statements.

 

 

 

 

Unusual Machines, Inc.

Consolidated Condensed Statement of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2024 and 2023

(Unaudited)

 

Six Months Ended June 30, 2023 (Restated – Note 13)

		Series B, Preferred Stock								Common Stock								Additional Paid-In				Accumulated				Total Stockholders’
		Shares				Value				Shares				Value				Capital				Deficit				Equity
Balance, December 31, 2022			140			$	1				3,392,250			$	33,923			$	4,714,041			$	(1,549,584	)		$	3,198,381
Issuance of common shares for services			–				–				75,005				750				599,250				–				600,000
Net loss			–				–				–				–				–				(1,177,904	)			(1,177,904	)
Balance, March 31, 2023			140			$	1				3,467,255			$	34,673			$	5,313,291			$	(2,727,488	)		$	2,620,477
Conversion of preferred stock			50				1				(250,000	)			(2,500	)			2,499				–				–
Net loss			–				–				–				–				–				(435,298	)			(435,298	)
Balance, June 30, 2023			190			$	2				3,217,255			$	32,173			$	5,315,790			$	(3,162,786	)		$	2,185,179

 

Six Months Ended June 30, 2024

 

		Series B, Preferred Stock								Common Stock								Additional Paid-In				Accumulated				Total Stockholders’
		Shares				Value				Shares				Value				Capital				Deficit				Equity
Balance, December 31, 2023			190			$	2				3,217,255			$	32,173			$	5,315,790			$	(3,933,046	)		$	1,414,919
Issuance of common shares as settlement			–				–				16,086				161				64,183				–				64,344
Issuance of common shares, initial public offering, net of offering costs			–				–				1,250,000				12,500				3,837,055				–				3,849,555
Issuance of common shares, business combination			–				–				4,250,000				42,500				16,957,500				–				17,000,000
Conversion of preferred shares			(120	)			(1	)			600,000				6,000				(5,999	)			–				–
Net loss			–				–				–				–				–				(1,106,002	)			(1,106,002	)
Balance, March 31, 2024			70			$	1				9,333,341			$	93,334			$	26,168,529			$	(5,039,048	)		$	21,222,816
Conversion of preferred shares			(20	)			–				100,000				1,000				(1,000	)			–				–
Issuance of common shares, equity incentive plan			–				–				977,899				9,779				(9,779	)			–				–
Stock compensation expense - vested stock			–				–				–				–				346,854				–				346,854
Stock option compensation expense			–				–				–				–				14,389				–				14,389
Net loss			–				–				–				–				–				(1,612,238	)			(1,612,238	)
Balance, June 30, 2024			50			$	1				10,411,240			$	104,113			$	26,518,993			$	(6,651,286	)		$	19,971,821

 

See accompanying condensed unaudited notes to the consolidated condensed financial statements.

  

 

 

Unusual Machines, Inc.

Consolidated Condensed Statement of Cash Flows

For the Six Months Ended June 30, 2024 and 2023

(Unaudited)

		Six Months Ended June 30,
		2024				2023
						(Restated – Note 13)
Cash flows from operating activities:
Net loss		$	(2,718,240	)		$	(1,613,202	)
Depreciation and amortization			342				763
Stock compensation expense as settlement			64,344				600,000
Stock compensation expense			361,243				–
Change in assets and liabilities:
Accounts receivable			6,798				–
Inventory			152,566				–
Prepaid inventory			(253,424	)			–
Other assets			(129,089	)			22,500
Accounts payable and accrued expenses			384,556				(32,922	)
Operating lease liabilities			(18,615	)			–
Customer deposits and other current liabilities			(32,321	)			–
Net cash used in operating activities			(2,181,840	)			(1,022,861	)
Cash flows from investing activities
Cash portion of consideration paid for acquisition of businesses, net of cash received			(852,801	)			–
Net cash used in investing activities			(852,801	)			–
Cash flows from financing activities:
Proceeds from issuance of common shares			5,000,000				–
Common share issuance offering costs			(637,687	)			(223,579	)
Net cash provided by (used in) financing activities			4,362,313				(223,579	)
Net increase (decrease) in cash			1,327,672				(1,246,440	)
Cash, beginning of period			894,773				3,099,422
Cash, end of period		$	2,222,445			$	1,852,982
Supplemental disclosures of cash flow information:
Non-cash consideration paid for assets acquired and liabilities assumed		$	19,000,000			$	–
Deferred acquisition costs		$	100,000			$	–
Deferred offering costs recorded as reduction of proceeds		$	512,758			$	–

 

See accompanying condensed unaudited notes to the consolidated condensed financial statements.

 

 

 

 

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Period Ended June 30, 2024

 

 

Note 1 – Organization and nature of business

 

Unusual Machines, Inc. (“the Company”) is a Nevada corporation engaged in the commercial drone industry. The Company reincorporated from Puerto Rico to Nevada on April 22, 2024.

 

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 (“IPO Price”). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (“Red Cat”) (See Note 3).

 

Note 2 – Summary of significant accounting policies

 

Principles of Consolidation

 

The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024. Intercompany transactions and balances have been eliminated upon consolidation.

 

Unaudited interim financial information

 

The consolidated condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, for the year ended December 31, 2023. The results for any interim period are not necessarily indicative of results for any future period.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.

 

The financial statements include some amounts that are based on management’s best estimates and judgments. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, inventory and sales, (iv) the evaluation of long-term assets, including goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, and (vi) the warranty liability.

 

 

 

F-29

 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less, when purchased, to be cash equivalents. The Company maintains cash deposits in multiple commercial banks and financial services companies. These financial institutions are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. At June 30, 2024 and December 31, 2023, the Company had approximately $1.7 million and $0.6 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests.

 

Accounts Receivable, net

 

The Company carries its accounts receivable at invoiced amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC 326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At June 30, 2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established.

 

Inventory

 

Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence.

 

Deferred offering costs

 

The Company deferred direct incremental costs associated with its IPO. The Company capitalized $127,687 and $70,268 during the six months ended June 30, 2024 and 2023 prior to the IPO, respectively and the deferred offering costs were $512,758 as of December 31, 2023. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation and preparation of the IPO. After consummation of the IPO, total deferred offering costs of $640,445 were recorded as a reduction to additional paid-in capital generated as a result of the offering.

 

Property and equipment, net

 

Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from two to five years.

 

Leases

 

The Company has adopted Accounting Standards Codification (ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. As of February 16, 2024, the date of the acquisition, the Company recognized a lease liability obligation of $378,430 and a right-of-use asset for the same amount related to the lease in Orlando, FL.

 

The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company’s leases do not provide an implicit rate. Therefore, the Company used an effective discount rate of 11.49% based on its last debt financings. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.

 

 

 

F-30

 

 

Goodwill and Long-lived Assets

 

Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

 

The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management’s assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.

 

The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

 

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures

 

The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

  

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

 

 

F-31

 

 

The guidance establishes three levels of the fair value hierarchy as follows:

 

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

 

The Company’s financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.

 

Warranty Liability

 

Fat Shark products are warranted against defects in materials and workmanship for a period of two years from the date of shipment. If a defect arises during the warranty period, Fat Shark will either (i) repair the affected product at no charge using new parts or parts that are equivalent to new in performance and reliability; (ii) exchange the affected product with a functionally equivalent product; or (iii) refund the original purchase price for the affected product. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product warranty claim rates and expected costs to repair or to replace the products under warranty. The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior 24 months’ sales activities. If actual return rates and/or repair and replacement costs differ significantly from the Company’s estimates, adjustments to recognize additional cost of sales may be required in future periods. Historically the warranty accrual and the expense amounts have been immaterial. The warranty liability is included in accrued expenses on the accompanying consolidated balance sheets and amounted $66,025 as of June 30, 2024, which was acquired as a part of the acquisitions in February 2024.

 

Rotor Riot does not provide any warranty of any kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor Riot.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:

 

Step 1: Identify the contract with a customer;

Step 2: Identify the performance obligations in the contract;

Step 3: Determine the transaction price;

Step 4: Allocate the transaction price to the performance obligations in the contract; and

Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.

 

 

 

F-32

 

 

The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met.

 

Deferred Revenue

 

Deferred revenue relates to (i) orders placed, but not yet fulfilled and (ii) customer tickets purchased related to the Company’s Rampage event, in which tickets are sold in advance and recognized when the event takes place. All deferred revenue is expected to be recognized within one year. Deferred revenue related to orders placed, but not yet fulfilled totaled $82,120 and $0 as of June 30, 2024 and December 31, 2023, respectively.

 

Cost of Goods Sold

 

Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any.

 

Shipping and Handling Costs

 

Shipping and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted to $74,634 since February 16, 2024, the date of the acquisition, through June 30, 2024. The Company did not incur and shipping and handling costs in the six months ended June 30, 2023. Shipping and handling costs charged to customers are included in sales.

 

Research and Development

 

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs, materials, and a proportionate share of overhead costs.

  

Income Taxes

 

The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.

 

The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.

 

The Company’s current provision for the six months ending June 30, 2024 and 2023 consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. Since the Company has not generated an operating profit since inception, there are no deferred tax assets other than a net operating loss carryforward offset by a valuation allowance as of June 30, 2024 and December 31, 2023.

 

 

 

F-33

 

 

Stock-Based Compensation

 

Stock options are valued using the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. The Company recognizes forfeitures as they occur. The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the date of grant. Compensation cost is recognized on a straight-line basis over the service period which is typically the vesting term.

 

Warrants

 

The Company accounts for warrants to purchase shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

 

For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants classified as liabilities are recognized as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss.

 

Net Loss per Share

 

Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.

 

Segment Reporting

 

Since the acquisitions of Fat Shark and Rotor Riot, the Company operates with one reportable segment. The Company bases its reportable segment based on how our Chief Operating Decision Maker manages the business, makes resource allocations and operating decisions, and evaluates operating performance.

 

Recent Accounting Pronouncements

 

In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment’s profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption.

 

 

 

F-34

 

 

In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.

 

Note 3 – Acquisitions

 

Fat Shark and Rotor Riot

 

On February 16, 2024, the Company closed on the acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the “Business Combination”) (See Note 11 – Related Party Transactions for additional information). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties.

 

The Company specializes in the production and sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a strong curated retail channel in the FPV drone market segment. This Business Combination is a realization of the Company’s strategy to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for customers that require a domestic supply chain.

 

The Business Combination was based on a share purchase agreement (the “Purchase Agreement”) that was executed on November 21, 2022. From November 21, 2022 to February 16, 2024, the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments. Under the terms of the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $1.0 million in cash and a cash deposit of $0.1 million made in 2022, (ii) issuance of a $4.0 million 18 month promissory note to Red Cat (see Note 8 “Debt” for further details), and (iii) the issuance of 4,250,000 shares of the Company’s common stock, which represented approximately 48.66% of the outstanding common stock of the Company on February 16, 2024, after the effect of the issued shares (collectively the “Consideration Paid”). The Company has currently valued the Red Cat common stock at $4.00 per share which represents the IPO price of the Company’s common stock on February 15, 2024. Accordingly, the value of the Consideration Paid is equal to $22,100,000. See Note 14, Subsequent Events, related to the working capital adjustment.

 

The acquisitions met the definition of a business combination under ASC 805, Business Combinations, and therefore the assets acquired and liabilities assumed are accounted for at fair value. The Company has not completed its evaluation of the fair value of assets acquired and liabilities assumed of Fat Shark and Rotor Riot for the purpose of its 2024 fiscal year financial reporting and as such has not fully determined the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period.

 

 

 

F-35

 

 

The following represents the fair value allocation of Fat Shark and Rotor Riot Purchase Price:

Schedule of fair value allocation
Cash		$	147,200
Accounts receivable (approximates contractual value)			6,798
Inventories (on hand and prepaid)			2,611,583
Other current assets			10,892
Right of use asset - operating			378,430
Other long-term assets			59,426
Goodwill and intangible assets (unallocated purchase price)			19,666,086
Total assets			22,880,415
Accounts payable and accrued liabilities			287,544
Customer deposits			114,441
Operating lease liability – current and long-term			378,430
Total liabilities			780,415
Total purchase price		$	22,100,000

 

Initial goodwill and intangible assets relate to Fat Shark and Rotor Riot being FPV market leaders and their well-known and established brands within the industry. Combining these entities and their existing customer base along with Unusual Machines’ strategy of extending to B2B sales of drone components will provide strategic advantage. The Company will evaluate the amount of goodwill and intangibles that are expected to be deductible for tax purposes once the unallocated purchase price is finalized.

 

The results of Fat Shark and Rotor Riot have been included in the Consolidated Financial Statements from the date of acquisition. The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and Rotor Riot at the beginning of each period are as follows. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share data): 

Schedule of unaudited pro forma results
		For the Six Months Ended								For the Six Months Ended
		June 30, 2024								June 30, 2023
		As Reported				Proforma (unaudited)				As Reported				Proforma (unaudited)
Revenue		$	2,030			$	2,525			$	–			$	2,663
Gross profit/(loss)			593				624				–				362
Loss from operations			(2,658	)			(3,347	)			(1,613	)			(3,876	)
Other expense			60				39				–				36
Net loss		$	(2,718	)		$	(3,386	)		$	(1,613	)		$	(3,912	)
Net earnings per share:
Basic		$	(0.34	)		$	(0.34	)		$	(0.47	)		$	(0.44	)

 

 

 

F-36

 

 

This unaudited consolidated pro forma financial information is presented for informational purposes only. The unaudited consolidated pro forma adjustments are based on preliminary estimates, information available and certain assumptions, and may be revised as additional information becomes available. In addition, the unaudited pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.

 

The unaudited pro forma financial information from the beginning of the periods presented until the acquisition date includes adjustments to: 1) eliminate intercompany revenue and associated cost of sales for sales of product from Fat Shark to Rotor Riot, 2) to adjust fair value for certain Fat Shark inventory as if the acquisition had occurred as of the beginning of the respective periods and 3) to include acquisition related expenses in the Q1 ’23 that were incurred in Q1 ’24.

 

Note 4 – Inventories

 

Inventories, consisting solely of finished goods, totaled $1,638,038 and $0 as of June 30, 2024 and December 31, 2023, respectively. In addition, the Company had prepaid and deposits for inventory totaling $1,074,403 and $0 as of June 30, 2024 and December 31, 2023, respectively.

 

Note 5 – Other Current Assets

 

Other current assets included as of::

Schedule of other current assets
		June 30, 2024				December 31, 2023
Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions		$	–			$	100,000
Prepaid insurance			157,500				20,631
Other receivables			10,000				–
Other prepaid expenses			14,577				–
Total other current assets		$	182,077			$	120,631

 

Note 6 – Property and Equipment, net

 

Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically assessed for impairment. Property and equipment as of:

Schedule of property and equipment
		June 30, 2024				December 31, 2023
Computer equipment		$	7,738			$	7,738
Accumulated depreciation			(6,826	)			(6,484	)
Total property and equipment, net		$	912			$	1,254

 

Depreciation expense totaled $342 and $762 for the six months ended June 30, 2024 and 2023, respectively.

 

 

 

F-37

 

 

Note 7 – Operating Leases

 

As identified in Note 3 “Acquisitions”, the acquired businesses, specifically Rotor Riot, has entered into a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. The Company has valued the ROUA and the associated liability, as of February 15, 2024, at $378,430. The Company has no finance leases. Operating lease expense totaled $39,429 from the date of acquisition through the period ended June 30, 2024. The following is a summary of future lease payments required under the five-year lease agreement:

Schedule of future lease payments
Year		Future Lease Payments				Operating Lease Discount				Operating Lease Liability
2024		$	48,944			$	(19,122	)		$	29,822
2025			101,133				(33,313	)			67,820
2026			105,178				(25,468	)			79,710
2027			109,037				(15,985	)			93,052
2028			94,185				(4,776	)			89,409
Total		$	458,477			$	(98,664	)		$	359,813

 

Schedule of supplemental information
Supplemental Information
Weighted average remaining lease term (in years)			4.33
Weighted average discount rate			11.49%

  

Note 8 – Promissory Note

 

In conjunction with the acquisition of Fat Shark and Rotor Riot, as discussed in Note 3, the Company issued a promissory note (“Note”) with Red Cat Holdings, Inc. (“Red Cat”) for $2.0 million. In July 2024, the Company finalized its working capital adjustment with Red Cat which increased the overall purchase price by an additional $2.0 million. The additional $2.0 million was added to the existing Note and was reflected as an adjustment to the opening purchase price and was included in the opening balance sheet as of February 16, 2024 as an increase to goodwill and intangible assets. Accordingly, the Note was amended to increase to $4.0 million. In conjunction with a private sale of Red Cat’s common stock and its promissory note to two investors, the Company issued new notes to such investors (the “New Notes”). The New Notes bear interest at 8% annually. In conjunction with the finalization of the working capital adjustment, the maturity date of the New Notes was extended to be due in full on November 30, 2025, subject to certain conditions. In the Event of Default as defined in the Promissory Note, the investors each have the right to convert the New Notes including any accrued and unpaid interest, in whole or in part, into common stock. The conversion price is calculated at a 10% discount of the average three-day volume-weighted average price (VWAP) prior to the conversion date. The balance of the Note payable was $4.0 million as of June 30, 2024. Interest expense for the six months ended June 30, 2024 was $60,183 and the Company had accrued interest of $6,677 as of June 30, 2024. See Note 14, Subsequent Events for additional information.

 

Note 9 – Earnings Per Share and Stockholders’ Equity

 

Earnings per Share

  

Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include 250,000 and 950,000 shares of Series B Preferred Stock, as converted as of June 30, 2024 and 2023, respectively, the 310,000 of stock options issued to employees as of June 30, 2024, the 62,500 of common stock representative warrants issued to the underwriter associated with the February 2024 IPO and 3,418,803 shares of common stock, as converted, associated with the Note discussed in Note 8 “Debt”.

 

 

 

F-38

 

 

Preferred Stock

 

The preferred stock par value is $0.01. The Series B preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company.

 

Subsequent to the IPO but prior to June 30, 2024, certain shareholders converted 140 shares of Series B preferred shares into 700,000 shares of common stock. The Company canceled the 140 shares of Series B preferred shares upon the conversion.

 

On June 1, 2023, the Company issued an additional 50 Series B preferred shares in connection with the cancellation of 250,000 shares of common stock.

 

Series B preferred shares outstanding at June 30, 2024 totaled 50 which are convertible into 250,000 shares of common stock. Series B preferred shares outstanding at December 31, 2023 totaled 190 which are convertible into 950,000 shares of common stock.

 

See Note 14, Subsequent Events, for more information regarding the Company’s Series A Convertible Preferred Stock.

 

Common Stock

 

The common stock par value is $0.01.

 

2024 Transactions

 

On January 2, 2024, the Company issued 16,086 shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of $64,344, which is $4 per share, the last valuation of the Company’s private placement and the value of the IPO in February 2024.

 

On February 16, 2024 the Company completed its IPO and issued 1,250,000 shares of common stock at the IPO Price for total net proceeds of $3,849,555. The Company incurred $510,000 direct deduction from proceeds, $127,687 in cash disbursements related to offering costs in the six months ended June 30, 2024 and $512,758 in prior year paid and deferred offering costs as of December 31, 2023 for a total of $1,150,445 offering costs, associated with the IPO which consisted of underwriter, legal, accounting, and other associated filing fees. These costs have been recorded as a reduction of the gross proceeds from the IPO in stockholder’s equity. The Company also incurred additional costs related to warrants to purchase 62,500 shares of common stock issued to the underwriters as partial compensation for services rendered in connection with the IPO, which is preliminarily valued at $250,000 as of the date of the IPO using the IPO Price of $4 per share. The Company is planning to value the warrants using a Black-Scholes valuation model but has not completed this workflow. Any change to the fair value of the warrants would have no change to the Company’s financial statements since the value of the warrants would only impact the “offering costs” and thus entry would be to adjust “Additional Paid-In Capital – Common Stock” and “Additional Paid-In Capital – Warrants”. The warrants are exercisable for common stock at a price of $5.00 per share (125% of the IPO Price) at any time beginning on August 15, 2024 through and including February 16, 2029, the expiration date.

 

Simultaneously with its IPO and as a part of the Purchase Agreement as discussed in Note 3, the Company issued Red Cat 4,250,000 shares of common stock as consideration of the business combination. As agreed in the Purchase Agreement, $17.0 million of the purchase price would be issued in common stock based on the IPO price of $4.00 per share.

 

Subsequent to the IPO and prior to June 30, 2024, the Company issued 700,000 shares of common stock related to certain shareholders converting 140 of Series B shares into common stock.

 

 

 

F-39

 

 

On April 30, 2024, the Company issued 937,249 restricted shares of common stock to executive officers and board members of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through February 14, 2025.

 

On May 2, 2024, the Company issued an additional 40,650 of restricted shares of common stock to Allan Evans, the Company’s CEO related to an agreed upon reduction of salary. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan.

 

The April 30, 2024 and May 2, 2024 shares were valued at $1.20 and $1.23 per share, respectively for a total of $1,174,698 to be recognized pro-rata over the vesting period which is the forfeiture period. Stock compensation expense of $346,854 was recognized during the three months ended June 30, 2024.

 

See Note 14, Subsequent Events, for additional information.

 

2023 Transactions

 

On March 7, 2023, the Company issued 75,000 shares of common stock to an investment banking firm (“Revere”) as a fee for the termination of the January 2023 engagement with Revere. These shares were allocated by Revere to some of the Company’s existing shareholders. The Company recorded $600,000 of stock compensation expense related to the issuance of the shares valued at $8.00 per share, which was based on the most recent private sale of common stock for the Company.

 

On July 10, 2023, the Company’s Board of Directors approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock. In accordance with Staff Accounting Bulletin Topic 4.C, the Company has given retroactive effect to reverse stock split. In addition and in accordance with FASB ASC 260, Earnings Per Share, the Company has retroactively adjusted the computations of basic and diluted share calculations.

 

Note 10 – Share Based Awards

 

Stock Options

 

The Company’s 2022 Equity Incentive Plan (the “Plan”) allows the Company to incentivize key employees and directors with long term compensation awards such as stock options, restricted stock, and other similar types of awards. The Plan is authorized to issue 1,461,876 of awards and has an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of directors.

 

On April 30, 2024, the Company’s board of directors approved the grant of 310,000 stock options under the Plan to certain employees. The stock options are subject to certain vesting provisions.

 

The following table presents the activity for stock options outstanding:

Schedule of stock option activity

Weighted

Weighted Average

Non-Qualified

Average

Remaining

Aggregate

Options

Exercise Price

Contractual Term

Intrinsic Value

Outstanding - December 31, 2023

–

$

–

–

–

Granted

310,000

1.20

9.83

$

31,000

Forfeited/canceled

–

–

–

–

Exercised

–

–

–

–

Outstanding – June 30, 2024

310,000

$

1.20

9.83

$

31,000

 

 

 

F-40

 

 

The range of assumptions used to calculate the fair value of options granted during the six months ended June 30, 2024 was: 

Schedule of stock options assumptions
Exercise Price		$	1.20
Stock Price on date of grant		$	1.20
Risk-free interest rate			4.71%
Dividend yield			–
Expected term (years)			6.11
Volatility			129.45%

 

The Company recognized $14,389 in stock-based compensation expense related to stock options during the six months ended June 30, 2024. As of June 30, 2024, there was $325,371 of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term through 2028.

 

Restricted Stock

 

The following table presents the activity for stock options outstanding:

Schedule of restricted stock activity

Restricted

Awards

Awards

Stock

Vested

Unvested

Outstanding - December 31, 2023

–

–

–

Granted

977,899

291,737

686,162

Forfeited/canceled

–

–

–

Exercised

–

–

–

Outstanding – June 30, 2024

977,899

291,737

686,162

 

The Company recognized $346,854 in stock-based compensation expense related to restricted stock during the six months ended June 30, 2024. As of June 30, 2024, there was $827,844 of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized over the remaining vesting term through February 15, 2025.

 

Warrants

 

The following table presents the activity for warrants outstanding as of June 30, 2024:

Schedule of warrant activity
						Weighted
		Warrants				Average
		Outstanding				Exercise Price
Outstanding - December 31, 2023			–			$	–
Granted			62,500				5.00
Forfeited/cancelled/restored			–				–
Exercised			–				–
Outstanding – June 30, 2024			62,500			$	5.00

 

 

 

F-41

 

 

As discussed in Note 9, “Earnings Per Share and Stockholders’ Equity”, in connection with the IPO, the Company issued 62,500 representative warrants to its underwriters to purchase shares of common stock. The representative warrants have an exercise price of $5.00 or can be exercised through a cashless exercise feature. All warrants outstanding have a weighted average remaining contractual life of approximately 4.63 years as of June 30, 2024.

 

Note 11 – Related Party Transactions

 

In November 2022, the Company 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 and also the current Chief Executive Officer of Red Cat, 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 from February 16, 2024, 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. Our prior Chief Executive Officer, Mr. Brandon 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 February 2024, the Company completed the acquisitions to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO.

 

On April 30, 2024 (“Grant Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services as the Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant agreed to cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations activities; (iii) to report to the Company’s board of directors; (iv) to perform services for such subsidiaries of the Company as may be necessary.

 

The Consultant receives a $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restricted common stock. The fair value of the shares was $585,600 based on the $1.20 quoted trading price on the Grant Date and will be recognized over the service period (see below). The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan. The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that Dr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code. The Company and Dr. Evans previously entered into an Offer Letter dated November 27, 2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023. The Agreement terminates and replaces the Offer Letter dated November 27, 2023.

 

 

 

F-42

 

 

Note 12 – Commitments and Contingencies

 

As part of the business combination that occurred on February 14, 2024, the Company acquired a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. See Note 7 – Operating Leases for additional information.

 

Note 13 – Restatement of Previously Issued Financial Statements

 

On April 16, 2024, the Company changed their independent PCAOB-registered accounting firm and terminated its engagement with their prior auditor. On May 3, 2024, the Securities and Exchange Commission (“SEC”) issued an order that instituted a cease-and-desist against the Company’s previous auditor, which required the Company to obtain new auditors and re-audit its financial statements for the years ended December 31, 2023 and 2022.

 

The Company engaged a new, an independent and registered accounting firm, to re-audit the Company’s previously issued financial statements. During the Company’s re-audits, it was noted that certain transactions were not recorded in the correct period, stock compensation expense of $600,000 related to the March 7, 2023 common stock issuance was not recorded and deferred offering costs were classified as an operating activity rather than a financing activity. Expenses totaling $10,993 were originally recorded in 2023 but related to 2022 expenses.

 

With this restatement, the transactions previously recorded in the incorrect period have been updated to the correct period, classifications on the statements of cash flow have been corrected and the stock compensation previously not recorded has been properly recorded.

 

The following presents reconciliations of the impacted financial statement line items as filed to the restated amounts as of June 30, 2023 and for the periods then ended. The previously reported amounts reflect those included in the registration statements the Company filed with the Securities and Exchange Commission on September 19, 2023. These amounts are labeled “As Filed” in the tables below. The amounts labeled “Restatement Adjustments” represent the effects of these restatements due to the timing differences and stock compensation expense.

  

 

 

 

 

F-43

 

 

Schedule of restatement adjustments in financial statements
Statement of Operations for the Six Months Ended June 30, 2023
		As Filed				Restatement Adjustments				As Restated
Revenue		$	–			$	–			$	–
Cost of goods sold			–				–				–
Gross profit			–				–				–
Operating expenses:
Research and development			–				–				–
General and administrative			1,023,433				589,007				1,612,440
Depreciation and amortization			762				–				762
Total operating expenses			1,024,195				589,007				1,613,202
Loss from operations			(1,024,195	)			(589,007	)			(1,613,202	)
Other income:
Interest income			–				–				–
Total other income			–				–				–
Net loss before income tax			(1,024,195	)			(589,007	)			(1,613,202	)
Income tax benefit (expense)			–				–				–
Net loss		$	(1,024,195	)		$	(589,007	)		$	(1,613,202	)
Net loss per share attributable to common stockholders
Basic and diluted		$	(0.30	)		$	(0.17	)		$	(0.47	)
Weighted average common shares outstanding
Basic and diluted			3,398,470				–				3,398,470

 

 

 

F-44

 

 

Statements of Changes in Stockholders’ Equity – As Filed – For the Six Months Ended June 30, 2023

		Series B, Preferred Stock								Common Stock								Additional Paid-In				Stocks to be				Accumulated
		Shares				Value				Shares				Value				Capital				Issued				Deficit				Total
Balance, December 31, 2022			140			$	1				3,392,250			$	33,923			$	4,714,041			$	–			$	(1,538,591	)		$	3,209,374
Issuance of common shares			–				–				75,005				750				(750	)			–				–				–
Conversion to preferred shares			50				1				(250,000	)			(2,500	)			2,499				–				–				–
Net loss			–				–				–				–				–				–				(1,024,195	)			(1,024,195	)
Balance, June 30, 2023			190			$	2				3,217,255			$	32,173			$	4,716,540			$	–			$	(2,562,786	)		$	2,185,929

 

Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Six Months Ended June 30, 2023

Series B, Preferred Stock

Common Stock

Additional Paid-In

Stocks to be

Accumulated

Shares

Value

Shares

Value

Capital

Issued

Deficit

Total

Balance, December 31, 2022

–

$

–

–

$

–

$

–

$

–

$

(10,993

)

$

(10,993

)

Issuance of common shares

–

–

–

–

600,000

–

–

600,000

Conversion to preferred shares

–

–

–

–

–

–

–

–

Net loss

–

–

–

–

–

–

(589,007

)

(589,007

)

Balance, June 30, 2023

–

$

–

–

$

–

$

600,000

$

–

$

(600,000

)

$

–

 

Statements of Changes in Stockholders’ Equity – As Restated – For the Six Months Ended June 30, 2023

		Series B, Preferred Stock								Common Stock								Additional Paid-In				Stocks to be				Accumulated
		Shares				Value				Shares				Value				Capital				Issued				Deficit				Total
Balance, December 31, 2022			140			$	1				3,392,250			$	33,923			$	4,714,041			$	–			$	(1,549,584	)		$	3,198,381
Issuance of common shares			–				–				75,005				750				599,250				–				–				600,000
Conversion to preferred shares			50				1				(250,000	)			(2,500	)			2,499				–				–				–
Net loss			–				–				–				–				–				–				(1,613,202	)			(1,613,202	)
Balance, June 30, 2023			190			$	2				3,217,255			$	32,173			$	5,315,790			$	–			$	(3,162,786	)		$	2,185,179

 

 

 

F-45

 

 

Statement of Cash Flows for the Six Months Ended June 30, 2023

		As Filed				Restatement Adjustments				As Restated
Cash flows from operating activities:
Net loss		$	(1,024,195	)		$	(589,007	)		$	(1,613,202	)
Depreciation			763				–				763
Stock compensation expense			–				600,000				600,000
Change in assets and liabilities:
Accounts receivable			–				–				–
Deferred offering costs			(223,579	)			223,579				–
Other current assets			22,500				–				22,500
Accounts payable and accrued expenses			(21,929	)			(10,993	)			(32,922	)
Net cash used in operating activities			(1,246,440	)			223,579				(1,022,861	)
Cash flows from investing activities
Purchases of property and equipment			–				–				–
Net cash used in investing activities			–				–				–
Cash flows from financing activities:
Deferred offering costs			–				(223,579	)			(223,579	)
Net cash provided by financing activities			–				(223,579	)			(223,579	)
Net increase (decrease) in cash			(1,246,440	)			–				(1,246,440	)
Cash, beginning of period			3,099,422				–				3,099,422
Cash, end of period		$	1,852,982			$	–			$	1,852,982
Supplemental disclosures of cash flow information:
Cash paid for interest		$	–			$	–			$	–
Cash paid for income tax		$	–			$	–			$	–

 

 

 

F-46

 

 

Note 14 – Subsequent Events

 

Amendments to Articles of Incorporation

 

On July 17, 2024, following approval by the Board of Directors, the Company filed a Certificate of Designations, Preferences, and Rights of the Series A Convertible Preferred Stock (the "COD”) with the Nevada Secretary of State. The COD designated 4,250 shares of Series A Convertible Preferred Stock (the “Series A”). The Series A ranks senior to both the Company’s common stock and any other series of preferred stock with respect to the preferences as to dividends, distributions, and payments, upon the liquidation, dissolution, and winding up of the Company. Each share of Series A may be converted into 1,000 shares of the Company’s common stock.

 

The Series A preferred shares have a conversion beneficial ownership limitation of 4.99%, or 9.99% upon election of the holder upon at least 61 days written notice to the Company. The Series A preferred shares have no voting rights, except as required by law and as expressly provided in the COD.

 

Working Capital Adjustment Agreement

 

On July 22, 2024, the Company and Red Cat finalized the working capital adjustment related to the acquisitions of Fat Shark and Rotor Riot pursuant to the Purchase Agreement. The Purchase Agreement provided that the purchase price was to be increased on a dollar-for-dollar basis by the amount by which the working capital exceeded the agreed working capital (the "Working Capital Adjustment”). After negotiations between the parties, it was determined that the Company owed Red Cat $2.0 million as a Working Capital Adjustment.

 

The original Note payable for $2.0 million was reissued to Red Cat with (i) an increased aggregate principal amount of $4,000,000 to give effect to the working capital adjustments discussed above, and (ii) extend the maturity date of the new Note to November 30, 2025.

 

Red Cat Holdings, Inc.’s Sale of Securities

 

On July 22, 2024, the Company’s principal shareholder, Red Cat sold all of its securities in the Company to two unaffiliated third-party investors (the "Investors”). As part of the transaction, Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s common stock, par value $0.01 per share for 4,250 shares of the Company’s newly designated Series A Convertible Preferred Stock (the "Series A”).

 

Red Cat then sold the Series A and the New Note Payable, to the Investors on July 22, 2024.

 

Quarterly Grants to our Board of Directors

 

On July 30, 2024, the Company issued non-employee directors listed in the table below the equity portion of their quarterly compensation. Each of the directors received a vested restricted stock grant for services as a director (and where applicable, committee member) during the quarter ended June 30, 2024. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan and was subject to each director executing the Company’s standard Restricted Stock Agreement, which occurred on July 29, 2024. The fair value per share was based on the quoted trading price as of the close of the market as of July 17, 2024.

 

Director	Fair Value Per Share	Amount of Restricted Common Stock	Aggregate Fair Value
Cristina Colon	$1.79	6,052	$10,833
Sanford Rich	$1.79	6,052	$10,833
Robert Lowry	$1.79	6,052	$10,833
Jeffrey Thompson	$1.79	5,587	$10,000

 

 

 

 

PART II — INFORMATION NOT REQUIRED IN PROSPECTUS

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

 

We estimate that expenses in connection with the distribution described in this Registration Statement (other than brokerage commissions, discounts or other expenses relating to the sale of the shares by the selling security holders) will be as set forth below. We will pay all of the expenses with respect to the distribution, and such amounts, with the exception of the SEC registration fee, are estimates.

 

SEC registration fee		$	2,000
Accounting fees and expenses			10,000
Legal fees and expenses			25,000
Transfer agent fees and expenses			3,000
Miscellaneous			5,000
Total		$	45,000

 

INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

The laws of Nevada provides for discretionary indemnification for each person who serves as or at our request as an officer, director, employee, or agent. We may indemnify such individual against all costs, expenses, and liabilities incurred in a threatened, pending or completed action, suit, or proceeding brought because such individual is a director, officer, employee, or agent. Such individual must have conducted himself in good faith and reasonably believed that his conduct was in, or not opposed to, our best interests. In a criminal action, he/she must not have had a reasonable cause to believe his conduct was unlawful. Such discretionary indemnification must be determined by the stockholders, the board of directors my majority vote of a quorum not including those who were parties to the action, suit, or proceeding, or, in certain circumstances, independent legal counsel in a written opinion. Notwithstanding the above, our Articles of Incorporation further provides that our Bylaws and any agreements cannot provide for the advancement of expenses incurred relating to or arising from proceedings in which we assert a direct claim against an indemnitee or in a proceeding where an indemnitee asserts a direct claim against us.

 

Our Articles of Incorporation provide that our Company shall indemnify its officers, directors, and agents to the fullest extent permitted by applicable law, and as provided for in the Company’s Bylaws and agreements.

 

Our Articles of Incorporation further provide that the liability of our directors and offices shall be eliminated or limited to the fullest extent permitted by the Nevada Revised Statutes.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers and controlling persons pursuant to the foregoing, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.

 

RECENT SALES OF UNREGISTERED SECURITIES

 

The following is a summary of all securities that we have sold during the last three years without registration under the Securities Act of 1933, as amended (the “Securities Act”).

 

 

 

On September 10, 2021, we closed a private offering. Our founders purchased 1,500,000 shares of common stock at a price of $0.02 per share for total proceeds of $30,000. The shares were issued pursuant to the exemption provided under Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506(b) promulgated thereunder.

 

Subscriber Name	Shares Issued	Subscription price
Jeffrey Thompson	1,200,000	$24,000
Brains Riding In Tanks, LLC	75,000	$1,500
John J. Laxague	75,000	$1,500
Matthew Newman	75,000	$1,500
James T. Connell	75,000	$1,500
Total	1,500,000	$30,000

 

On September 14, 2021, we closed a private offering and sold 2,276,000 shares of common stock at a price of $1.00 per share for total proceeds of $2,276,000, including 26,000 shares of common stock issued to Jeffrey Thompson for a total of $26,000. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933.

 

On November 24, 2021, we closed a private offering and sold 12,500 shares of common stock at a price of $8.00 per share for total proceeds of $100,000. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933.

 

On December 1, 2021, we closed a private offering and sold 6,250 shares of common stock at a price of $8.00 per share for total proceeds of $50,000. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933.

 

On December 30, 2021, we closed a private offering and sold 241,250 shares of common stock at a price of $8.00 per share for total proceeds of $1,930,000. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933.

 

On January 10, 2022, we closed a private offering and sold 43,750 shares of common stock at a price of $8.00 per share for total proceeds of $350,000. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933.

 

On April 14, 2022, we closed a private offering and sold 12,500 shares of common stock at a price of $8.00 per share for total proceeds of $100,000. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933.

 

On December 13, 2022, the Company issued 140 Series B preferred shares to three accredited investors in connection with the cancellation of 700,000 shares of common stock. The Series B preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company. Shares outstanding at December 31, 2022 totaled 140 which are convertible into 700,000 shares of common stock. These issuances were exempt from registration under Section3(a)(9) of the Securities Act.

  

On March 7, 2023, we issued 75,000 shares of our common stock to the investors in the July 27, 2022 private placement. The shares were issued at the request of Revere Securities as partial consideration for its agreement to modify its engagement letter with the Company. The shares were exempt from registration under Rule 506(b) under the Securities Act.

 

On June 1, 2023, the Company issued 50 Series B preferred shares to an accredited investor in connection with the cancellation of 250,000 shares of common stock. The Series B preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company. Preferred shares outstanding at June 5, 2023, totaled 190 which are convertible into 950,000 shares of common stock. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.

 

On January 2, 2024, the Company issued 16,086 shares of our common stock to Brandon Torres Declet as part of severance the Company and Mr. Declet agreed to pursuant to Mr. Declet’s Termination Agreement. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933

 

 

 

 

On February 16, 2024, the Company issued 4,250,000 shares of the Company’s common stock to Red Cat which were not registered under the Securities Act of 1933 and were exempt from registration pursuant to Section 4(a)(2) thereunder.

 

On February 28, 2024, the Company issued 175,000 shares of our common stock to an accredited investor in connection with a conversion of 35 shares of our Series B Convertible Preferred Stock. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.

 

On March 12, 2024, the Company issued 175,000 shares of our common stock to an accredited investor in connection with a conversion of 35 shares of our Series B Convertible Preferred Stock. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.

 

On March 28, 2024, the Company issued 250,000 shares of our common stock to an accredited investor in connection with a conversion of 50 shares of our Series B Convertible Preferred Stock. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.

 

On April 30, 2024, the Company issued 937,249 of restricted shares of our common stock to our executive officers and board members under our 2022 Equity Incentive Plan. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933.

 

On May 2, 2024, the Company issued 40,650 of restricted shares of our common stock to our chief executive officer under our 2022 Equity Incentive Plan. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933.

 

On May 17, 2024, the Company issued 75,000 shares of our common stock to an accredited investor in connection with a conversion of 15 shares of our Series B Convertible Preferred Stock. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.

 

On June 13, 2024, the Company issued 25,000 shares of our common stock to an accredited investor in connection with a conversion of 5 shares of our Series B Convertible Preferred Stock. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.

 

On July 22, 2024, Red Cat Holdings, Inc., the Company’s principal shareholder, entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s common stock, par value $0.01 per share for 4,250 shares of the Company’s newly designated Series A Convertible Preferred Stock. The transaction was exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933.

 

On July 30, 2024, the Company issued the non-employee directors listed in the table below the equity portion of their quarterly compensation. Each of the directors received a vested restricted stock grant for services as a director (and where applicable, committee member) during the quarter ended June 30, 2024. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan and was subject to each director executing the Company’s standard Restricted Stock Agreement (the “Agreement”), which occurred on July 29, 2024. The fair value per share was based on the quoted trading price as of the close of the market as of July 17, 2024. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933.

 

Director	Fair Value Per Share	Amount of Restricted Common Stock	Aggregate Fair Value
Cristina Colon	$1.79	6,052	$10,833
Sanford Rich	$1.79	6,052	$10,833
Robert Lowry	$1.79	6,052	$10,833
Jeffrey Thompson	$1.79	5,587	$10,000

 

On August 21, 2024, the Company issued two third-party accredited investors (i) 4% Convertible Promissory Note with an aggregate principal amount of $3,000,000 convertible into 1,507,538 shares of common stock at (A) $1.99 per share (125% of the closing bid price on August 20, 2024) or (B) upon an event of default, at a conversion price equal to the 10% discount of the average three day VWAP, as defined in the New Notes, prior to the conversion date, (ii) 105 shares each of the newly-designated Series C Preferred Stock based on an exchange price of $1.59 per common share into which the Series C Preferred Stock is convertible into (the share price at the close of the market on August 20, 2024). The Series C is convertible into 315,000 shares of the Company’s common stock, and (iii) five-year warrants each exercisable for 315,000 shares of the Company’s common stock with an exercise price of $1.99 per share, subject to adjustments as set forth in the warrants. These issuances were exempt from registration under Section 3(a)(9) of the Securities Act.

 

 

 

 

 

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
2.1		Agreement and Plan of Merger by and between Unusual Machines, Inc., a Puerto Rico corporation and Unusual Machines, Inc., a Nevada corporation				8-K		2.1		4/23/24
3.1		Articles of Incorporation				8-K		3.1		4/23/24
3.1(a)		Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock				8-K		3.1		7/22/24
3.1(b)		Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock				8-K		3.3		4/23/24
3.1(c)		Certificate of Designations, Preferences and Rights of the Series C Convertible Preferred Stock				8-K		3.1		8/22/24
3.2		Bylaws				8-K		3.2		4/23/24
3.3		Form of Common Stock Certificate				8-K		3.4		4/23/24
4.1		Revised Form of Representatives Warrant				S-1/A		10.7		2/1/24
4.2		Form of Representatives Warrant				8-K		4.1		2/16/24
4.3		Form of 8% Promissory Note +				8-K		4.1		7/22/24
5.1		Legal Opinion of Nason, Yeager, Gerson, Harris & Fumero, P.A.		(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 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
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
10.15		Management Services Agreement #				8-K		10.1		5/6/24
10.16		Form of Restricted Stock Agreement				8-K		10.2		5/6/24
10.17		Form of Exchange Agreement +				8-K		10.1		7/22/24
10.18		Form of Closing Date working Capital Agreement and Consent +				8-K		10.2		7/22/24
10.19		Form of Restricted Stock Agreement				8-K		10.1		7/31/24
10.20		4% Convertible Promissory Note – Titan Multi-Strategy Fund I, Ltd. +		(1)
10.21		4% Convertible Promissory Note – Eleven Ventures LLC +		(1)
10.22		Common Stock Purchase Warrant – Titan Multi-Strategy Fund I, Ltd. +		(1)
10.23		Common Stock Purchase Warrant – Eleven Ventures LLC +		(1)
10.24		Exchange Agreement – Titan Multi-Strategy Fund I, Ltd. +		(1)
10.25		Exchange Agreement – Eleven Ventures LLC +		(1)
10.26		Registration Rights Agreement – Titan Multi-Strategy Fund I, Ltd. +		(1)
10.27		Registration Rights Agreement – Eleven Ventures LLC +		(1)
21.1		List of Subsidiaries				10-K/A		21.1		8/9/24
23.1		Consent of Salberg & Company, P.A.		(1)
23.2		Consent of Nason, Yeager, Gerson, Harris & Fumero, P.A.		(2)
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)
107		Filing Fee Table		(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 compensatory plan, contract or agreement.
(1)	Filed herein
(2)	Contained in Exhibit 5.1

 

 

 

 

 

 

 

 

 

 

 

UNDERTAKINGS

 

The undersigned registrant hereby undertakes:

 

(1)	To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

	(i)	To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
	(ii)	To reflect in the Prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Filing Fee" table in the effective registration statement.
	(iii)	To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

(2)	That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3)	To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4)	That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
	If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5)	Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Orlando Florida on September 11, 2024.

 

	UNUSUAL MACHINES, INC.
	By:	/s/ Allan Evans
		Allan Evans
		Chief Executive Officer (Principal Executive Officer)

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Allan Evans		Chief Executive Officer and Director		September 11, 2024
Allan Evans		(Principal executive officer)
/s/ Brian Hoff		Chief Financial Officer		September 11, 2024
Brian Hoff		(Principal financial and accounting officer)
/s/ Cristina Colón		Director		September 11, 2024
Cristina Colón
/s/ Jeffrey Thompson		Director		September 11, 2024
Jeffrey Thompson
/s/ Robert Lowry		Director		September 11, 2024
Robert Lowry
/s/ Sanford Rich		Director		September 11, 2024
Sanford Rich

 

 

Exhibit 5.1

 

 

 

September 11, 2024

 

Unusual Machines, Inc.

4677 L B McLeod Rd

Suite J

Orlando, FL 32811

Attention: Dr. Allan Evans, CEO

 

 

Re: Registration Statement on Form S-1 (SEC File No. 333-______)

 

Ladies and Gentlemen:

 

 

We have acted as counsel to Unusual Machines, Inc., a Nevada corporation (the “Company”), in connection with its filing on the date hereof with the Securities and Exchange Commission (the “Commission”) of a registration statement on Form S-1, (the “Registration Statement”) under the Securities Act of 1933, as amended (the “Act”) the Company filed with the Commission.

 

This opinion is being furnished in connection with the requirements of Item 601(b)(5) of Regulation S-K under the Act, and no opinion is expressed herein as to any matter pertaining to the contents of the Registration Statement or related prospectus or prospectus supplement (collectively, the “Prospectus”), other than as expressly stated herein with respect to the issuance of the Shares.

 

As such counsel, we have examined the Registration Statement and originals, or copies certified or otherwise, identified to our satisfaction of the Company’s Articles of Incorporation and Bylaws and such other documents, records, and instruments as we have deemed appropriate for purposes of the opinion set forth herein. We have relied upon certificates and other assurances of officers of the Company and others as to factual matters material to this opinion without having independently verified such factual matters.

 

We have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of the documents submitted to us as originals, the conformity with the originals of all documents submitted to us as certified, facsimile, or photostatic copies and the authenticity of the originals of all documents submitted to us as copies.

 

Based on our examination mentioned above, we are of the opinion that the securities being registered to be sold pursuant to the Registration Statement, and with respect to any warrant shares, assuming receipt of the exercise price for any such warrant shares, are duly authorized, legally and validly issued, are fully paid and non-assessable.

 

This opinion is for your benefit in connection with the Registration Statement and may be relied upon by you and by persons entitled to rely upon it pursuant to the applicable provisions of the Act. We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to us under the caption “Legal Matters” in the Prospectus included in the Registration Statement. In giving such consent, we do not hereby admit that we are acting within the category of persons whose consent is required under Section 7 of the Securities Act or the rules or regulations of the Commission thereunder.

 

 

	Very truly yours,     /s/ Nason, Yeager, Gerson, Harris & Fumero, P.A.
	Nason, Yeager, Gerson, Harris & Fumero, P.A.

 

Exhibit 10.20

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

Original Issue Date: August 21, 2024

$1,318,181.82

 

4% CONVERTIBLE PROMISSORY NOTE

DUE NOVEMBER 30, 2025

 

THIS 4% CONVERTIBLE PROMISSORY NOTE (this “Note”) duly authorized and validly issued on the Original Issue Date above by Unusual Machines Inc., a Nevada corporation (the “Company”).

 

FOR VALUE RECEIVED, the Company promises to pay to Titan Multi-Strategy Fund I, Ltd., maintaining an address at 5825 Windsor Court, Boca Raton, Florida 33496 or its registered assigns (the “Holder”), pursuant to the terms hereunder, the principal sum of $1,318,181.82 on November 30, 2025 (the “Maturity Date”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof. This Note is subject to the following additional provisions:

 

Section 1. Definitions. For the purposes hereof, the following terms shall have the following meanings:

 

“Bankruptcy Event” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof, (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.

 

“Beneficial Ownership Limitation” shall have the meaning set forth in Section 4(e).

 

“Business Day” means any day except Saturday, Sunday or any other day on which commercial banks located in New York are authorized or required by Law to be closed for business.

 

“Buy-In” shall have the meaning set forth in Section 5(d)(v).

 

 

 

 

“Change of Control Transaction” means the occurrence after the Original Issue Date of any of (a) an acquisition after the Original Issue Date by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 50% of the voting securities of the Company (other than by means of conversion, exercise or exchange of the Notes or the Securities issued together with the Notes), (b) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates with the Company and, after giving effect to such transaction, the shareholders of the Company immediately prior to such transaction own less than 50% of the aggregate voting power of the Company or the Successor Entity (as hereinafter defined) of such transaction, (c) the Company sells or transfers all or substantially all of its assets to another Person and the shareholders of the Company immediately prior to such transaction own less than 50% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a replacement at one time or within a three year period of more than one-half of the members of the Board of Directors which is not approved by a majority of those individuals who are members of the Board of Directors on the Original Issue Date (or by those individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was approved by a majority of the members of the Board of Directors who are members on the Original Issue Date), or (e) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in clauses (a) through (d) above.

 

“Common Stock” means the common stock of the Company, $0.01 par value per share, and any securities into which such common stock may hereafter be reclassified or for which it may be exchanged as a class.

 

“Company” shall have the meaning set forth in the preamble.

 

“Conversion” shall have the meaning ascribed to such term in Section 4(a).

 

“Conversion Date” shall have the meaning set forth in Section 4(a).

 

“Conversion Notice” shall have the meaning set forth in Section 4(a).

 

“Conversion Price” shall have the meaning set forth in Section 4(c).

 

“Conversion Schedule” means the Conversion Schedule in the form of Schedule 1 attached hereto.

 

“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of this Note in accordance with the terms hereof.

 

“Default Interest Rate” shall have the meaning set forth in Section 2(a).

 

“Event of Default” shall have the meaning set forth in Section 4(a).

 

“Force Majeure” means the Company shall be excused from any delay in performance or for non-performance of any of the terms and conditions of this Note caused by any Force Majeure event. Force Majeure shall mean strikes, labor disputes, freight embargoes, interruption or failure in the Internet, telephone or other telecommunications service or related equipment, material interruption in the mail service or other means of communication within the United States or its territories, if the Company shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage, or other calamity or malicious act, whether or not such loss shall have been insured, acts of God, outbreak or material escalation of hostilities or civil disturbances, national emergency or war (whether or not declared), or other calamity or crises including a terrorist act or acts affecting the United States, future laws, rules, regulations or acts of any government including any orders, rules or regulations issued by any official or agency of such government and including any Covid-19 lock down or disruption of commercial activity within the United States or its territories, or any cause beyond the reasonable control of the Company.

 

 

 

 

“Mandatory Default Amount” means the sum of (a) 100% of the outstanding principal amount of this Note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of this Note.

 

“Maturity Date” shall have the meaning set forth in the preamble.

 

“Note” or “Notes” shall have the meaning set forth in the preamble.

 

“Note Register” shall mean the Company’s records regarding the ownership of the Note.

 

“Original Issue Date” is the date set forth on page 1 hereto.

 

“Exchange Agreement” shall mean that certain Exchange Agreement by and between the Company and the Holder dated as of August 21, 2024.

 

“Qualified Financing” shall mean the sale by the Company of its debt or equity securities (other than in connection with an initial public offering) in one or more related transaction which the Company receives gross proceeds of at least $5.0 million.

 

“Securities Act” shall mean the Securities Act of 1933, as amended.

 

“Share Delivery Date” shall have the meaning set forth in Section 5(d)(ii).

 

“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the NYSE American, the New York Stock Exchange (or any successors to any of the foregoing).

 

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New Yor, NY time) to 4:02 p.m. (New York, NY time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock are not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock is then reported on the Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Notes then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

 

Section 2. Interest; Amortization Payments.

 

(a)   Interest. Interest shall accrue to the Holder on the aggregate unconverted and then outstanding principal amount of this Note at the rate of 4% per annum, calculated on the basis of a 360-day year and shall accrue daily commencing on the Original Issue Date until payment in full of the outstanding principal (or conversion to the extent applicable), together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. Following an Event of Default, regardless of whether such Event of Default has been cured or remains ongoing, interest shall accrue at the lesser of (i) the rate of 12% per annum, or (ii) the maximum amount permitted by law (the lesser of clause (i) or (ii), the “Default Interest Rate”).

 

 

 

 

(b)   Payment in Cash; Holder’s Right to Call the Note upon a Qualified Financing. All payments of interest due hereunder shall be payable in cash monthly in arrears on the 15^th day of each month commencing on the next month following the Original Issue Date. The outstanding principal amount of this Note shall be due payable on the Maturity Date. Upon the consummation of a Qualified Offering, upon written notice by the Holder to the Company within ten days after the Qualified Financing (the “Call Notice”), in the event that the Holder shall send the Call Notice with such ten day period, the Holder shall have the right, but not the obligation, to require the Company to repay, all, or a portion of, the outstanding principal amount of this Note (together with accrued and unpaid interest thereon) in cash within five days after receipt of the Call Notice from Holder by the Company. Unless such Call Notice is revoked by the Holder in writing, the Company shall repay the Holder in cash the amount specified in the Call Notice.

 

Section 3. Registration of Transfers and Exchanges.

 

(a)   Different Denominations. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be payable for such registration of transfer or exchange.

 

(b)    Holder Representations. This Note has been issued subject to certain investment representations as set forth in the Exchange Agreement, and may be transferred or exchanged only in compliance with the Exchange Agreement and applicable federal and state securities laws and regulations.

 

(c)   This Note may be transferred or exchanged only in compliance with the Exchange Agreement and applicable federal and state securities laws and regulations.

 

(d)   Reliance on Note Register. Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

 

Section 4. Events of Default.

 

(a)  “Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):

 

(i)   any default in the payment of (A) the principal amount of any Note or (B) interest, late fees, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise);

 

(ii)  the Company shall fail to observe or perform any other covenant or agreement contained in the Exchange Agreement or the Notes which failure is not cured, if possible to cure, within the earlier to occur of (A) five Business Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) 10 Business Days after the Company has become aware of such failure, unless a longer cure period exists in an applicable agreement in which such longer cure period shall apply;

 

(iii)   any representation or warranty made in this Note, the Exchange Agreement, any written statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder or any other Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;

 

(iv)  the Company or any Significant Subsidiary (as such term is defined in Rule 1- 02(w) of Regulation S-X) shall be subject to a Bankruptcy Event;

 

(v)  (A) the Common Stock shall not be eligible for listing or quotation for trading on any Trading Market and shall not be eligible to resume listing or quotation for trading thereon within five Business Days unless a Force Majeure event has occurred (B) the transfer of shares of Common Stock through the Depository Trust Company System is no longer available or is subject to a “chill”, or (C) the Company’s failure to comply with any rules or regulations of its Trading Market;

 

 

 

 

(vi)   the Company shall be a party to any Change of Control Transaction or shall agree to sell or dispose of all or in excess of 50% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a Change of Control Transaction);

 

(vii)  the Company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s intention to not honor requests for conversions of any Notes in accordance with the terms hereof; or

 

(viii)  any monetary judgment, writ or similar final process shall be entered or filed against the Company, any Subsidiary or any of their respective property or other assets for more than $125,000, and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of 10 calendar days.

 

(b)   Remedies Upon Event of Default. If any Event of Default occurs and is not cured within 10 days after the giving of written notice, the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due and payable in cash at the Mandatory Default Amount (unless the Holder exercises its right to convert the Note in accordance with Section 5 below). Upon the payment in full of the Mandatory Default Amount, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 7(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. The Borrower shall pay the Holder hereof costs of collection, including reasonable attorneys’ fees.

 

(c)   Interest Rate Upon Event of Default. Commencing on the occurrence of any Event of Default and until such Event of Default is cured, this Note shall accrue interest at an interest rate equal to the Default Interest Rate.

 

(d)  Conversion Price Upon Event of Default. Commencing on the occurrence of any Event of Default and until such Event of Default is cured, this Note shall be convertible at the Default Conversion Price.

 

Section 5. Holder’s Conversion Right.

 

(a)    Voluntary Conversion. (i) During the occurrence and continuance of an Event of Default (an “Event of Default Conversion”) or (ii) subject to confirmation from the NYSE American that shareholder approval will not be required, or if shareholder approval is required, the Company shall use its commercially reasonable efforts to obtain such shareholder approval in accordance with Section 9(l) of the Exchange Agreement, and subject to the Beneficial Ownership Limitations (as defined below), at any time after the date hereof (a “Voluntary Conversion” and, together with an Event of Default Conversion, a “Conversion”) and until this Note is no longer outstanding, in lieu of requiring the Company to repay the Note in cash, this Note shall be convertible, including any accrued and unpaid interest, in whole or in part, at any time, and from time to time, into shares of Common Stock at the option of the Holder. The Holder shall effect conversions by delivering to the Company a Conversion Notice, the form of which is attached hereto as Annex A (each, a “Conversion Notice”), specifying therein the principal amount and interest on this Note to be converted and the date on which such conversion shall be effected (such date, the “Conversion Date”). If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that such Conversion Notice is deemed delivered hereunder. No ink-original Conversion Notice shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Conversion Notice form be required. To effect conversions hereunder, the Holder shall not be required to physically surrender this Note to the Company unless the entire principal amount of this Note, plus all accrued and unpaid interest thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the principal amount(s) converted in each conversion, the date of each conversion, and the Conversion Price in effect at the time of each conversion. The Company may deliver an objection to any Conversion Notice within one Business Day of delivery of such Conversion Notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder, and any registered assignee by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof.

 

 

 

 

(b) Reserved.

 

(c)  Conversion Price. The “Conversion Price” in effect on any Conversion Date means, as of any Conversion Date, (i) in the event of an Event of Default Conversion, the amount equal to a 10% discount of the average three day VWAP prior to the Conversion Date and (ii) in the event of a Voluntary Conversion, $1.99.

 

(d) Mechanics of Conversion.

 

(i)  Conversion Shares Issuable Upon Conversion of Principal Amount. The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note and accrued interest and other amounts due and owing under this Note to be converted by (y) the Conversion Price in effect at the time of such conversion.

 

(ii)  Delivery of Certificate Upon Conversion. Not later than one Trading Day after each Conversion Date (the “Share Delivery Date”), the Company shall deliver, or cause to be delivered, to the Holder (A) a certificate or certificates representing the Conversion Shares representing the number of Conversion Shares being acquired upon the conversion of this Note, which, on or after the date on which such Conversion Shares are eligible to be sold under Rule 144 without the need for current public information and the Company has received an opinion of counsel to such effect, which such opinion must be acceptable to the Holder in its sole and absolute discretion (which opinion the Company shall be responsible for obtaining at its sole cost and expense) shall be free of restrictive legends and trading restrictions, representing the number of Conversion Shares being acquired upon the conversion of this Note. All certificate or certificates required to be delivered by the Company under this Section shall be delivered electronically through the Depository Trust Company or another established clearing corporation performing similar functions.

 

(iii)  Failure to Deliver Certificates. If, in the case of any Conversion Notice, such certificate or certificates are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice.

 

(iv)  Obligation Absolute; Partial Liquidated Damages. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Note in accordance with the terms hereof is absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. In the event the Holder of this Note shall elect to convert any or all of the outstanding principal amount hereof, the Company may not refuse conversion based on any claim that the Holder or anyone associated or affiliated with the Holder has been engaged in any violation of law, agreement or for any other reason, unless an injunction from a court, on notice to Holder, restraining and or enjoining conversion of all or part of this Note shall have been sought and obtained, and the Company posts a surety bond for the benefit of the Holder in the amount of 150% of the outstanding principal amount of this Note, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to the Holder to the extent it obtains judgment. In the absence of such injunction, the Company shall issue Conversion Shares. If the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 5(d)(ii) by the Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of principal amount being converted, $10 per Business Day (increasing to $20 per Business Day on the fifth Business Day after such Conversion Date) for each Business Day after such Share Delivery Date until such certificates are delivered or Holder rescinds such conversion. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 4 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

 

 

 

 

(v)    Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates by the Share Delivery Date pursuant to Section 5(d)(ii), and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then the Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount, if any, by which (x) the Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Note in a principal amount equal to the principal amount of the attempted conversion (in which case such conversion shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements under Section 5(d)(ii). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of this Note with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof.

 

(vi)   Reservation of Shares Issuable Upon Conversion. The Company covenants that it will reserve and keep available out of its authorized and unissued shares of Common Stock for the purpose of issuances upon conversion of this Note, free from preemptive rights or any other actual contingent purchase rights of Persons other than the holder (and the other holders of the Notes), an amount of shares at least equal to the greater of: (i) one times the number of shares of Common Stock necessary to allow the Holder to convert this Note and accrued interest thereon to maturity in full; or (ii) 19.9% of the current shares of Common Stock outstanding, if such restriction is required under Rule 5635 of the NYSE American listing rules. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and non-assessable.

 

(vii)  Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.

 

(viii)  Transfer Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that, the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note so converted and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

 

(ix) Reserved.

 

 

 

 

(e)  Holder’s Conversion Limitations. The Company shall not affect any conversion of this Note, and a Holder shall not have the right to convert any portion of this Note, to the extent that after giving effect to the conversion set forth on the applicable Conversion Notice, the Holder (together with the Holder’s Affiliates, and any Persons acting as a group together with the Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Notes) beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 5(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this Section 5(e) applies, the determination of whether this Note is convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is convertible shall be in the sole discretion of the Holder, and the submission of a Conversion Notice shall be deemed to be the Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Conversion Notice that such Conversion Notice has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 5(e), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the Company’s most recent periodic or annual report filed with the SEC, if any, as the case may be, (ii) a more recent public announcement by the Company, or (iii) a more recent written notice by the Company setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. The Holder, upon not less than 61 days’ prior notice to the Company, may increase the Beneficial Ownership Limitation provisions of this Section 5(e) solely with respect to the Holder’s Note, up to but not in excess of 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. Any such increase will not be effective until the 61st day after such notice is delivered to the Company. The Holder may also decrease the Beneficial Ownership Limitation provisions of this Section 5(e) solely with respect to the Holder’s Note at any time, which decrease shall be effective immediately upon delivery of notice to the Company. Notwithstanding the foregoing and for avoidance of doubt, in order to comply with the rules of the Trading Market, in no event shall the Beneficial Ownership Limitation exceed 19.9% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder or such other lesser percentage that does not violate the rules of the NYSE American, or other applicable Trading Market. The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 5(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Note.

 

 

 

 

Section 6. Certain Adjustments.

 

(a)                Stock Dividends and Splits. If the Company, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in Common Stock (which, for avoidance of doubt, shall not include any Common Stock s issued by the Company upon conversion of this Note), (ii) subdivides outstanding Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares) outstanding immediately after such event, and the number of shares issuable upon conversion of this Note shall be proportionately adjusted such that the aggregate Conversion Price of this Note shall remain unchanged. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

(b)                Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 6(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

 

(c)                Pro Rata Distributions. If the Company, at any time while this Note is outstanding, shall distribute to all holders of Common Stock (and not to the Holder) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to 6(c)), then in each such case the Conversion Price shall be adjusted by multiplying the Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the board of directors of the Company in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

 

 

 

 

(d)                Fundamental Transaction. If, at any time while this Note is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding Common Stock (not including any Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent conversion of this Note, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 5(e) on the conversion of this Note), the number of Common Stock (or successor security) of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of Common Stock for which this Note is convertible immediately prior to such Fundamental Transaction (without regard to any limitation in Section 5(e) on the conversion of this Note). For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Note in accordance with the provisions of this Section pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Note a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Note which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the Common Stock acquirable and receivable upon conversion of this Note (without regard to any limitations on the conversion of this Note) prior to such Fundamental Transaction, and with an conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account the relative value of the Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value of this Note immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note with the same effect as if such Successor Entity had been named as the Company herein. For the avoidance of doubt, the Holder shall be entitled to the benefits of the provisions of this Section regardless of whether (i) the Company has sufficient authorized shares of Common Stock for the issuance of the Conversion Shares and/or (ii) a Fundamental Transaction occurs prior to the Conversion Date.

 

(d)               Calculations. All calculations under this Section shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of Common Stock (excluding treasury shares, if any) issued and outstanding.

 

 

 

 

(e)                Notice to Holder.

 

(i)                 Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section, the Company shall promptly give notice to the Holder setting forth the Conversion Price after such adjustment and any resulting adjustment to the number of Conversion Shares and setting forth a statement of the facts requiring such adjustment (“Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section, upon the occurrence of any Dilutive Issuance or other reduction of the Conversion Price, the Holder is entitled to receive a number of Conversion Shares based upon the reduced Conversion Price regardless of whether the Holder accurately refers to the Conversion Price in the Notice of Conversion.

 

(ii)               Notice to Allow Conversion by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock , (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock are converted into other securities, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, the Company shall deliver to the Holder at its last address as it shall appear upon the Note Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder shall remain entitled to convert this Notet during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

(f)                Voluntary Adjustment By Company. Subject to the rules and regulations of the Trading Market, the Company may at any time during the term of this Note reduce the then current Conversion Price to any amount and for any period of time deemed appropriate by the board of directors of the Company.

 

Section 6. Miscellaneous.

 

(a)   No Rights as Stockholder Until Conversion. This Note does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the conversion hereof other than as explicitly set forth in Section 6.

 

(b)   Notices. All notices, offers, acceptance and any other acts under this Note (except payment) shall be in writing, and shall be sufficiently given if delivered to the addressees in person, by Federal Express or similar receipted next business day delivery, as follows:

 

If to the Company:	Unusual Machines, Inc.
	4677 L B McLeod Rd, Suite J
	Orlando, FL 32811
	Attention: Dr. Allan Evans, CEO
	Email: allan@unusualmachines.com

 

 

 

 

With a copy to (which shall not constitute notice to Unusual):	Nason Yeager Gerson Harris & Fumero, P.A.
	3001 PGA Boulevard, Suite 305
	Palm Beach Gardens, FL 33410
	Attention: Michael D. Harris, Esq.
	Email: mharris@nasonyeager.com
If to Holder:	the address set forth above
With a copy to (which shall not constitute notice to Holder):

 

or to such other address as any of them, by notice to the other may designate from time to time. Time shall be counted to, or from, as the case may be, the date of delivery.

 

(c)   Absolute Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest and late fees, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company. This Note ranks pari passu with all other Notes outstanding as of the date of this Note.

 

(d)   Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.

 

(e)   Exclusive Jurisdiction; Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with Section 7 of the Exchange Agreement. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the courts set forth in Section 7 of the Exchange Agreement for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of this Note), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby.

 

(f)  Waiver. Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note on any other occasion. Any waiver by the Company or the Holder must be in writing.

 

 

 

 

(g)   Severability. If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.

 

(h)   Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. The Company covenants to the Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach would be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any such breach or any such threatened breach, without the necessity of showing economic loss and without any bond or other security being required. The Company shall provide all information and documentation to the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance with the terms and conditions of this Note.

 

(i)  Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

 

(j)  Headings. The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

 

(k)  Attorneys’ Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Note, the prevailing party will be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled..

 

 

 

** Signature Pages Follow **

 

 

 

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the Original Issue Date.

 

 

	UNUSUAL MACHINES INC.
	By: /s/ Brian Hoff
	Name: Brian Hoff
	Title: Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ANNEX A CONVERSION NOTICE

 

The undersigned hereby elects to convert principal under the 4% Convertible Promissory Note due November 30, 2025, of Unusual Machines Inc., a Nevada corporation (the “Company”), into shares of common stock (the “Common Stock”), of the Company according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.

 

The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.

 

Conversion calculations:

 

	Date to Effect Conversion:
	Principal Amount of Note to be Converted:
	Payment of Interest in Common Stock __ yes ___ no
	If yes, $ ___ of Interest Accrued on Account of Conversion at Issue.
	Number of shares of Common Stock to be issued:
	Signature:
	Name:
	DWAC Instructions:
	Broker No: ______________
	Account No: ____________

 

 

 

 

 

 

 

 

 

 

Schedule 1

CONVERSION SCHEDULE

 

The 4% Convertible Promissory Note due on November 30, 2025, in the original principal amount of $1,318,181.82 is issued by Unusual Machines Inc., a Nevada corporation. This Conversion Schedule reflects conversions made under Section 5 of the above referenced Note.

 

Date of Conversion (or for first entry, Original Issue Date)	Amount of Converted Principal	Aggregate Principal Amount Remaining Subsequent to Conversion (or original Principal Amount)	Applicable Conversion Price	Company Attest

 

 

 

 

Exhibit 10.21

 

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

Original Issue Date: August 21, 2024

$1,681,818.18

 

4% CONVERTIBLE PROMISSORY NOTE

DUE NOVEMBER 30, 2025

 

THIS 4% CONVERTIBLE PROMISSORY NOTE (this “Note”) duly authorized and validly issued on the Original Issue Date above by Unusual Machines Inc., a Nevada corporation (the “Company”).

 

FOR VALUE RECEIVED, the Company promises to pay to Eleven Ventures LLC, a Delaware limited liability company, maintaining an address at 463 Adams St., Denver, CO 80206 email: hw@11f.co or its registered assigns (the “Holder”), pursuant to the terms hereunder, the principal sum of $1,681,818.18 on November 30,2025 (the “Maturity Date”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof. This Note is subject to the following additional provisions:

 

Section 1. Definitions. For the purposes hereof, the following terms shall have the following meanings:

 

“Bankruptcy Event” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof, (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.

 

“Beneficial Ownership Limitation” shall have the meaning set forth in Section 4(e).

 

“Business Day” means any day except Saturday, Sunday or any other day on which commercial banks located in New York are authorized or required by Law to be closed for business.

 

 

 

 

“Buy-In” shall have the meaning set forth in Section 5(d)(v).

 

“Change of Control Transaction” means the occurrence after the Original Issue Date of any of (a) an acquisition after the Original Issue Date by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 50% of the voting securities of the Company (other than by means of conversion, exercise or exchange of the Notes or the Securities issued together with the Notes), (b) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates with the Company and, after giving effect to such transaction, the shareholders of the Company immediately prior to such transaction own less than 50% of the aggregate voting power of the Company or the Successor Entity (as hereinafter defined) of such transaction, (c) the Company sells or transfers all or substantially all of its assets to another Person and the shareholders of the Company immediately prior to such transaction own less than 50% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a replacement at one time or within a three year period of more than one-half of the members of the Board of Directors which is not approved by a majority of those individuals who are members of the Board of Directors on the Original Issue Date (or by those individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was approved by a majority of the members of the Board of Directors who are members on the Original Issue Date), or (e) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in clauses (a) through (d) above.

 

“Common Stock” means the common stock of the Company, $0.01 par value per share, and any securities into which such common stock may hereafter be reclassified or for which it may be exchanged as a class.

 

“Company” shall have the meaning set forth in the preamble.

 

“Conversion” shall have the meaning ascribed to such term in Section 4(a).

 

“Conversion Date” shall have the meaning set forth in Section 4(a).

 

“Conversion Notice” shall have the meaning set forth in Section 4(a).

 

“Conversion Price” shall have the meaning set forth in Section 4(c).

 

“Conversion Schedule” means the Conversion Schedule in the form of Schedule 1 attached hereto.

 

“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of this Note in accordance with the terms hereof.

 

“Default Interest Rate” shall have the meaning set forth in Section 2(a).

 

“Event of Default” shall have the meaning set forth in Section 4(a).

 

“Force Majeure” means the Company shall be excused from any delay in performance or for non-performance of any of the terms and conditions of this Note caused by any Force Majeure event. Force Majeure shall mean strikes, labor disputes, freight embargoes, interruption or failure in the Internet, telephone or other telecommunications service or related equipment, material interruption in the mail service or other means of communication within the United States or its territories, if the Company shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage, or other calamity or malicious act, whether or not such loss shall have been insured, acts of God, outbreak or material escalation of hostilities or civil disturbances, national emergency or war (whether or not declared), or other calamity or crises including a terrorist act or acts affecting the United States, future laws, rules, regulations or acts of any government including any orders, rules or regulations issued by any official or agency of such government and including any Covid-19 lock down or disruption of commercial activity within the United States or its territories, or any cause beyond the reasonable control of the Company.

 

 

 

 

“Mandatory Default Amount” means the sum of (a) 100% of the outstanding principal amount of this Note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of this Note.

 

“Maturity Date” shall have the meaning set forth in the preamble.

 

“Note” or “Notes” shall have the meaning set forth in the preamble.

 

“Note Register” shall mean the Company’s records regarding the ownership of the Note.

 

“Original Issue Date” is the date set forth on page 1 hereto.

 

“Exchange Agreement” shall mean that certain Exchange Agreement by and between the Company and the Holder dated as of August 21, 2024.

 

“Qualified Financing” shall mean the sale by the Company of its debt or equity securities (other than in connection with an initial public offering) in one or more related transaction which the Company receives net proceeds of at least $5.0 million.

 

“Securities Act” shall mean the Securities Act of 1933, as amended.

 

“Share Delivery Date” shall have the meaning set forth in Section 5(d)(ii).

 

“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the NYSE American, the New York Stock Exchange (or any successors to any of the foregoing).

 

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Business Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), or other reliable service or (b) in all other cases, the fair market value of a share of Common Stock as determined by the Board of Directors of the Company.

 

Section 2. Interest; Amortization Payments.

 

(a)   Interest. Interest shall accrue to the Holder on the aggregate unconverted and then outstanding principal amount of this Note at the rate of 4% per annum, calculated on the basis of a 360-day year and shall accrue daily commencing on the Original Issue Date until payment in full of the outstanding principal (or conversion to the extent applicable), together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. Following an Event of Default, regardless of whether such Event of Default has been cured or remains ongoing, interest shall accrue at the lesser of (i) the rate of 12% per annum, or (ii) the maximum amount permitted by law (the lesser of clause (i) or (ii), the “Default Interest Rate”).

 

 

 

 

(b)   Payment in Cash; Holder’s Right to Call the Note upon a Qualified Financing. All payments of interest due hereunder shall be payable in cash monthly in arrears on the 15^th day of each month commencing on the next month following the Original Issue Date. The outstanding principal amount of this Note shall be due payable on the Maturity Date. Upon the consummation of a Qualified Offering, upon written notice by the Holder to the Company within ten days after the Qualified Financing (the “Call Notice”), in the event that the Holder shall send the Call Notice with such ten day period, the Holder shall have the right, but not the obligation, to require the Company to repay, all, or a portion of, the outstanding principal amount of this Note (together with accrued and unpaid interest thereon) in cash within five days after receipt of the Call Notice from Holder by the Company. Unless such Call Notice is revoked by the Holder in writing, the Company shall repay the Holder in cash the amount specified in the Call Notice.

 

Section 3. Registration of Transfers and Exchanges.

 

(a)   Different Denominations. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be payable for such registration of transfer or exchange.

 

(b)    Holder Representations. This Note has been issued subject to certain investment representations as set forth in the Exchange Agreement, and may be transferred or exchanged only in compliance with the Exchange Agreement and applicable federal and state securities laws and regulations.

 

(c)   This Note may be transferred or exchanged only in compliance with the Exchange Agreement and applicable federal and state securities laws and regulations.

 

(d)   Reliance on Note Register. Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

 

Section 4. Events of Default.

 

(a)  “Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):

 

(i)   any default in the payment of (A) the principal amount of any Note or (B) interest, late fees, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise);

 

(ii)  the Company shall fail to observe or perform any other covenant or agreement contained in the Notes (other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion, which breach is addressed in clause (xi) below which failure is not cured, if possible to cure, within the earlier to occur of (A) five Business Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) 10 Business Days after the Company has become aware of such failure, unless a longer cure period exists n an applicable agreement in which such longer cure period shall apply;

 

(iii)   any representation or warranty made in this Note, the Exchange Agreement, any written statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder or any other Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;

 

(iv)  the Company or any Significant Subsidiary (as such term is defined in Rule 1- 02(w) of Regulation S-X) shall be subject to a Bankruptcy Event;

 

 

 

 

(v)  the Common Stock shall not be eligible for listing or quotation for trading on any Trading Market and shall not be eligible to resume listing or quotation for trading thereon within five Business Days unless a Force Majeure event has occurred;

 

(vi)   the Company shall be a party to any Change of Control Transaction or shall agree to sell or dispose of all or in excess of 50% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a Change of Control Transaction);

 

(vii)  the Company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s intention to not honor requests for conversions of any Notes in accordance with the terms hereof; or

 

(viii)  any monetary judgment, writ or similar final process shall be entered or filed against the Company, any Subsidiary or any of their respective property or other assets for more than $125,000, and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of 10 calendar days.

 

(b)   Remedies Upon Event of Default. If any Event of Default occurs and is not cured within 10 days after the giving of written notice, the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due and payable in cash at the Mandatory Default Amount (unless the Holder exercises its right to convert the Note in accordance with Section 5 below). Upon the payment in full of the Mandatory Default Amount, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 7(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.

 

(c)   Interest Rate Upon Event of Default. Commencing on the occurrence of any Event of Default and until such Event of Default is cured, this Note shall accrue interest at an interest rate equal to the Default Interest Rate.

 

(d)  Conversion Price Upon Event of Default. Commencing on the occurrence of any Event of Default and until such Event of Default is cured, this Note shall be convertible at the Default Conversion Price.

 

Section 5. Holder’s Conversion Right.

 

(a)    Voluntary Conversion. (i) During the occurrence and continuance of an Event of Default (an “Event of Default Conversion”) or (ii) subject to confirmation from the NYSE American that shareholder approval will not be required, or to the extent such shareholder approval is required, the Company shall use its commercially reasonable efforts to promptly obtain such approval, and subject to the Beneficial Ownership Limitations (as defined below), at any time after the date hereof (a “Voluntary Conversion” and, together with an Event of Default Conversion, a “Conversion”) and until this Note is no longer outstanding, in lieu of requiring the Company to repay the Note in cash, this Note shall be convertible, including any accrued and unpaid interest, in whole or in part, at any time, and from time to time, into shares of Common Stock at the option of the Holder. The Holder shall effect conversions by delivering to the Company a Conversion Notice, the form of which is attached hereto as Annex A (each, a “Conversion Notice”), specifying therein the principal amount and interest on this Note to be converted and the date on which such conversion shall be effected (such date, the “Conversion Date”). If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that such Conversion Notice is deemed delivered hereunder. No ink-original Conversion Notice shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Conversion Notice form be required. To effect conversions hereunder, the Holder shall not be required to physically surrender this Note to the Company unless the entire principal amount of this Note, plus all accrued and unpaid interest thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the principal amount(s) converted in each conversion, the date of each conversion, and the Conversion Price in effect at the time of each conversion. The Company may deliver an objection to any Conversion Notice within one Business Day of delivery of such Conversion Notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder, and any registered assignee by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof.

 

 

 

 

(b) Reserved.

 

(c)  Conversion Price. The “Conversion Price” in effect on any Conversion Date means, as of any Conversion Date, (i) in the event of an Event of Default Conversion, the amount equal to a 10% discount of the average three day VWAP prior to the Conversion Date and (ii) in the event of a Voluntary Conversion, $1.99.

 

(d) Mechanics of Conversion.

 

(i)  Conversion Shares Issuable Upon Conversion of Principal Amount. The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note and accrued interest and other amounts due and owing under this Note to be converted by (y) the Conversion Price in effect at the time of such conversion.

 

(ii) Reserved.

 

(iii)  Failure to Deliver Certificates. If, in the case of any Conversion Notice, such certificate or certificates are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice.

 

(iv)  Obligation Absolute; Partial Liquidated Damages. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Note in accordance with the terms hereof is absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. In the event the Holder of this Note shall elect to convert any or all of the outstanding principal amount hereof, the Company may not refuse conversion based on any claim that the Holder or anyone associated or affiliated with the Holder has been engaged in any violation of law, agreement or for any other reason, unless an injunction from a court, on notice to Holder, restraining and or enjoining conversion of all or part of this Note shall have been sought and obtained, and the Company posts a surety bond for the benefit of the Holder in the amount of 150% of the outstanding principal amount of this Note, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to the Holder to the extent it obtains judgment. In the absence of such injunction, the Company shall issue Conversion Shares. If the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 5(d)(ii) by the Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of principal amount being converted, $10 per Business Day (increasing to $20 per Business Day on the fifth Business Day after such Conversion Date) for each Business Day after such Share Delivery Date until such certificates are delivered or Holder rescinds such conversion. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 4 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

 

 

 

 

(v)    Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates by the Share Delivery Date pursuant to Section 5(d)(ii), and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then the Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount, if any, by which (x) the Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Note in a principal amount equal to the principal amount of the attempted conversion (in which case such conversion shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements under Section 5(d)(ii). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of this Note with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof.

 

(vi)   Reservation of Shares Issuable Upon Conversion. The Company covenants that it will reserve and keep available out of its authorized and unissued shares of Common Stock for the purpose of issuances upon conversion of this Note, free from preemptive rights or any other actual contingent purchase rights of Persons other than the holder (and the other holders of the Notes), an amount of shares at least equal to the greater of: (i) one times the number of shares of Common Stock necessary to allow the Holder to convert this Note and accrued interest thereon to maturity in full; or (ii) 19.9% of the current shares of Common Stock outstanding or such lesser percentage, if such restriction is required under Rule 5635 of the NYSE American listing rules. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and non-assessable.

 

(vii)  Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.

 

(viii)  Transfer Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that, the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note so converted and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

 

(ix) Reserved.

 

 

 

 

(e)  Holder’s Conversion Limitations. The Company shall not affect any conversion of this Note, and a Holder shall not have the right to convert any portion of this Note, to the extent that after giving effect to the conversion set forth on the applicable Conversion Notice, the Holder (together with the Holder’s Affiliates, and any Persons acting as a group together with the Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Notes) beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 5(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this Section 5(e) applies, the determination of whether this Note is convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is convertible shall be in the sole discretion of the Holder, and the submission of a Conversion Notice shall be deemed to be the Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Conversion Notice that such Conversion Notice has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 5(e), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the Company’s most recent periodic or annual report filed with the SEC, if any, as the case may be, (ii) a more recent public announcement by the Company, or (iii) a more recent written notice by the Company setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. The Holder, upon not less than 61 days’ prior notice to the Company, may increase the Beneficial Ownership Limitation provisions of this Section 5(e) solely with respect to the Holder’s Note, up to but not in excess of 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. Any such increase will not be effective until the 61st day after such notice is delivered to the Company. The Holder may also decrease the Beneficial Ownership Limitation provisions of this Section 5(e) solely with respect to the Holder’s Note at any time, which decrease shall be effective immediately upon delivery of notice to the Company. Notwithstanding the foregoing and for avoidance of doubt, in order to comply with the rules of the Trading Market, in no event shall the Beneficial Ownership Limitation exceed 19.9% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder or such other lesser percentage that does not violate the rules of the NYSE American, or other applicable Trading Market. The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 5(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Note.

 

 

 

 

Section 6. Miscellaneous.

 

(a)   No Rights as Stockholder Until Conversion. This Note does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the conversion hereof other than as explicitly set forth in Section 6.

 

(b)   Notices. All notices, offers, acceptance and any other acts under this Note (except payment) shall be in writing, and shall be sufficiently given if delivered to the addressees in person, by Federal Express or similar receipted next business day delivery, as follows:

 

If to the Company:	Unusual Machines, Inc. 4677 L B McLeod Rd, Suite J Orlando, FL 32811 Attention: Dr. Allan Evans, CEO Email: allan@unusualmachines.com
With a copy to (which shall not constitute notice to Unusual):	Nason Yeager Gerson Harris & Fumero, P.A. 3001 PGA Boulevard, Suite 305 Palm Beach Gardens, FL 33410 Attention: Michael D. Harris, Esq. Email: mharris@nasonyeager.com
If to Holder:	the address set forth above
With a copy to (which shall not constitute notice to Holder):	Grushko & Mittman, P.C. 1800 Rockaway Avenue, Suite 206 Hewlett, NY 11557 li@grushkomittman.com Attn: Eliezer Drew, Esq.

 

or to such other address as any of them, by notice to the other may designate from time to time. Time shall be counted to, or from, as the case may be, the date of delivery.

 

(c)   Absolute Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest and late fees, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company. This Note ranks pari passu with all other Notes outstanding as of the date of this Note.

 

(d)   Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.

 

 

 

 

(e)   Exclusive Jurisdiction; Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with Section 7 of the Exchange Agreement. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the courts set forth in Section 7 of the Exchange Agreement for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of this Note), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby.

 

(f)  Waiver. Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note on any other occasion. Any waiver by the Company or the Holder must be in writing.

 

(g)   Severability. If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.

 

(h)   Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. The Company covenants to the Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach would be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any such breach or any such threatened breach, without the necessity of showing economic loss and without any bond or other security being required. The Company shall provide all information and documentation to the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance with the terms and conditions of this Note.

 

(i)  Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

 

(j)  Headings. The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

 

(k)   Assignment, Etc. The Holder may assign or transfer this Note to any transferee at its sole discretion. This Note shall be binding upon the Company and its successors and shall inure to the benefit of the Holder and its successors and permitted assigns.

 

 

 

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the Original Issue Date.

 

	UNUSUAL MACHINES INC.
	By: /s/ Brian Hoff
	Name: Brian Hoff
	Title: Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ANNEX A

CONVERSION NOTICE

 

The undersigned hereby elects to convert principal under the 4% Convertible Promissory Note due November 30, 2025, of Unusual Machines Inc., a Nevada corporation (the “Company”), into shares of common stock (the “Common Stock”), of the Company according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.

 

The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.

 

Conversion calculations:

 

	Date to Effect Conversion:
	Principal Amount of Note to be Converted:
	Payment of Interest in Common Stock __ yes ___ no
	If yes, $ ___ of Interest Accrued on Account of Conversion at Issue.
	Number of shares of Common Stock to be issued:
	Signature:
	Name:
	DWAC Instructions:
	Broker No: ______________
	Account No: ____________

 

 

 

 

 

Schedule 1

CONVERSION SCHEDULE

 

The 4% Convertible Promissory Note due on November 30, 2025, in the original principal amount of $1,681,818.18 is issued by Unusual Machines Inc., a Nevada corporation. This Conversion Schedule reflects conversions made under Section 5 of the above referenced Note.

 

 

Date of Conversion (or for first entry, Original Issue Date)	Amount of Converted Principal	Aggregate Principal Amount Remaining Subsequent to Conversion (or original Principal Amount)	Applicable Conversion Price	Company Attest

 

 

 

 

Exhibit 10.22

 

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

COMMON STOCK PURCHASE WARRANT

 

UNUSUAL MACHINES INC.

 

Warrant Shares: 315,000	Issuance Date: August 21, 2024
Warrant No: UMAC2024B

 

THIS COMMON SHARE PURCHASE WARRANT (the “Warrant”) certifies that, for value received, Titan Multi-Strategy Fund I, Ltd., maintaining an address at 5825 Windsor Court, Boca Raton, Florida 33496 or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date that the Company’s Common Stock have been approved for and are listed for trading on a Trading Market (the “Initial Exercise Date”) until the close of business on the five (5) year anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from UNUSUAL MACHINES INC., a Nevada corporation (the “Company”), up to 315,000 shares of Common Stock (as subject to adjustment hereunder, the “Warrant Shares”). The purchase price of one Warrant Share under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

 

Reference is hereby made to that certain Exchange Agreement, dated August 21, 2024, among the Company and the Holder identified therein.

 

Section 1. Definitions. Capitalized words and terms used and not otherwise defined herein shall have the meanings set forth in this Section 1 or in the Exchange Agreement:

 

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

 

“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which commercial banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

“Common Stock” shall mean the $0.01 par value per share, common stock of the Company.

 

“Common Stock Equivalent” means any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Stock , including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock .

 

 

 

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

 

“Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

 

“SEC ” means the United States Securities and Exchange Commission.

 

“Subsidiary” means with respect to any entity at any date, any direct or indirect corporation, limited or general partnership, limited liability company, trust, estate, association, joint venture or other business entity of which (A) more than 35% of (i) the outstanding capital stock having (in the absence of contingencies) ordinary voting power to elect a majority of the board of directors or other managing body of such entity, (ii) in the case of a partnership or limited liability company, the interest in the capital or profits of such partnership or limited liability company or (iii) in the case of a trust, estate, association, joint venture or other entity, the beneficial interest in such trust, estate, association or other entity business is, at the time of determination, owned or controlled directly or indirectly through one or more intermediaries, by such entity, or (B) is under the actual control of the Company. Representations, undertakings and obligations set forth in this Agreement shall be applicable only to Subsidiaries which exist or have existed at the applicable and relevant time.

 

“Trading Day” means a day on which the principal Trading Market is open for trading for three or more hours, and if the Company has no Trading Market, shall mean a Business Day.

 

“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the NYSE American, the New York Stock Exchange (or any successors to any of the foregoing).

 

“Transfer Agent” means the transfer agent of the Company. As of the Issuance Date, the Transfer Agent is Equity Stock Transfer LLC.

 

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York, N.Y. time)), (b) if the Common Stock is not then listed or quoted for trading on a Trading Market but is then reported on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the volume weighted average price of the Common Stock on the first such facility (or a similar organization or agency succeeding to its functions of reporting prices), or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by a majority in interest and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

 

 

 

 

Section 2.Exercise.

 

(a) Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after 180 days after the Issuance Date (the “Exercise Date”) and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed PDF copy submitted by e-mail (or e-mail attachment)of the Notice of Exercise Form annexed hereto. Within one Trading Day following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary (although the Holder may surrender the Warrant to, and receive a replacement Warrant from, the Company), the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within one Trading Day of delivery of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

 

(b) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $1.99 subject to adjustment as described herein (“Exercise Price”).

 

(c) Cashless Exercise. If at any time after the Initial Exercise Date, there is no effective registration statement registering the Warrant Shares for unrestricted public offering and resale, or no current prospectus available for the unrestricted public offering and resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at the Holder’s election, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

 

	(A)	=	the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise;
	(B)	=	the Exercise Price of this Warrant, as adjusted hereunder; and
	(X)	=	the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

 

If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised. The Company agrees not to take any position contrary to this Section 2(c). Notwithstanding anything herein to the contrary, on the Termination Date, unless the Holder notifies the Company otherwise, if there is no effective registration statement registering the Warrant Shares, or no current prospectus available for the resale of the Warrant Shares by the Holder, then this Warrant shall be automatically exercised on the last Trading Day on which this Warrant may be exercised via cashless exercise pursuant to this Section 2(c).

 

 

 

 

(d) Mechanics of Exercise.

 

(i) Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares or (B) this Warrant is being exercised via cashless exercise and Rule 144 is available, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise no later than the earlier of (i) one Trading Day and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined below) after the latest of (A) the delivery to the Company of the Notice of Exercise, (B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (including by cashless exercise, if permitted) (such date, the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi) prior to the issuance of such shares, having been paid. The Company understands that a delay in the delivery of the Warrant Shares after the Warrant Share Delivery Date could result in economic loss to the Holder. As compensation to the Holder for such loss, the Company agrees to pay (as liquidated damages and not as a penalty) to the Holder for late issuance of Warrant Shares upon exercise of this Warrant the proportionate amount of $10 per Trading Day (increasing to $20 per Trading Day after the fifth Trading Day) commencing three Trading Days after the Warrant Share Delivery Date for each $1,000 of Exercise Price of Warrant Shares for which this Warrant is exercised which are not timely delivered. The Company shall pay any payments incurred under this Section in immediately available funds upon demand. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of a certificate representing common stock issued without a restrictive legend.

 

(ii) Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

 

(iii) Revocation of Exercise. In addition to any other remedies which may be available to the Holder, in the event that the Company fails for any reason to effect delivery of the Warrant Shares by the Warrant Share Delivery Date, the Holder may revoke all or part of the relevant Warrant exercise by delivery of a notice to such effect to the Company, whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to the exercise of the relevant portion of this Warrant, except that the liquidated damages described above shall be payable through the date notice of revocation or rescission is given to the Company.

 

(iv) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, Common Stock s to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) and return any amount received by the Company in respect of the Exercise Price for those Warrant Shares or deliver to the Holder the number of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

 

 

 

(v) No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

 

(vi) Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise.

 

(vii) Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

 

(e) Holder’s Exercise Limitations. Upon the Company’s having a class of stock registered with the SEC under the Exchange Agreement, the Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding Common Stock, a Holder may rely on the number of outstanding Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of Common Stock then outstanding. In any case, the number of outstanding Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of Common Stock issuable upon exercise of this Warrant. Upon 61 days prior written notice the Holder may increase the Beneficial Ownership Limitations to 9.99%. The Holder may decrease the Beneficial Ownership Limitation at any time. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant. Notwithstanding the foregoing and for avoidance of doubt, to comply with the rules of the NYSE American, Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, to the to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise such Holder or any of its affiliates would beneficially own in excess of 19.9% of the Common Stock or such lesser percentage required by the NYSE American without first obtaining stockholder approval in accordance with the NYSE American rules.

 

 

 

 

(f) Redemption Right.

 

(i)   Beginning on the Initial Exercise Date, this Warrant may be redeemed at the option of the Company, in whole or in part, by giving not less than 30 days’ prior notice, which notice may not be given before, but may be given at any time after the date on which (i) the average daily VWAP for 10 consecutive Trading Days has equaled or exceeded $3.00 and (ii) the average daily trading volume of the Common Stock for such 10 Trading Day period referred to in this Section 2(f)(i) is or exceeded 250,000 shares of Common Stock.

 

(ii) The price at which this Warrant may be redeemed (the “Redemption Price”) is $0.01 per Warrant Share. On and after the date upon which such Warrant is redeemed by the Company (the “Redemption Date”), the Holder of a redeemed Warrant shall be entitled to payment of the Redemption Price upon surrender of the Warrant to the Company.

 

(iii)  Notice of redemption of this Warrant (the “Redemption Notice”) shall be given at least 30 days’ prior to the Redemption Date (the “Redemption Notice Date”) by the Company (i) providing notice to the Holder as provided in the Exchange Agreement, (ii) notifying the Holders of such redemption via publication of a press release and (iii) taking such other steps as may be required under applicable law.

 

(iv)     From and after the Redemption Date, any Warrant Shares noticed for redemption that have not theretofore been exercised by the Holder shall cease to represent the right to purchase any shares of Common Stock and shall be deemed cancelled and void and of no further force or effect without any further act or deed on the part of the Company.

 

(v)   By acceptance of this Warrant, the Holder undertakes to return the certificate representing any redeemed Warrant to the Company upon their redemption and to indemnify the Company with respect to any losses, claims, damages or liabilities arising from the Holder’s failure to return such certificate. In the event the certificate so returned represents a number of Warrant Shares in excess of the number being redeemed, the Company shall as promptly as practicable issue to the Holder a new certificate in book-entry form for the number of unredeemed Warrant Shares.

 

(vi)  Notwithstanding anything to the contrary set forth in this Warrant, the Company may not require the cancellation of this Warrant (and any related Redemption Notice shall be void), unless, from the beginning of the Redemption Notice Date through the Redemption Date, (1) the Company shall have honored in accordance with the terms of this Warrant all Notices of Exercise delivered by 6:30 p.m. (New York, N.Y. time) on the Redemption Date, (2) a registration statement shall be effective covering the Warrant held the Holder which the Company is seeking to redeem, (3) the Common Stock shall be listed or quoted for trading on the Trading Market, (4) there is a sufficient number of authorized shares of Common Stock for issuance of all Warrant Shares, and (5) the issuance of all Warrant Shares subject to a Redemption Notice shall not cause a breach of any provision of Section 2(e) herein. The Company’s right to redeem the Warrants under this Section 2(f) shall be exercised ratably among the Holders based on each Holder’s (or its assignee’s) initial purchase of Warrants if there is more than one Holder.

 

 

 

 

Section 3.Certain Adjustments.

 

(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in Common Stock (which, for avoidance of doubt, shall not include any Common Stock s issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares) outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

(b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

 

(c) Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to the Holder) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to 3(c)), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the board of directors of the Company in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

 

 

 

 

(d) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding Common Stock (not including any Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of Common Stock (or successor security) of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. “Black Scholes Value” means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein. For the avoidance of doubt, the Holder shall be entitled to the benefits of the provisions of this Section 3(e) regardless of whether (i) the Company has sufficient authorized shares of Common Stock for the issuance of the Warrant Shares and/or (ii) a Fundamental Transaction occurs prior to the Initial Exercise Date.

 

 

 

 

(g)                 Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of Common Stock (excluding treasury shares, if any) issued and outstanding.

 

(h)                 Notice to Holder.

 

(i) Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly give notice to the Holder setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a statement of the facts requiring such adjustment (“Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3, upon the occurrence of any Dilutive Issuance or other reduction of the Exercise Price, the Holder is entitled to receive a number of Warrant Shares based upon the reduced Exercise Price regardless of whether the Holder accurately refers to the Exercise Price in the Notice of Exercise.

 

(ii) Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock , (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock are converted into other securities, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, the Company shall deliver to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

(i) Voluntary Adjustment By Company. Subject to the rules and regulations of the Trading Market, the Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the board of directors of the Company

 

Section 4.Transfer of Warrant.

 

(a) Transferability. Subject to compliance with any applicable securities laws and the provisions of this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

 

 

 

 

(b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

 

(c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

Section 5.Miscellaneous.

 

(a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i).

 

(b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

(c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such action may be taken or such right may be exercised on the next succeeding Trading Day.

 

(d) Authorized Shares. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

 

 

 

 

(e) Governing Law; Exclusive Jurisdiction. All questions concerning governing law, jurisdiction, venue and the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the Exchange Agreement.

 

(f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, or unless exercised in a cashless exercise when Rule 144 is available, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

 

(g) Non-Waiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

(h) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be made in writing to the mailing address or email address provided by the Holder of this Warrant, and shall be deemed to have been given (a) when delivered by hand (with written confirmation of receipt); (b) when received by the Holder if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission); or (d) on the day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid.

 

(i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

 

(j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

 

(k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

(l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder of this Warrant.

 

(m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

 

(n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

********************

(Signature Page Follows)

 

 

 

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

 

 

 

	Unusual Machines Inc.
	By: /s/ Brian Hoff
	Name: Brian Hoff
	Title: Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

NOTICE OF EXERCISE

 

TO: UNUSUAL MACHINES INC.

 

 

(1) The undersigned hereby elects to purchase ______________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

(2) Payment shall take the form of (check applicable box):

 

[_] in lawful money of the United States;

 

[_] [if permitted] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in Section 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in Section 2(c).

 

(3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

 

 

_____________________________________

 

(4) After giving effect to this Notice of Exercise, the undersigned will not have exceeded the Beneficial Ownership Limitation.

 

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

 

_____________________________________

 

 

_____________________________________

 

 

_____________________________________

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity:

 

________________________________________________________________

 

Signature of Authorized Signatory of Investing Entity:

 

____________________________________________

 

 

Name of Authorized Signatory:

 

____________________________________________

 

Title of Authorized Signatory:

 

____________________________________________

 

Date:

 

____________________________________________

 

 

 

ASSIGNMENT FORM

 

(To assign the foregoing warrant, execute this form and supply required information.

Do not use this form to exercise the warrant.)

 

UNUSUAL MACHINES INC.

 

 

FOR VALUE RECEIVED, [___] all of or [______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

__________________________________________________________ whose address is

 

___________________________________________________________________________.

  

 

 

Dated: __________, _____

 

 

Holder’s Signature: __________________________

 

Holder’s Address: ___________________________

 

___________________________

 

 

 

Signature Guaranteed: _____________________________________________________

 

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

 

 

 

Exhibit 10.23

 

 

 

 

 

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

COMMON STOCK PURCHASE WARRANT

 

UNUSUAL MACHINES INC.

 

Warrant Shares: 315,000	Issuance Date: August 21, 2024
Warrant No: UMAC2024A

 

THIS COMMON SHARE PURCHASE WARRANT (the “Warrant”) certifies that, for value received, Eleven Ventures LLC, a Delaware limited liability company, maintaining an address at 463 Adams St., Denver, CO 80206 email: hw@11f.co attention: Hartley Wasko, or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time commencing 180 days from the date hereof provided that the Company’s Common Stock has been approved for and are listed for trading on a GTrading Market (the “Initial Exercise Date”) until the close of business on the five (5) year anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from UNUSUAL MACHINES INC., a Nevada corporation (the “Company”), up to 315,000 shares of Common Stock (as subject to adjustment hereunder, the “Warrant Shares”). The purchase price of one Warrant Share under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

 

Reference is hereby made to that certain Exchange Agreement, dated August21, 2024, among the Company and the Holder identified therein (the “Exchange Agreement”).

 

Section 1. Definitions. Capitalized words and terms used and not otherwise defined herein shall have the meanings set forth in this Section 1 or in the Exchange Agreement:

 

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

 

“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which commercial banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

 

 

 

“Common Stock” shall mean the $0.01 par value per share, common stock of the Company.

 

“Common Stock Equivalent” means any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Stock , including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock .

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

 

“Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

 

“SEC ” means the United States Securities and Exchange Commission.

 

“Subsidiary” means with respect to any entity at any date, any direct or indirect corporation, limited or general partnership, limited liability company, trust, estate, association, joint venture or other business entity of which (A) more than 35% of (i) the outstanding capital stock having (in the absence of contingencies) ordinary voting power to elect a majority of the board of directors or other managing body of such entity, (ii) in the case of a partnership or limited liability company, the interest in the capital or profits of such partnership or limited liability company or (iii) in the case of a trust, estate, association, joint venture or other entity, the beneficial interest in such trust, estate, association or other entity business is, at the time of determination, owned or controlled directly or indirectly through one or more intermediaries, by such entity, or (B) is under the actual control of the Company. Representations, undertakings and obligations set forth in this Agreement shall be applicable only to Subsidiaries which exist or have existed at the applicable and relevant time.

 

“Trading Day” means a day on which the principal Trading Market is open for trading for three or more hours, and if the Company has no Trading Market, shall mean a Business Day.

 

“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the NYSE American, the New York Stock Exchange (or any successors to any of the foregoing).

 

“Transfer Agent” means the transfer agent of the Company. As of the Issuance Date, the Transfer Agent is Equity Stock Transfer LLC.

 

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York, N.Y. time)), (b) if the Common Stock is not then listed or quoted for trading on a Trading Market but is then reported on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the volume weighted average price of the Common Stock on the first such facility (or a similar organization or agency succeeding to its functions of reporting prices), or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by a majority in interest and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

 

 

 

 

Section 2. Exercise.

 

(a) Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto. Within one Trading Day following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. Notwithstanding anything herein to the contrary (although the Holder may surrender the Warrant to, and receive a replacement Warrant from, the Company), the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within one Trading Day of delivery of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

 

(b) Exercise Price. The exercise price per share of the Common Stock s under this Warrant shall be $1.99, subject to adjustment as described herein (“Exercise Price”).

 

(c) Cashless Exercise. If at any time after the Initial Exercise Date, there is no effective registration statement registering the Warrant Shares for unrestricted public offering and resale, or no current prospectus available for the unrestricted public offering and resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at the Holder’s election, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

 

	(A)	=	the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise;
	(B)	=	the Exercise Price of this Warrant, as adjusted hereunder; and
	(X)	=	the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

 

Notwithstanding anything herein to the contrary, on the Termination Date, unless the Holder notifies the Company otherwise, if there is no effective registration statement registering the Warrant Shares, or no current prospectus available for the resale of the Warrant Shares by the Holder, then this Warrant shall be automatically exercised on the last Trading Day on which this Warrant may be exercised via cashless exercise pursuant to this Section 2(c).

 

 

 

 

(d) Mechanics of Exercise.

 

(i) Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares or (B) this Warrant is being exercised via cashless exercise and Rule 144 is available, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise no later than the earlier of (i) one Trading Day and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined below) after the latest of (A) the delivery to the Company of the Notice of Exercise, (B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (including by cashless exercise, if permitted) (such date, the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi) prior to the issuance of such shares, having been paid. The Company understands that a delay in the delivery of the Warrant Shares after the Warrant Share Delivery Date could result in economic loss to the Holder. As compensation to the Holder for such loss, the Company agrees to pay (as liquidated damages and not as a penalty) to the Holder for late issuance of Warrant Shares upon exercise of this Warrant the proportionate amount of $10 per Trading Day (increasing to $20 per Trading Day after the fifth Trading Day) commencing three Trading Days after the Warrant Share Delivery Date for each $1,000 of Exercise Price of Warrant Shares for which this Warrant is exercised which are not timely delivered. The Company shall pay any payments incurred under this Section in immediately available funds upon demand. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of a certificate representing common stock issued without a restrictive legend.

 

(ii) Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

 

(iii) Revocation of Exercise. In addition to any other remedies which may be available to the Holder, in the event that the Company fails for any reason to effect delivery of the Warrant Shares by the Warrant Share Delivery Date, the Holder may revoke all or part of the relevant Warrant exercise by delivery of a notice to such effect to the Company, whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to the exercise of the relevant portion of this Warrant, except that the liquidated damages described above shall be payable through the date notice of revocation or rescission is given to the Company.

 

(iv) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, Common Stock s to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

 

 

 

(v) No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

 

(vi) Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise.

 

(vii) Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

 

(e) Holder’s Exercise Limitations. Upon the Company’s having a class of stock registered with the SEC under the Exchange Agreement, the Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding Common Stock, a Holder may rely on the number of outstanding Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of Common Stock s outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of Common Stock then outstanding. In any case, the number of outstanding Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of Common Stock issuable upon exercise of this Warrant. Upon 61 days prior written notice the Holder may increase the Beneficial Ownership Limitations to 9.99%. The Holder may decrease the Beneficial Ownership Limitation at any time. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant. Notwithstanding the foregoing and for avoidance of doubt, to comply with the rules of the NYSE American, Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, to the to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise such Holder or any of its affiliates would beneficially own in excess of 19.9% of the Common Stock or such lesser percentage required by the NYSE American without first obtaining stockholder approval in accordance with the NYSE American rules.

 

 

 

 

(f) Redemption Right.

 

(i)  Beginning on the Initial Exercise Date, this Warrant may be redeemed at the option of the Company, in whole or in part, by giving not less than 30 days’ prior notice, which notice may not be given before, but may be given at any time after the date on which (i) the average daily VWAP for 10 consecutive Trading Days (the “Measurement Period”) has equaled or exceeded $3.00 and (ii) the average daily trading volume of the Common Stock on each day during the Measurement Period is or exceeded 250,000 shares of Common Stock.

 

(ii)   The price at which this Warrant may be redeemed (the “Redemption Price”) is $0.01 per Warrant Share. On and after the date upon which such Warrant is redeemed by the Company (the “Redemption Date”), the Holder of a redeemed Warrant shall be entitled to payment of the Redemption Price upon surrender of the Warrant to the Company.

 

(iii)  Notice of redemption of this Warrant (the “Redemption Notice”) shall be given at least 30 days’ prior to the Redemption Date (the “Redemption Notice Date”) by the Company (i) providing notice to the Holder as provided in the Exchange Agreement, (ii) notifying the Holders of such redemption via publication of a press release and (iii) taking such other steps as may be required under applicable law.

 

(iv)   From and after the Redemption Date, any Warrant Shares noticed for redemption that have not theretofore been exercised by the Holder shall cease to represent the right to purchase any shares of Common Stock and shall be deemed cancelled and void and of no further force or effect without any further act or deed on the part of the Company.

 

(v)   By acceptance of this Warrant, the Holder undertakes to return the certificate representing any redeemed Warrant to the Company upon their redemption and to indemnify the Company with respect to any losses, claims, damages or liabilities arising from the Holder’s failure to return such certificate. In the event the certificate so returned represents a number of Warrant Shares in excess of the number being redeemed, the Company shall as promptly as practicable issue to the Holder a new certificate in book-entry form for the number of unredeemed Warrant Shares.

 

(vi)  Notwithstanding anything to the contrary set forth in this Warrant, the Company may not require the cancellation of this Warrant (and any related Redemption Notice shall be void), unless, from the beginning of the Redemption Notice Date through the Redemption Date, (1) the Company shall have honored in accordance with the terms of this Warrant all Notices of Exercise delivered by 6:30p.m. (New York, N.Y. time) on the Redemption Date, (2) a registration statement shall be effective covering the resale of the shares of Common Stock issuable upon exercise of this Warrant which the Company is seeking to redeem, (3) the Common Stock shall be listed or quoted for trading on the Trading Market continuously from the 10^th Trading Day preceding the Measurement Period through the Redemption Date, (4) there is a sufficient number of authorized shares of Common Stock for issuance of all Warrant Shares, (5) the Holder is not in possession of any information provided by the Company that constitutes material non-public information, (6) the issuance of all Warrant Shares subject to a Redemption Notice shall not cause a breach of any provision of Section 2(e) herein, and (7) the Company has not breached any of the terms of the Transaction Documents. The Company’s right to redeem the Warrants under this Section 2(f) shall be exercised ratably among the Holders based on each Holder’s (or its assignee’s) initial purchase of Warrants if there is more than one Holder. A Redemption Notice with respect to any Warrant may not be given more frequently than one (1) time each thirty (30) Trading Days.

 

Section 3. Certain Adjustments.

 

(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in Common Stock (which, for avoidance of doubt, shall not include any Common Stock s issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares) outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

 

 

 

(b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or common stock equivalents, at an effective price per share less than the Exercise Price then in effect, excluding Exempt Issuances as defined below (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective price), then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to equal the Base Share Price. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. The Company shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance of any Common Stock or common stock equivalents subject to this Section 3(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise. If the Company enters into a variable rate transaction, despite the prohibition thereon in the Exchange Agreement, the Company shall be deemed to have issued Common Stock or common stock equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised. . For purposes of this Warrant, “Exempt Issuance” shall mean the issuance of (a) shares of Common Stock, restricted stock units or options, and the issuance of Common Stock under such restricted stock units and the exercise of such options, to consultants, employees, officers or directors of the Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members of the board of directors or a majority of the members of a committee of non-employee directors established for such purpose for services rendered to the Company, (b) securities issuable pursuant to existing agreements, exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date hereof, provided that such securities have not, except as provided in clause (f) below, been amended since the date hereof to increase the number of such securities or to decrease the exercise price, exchange price, or conversion price of such securities (other than in connection with stock dividends, stock splits or combinations) or to extend the term of such securities, (c) securities issued pursuant to any merger, acquisition or strategic transaction approved by a majority of the directors of the Company, provided that any such issuance shall only be to a Person (or to the equity holders of a Person) which is, itself or through its subsidiaries, an operating company or an owner of an asset in a business synergistic with the business of the Company and which shall reasonably be expected to provide to the Company additional benefits, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities, (d) securities issued pursuant to any purchase money equipment loan or capital leasing arrangement or in connection with any amendment to any existing real estate lease to which the Company or any subsidiary is a party, (e) shares of Common Stock issued pursuant to any presently outstanding warrants, and (f) the issuance of the Conversion Shares upon the conversion of any Preferred Stock or the New Note, as applicable, and the issuance of the Warrant Shares upon the exercise of the Warrant.

 

(c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Sections 3(a) and 3(b) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

 

 

 

 

(d) Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to the Holder) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to 3(c)), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the board of directors of the Company in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

 

(e) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding Common Stock (not including any Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of Common Stock (or successor security) of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. “Black Scholes Value” means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.

 

 

 

 

(f) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of Common Stock (excluding treasury shares, if any) issued and outstanding.

 

(g) Notice to Holder.

 

(i) Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly give notice to the Holder setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a statement of the facts requiring such adjustment (“Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3, upon the occurrence of any Dilutive Issuance or other reduction of the Exercise Price, the Holder is entitled to receive a number of Warrant Shares based upon the reduced Exercise Price regardless of whether the Holder accurately refers to the Exercise Price in the Notice of Exercise.

 

(ii) Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock , (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock are converted into other securities, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, the Company shall deliver to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice.

 

To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

Section 4. Transfer of Warrant.

 

(a) Transferability. Subject to compliance with any applicable securities laws and the provisions of this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

 

 

 

 

(b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

 

(c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

Section 5. Miscellaneous.

 

(a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i).

 

 

(b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

(c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Trading Day, then, such action may be taken or such right may be exercised on the next succeeding Trading Day.

 

(d) Authorized Shares. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

 

 

 

 

(e) Governing Law; Exclusive Jurisdiction. All questions concerning governing law, jurisdiction, venue and the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the Exchange Agreement.

 

(f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, or unless exercised in a cashless exercise when Rule 144 is available, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

 

(g) Non-Waiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

(h) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be made in writing to the mailing address or email address provided by the Holder of this Warrant, and shall be deemed to have been given (a) when delivered by hand (with written confirmation of receipt); (b) when received by the Holder if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission); or (d) on the day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid.

 

(i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

 

(j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

 

(k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

(l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder of this Warrant.

 

(m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

 

(n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

********************

(Signature Page Follows)

 

 

 

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

 

 

	Unusual Machines Inc.
	By: /s/ Brian Hoff
	Name: Brian Hoff
	Title: Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTICE OF EXERCISE

 

TO: UNUSUAL MACHINES INC.

 

 

(1) The undersigned hereby elects to purchase ______________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

(2) Payment shall take the form of (check applicable box):

 

[_] in lawful money of the United States;

 

[_] [if permitted] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in Section 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in Section 2(c).

 

(3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

 

 

_____________________________________

 

(4) After giving effect to this Notice of Exercise, the undersigned will not have exceeded the Beneficial Ownership Limitation.

 

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

 

_____________________________________

 

 

_____________________________________

 

 

_____________________________________

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity: ________________________________________________________________

 

Signature of Authorized Signatory of Investing Entity: ____________________________________________

 

Name of Authorized Signatory: ____________________________________________

 

Title of Authorized Signatory: ____________________________________________

 

Date: ____________________________________________

 

 

 

 

 

ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute this form and supply required information.

Do not use this form to exercise the warrant.)

 

UNUSUAL MACHINES INC.

 

 

FOR VALUE RECEIVED, [___] all of or [______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

__________________________________________________________ whose address is

 

___________________________________________________________________________.

  

 

 

Dated: __________, _____

 

 

Holder’s Signature: __________________________

 

Holder’s Address: ___________________________

 

___________________________

 

 

 

Signature Guaranteed: _____________________________________________________

 

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

 

 

 

Exhibit 10.24

 

EXCHANGE AGREEMENT

 

THIS EXCHANGE AGREEMENT (the “Agreement”), dated as of August 21, 2024, is made by and between Unusual Machines, Inc., a Nevada corporation (the “Company”), and the holder of the Company’s 8% Promissory Note in the principal amount of $1,818,181.82 dated July 17, 2024 (the “Original Note”) signatory hereto (the “Holder”).

 

WHEREAS, the Holder holds such Original Note;

 

WHEREAS, the Company has authorized a new series of convertible preferred stock of the Company designated as Series C Convertible Preferred Stock, $0.01 par value (the “Preferred Stock”), the terms of which are set forth in the Certificate of Designations of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (the “Certificate of Designations”) substantially in the form attached hereto as Exhibit A, which Preferred Stock shall be convertible into the Company’s Common Stock, in accordance with the terms of the Certificate of Designations;

 

WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 3(a)(9) of the Securities Act of 1933 (the “Securities Act”), the Company desires to exchange with the Holder, and the Holder desires to exchange with the Company, the Original Note for (i) a 4% Promissory Note in the principal amount of $1,318,181.82, substantially in the form attached hereto as Exhibit B (the “New Note”) , (ii) 105 shares of the Company’s Preferred Stock, and (iii) a Warrant to purchase 315,000 shares of the Company’s common stock, substantially in the form attached as Exhibit C. The New Note, the shares of Preferred Stock and the Warrant are collectively referred to herein as the “Exchange Securities” as set forth on Schedule A hereto.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and Holder agree as follows:

 

	1.	Terms of the Exchange. The Company and Holder agree that the Holder will exchange the Note and will relinquish any and all other rights they may have under the Note in exchange for the Exchange Securities as set forth on Schedule A, annexed hereto. Additionally, the Holder hereby waives any and all unpaid interest accrued, if any, on the Original Note, as of the date of issuance and releases the Company from any payment thereof or obligation in connection therewith. Notwithstanding the foregoing, as of the date hereof, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Exchange Securities and shall be entitled to exercise all of its rights with respect to the Exchange Securities and, irrespective of the date the Company delivers any certificate evidencing the Exchange Securities.
	2.	Public Disclosure. Within two business days after the Closing (as defined in Section 3), the Company will publicly disclose the transactions contemplated by this Agreement and all material non-public information, if any, disclosed to the Holder.

 

 

 

 

 

 

3.

Closing. Upon satisfaction of the conditions set forth herein, a closing shall occur at the principal offices of the Company, or such other location as the parties shall mutually agree (the “Closing”). At the Closing, Holder shall deliver to the Company the Original Note and/or other documents reasonably required by the Company to effect the exchange, and the Company shall issue to the Holder the shares of Preferred Stock in book entry in the name(s) and amount(s) as indicated on Schedule A annexed hereto, the New Note and the Warrant. Upon Closing, any and all obligations of the Company to Holder under the Original Note shall be fully satisfied, the Original Note shall be cancelled and the Holder will have no remaining rights, powers, privileges, remedies or interests under the Original Note.

 

4.

Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

5.

Representations and Warranties of the Holder. The Holder represents and warrants as of the date hereof and as of the Closing to the Company as follows:

 

(a)               Authorization; Enforcement. The Holder has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement by the Holder and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Holder and no further action is required by the Holder. This Agreement has been (or upon delivery will have been) duly executed by the Holder and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Holder enforceable against the Holder in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

(b)               Tax Advisors. The Holder has had the opportunity to review and/or has reviewed with its own tax advisors the U.S. federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. With respect to such matters, the Holder relies solely on such advisors and not on any statements or representations of the Company or any of its agents, written or oral. The Holder understands that it (and not the Company) shall be responsible for its own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.

 

(c)               Information Regarding the Holder. The Holder is an “accredited investor”, as such term is defined in Rule 501 of Regulation D promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act, is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of companies in private placements in the past and, with its representatives, has such knowledge and experience in financial, tax and other business matters as to enable the Holder to utilize the information made available by the Company to evaluate the merits and risks of and to make an informed investment decision with respect to the proposed purchase, which represents a speculative investment. The Holder has the authority and is duly and legally qualified to purchase and own the Securities (as defined below). The Holder is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof.

 

 

 

 

 

 

(d.)             Legend. The Holder understands that the Securities have been issued (or will be issued in the case of the shares of Common Stock issuable upon conversion of the Preferred Stock (the “Conversion Shares”),and the shares of Common Stock issuable upon the exercise of the Warrant (the “Warrant Shares,” and together with the Conversion Shares and the Preferred Stock, together, the “Securities”)) pursuant to an exemption from registration or qualification under the Securities Act and applicable state securities laws, and except as set forth below, the Securities shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates):

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE OR EXERCISABLE HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, OR (B) AN OPINION OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

(e)                Removal of Legends. Certificates evidencing Securities shall not be required to contain the legend set forth in Section 5(d) above or any other legend (i) while a registration statement covering the resale of such Securities is effective under the Securities Act, (ii) following any sale of such Securities pursuant to Rule 144 (assuming the transferor is not an affiliate of the Company), (iii) if such Securities are eligible to be sold, assigned or transferred under Rule 144 without having to meet the requirements of Rule 144(c) (provided that the Holder provides the Company with reasonable assurances that such Securities are eligible for sale, assignment or transfer under Rule 144 which shall not include an opinion of the Holder’s counsel), (iv) in connection with a sale, assignment or other transfer (other than under Rule 144), provided that the Holder provides the Company with an opinion of counsel to the Holder, in a generally acceptable form, to the effect that such sale, assignment or transfer of the Securities may be made without registration under the applicable requirements of the Securities Act or (v) if such legend is not required under applicable requirements of the Securities Act (including, without limitation, controlling judicial interpretations and pronouncements issued by the SEC). If a legend is not required pursuant to the foregoing, the Company shall no later than three business days following the delivery by the Holder to the Company or the transfer agent (with notice to the Company) of a legended certificate representing such Securities (endorsed or with stock powers attached, signatures guaranteed, and otherwise in form necessary to affect the reissuance and/or transfer, if applicable), together with any other deliveries from the Holder as may be required above in this Section 5(e), as directed by the Holder, either: (A) provided that the Company’s transfer agent is participating in the DTC Fast Automated Securities Transfer Program and such Securities are Conversion Shares or Warrant Shares, as applicable, credit the aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal at Custodian system or (B) if the Company’s transfer agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver (via reputable overnight courier) to the Holder, a certificate representing such Securities that is free from all restrictive and other legends, registered in the name of the Holder or its designee. The Company shall be responsible for any transfer agent fees or DTC fees with respect to any issuance of Securities or the removal of any legends with respect to any Securities in accordance herewith.

 

(f)                Restricted Securities. The Holder understands that: (i) the Exchange Securities have not been and are not being registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) the Holder shall have delivered to the Company (if requested by the Company) an opinion of counsel to the Holder, in a form reasonably acceptable to the Company, to the effect that such Exchange Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) the Holder provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the Securities Act (or a successor rule thereto) (collectively, “Rule 144”); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144, and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the Person (as defined) through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC promulgated thereunder; and (iii) neither the Company nor any other Person is under any obligation to register the Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder.

 

 

 

 

6.

Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to the Holder:

 

(a)               Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, the Board of Directors of the Company or the Company’s stockholders in connection therewith, including, without limitation, the issuance of the Shares or Preferred Stock, as the case may be, and the reservation for issuance and issuance of (i) Conversion Shares issuable upon conversion of the Preferred Stock and (ii) Warrant Shares upon the exercise of the Warrant have been duly authorized by the Company’s Board of Directors and no further filing, consent, or authorization is required by the Company, its Board of Directors or its stockholders. This Agreement and any Transaction Documents have been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

(b)               Organization and Qualification. The Company and is duly organized and validly existing and in good standing under the laws of the jurisdiction in which it was formed, and have the requisite power and authorization to own its properties and to carry on its business as now being conducted and as presently proposed to be conducted.

 

(c)               No Conflict. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Conversion Shares and the Preferred Stock and the issuance of the Warrant and the Warrant Shares and reservation for issuance and issuance of the Conversion Shares and the Warrant Shares) will not (i) (i) result in a violation of the Company’s Articles of Incorporation or other organizational documents of the Company, any capital stock of the Company or ( of the Company, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree applicable to the Company or by which any property or asset of the Company is bound or affected except, in the case of clause (ii) or (iii) above, to the extent such violations that could not reasonably be expected to have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any material adverse effect on (i) the business, properties, assets, liabilities, operations (including results thereof), condition (financial or otherwise) or prospects of the Company or any subsidiary, individually or taken as a whole, (ii) the transactions contemplated hereby or in any of the other Transaction Documents or (iii) the authority or ability of the Company to perform any of its obligations under any of the Transaction Documents. There is no Person (as defined below) in which the Company, directly or indirectly, owns capital stock or holds an equity or similar interest except for its subsidiaries. “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and any governmental entity or any department or agency thereof.

 

(d)               No Consents. The Company is not required to obtain any consent from, authorization or order of, or make any filing or registration with, any court, governmental agency or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of its respective obligations under or contemplated by the Transaction Documents, in each case, in accordance with the terms hereof or thereof.

 

 

 

 

(e)               Issuance of Securities. The issuance of the Preferred Stock is duly authorized and upon issuance in accordance with the terms of the Transaction Documents shall be validly issued, fully paid and non-assessable and free from all taxes, liens, charges and other encumbrances with respect to the issue thereof. Upon issuance or conversion in accordance with the Certificate of Designations and/or upon the exercise of the Warrant in accordance with its terms, the Conversion Shares and the Warrant Shares, when issued, will be validly issued, fully paid and nonassessable and free from all preemptive or similar rights, taxes, liens, charges and other encumbrances with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock other than restrictions under the Securities Act of 1933 (the “Securities Act”).

 

(f)                Transfer Taxes. As of the date of this Agreement, all share transfer or other taxes (other than income or similar taxes) which are required to be paid in connection with the issuance of the Preferred Stock to be exchanged with the Holder hereunder will be, or will have been, fully paid or provided for by the Company, and all laws imposing such taxes will be or will have been complied with.

 

(g)               Securities Law Exemptions. Assuming the accuracy of the representations and warranties of the Holder contained herein, the offer and issuance by the Company of the Exchange Securities is exempt from registration under the Securities Act, pursuant to the exemption provided by Section 4(a)(2) thereof, and Rule 506 thereunder, and applicable state securities laws.

 

(h)               Acknowledgment Regarding Holder’s Acquisition of New Securities. The Company acknowledges and agrees that the Holder is acting solely in the capacity of an arm’s length purchaser with respect to this and the transactions contemplated hereby and thereby and that the Holder is not (i) an officer or director of the Company or any of its Subsidiaries, (ii) an “affiliate” (as defined in Rule 144 promulgated under the 1933 Act (or a successor rule thereto) (collectively, “Rule 144”)) of the Company or any of its Subsidiaries or (iii) to its knowledge, a “beneficial owner” of more than 10% of the shares of Common Stock (as defined for purposes of Rule 13d-3 of the 1934 Act). The Company further acknowledges that the Holder is not acting as a financial advisor or fiduciary of the Company or any of its Subsidiaries (or in any similar capacity) with respect to the transactions contemplated hereby, and any advice given by the Holder or any of its representatives or agents in connection with the Exchange Documents and the transactions contemplated hereby and thereby is merely incidental to the Holder’s purchase of the Exchange Securities. The Company further represents to the Holder that the Company’s and each Subsidiary’s decision to enter into the this Agreement to which it is a party has been based solely on the independent evaluation by the Company, each Subsidiary and their respective representatives.

 

(i)                 Absence of Certain Changes. Except as disclosed in the Form 10-Q for the six months ended June 30, 2024, there has been no material adverse change and no material adverse development in the business, assets, liabilities, properties, operations (including results thereof), condition (financial or otherwise) or prospects of the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets, individually or in the aggregate, outside of the ordinary course of business or (iii) made any capital expenditures, individually or in the aggregate, outside of the ordinary course of business.

 

(j)                 No Undisclosed Events, Liabilities, Developments or Circumstances. Except as reflected in Schedule 6(j), no event, liability, development or circumstance has occurred or exists, or is reasonably expected to exist or occur with respect to the Company, any of its Subsidiaries or any of their respective businesses, properties, liabilities, prospects, operations (including results thereof) or condition (financial or otherwise), that (i) would be required to be disclosed by the Company under applicable securities laws on a registration statement on Form S- 1 filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced, (ii) has had, or would be reasonably expected to have, a material adverse effect on the Holder’s investment hereunder or (iii) has had, or would be reasonably expected to have, a Material Adverse Effect.

 

(k)               Shell Company Status. The Company is not, and has never been, an issuer identified in, or subject to, Rule 144(i).

 

 

 

 

 

(l)                 Disclosure. All disclosure provided to the Holders regarding the Company and its Subsidiaries, their businesses and the transactions contemplated hereby, including the schedules to this Agreement, furnished by or on behalf of the Company or any of its Subsidiaries is true and correct as of the date furnished and does not contain any untrue statement of a material fact or omit to state any material fact as of the date furnished necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, liabilities, prospects, operations (including results thereof) or conditions (financial or otherwise), which, under applicable law, rule or regulation, requires public disclosure at or before the date hereof or announcement by the Company but which has not been so publicly disclosed. The Company acknowledges and agrees that the Holder has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 5 herein.

 

 

6.

Financial Information. Until the date on which the Holder shall have sold all of the Exchange Securities (the “Reporting Period”), the Company agrees to send the following to each holde rduring the Reporting Period: (i) unless the following are filed with the SEC through EDGAR and are available to the public through the EDGAR system, within one (1) Business Day after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, any interim reports or any consolidated balance sheets, income statements, shareholders’ equity statements and/or cash flow statements for any period other than annual, any Current Reports on Form 8-K and any registration statements (other than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) unless the following are either filed with the SEC through EDGAR or are otherwise widely disseminated via a recognized news release service (such as PR Newswire), on the same day as the release thereof, facsimile copies of all press releases issued by the Company or any of its Subsidiaries and (iii) unless the following are filed with the SEC through EDGAR, copies of any notices and other information made available or given to the shareholders of the Company generally, contemporaneously with the making available or giving thereof to the shareholders.

 

7.

Miscellaneous.

 

(a)               Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns.

 

(b)               Governing Law; Exclusive Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by and construed under the laws of the State of Nevada without regard to the choice of law principles thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in New York County, New York for the adjudication of any dispute hereunder or in connection herewith or therewith or with any transaction contemplated hereby or thereby, and hereby irrevocably waives any objection that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(c)               Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

 

 

 

 

(d)                Counterparts/Execution. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event that any signature is delivered by facsimile transmission or by an e-mail which contains an electronic file of an executed signature page, such signature page shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or electronic file signature page (as the case may be) were an original thereof.

 

(e)                Notices. Any notice or communication permitted or required hereunder shall be in writing and shall be deemed sufficiently given if hand-delivered or sent (i)overnight delivery service next business day delivery, or (ii) by email, to the respective parties as set forth below, or to such other address as either party may notify the other in writing.

 

If to the Company, to:

 

Dr. Allan Evans, Chief Executive Officer

4677 L B McLeod Rd, Suite J

Orlando, FL 32811

(787)-501-2048

Email: Allan@unusualmachines.com

 

With a Copy to, which shall not constitute notice to the copy:

 

Nason Yeager Gerson Harris & Fumero, P.A.

3001 PGA Boulevard, Suite 305

Palm Beach Gardens, FL 33410

Attention: Michael D. Harris, Esq.

Email: mharris@nasonyeager.com

 

If to Holder, to the address set forth on the signature page of the Holder

 

(f)                 Expenses. The parties hereto shall pay their own costs and expenses in connection herewith.

 

 

(g)                Entire Agreement; Amendments. This Agreement constitutes the entire agreement between the parties with regard to the subject matter hereof and thereof, superseding all prior agreements or understandings, whether written or oral, between or among the parties. This Agreement may be amended, modified, superseded, cancelled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by all parties, or, in the case of a waiver, by the party waiving compliance. Except as expressly stated herein, no delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder preclude any other or future exercise of any other right, power or privilege hereunder.

 

(h)                Headings. The headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

 

 

 

 

 

(i)                  Registration Rights Agreement. As a condition to the closing of the transactions contemplated in this Agreement, the Company shall execute and deliver to Holder a Registration

Rights Agreement substantially in the form attached hereto as Exhibit D.

 

 

(j)                  No Short Sales. The Holder shall not directly or indirectly engage in a short sale, as defined in Rule 200 of Regulation SHO promulgated by the SEC, of the Company’s Common Stock including the Conversion Shares and the Warrant Shares while the Preferred Stock or Warrants are outstanding.

 

(k)                Holding Period. For the purposes of Rule 144, the Company acknowledges that the holding period of the Exchange Securities may be tacked onto both the holding period of the Original Note and the Company agrees not to take a position contrary to this Section. The Company acknowledges and agrees that the Exchange Securities (and upon conversion and/or exercise thereof, the shares of Common Stock issuable thereunder) shall not be required to bear any restrictive legend and shall be freely transferable by the Holder pursuant to and in accordance with Rule 144, provided, for the avoidance of doubt, that the Holder shall not be an affiliate of the Company and shall not have been an affiliate during the 90 days preceding the date of any transfer.

 

(l)                  Stockholder Approval. If stockholder approval is required for the issuance of the securities underlying the Exchange Securities, the Company shall provide each stockholder entitled to vote at the annual meeting of stockholders of the Company (the “Annual Stockholder Meeting”), a proxy statement, in a form reasonably acceptable to the Holder to solicit each of the Company’s stockholder’s affirmative vote at the Stockholder Meeting for approval of resolutions (“Stockholder Resolutions”) providing the approval of any matters requiring stockholder approval pursuant to the listing requirements of any Trading Market including, without limitation, the issuance of more than 20% of the outstanding shares of Common Stock, in connection with the transactions contemplated by this Agreement (such affirmative approval being referred to herein as the “Stockholder Approval”, and the date such Stockholder Approval is obtained, the “Stockholder Approval Date”), and the Company shall use its reasonable best efforts to solicit its stockholders’ approval of such resolutions and to cause the Board of Directors of the Company to recommend to the stockholders that they approve such resolutions. The Company shall only be obligated to seek to obtain the Stockholder Approval at the Annual Stockholder Meeting. If, despite the Company’s commercially reasonable best efforts, the Stockholder Approval is not obtained at the Annual Stockholder Meeting, the Company shall cause an additional meeting of the Company’s stockholders to be held as soon as possible. If, despite the Company’s reasonable best efforts the Stockholder Approval is not obtained after such subsequent stockholder meetings, the Company shall cause an additional meeting of the Company’s stockholders to be held semi- annually thereafter until such Stockholder Approval is obtained.

 

 

 

(Signature Pages Follow)

 

 

 

 

 

 

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written.

 

	UNUSUAL MACHINES, INC.
	By: /s/ Brian Hoff
	Name: Brian Hoff
	Title: Chief Financial Officer
	HOLDER:
	Titan Multi-Strategy Fund I, Ltd.
	By:___________________________
	Name:
	Title:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Signature Page to Titan Exchange Agreement

 

 

 

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written.

 

 

	UNUSUAL MACHINES, INC.
	By: __________________________
	Name: Brian Hoff
	Title: Chief Financial Officer
	HOLDER:
	Titan Multi-Strategy Fund I, Ltd.
	By: /s/ Jonathan Honig
	Name: Jonathan Honig
	Title:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 10.25

 

EXCHANGE AGREEMENT

 

THIS EXCHANGE AGREEMENT (the “Agreement”), dated as of August 21, 2024, is made by and between Unusual Machines, Inc., a Nevada corporation (the “Company”), and the holder of the Company’s 8% Promissory Note in the principal amount of $2,181,818.18 dated July 17, 2024 (the “Original Note”) signatory hereto (the “Holder”).

 

WHEREAS, the Holder holds such Original Note;

 

WHEREAS, the Company has authorized a new series of convertible preferred stock of the Company designated as Series C Convertible Preferred Stock, $0.01 par value (the “Preferred Stock”), the terms of which are set forth in the Certificate of Designations of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (the “Certificate of Designations”) substantially in the form attached hereto as Exhibit A, which Preferred Stock shall be convertible into the Company’s Common Stock, in accordance with the terms of the Certificate of Designations;

 

WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 3(a)(9) of the Securities Act of 1933 (the “Securities Act”), the Company desires to exchange with the Holder, and the Holder desires to exchange with the Company, the Original Note for (i) a 4% Convertible Promissory Note in the principal amount of $1,681,818.18, substantially in the form attached hereto as Exhibit B (the “New Note”) , (ii) 105 shares of the Company’s Preferred Stock convertible into 315,000 shares of the Company Common Stock, and (iii) a Warrant to purchase 315,000 shares of the Company’s common stock, substantially in the form attached as Exhibit C. The New Note, the shares of Preferred Stock and the Warrant are collectively referred to herein as the “Exchange Securities” as set forth on Schedule A hereto.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and Holder agree as follows:

 

	1.	Terms of the Exchange. The Company and Holder agree that the Holder will exchange the Note and will relinquish any and all other rights they may have under the Note in exchange for the Exchange Securities as set forth on Schedule A, annexed hereto. Additionally, the Holder hereby waives any and all unpaid interest accrued, if any, on the Original Note, as of the date of issuance and releases the Company from any payment thereof or obligation in connection therewith.
	2.	Public Disclosure. Within two business days after the Closing (as defined in Section 3), the Company will publicly disclose the transactions contemplated by this Agreement and all material non-public information, if any, disclosed to the Holder.

 

3.

Closing. Upon satisfaction of the conditions set forth herein, a closing shall occur at the principal offices of the Company, or such other location as the parties shall mutually agree (the “Closing”). At the Closing, Holder shall deliver to the Company the Original Note and/or other documents reasonably required by the Company to effect the exchange, and the Company shall issue to the Holder the shares of Preferred Stock in book entry in the name(s) and amount(s) as indicated on Schedule A annexed hereto, the New Note and the Warrant. Upon Closing, any and all obligations of the Company to Holder under the Original Note shall be fully satisfied, the Original Note shall be cancelled, and the Holder will have no remaining rights, powers, privileges, remedies or interests under the Original Note.

 

4.

Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

 

 

 

 

5.

Representations and Warranties of the Holder. The Holder represents and warrants as of the date hereof and as of the Closing to the Company as follows:

 

(a)               Authorization; Enforcement. The Holder has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement by the Holder and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Holder and no further action is required by the Holder. This Agreement has been (or upon delivery will have been) duly executed by the Holder and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Holder enforceable against the Holder in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

(b)                 Tax Advisors. The Holder has had the opportunity to review and/or has reviewed with its own tax advisors the U.S. federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. With respect to such matters, the Holder relies solely on such advisors and not on any statements or representations of the Company or any of its agents, written or oral. The Holder understands that it (and not the Company) shall be responsible for its own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.

 

(c)                 Information Regarding the Holder. The Holder is an “accredited investor”, as such term is defined in Rule 501 of Regulation D promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act, is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of companies in private placements in the past and, with its representatives, has such knowledge and experience in financial, tax and other business matters as to enable the Holder to utilize the information made available by the Company to evaluate the merits and risks of and to make an informed investment decision with respect to the proposed purchase, which represents a speculative investment. The Holder has the authority and is duly and legally qualified to purchase and own the Securities (as defined below). The Holder is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof.

 

(d)               Legend. The Holder understands that the Securities have been issued (or will be issued in the case of the shares of Common Stock issuable upon conversion of the Preferred Stock and/or conversion of the New Note (each of the foregoing “Conversion Shares”),and the shares of Common Stock issuable upon the exercise of the Warrant (the “Warrant Shares,” and together with the Conversion Shares and the Preferred Stock, together, the “Securities”)) pursuant to an exemption from registration or qualification under the Securities Act and applicable state securities laws, and except as set forth below, the Securities shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates):

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE OR EXERCISABLE HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, OR (B) AN OPINION OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

 

 

 

(e)               Removal of Legends. Certificates evidencing Securities shall not be required to contain the legend set forth in Section 5(d) above or any other legend (i) while a registration statement covering the resale of such Securities is effective under the Securities Act, (ii) following any sale of such Securities pursuant to Rule 144 (assuming the transferor is not an affiliate of the Company), (iii) if such Securities are eligible to be sold, assigned or transferred under Rule 144 without having to meet the requirements of Rule 144(c) (provided that the Holder provides the Company with reasonable assurances that such Securities are eligible for sale, assignment or transfer under Rule 144 which shall not include an opinion of the Holder’s counsel), (iv) in connection with a sale, assignment or other transfer (other than under Rule 144), provided that the Holder provides the Company, at the expense of the Company, with an opinion of counsel to the Holder, in a generally acceptable form, to the effect that such sale, assignment or transfer of the Securities may be made without registration under the applicable requirements of the Securities Act or (v) if such legend is not required under applicable requirements of the Securities Act (including, without limitation, controlling judicial interpretations and pronouncements issued by the SEC). If a legend is not required pursuant to the foregoing, the Company shall no later than three business days following the delivery by the Holder to the Company or the transfer agent (with notice to the Company) of a legended certificate representing such Securities (endorsed or with stock powers attached, signatures guaranteed, and otherwise in form necessary to affect the reissuance and/or transfer, if applicable), together with any other deliveries from the Holder as may be required above in this Section 5(e), as directed by the Holder, either: (A) provided that the Company’s transfer agent is participating in the DTC Fast Automated Securities Transfer Program and such Securities are Conversion Shares or Warrant Shares, as applicable, credit the aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal at Custodian system or (B) if the Company’s transfer agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver (via reputable overnight courier) to the Holder, a certificate representing such Securities that is free from all restrictive and other legends, registered in the name of the Holder or its designee. The Company shall be responsible for any transfer agent fees or DTC fees with respect to any issuance of Securities or the removal of any legends with respect to any Securities in accordance herewith.

 

(f)                Restricted Securities. The Holder understands that: (i) the Exchange Securities have not been and are not being registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) the Holder shall have delivered to the Company (if requested by the Company), at the expense of the Company, an opinion of counsel to the Holder, in a form reasonably acceptable to the Company, to the effect that such Exchange Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) the Holder provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the Securities Act (or a successor rule thereto) (collectively, “Rule 144”); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144, and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the Person (as defined) through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC promulgated thereunder; and (iii) neither the Company nor any other Person is under any obligation to register the Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder.

 

6.

Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to the Holder:

 

(a)               Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Companyand no further action is required by the Company, the Board of Directors of the Company or the Company’s stockholders in connection therewith, including, without limitation, the issuance of the Shares or Preferred Stock, as the case may be, and the reservation for issuance and issuance of (i) Conversion Shares issuable upon conversion of the Preferred Stock and conversion of the New Note, and (ii) Warrant Shares upon the exercise of the Warrant have been duly authorized by the Company’s Board of Directors and no further filing, consent, or authorization is required by the Company, its Board of Directors or its stockholders. This Agreement and any Transaction Documents have been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

 

 

 

(b)               Organization and Qualification. The Company and is duly organized and validly existing and in good standing under the laws of the jurisdiction in which it was formed, and have the requisite power and authorization to own its properties and to carry on its business as now being conducted and as presently proposed to be conducted.

 

(c)               No Conflict. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the New Note, Conversion Shares and the Preferred Stock and the issuance of the Warrant and the Warrant Shares and reservation for issuance and issuance of the Conversion Shares and the Warrant Shares) will not (i) (i) result in a violation of the Company’s Articles of Incorporation or other organizational documents of the Company, any capital stock of the Company or ( of the Company, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree applicable to the Company or by which any property or asset of the Company is bound or affected except, in the case of clause (ii) or (iii) above, to the extent such violations that could not reasonably be expected to have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any material adverse effect on (i) the business, properties, assets, liabilities, operations (including results thereof), condition (financial or otherwise) or prospects of the Company or any subsidiary, individually or taken as a whole, (ii) the transactions contemplated hereby or in any of the other Transaction Documents or (iii) the authority or ability of the Company to perform any of its obligations under any of the Transaction Documents. There is no Person (as defined below) in which the Company, directly or indirectly, owns capital stock or holds an equity or similar interest except for its subsidiaries. “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and any governmental entity or any department or agency thereof.

 

(d)               No Consents. The Company is not required to obtain any consent from,a uthorization or order of, or make any filing or registration with, any court, governmental agency or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of its respective obligations under or contemplated by the Transaction Documents, in each case, in accordance with the terms hereof or thereof.

 

(e)               Issuance of Securities. The issuance of the Preferred Stock is duly authorized and upon issuance in accordance with the terms of the Transaction Documents shall be validly issued, fully paid and non-assessable and free from all taxes, liens, charges and other encumbrances with respect to the issue thereof. Upon issuance or conversion in accordance with the New Note, the Certificate of Designations and/or upon the exercise of the Warrant in accordance with its terms, the Conversion Shares and the Warrant Shares, when issued, will be validly issued, fully paid and nonassessable and free from all preemptive or similar rights, taxes, liens, charges and other encumbrances with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock other than restrictions under the Securities Act of 1933.

 

(f)                Transfer Taxes. As of the date of this Agreement, all share transfer or other taxes (other than income or similar taxes) which are required to be paid in connection with the issuance of the Preferred Stock to be exchanged with the Holder hereunder will be, or will have been, fully paid or provided for by the Company, and all laws imposing such taxes will be or will have been complied with.

 

7.

Tacking. Subject to the truth and accuracy of the Holder’s representations set forth in Section 5 of this Agreement, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, Common Stock issued in exchange for the Exchange Securities will tack back to the original date of closing and/or funding of the Notes (as applicable) all pursuant to Rule 144 and the Company agrees not to take a position to the contrary.

 

 

 

 

 

8.

Releases. (a) The Holder releases and discharges the Company, its officers, directors, principals, control persons, past and present employees, insurers, successors, and assigns (the Company Parties”) from all actions, cause of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Company Parties ever had, now have or hereafter can, shall or may, have for, upon, or by reason of any matter, cause or thing whatsoever, whether or not known or unknown, arising under the Original Note. It being understood that this Section 6(a) shall be limited in all respects to only matters arising under or related to the Note and shall under no circumstances constitute a release, waiver or discharge with respect to the Preferred Stock, the New Note, the Warrant or any other Transaction Document or limit the Holder from taking action for matters with respect to the Preferred Stock, the New Note, the Warrant or any other Transaction Document or events that may arise in the future.

 

(b)     The Company releases and discharges the Holder, its officers, directors, principals, control persons, past and present employees, insurers, successors, and assigns (the “Holder Parties”) from all actions, cause of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, which against the Holder Parties ever had, now have or hereafter can, shall or may, have for, upon, or by reason of any matter, cause or thing whatsoever, whether or not known or unknown, arising under the Original Note. It being understood that this Section 6(b) shall be limited in all respects to only matters arising under or related to the Original Note and shall under no circumstances constitute a release, waiver or discharge with respect to the Preferred Stock or any Transaction Document or limit the Company from taking action for matters with respect to the Preferred Stock, the New Note, the Warrant or any other Transaction Document or events that may arise in the future.

 

9.

Miscellaneous.

 

(a)      Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns.

 

(b)     Governing Law; Exclusive Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by and construed under the laws of the State of Nevada without regard to the choice of law principles thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in New York County, New York for the adjudication of any dispute hereunder or in connection herewith or therewith or with any transaction contemplated hereby or thereby, and hereby irrevocably waives any objection that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(c)    Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

 

(d)     Counterparts/Execution. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event that any signature is delivered by facsimile transmission or by an e-mail which contains an electronic file of an executed signature page, such signature page shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or electronic file signature page (as the case may be) were an original thereof.

 

 

 

 

(e)     Notices. Any notice or communication permitted or required hereunder shall be in writing and shall be deemed sufficiently given if hand-delivered or sent (i)overnight delivery service next business day delivery, or (ii) by email, to the respective parties as set forth below, or to such other address as either party may notify the other in writing.

 

If to the Company, to:

 

Dr. Allan Evans, Chief Executive Officer

4677 L B McLeod Rd, Suite J

Orlando, FL 32811

(787)-501-2048

Email: Allan@unusualmachines.com

 

With a Copy to, which shall not constitute notice to the copy:

 

Nason Yeager Gerson Harris & Fumero, P.A.

3001 PGA Boulevard, Suite 305

Palm Beach Gardens, FL 33410

Attention: Michael D. Harris, Esq.

Email: mharris@nasonyeager.com

 

If to Holder, to the address set forth on the signature page of the Holder

 

(f)        Expenses. The parties hereto shall pay their own costs and expenses in connection herewith.

 

(g)       Entire Agreement; Amendments. This Agreement constitutes the entire agreement between the parties with regard to the subject matter hereof and thereof, superseding all prior agreements or understandings, whether written or oral, between or among the parties. This Agreement may be amended, modified, superseded, cancelled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by all parties, or, in the case of a waiver, by the party waiving compliance. Except as expressly stated herein, no delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder preclude any other or future exercise of any other right, power or privilege hereunder.

 

(h)     Headings. The headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

 

(i)      Registration Rights Agreement. As a condition to the closing of the transactions contemplated in this Agreement, the Company shall execute and deliver to Holder a Registration Rights Agreement substantially in the form attached hereto as Exhibit D.

 

(j)       Legal Opinion. As a condition to the closing of the transactions contemplated in this Agreement, the Company shall deliver to Holder a legal opinion of counsel in a form acceptable to Holder opining on the transactions contemplated in this Agreement.

 

(k)      No Short Sales. The Holder shall not directly or indirectly engage in a short sale, as defined in Rule 200 of Regulation SHO promulgated by the SEC, of the Company’s Common Stock including the Conversion Shares and the Warrant Shares while the Preferred Stoc or Warrants are outstanding.

 

(l)       Listing. The Company shall use reasonable best efforts to promptly secure the listing or designation for quotation (as the case may be) of all of the Conversion Shares (subject to the last sentence below) upon each national securities exchange and automated quotation system, if any, upon which the Common Stock is then listed or designated for quotation (as the case may be) (subject to official notice of issuance) (but in no event later than the date of this Agreement) and shall use reasonable best efforts to maintain such listing or designation for quotation (as the case may be) of all Conversion Shares from time to time issuable under the terms of this Agreement on such national securities exchange or automated quotation system. The Company shall maintain the Common Stock’s listing or authorization for quotation (as the case may be) on the Principal Market, The New York Stock Exchange, the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market or the Nasdaq Global Select Market (each, an “Eligible Market”). The Company shall not take any action which could be reasonably expected to result in the delisting or suspension of the Common Stock on an Eligible Market. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 9(l). Notwithstanding the foregoing, the Company shall only be required to secure the listing for the Conversion Shares issuable pursuant to the New Note within two Trading Days after an Event of Default (as defined in the New Note) that remains uncured.

 

(Signature Pages Follow)

 

 

 

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written.

 

	UNUSUAL MACHINES, INC.
	By: /s/ Brian Hoff
	Name: Brian Hoff
	Title: Chief Financial Officer
	HOLDER:
	Eleven Ventures, Inc
	By:___________________________
	Name:
	Title:

 

 

 

 

 

 

 

 

Eleven Ventures Exchange Agreement Signature Page

 

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written.

 

	UNUSUAL MACHINES, INC.
	By: __________________________
	Name: Brian Hoff
	Title: Chief Financial Officer
	HOLDER:
	Eleven Ventures, Inc
	By: /s/ Hartley Wasko
	Name: Hartley Wasko
	Title: Manager

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 10.26

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”) is made and entered into as of August 21, 2024, between Unusual Machines, Inc., a Nevada corporation (the “Company”), and each of the several purchasers signatory hereto (each such purchaser, a “Purchaser” and, collectively, the “Purchasers”).

 

The Company and each Purchaser hereby agrees as follows:

 

1.

Definitions.

 

Capitalized words and terms used and not otherwise defined herein that are defined in the Exchange Agreement, dated as August 21, 2024 between the Company and each Purchaser (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Exchange Agreement”), shall have the meanings given such terms in the Exchange Agreement. As used in this Agreement, the following terms shall have the following meanings:

 

“Advice” shall have the meaning set forth in Section 6(c).

 

“Effectiveness Date” means, with respect to the Initial Registration Statement required to be filed hereunder, the 60th calendar day following the Filing Date (or, in the event of a “full review” by the Commission, the 75th calendar day following the Filing Date) and with respect to any additional Registration Statements which may be required pursuant to Section 2(c) or Section 3(c), the 60th calendar day following the date on which an additional Registration Statement is required to be filed hereunder(or, in the event of a “full review” by the SEC, the 75th calendar day following the date such additional Registration Statement is required to be filed hereunder); provided, however, that in the event the Company is notified by the SEC that one or more of the above Registration Statements will not be reviewed or is no longer subject to further review and comments, the Effectiveness Date as to such Registration Statement shall be the fifth Trading Day following the date on which the Company is so notified if such date precedes the dates otherwise required above, provided, further, if such Effectiveness Date falls on a day that is not a Trading Day, then the Effectiveness Date shall be the next succeeding Trading Day.

 

“Effectiveness Period” shall have the meaning set forth in Section 2(a).

 

“Event” shall have the meaning set forth in Section 2(d).

 

“Event Date” shall have the meaning set forth in Section 2(d).

 

“Filing Date” means, with respect to the Initial Registration Statement required hereunder, the 30th calendar day following the Closing Date, and, with respect to any additional Registration Statements which may be required pursuant to Section 2(c) or Section 3(c), the earliest practical date on which the Company is permitted by SEC Guidance to file such additional Registration Statement related to the Registrable Securities but not later than 30 days after the Company is permitted to do so.

 

“Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities.

 

“Indemnified Party” shall have the meaning set forth in Section 5(c).

 

“Indemnifying Party” shall have the meaning set forth in Section 5(c).

 

“Initial Registration Statement” means the initial Registration Statement filed pursuant to this Agreement.

 

“Losses” shall have the meaning set forth in Section 5(a).

 

“Plan of Distribution” shall have the meaning set forth in Section 2(a).

 

 

 

 

 

“Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated by the SEC pursuant to the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

 

“Registrable Securities” means, as of any date of determination, (a) all shares of Common Stock then issued and issuable upon conversion in full of the Series A Preferred Stock (assuming on such date the shares of Series A Preferred Stock are converted in full without regard to any conversion limitations therein) ; (b) all shares of Common Stock then issued and issuable upon conversion in full of the Series C Preferred Stock (assuming on such date the shares of Series C Preferred Stock are converted in full without regard to any conversion limitations therein); (c) all Warrant Shares then issued and issuable upon exercise of the Common Stock Purchase Warrant (assuming on such date the Common Stock Purchase Warrant is exercised in full for cash without regard to any exercise limitations therein); (d) all shares of Common Stock then issued and issuable upon the conversion in full of the New Note (assuming on such date the New Note is converted in full without regard to any conversion limitations therein); (e) any additional shares of Common Stock issued and issuable in connection with any anti-dilution provisions in the Common Stock Purchase Warrant (without giving effect to any limitations on exercise set forth in the Common Stock Purchase Warrant), and (f) any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing; provided, however, that any such Registrable Securities shall cease to be Registrable Securities (and the Company shall not be required to maintain the effectiveness of any, or file another, Registration Statement hereunder with respect thereto) for so long as (i) a Registration Statement with respect to the sale of such Registrable Securities is declared effective by the SEC under the Securities Act and such Registrable Securities have been disposed of by the Holder in accordance with such effective Registration Statement, (ii) such Registrable Securities have been previously sold in accordance with Rule 144, or (iii) such securities become eligible for resale without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 as set forth in a written opinion letter from counsel to the Company to such effect, addressed, delivered and acceptable to the Transfer Agent and the affected Holders.

 

“Registration Statement” means any registration statement required to be filed hereunder pursuant to Section 2(a) and any additional registration statements contemplated by Section 2(c) or Section 3(c), including (in each case) the Prospectus, amendments and supplements to any such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in any such registration statement.

 

“Rule 415” means Rule 415 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

 

“Rule 424” means Rule 424 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

 

“Selling Stockholder Questionnaire” shall have the meaning set forth in Section 3(a).

 

“SEC Guidance” means (i) any publicly-available written or oral guidance of the SEC, or any comments, requirements or requests of the SEC and (ii) the Securities Act.

 

 

 

 

 

 

 

 

 

2.

Registration.

 

(a) On or prior to each Filing Date, the Company shall prepare and file with the SEC a Registration Statement covering the resale of all of the Registrable Securities that are not then registered on an effective Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415. Each Registration Statement filed hereunder shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith, subject to the provisions of Section 2(e)) and shall contain (unless otherwise directed by the Holders of at least 50.1% of the Registrable Securities included in such Registration Statement) substantially the “Plan of Distribution” attached hereto as Annex A and substantially the “Selling Stockholder” section attached hereto as Annex B; provided, however, that no Holder shall be required to be named as an “underwriter” without such Holder’s express prior written consent. Subject to the terms of this Agreement, the Company shall use its commercially reasonable efforts to cause a Registration Statement filed under this Agreement (including, without limitation, under Section 3(c)) to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the applicable Effectiveness Date, and shall use commercially reasonable efforts to keep such Registration Statement continuously effective under the Securities Act until the date that all Registrable Securities covered by such Registration Statement (i) have been sold, thereunder or pursuant to Rule 144, or (ii) may be sold without volume or manner-of-sale restrictions pursuant to Rule 144 and without the requirement for the Company to be in compliance with the current public information requirement under Rule 144, as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected Holders (the “Effectiveness Period”). The Company shall telephonically request effectiveness of a Registration Statement as of 5:00 p.m. (New York, New York time) on a Trading Day. The Company shall immediately notify the Holders via e-mail of the effectiveness of a Registration Statement on the same Trading Day that the Company telephonically confirms effectiveness with the SEC. The Company shall, by 5:30 p.m. (New York, New York time) on the second Business Day after the effective date of such Registration Statement, file a final Prospectus with the SEC as required by Rule 424. Failure to so notify the Holder within one Trading Day of such notification of effectiveness or failure to file a final Prospectus as foresaid shall be deemed an Event under Section 2(d).

 

(b) Notwithstanding the registration obligations set forth in Section 2(a), if the SEC informs the Company that all of the Registrable Securities cannot, as a result of the application of Rule 415, be registered for resale as a secondary offering on a single registration statement, the Company agrees to promptly inform each of the Holders thereof and use its commercially reasonable efforts to file amendments to the Initial Registration Statement as required by the SEC, covering the maximum number of Registrable Securities permitted to be registered by the SEC, on Form S-3 or such other form available to register for resale the Registrable Securities as a secondary offering, subject to the provisions of Section 2(e); with respect to filing on Form S-3 or other appropriate form; provided, however, that prior to filing such amendment, the Company shall be obligated to use diligent efforts to advocate with the SEC for the registration of all of the Registrable Securities in accordance with the SEC Guidance, including without limitation, Compliance and Disclosure Interpretation 612.09.

 

(c) Notwithstanding any other provision of this Agreement, if the SEC Staff limits the number of Registrable Securities permitted to be registered on a particular Registration Statement as a secondary offering (and notwithstanding that the Company used diligent efforts to advocate with the SEC for the registration of all or a greater portion of Registrable Securities), unless otherwise directed in writing by a Holder as to its Registrable Securities, the number of Registrable Securities to be registered on such Registration Statement will be reduced as follows:

 

(i)First, the Company shall reduce or eliminate any securities to be included other than Registrable Securities;

 

(ii)Second, the Company shall reduce Registrable Securities represented by Warrant Shares (applied, in the case that some Warrant Shares may be registered, to the Holders on a pro rata basis based on the total number of unregistered Warrant Shares held or acquirable upon cash exercise of the Common Stock Purchase Warrant by such Holders);

 

(iii)Third, the Company shall reduce the Registrable Securities represented by the shares of Common Stock issuable upon conversion of the Series C Preferred Stock; and

 

(iv)Fourth, the Company shall reduce the Registrable Securities represented by the shares of Common Stock issuable upon conversion of the Series A Preferred Stock; and

 

 

 

 

(v) Fifth, the Company shall reduce the Registrable Securities represented by the shares of Common Stock issuable upon the conversion of the New Note.

 

In the event of a cutback hereunder, the Company shall give each Holder at least three Trading Days prior written notice along with the calculations as to such Holder’s allotment. In the event the Company amends the Initial Registration Statement in accordance with the foregoing, the Company will use its commercially reasonable efforts to file with the SEC, as promptly as allowed by SEC or SEC Guidance or to registrants of securities in general, one or more registration statements on Form S-3 or such other form available to register for resale those Registrable Securities that were not registered for resale on the Initial Registration Statement, as amended. No liquidated damages shall accrue or be payable with respect to any Registrable Securities which are not included in a Registration Statement as a result of a cutback imposed by the SEC until such time as the Company is required to file an additional Registration Statement.

 

(d) If: (i) the Initial Registration Statement is not filed on or prior to its Filing Date (if the Company files the Initial Registration Statement without affording the Holders the opportunity to review and comment on the same as required by Section 3(a) herein, the Company shall be deemed to have not satisfied this clause (i)), or (ii) the Company fails to file with the SEC a request for acceleration of a Registration Statement in accordance with Rule 461 promulgated by the SEC pursuant to the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the SEC that such Registration Statement will not be “reviewed” or will not be subject to further review, or (iii) prior to the effective date of a Registration Statement, the Company fails to file a pre-effective amendment and otherwise respond in writing to comments made by the SEC in respect of such Registration Statement within ten (10) calendar days after the receipt of comments by or notice from the SEC that such amendment is required in order for such Registration Statement to be declared effective, or (iv) a Registration Statement registering for resale all of the Registrable Securities is not declared effective by the SEC by the Effectiveness Date of the Initial Registration Statement, or (v) after the effective date of a Registration Statement, such Registration Statement ceases for any reason to remain continuously effective as to all Registrable Securities included in such Registration Statement, or the Holders are otherwise not permitted to utilize the Prospectus therein to resell such Registrable Securities, for more than 30 consecutive calendar days or more than an aggregate of 60 calendar days (which need not be consecutive calendar days) during any 12-month period (any such failure or breach being referred to as an “Event”, and for purposes of clauses (i) and (iv), the date on which such Event occurs, and for purpose of clause (ii) the date on which such five Trading Day period is exceeded, and for purpose of clause (iii) the date which such 10 calendar day period is exceeded, and for purpose of clause (v) the date on which such 10 or 15 calendar day period, as applicable, is exceeded being referred to as “Event Date”), then, in addition to any other rights the Holders may have hereunder or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of 2.0% multiplied by $500,000. The parties agree that the maximum aggregate liquidated damages payable to a Holder under this Agreement shall be the product of 18% times $500,000. For the purposes of this Section 2(d), the Subscription Amount shall be proportionately reduced in the even that Conversion Shares shall have been issued and sold. If the Company fails to pay any partial liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro rata basis for any portion of a month prior to the cure of an Event. For avoidance of doubt, if the SEC Guidance reduces, or the Staff requires a reduction, the number of Registrable Securities as contemplated in Section 2(c), no liquidated damages penalties pursuant to Section 2(d) shall be imposed on the Initial Registration Statement for failure to register all of the Registrable Securities.

 

(e) If Form S-3 is not available for the registration of the resale of Registrable Securities hereunder, the Company shall (i) register the resale of the Registrable Securities on another appropriate form and (ii) undertake to register the Registrable Securities on Form S-3 promptly after such form is available, provided that the Company shall maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC.

 

(f) Notwithstanding anything to the contrary contained herein, in no event shall the Company be permitted to name any Holder or affiliate of a Holder as any Underwriter without the prior written consent of such Holder provided that if such disclosure is required by law and the Holder wishes not to be named the Company may remove such Holder from the Registration Statement.

 

 

 

 

3.

Registration Procedures.

 

In connection with the Company’s registration obligations hereunder, the Company shall:

 

(a) Not less than (x) five Trading Days prior to the filing of each Registration Statement and (y) one Trading Day prior to the filing of any Prospectus or any amendment or supplement to a Registration Statement or Prospectus (including any document that would be incorporated or deemed to be incorporated therein by reference) that adversely modifies the Plan of Distribution or adversely alters the disclosure relating to a Holder, the Company shall furnish to each such Holder, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders The Company shall not file a Registration Statement or any related Prospectus to which the Holders of a majority of the Registrable Securities held by shall reasonably object in good faith, provided that, the Company is notified of such objection in writing no later than three Trading Days after the Holders have been so furnished copies of a Registration Statement. Each Holder agrees to furnish to the Company a completed questionnaire in the form attached to this Agreement as Annex B (a “Selling Stockholder Questionnaire”) on a date that is not less than two (2) Trading Days prior to the Filing Date and to provide an updated questionnaire on such form not less than two Trading Days prior to the date on which the Company intends to file any post-effective amendment to such Registration Statement to update the information contained therein under Section 10(a)(3) of the Securities Act.

 

(b) (i) Prepare and file with the SEC such amendments, including post-effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the SEC such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities, (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and, as so supplemented or amended, to be filed pursuant to Rule 424, (iii) respond as promptly as reasonably possible to any comments received from the SEC with respect to a Registration Statement or any amendment thereto and provide to each Holder of Registrable Securities as promptly as reasonably possible true and complete copies of all correspondence from and to the SEC relating to a Registration Statement (provided that, the Company shall excise any information contained therein which would constitute material non-public information regarding the Company or any of its Subsidiaries), and (iv) comply in all material respects with the applicable provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by the Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented.

 

(c) If during the Effectiveness Period, the number of Registrable Securities at any time exceeds 100% of the number of shares of Common Stock then registered in a Registration Statement (other than as a result of sales of such Registrable Securities), then the Company shall file as soon as reasonably practicable, but in any case prior to the applicable Filing Date, an additional Registration Statement covering the resale by the Holders of not less than the number of such Registrable Securities.

 

 

 

 

 

(d) Notify each Holder of Registrable Securities included in a Registration Statement (which notice shall, pursuant to clauses (iii) through (vi) hereof, be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than one Trading Day prior to such filing) and confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed, (B) when the SEC notifies the Company whether there will be a “review” of such Registration Statement and whenever the SEC comments in writing on such Registration Statement, and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any other federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information, (iii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose, (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vi) of the occurrence or existence of any pending corporate development with respect to the Company that the Company believes is material and that, in the determination of the Company, makes it not in the best interest of the Company to allow continued availability of a Registration Statement or Prospectus; provided, however, that in no event shall any such notice contain any information which would constitute material, non-public information regarding the Company or any of its Subsidiaries. Anything to the contrary herein notwithstanding, notice of an event described in Sections 3(d)(iii) through (vi) must be given to all of the Holders of securities included in a Registration Statement within four Trading Hours, after the Company becomes aware of such event.

 

(e) Use its commercially reasonable efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order stopping or suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

 

(f) Make available on the SEC’s EDGAR system (or successor thereto) or otherwise furnish to each Holder, without charge, at least one conformed copy of each such Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference to the extent requested by such Person, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the SEC, provided that any such item which is available on the EDGAR system (or successor thereto) need not be furnished in physical form.

 

(g) Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto, except after the giving of any notice pursuant to Section 3(d).

 

(h) Prior to any resale of Registrable Securities by a Holder, use its commercially reasonable efforts, at the Company’s cost and expense, to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from the Registration or qualification) of such Registrable Securities for the resale by the Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any such Holder reasonably requests in writing, to keep each registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by each Registration Statement, provided that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction. Notwithstanding anything in this Agreement to the contrary, if the Company’s Common Stock is no longer a “covered security” within the meaning of the National Securities Markets Improvements Act of 1995, the Company shall not be required to file under the Blue Sky laws of any states that imposes a merit review standard of review of a Registration Statement. This sentence also applies to Section 4.

 

 

 

 

(i) If requested by a Holder, cooperate with such Holder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Exchange Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holder may request.

 

(j) Upon the occurrence of any event contemplated by Section 3(d), as promptly as reasonably possible under the circumstances taking into account the Company’s good faith assessment of any adverse consequences to the Company and its stockholders of the premature disclosure of such event, prepare a supplement or amendment, including a post-effective amendment, to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither a Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with clauses (iii) through (vi) of Section 3(d) above to suspend the use of any Prospectus until the requisite changes to such Prospectus have been made, then the Holders shall suspend use of such Prospectus. The Company will use its commercially reasonable efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable. The Company shall be entitled to exercise its right under this Section 3(j) to suspend the availability of a Registration Statement and Prospectus, subject to the payment of liquidated damages otherwise required pursuant to Section 2(d), for a period not to exceed thirty (30) consecutive calendar days or more than an aggregate of sixty (60) calendar days (which need not be consecutive calendar days) in any 12-month period.

 

(k) Otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the SEC under the Securities Act and the Exchange Act, including, without limitation, Rule 172 under the Securities Act, file any final Prospectus, including any supplement or amendment thereof, with the SEC pursuant to Rule 424 under the Securities Act, promptly inform the Holders in writing if, at any time during the Effectiveness Period, the Company does not satisfy the conditions specified in Rule 172 and, as a result thereof, the Holders are required to deliver a Prospectus in connection with any disposition of Registrable Securities and take such other actions as may be reasonably necessary to facilitate the registration of the Registrable Securities hereunder.

 

(l) The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and, if required by the SEC, the natural persons thereof that have voting and dispositive control over the shares. During any periods that the Company is unable to meet its obligations hereunder with respect to the registration of the Registrable Securities solely because any Holder fails to furnish such information within three Trading Days of the Company’s request, any liquidated damages that are accruing at such time as to such Holder only shall be tolled and any Event that may otherwise occur solely because of such delay shall be suspended as to such Holder only, until such information is delivered to the Company.

 

4. Registration Expenses. All fees and expenses incident to the performance of or compliance with, this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses of the Company’s counsel and independent registered public accountants) (A) with respect to filings made with the SEC, (B) with respect to filings required to be made with any Trading Market on which the Common Stock is then listed for trading, and (C) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities, if applicable), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. In no event shall the Company be responsible for any broker or similar commissions of any Holder or, except to the extent provided for in the Transaction Documents, any legal fees or other costs of the Holders.

 

 

 

 

5.

Indemnification.

 

(a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, members, partners, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, members, stockholders, partners, agents and employees (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys’ fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to (1) any untrue or alleged untrue statement of a material fact contained in a Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading or (2) any violation or alleged violation by the Company of the Securities Act, the Exchange Act or any state securities law, or any rule or regulation thereunder, in connection with the performance of its obligations under this Agreement, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (ii) in the case of an occurrence of an event of the type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated, defective or otherwise unavailable Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated, defective or otherwise unavailable for use by such Holder and prior to the receipt by such Holder of the Advice contemplated in Section 6(c). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding arising from or in connection with the transactions contemplated by this Agreement of which the Company is aware. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such indemnified person and shall survive the transfer of any Registrable Securities by any of the Holders in accordance with Section 6(f).

 

(b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based solely upon: any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading (i) to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company expressly for inclusion in such Registration Statement or such Prospectus or (ii) to the extent, but only to the extent, that such information relates to such Holder’s information provided in the Selling Stockholder Questionnaire or the proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or in any amendment or supplement thereto. In no event shall the liability of a selling Holder be greater in amount than the dollar amount of the proceeds (net of all expenses paid by such Holder in connection with any claim relating to this Section 5 and the amount of any damages such Holder has otherwise been required to pay by reason of such untrue statement or omission) received by such Holder upon the sale of the Registrable Securities included in the Registration Statement giving rise to such indemnification obligation.

 

 

 

 

 

(c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof, provided that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have materially and adversely prejudiced the Indemnifying Party.

 

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses, (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding, or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and counsel to the Indemnified Party shall reasonably believe that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of no more than one separate counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

 

Subject to the terms of this Agreement, all reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party, provided that the Indemnified Party shall promptly reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) not to be entitled to indemnification hereunder.

 

(d) Contribution. If the indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless for any Losses, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

 

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. In no event shall the contribution obligation of a Holder of Registrable Securities be greater in amount than the dollar amount of the proceeds (net of all expenses paid by such Holder in connection with any claim relating to this Section 5 and the amount of any damages such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission) received by it upon the sale of the Registrable Securities giving rise to such contribution obligation.

 

The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

 

 

 

 

6.

Miscellaneous.

 

(a) Remedies. In the event of a breach by the Company or by a Holder of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, shall be entitled to specific performance of its rights under this Agreement. Each of the Company and each Holder agrees that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall not assert or shall waive the defense that a remedy at law would be adequate.

 

(b) No Piggyback on Registrations; Prohibition on Filing Other Registration Statement. Except as set forth on Schedule 6(b) attached hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in any Registration Statements other than the Registrable Securities. Except as set forth in the next sentence, the Company shall not file any other registration statements until all Registrable Securities are (i) registered pursuant to a Registration Statement that is declared effective by the SEC, or (ii) without regard to Beneficial Ownership Limitation restrictions, are eligible for resale pursuant to Rule 144 and the Company is in compliance with the informational requirements of Rule 144(c) to the extent applicable. This Section 6(b) shall not prohibit the Company from filing any (i) registration statement on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or any amendment or supplement thereto, (ii) any amendment or supplement to a registration statement filed by the Company prior to the date of this Agreement so long as no new securities are registered or the price of any registered securities is reduced on any such existing registration statement (appropriately adjusted for any stock split, reverse stock split, stock dividend or other reclassification or combination of the Common Stock occurring after the date hereof), (iii) the filing of a new registration statement on a different form for the purpose of re-registering securities covered by a registration statement filed by the Company prior to the date of this Agreement so long as no new securities are registered or the price of any registered securities is reduced on any such existing registration statement (other than as a result of customary antidilution adjustments), or (iv) filing a new registration statement for a primary offering of securities for the account of the Company only in an amount of at least $1 million.

 

(c) Discontinued Disposition. By its acquisition of Registrable Securities, each Holder agrees that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(d)(iii) through (vi), such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration Statement until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus (as it may have been supplemented or amended) may be resumed. The Company will use its commercially reasonable efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable. The Company agrees and acknowledges that any periods during which the Holder is required to discontinue the disposition of the Registrable Securities hereunder shall be subject to the provisions of Section 2(d).

 

(d) Piggy-Back Registrations. If, at any time during the Effectiveness Period, there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the SEC a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the Company’s stock option or other employee benefit plans, then, unless the Company is prohibited from including additional Registrable Securities as a result of any SEC action or SEC Guidance, the Company shall deliver to each Holder a written notice of such determination and, if within fifteen days after the date of the delivery of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered; provided, however, that the Company shall not be required to register any Registrable Securities pursuant to this Section 6(d) that are eligible for resale pursuant to Rule 144 (without volume restrictions or current public information requirements) promulgated by the SEC pursuant to the Securities Act or that are the subject of a then effective Registration Statement that is available for resales or other dispositions by such Holder.

 

(e) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of 50.1% of the Registrable Securities, and further provided that, if any amendment, modification or waiver disproportionately and adversely impacts a Holder (or group of Holders), the consent of such disproportionately impacted Holder (or group of Holders) shall be required. If a Registration Statement does not register all of the Registrable Securities pursuant to a waiver or amendment done in compliance with the previous sentence, then the number of Registrable Securities to be registered for each Holder shall be reduced pro rata among all Holders and each Holder shall have the right to designate which of its Registrable Securities shall be omitted from such Registration Statement. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of a Holder or some Holders and that does not directly or indirectly affect the rights of other Holders may be given only by such Holder or Holders of all of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the first sentence of this Section 6(e). No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of this Agreement unless the same consideration also is offered to all of the parties to this Agreement.

 

 

 

 

(f) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered as set forth in the Purchase Agreement.

 

(g) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign (except by merger) its rights or obligations hereunder without the prior written consent of all of the Holders of the then outstanding Registrable Securities. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under Section 5.7 of the Purchase Agreement.

 

(h) No Inconsistent Agreements. Neither the Company nor any of its Subsidiaries has entered, as of the date hereof, nor shall the Company or any of its Subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth on Schedule 6(h), neither the Company nor any of its Subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been satisfied in full.

 

(i) Execution and Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

 

(j) Governing Law; Exclusive Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Agreement and the jurisdiction and venue of all litigation shall be determined in accordance with the provisions of the Exchange Agreement.

 

(k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any other remedies provided by law.

 

(l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

 

(m) Headings. The headings in this Agreement are for convenience only, do not constitute a part of the Agreement and shall not be deemed to limit or affect any of the provisions hereof.

 

(n) Independent Nature of Holders’ Obligations and Rights. The obligations of each Holder hereunder are several and not joint with the obligations of any other Holder hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of group or entity, or create a presumption that the Holders are in any way acting in concert or as a group or entity with respect to such obligations or the transactions contemplated by this Agreement or any other matters, and the Company acknowledges that the Holders are not acting in concert or as a group, and the Company shall not assert any such claim, with respect to such obligations or transactions. Each Holder shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Holder to be joined as an additional party in any proceeding for such purpose. The use of a single agreement with respect to the obligations of the Company contained was solely in the control of the Company, not the action or decision of any Holder, and was done solely for the convenience of the Company and not because it was required or requested to do so by any Holder. It is expressly understood and agreed that each provision contained in this Agreement is between the Company and a Holder, solely, and not between the Company and the Holders collectively and not between and among Holders.

 

********************

 

 

 

 

 

 

(Signature Pages Follow)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.

 

	UNUSUAL MACHINES, Inc.
	By:_/s/ Brian Hoff_________________ Name: Brian Hoff Title: Chief Financial Officer

 

 

 

 

[SIGNATURE PAGE OF HOLDERS FOLLOWS]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[SIGNATURE PAGE OF HOLDERS TO Unusual Machines, INC. RRA]

 

 

Name of Holder: Titan Multi-Strategy Fun I, Ltd.                           

 

Signature of Authorized Signatory of Holder: /s/ Jonathan Honig_____

 

Name of Authorized Signatory: Jonathan Honig___________

 

Title of Authorized Signatory: __________________________

 

 

 

[SIGNATURE PAGES CONTINUE]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 10.27

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”) is made and entered into as of August 21, 2024, between Unusual Machines, Inc., a Nevada corporation (the “Company”), and each of the several purchasers signatory hereto (each such purchaser, a “Purchaser” and, collectively, the “Purchasers”).

 

The Company and each Purchaser hereby agrees as follows:

 

1.

Definitions.

 

Capitalized words and terms used and not otherwise defined herein that are defined in the Exchange Agreement, dated as August 21, 2024 between the Company and each Purchaser (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Exchange Agreement”), shall have the meanings given such terms in the Exchange Agreement. As used in this Agreement, the following terms shall have the following meanings:

 

“Advice” shall have the meaning set forth in Section 6(c).

 

“Effectiveness Date” means, with respect to the Initial Registration Statement required to be filed hereunder, the 60th calendar day following the Filing Date (or, in the event of a “full review” by the Commission, the 75th calendar day following the Filing Date) and with respect to any additional Registration Statements which may be required pursuant to Section 2(c) or Section 3(c), the 60th calendar day following the date on which an additional Registration Statement is required to be filed hereunder(or, in the event of a “full review” by the SEC, the 75th calendar day following the date such additional Registration Statement is required to be filed hereunder); provided, however, that in the event the Company is notified by the SEC that one or more of the above Registration Statements will not be reviewed or is no longer subject to further review and comments, the Effectiveness Date as to such Registration Statement shall be the fifth Trading Day following the date on which the Company is so notified if such date precedes the dates otherwise required above, provided, further, if such Effectiveness Date falls on a day that is not a Trading Day, then the Effectiveness Date shall be the next succeeding Trading Day.

 

“Effectiveness Period” shall have the meaning set forth in Section 2(a).

 

“Event” shall have the meaning set forth in Section 2(d).

 

“Event Date” shall have the meaning set forth in Section 2(d).

 

“Filing Date” means, with respect to the Initial Registration Statement required hereunder, the 30th calendar day following the Closing Date, and, with respect to any additional Registration Statements which may be required pursuant to Section 2(c) or Section 3(c), the earliest practical date on which the Company is permitted by SEC Guidance to file such additional Registration Statement related to the Registrable Securities but not later than 30 days after the Company is permitted to do so.

 

“Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities.

 

“Indemnified Party” shall have the meaning set forth in Section 5(c).

 

“Indemnifying Party” shall have the meaning set forth in Section 5(c).

 

“Initial Registration Statement” means the initial Registration Statement filed pursuant to this Agreement.

 

“Losses” shall have the meaning set forth in Section 5(a).

 

“Plan of Distribution” shall have the meaning set forth in Section 2(a).

 

 

 

 

 

“Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated by the SEC pursuant to the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

 

“Registrable Securities” means, as of any date of determination, (a) all shares of Common Stock then issued and issuable upon conversion in full of the Series A Preferred Stock (assuming on such date the shares of Series A Preferred Stock are converted in full without regard to any conversion limitations therein) ; (b)  all shares of Common Stock then issued and issuable upon conversion in full of the Series C Preferred Stock (assuming on such date the shares of Series C Preferred Stock are converted in full without regard to any conversion limitations therein); (c)  all Warrant Shares then issued and issuable upon exercise of the Common Stock Purchase Warrant (assuming on such date the Common Stock Purchase Warrant is exercised in full for cash without regard to any exercise limitations therein); (d) all shares of Common Stock then issued and issuable upon the conversion in full of the New Note (assuming on such date the New Note is converted in full without regard to any conversion limitations therein); (e) any additional shares of Common Stock issued and issuable in connection with any anti-dilution provisions in the Common Stock Purchase Warrant (without giving effect to any limitations on exercise set forth in the Common Stock Purchase Warrant), and (f) any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing; provided, however, that any such Registrable Securities shall cease to be Registrable Securities (and the Company shall not be required to maintain the effectiveness of any, or file another, Registration Statement hereunder with respect thereto) for so long as (i) a Registration Statement with respect to the sale of such Registrable Securities is declared effective by the SEC under the Securities Act and such Registrable Securities have been disposed of by the Holder in accordance with such effective Registration Statement, (ii) such Registrable Securities have been previously sold in accordance with Rule 144, or (iii) such securities become eligible for resale without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 as set forth in a written opinion letter from counsel to the Company to such effect, addressed, delivered and acceptable to the Transfer Agent and the affected Holders.

 

“Registration Statement” means any registration statement required to be filed hereunder pursuant to Section 2(a) and any additional registration statements contemplated by Section 2(c) or Section 3(c), including (in each case) the Prospectus, amendments and supplements to any such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in any such registration statement.

 

“Rule 415” means Rule 415 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

 

“Rule 424” means Rule 424 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

 

“Selling Stockholder Questionnaire” shall have the meaning set forth in Section 3(a).

 

“SEC Guidance” means (i) any publicly-available written or oral guidance of the SEC, or any comments, requirements or requests of the SEC and (ii) the Securities Act.

 

 

 

 

 

 

2.

Registration.

 

(a) On or prior to each Filing Date, the Company shall prepare and file with the SEC a Registration Statement covering the resale of all of the Registrable Securities that are not then registered on an effective Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415. Each Registration Statement filed hereunder shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith, subject to the provisions of Section 2(e)) and shall contain (unless otherwise directed by the Holders of at least 50.1% of the Registrable Securities included in such Registration Statement) substantially the “Plan of Distribution” attached hereto as Annex A and substantially the “Selling Stockholder” section attached hereto as Annex B; provided, however, that no Holder shall be required to be named as an “underwriter” without such Holder’s express prior written consent. Subject to the terms of this Agreement, the Company shall use its commercially reasonable efforts to cause a Registration Statement filed under this Agreement (including, without limitation, under Section 3(c)) to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the applicable Effectiveness Date, and shall use commercially reasonable efforts to keep such Registration Statement continuously effective under the Securities Act until the date that all Registrable Securities covered by such Registration Statement (i) have been sold, thereunder or pursuant to Rule 144, or (ii) may be sold without volume or manner-of-sale restrictions pursuant to Rule 144 and without the requirement for the Company to be in compliance with the current public information requirement under Rule 144, as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the affected Holders (the “Effectiveness Period”). The Company shall telephonically request effectiveness of a Registration Statement as of 5:00 p.m. (New York, New York time) on a Trading Day. The Company shall immediately notify the Holders via e-mail of the effectiveness of a Registration Statement on the same Trading Day that the Company telephonically confirms effectiveness with the SEC. The Company shall, by 5:30 p.m. (New York, New York time) on the second Business Day after the effective date of such Registration Statement, file a final Prospectus with the SEC as required by Rule 424. Failure to so notify the Holder within one Trading Day of such notification of effectiveness or failure to file a final Prospectus as foresaid shall be deemed an Event under Section 2(d).

 

(b)Notwithstanding the registration obligations set forth in Section 2(a), if the SEC informs the Company that all of the Registrable Securities cannot, as a result of the application of Rule 415, be registered for resale as a secondary offering on a single registration statement, the Company agrees to promptly inform each of the Holders thereof and use its commercially reasonable efforts to file amendments to the Initial Registration Statement as required by the SEC, covering the maximum number of Registrable Securities permitted to be registered by the SEC, on Form S-3 or such other form available to register for resale the Registrable Securities as a secondary offering, subject to the provisions of Section 2(e); with respect to filing on Form S-3 or other appropriate form, and ; provided, however, that prior to filing such amendment, the Company shall be obligated to use diligent efforts to advocate with the SEC for the registration of all of the Registrable Securities in accordance with the SEC Guidance, including without limitation, Compliance and Disclosure Interpretation 612.09.

 

(c) Notwithstanding any other provision of this Agreement, if the SEC Staff limits the number of Registrable Securities permitted to be registered on a particular Registration Statement as a secondary offering (and notwithstanding that the Company used diligent efforts to advocate with the SEC for the registration of all or a greater portion of Registrable Securities), unless otherwise directed in writing by a Holder as to its Registrable Securities, the number of Registrable Securities to be registered on such Registration Statement will be reduced as follows:

 

(i) First, the Company shall reduce or eliminate any securities to be included other than Registrable Securities;

 

(ii)Second, the Company shall reduce Registrable Securities represented by Warrant Shares (applied, in the case that some Warrant Shares may be registered, to the Holders on a pro rata basis based on the total number of unregistered Warrant Shares held or acquirable upon cash exercise of the Common Stock Purchase Warrant by such Holders);

 

(iii)Third, the Company shall reduce the Registrable Securities represented by the shares of Common Stock issuable upon conversion of the Series C Preferred Stock;

 

(iv)Fourth, the Company shall reduce the Registrable Securities represented by the shares of Common Stock issuable upon conversion of the Series A Preferred Stock; and

 

 

 

 

(v) Fifth, the Company shall reduce the Registrable Securities represented by the shares of Common Stock issuable upon conversion of the New Note. In the event of a cutback hereunder, the Company shall give each Holder at least three Trading Days prior written notice along with the calculations as to such Holder’s allotment. In the event the Company amends the Initial Registration Statement in accordance with the foregoing, the Company will use its commercially reasonable efforts to file with the SEC, as promptly as allowed by SEC or SEC Guidance or to registrants of securities in general, one or more registration statements on Form S-3 or such other form available to register for resale those Registrable Securities that were not registered for resale on the Initial Registration Statement, as amended. No liquidated damages shall accrue or be payable with respect to any Registrable Securities which are not included in a Registration Statement as a result of a cutback imposed by the SEC until such time as the Company is required to file an additional Registration Statement.

 

(d) If: (i) the Initial Registration Statement is not filed on or prior to its Filing Date (if the Company files the Initial Registration Statement without affording the Holders the opportunity to review and comment on the same as required by Section 3(a) herein, the Company shall be deemed to have not satisfied this clause (i)), or (ii) the Company fails to file with the SEC a request for acceleration of a Registration Statement in accordance with Rule 461 promulgated by the SEC pursuant to the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the SEC that such Registration Statement will not be “reviewed” or will not be subject to further review, or (iii) prior to the effective date of a Registration Statement, the Company fails to file a pre-effective amendment and otherwise respond in writing to comments made by the SEC in respect of such Registration Statement within ten (10) calendar days after the receipt of comments by or notice from the SEC that such amendment is required in order for such Registration Statement to be declared effective, or (iv) a Registration Statement registering for resale all of the Registrable Securities is not declared effective by the SEC by the Effectiveness Date of the Initial Registration Statement, or (v) after the effective date of a Registration Statement, such Registration Statement ceases for any reason to remain continuously effective as to all Registrable Securities included in such Registration Statement, or the Holders are otherwise not permitted to utilize the Prospectus therein to resell such Registrable Securities, for more than 30 consecutive calendar days or more than an aggregate of 60 calendar days (which need not be consecutive calendar days) during any 12-month period (any such failure or breach being referred to as an “Event”, and for purposes of clauses (i) and (iv), the date on which such Event occurs, and for purpose of clause (ii) the date on which such five Trading Day period is exceeded, and for purpose of clause (iii) the date which such 10 calendar day period is exceeded, and for purpose of clause (v) the date on which such 10 or 15 calendar day period, as applicable, is exceeded being referred to as “Event Date”), then, in addition to any other rights the Holders may have hereunder or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of 2.0% multiplied by $500,000. The parties agree that the maximum aggregate liquidated damages payable to a Holder under this Agreement shall be the product of 18% times $500,000. For the purposes of this Section 2(d), the Subscription Amount shall be proportionately reduced in the even that Conversion Shares shall have been issued and sold. If the Company fails to pay any partial liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro rata basis for any portion of a month prior to the cure of an Event. For avoidance of doubt, if the SEC Staff reduces the number of Registrable Securities as contemplated in Section 2(c), no liquidated penalties pursuant to Section 2(d) shall be imposed.

 

(e) If Form S-3 is not available for the registration of the resale of Registrable Securities hereunder, the Company shall (i) register the resale of the Registrable Securities on another appropriate form and (ii) undertake to register the Registrable Securities on Form S-3 promptly after such form is available, provided that the Company shall maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC.

 

(f) Notwithstanding anything to the contrary contained herein, in no event shall the Company be permitted to name any Holder or affiliate of a Holder as any Underwriter without the prior written consent of such Holder.

 

 

 

 

 

3.

Registration Procedures.

 

In connection with the Company’s registration obligations hereunder, the Company shall:

 

(a) Not less than (x) five Trading Days prior to the filing of each Registration Statement and (y) one Trading Day prior to the filing of any Prospectus or any amendment or supplement to a Registration Statement or Prospectus (including any document that would be incorporated or deemed to be incorporated therein by reference) that adversely modifies the Plan of Distribution or adversely alters the disclosure relating to a Holder, the Company shall furnish to each such Holder, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders The Company shall not file a Registration Statement or any related Prospectus to which the Holders of a majority of the Registrable Securities held by shall reasonably object in good faith, provided that, the Company is notified of such objection in writing no later than three Trading Days after the Holders have been so furnished copies of a Registration Statement. Each Holder agrees to furnish to the Company a completed questionnaire in the form attached to this Agreement as Annex B (a “Selling Stockholder Questionnaire”) on a date that is not less than two (2) Trading Days prior to the Filing Date and to provide an updated questionnaire on such form not less than two Trading Days prior to the date on which the Company intends to file any post-effective amendment to such Registration Statement to update the information contained therein under Section 10(a)(3) of the Securities Act.

 

(b) (i) Prepare and file with the SEC such amendments, including post- effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the SEC such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities, (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and, as so supplemented or amended, to be filed pursuant to Rule 424, (iii) respond as promptly as reasonably possible to any comments received from the SEC with respect to a Registration Statement or any amendment thereto and provide to each Holder of Registrable Securities as promptly as reasonably possible true and complete copies of all correspondence from and to the SEC relating to a Registration Statement (provided that, the Company shall excise any information contained therein which would constitute material non-public information regarding the Company or any of its Subsidiaries), and (iv) comply in all material respects with the applicable provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by the Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented.

 

(c) If during the Effectiveness Period, the number of Registrable Securities at any time exceeds 100% of the number of shares of Common Stock then registered in a Registration Statement (other than as a result of sales of such Registrable Securities), then the Company shall file as soon as reasonably practicable, but in any case prior to the applicable Filing Date, an additional Registration Statement covering the resale by the Holders of not less than the number of such Registrable Securities.

 

 

 

 

 

 

 

(d) Notify each Holder of Registrable Securities included in a Registration Statement (which notice shall, pursuant to clauses (iii) through (vi) hereof, be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than one Trading Day prior to such filing) and confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed, (B) when the SEC notifies the Company whether there will be a “review” of such Registration Statement and whenever the SEC comments in writing on such Registration Statement, and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any other federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information, (iii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose, (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vi) of the occurrence or existence of any pending corporate development with respect to the Company that the Company believes is material and that, in the determination of the Company, makes it not in the best interest of the Company to allow continued availability of a Registration Statement or Prospectus; provided, however, that in no event shall any such notice contain any information which would constitute material, non-public information regarding the Company or any of its Subsidiaries. Anything to the contrary herein notwithstanding, notice of an event described in Sections 3(d)(iii) through (vi) must be given to all of the Holders of securities included in a Registration Statement within four Trading Hours, after the Company becomes aware of such event.

 

(e) Use its commercially reasonable efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order stopping or suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

 

(f) Make available on the SEC’s EDGAR system (or successor thereto) or otherwise furnish to each Holder, without charge, at least one conformed copy of each such Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference to the extent requested by such Person, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the SEC, provided that any such item which is available on the EDGAR system (or successor thereto) need not be furnished in physical form.

 

(g) Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto, except after the giving of any notice pursuant to Section 3(d).

 

(h) Prior to any resale of Registrable Securities by a Holder, use its commercially reasonable efforts, at the Company’s cost and expense, to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from the Registration or qualification) of such Registrable Securities for the resale by the Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any such Holder reasonably requests in writing, to keep each registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by each Registration Statement, provided that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction. Notwithstanding anything in this Agreement to the contrary, if the Company’s Common Stock is no longer a “covered security” within the meaning of the National Securities Markets Improvements Act of 1995, the Company shall not be required to file under the Blue Sky laws of any states that imposes a merit review standard of review of a Registration Statement. This sentence also applies to Section 4.

 

 

 

 

 

(i) Reserved.

 

(j) Upon the occurrence of any event contemplated by Section 3(d), as promptly as reasonably possible under the circumstances taking into account the Company’s good faith assessment of any adverse consequences to the Company and its stockholders of the premature disclosure of such event, prepare a supplement or amendment, including a post-effective amendment, to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither a Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with clauses (iii) through (vi) of Section 3(d) above to suspend the use of any Prospectus until the requisite changes to such Prospectus have been made, then the Holders shall suspend use of such Prospectus. The Company will use its commercially reasonable efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable. The Company shall be entitled to exercise its right under this Section 3(j) to suspend the availability of a Registration Statement and Prospectus, subject to the payment of liquidated damages otherwise required pursuant to Section 2(d), for a period not to exceed thirty (30) consecutive calendar days or more than an aggregate of sixty (60) calendar days (which need not be consecutive calendar days) in any 12-month period.

 

(k) Otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the SEC under the Securities Act and the Exchange Act, including, without limitation, Rule 172 under the Securities Act, file any final Prospectus, including any supplement or amendment thereof, with the SEC pursuant to Rule 424 under the Securities Act, promptly inform the Holders in writing if, at any time during the Effectiveness Period, the Company does not satisfy the conditions specified in Rule 172 and, as a result thereof, the Holders are required to deliver a Prospectus in connection with any disposition of Registrable Securities and take such other actions as may be reasonably necessary to facilitate the registration of the Registrable Securities hereunder.

 

(l) The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and, if required by the SEC, the natural persons thereof that have voting and dispositive control over the shares. During any periods that the Company is unable to meet its obligations hereunder with respect to the registration of the Registrable Securities solely because any Holder fails to furnish such information within three Trading Days of the Company’s request, any liquidated damages that are accruing at such time as to such Holder only shall be tolled and any Event that may otherwise occur solely because of such delay shall be suspended as to such Holder only, until such information is delivered to the Company.

 

4.Registration Expenses. All fees and expenses incident to the performance of or compliance with, this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses of the Company’s counsel and independent registered public accountants) (A) with respect to filings made with the SEC, (B) with respect to filings required to be made with any Trading Market on which the Common Stock is then listed for trading, and (C) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities, if applicable), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. In no event shall the Company be responsible for any broker or similar commissions of any Holder or, except to the extent provided for in the Transaction Documents, any legal fees or other costs of the Holders.

 

 

 

 

 

5.

Indemnification.

 

(a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, members, partners, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, members, stockholders, partners, agents and employees (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys’ fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to (1) any untrue or alleged untrue statement of a material fact contained in a Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading or (2) any violation or alleged violation by the Company of the Securities Act, the Exchange Act or any state securities law, or any rule or regulation thereunder, in connection with the performance of its obligations under this Agreement, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (ii) in the case of an occurrence of an event of the type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated, defective or otherwise unavailable Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated, defective or otherwise unavailable for use by such Holder and prior to the receipt by such Holder of the Advice contemplated in Section 6(c). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding arising from or in connection with the transactions contemplated by this Agreement of which the Company is aware. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such indemnified person and shall survive the transfer of any Registrable Securities by any of the Holders in accordance with Section 6(f).

 

(b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based solely upon: any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading (i) to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company expressly for inclusion in such Registration Statement or such Prospectus or (ii) to the extent, but only to the extent, that such information relates to such Holder’s information provided in the Selling Stockholder Questionnaire or the proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or in any amendment or supplement thereto. In no event shall the liability of a selling Holder be greater in amount than the dollar amount of the proceeds (net of all expenses paid by such Holder in connection with any claim relating to this Section 5 and the amount of any damages such Holder has otherwise been required to pay by reason of such untrue statement or omission) received by such Holder upon the sale of the Registrable Securities included in the Registration Statement giving rise to such indemnification obligation.

 

 

 

 

 

(c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof, provided that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have materially and adversely prejudiced the Indemnifying Party.

 

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses, (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding, or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and counsel to the Indemnified Party shall reasonably believe that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of no more than one separate counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

 

Subject to the terms of this Agreement, all reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party, provided that the Indemnified Party shall promptly reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) not to be entitled to indemnification hereunder.

 

(d) Contribution. If the indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless for any Losses, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

 

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. In no event shall the contribution obligation of a Holder of Registrable Securities be greater in amount than the dollar amount of the proceeds (net of all expenses paid by such Holder in connection with any claim relating to this Section 5 and the amount of any damages such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission) received by it upon the sale of the Registrable Securities giving rise to such contribution obligation.

 

The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

 

 

 

 

6.

Miscellaneous.

 

(a) Remedies. In the event of a breach by the Company or by a Holder of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, shall be entitled to specific performance of its rights under this Agreement. Each of the Company and each Holder agrees that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall not assert or shall waive the defense that a remedy at law would be adequate.

 

(b) No Piggyback on Registrations; Prohibition on Filing Other Registration Statement. Except as set forth on Schedule 6(b) attached hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in any Registration Statements other than the Registrable Securities. Except as set forth in the next sentence, the Company shall not file any other registration statements until all Registrable Securities are (i) registered pursuant to a Registration Statement that is declared effective by the SEC, or (ii) without regard to Beneficial Ownership Limitation restrictions, are eligible for resale pursuant to Rule 144 and the Company is in compliance with the informational requirements of Rule 144(c) to the extent applicable. This Section 6(b) shall not prohibit the Company from filing any (i) registration statement on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or any amendment or supplement thereto, (ii) any amendment or supplement to a registration statement filed by the Company prior to the date of this Agreement so long as no new securities are registered or the price of any registered securities is reduced on any such existing registration statement (appropriately adjusted for any stock split, reverse stock split, stock dividend or other reclassification or combination of the Common Stock occurring after the date hereof), (iii) the filing of a new registration statement on a different form for the purpose of re-registering securities covered by a registration statement filed by the Company prior to the date of this Agreement so long as no new securities are registered or the price of any registered securities is reduced on any such existing registration statement (other than as a result of customary antidilution adjustments), or (iv) filing a new registration statement for a primary offering of securities for the account of the Company only in an amount of at least $ 1.0 million.

 

(c) Discontinued Disposition. By its acquisition of Registrable Securities, each Holder agrees that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(d)(iii) through (vi), such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration Statement until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus (as it may have been supplemented or amended) may be resumed. The Company will use its commercially reasonable efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable. The Company agrees and acknowledges that any periods during which the Holder is required to discontinue the disposition of the Registrable Securities hereunder shall be subject to the provisions of Section 2(d).

 

(d) Piggy-Back Registrations. If, at any time during the Effectiveness Period, there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the SEC a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the Company’s stock option or other employee benefit plans, then, unless the Company is prohibited from including additional Registrable Securities as a result of any SEC action or SEC Guidance, the Company shall deliver to each Holder a written notice of such determination and, if within fifteen days after the date of the delivery of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered; provided, however, that the Company shall not be required to register any Registrable Securities pursuant to this Section 6(d) that are eligible for resale pursuant to Rule 144 (without volume restrictions or current public information requirements) promulgated by the SEC pursuant to the Securities Act or that are the subject of a then effective Registration Statement that is available for resales or other dispositions by such Holder.

 

 

 

 

(e) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of 50.1% of the Registrable Securities, and further provided that, if any amendment, modification or waiver disproportionately and adversely impacts a Holder (or group of Holders), the consent of such disproportionately impacted Holder (or group of Holders) shall be required. If a Registration Statement does not register all of the Registrable Securities pursuant to a waiver or amendment done in compliance with the previous sentence, then the number of Registrable Securities to be registered for each Holder shall be reduced pro rata among all Holders and each Holder shall have the right to designate which of its Registrable Securities shall be omitted from such Registration Statement. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of a Holder or some Holders and that does not directly or indirectly affect the rights of other Holders may be given only by such Holder or Holders of all of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the first sentence of this Section 6(e). No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of this Agreement unless the same consideration also is offered to all of the parties to this Agreement.

 

(f) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered as set forth in the Exchange Agreement.

 

(g) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign (except by merger) its rights or obligations hereunder without the prior written consent of all of the Holders of the then outstanding Registrable Securities. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under Section 7(k) of the Exchange Agreement.

 

(h) No Inconsistent Agreements. Neither the Company nor any of its Subsidiaries has entered, as of the date hereof, nor shall the Company or any of its Subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth on Schedule 6(h), neither the Company nor any of its Subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been satisfied in full.

 

(i) Execution and Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e- mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

 

(j) Governing Law; Exclusive Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Agreement and the jurisdiction and venue of all litigation shall be determined in accordance with the provisions of the Exchange Agreement.

 

(k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any other remedies provided by law.

 

 

 

 

 

 

(l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

 

(m) Headings. The headings in this Agreement are for convenience only, do not constitute a part of the Agreement and shall not be deemed to limit or affect any of the provisions hereof.

 

(n) Independent Nature of Holders’ Obligations and Rights. The obligations of each Holder hereunder are several and not joint with the obligations of any other Holder hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of group or entity, or create a presumption that the Holders are in any way acting in concert or as a group or entity with respect to such obligations or the transactions contemplated by this Agreement or any other matters, and the Company acknowledges that the Holders are not acting in concert or as a group, and the Company shall not assert any such claim, with respect to such obligations or transactions. Each Holder shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Holder to be joined as an additional party in any proceeding for such purpose. The use of a single agreement with respect to the obligations of the Company contained was solely in the control of the Company, not the action or decision of any Holder, and was done solely for the convenience of the Company and not because it was required or requested to do so by any Holder. It is expressly understood and agreed that each provision contained in this Agreement is between the Company and a Holder, solely, and not between the Company and the Holders collectively and not between and among Holders.

 

********************

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Signature Pages Follow)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.

 

	UNUSUAL MACHINES, Inc.
	By:_/s/ Brian Hoff________________ Name: Brian Hoff Title: Chief Financial Officer

 

 

 

[SIGNATURE PAGE OF HOLDERS FOLLOWS]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[SIGNATURE PAGE OF HOLDERS TO UNUSUAL MACHINES, INC. RRA]

 

 

Name of Holder:     Eleven Ventures LLC                     

 

Signature of Authorized Signatory of Holder: /s/ Hartley Wasko               

 

Name of Authorized Signatory:     Hartley Wasko                            

 

Title of Authorized Signatory:     Manager                                 

 

 

 

[SIGNATURE PAGES CONTINUE]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

 

 

 

We hereby consent to the use of our report dated August 9, 2024, on the financial statements of Unusual Machines, Inc. for the years ended December 31, 2023 and 2022, included herein on the registration statement of Unusual Machines, Inc. on Form S-1, and to the reference to our firm under the heading “Experts” in the prospectus.

 

 

 

/s/ Salberg & Company, P.A.

 

 

SALBERG & COMPANY, P.A.

Boca Raton, Florida

September 11, 2024

 

 

Exhibit 107

 

Calculation of Filing Fee

 

Form S-1

(Form Type)

 

Unusual Machines, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Table 1: Newly Registered and Carry Forward Securities

Security Type

Security Class Title

Fee Calculation or Carry Forward Rule

Amount Registered

Proposed Maximum Offering Price Per Share

Maximum Aggregate Offering Price (2)(3)

Fee Rate

Amount of Registration Fee

Carry Forward Form Type

Carry Forward File Number

Carry Forward Initial effective date

Filing Fee Previously Paid In Connection with Unsold Securities to be Carried Forward

Newly Registered Securities

Fees to Be Paid

Equity

Common Stock, par value $0.01 per share

457(c)

7,080,038 (1)

$147.60 per $1,000,000

$1,754.58

Carry Forward Securities

Total Offering Amounts

$1,754.58

Total Fees Previously Paid

-

Total Fee Offsets

-

Net Fee Due

$1,754.58

__________________

 

(1)	Consists of (i) 630,000 shares of common stock issuable upon the full conversion of the Company’s Series C Convertible Preferred Stock; (ii) 630,000 shares of common stock issuable upon the exercise of common stock purchase warrants; (iii) 1,507,538 shares of common stock issuable upon the full conversion of two 4% Convertible Promissory Notes; (iv) 4,250,000 shares of common stock issuable upon the full conversion of the Company’s Series A Convertible Preferred Stock; and (v) 62,500 shares of common stock issuable upon the exercise of the warrant issued in connection with the consummation of our initial public offering (the “IPO”) to our underwriter for the IPO, Dominari Securities, LLC.
(2)	Pursuant to Rule 457(c) under the Securities Act of 1933, and solely for the propose of calculating the registration fee, the proposed maximum offering price per share of common stock is estimated to be $1.679, which is the average of the high and low sale prices of the shares of common stock as of September 10, 2024, as reported on NYSE American.
(3)	In the event of a stock split, stock dividend, or similar transaction involving our common stock, the number of shares registered shall automatically be increased to cover the additional shares of common stock issuable pursuant to Rule 416 under the Securities Act of 1933.

 

v3.24.2.u1

Cover	6 Months Ended
	Jun. 30, 2024
Cover [Abstract]
Document Type	S-1
Amendment Flag	false
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2024
Entity Registrant Name	Unusual Machines, Inc.
Entity Central Index Key	0001956955
Entity Tax Identification Number	66-0927642
Entity Incorporation, State or Country Code	NV
Entity Address, Address Line One	4677 L B McLeod Rd
Entity Address, Address Line Two	Suite J
Entity Address, City or Town	Orlando
Entity Address, State or Province	FL
Entity Address, Postal Zip Code	32811
City Area Code	(855)
Local Phone Number	921-4600
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Elected Not To Use the Extended Transition Period	false

v3.24.2.u1

Consolidated Condensed Balance Sheets - USD ($)	Jun. 30, 2024	Dec. 31, 2023
Current assets:
Cash and cash equivalents	$ 2,222,445	$ 894,773
Inventory	1,638,038	0
Prepaid inventory	1,074,403	0
Other current assets	182,077	120,631
Total current assets	5,116,963	1,015,404
Non-current assets:
Property and equipment, net	912	1,254
Deferred offering costs	0	512,758
Operating lease right-of-use assets	356,965	0
Goodwill and intangible assets	19,666,087	0
Other non-current assets	59,426	0
Total non-current assets	20,083,390	514,012
Total assets	25,200,353	1,529,416
Current liabilities
Accounts payable and accrued expenses	786,598	114,497
Operating lease liabilities	62,482	0
Deferred revenue	82,120	0
Total current liabilities	931,200	114,497
Long-term liabilities
Promissory note	4,000,000	0
Operating lease liabilities – long term	297,332	0
Total liabilities	5,228,532	114,497
Commitments and contingencies (See note 12)
Stockholders’ equity:
Series B preferred stock - $0.01 par value, 10,000,000 authorized and 50 and 190 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively	1	2
Common stock - $0.01 par value, 500,000,000 authorized and 10,411,240 and 3,217,255 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively	104,113	32,173
Additional paid in capital	26,518,993	5,315,790
Accumulated deficit	(6,651,286)	(3,933,046)
Total stockholders’ equity	19,971,821	1,414,919
Total liabilities and stockholders’ equity	$ 25,200,353	$ 1,529,416

v3.24.2.u1

Consolidated Condensed Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2024	Dec. 31, 2023
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	500,000,000	500,000,000
Common stock, shares issued	10,411,240	3,217,255
Common stock, shares outstanding	10,411,240	3,217,255
Series B Preferred Stock [Member]
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares Issued	50	190
Preferred stock, shares outstanding	50	190

v3.24.2.u1

Consolidated Condensed Statement of Operations (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2024	Jun. 30, 2023	Jun. 30, 2024	Jun. 30, 2023
Income Statement [Abstract]
Revenues	$ 1,411,124	$ 0	$ 2,030,039	$ 0
Cost of goods sold	1,022,684	0	1,437,432	0
Gross Margin	388,440	0	592,607	0
Operating Expenses
Operations	213,772	0	326,094	0
Research and development	10,282	0	27,078	0
Sales and marketing	386,332	0	543,390	0
General and administrative	1,349,587	434,917	2,353,761	1,612,439
Depreciation and amortization	171	381	342	763
Total operating expenses	1,960,144	435,298	3,250,664	1,613,202
Operating loss	(1,571,704)	(435,298)	(2,658,057)	(1,613,202)
Other Expense
Interest expense	40,534	0	60,183	0
Other Expense	40,534	0	60,183	0
Net loss	$ (1,612,238)	$ (435,298)	$ (2,718,240)	$ (1,613,202)
Net loss per share attributable to common stockholders
Basic	$ (0.16)	$ (0.13)	$ (0.34)	$ (0.47)
Diluted	$ (0.16)	$ (0.13)	$ (0.34)	$ (0.47)
Weighted average common shares outstanding
Basic	10,040,741	3,384,837	8,053,299	3,398,470
Diluted	10,040,741	3,384,837	8,053,299	3,398,470

v3.24.2.u1

Consolidated Condensed Statement of Changes in Stockholders' Equity (Unaudited) - USD ($)	Series B, Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Beginning balance, value at Dec. 31, 2022	$ 1	$ 33,923	$ 4,714,041	$ (1,549,584)	$ 3,198,381
Beginning balance, shares at Dec. 31, 2022	140	3,392,250
Issuance of common shares for services		$ 750	599,250		600,000
Issuance of common shares for services, shares		75,005
Net loss				(1,177,904)	(1,177,904)
Ending balance, value at Mar. 31, 2023	$ 1	$ 34,673	5,313,291	(2,727,488)	2,620,477
Ending balance, shares at Mar. 31, 2023	140	3,467,255
Beginning balance, value at Dec. 31, 2022	$ 1	$ 33,923	4,714,041	(1,549,584)	3,198,381
Beginning balance, shares at Dec. 31, 2022	140	3,392,250
Net loss					(1,613,202)
Ending balance, value at Jun. 30, 2023	$ 2	$ 32,173	5,315,790	(3,162,786)	2,185,179
Ending balance, shares at Jun. 30, 2023	190	3,217,255
Beginning balance, value at Mar. 31, 2023	$ 1	$ 34,673	5,313,291	(2,727,488)	2,620,477
Beginning balance, shares at Mar. 31, 2023	140	3,467,255
Conversion of preferred shares	$ 1	$ (2,500)	2,499
Conversion of preferred shares, shares	50	(250,000)
Net loss				(435,298)	(435,298)
Ending balance, value at Jun. 30, 2023	$ 2	$ 32,173	5,315,790	(3,162,786)	2,185,179
Ending balance, shares at Jun. 30, 2023	190	3,217,255
Beginning balance, value at Dec. 31, 2023	$ 2	$ 32,173	5,315,790	(3,933,046)	1,414,919
Beginning balance, shares at Dec. 31, 2023	190	3,217,255
Issuance of common shares as settlement		$ 161	64,183		64,344
Issuance of common shares as settlement, shares		16,086
Issuance of common shares, initial public offering, net of offering costs		$ 12,500	3,837,055		3,849,555
Issuance of common shares, initial public offering, net of offering costs, shares		1,250,000
Issuance of common shares, business combination		$ 42,500	16,957,500		17,000,000
Issuance of common shares, business combination, shares		4,250,000
Conversion of preferred shares	$ (1)	$ 6,000	(5,999)
Conversion of preferred shares, shares	(120)	600,000
Net loss				(1,106,002)	(1,106,002)
Ending balance, value at Mar. 31, 2024	$ 1	$ 93,334	26,168,529	(5,039,048)	21,222,816
Ending balance, shares at Mar. 31, 2024	70	9,333,341
Beginning balance, value at Dec. 31, 2023	$ 2	$ 32,173	5,315,790	(3,933,046)	1,414,919
Beginning balance, shares at Dec. 31, 2023	190	3,217,255
Net loss					(2,718,240)
Ending balance, value at Jun. 30, 2024	$ 1	$ 104,113	26,518,993	(6,651,286)	19,971,821
Ending balance, shares at Jun. 30, 2024	50	10,411,240
Beginning balance, value at Mar. 31, 2024	$ 1	$ 93,334	26,168,529	(5,039,048)	21,222,816
Beginning balance, shares at Mar. 31, 2024	70	9,333,341
Conversion of preferred shares		$ 1,000	(1,000)
Conversion of preferred shares, shares	(20)	100,000
Issuance of common shares, equity incentive plan		$ 9,779	(9,779)
Net loss				(1,612,238)	(1,612,238)
Stock compensation expense - vested stock			346,854		346,854
Issuance of common shares, equity incentive plan, shares		977,899
Stock option compensation expense			14,389		14,389
Ending balance, value at Jun. 30, 2024	$ 1	$ 104,113	$ 26,518,993	$ (6,651,286)	$ 19,971,821
Ending balance, shares at Jun. 30, 2024	50	10,411,240

v3.24.2.u1

Consolidated Condensed Statement of Cash Flows (Unaudited) - USD ($)	6 Months Ended
	Jun. 30, 2024	Jun. 30, 2023
Cash flows from operating activities:
Net loss	$ (2,718,240)	$ (1,613,202)
Depreciation and amortization	342	763
Stock compensation expense as settlement	64,344	600,000
Stock compensation expense	361,243
Change in assets and liabilities:
Accounts receivable	6,798	0
Inventory	152,566	0
Prepaid inventory	(253,424)	0
Other assets	(129,089)	22,500
Accounts payable and accrued expenses	384,556	(32,922)
Operating lease liabilities	(18,615)	0
Customer deposits and other current liabilities	(32,321)	0
Net cash used in operating activities	(2,181,840)	(1,022,861)
Cash flows from investing activities
Cash portion of consideration paid for acquisition of businesses, net of cash received	(852,801)	0
Net cash used in investing activities	(852,801)	0
Cash flows from financing activities:
Proceeds from issuance of common shares	5,000,000	0
Common share issuance offering costs	(637,687)	(223,579)
Net cash provided by (used in) financing activities	4,362,313	(223,579)
Net increase (decrease) in cash	1,327,672	(1,246,440)
Cash, beginning of period	894,773	3,099,422
Cash, end of period	2,222,445	1,852,982
Supplemental disclosures of cash flow information:
Non-cash consideration paid for assets acquired and liabilities assumed	19,000,000	0
Deferred acquisition costs	100,000	0
Deferred offering costs recorded as reduction of proceeds	$ 512,758	$ 0

v3.24.2.u1

Pay vs Performance Disclosure - USD ($)	3 Months Ended				6 Months Ended
	Jun. 30, 2024	Mar. 31, 2024	Jun. 30, 2023	Mar. 31, 2023	Jun. 30, 2024	Jun. 30, 2023
Pay vs Performance Disclosure [Table]
Net Income (Loss)	$ (1,612,238)	$ (1,106,002)	$ (435,298)	$ (1,177,904)	$ (2,718,240)	$ (1,613,202)

v3.24.2.u1

Organization and nature of business	6 Months Ended
	Jun. 30, 2024
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Organization and nature of business	Note 1 – Organization and nature of business   Unusual Machines, Inc. (“the Company”) is a Nevada corporation engaged in the commercial drone industry. The Company reincorporated from Puerto Rico to Nevada on April 22, 2024.   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 (“IPO Price”). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (“Red Cat”) (See Note 3).

v3.24.2.u1

Summary of significant accounting policies	6 Months Ended
	Jun. 30, 2024
Accounting Policies [Abstract]
Summary of significant accounting policies	Note 2 – Summary of significant accounting policies   Principles of Consolidation   The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024. Intercompany transactions and balances have been eliminated upon consolidation.   Unaudited interim financial information   The consolidated condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, for the year ended December 31, 2023. The results for any interim period are not necessarily indicative of results for any future period.   Use of Estimates   The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.   The financial statements include some amounts that are based on management’s best estimates and judgments. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, inventory and sales, (iv) the evaluation of long-term assets, including goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, and (vi) the warranty liability.   Cash and Cash Equivalents   The Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less, when purchased, to be cash equivalents. The Company maintains cash deposits in multiple commercial banks and financial services companies. These financial institutions are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. At June 30, 2024 and December 31, 2023, the Company had approximately $1.7 million and $0.6 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests.   Accounts Receivable, net   The Company carries its accounts receivable at invoiced amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC 326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At June 30, 2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established.   Inventory   Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence.   Deferred offering costs   The Company deferred direct incremental costs associated with its IPO. The Company capitalized $127,687 and $70,268 during the six months ended June 30, 2024 and 2023 prior to the IPO, respectively and the deferred offering costs were $512,758 as of December 31, 2023. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation and preparation of the IPO. After consummation of the IPO, total deferred offering costs of $640,445 were recorded as a reduction to additional paid-in capital generated as a result of the offering.   Property and equipment, net   Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from two to five years.   Leases   The Company has adopted Accounting Standards Codification (ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. As of February 16, 2024, the date of the acquisition, the Company recognized a lease liability obligation of $378,430 and a right-of-use asset for the same amount related to the lease in Orlando, FL.   The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company’s leases do not provide an implicit rate. Therefore, the Company used an effective discount rate of 11.49% based on its last debt financings. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.   Goodwill and Long-lived Assets   Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.   The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management’s assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.   The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.   Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures   The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.    The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.   The guidance establishes three levels of the fair value hierarchy as follows:   Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.   Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis   The Company’s financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.   Warranty Liability   Fat Shark products are warranted against defects in materials and workmanship for a period of two years from the date of shipment. If a defect arises during the warranty period, Fat Shark will either (i) repair the affected product at no charge using new parts or parts that are equivalent to new in performance and reliability; (ii) exchange the affected product with a functionally equivalent product; or (iii) refund the original purchase price for the affected product. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product warranty claim rates and expected costs to repair or to replace the products under warranty. The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior 24 months’ sales activities. If actual return rates and/or repair and replacement costs differ significantly from the Company’s estimates, adjustments to recognize additional cost of sales may be required in future periods. Historically the warranty accrual and the expense amounts have been immaterial. The warranty liability is included in accrued expenses on the accompanying consolidated balance sheets and amounted $66,025 as of June 30, 2024, which was acquired as a part of the acquisitions in February 2024.   Rotor Riot does not provide any warranty of any kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor Riot.   Revenue Recognition   The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:   Step 1: Identify the contract with a customer; Step 2: Identify the performance obligations in the contract; Step 3: Determine the transaction price; Step 4: Allocate the transaction price to the performance obligations in the contract; and Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.   The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met.   Deferred Revenue   Deferred revenue relates to (i) orders placed, but not yet fulfilled and (ii) customer tickets purchased related to the Company’s Rampage event, in which tickets are sold in advance and recognized when the event takes place. All deferred revenue is expected to be recognized within one year. Deferred revenue related to orders placed, but not yet fulfilled totaled $82,120 and $0 as of June 30, 2024 and December 31, 2023, respectively.   Cost of Goods Sold   Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any.   Shipping and Handling Costs   Shipping and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted to $74,634 since February 16, 2024, the date of the acquisition, through June 30, 2024. The Company did not incur and shipping and handling costs in the six months ended June 30, 2023. Shipping and handling costs charged to customers are included in sales.   Research and Development   Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs, materials, and a proportionate share of overhead costs.    Income Taxes   The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.   The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.   The Company’s current provision for the six months ending June 30, 2024 and 2023 consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. Since the Company has not generated an operating profit since inception, there are no deferred tax assets other than a net operating loss carryforward offset by a valuation allowance as of June 30, 2024 and December 31, 2023.   Stock-Based Compensation   Stock options are valued using the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. The Company recognizes forfeitures as they occur. The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the date of grant. Compensation cost is recognized on a straight-line basis over the service period which is typically the vesting term.   Warrants   The Company accounts for warrants to purchase shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.   For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants classified as liabilities are recognized as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss.   Net Loss per Share   Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.   Segment Reporting   Since the acquisitions of Fat Shark and Rotor Riot, the Company operates with one reportable segment. The Company bases its reportable segment based on how our Chief Operating Decision Maker manages the business, makes resource allocations and operating decisions, and evaluates operating performance.   Recent Accounting Pronouncements   In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment’s profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption.   In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.

v3.24.2.u1

Acquisitions	6 Months Ended
	Jun. 30, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]
Acquisitions	Note 3 – Acquisitions   Fat Shark and Rotor Riot   On February 16, 2024, the Company closed on the acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the “Business Combination”) (See Note 11 – Related Party Transactions for additional information). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties.   The Company specializes in the production and sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a strong curated retail channel in the FPV drone market segment. This Business Combination is a realization of the Company’s strategy to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for customers that require a domestic supply chain.   The Business Combination was based on a share purchase agreement (the “Purchase Agreement”) that was executed on November 21, 2022. From November 21, 2022 to February 16, 2024, the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments. Under the terms of the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $1.0 million in cash and a cash deposit of $0.1 million made in 2022, (ii) issuance of a $4.0 million 18 month promissory note to Red Cat (see Note 8 “Debt” for further details), and (iii) the issuance of 4,250,000 shares of the Company’s common stock, which represented approximately 48.66% of the outstanding common stock of the Company on February 16, 2024, after the effect of the issued shares (collectively the “Consideration Paid”). The Company has currently valued the Red Cat common stock at $4.00 per share which represents the IPO price of the Company’s common stock on February 15, 2024. Accordingly, the value of the Consideration Paid is equal to $22,100,000. See Note 14, Subsequent Events, related to the working capital adjustment.   The acquisitions met the definition of a business combination under ASC 805, Business Combinations, and therefore the assets acquired and liabilities assumed are accounted for at fair value. The Company has not completed its evaluation of the fair value of assets acquired and liabilities assumed of Fat Shark and Rotor Riot for the purpose of its 2024 fiscal year financial reporting and as such has not fully determined the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period.   The following represents the fair value allocation of Fat Shark and Rotor Riot Purchase Price: Schedule of fair value allocation        Cash   $ 147,200   Accounts receivable (approximates contractual value)     6,798   Inventories (on hand and prepaid)     2,611,583   Other current assets     10,892   Right of use asset - operating     378,430   Other long-term assets     59,426   Goodwill and intangible assets (unallocated purchase price)     19,666,086             Total assets     22,880,415             Accounts payable and accrued liabilities     287,544   Customer deposits     114,441   Operating lease liability – current and long-term     378,430   Total liabilities     780,415             Total purchase price   $ 22,100,000     Initial goodwill and intangible assets relate to Fat Shark and Rotor Riot being FPV market leaders and their well-known and established brands within the industry. Combining these entities and their existing customer base along with Unusual Machines’ strategy of extending to B2B sales of drone components will provide strategic advantage. The Company will evaluate the amount of goodwill and intangibles that are expected to be deductible for tax purposes once the unallocated purchase price is finalized.   The results of Fat Shark and Rotor Riot have been included in the Consolidated Financial Statements from the date of acquisition. The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and Rotor Riot at the beginning of each period are as follows. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share data):  Schedule of unaudited pro forma results                                     For the Six Months Ended     For the Six Months Ended       June 30, 2024     June 30, 2023       As Reported     Proforma (unaudited)     As Reported     Proforma (unaudited)   Revenue   $ 2,030     $ 2,525     $ –     $ 2,663   Gross profit/(loss)     593       624       –       362   Loss from operations     (2,658 )     (3,347 )     (1,613 )     (3,876 ) Other expense     60       39       –       36   Net loss   $ (2,718 )   $ (3,386 )   $ (1,613 )   $ (3,912 ) Net earnings per share:                                 Basic   $ (0.34 )   $ (0.34 )   $ (0.47 )   $ (0.44 )   This unaudited consolidated pro forma financial information is presented for informational purposes only. The unaudited consolidated pro forma adjustments are based on preliminary estimates, information available and certain assumptions, and may be revised as additional information becomes available. In addition, the unaudited pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.   The unaudited pro forma financial information from the beginning of the periods presented until the acquisition date includes adjustments to: 1) eliminate intercompany revenue and associated cost of sales for sales of product from Fat Shark to Rotor Riot, 2) to adjust fair value for certain Fat Shark inventory as if the acquisition had occurred as of the beginning of the respective periods and 3) to include acquisition related expenses in the Q1 ’23 that were incurred in Q1 ’24.

v3.24.2.u1

Inventories	6 Months Ended
	Jun. 30, 2024
Inventory Disclosure [Abstract]
Inventories	Note 4 – Inventories   Inventories, consisting solely of finished goods, totaled $1,638,038 and $0 as of June 30, 2024 and December 31, 2023, respectively. In addition, the Company had prepaid and deposits for inventory totaling $1,074,403 and $0 as of June 30, 2024 and December 31, 2023, respectively.

v3.24.2.u1

Other Current Assets	6 Months Ended
	Jun. 30, 2024
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]
Other Current Assets	Note 5 – Other Current Assets   Other current assets included as of:: Schedule of other current assets                 June 30, 2024     December 31, 2023   Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions   $ –     $ 100,000   Prepaid insurance     157,500       20,631   Other receivables     10,000       –   Other prepaid expenses     14,577       –   Total other current assets   $ 182,077     $ 120,631

v3.24.2.u1

Property and Equipment, net	6 Months Ended
	Jun. 30, 2024
Property, Plant and Equipment [Abstract]
Property and Equipment, net	Note 6 – Property and Equipment, net   Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically assessed for impairment. Property and equipment as of: Schedule of property and equipment                 June 30, 2024     December 31, 2023   Computer equipment   $ 7,738     $ 7,738   Accumulated depreciation     (6,826 )     (6,484 ) Total property and equipment, net   $ 912     $ 1,254     Depreciation expense totaled $342 and $762 for the six months ended June 30, 2024 and 2023, respectively.

v3.24.2.u1

Operating Leases	6 Months Ended
	Jun. 30, 2024
Operating Leases
Operating Leases	Note 7 – Operating Leases   As identified in Note 3 “Acquisitions”, the acquired businesses, specifically Rotor Riot, has entered into a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. The Company has valued the ROUA and the associated liability, as of February 15, 2024, at $378,430. The Company has no finance leases. Operating lease expense totaled $39,429 from the date of acquisition through the period ended June 30, 2024. The following is a summary of future lease payments required under the five-year lease agreement: Schedule of future lease payments                   Year   Future Lease Payments     Operating Lease Discount     Operating Lease Liability   2024   $ 48,944     $ (19,122 )   $ 29,822   2025     101,133       (33,313 )     67,820   2026     105,178       (25,468 )     79,710   2027     109,037       (15,985 )     93,052   2028     94,185       (4,776 )     89,409   Total   $ 458,477     $ (98,664 )   $ 359,813     Schedule of supplemental information       Supplemental Information       Weighted average remaining lease term (in years)     4.33   Weighted average discount rate     11.49%

v3.24.2.u1

Promissory Note	6 Months Ended
	Jun. 30, 2024
Debt Disclosure [Abstract]
Promissory Note	Note 8 – Promissory Note   In conjunction with the acquisition of Fat Shark and Rotor Riot, as discussed in Note 3, the Company issued a promissory note (“Note”) with Red Cat Holdings, Inc. (“Red Cat”) for $2.0 million. In July 2024, the Company finalized its working capital adjustment with Red Cat which increased the overall purchase price by an additional $2.0 million. The additional $2.0 million was added to the existing Note and was reflected as an adjustment to the opening purchase price and was included in the opening balance sheet as of February 16, 2024 as an increase to goodwill and intangible assets. Accordingly, the Note was amended to increase to $4.0 million. In conjunction with a private sale of Red Cat’s common stock and its promissory note to two investors, the Company issued new notes to such investors (the “New Notes”). The New Notes bear interest at 8% annually. In conjunction with the finalization of the working capital adjustment, the maturity date of the New Notes was extended to be due in full on November 30, 2025, subject to certain conditions. In the Event of Default as defined in the Promissory Note, the investors each have the right to convert the New Notes including any accrued and unpaid interest, in whole or in part, into common stock. The conversion price is calculated at a 10% discount of the average three-day volume-weighted average price (VWAP) prior to the conversion date. The balance of the Note payable was $4.0 million as of June 30, 2024. Interest expense for the six months ended June 30, 2024 was $60,183 and the Company had accrued interest of $6,677 as of June 30, 2024. See Note 14, Subsequent Events for additional information.

v3.24.2.u1

Earnings Per Share and Stockholders’ Equity	6 Months Ended
	Jun. 30, 2024
Earnings Per Share And Stockholders Equity
Earnings Per Share and Stockholders’ Equity	Note 9 – Earnings Per Share and Stockholders’ Equity   Earnings per Share    Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include 250,000 and 950,000 shares of Series B Preferred Stock, as converted as of June 30, 2024 and 2023, respectively, the 310,000 of stock options issued to employees as of June 30, 2024, the 62,500 of common stock representative warrants issued to the underwriter associated with the February 2024 IPO and 3,418,803 shares of common stock, as converted, associated with the Note discussed in Note 8 “Debt”.   Preferred Stock   The preferred stock par value is $0.01. The Series B preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company.   Subsequent to the IPO but prior to June 30, 2024, certain shareholders converted 140 shares of Series B preferred shares into 700,000 shares of common stock. The Company canceled the 140 shares of Series B preferred shares upon the conversion.   On June 1, 2023, the Company issued an additional 50 Series B preferred shares in connection with the cancellation of 250,000 shares of common stock.   Series B preferred shares outstanding at June 30, 2024 totaled 50 which are convertible into 250,000 shares of common stock. Series B preferred shares outstanding at December 31, 2023 totaled 190 which are convertible into 950,000 shares of common stock.   See Note 14, Subsequent Events, for more information regarding the Company’s Series A Convertible Preferred Stock.   Common Stock   The common stock par value is $0.01.   2024 Transactions   On January 2, 2024, the Company issued 16,086 shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of $64,344, which is $4 per share, the last valuation of the Company’s private placement and the value of the IPO in February 2024.   On February 16, 2024 the Company completed its IPO and issued 1,250,000 shares of common stock at the IPO Price for total net proceeds of $3,849,555. The Company incurred $510,000 direct deduction from proceeds, $127,687 in cash disbursements related to offering costs in the six months ended June 30, 2024 and $512,758 in prior year paid and deferred offering costs as of December 31, 2023 for a total of $1,150,445 offering costs, associated with the IPO which consisted of underwriter, legal, accounting, and other associated filing fees. These costs have been recorded as a reduction of the gross proceeds from the IPO in stockholder’s equity. The Company also incurred additional costs related to warrants to purchase 62,500 shares of common stock issued to the underwriters as partial compensation for services rendered in connection with the IPO, which is preliminarily valued at $250,000 as of the date of the IPO using the IPO Price of $4 per share. The Company is planning to value the warrants using a Black-Scholes valuation model but has not completed this workflow. Any change to the fair value of the warrants would have no change to the Company’s financial statements since the value of the warrants would only impact the “offering costs” and thus entry would be to adjust “Additional Paid-In Capital – Common Stock” and “Additional Paid-In Capital – Warrants”. The warrants are exercisable for common stock at a price of $5.00 per share (125% of the IPO Price) at any time beginning on August 15, 2024 through and including February 16, 2029, the expiration date.   Simultaneously with its IPO and as a part of the Purchase Agreement as discussed in Note 3, the Company issued Red Cat 4,250,000 shares of common stock as consideration of the business combination. As agreed in the Purchase Agreement, $17.0 million of the purchase price would be issued in common stock based on the IPO price of $4.00 per share.   Subsequent to the IPO and prior to June 30, 2024, the Company issued 700,000 shares of common stock related to certain shareholders converting 140 of Series B shares into common stock.   On April 30, 2024, the Company issued 937,249 restricted shares of common stock to executive officers and board members of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through February 14, 2025.   On May 2, 2024, the Company issued an additional 40,650 of restricted shares of common stock to Allan Evans, the Company’s CEO related to an agreed upon reduction of salary. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan.   The April 30, 2024 and May 2, 2024 shares were valued at $1.20 and $1.23 per share, respectively for a total of $1,174,698 to be recognized pro-rata over the vesting period which is the forfeiture period. Stock compensation expense of $346,854 was recognized during the three months ended June 30, 2024.   See Note 14, Subsequent Events, for additional information.   2023 Transactions   On March 7, 2023, the Company issued 75,000 shares of common stock to an investment banking firm (“Revere”) as a fee for the termination of the January 2023 engagement with Revere. These shares were allocated by Revere to some of the Company’s existing shareholders. The Company recorded $600,000 of stock compensation expense related to the issuance of the shares valued at $8.00 per share, which was based on the most recent private sale of common stock for the Company.   On July 10, 2023, the Company’s Board of Directors approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock. In accordance with Staff Accounting Bulletin Topic 4.C, the Company has given retroactive effect to reverse stock split. In addition and in accordance with FASB ASC 260, Earnings Per Share, the Company has retroactively adjusted the computations of basic and diluted share calculations.

v3.24.2.u1

Share Based Awards	6 Months Ended
	Jun. 30, 2024
Equity [Abstract]
Share Based Awards	Note 10 – Share Based Awards   Stock Options   The Company’s 2022 Equity Incentive Plan (the “Plan”) allows the Company to incentivize key employees and directors with long term compensation awards such as stock options, restricted stock, and other similar types of awards. The Plan is authorized to issue 1,461,876 of awards and has an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of directors.   On April 30, 2024, the Company’s board of directors approved the grant of 310,000 stock options under the Plan to certain employees. The stock options are subject to certain vesting provisions.   The following table presents the activity for stock options outstanding: Schedule of stock option activity                                    Weighted     Weighted Average             Non-Qualified     Average     Remaining     Aggregate       Options     Exercise Price     Contractual Term     Intrinsic Value   Outstanding - December 31, 2023     –     $ –       –       –   Granted     310,000       1.20       9.83     $ 31,000   Forfeited/canceled     –       –       –       –   Exercised     –       –       –       –   Outstanding – June 30, 2024     310,000     $ 1.20       9.83     $ 31,000     The range of assumptions used to calculate the fair value of options granted during the six months ended June 30, 2024 was:  Schedule of stock options assumptions         Exercise Price   $ 1.20   Stock Price on date of grant   $ 1.20   Risk-free interest rate     4.71%   Dividend yield     –   Expected term (years)     6.11   Volatility     129.45%     The Company recognized $14,389 in stock-based compensation expense related to stock options during the six months ended June 30, 2024. As of June 30, 2024, there was $325,371 of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term through 2028.   Restricted Stock   The following table presents the activity for stock options outstanding: Schedule of restricted stock activity                                           Restricted     Awards     Awards       Stock     Vested     Unvested   Outstanding - December 31, 2023     –       –       –   Granted     977,899       291,737       686,162   Forfeited/canceled     –       –       –   Exercised     –       –       –   Outstanding – June 30, 2024     977,899       291,737       686,162     The Company recognized $346,854 in stock-based compensation expense related to restricted stock during the six months ended June 30, 2024. As of June 30, 2024, there was $827,844 of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized over the remaining vesting term through February 15, 2025.   Warrants   The following table presents the activity for warrants outstanding as of June 30, 2024: Schedule of warrant activity                        Weighted       Warrants     Average       Outstanding     Exercise Price   Outstanding - December 31, 2023     –     $ –                     Granted     62,500       5.00   Forfeited/cancelled/restored     –       –   Exercised     –       –   Outstanding – June 30, 2024     62,500     $ 5.00     As discussed in Note 9, “Earnings Per Share and Stockholders’ Equity”, in connection with the IPO, the Company issued 62,500 representative warrants to its underwriters to purchase shares of common stock. The representative warrants have an exercise price of $5.00 or can be exercised through a cashless exercise feature. All warrants outstanding have a weighted average remaining contractual life of approximately 4.63 years as of June 30, 2024.

v3.24.2.u1

Related Party Transactions	6 Months Ended
	Jun. 30, 2024
Related Party Transactions [Abstract]
Related Party Transactions	Note 11 – Related Party Transactions   In November 2022, the Company 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 and also the current Chief Executive Officer of Red Cat, 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 from February 16, 2024, 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. Our prior Chief Executive Officer, Mr. Brandon 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 February 2024, the Company completed the acquisitions to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO.   On April 30, 2024 (“Grant Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services as the Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant agreed to cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations activities; (iii) to report to the Company’s board of directors; (iv) to perform services for such subsidiaries of the Company as may be necessary.   The Consultant receives a $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restricted common stock. The fair value of the shares was $585,600 based on the $1.20 quoted trading price on the Grant Date and will be recognized over the service period (see below). The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan. The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that Dr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code. The Company and Dr. Evans previously entered into an Offer Letter dated November 27, 2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023. The Agreement terminates and replaces the Offer Letter dated November 27, 2023.

v3.24.2.u1

Commitments and Contingencies	6 Months Ended
	Jun. 30, 2024
Commitments and Contingencies Disclosure [Abstract]
Commitments and Contingencies	Note 12 – Commitments and Contingencies   As part of the business combination that occurred on February 14, 2024, the Company acquired a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. See Note 7 – Operating Leases for additional information.

v3.24.2.u1

Restatement of Previously Issued Financial Statements	6 Months Ended
	Jun. 30, 2024
Accounting Changes and Error Corrections [Abstract]
Restatement of Previously Issued Financial Statements	Note 13 – Restatement of Previously Issued Financial Statements   On April 16, 2024, the Company changed their independent PCAOB-registered accounting firm and terminated its engagement with their prior auditor. On May 3, 2024, the Securities and Exchange Commission (“SEC”) issued an order that instituted a cease-and-desist against the Company’s previous auditor, which required the Company to obtain new auditors and re-audit its financial statements for the years ended December 31, 2023 and 2022.   The Company engaged a new, an independent and registered accounting firm, to re-audit the Company’s previously issued financial statements. During the Company’s re-audits, it was noted that certain transactions were not recorded in the correct period, stock compensation expense of $600,000 related to the March 7, 2023 common stock issuance was not recorded and deferred offering costs were classified as an operating activity rather than a financing activity. Expenses totaling $10,993 were originally recorded in 2023 but related to 2022 expenses.   With this restatement, the transactions previously recorded in the incorrect period have been updated to the correct period, classifications on the statements of cash flow have been corrected and the stock compensation previously not recorded has been properly recorded.   The following presents reconciliations of the impacted financial statement line items as filed to the restated amounts as of June 30, 2023 and for the periods then ended. The previously reported amounts reflect those included in the registration statements the Company filed with the Securities and Exchange Commission on September 19, 2023. These amounts are labeled “As Filed” in the tables below. The amounts labeled “Restatement Adjustments” represent the effects of these restatements due to the timing differences and stock compensation expense.    Schedule of restatement adjustments in financial statements                   Statement of Operations for the Six Months Ended June 30, 2023                       As Filed     Restatement Adjustments     As Restated                       Revenue   $ –     $ –     $ –                             Cost of goods sold     –       –       –                             Gross profit     –       –       –                             Operating expenses:                         Research and development     –       –       –   General and administrative     1,023,433       589,007       1,612,440   Depreciation and amortization     762       –       762   Total operating expenses     1,024,195       589,007       1,613,202                             Loss from operations     (1,024,195 )     (589,007 )     (1,613,202 )                           Other income:                         Interest income     –       –       –   Total other income     –       –       –                             Net loss before income tax     (1,024,195 )     (589,007 )     (1,613,202 )                           Income tax benefit (expense)     –       –       –                             Net loss   $ (1,024,195 )   $ (589,007 )   $ (1,613,202 )                           Net loss per share attributable to common stockholders                         Basic and diluted   $ (0.30 )   $ (0.17 )   $ (0.47 )                           Weighted average common shares outstanding                         Basic and diluted     3,398,470       –       3,398,470     Statements of Changes in Stockholders’ Equity – As Filed – For the Six Months Ended June 30, 2023                                                       Series B, Preferred Stock     Common Stock     Additional Paid-In     Stocks to be     Accumulated             Shares     Value     Shares     Value     Capital     Issued     Deficit     Total   Balance, December 31, 2022     140     $ 1       3,392,250     $ 33,923     $ 4,714,041     $ –     $ (1,538,591 )   $ 3,209,374                                                                     Issuance of common shares     –       –       75,005       750       (750 )     –       –       –   Conversion to preferred shares     50       1       (250,000 )     (2,500 )     2,499       –       –       –   Net loss     –       –       –       –       –       –       (1,024,195 )     (1,024,195 )                                                                   Balance, June 30, 2023     190     $ 2       3,217,255     $ 32,173     $ 4,716,540     $ –     $ (2,562,786 )   $ 2,185,929     Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Six Months Ended June 30, 2023                                                       Series B, Preferred Stock     Common Stock     Additional Paid-In     Stocks to be     Accumulated             Shares     Value     Shares     Value     Capital     Issued     Deficit     Total   Balance, December 31, 2022     –     $ –       –     $ –     $ –     $ –     $ (10,993 )   $ (10,993 )                                                                   Issuance of common shares     –       –       –       –       600,000       –       –       600,000   Conversion to preferred shares     –       –       –       –       –       –       –       –   Net loss     –       –       –       –       –       –       (589,007 )     (589,007 )                                                                   Balance, June 30, 2023     –     $ –       –     $ –     $ 600,000     $ –     $ (600,000 )   $ –     Statements of Changes in Stockholders’ Equity – As Restated – For the Six Months Ended June 30, 2023                                                       Series B, Preferred Stock     Common Stock     Additional Paid-In     Stocks to be     Accumulated             Shares     Value     Shares     Value     Capital     Issued     Deficit     Total   Balance, December 31, 2022     140     $ 1       3,392,250     $ 33,923     $ 4,714,041     $ –     $ (1,549,584 )   $ 3,198,381                                                                     Issuance of common shares     –       –       75,005       750       599,250       –       –       600,000   Conversion to preferred shares     50       1       (250,000 )     (2,500 )     2,499       –       –       –   Net loss     –       –       –       –       –       –       (1,613,202 )     (1,613,202 )                                                                   Balance, June 30, 2023     190     $ 2       3,217,255     $ 32,173     $ 5,315,790     $ –     $ (3,162,786 )   $ 2,185,179     Statement of Cash Flows for the Six Months Ended June 30, 2023                         As Filed     Restatement Adjustments     As Restated                       Cash flows from operating activities:                         Net loss   $ (1,024,195 )   $ (589,007 )   $ (1,613,202 ) Depreciation     763       –       763   Stock compensation expense     –       600,000       600,000   Change in assets and liabilities:                         Accounts receivable     –       –       –   Deferred offering costs     (223,579 )     223,579       –   Other current assets     22,500       –       22,500   Accounts payable and accrued expenses     (21,929 )     (10,993 )     (32,922 ) Net cash used in operating activities     (1,246,440 )     223,579       (1,022,861 )                           Cash flows from investing activities                         Purchases of property and equipment     –       –       –   Net cash used in investing activities     –       –       –                             Cash flows from financing activities:                         Deferred offering costs     –       (223,579 )     (223,579 ) Net cash provided by financing activities     –       (223,579 )     (223,579 )                           Net increase (decrease) in cash     (1,246,440 )     –       (1,246,440 )                           Cash, beginning of period     3,099,422       –       3,099,422                             Cash, end of period   $ 1,852,982     $ –     $ 1,852,982                             Supplemental disclosures of cash flow information:                         Cash paid for interest   $ –     $ –     $ –   Cash paid for income tax   $ –     $ –     $ –

v3.24.2.u1

Subsequent Events	6 Months Ended
	Jun. 30, 2024
Subsequent Events [Abstract]
Subsequent Events	Note 14 – Subsequent Events   Amendments to Articles of Incorporation   On July 17, 2024, following approval by the Board of Directors, the Company filed a Certificate of Designations, Preferences, and Rights of the Series A Convertible Preferred Stock (the "COD”) with the Nevada Secretary of State. The COD designated 4,250 shares of Series A Convertible Preferred Stock (the “Series A”). The Series A ranks senior to both the Company’s common stock and any other series of preferred stock with respect to the preferences as to dividends, distributions, and payments, upon the liquidation, dissolution, and winding up of the Company. Each share of Series A may be converted into 1,000 shares of the Company’s common stock.   The Series A preferred shares have a conversion beneficial ownership limitation of 4.99%, or 9.99% upon election of the holder upon at least 61 days written notice to the Company. The Series A preferred shares have no voting rights, except as required by law and as expressly provided in the COD.   Working Capital Adjustment Agreement   On July 22, 2024, the Company and Red Cat finalized the working capital adjustment related to the acquisitions of Fat Shark and Rotor Riot pursuant to the Purchase Agreement. The Purchase Agreement provided that the purchase price was to be increased on a dollar-for-dollar basis by the amount by which the working capital exceeded the agreed working capital (the "Working Capital Adjustment”). After negotiations between the parties, it was determined that the Company owed Red Cat $2.0 million as a Working Capital Adjustment.   The original Note payable for $2.0 million was reissued to Red Cat with (i) an increased aggregate principal amount of $4,000,000 to give effect to the working capital adjustments discussed above, and (ii) extend the maturity date of the new Note to November 30, 2025.   Red Cat Holdings, Inc.’s Sale of Securities   On July 22, 2024, the Company’s principal shareholder, Red Cat sold all of its securities in the Company to two unaffiliated third-party investors (the "Investors”). As part of the transaction, Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s common stock, par value $0.01 per share for 4,250 shares of the Company’s newly designated Series A Convertible Preferred Stock (the "Series A”).   Red Cat then sold the Series A and the New Note Payable, to the Investors on July 22, 2024.   Quarterly Grants to our Board of Directors   On July 30, 2024, the Company issued non-employee directors listed in the table below the equity portion of their quarterly compensation. Each of the directors received a vested restricted stock grant for services as a director (and where applicable, committee member) during the quarter ended June 30, 2024. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan and was subject to each director executing the Company’s standard Restricted Stock Agreement, which occurred on July 29, 2024. The fair value per share was based on the quoted trading price as of the close of the market as of July 17, 2024.   Director Fair Value Per Share Amount of Restricted Common Stock Aggregate Fair Value Cristina Colon $1.79 6,052 $10,833 Sanford Rich $1.79 6,052 $10,833 Robert Lowry $1.79 6,052 $10,833 Jeffrey Thompson $1.79 5,587 $10,000

v3.24.2.u1

Summary of significant accounting policies (Policies)	6 Months Ended
	Jun. 30, 2024
Accounting Policies [Abstract]
Principles of Consolidation	Principles of Consolidation   The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024. Intercompany transactions and balances have been eliminated upon consolidation.
Unaudited interim financial information	Unaudited interim financial information   The consolidated condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, for the year ended December 31, 2023. The results for any interim period are not necessarily indicative of results for any future period.
Use of Estimates	Use of Estimates   The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.   The financial statements include some amounts that are based on management’s best estimates and judgments. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, inventory and sales, (iv) the evaluation of long-term assets, including goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, and (vi) the warranty liability.
Cash and Cash Equivalents	Cash and Cash Equivalents   The Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less, when purchased, to be cash equivalents. The Company maintains cash deposits in multiple commercial banks and financial services companies. These financial institutions are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. At June 30, 2024 and December 31, 2023, the Company had approximately $1.7 million and $0.6 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests.
Accounts Receivable, net	Accounts Receivable, net   The Company carries its accounts receivable at invoiced amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC 326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At June 30, 2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established.
Inventory	Inventory   Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence.
Deferred offering costs	Deferred offering costs   The Company deferred direct incremental costs associated with its IPO. The Company capitalized $127,687 and $70,268 during the six months ended June 30, 2024 and 2023 prior to the IPO, respectively and the deferred offering costs were $512,758 as of December 31, 2023. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation and preparation of the IPO. After consummation of the IPO, total deferred offering costs of $640,445 were recorded as a reduction to additional paid-in capital generated as a result of the offering.
Property and equipment, net	Property and equipment, net   Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from two to five years.
Leases	Leases   The Company has adopted Accounting Standards Codification (ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. As of February 16, 2024, the date of the acquisition, the Company recognized a lease liability obligation of $378,430 and a right-of-use asset for the same amount related to the lease in Orlando, FL.   The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company’s leases do not provide an implicit rate. Therefore, the Company used an effective discount rate of 11.49% based on its last debt financings. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.
Goodwill and Long-lived Assets	Goodwill and Long-lived Assets   Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.   The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management’s assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.   The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures	Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures   The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.    The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.   The guidance establishes three levels of the fair value hierarchy as follows:   Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.   Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis   The Company’s financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
Warranty Liability	Warranty Liability   Fat Shark products are warranted against defects in materials and workmanship for a period of two years from the date of shipment. If a defect arises during the warranty period, Fat Shark will either (i) repair the affected product at no charge using new parts or parts that are equivalent to new in performance and reliability; (ii) exchange the affected product with a functionally equivalent product; or (iii) refund the original purchase price for the affected product. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product warranty claim rates and expected costs to repair or to replace the products under warranty. The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior 24 months’ sales activities. If actual return rates and/or repair and replacement costs differ significantly from the Company’s estimates, adjustments to recognize additional cost of sales may be required in future periods. Historically the warranty accrual and the expense amounts have been immaterial. The warranty liability is included in accrued expenses on the accompanying consolidated balance sheets and amounted $66,025 as of June 30, 2024, which was acquired as a part of the acquisitions in February 2024.   Rotor Riot does not provide any warranty of any kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor Riot.
Revenue Recognition	Revenue Recognition   The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:   Step 1: Identify the contract with a customer; Step 2: Identify the performance obligations in the contract; Step 3: Determine the transaction price; Step 4: Allocate the transaction price to the performance obligations in the contract; and Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.   The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met.
Deferred Revenue	Deferred Revenue   Deferred revenue relates to (i) orders placed, but not yet fulfilled and (ii) customer tickets purchased related to the Company’s Rampage event, in which tickets are sold in advance and recognized when the event takes place. All deferred revenue is expected to be recognized within one year. Deferred revenue related to orders placed, but not yet fulfilled totaled $82,120 and $0 as of June 30, 2024 and December 31, 2023, respectively.
Cost of Goods Sold	Cost of Goods Sold   Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any.
Shipping and Handling Costs	Shipping and Handling Costs   Shipping and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted to $74,634 since February 16, 2024, the date of the acquisition, through June 30, 2024. The Company did not incur and shipping and handling costs in the six months ended June 30, 2023. Shipping and handling costs charged to customers are included in sales.
Research and Development	Research and Development   Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs, materials, and a proportionate share of overhead costs.
Income Taxes	Income Taxes   The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.   The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.   The Company’s current provision for the six months ending June 30, 2024 and 2023 consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. Since the Company has not generated an operating profit since inception, there are no deferred tax assets other than a net operating loss carryforward offset by a valuation allowance as of June 30, 2024 and December 31, 2023.
Stock-Based Compensation	Stock-Based Compensation   Stock options are valued using the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. The Company recognizes forfeitures as they occur. The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the date of grant. Compensation cost is recognized on a straight-line basis over the service period which is typically the vesting term.
Warrants	Warrants   The Company accounts for warrants to purchase shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.   For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants classified as liabilities are recognized as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss.
Net Loss per Share	Net Loss per Share   Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.
Segment Reporting	Segment Reporting   Since the acquisitions of Fat Shark and Rotor Riot, the Company operates with one reportable segment. The Company bases its reportable segment based on how our Chief Operating Decision Maker manages the business, makes resource allocations and operating decisions, and evaluates operating performance.
Recent Accounting Pronouncements	Recent Accounting Pronouncements   In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment’s profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption.   In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.

v3.24.2.u1

Acquisitions (Tables) - Fat Shark And Rotor Riot [Member]	6 Months Ended
	Jun. 30, 2024
Business Acquisition [Line Items]
Schedule of fair value allocation	Schedule of fair value allocation        Cash   $ 147,200   Accounts receivable (approximates contractual value)     6,798   Inventories (on hand and prepaid)     2,611,583   Other current assets     10,892   Right of use asset - operating     378,430   Other long-term assets     59,426   Goodwill and intangible assets (unallocated purchase price)     19,666,086             Total assets     22,880,415             Accounts payable and accrued liabilities     287,544   Customer deposits     114,441   Operating lease liability – current and long-term     378,430   Total liabilities     780,415             Total purchase price   $ 22,100,000
Schedule of unaudited pro forma results	Schedule of unaudited pro forma results                                     For the Six Months Ended     For the Six Months Ended       June 30, 2024     June 30, 2023       As Reported     Proforma (unaudited)     As Reported     Proforma (unaudited)   Revenue   $ 2,030     $ 2,525     $ –     $ 2,663   Gross profit/(loss)     593       624       –       362   Loss from operations     (2,658 )     (3,347 )     (1,613 )     (3,876 ) Other expense     60       39       –       36   Net loss   $ (2,718 )   $ (3,386 )   $ (1,613 )   $ (3,912 ) Net earnings per share:                                 Basic   $ (0.34 )   $ (0.34 )   $ (0.47 )   $ (0.44 )

v3.24.2.u1

Other Current Assets (Tables)	6 Months Ended
	Jun. 30, 2024
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]
Schedule of other current assets	Schedule of other current assets                 June 30, 2024     December 31, 2023   Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions   $ –     $ 100,000   Prepaid insurance     157,500       20,631   Other receivables     10,000       –   Other prepaid expenses     14,577       –   Total other current assets   $ 182,077     $ 120,631

v3.24.2.u1

Property and Equipment, net (Tables)	6 Months Ended
	Jun. 30, 2024
Property, Plant and Equipment [Abstract]
Schedule of property and equipment	Schedule of property and equipment                 June 30, 2024     December 31, 2023   Computer equipment   $ 7,738     $ 7,738   Accumulated depreciation     (6,826 )     (6,484 ) Total property and equipment, net   $ 912     $ 1,254

v3.24.2.u1

Operating Leases (Tables)	6 Months Ended
	Jun. 30, 2024
Operating Leases
Schedule of future lease payments	Schedule of future lease payments                   Year   Future Lease Payments     Operating Lease Discount     Operating Lease Liability   2024   $ 48,944     $ (19,122 )   $ 29,822   2025     101,133       (33,313 )     67,820   2026     105,178       (25,468 )     79,710   2027     109,037       (15,985 )     93,052   2028     94,185       (4,776 )     89,409   Total   $ 458,477     $ (98,664 )   $ 359,813
Schedule of supplemental information	Schedule of supplemental information       Supplemental Information       Weighted average remaining lease term (in years)     4.33   Weighted average discount rate     11.49%

v3.24.2.u1

Share Based Awards (Tables)	6 Months Ended
	Jun. 30, 2024
Equity [Abstract]
Schedule of stock option activity	Schedule of stock option activity                                    Weighted     Weighted Average             Non-Qualified     Average     Remaining     Aggregate       Options     Exercise Price     Contractual Term     Intrinsic Value   Outstanding - December 31, 2023     –     $ –       –       –   Granted     310,000       1.20       9.83     $ 31,000   Forfeited/canceled     –       –       –       –   Exercised     –       –       –       –   Outstanding – June 30, 2024     310,000     $ 1.20       9.83     $ 31,000
Schedule of stock options assumptions	Schedule of stock options assumptions         Exercise Price   $ 1.20   Stock Price on date of grant   $ 1.20   Risk-free interest rate     4.71%   Dividend yield     –   Expected term (years)     6.11   Volatility     129.45%
Schedule of restricted stock activity	Schedule of restricted stock activity                                           Restricted     Awards     Awards       Stock     Vested     Unvested   Outstanding - December 31, 2023     –       –       –   Granted     977,899       291,737       686,162   Forfeited/canceled     –       –       –   Exercised     –       –       –   Outstanding – June 30, 2024     977,899       291,737       686,162
Schedule of warrant activity	Schedule of warrant activity                        Weighted       Warrants     Average       Outstanding     Exercise Price   Outstanding - December 31, 2023     –     $ –                     Granted     62,500       5.00   Forfeited/cancelled/restored     –       –   Exercised     –       –   Outstanding – June 30, 2024     62,500     $ 5.00

v3.24.2.u1

Restatement of Previously Issued Financial Statements (Tables)	6 Months Ended
	Jun. 30, 2024
Accounting Changes and Error Corrections [Abstract]
Schedule of restatement adjustments in financial statements	Schedule of restatement adjustments in financial statements                   Statement of Operations for the Six Months Ended June 30, 2023                       As Filed     Restatement Adjustments     As Restated                       Revenue   $ –     $ –     $ –                             Cost of goods sold     –       –       –                             Gross profit     –       –       –                             Operating expenses:                         Research and development     –       –       –   General and administrative     1,023,433       589,007       1,612,440   Depreciation and amortization     762       –       762   Total operating expenses     1,024,195       589,007       1,613,202                             Loss from operations     (1,024,195 )     (589,007 )     (1,613,202 )                           Other income:                         Interest income     –       –       –   Total other income     –       –       –                             Net loss before income tax     (1,024,195 )     (589,007 )     (1,613,202 )                           Income tax benefit (expense)     –       –       –                             Net loss   $ (1,024,195 )   $ (589,007 )   $ (1,613,202 )                           Net loss per share attributable to common stockholders                         Basic and diluted   $ (0.30 )   $ (0.17 )   $ (0.47 )                           Weighted average common shares outstanding                         Basic and diluted     3,398,470       –       3,398,470     Statements of Changes in Stockholders’ Equity – As Filed – For the Six Months Ended June 30, 2023                                                       Series B, Preferred Stock     Common Stock     Additional Paid-In     Stocks to be     Accumulated             Shares     Value     Shares     Value     Capital     Issued     Deficit     Total   Balance, December 31, 2022     140     $ 1       3,392,250     $ 33,923     $ 4,714,041     $ –     $ (1,538,591 )   $ 3,209,374                                                                     Issuance of common shares     –       –       75,005       750       (750 )     –       –       –   Conversion to preferred shares     50       1       (250,000 )     (2,500 )     2,499       –       –       –   Net loss     –       –       –       –       –       –       (1,024,195 )     (1,024,195 )                                                                   Balance, June 30, 2023     190     $ 2       3,217,255     $ 32,173     $ 4,716,540     $ –     $ (2,562,786 )   $ 2,185,929     Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Six Months Ended June 30, 2023                                                       Series B, Preferred Stock     Common Stock     Additional Paid-In     Stocks to be     Accumulated             Shares     Value     Shares     Value     Capital     Issued     Deficit     Total   Balance, December 31, 2022     –     $ –       –     $ –     $ –     $ –     $ (10,993 )   $ (10,993 )                                                                   Issuance of common shares     –       –       –       –       600,000       –       –       600,000   Conversion to preferred shares     –       –       –       –       –       –       –       –   Net loss     –       –       –       –       –       –       (589,007 )     (589,007 )                                                                   Balance, June 30, 2023     –     $ –       –     $ –     $ 600,000     $ –     $ (600,000 )   $ –     Statements of Changes in Stockholders’ Equity – As Restated – For the Six Months Ended June 30, 2023                                                       Series B, Preferred Stock     Common Stock     Additional Paid-In     Stocks to be     Accumulated             Shares     Value     Shares     Value     Capital     Issued     Deficit     Total   Balance, December 31, 2022     140     $ 1       3,392,250     $ 33,923     $ 4,714,041     $ –     $ (1,549,584 )   $ 3,198,381                                                                     Issuance of common shares     –       –       75,005       750       599,250       –       –       600,000   Conversion to preferred shares     50       1       (250,000 )     (2,500 )     2,499       –       –       –   Net loss     –       –       –       –       –       –       (1,613,202 )     (1,613,202 )                                                                   Balance, June 30, 2023     190     $ 2       3,217,255     $ 32,173     $ 5,315,790     $ –     $ (3,162,786 )   $ 2,185,179     Statement of Cash Flows for the Six Months Ended June 30, 2023                         As Filed     Restatement Adjustments     As Restated                       Cash flows from operating activities:                         Net loss   $ (1,024,195 )   $ (589,007 )   $ (1,613,202 ) Depreciation     763       –       763   Stock compensation expense     –       600,000       600,000   Change in assets and liabilities:                         Accounts receivable     –       –       –   Deferred offering costs     (223,579 )     223,579       –   Other current assets     22,500       –       22,500   Accounts payable and accrued expenses     (21,929 )     (10,993 )     (32,922 ) Net cash used in operating activities     (1,246,440 )     223,579       (1,022,861 )                           Cash flows from investing activities                         Purchases of property and equipment     –       –       –   Net cash used in investing activities     –       –       –                             Cash flows from financing activities:                         Deferred offering costs     –       (223,579 )     (223,579 ) Net cash provided by financing activities     –       (223,579 )     (223,579 )                           Net increase (decrease) in cash     (1,246,440 )     –       (1,246,440 )                           Cash, beginning of period     3,099,422       –       3,099,422                             Cash, end of period   $ 1,852,982     $ –     $ 1,852,982                             Supplemental disclosures of cash flow information:                         Cash paid for interest   $ –     $ –     $ –   Cash paid for income tax   $ –     $ –     $ –

v3.24.2.u1

Organization and nature of business (Details Narrative) - IPO [Member]	Feb. 16, 2024 $ / shares shares
Subsidiary, Sale of Stock [Line Items]
Stock issued new, shares | shares	1,250,000
Public offering price | $ / shares	$ 4.00

v3.24.2.u1

Summary of significant accounting policies (Details Narrative) - USD ($)	6 Months Ended
	Jun. 30, 2024	Jun. 30, 2023	Feb. 16, 2024	Dec. 31, 2023
Federal deposit insurance corporation	$ 250,000
Cash uninsured amount	1,700,000			$ 600,000
Allowance for doubtful accounts	0			0
Deferred offering costs	$ 0			512,758
Estimated useful lives	two to five years
Lease liability	$ 359,813
Right-of-use asset	$ 356,965			0
Effective discount rate	11.49%
Accrued expenses	$ 66,025
Deferred revenue	82,120			0
Deferred tax assets	0			0
General and Administrative Expense [Member]
Shipping and handling costs	74,634	$ 0
Orlando, FL [Member] | Rotor Riot [Member]
Lease liability			$ 378,430
Right-of-use asset			$ 378,430
IPO [Member]
Amortization of deferred offering costs	127,687	$ 70,268
Deferred offering costs				$ 1,150,445
Adjustment to APIC for deferred offering costs	$ 640,445

v3.24.2.u1

Acquisitions (Details - Fair value allocation) - Fat Shark And Rotor Riot [Member]	Feb. 16, 2024 USD ($)
Business Acquisition [Line Items]
Cash	$ 147,200
Accounts receivable (approximates contractual value)	6,798
Inventories (on hand and prepaid)	2,611,583
Other current assets	10,892
Right of use asset - operating	378,430
Other long-term assets	59,426
Goodwill and intangible assets (unallocated purchase price)	19,666,086
Total assets	22,880,415
Accounts payable and accrued liabilities	287,544
Customer deposits	114,441
Operating lease liability – current and long-term	378,430
Total liabilities	780,415
Total purchase price	$ 22,100,000

v3.24.2.u1

Acquisitions (Details - Pro Forma Info) - Fat Shark And Rotor Riot [Member] - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended
	Jun. 30, 2024	Jun. 30, 2023
Business Acquisition [Line Items]
Revenue	$ 2,030	$ 0
Gross profit/(loss)	593	0
Loss from operations	(2,658)	(1,613)
Other expense	60	0
Net loss	$ (2,718)	$ (1,613)
Net earnings per share:
Basic	$ (0.34)	$ (0.47)
Pro Forma [Member]
Business Acquisition [Line Items]
Revenue	$ 2,525	$ 2,663
Gross profit/(loss)	624	362
Loss from operations	(3,347)	(3,876)
Other expense	39	36
Net loss	$ (3,386)	$ (3,912)
Net earnings per share:
Basic	$ (0.34)	$ (0.44)

v3.24.2.u1

Acquisitions (Details Narrative)	Feb. 16, 2024 USD ($) $ / shares shares
IPO [Member]
Business Acquisition [Line Items]
Share price of Red Cat | $ / shares	$ 4.00
Fat Shark And Rotor Riot [Member]
Business Acquisition [Line Items]
Payments to acquire business	$ 1,000,000
Cash deposit	100,000
Issuance of promissory note	$ 4,000,000
Issuance of common stock under acquisition | shares	4,250,000
Consideration paid	$ 22,100,000

v3.24.2.u1

Inventories (Details Narrative) - USD ($)	Jun. 30, 2024	Dec. 31, 2023
Inventory Disclosure [Abstract]
Inventory	$ 1,638,038	$ 0
Prepaid and deposits for inventory	$ 1,074,403	$ 0

v3.24.2.u1

Other Current Assets (Details) - USD ($)	Jun. 30, 2024	Dec. 31, 2023
Restructuring Cost and Reserve [Line Items]
Prepaid insurance	$ 157,500	$ 20,631
Other receivables	10,000	0
Other prepaid expenses	14,577	0
Total other current assets	182,077	120,631
Fat Shark And Rotor Riot [Member]
Restructuring Cost and Reserve [Line Items]
Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions	$ 0	$ 100,000

v3.24.2.u1

Property and Equipment, net (Details) - USD ($)	Jun. 30, 2024	Dec. 31, 2023
Property, Plant and Equipment [Abstract]
Computer equipment	$ 7,738	$ 7,738
Accumulated depreciation	(6,826)	(6,484)
Total property and equipment, net	$ 912	$ 1,254

v3.24.2.u1

Property and Equipment, net (Details Narrative) - USD ($)	6 Months Ended
	Jun. 30, 2024	Jun. 30, 2023
Property, Plant and Equipment [Abstract]
Depreciation expense	$ 342	$ 762

v3.24.2.u1

Operating Leases (Details - Lease maturity)	Jun. 30, 2024 USD ($)
Lessee, Lease, Description [Line Items]
Operating Lease Discount	$ (98,664)
Operating Lease Liability	359,813
Future Lease Payments	458,477
Year 2024 [Member]
Lessee, Lease, Description [Line Items]
Future Lease Payments, 2024	48,944
Operating Lease Discount	(19,122)
Operating Lease Liability	29,822
Year 2025 [Member]
Lessee, Lease, Description [Line Items]
Operating Lease Discount	(33,313)
Operating Lease Liability	67,820
Future Lease Payments, 2025	101,133
Year 2026 [Member]
Lessee, Lease, Description [Line Items]
Operating Lease Discount	(25,468)
Operating Lease Liability	79,710
Future Lease Payments, 2026	105,178
Year 2027 [Member]
Lessee, Lease, Description [Line Items]
Operating Lease Discount	(15,985)
Operating Lease Liability	93,052
Future Lease Payments, 2027	109,037
Year 2028 [Member]
Lessee, Lease, Description [Line Items]
Operating Lease Discount	(4,776)
Operating Lease Liability	89,409
Future Lease Payments, 2028	$ 94,185

v3.24.2.u1

Operating Leases (Details - Lease supplemental information)	Jun. 30, 2024
Operating Leases
Weighted average remaining lease term (in years)	4 years 3 months 29 days
Weighted average discount rate	11.49%

v3.24.2.u1

Operating Leases (Details Narrative) - USD ($)	4 Months Ended	6 Months Ended
	Jun. 30, 2024	Jun. 30, 2024	Feb. 16, 2024	Dec. 31, 2023
Operating lease right-of-use asset	$ 356,965	$ 356,965		$ 0
Orlando, FL [Member] | Rotor Riot [Member]
Operating lease right-of-use asset			$ 378,430
Operating lease expense	$ 39,429
Rotor Riot Lease [Member]
Lease description		As identified in Note 3 “Acquisitions”, the acquired businesses, specifically Rotor Riot, has entered into a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028.

v3.24.2.u1

Promissory Note (Details Narrative) - USD ($)	1 Months Ended	6 Months Ended
	Jul. 31, 2024	Jun. 30, 2024	Dec. 31, 2023
Short-Term Debt [Line Items]
Note payable		$ 4,000,000	$ 0
Interest expense		60,183
Accrued interest		6,677
Red Cat Holdings, Inc [Member] | Promissory Note [Member]
Short-Term Debt [Line Items]
Note payable		4,000,000
Red Cat Holdings, Inc [Member] | Subsequent Event [Member]
Short-Term Debt [Line Items]
Additional purchase price	$ 2,000,000
Red Cat Holdings, Inc [Member] | Subsequent Event [Member] | Promissory Note [Member]
Short-Term Debt [Line Items]
Increase in debt	$ 2,000,000
Interest rate	8.00%
Fat Shark And Rotor Riot [Member]
Short-Term Debt [Line Items]
Issuance of convertible promissory note		$ 2,000,000

v3.24.2.u1

Earnings Per Share and Stockholders’ Equity (Details Narrative) - USD ($)							3 Months Ended	4 Months Ended	6 Months Ended
	May 02, 2024	Apr. 30, 2024	Feb. 16, 2024	Jan. 03, 2024	Jul. 10, 2023	Mar. 07, 2023	Mar. 31, 2024	Jun. 30, 2024	Jun. 30, 2024	Jun. 30, 2023	Dec. 31, 2023
Common stock, par value								$ 0.01	$ 0.01		$ 0.01
Stock compensation expense related to issuance of shares							$ 3,849,555
Deferred offering costs								$ 0	$ 0		$ 512,758
Warrants exercise price								$ 5.00	$ 5.00		$ 0
Stock Issued During Period, Value, Acquisitions							$ 17,000,000
Stock expense									$ 346,854
Executive Officers And Board Members [Member]
Issuance of restricted shares		937,249
Share price		$ 1.20
Issuance of restricted shares, value		$ 1,174,698
Chief Executive Officer [Member]
Issuance of restricted shares	40,650
Share price	$ 1.23
Issuance of restricted shares, value	$ 1,174,698
Board Of Directors [Member]
Reverse stock spli					1-for-2 reverse stock split
Preferred Series B Converted [Member]
Stock Issued During Period, Shares, Conversion of Convertible Securities								700,000
Red Cat Holdings, Inc [Member]
Stock Issued During Period, Shares, Acquisitions			4,250,000
Stock Issued During Period, Value, Acquisitions			$ 17,000,000
IPO [Member]
Issuance of common stock			1,250,000
Stock compensation expense related to issuance of shares			$ 3,849,555
Deferred offering costs											$ 1,150,445
Share price			$ 4.00
IPO [Member] | Direct Deduction From Proceeds [Member]
Deferred offering costs								$ 510,000	510,000
IPO [Member] | Cash Disbursements [Member]
Deferred offering costs								$ 127,687	$ 127,687
IPO [Member] | Paid Prior Year [Member]
Deferred offering costs											$ 512,758
January 2023 Engagement [Member]
Issuance of common stock						75,000
Stock compensation expense related to issuance of shares						$ 600,000
Share price						$ 8.00
Prior Chief Executive Officer [Member]
Stock issued for compensation, shares				16,086
Stock issued for compensation, value				$ 64,344
Underwriters [Member] | IPO [Member]
Warrants issued, shares			62,500
Warrants issued, value			$ 250,000
Warrants exercise price			$ 5.00
Series B Preferred Stock [Member]
Anti-dilutive shares									250,000	950,000
Preferred stock, par value								$ 0.01	$ 0.01		$ 0.01
Stock converted, shares converted								140
Stock cancelled, shares								140
Preferred stock, shares outstanding								50	50		190
Preferred stock convertible into common stock								250,000	250,000		950,000
Share-Based Payment Arrangement, Option [Member]
Anti-dilutive shares									310,000
Common Stock Warrants [Member]
Anti-dilutive shares									62,500
Promissory Note Common Stock [Member]
Anti-dilutive shares									3,418,803
Common Stock [Member]
Stock converted, shares issued								700,000

v3.24.2.u1

Share Based Awards (Details - Stock options activity) - Equity Option [Member]	6 Months Ended
	Jun. 30, 2024 USD ($) $ / shares shares
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Non-Qualified Options outstanding | shares	0
Options outstanding, weighted average exercise price | $ / shares	$ 0
Aggregate Intrinsic Value Granted Outstanding At Beginning | $	$ 0
Non-Qualified Options granted | shares	310,000
Options granted, weighted average exercise price | $ / shares	$ 1.20
Options outstanding, weighted average remaining contractual term	9 years 9 months 29 days
Options granted, aggregatge intrinsic value | $	$ 31,000
Non-Qualified Options forfeited/canceled | shares	0
Options forfeited/cancelled, weighted average exercise price | $ / shares	$ 0
Non-Qualified Options exercised | shares	0
Options exercised, weighted average exercise price | $ / shares	$ 0
Non-Qualified Options outstanding | shares	310,000
Options outstanding, weighted average exercise price | $ / shares	$ 1.20
Options outstanding, weighted average remaining contractual term	9 years 9 months 29 days
Options outstanding, aggregatge intrinsic value | $	$ 31,000

v3.24.2.u1

Share Based Awards (Details - Stock options assumptions) - Equity Option [Member]	6 Months Ended
	Jun. 30, 2024 $ / shares
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Exercise Price	$ 1.20
Stock Price on date of grant	$ 1.20
Risk-free interest rate	4.71%
Dividend yield	0.00%
Expected term (years)	6 years 1 month 9 days
Volatility	129.45%

v3.24.2.u1

Share Based Awards (Details - Restricted stock)	6 Months Ended
	Jun. 30, 2024 shares
Restricted Stock [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Non-Qualified Options outstanding	0
Restricted stock granted, unvested	977,899
Restricted stock forfeited/cancelled	0
Restricted stock exercised	0
Non-Qualified Options outstanding	977,899
Awards Vested [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Non-Qualified Options outstanding
Restricted stock granted, unvested	291,737
Non-Qualified Options outstanding	291,737
Awards Unvested [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Non-Qualified Options outstanding
Restricted stock granted, unvested	686,162
Non-Qualified Options outstanding	686,162

v3.24.2.u1

Share Based Awards (Details - Warrant activity)	6 Months Ended
	Jun. 30, 2024 $ / shares shares
Equity [Abstract]
Warrants outstanding | shares	0
Warrants outstanding, weighted average exercise price | $ / shares	$ 0
Warrants granted | shares	62,500
Warrants granted, weighted average exercise price | $ / shares	$ 5.00
Warrants forfeited/cancelled/restored | shares	0
Warrants forfeited/cancelled/restored, weighted average exercise price | $ / shares	$ 0
Warrants exercised | shares	0
Warrants exercised, weighted average exercise price | $ / shares	$ 0
Warrants outstanding | shares	62,500
Warrants outstanding, weighted average exercise price | $ / shares	$ 5.00

v3.24.2.u1

Share Based Awards (Details Narrative) - USD ($)	6 Months Ended
	Jun. 30, 2024	Jun. 30, 2023	Jan. 01, 2024
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
[custom:ShareBasedCompensationArrangementByShareBasedPaymentAwardNumberOfOptionsAuthorized-0]			310,000
Stock-based compensation expense	$ 361,243
Weighted average remaining contractual term	4 years 7 months 17 days
Equity Option [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Stock-based compensation expense	$ 14,389
Unvested Stock Options [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Unrecognized stock-based compensation expense	325,371
Restricted Stock [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Stock-based compensation expense	346,854
Unvested Restricted Stock [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Unrecognized stock-based compensation expense	$ 827,844
Equity Incentive Plan 2022 [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items]
Authorized shares	1,461,876

v3.24.2.u1

Related Party Transactions (Details Narrative) - Management Services Agreement [Member] - Consultant [Member] - USD ($)	Apr. 30, 2024	Jun. 30, 2024
Related Party Transaction [Line Items]
Consultant obligation		$ 250,000
Restricted Common Stock [Member]
Related Party Transaction [Line Items]
Granted fully vested shares of restricted common stock	488,000
Granted fully vested shares of restricted common stock, value	$ 585,600

v3.24.2.u1

Commitments and Contingencies (Details Narrative)	6 Months Ended
	Jun. 30, 2024
Rotor Riot Lease 1 [Member]
Lease description	As part of the business combination that occurred on February 14, 2024, the Company acquired a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028.

v3.24.2.u1

Restatement of Previously Issued Financial Statements (Details - Restatement adjustments) - USD ($)	3 Months Ended				6 Months Ended
	Jun. 30, 2024	Mar. 31, 2024	Jun. 30, 2023	Mar. 31, 2023	Jun. 30, 2024	Jun. 30, 2023
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Revenue	$ 1,411,124		$ 0		$ 2,030,039	$ 0
Cost of goods sold	1,022,684		0		1,437,432	0
Gross profit	388,440		0		592,607	0
Operating expenses:
Research and development	10,282		0		27,078	0
General and administrative	1,349,587		434,917		2,353,761	1,612,439
Depreciation and amortization	171		381		342	763
Total operating expenses	1,960,144		435,298		3,250,664	1,613,202
Loss from operations	(1,571,704)		(435,298)		(2,658,057)	(1,613,202)
Other income:
Total other income	(40,534)		(0)		(60,183)	(0)
Net loss	$ (1,612,238)	$ (1,106,002)	$ (435,298)	$ (1,177,904)	$ (2,718,240)	$ (1,613,202)
Earnings per share	$ (0.16)		$ (0.13)		$ (0.34)	$ (0.47)
Earnings per share	$ (0.16)		$ (0.13)		$ (0.34)	$ (0.47)
Weighted average common shares outstanding	10,040,741		3,384,837		8,053,299	3,398,470
Weighted average common shares outstanding	10,040,741		3,384,837		8,053,299	3,398,470
Beginning balance, value	$ 21,222,816	1,414,919	$ 2,620,477	3,198,381	$ 1,414,919	$ 3,198,381
Issuance of common shares				600,000
Conversion to preferred shares
Ending balance, value	19,971,821	21,222,816	2,185,179	2,620,477	19,971,821	2,185,179
Cash flows from operating activities:
Depreciation					342	762
Stock compensation expense					361,243
Change in assets and liabilities:
Accounts receivable					(6,798)	(0)
Other current assets					129,089	(22,500)
Accounts payable and accrued expenses					384,556	(32,922)
Net cash used in operating activities					(2,181,840)	(1,022,861)
Cash flows from investing activities
Net cash used in investing activities					(852,801)	0
Cash flows from financing activities:
Net cash provided by financing activities					4,362,313	(223,579)
Net increase (decrease) in cash					1,327,672	(1,246,440)
Cash, beginning of period		894,773		3,099,422	894,773	3,099,422
Cash, end of period	2,222,445		1,852,982		$ 2,222,445	$ 1,852,982
Common Stock [Member]
Other income:
Net loss
Beginning balance, shares	9,333,341	3,217,255	3,467,255	3,392,250	3,217,255	3,392,250
Beginning balance, value	$ 93,334	$ 32,173	$ 34,673	$ 33,923	$ 32,173	$ 33,923
Issuance of common shares, shares				75,005
Issuance of common shares				$ 750
Conversion to preferred shares, shares	100,000	600,000	(250,000)
Conversion to preferred shares	$ 1,000	$ 6,000	$ (2,500)
Ending balance, shares	10,411,240	9,333,341	3,217,255	3,467,255	10,411,240	3,217,255
Ending balance, value	$ 104,113	$ 93,334	$ 32,173	$ 34,673	$ 104,113	$ 32,173
Additional Paid-in Capital [Member]
Other income:
Net loss
Beginning balance, value	26,168,529	5,315,790	5,313,291	4,714,041	5,315,790	4,714,041
Issuance of common shares				599,250
Conversion to preferred shares	(1,000)	(5,999)	2,499
Ending balance, value	26,518,993	26,168,529	5,315,790	5,313,291	26,518,993	5,315,790
Retained Earnings [Member]
Other income:
Net loss	(1,612,238)	(1,106,002)	(435,298)	(1,177,904)
Beginning balance, value	(5,039,048)	(3,933,046)	(2,727,488)	(1,549,584)	(3,933,046)	(1,549,584)
Issuance of common shares
Conversion to preferred shares
Ending balance, value	$ (6,651,286)	$ (5,039,048)	(3,162,786)	(2,727,488)	$ (6,651,286)	(3,162,786)
Previously Reported [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Revenue						0
Cost of goods sold						0
Gross profit						0
Operating expenses:
Research and development						0
General and administrative						1,023,433
Depreciation and amortization						762
Total operating expenses						1,024,195
Loss from operations						(1,024,195)
Other income:
Interest income						0
Total other income						0
Net loss before income tax						(1,024,195)
Income tax benefit (expense)						0
Net loss						$ (1,024,195)
Earnings per share						$ (0.30)
Earnings per share						$ (0.30)
Weighted average common shares outstanding						3,398,470
Weighted average common shares outstanding						3,398,470
Beginning balance, value				3,209,374		$ 3,209,374
Ending balance, value			2,185,929			2,185,929
Cash flows from operating activities:
Depreciation						763
Stock compensation expense						0
Change in assets and liabilities:
Accounts receivable						0
Deferred offering costs						(223,579)
Other current assets						22,500
Accounts payable and accrued expenses						(21,929)
Net cash used in operating activities						(1,246,440)
Cash flows from investing activities
Purchases of property and equipment						0
Net cash used in investing activities						0
Cash flows from financing activities:
Deferred offering costs						0
Net cash provided by financing activities						0
Net increase (decrease) in cash						(1,246,440)
Cash, beginning of period				$ 3,099,422		3,099,422
Cash, end of period			$ 1,852,982			1,852,982
Supplemental disclosures of cash flow information:
Cash paid for interest						0
Cash paid for income tax						$ 0
Previously Reported [Member] | Series B Preferred Stock [Member]
Other income:
Beginning balance, shares				140		140
Beginning balance, value				$ 1		$ 1
Conversion to preferred shares, shares						50
Conversion to preferred shares						$ 1
Ending balance, shares			190			190
Ending balance, value			$ 2			$ 2
Previously Reported [Member] | Common Stock [Member]
Other income:
Beginning balance, shares				3,392,250		3,392,250
Beginning balance, value				$ 33,923		$ 33,923
Issuance of common shares, shares						75,005
Issuance of common shares						$ 750
Conversion to preferred shares, shares						(250,000)
Conversion to preferred shares						$ (2,500)
Ending balance, shares			3,217,255			3,217,255
Ending balance, value			$ 32,173			$ 32,173
Previously Reported [Member] | Additional Paid-in Capital [Member]
Other income:
Beginning balance, value				4,714,041		4,714,041
Issuance of common shares						(750)
Conversion to preferred shares						2,499
Ending balance, value			4,716,540			4,716,540
Previously Reported [Member] | Stocks To Be Issued [Member]
Other income:
Beginning balance, value				0		0
Ending balance, value			0			0
Previously Reported [Member] | Retained Earnings [Member]
Other income:
Net loss						(1,024,195)
Beginning balance, value				(1,538,591)		(1,538,591)
Ending balance, value			(2,562,786)			(2,562,786)
Revision of Prior Period, Adjustment [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Revenue						0
Cost of goods sold						0
Gross profit						0
Operating expenses:
Research and development						0
General and administrative						589,007
Depreciation and amortization						0
Total operating expenses						589,007
Loss from operations						(589,007)
Other income:
Interest income						0
Total other income						0
Net loss before income tax						(589,007)
Income tax benefit (expense)						0
Net loss						$ (589,007)
Earnings per share						$ (0.17)
Earnings per share						$ (0.17)
Weighted average common shares outstanding						0
Weighted average common shares outstanding						0
Beginning balance, value				(10,993)		$ (10,993)
Issuance of common shares						600,000
Ending balance, value			0			0
Cash flows from operating activities:
Depreciation						0
Stock compensation expense						600,000
Change in assets and liabilities:
Accounts receivable						0
Deferred offering costs						223,579
Other current assets						0
Accounts payable and accrued expenses						(10,993)
Net cash used in operating activities						223,579
Cash flows from investing activities
Purchases of property and equipment						0
Net cash used in investing activities						0
Cash flows from financing activities:
Deferred offering costs						(223,579)
Net cash provided by financing activities						(223,579)
Net increase (decrease) in cash						0
Cash, beginning of period				$ 0		0
Cash, end of period			$ 0			0
Supplemental disclosures of cash flow information:
Cash paid for interest						0
Cash paid for income tax						$ 0
Revision of Prior Period, Adjustment [Member] | Series B Preferred Stock [Member]
Other income:
Beginning balance, shares				0		0
Beginning balance, value				$ 0		$ 0
Ending balance, shares			0			0
Ending balance, value			$ 0			$ 0
Revision of Prior Period, Adjustment [Member] | Common Stock [Member]
Other income:
Beginning balance, shares				0		0
Beginning balance, value				$ 0		$ 0
Ending balance, shares			0			0
Ending balance, value			$ 0			$ 0
Revision of Prior Period, Adjustment [Member] | Additional Paid-in Capital [Member]
Other income:
Beginning balance, value				0		0
Issuance of common shares						600,000
Ending balance, value			600,000			600,000
Revision of Prior Period, Adjustment [Member] | Stocks To Be Issued [Member]
Other income:
Beginning balance, value				0		0
Ending balance, value			0			0
Revision of Prior Period, Adjustment [Member] | Retained Earnings [Member]
Other income:
Net loss						(589,007)
Beginning balance, value				(10,993)		(10,993)
Ending balance, value			(600,000)			(600,000)
As Restated [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Revenue						0
Cost of goods sold						0
Gross profit						0
Operating expenses:
Research and development						0
General and administrative						1,612,440
Depreciation and amortization						762
Total operating expenses						1,613,202
Loss from operations						(1,613,202)
Other income:
Interest income						0
Total other income						0
Net loss before income tax						(1,613,202)
Income tax benefit (expense)						0
Net loss						$ (1,613,202)
Earnings per share						$ (0.47)
Earnings per share						$ (0.47)
Weighted average common shares outstanding						3,398,470
Weighted average common shares outstanding						3,398,470
Beginning balance, value				3,198,381		$ 3,198,381
Issuance of common shares						600,000
Ending balance, value			2,185,179			2,185,179
Cash flows from operating activities:
Depreciation						763
Stock compensation expense						600,000
Change in assets and liabilities:
Accounts receivable						0
Deferred offering costs						0
Other current assets						22,500
Accounts payable and accrued expenses						(32,922)
Net cash used in operating activities						(1,022,861)
Cash flows from investing activities
Purchases of property and equipment						0
Net cash used in investing activities						0
Cash flows from financing activities:
Deferred offering costs						(223,579)
Net cash provided by financing activities						(223,579)
Net increase (decrease) in cash						(1,246,440)
Cash, beginning of period				$ 3,099,422		3,099,422
Cash, end of period			$ 1,852,982			1,852,982
Supplemental disclosures of cash flow information:
Cash paid for interest						0
Cash paid for income tax						$ 0
As Restated [Member] | Series B Preferred Stock [Member]
Other income:
Beginning balance, shares				140		140
Beginning balance, value				$ 1		$ 1
Conversion to preferred shares, shares						50
Conversion to preferred shares						$ 1
Ending balance, shares			190			190
Ending balance, value			$ 2			$ 2
As Restated [Member] | Common Stock [Member]
Other income:
Beginning balance, shares				3,392,250		3,392,250
Beginning balance, value				$ 33,923		$ 33,923
Issuance of common shares, shares						75,005
Issuance of common shares						$ 750
Conversion to preferred shares, shares						(250,000)
Conversion to preferred shares						$ (2,500)
Ending balance, shares			3,217,255			3,217,255
Ending balance, value			$ 32,173			$ 32,173
As Restated [Member] | Additional Paid-in Capital [Member]
Other income:
Beginning balance, value				4,714,041		4,714,041
Issuance of common shares						599,250
Conversion to preferred shares						2,499
Ending balance, value			5,315,790			5,315,790
As Restated [Member] | Stocks To Be Issued [Member]
Other income:
Beginning balance, value				0		0
Ending balance, value			0			0
As Restated [Member] | Retained Earnings [Member]
Other income:
Net loss						(1,613,202)
Beginning balance, value				$ (1,549,584)		(1,549,584)
Ending balance, value			$ (3,162,786)			$ (3,162,786)

---