424B1 1 unusual_424b1.htm PROSPECTUS

Table of Contents

 

 

 

     

Filed pursuant to 424(b)(1)

Under the Securities Act of 1933, as amended

Registration No. 333-270519

 

1,250,000 Shares

of Common Stock

 

 

Unusual Machines, Inc.

 

 

This is a firm commitment initial public offering (“Offering”) of 1,250,000 shares of common stock, of Unusual Machines, Inc. The initial public offering price of our common stock is $4.00 per share. See “Determination of Offering Price” on page 38.

 

On November 21, 2022, we entered into a Share Purchase Agreement (the “Purchase Agreement”) with Red Cat Holdings, Inc. (“Red Cat,”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, pursuant to which we agreed to purchase Red Cat’s consumer business consisting of Fat Shark Holdings, Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) that design and sell consumer drones and first-person-view (“FPV”) goggles. Because we intend to use $1.0 million in cash from the proceeds of this Offering as part of the consideration for said purchase, Fat Shark and Rotor Riot are, pursuant to the rules of the Securities and Exchange Commission (“SEC”), “co-issuers” in this Offering.

 

Prior to this Offering, there has been no public market for our common stock. We have been approved to list the shares of our Common Stock on NYSE American (“NYSE American”) under the symbol “UMAC.”

 

We are an “emerging growth company” under applicable U.S. federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary — Implications of Being an Emerging Growth Company.”

 

Upon consummation of the Offering, and without giving effect to the underwriters’ overallotment option, Red Cat will own 48.66% of our outstanding common stock and Mr. Jeffrey Thompson, the Chief Executive Officer of Red Cat, and a director of Unusual Machines, Inc. will own approximately 3.76% of our common stock based on the offering price of $4.00 per share. Mr. Thompson will not have the power to vote the Red Cat shares of our common stock, although that could change. See Risk Factors- “Because Red Cat and our Principal Stockholder will own 48.66% and 3.76%, respectively, of our common stock, the voting power of the other stockholders is limited and Red Cat will likely be able to control our business, elect our Board of Directors and otherwise control the Company which control may place their interests ahead of our stockholders’ interests.” See also “Principal Stockholders” for more information.

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 8.

 

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.

 

   Per Share   Total 
Initial public offering price  $4.00   $5,000,000 
Underwriting discounts and commissions(1)  $0.30   $375,000 
Proceeds to us, before expenses  $3.70   $4,625,000 

 

(1) Underwriting discounts and commissions do not include a non-accountable expense allowance equal to 1.0% of the initial public offering price payable to the underwriters. We refer you to “Underwriting” beginning on page 78 for additional information regarding the underwriters’ compensation.

 

We have granted a 45-day option to the representative of the underwriters to purchase up to 187,500 additional shares of common stock solely to cover overallotments, if any.

 

The underwriters expect to deliver the shares to purchasers on or about February 16, 2024.

 

Dominari Securities LLC                 R.F. Lafferty & Co., Inc.

 

Revere Securities LLC

 

 

The date of this Prospectus is February 13, 2024.

 

 

 

   

 

 

 

 

 

   
 

 

TABLE OF CONTENTS

 

 

  Page
Cautionary Statement Regarding Forward-Looking Statements 1
Prospectus Summary 2
Risk Factors 8
Use of Proceeds 35
Capitalization 36
Market for our Common Stock 37
Determination of Offering Price 38
Dilution 39
The Business Combination 41
Our Business 43
Management’s Discussion and Analysis of Financial Condition and Results of Operations 53
Management and Board of Directors 62
Executive and Director Compensation 67
Related Party Transactions 70
Principal Stockholders 71
Description of Securities 73
Material U.S. Federal Income Tax Considerations to Non-U.S. Holders of Our Common Stock 75
Underwriting 80
Legal Matters 93
Experts 93
Where You Can Find More Information 93
Index to Financial Statements F-1

 

You should rely only on information contained in this Prospectus. We have not, and the underwriter has not, authorized anyone to provide you with additional information or information different from that contained in this Prospectus. Neither the delivery of this Prospectus nor the sale of our securities means that the information contained in this Prospectus is correct after the date of this Prospectus. This Prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful or in any state or other jurisdiction where the offer is not permitted.

 

For investors outside the United States: Neither we nor the underwriter has taken any action that would permit this Offering or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this Prospectus must inform themselves about, and observe any restrictions relating to, the offering of the securities covered hereby and the distribution of this Prospectus outside of the United States. 

 

The information in this Prospectus is accurate only as of the date on the front cover of this Prospectus. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

No person is authorized in connection with this Prospectus to give any information or to make any representations about us, the securities offered hereby or any matter discussed in this Prospectus, other than the information and representations contained in this Prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us.

 

Neither we nor the underwriters have done anything that would permit this Offering or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this Offering and the distribution of this Prospectus.

 

 

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus contains, in addition to historical information, certain forward-looking statements that includes information relating to future events, future financial performance, strategies, business opportunities, expectations including our goals and projections with respect to the planned Business Combination, our anticipated operations and business strategy with respect to Fat Shark and Rotor Riot and the design, manufacture and sale of drone and drone-related products through those entities, projections and estimates for demand, growth and other metrics regarding drone products and the drone industry, future plans for and anticipated transactions and relationships with respect to our products and intellectual property portfolio and operations, our working capital needs, the planned use and sufficiency of the proceeds from this Offering, our further development and implementation of our business plan and our ability to locate sources of capital necessary to meet our business needs and objectives. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.

 

In some cases, you can identify forward-looking statements by terminology, such as “may,” “should,” “would,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “continue,” “plan,” “potential” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Prospectus or incorporated herein by reference.

 

You should read this Prospectus and the documents we have filed as exhibits to the Registration Statement, of which this Prospectus is 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 as to whether 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.

 

Industry and Market Data

 

This Prospectus contains estimates made, and other statistical data published by independent parties and by us relating to market size and growth and other data about our industry. We obtained the industry and market data in this Prospectus from our own research as well as from industry and general publications, surveys and studies conducted by third parties. This data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are inherently subject to a high degree of uncertainty and actual events or circumstances may differ materially from events and circumstances reflected in this information. We caution you not to give undue weight to such projections, assumptions and estimates. While we believe that these publications, studies and surveys are reliable, we have not independently verified the data contained in them. In addition, while we believe that the results and estimates from our internal research are reliable, such results and estimates have not been verified by any independent source.

 

 

 

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PROSPECTUS SUMMARY

 

This summary highlights certain information contained elsewhere in this Prospectus. This summary is not intended to be complete and does not contain all of the information that you should consider in making your investment decision. You should carefully read this entire Prospectus, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Prospectus before making an investment decision.

 

Unless the context otherwise requires, references to “we,” “our,” “us,” “Unusual” “Unusual Machines” or the “Company” in this Prospectus means Unusual Machines, Inc., a Puerto Rico corporation.

 

Company Background

 

We are a Puerto Rico corporation, originally incorporated July 11, 2019, with our principal place of business in San Juan, Puerto Rico. Our principal corporate office is located at 151 Calle De San Francisco, Ste 200 PMB 2106 San Juan, Puerto Rico 00901-1607 and our telephone number is +1 855-921-4600. Our corporate website is unusualmachines.com. Information on our website is not incorporated into this Prospectus.

 

The Company was incorporated in Puerto Rico under the name “Red Cat Motor Corporation” on July 11, 2019, before changing its name to “AerocarveUS Corporation” on October 20, 2020 and then to “Unusual Machines, Inc.” on July 5, 2022.

 

The Business Combination

 

On November 21, 2022, we entered into a Share Purchase Agreement (the “Purchase Agreement”) with Red Cat Holdings, Inc. (“Red Cat,”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, pursuant to which we agreed to purchase Red Cat’s consumer business consisting of Fat Shark and Rotor Riot (the “Business Combination”). 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 Agreement was amended on March 31, 2023. Under the terms of the Purchase Agreement, as amended, upon satisfaction of closing conditions, Unusual will purchase from Red Cat its Rotor Riot and Fat Shark subsidiaries for $20 million (the “Purchase Price”) comprised of (i) $1.0 million in cash, (ii) a $2.0 million promissory note (referred to in this Prospectus as the “Note”) issued by the Company to Red Cat, and (iii) $17.0 million of the Company’s common stock or 4,250,000 shares of common stock. These 4,250,000 shares will be restricted and subject to a 12-month holding period unless the shares are registered. On July 10, 2023, the parties entered into Amendment No. 2 to SPA (the “Second Amendment”). Under the Second Amendment the parties agreed to extend the termination date of the Purchase Agreement until September 30, 2023 and remove the requirement that the Principal Stockholder escrow shares of our common stock at closing. In lieu of any escrow the Principal Stockholder has agreed to lockup 100,000 shares (or $500,000 at the assumed public offering price) of our common stock as a security for the Principal Stockholder’s indemnification obligations under Article VII of the Purchase Agreement. On September 18, 2023, the parties entered into Amendment No. 3 to the SPA (the “Third Amendment”). Under the Third Amendment, the parties agreed to extend the termination date of the Purchase Agreement until October 31, 2023. On December 11, 2023, the parties entered into Amendment No. 4 to the SPA (the “Fourth Amendment”). Under the Fourth Amendment the parties agreed to (a) revise the components of the Purchase Price set forth in Section 2.01 of the Purchase Agreement to reduce the total cash paid to $1.0 million, eliminate the need to deposit $1.0 million of cash on hand into escrow prior to closing, and include the $2.0 million Note as part of the Purchase Price, (b) revise the minimum Offering amount from $10.0 million to $5.0 million, (c) replace Dr. Allan Evans for Brandon Torres Declet in Section 10.01(d) and (d) extend the End Date (as defined in the Purchase Agreement) from October 31, 2023 to May 31, 2024 as provided in Section 11.02(a) of the Purchase Agreement, as amended.

 

In addition, Unusual agreed to use its best efforts to prepare and file a registration statement with respect to 500,000 shares of our common stock to be issued to Red Cat, and to cause such registration statement to be filed within 120 days and declared effective within 180 days of closing. Red Cat agreed to execute a lock-up agreement effective for 180 days following the closing, or such lesser period as may be agreed upon by the managing underwriter and Red Cat under which Red Cat agreed not to transfer or sell any of its 4,250,000 shares of our common stock during such period, subject to certain exceptions, as described in more detail under “Underwriting-Lock-Up Agreements” at page 79. We have also agreed to reimburse Red Cat up to $100,000 for documented legal and out-of-pocket expenses incurred in connection with the transaction.

 

See “The Business Combination” for more information. The Red Cat shareholders approved the transaction contemplated in the Purchase Agreement in a special meeting on March 8, 2023.

 

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. As disclosed in Red Cat’s definitive proxy statement on Schedule 14A that was mailed to Red Cat’s shareholders, Red Cat received a valuation from Vantage Point Advisors, Inc. 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. See “Risk Factors, 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. Additionally, we may incur impairment charges for the goodwill we will be required to include on our balance sheet. See “Risk Factors” at page 20.

 

 

 

 

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Business Overview

 

Simultaneous with the closing of this Offering, we will acquire Fat Shark Ltd., referred into in this Prospectus as “Fat Shark,” and Rotor Riot, LLC, referred into in this Prospectus as “Rotor Riot,” which are first-person view (“FPV”) drone technology market leaders. Because Unusual Machines is still in its development stage and has limited operations on a pre-transaction basis, the business-related and certain financial information in this Prospectus focuses on the business, products and operations of Fat Shark and Rotor Riot, which will entail the Company’s business focus following the acquisition. While each entity exists independently, their operations have been structured and developed to complement each other and operate largely in tandem, as the discussions contained elsewhere in this Prospectus describe in greater detail.

 

Fat Shark is a leader in FPV, designing and manufacturing ultra-low latency 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 markets drones and drone-related products including Fat Shark goggles and competitor offerings, to end users of the drones and drone products including drone enthusiasts, hobbyists and competitive racers. Over the next two years, we expect that these businesses will continue to excel in the consumer FPV market, while expanding into new enterprise verticals like drone delivery. This is part of our vision to enable people to be part of the robotics revolution.

 

Headquartered in Puerto Rico, we intend to build our business both organically and through strategic acquisitions, by targeting companies within the highly fragmented drone industry that have valuable intellectual property, revenue generating customers, and exceptional teams.

 

The Drone Industry

 

The drone industry continues to expand beyond its military origin to become a powerful business tool and recreational activity, with growth occurring broadly and across our targeted industries. Consumer – our primary market today, the Consumer or “Recreational” market for drones is forecast to grow at a compound annual growth rate (“CAGR”) of 20.8% from $4.34 billion (“b”) in 2022 to $19.71b by 2030. Delivery – the global drone package delivery market was valued at $0.94b in 2021 and is projected to reach $32.1b by 2031, a CAGR of 43.3%.

 

Accordingly, we will pursue strategic acquisition targets in the FPV drone technology space that have the potential to improve our own hardware and software solutions, rapidly grow our revenues, open new industry verticals, and integrate best in class intellectual property and teams. We believe that very promising, private companies (such as those we will likely target) are in many instances grossly underfunded and missing out on the ability to go public and bring their innovative products and solutions to a larger set of customers globally. Unlocking this potential will be key to industry consolidation and breaking the dominance of China in the drone industry. We stand at the forefront of this important trend.

 

Exclusively FPV

 

Fat Shark and Rotor Riot principally operate in the drone FPV segment of the 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. In this augmented reality (AR), the pilot sees only what the drone sees, as if sitting in the pilot seat. 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 three common categories of FPV flight – freestyle flight, racing, and aerial photography. In freestyle, the pilot navigates around obstacles focused on acrobatics and exploring the environment around the aircraft through the HMD. This type of flight can be used for different applications including package delivery. FPV racing describes a growing spectator sport where pilots fly their drones in competitions through a series of obstacles, flags, and gates in a racetrack. Aerial photography is the process of viewing and recording a subject matter from the air from the viewpoint of the pilot.

 

Plans for Growth, Development, and Expansion

 

We plan to strengthen our market position through continued revenue growth. In parallel, we are aggressively investing in the development or acquisition of FPV products and services that serve a broad set of industries including consumer and drone delivery. Our business strategy includes (i) increasing our overall customer base with a superior product and rapid adoption; (ii) investing in new products and IP, beginning with the Fat Shark and Rotor Riot acquisitions, (iii) exploring and pursuing acquisitions of additional products, teams and technologies that complement and expand the functionality of the FPV goggles offered by Fat Shark and the inventory and marketing capabilities of Rotor Riot; (iv) expanding and growing our customer base and revenue streams from our 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, (v) enhancing our products to improve the integration of third-party solutions; (vi) targeting underserved drone pilots as customers and as potential marketing partners, and (vii) seeking strategic partnerships and sponsorships with companies that want access to the FPV community.

 

 

 

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Risk Factors Summary

 

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

 

·The reports from Rotor Riot and Fat Shark’s independent registered public accounting firm for the fiscal year ended April 30, 2023 and prior years include an explanatory paragraph that they may not be able to continue operating as a going concern.
·Because the Company will have no operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in us is highly speculative.
 ·The Company may be unable to repay the Note.
·Fat Shark and Rotor Riot have incurred net losses since their acquisition by Red Cat and may fail to achieve or maintain profitability.
·If the proceeds of this Offering 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 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.
·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.
·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, and 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.
·Lack of long-term purchase orders and commitments from customers, and other factors such as seasonality and high fluctuation in revenue, may lead to a rapid decline in sales or make it difficult to evaluate us.
·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, which may arise from intellectual property disputes, personal injury, property damage, regulatory violations other disputes, 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.
·Product quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.
·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.

 

 

 

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·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 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.
·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 management will have significant discretion over our use of the net proceeds from this Offering and we may use these proceeds in ways with which you may not agree.
 ·Because Red Cat and our Principal Stockholder will own 48.66% and 3.76%, respectively, of our common stock, the voting power of the other stockholders is limited and Red Cat will likely be able to control our business, elect our Board of Directors and otherwise control the Company which control may place their interests ahead of our stockholders’ interests. See “Principal Stockholders.
·Because the market price of shares of our common stock is subject to fluctuation, you may not be able to sell your common stock at the Offering price.
·Because our public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.
·Because our sole remedy under the Purchase Agreement, as amended by the Second Amendment, in the event of any breaches of representations and warranties is to cancel some or all of the 100,000 shares of our common stock (after giving effect to the approved 1-for-2 reverse stock split), the value of such shares maybe an insufficient remedy.
·We will incur 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 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.
 ·We will carry a significant amount of goodwill as an asset on our balance sheet which we must value at least annually and as a result we may be required to write off some or all of that goodwill.
·Because our common stock will be listed on NYSE American, we will become subject to additional regulations and continued requirements.
·Our Board of Directors 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 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.
·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.

 

 

 

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Summary of the Offering

 

Common stock offered by the Company:   1,250,000 shares of our common stock (1,437,500 shares if the underwriters exercise their over-allotment option in full), on a firm commitment basis.
Shares of common stock outstanding prior to the Offering (1):  

7,467,255 shares

Shares of common stock outstanding after the Offering (2):  

8,717,255 shares (8,904,755 shares if the underwriters exercise their over-allotment option in full), based on the initial public offering price of $4.00 per share.

Over-allotment option:   The underwriters have an option for a period of 45 days to purchase up to 187,500 additional shares, or an additional 15% of the shares of common stock offered in this Offering to cover over-allotments, if any.
Use of proceeds:   We estimate that we will receive net proceeds of approximately $3,725,000 from our sale of shares of common stock in this Offering, after deducting underwriting discounts and estimated offering expenses payable by us. We intend to use the net proceeds of this Offering to pay the cash portion of the purchase price for the Business Combination, and for working capital and general corporate purposes.
Representative’s warrants:   We have agreed to issue warrants to the underwriters (“Representative’s Warrants”) to purchase 62,500 (or five percent (5%)) shares of our common stock (sold in the Offering not including the over-allotment option) to Dominari Securities LLC, the representative of the underwriters (“Representative”). The Representative’s Warrants will be exercisable at any time, and from time to time, in whole or in part, during the five- year period commencing 180 days following the commencement of the sale of the securities by the Company at an exercise price of $5.00 (one hundred and twenty-five percent (125%) of the public offering price per share). The shares of our common stock underlying the Representative’s Warrants are being registered in this Offering.
NYSE American symbol:   We have been approved to have the shares of our common stock listed on NYSE American under the symbol “UMAC”.
Risk factors:   Investing in our securities involves a high degree of risk and purchasers of our securities may lose their entire investment. See “Risk Factors” and the other information included and incorporated by reference into this Prospectus for a discussion of risk factors you should carefully consider before deciding to invest in our securities.
Lock-Up:  

Shares of the Company’s common stock held by its directors, officers, and 5% shareholders will be subject to a lock-up of 180 days. In addition, we have agreed with the underwriters not to issue any equity, equity derivatives or debt for a period of 180 days after the Closing date of this Offering without the prior consent of the Representative.

 

  (1) Includes 3,217,255 shares of common stock outstanding after a 1-for-2 reverse stock split. In addition, it assumes 4,250,000 shares of our common stock are issued as a part of the Purchase Agreement immediately prior to the consummation of the Offering.
  (2) The number of shares of our common stock to be outstanding after this offering is based on 3,217,255 shares of our common stock outstanding as of the date of this Prospectus, giving effect to the 1-for-2 reverse stock split and to the issuance of 4,250,000 shares of our common stock issued as part of the Purchase Agreement immediately prior to the consummation of the Offering, and does not assume the exercise of the over-allotment option and excludes the following:

 

  · 1,461,876 shares of our common stock available for future issuance under our 2022 Equity Incentive Plan, which includes shares of common stock deliverable under grants of restricted stock units to our executives
  · 62,500 shares of our common stock issuable upon the exercise of the Representative’s Warrant; and
  · 16,086 shares of common stock issued to our former Chief Executive Officer.

 

 

 

 6 

 

 

Summary Combined Pro Forma Financial Data

 

The following summary combined pro forma statements of operations for the periods ended September 30, 2023 and 2022 and summary combined pro forma balance sheet data as of September 30, 2023 and 2022 have been derived from our, Fat Shark and Rotor Riot unaudited combined pro forma financial statements included elsewhere in this Prospectus. You should read this “Summary Combined Pro Forma Financial Data” section together with our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Prospectus. Our financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods.

 

Pro Forma Balance Sheet Data (unaudited)  Period
Ended
September 30,
2023
   Period
Ended
September 30,
2022
 
Cash and cash equivalents  $4,120,309   $3,652,256 
Total assets  $24,430,166   $16,002,145 
Total liabilities  $2,338,188   $8,353,402 
Total shareholders’ equity  $22,091,978   $7,648,743 

 

   Nine Months Ended September 30, 
   2023   2022 
Pro Forma Statements of Operations (unaudited)        
Revenues  $4,115,468   $3,965,405 
Gross margin  $705,029   $853,662 
Operating loss  $(3,208,845)  $(1,523,924)
Other income (expense)  $(50,796)  $(30,717)
Net loss  $(3,259,641)  $(1,554,641)

 

 

 

 

 

 

 

 

 

 

 

 

 7 

 

 

RISK FACTORS

 

Any investment in our securities involves a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this Prospectus before deciding whether to purchase our securities. Our business, financial condition and results of operations could be materially adversely affected by these risks if any of them actually occur. This Prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this Prospectus.

 

Risks Related to our Business and Financial Condition

 

Because Fat Shark and Rotor Riot’s auditors have qualified their reports on a going concern basis and with our history of losses, we may not be able to continue operating as a going concern.

 

We have experienced losses from operations since inception and have never generated positive cash flow. The success of our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our operating costs and obtaining financing from this Offering. The reports from Fat Shark and Rotor Riot’s independent registered public accounting firm for the fiscal year ended April 30, 2023 and prior years include an explanatory paragraph stating Fat Shark and Rotor Riot have each recurring net losses from operations, negative operating cash flows, and will need additional working capital for ongoing operations. These factors, among others, raise substantial doubt about each of Fat Shark and Rotor Riot’s ability to continue as a going concern. If we are unable to close this Offering, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern.

 

Because the Company will have no operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in us is highly speculative.

 

We plan to acquire Fat Shark and Rotor Riot simultaneously with the closing of this Offering. Both companies have been operated by Red Cat since their acquisition by Red Cat in 2020. While we expect the management of each target 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 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 sufficient capital in this Offering or in future financing transactions, we may use a portion of the 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. Additionally, Fat Shark and Rotor Riot currently operate as subsidiaries of Red Cat, a holding company of drone-related businesses, which also holds two drone businesses that market products for government, industrial and military applications in addition to its consumer-focused product offerings which we will acquire through Fat Shark and Rotor Riot. Therefore, 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.

 

Our prospects 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, in which case you could lose all or some of your investment.

 

The Company may be unable to repay indebtedness

 

As part of the Purchase Price in connection with the consummation of the Business Combination, we are issuing the $2.0 million Note to Red Cat.

 

The Note bears interest at 8%. Interest is payable monthly in arrears on the 15th day of each month commencing on the next month following the original issue date of the Note. The principal amount of the note is payable in a lump sum on the 18 month anniversary of closing the Business Combination. 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, Red Cat may require the Company to repay the Note with accrued interest thereon in cash. Upon an event of default, Red Cat may require the Company to convert the Note into shares of our common stock, subject to beneficial ownership limitations set forth in the Note, at a conversion price equal to an amount of the 10 day average VWAP, as will be defined in the Note prior to the conversion date.

 

 

 

 8 

 

 

In order to repay the Note we will need to expend proceeds, obtain additional debt financing, or refinance the Note. 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 Note issued to Red Cat. If we fail to repay the Note, Red Cat may exercise all rights and remedies owed to it under the Note, including conversion of the Note. If Red Cat converts the Note, our stockholders could experience dilution.

 

The foregoing description of the terms of the Note does not purport to be complete and is qualified in its entirety by reference to the copy or form of such Note, which is filed as Exhibit 4.3 to the Registration Statement of which this Prospectus is a part.

 

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 will constitute 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 following the acquisition of Fat Shark and Rotor Riot, 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.

 

If the proceeds of this Offering 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 the net proceeds of this Offering after payment to Red Cat will be sufficient to meet our working capital needs for at least 12 months following the closing. 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. The expected use of net proceeds of this Offering represents our current intentions based upon our present plan and business conditions. As of the date of this Prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this Offering. We will have broad discretion in the application of the net proceeds in the category of working capital and general corporate purposes, including acquisitions, and to fund ongoing operations and expansion of our business, and investors will be relying on our judgment regarding the application of the net proceeds of this Offering other than payments to Red Cat. Depending on the outcome of our business activities and other unforeseen events, our plans and priorities may change and we may apply the net proceeds of this Offering in different proportions than we currently anticipate.

 

 

 

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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. We may be unable to raise adequate capital through sales of equity linked securities, and if our stock price is lower than the Offering price at the time of such sales, our existing stockholders could experience substantial dilution. 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. As more fully described elsewhere in this Prospectus, 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. We are in the process of obtaining “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 Board of Directors.” Mr. Jeffrey Thompson and Allan Evans, members of our Board of Directors, also have significant roles and interests in the drone industry outside our Company. These arrangements could cause them 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.

 

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.

 

 

 

 10 

 

 

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, including those referenced elsewhere in this Prospectus, 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;

 

 

 

 11 

 

 

·any future impact from COVID-19, including any long-term or pervasive effects of the virus;
   
·supply chain issues particularly with the current COVID-19 resurgence in China and 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, which is presently elevated due to the recent work-from-home environment arising from the COVID-19 pandemic, 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.

 

 

 

 12 

 

 

In July 2023, 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 apply to us beginning next June and will require us to enhance our cybersecurity compliance efforts and have the effect of causing us to expend funds to prevent material cybersecurity incidents.

 

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 of directors 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.

 

Other than our agreement with Red Cat to acquire Fat Shark and Rotor Riot, we have no operating 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. Our failure to meet these challenges could cause us to lose money, and your investment could be lost. 

 

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.

 

 

 

 13 

 

 

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.

 

We do not own or operate any manufacturing facilities. 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. Additionally, the Company will operate out of multiple locations including Florida and Puerto Rico subjecting it to local labor market conditions.

 

 

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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 prospectus 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.

 

 

 

 15 

 

 

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 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.

 

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.

 

 

 

 16 

 

 

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.

 

 

 

 17 

 

 

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 the 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.

 

 

 

 18 

 

 

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.

 

 

 

 19 

 

 

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.

 

 

 

 20 

 

 

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.

 

 

 

 21 

 

 

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.

 

On a combined pro forma basis, as of September 30, 2023, we had $14,117,023 of estimated goodwill and $1,282,756 of 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 good will. 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. On a combined pro forma basis, as of September 30, 2023, we also had $1,282,756 of estimated intangible assets, net on our balance sheet. A valuation will be performed upon 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.

 

 

 

 22 

 

 

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.

 

 

 

 23 

 

 

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 this Offering, 12 issued patents, including four issued in the United States, and nine pending patent Applications, including two pending in the United States will be 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. See “Business – Intellectual Property” for more information.

 

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.

 

 

 

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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.

 

 

 

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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 recent shortage of chips. The Company has not identified, planned or taken any actions as of the date of this Prospectus 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. For more information on the laws and regulations applicable to us and our industry, as well as recent developments involving such laws and regulations and their actual and potential impact on us, see “Business – Government Regulations.” 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.

 

 

 

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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., referred to elsewhere in this Prospectus as the “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. See “Related Party Transactions” for more information. 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 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.

 

 

 

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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 European Union that are broader and more stringent than those previously in place in the European Union 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. Since the CCPA was enacted, Nevada, Maine, Colorado and Virginia have enacted similar legislation designed to protect the personal information of consumers and penalize companies that fail to comply, and other states have proposed similar legislation. 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.

 

In the U.S. currently, there are at least 13 states – California, Virginia, Connecticut, Colorado, Utah, Iowa, Indiana, Tennessee, Oregon, Montana, Texas, Florida and Delaware – that have comprehensive data privacy laws in place. During the 2022-23 legislative cycle, at least 16 states have introduced privacy bills that address a range of issues, including protecting biometric identifiers and health data. However, this patchwork approach to privacy legislation could pose compliance and liability risks for companies that have multistate operations. Proposed bills in Massachusetts, New Jersey, Pennsylvania, North Carolina, and several other states have similar rights in preexisting privacy legislation but differ in implementation and enforcement. Additionally, in June 2022 the American Data Privacy and Protection Act was introduced in the U.S. House of Representatives but has not yet been 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 to that which is reasonably necessary to provide a requested product or service, 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 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 Data Privacy and Protection Act, 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.

 

 

 

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Risks Related To Our Common Stock and this Offering

 

Our management will have significant discretion over our use of the net proceeds from this Offering and we may use these proceeds in ways with which you may not agree.

 

Other than payments to Red Cat for the purchase of Fat Shark and Rotor Riot, our management will have considerable discretion in deciding how to apply net proceeds of this Offering. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this Offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of operations or increase our stock price. See “Use of Proceeds.”

 

Because Red Cat and our Principal Stockholder will own 48.66% and 3.76% of our outstanding common stock after the consummation of the Offering, the voting power of other stockholders is limited and Red Cat will likely be able to control our business, elect our Board of Directors and otherwise control the Company which control may place their interests ahead of our stockholders’ interests.

 

Upon consummation of the Offering, and without giving effect to the underwriters’ overallotment option, Red Cat will own 48.66% of our outstanding common stock and Mr. Jeffrey Thompson, the Chief Executive Officer of Red Cat, will own 3.76% of our common stock based on the initial public offering price of $4.00. Mr. Thompson does not have any power to vote the Red Cat shares of our common stock. Red Cat has delegated the voting power to a special committee of its Board of Directors on which Mr. Thompson is not a member, although the voting power could be changed in the future. See “Principal Stockholders” for more information. Because of Red Cat’s ownership it is clear even without Mr. Thompson voting with them that they can control the Company for the foreseeable future. Red Cat will have the ability to have a substantial influence on matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. As a result, our other stockholders including our management and Board of Directors may have little or no influence over matters submitted for stockholder approval. In addition, the ownership of such stockholders could preclude any unsolicited acquisition of us, and consequently, adversely affect the price of our common stock. Red Cat may make decisions that favor Red Cat and are adverse to your interests. Further, it is possible that if we filed an indemnification claim, Red Cat and Mr. Thompson acting together could simply remove our Board of Directors and dismiss the indemnification claim or lawsuit.

  

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.

 

We have agreed to pay Red Cat the Purchase Price of $20.0 million to acquire Fat Shark and Rotor Riot comprised of (i) $1.0 million in cash, (ii) the $2.0 million Note issued by the Company to Red Cat, 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. As disclosed in Red Cat’s definitive proxy statement on Schedule 14A that was mailed to Red Cat’s shareholders, 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 of directors, the Company does not intend to obtain an independent valuation on the assets and liabilities assumed. A valuation will be performed upon closing of the Business Combination based on final assets acquired and liabilities assumed and 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 after the Business Combination to justify what it is paying for the Purchase Price, it is possible that an investor may lose all or part of its investment.

 

 

 

 

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Because the market price of shares of our common stock is subject to fluctuation, you may not be able to sell your common stock at or above the Offering price.

 

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

 

  ·

our ability to integrate the operations of Fat Shark and Red Cat;

     
  ·

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 Red Cat 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. 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 the Offering price.

 

 

 

 

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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.

 

Because our public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

 

If you purchase our common stock in this Offering, you will pay more for your common stock than the amount paid by our existing shareholders for their common stock on a per share basis. As a result, you will experience immediate and substantial dilution of approximately $3.24 per share, representing the difference between the initial public offering price of $4.00 per share and our pro forma as adjusted net tangible book value per share as of September 30, 2023 immediately upon the completion of this Offering.

 

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 100,000 shares of our common stock, 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, our largest stockholder 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 by the Second Amendment with 100,000 shares of our common stock (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.

 

 

 

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We will incur 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.

 

Upon completion of this Offering, we expect to incur 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 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. As described elsewhere in this Prospectus, the SEC’s new cybersecurity 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 will be 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.

 

Our Auditor and Red Cat’s auditor recently was subjected to certain significant enforcement actions in Canada. If its ability to perform audits for public companies in the United States is restricted it could have material adverse consequences on the Company and our investors.

 

In December 2023, the Canadian Public Accountability Board imposed significant restrictions on our auditors (the “Firm”) who also audited the financial statements of Fat Shark and Rotor Riot which are contained in this Prospectus. The sanctions were imposed as a result of a finding of 19 significant inspection findings relating to Canadian auditing rules occurring with two public companies whose audits the regulator reviewed. As a result, the regulator imposed certain sanctions which included: (a) prohibiting the Firm from accepting Canadian reporting issuer clients including those resulting from initial public offerings, reverse takeovers or other transactions (including an existing private company audit client seeking to become a reporting issuer through initial public offering, reverse takeover or other transaction which is considered a new reporting issuer) and (b) prohibiting the Firm from assigning one of its partners to audits of financial statements of reporting issuers in any Canadian jurisdiction in which such partner is not properly licensed to provide public accounting services by the relevant provincial Chartered Professional Accountant regulatory body.

 

The Firm is also subject to oversight by the Public Accounting Oversight Board (the “PCAOB”) in the United States. The PCAOB was established by Congress to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB oversees auditors' compliance with the Sarbanes-Oxley Act, provisions of the securities laws relating to auditing, professional standards, and PCAOB and SEC accounting rules. In May 2022 the PCAOB previously barred a former director and nonequity partner of the Firm for violations of PCAOB rules and standards as part of four audits across three public companies.

 

In the event that the PCAOB or the SEC were to impose material enforcement actions against the Firm including barring it from issuing audit opinions for companies that file reports or registration statements with the SEC, the Company and our investors could be materially and adversely affected. For example, if was determined that our previous and current financial statements (or the financial statements of Fat Shark and Rotor Riot) that were audited or reviewed by the Firm can no longer be relied upon due to auditing errors, we would be required to restate such financial statements. To the extent that the Firm was banned from representing public companies, we would be required to retain new auditors and have such financial statements re-audited, which could result in material additional auditing costs and could adversely affect our stock price and investor confidence in our company. In addition, if the Firm was to be forced to cease its operations, there can be no assurance that the SEC would grant a waiver to issuers like the Company who are unable to use prior audit reports in annual reports on Form 10-K or amendments to the Registration Statement containing this Prospectus. Furthermore, in the event that PCAOB or SEC sanctions were to result in the Firm ceasing to audit public companies that file reports with the SEC, our shareholders may not be able to recover damages against the Firm on claims in connection with a material misstatement or omission in our financial statements that were audited or reviewed by the Firm. 

 

 

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Because our common stock will be listed on NYSE American, we will become subject to additional regulations and continued requirements.

 

We have been approved to have the shares of our common stock listed on NYSE American. Following the Offering, we will be 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 of Directors 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 of Directors 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 have agreed to enter into a registration rights agreement for the registration of 500,000 shares of our common stock that we will issue to Red Cat in connection with the Business Combination and to use our best efforts to file a registration statement 120 days after the consummation of the Offering and have such registration statement declared effective within 180 days. Upon registration and expiration of the 180-day lockup for Red Cat, Red Cat’s common stock 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.

 

 

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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. As of the date of this Prospectus, no 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.

 

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 the fifth anniversary of the completion of this Offering; (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 Certificate 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 Certificate of Incorporation provides that the internal affairs of the Company, including stockholder derivative actions, shall be brought exclusively in commonwealth courts located in Puerto Rico. To the extent that any such action asserts a claim under the Exchange Act, that provision 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 Puerto Rico 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 Puerto Rican 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 another jurisdiction, including Puerto Rico, might rule. Therefore, an investor seeking to bring a claim against or on behalf of the Company or its affiliates under Puerto Rico 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.

 

 

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from this Offering will be approximately $3,725,000 after deducting estimated underwriting discounts and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds will be approximately $4,411,250.

 

   Amount   Percent 
USE OF NET PROCEEDS1          
Payment for the Business Combination2  $1,000,000    26.85% 
Working Capital and General Corporate Purposes3  $2,725,000    73.15% 
           
TOTAL APPLICATION OF NET PROCEEDS  $3,725,000    100.00% 

______________ 

1 Reflects estimated offering expenses, underwriting discounts, and commissions payable by us and assumes no exercise of the underwriters’ option to purchase additional shares of our common stock.

 

We intend to use $1,000,000, or approximately 26.85% of the net proceeds of the Offering to pay Red Cat to consummate the Business Combination. See “The Business Combination.” In addition, we will issue Red Cat the Note in the amount of $2.0 million.

 

3 Includes approximately $23,000 that we owe to a related party for unfulfilled orders and potentially an additional $1.29 million for outstanding purchase orders as of September 30, 2023. The unfulfilled purchase orders relate to the purchase of additional inventory and the timing of which is dependent on sales and current inventory levels. The Company does not anticipate paying this amount to the related party within 12 months following the closing of this Offering based on current inventory levels and anticipated sales over the next 12 months. See “Related Party Transactions” for more information. We intend to use approximately $2,725,000, or 73.15% of the net Offering proceeds, for working capital and general corporate purposes.

 

The actual allocation of proceeds realized from this Offering will depend upon our operating revenues and cash position and our working capital requirements and may change.

 

Therefore, as of the date of this Prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this Offering. Accordingly, we will have discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the proceeds of this Offering.

 

Pending our use of the net proceeds from this Offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

 

 

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of September 30, 2023:

 

  · on an actual basis;
     
  · on a pro forma basis to give effect to the business combination as described above; and
     
  · on a pro forma as adjusted basis to give effect to the business combination as described above and the issuance and sale of 1,250,000 shares of common stock by us in this Offering at the initial public offering price of $4.00 per share, after deducting the estimated underwriting commissions and estimated offering expenses.

 

The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this Offering is subject to adjustment based on the public offering price of our common stock. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Prospectus. The following table assumes the issuance of 4,250,000 shares of our common stock at $4.00 per share, related to the Business Combination as described above, and 1,250,000 shares of our common stock at $4.00 per share, related to this Offering, and excludes the exercise of the over-allotment option by the underwriters and the issuance of the common stock underlying the warrants to be issued to the representative of the underwriters at the Closing of this Offering.

 

   

As of September 30, 2023

(Presented in $ except for share numbers)

 
    Actual     Pro forma (1)    

Pro forma as

adjusted (2)

 
Long term debt   $ 0     $ 2,000,000     $ 2,000,000  
Par Value of preferred stock     0.01       0.01       0.01  
Series B Preferred stock, 190 shares issued and outstanding as of September 30, 2023   $ 2     $ 2     $ 2  
Par Value of common stock     0.01       0.01       0.01  
                         
Common stock, 3,217,255 shares issued and outstanding as of September 30, 2023; pro forma as adjusted without over-allotment reflects 8,717,255 shares issued and outstanding   $ 32,173     $ 74,673     $ 87,173  
Additional paid in capital   $ 4,715,790     $ 21,673,290     $ 25,396,263  
Accumulated deficit   $ (2,916,460 )   $ (2,916,460 )   $ (3,391,460 )
Total shareholders’ equity   $ 1,831,505     $ 18,831,505     $ 22,091,978  
Total capitalization   $ 1,831,505     $ 20,831,505     $ 24,091,978  

________________

 

  (1) Reflects the $2,000,000 Note and the issuance of common stock both related to the Business Combination as discussed above at the public offering price of $4.00 share. It also reflects the 1-for-2 reverse stock split.
     
  (2) Reflects the sale of common stock in this Offering at the public offering price of $4.00 per share and after deducting the estimated underwriting discounts and estimated offering expenses payable by us, assuming the Underwriter’s over-allotment option has not been exercised. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual public offering price and other terms of this Offering determined at pricing. Additional paid-in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts and estimated Offering expenses payable by us. We estimate that such net proceeds will be approximately $3,725,000 assuming the Underwriter has not exercised the over-allotment option. The net proceeds of $3,725,000 are calculated as follows: $5,000,000 gross offering proceeds, less underwriting discounts and commissions of $375,000, underwriter non-accountable expense allowance of $50,000, bonus payable to the Chief Financial Officer of $125,000, and estimated business combination and offering expenses of $725,000. The pro forma as adjusted total equity of $22,091,978 is the sum of the net proceeds of $3,725,000, $16,535,473 related to the business combination, and the actual equity of $1,831,505.

 

 

 

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MARKET FOR OUR COMMON STOCK

 

Prior to this Offering, there has been no public market for our common stock. The initial public offering price of our common stock is $4.00 per share. We have been approved to list the common stock on NYSE American under the symbol “UMAC”. However, there is no assurance that the Offering will close or that our common stock will continue trading on NYSE American.

 

Holders

 

As of the date of the Prospectus, there were approximately 45 stockholders of record of our common stock.

 

Dividend Policy

 

We have never paid our stockholders cash dividends, and we do not anticipate paying any cash dividends in the foreseeable future as we intend to retain any earnings for use in our business. Any future determination to pay dividends will be at the discretion of our Board of Directors.

 

Shares Eligible for Future Sale

 

Future sales of substantial amounts of shares of our common stock in the public market, including shares issued upon the exercise of outstanding options or warrants, or upon conversion of convertible preferred stock, or other securities which we have or may in the future issue, or the anticipation of these sales, could adversely affect market prices prevailing from time-to-time and could impair our ability to raise capital through sales of equity securities.

 

Upon completion of this Offering, we estimate that we will have 8,717,255 outstanding shares, calculated as of the date of this Prospectus, reflecting the 1-for-2 reverse stock split, the issuance of the shares in the Business Combination, the issuance of the shares hereunder, and assuming no exercise of the underwriter’s option or the exercise of the Representative’s Warrants. As of the date of this Prospectus, there are no shares of common stock which may be sold pursuant to Rule 144 under the Securities Act of 1933.

 

 

 

 

 

 

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DETERMINATION OF OFFERING PRICE

 

Prior to this Offering, there has not been a public market for our common stock. Consequently, the initial public offering price for our common stock was determined by negotiations between us and the representative of the underwriters. Among the factors considered in these negotiations were prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.

 

We offer no assurances that the initial public offering price will correspond to the price at which the common stock will trade in the public market subsequent to the Offering or that an active trading market for the common stock will develop and continue after the Offering.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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DILUTION

 

If you invest in our common stock in this Offering, your ownership interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this Offering.

 

Our historical net tangible book value as of September 30, 2023 was $1,826,058, or $0.57 per share of our common stock. Our historical net tangible book value is the amount of our total tangible assets less our total liabilities. Historical net tangible book value per share represents our historical net tangible book value divided by the 3,217,255 shares of our common stock, which takes into effect the 1-for-2 reverse stock split, outstanding as of September 30, 2023.

 

Our pro forma net tangible book value as of September 30, 2023 was $3,356,336, or $0.45 per share of our common stock. Pro Forma net tangible book value represents the amount of our total tangible assets, less our total tangible liabilities, after giving effect to the closing of the Business Combination. Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares outstanding as of September 30, 2023 after giving effect to the issuance of the 4,250,000 common shares to Red Cat in the Business Combination based an initial public offering price of $4.00 per share.

 

After giving effect to our issuance and sale of 1,250,000 shares of common stock in this Offering at the initial public offering price of $4.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and after giving effect to the closing of the Business Combination, our pro forma as adjusted net tangible book value as of September 30, 2023 would have been $6,616,809, or $0.76 per share. This represents an immediate increase in pro forma as adjusted net tangible book value per share of $0.31 to existing stockholders and immediate dilution of $3.24 in pro forma as adjusted net tangible book value per share to new investors purchasing common stock in this Offering. Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this Offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share  $4.00 
Historical net tangible book value per share as of September 30, 2023  $0.57 
Decrease per share attributable to the pro forma adjustments described above  $(0.12)
Pro forma net tangible book value per share as of September 30, 2023  $0.45 
Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing shares in this Offering  $0.31 
      
Pro forma as adjusted net tangible book value per share after this Offering  $0.76 
      
Dilution per share to new investors purchasing shares in this Offering  $3.24 

 

If the underwriters exercise their option to purchase additional shares in full, our pro forma as adjusted net tangible book value per share after this Offering would be $0.82 per share, representing an immediate increase in pro forma as adjusted net tangible book value per share of $0.37 to existing stockholders after giving effect to the closing of the Business Combination and immediate dilution in pro forma as adjusted net tangible book value per share of $3.18 to new investors purchasing common stock in this Offering, based on the initial public offering price of $4.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If any shares are issued upon exercise of outstanding options, you will experience further dilution.

 

 

 

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The following table summarizes, on the pro forma as adjusted basis described above, the differences between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this Offering. The calculation below takes into effect the 1-for-2 reverse stock split and is based on an initial public offering price of $4.00 per share before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

    Shares Purchased     Total Consideration     Average Price
Per Share
 
    Number     Percent     Amount     Percent        
Existing stockholders     3,217,255       36.9%     $ 4,748,000       17.8%     $ 1.48  
Business combination     4,250,000       48.8%       17,000,000       63.6%     $ 4.00  
New investors     1,250,000       14.3%     $ 5,000,000       18.7%     $ 4.00  
Total     8,717,255       100.0%     $ 26,748,000       100.0%     $ 3.07  

 

The table above assumes no exercise of the underwriters’ option to purchase additional shares in this Offering. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of our common stock held by existing stockholders would be reduced to 36.1% of the total number of shares of our common stock outstanding after this Offering, and the number of shares of common stock held by new investors participating in the offering would be increased to 16.1% of the total number of shares of our common stock outstanding after this Offering.

 

The number of shares purchased from us by existing stockholders is based on 3,217,255 shares of our common stock outstanding as of the date of this Prospectus, giving effect to the 1-for-2 reverse stock split, and excludes the following:

 

  · 1,461,876 shares of our common stock available for future issuance under our 2022 Equity Incentive Plan, which includes shares of common stock deliverable under grants of restricted stock units to our executives;
  · 62,500 shares of our common stock issuable upon the exercise of the Representative’s Warrant; and
  · 16,086 shares of common stock issued to our former Chief Executive Officer.

 

 

 

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THE BUSINESS COMBINATION

 

On November 21, 2022, the Company, Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, entered into the Purchase Agreement for the Company’s purchase of Red Cat’s consumer business consisting of recreational and hobbyist drones, first-person-view goggles, and as a licensed authorized reseller.

 

The execution and delivery of the Purchase Agreement followed an internal review by Red Cat of its military and enterprise opportunities to focus its efforts on its Made in America Class 1 ISR Drone development program and Red Cat’s Golden Eagle I, Teal 2, Four Ship and swarm software under development.

 

Under the terms of the Purchase Agreement, upon satisfaction of closing conditions including the closing of the Offering, the approval of our common stock for listing on NYSE American, and the affirmative vote of a majority of the disinterested stockholders of Red Cat following Red Cat’s filing with the SEC and mailing of its Proxy Statement in connection therewith, we will purchase Fat Shark and Rotor Riot, for $20.0 million in cash and securities of Unusual, as more fully-described below. Mr. Thompson, who holds approximately 24% of the voting power of Red Cat, abstained from the voting on approval of the Purchase Agreement.

 

The purchase price under the Purchase Agreement, as amended, is equal to $20.0 million and is comprised of (i) $1.0 million in cash, (ii) the $2.0 million Note issued by the Company to Red Cat, and (iii) $17.0 million of the Company’s common stock. The Red Cat shareholders approved the transaction contemplated in the Purchase Agreement in a special meeting on March 8, 2023.

 

Under the terms of the Purchase Agreement, as amended by the Second Amendment described below, 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 (after giving effect to the 1-for-2 reverse stock split) owned by him to secure any indemnification obligations, which stock is our sole remedy in the event of any claims, except for fraud. Such shares will not be placed into escrow. See “Risk Factors” and “Related Party Transactions.”

 

As a condition to closing, the Company shall enter into an employment agreement with Dr. Allan Evans, our Chief Executive Officer, including non-compete provisions, which provisions cannot be amended or waived without the prior written consent of Red Cat. We, Fat Shark and Rotor Riot will also be subject to five-year non-competition agreements with Red Cat generally restricting activities involving Class I ISR drones for government and institutional customers and an agreement to refer government and institutional inquiries to Red Cat. Until recently, Dr. Evans had been the Chief Operating Officer of Red Cat.

 

On November 21, 2022, the Company’s Board approved the Purchase Agreement. On November 21, 2022, the Board of Directors of Red Cat approved the Purchase Agreement and submission of the Purchase Agreement to stockholders for approval. In addition, closing of the Purchase Agreement is subject to successful completion of the Offering, and approval by NYSE American of listing of our common stock. The Purchase Agreement requires that Red Cat is required to cooperate with us in connection with the Offering and to prepare and deliver to us audited and unaudited financial statements prepared in accordance with U.S. generally accepted accounting principles of Fat Shark and Rotor Riot, in such form and for such periods as are required to be included in the Registration Statement of which this Prospectus forms a part.

 

On March 31, 2023, Red Cat and the Company amended the Purchase Agreement to increase the Purchase Price from $18.0 million to $20.0 million (as described above), extend the March 30, 2023 end date in the Purchase Agreement until June 12, 2023 and lower the minimum amount of the Offering from $15 million to $10 million. As a result of arms’ length negotiations between the Company and special committee of Red Cat and in consideration for Red Cat agreeing to amend the Purchase Agreement, the Purchase Price was increased from $18.0 million to $20.0 million.

 

 

 

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On July 10, 2023, the parties entered into Amendment No. 2 to the Purchase Agreement (the “Second Amendment”). Under the Second Amendment, the parties agreed to extend the termination date of the Purchase Agreement until September 30, 2023 and remove the requirement that Mr. Thompson’s escrow shares of our common stock at closing. In lieu of any escrow Mr. Thompson has agreed to lockup 100,000 shares (or $500,000 at the Offering price) of our common stock as security for his indemnification obligations under Article VII of the Purchase Agreement.

 

On September 18, 2023, the parties entered into Amendment No. 3 to the Purchase Agreement (the “Third Amendment”). Under the Third Amendment, the parties agreed to extend the termination date of the Purchase Agreement until October 31, 2023.

 

On December 11, 2023, the parties entered into Amendment No. 4 to the Purchase Agreement ( the “Fourth Amendment”). Under the Fourth Amendment, the parties agreed to (a) revise the components of the Purchase Price set forth in Section 2.01 of the Purchase Agreement to reduce the total cash paid to $1.0 million, eliminate the need to deposit $1.0 million of cash on hand into escrow prior to closing, and include the $2.0 million Note as part of the Purchase Price, (b) revise the minimum Offering amount from $10.0 million to $5.0 million, (c) replace Dr. Allan Evans for Brandon Torres Declet in Section 10.01(d) and (d) extend the End Date (as defined in the Purchase Agreement) from October 31, 2023 to May 31, 2024 as provided in Section 11.02(a) of the Purchase Agreement, as amended.

 

In addition, Unusual agreed to use its best efforts to prepare and file a Registration Statement with respect to 500,000 shares of our common stock to be issued to Red Cat, and to cause such Registration Statement to be declared effective, to be filed within 120 days and declared effective within 180 days of closing. Red Cat agreed to execute a lock-up agreement effective for 180 days following the closing, or such lesser period as may be agreed upon by the managing underwriter and Red Cat. We have also agreed to reimburse Red Cat up to $100,000 for documented legal and out-of-pocket expenses incurred in connection with the transaction.

 

 

 

 

 

 

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OUR BUSINESS

 

Overview

 

We are a development stage technology company which intends to acquire Fat Shark and Rotor Riot, from Red Cat pursuant to the Purchase Agreement which will close simultaneously with the closing of this Offering. Fat Shark and Rotor Riot are in the business of developing, producing and selling drone solutions and technology, with an initial focus on first-person view, or FPV, drone technology. Fat Shark is a market leader in FPV, designing and manufacturing ultra-low latency video goggles for drone pilots. Rotor Riot’s principal business is the operation of a drone-focused e-commerce marketplace, backed by one of the largest communities of FPV drone pilots in the world. Over the next two years, these businesses plan to continue to focus on leveraging and growing their market share in the retail purchase of drone products for “consumer” uses in the drone technology market. Consumer uses refers to entertainment and cinema, recreational flight, competitive racing and Department of Defense purposes. We also plan to explore a potential expansion into new sub-markets, which we refer to as “enterprise” uses, such as drone delivery functions, organically and/or through strategic acquisitions. This is part of our vision to enable people to be part of the robotics revolution.

 

We were incorporated in Puerto Rico under the name “Red Cat Motor Corporation” on July 11, 2019, before changing our name to “AerocarveUS Corporation” on October 20, 2020 and then to “Unusual Machines, Inc.” on July 5, 2022.

 

Headquartered in Puerto Rico, we intend to build both organically and through acquisitions in addition to our planned acquisition of Fat Shark and Rotor Riot, targeting companies within the highly fragmented drone industry that have valuable IP, revenue generating customers, and great teams.

 

The Drone Industry

 

The drone industry continues to expand beyond its military origin to become a powerful business tool and recreational activity, with growth occurring broadly and across our targeted industries. Consumer – our primary market today, the Consumer or “Recreational” market for drones is forecast to grow at a compound annual growth rate of 20.8% from $4.34 billion in 2022 to $19.71 billion by 2030. Delivery – the global drone package delivery market was valued at $0.94 billion in 2021 and is projected to reach $32.1 billion by 2031, a CAGR of 43.3%.

 

We will also pursue potential acquisition targets in the FPV drone technology space that will improve our own hardware and software solutions, rapidly provide the potential to grow our revenues, expand to new industry verticals, and integrate best in class IP and teams. We cannot assure you we will complete any acquisitions or, if we do, achieve these goals. See “Risk Factors.” We believe that very promising, private companies (such as those we will likely target) are in many instances grossly underfunded and missing out on the ability to go public and bring their innovative products and solutions to a larger set of customers globally. Unlocking this potential will be key to industry consolidation and breaking the dominance of China in the drone industry. We stand at the forefront of this important trend.

 

Our acquisition strategy will focus on private technology companies that are fundamentally changing the world at an unprecedented pace by making superior new products, establishing new markets, creating new experiences and generating revenue with a significant opportunity for growth. Key technological advances and practices, such as new drone designs, automation, cloud computing, data analytics and intelligence platforms, open-source software development, developer-focused software tools, and software-defined networking, storage and computing, are allowing these companies to rapidly effect change in every major sector of the global economy.

 

 

 

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Puerto Rico Advantages

 

According to the Puerto Rico Department of Economic Development and Commerce (“DEDC”), Puerto Rico has become a magnet for some of the world’s leading aviation and aerospace companies. With a long history of manufacturing experience and a strong cadre of engineering talent, the island has attracted multi-million-dollar investments from these and other major companies in recent years.

 

Puerto Rico is well positioned to capture much of the research, innovation, engineering, service and production activity related to the drone sector. Beyond industry incentives and federal tax programs, the island also offers the drone industry these benefits:

 

·Puerto Rico is home to two of the 35 largest engineering programs in the country at the Polytechnic University of Puerto Rico and the University of Puerto Rico, Mayagüez Campus. Every year, the island’s universities award more than 20,000 degrees in science, engineering and technology.
   
·Puerto Rico has the lowest labor costs of any state or territory in the U.S., the island’s bilingual workforce is known for its high productivity with extensive experience in process development, automation, control/warranty quality, storage and more.
   
 ·MRO Opportunities: Roosevelt Roads, Puerto Rico’s former naval base, provides adequate runways and facilities for aircraft maintenance, repair and overhaul (MRO), training, and other services.

 

Planned Acquisition

 

As described under “The Business Combination,” we plan to acquire Fat Shark and Rotor Riot simultaneously with the closing of this Offering. Because the Company is still its development stage and has limited operations on a pre-transaction basis, the following is an overview of these entities and each of their principal operations, products, development effort and marketing strategies, which will entail the Company’s business focus following the acquisition. While each entity exists independently, their operations have been structured and developed to complement each other and operate largely in tandem, as the below discussions describes in greater detail.

 

Fat Shark - First Person View Drone Goggles

 

Fat Shark entered the market in 2007, when founder Greg French began working with camera-fitted aircraft and FPV headsets and decided to design and market his own version of these devices. Fifteen years later, Fat Shark is now a leading provider of drone racing FPV technology. Dr. Allan Evans, our new Chief Executive Officer, was previously the Chief Executive Officer of Fat Shark in 2017 prior to the acquisition from Red Cat in September 2020. Fat Shark aims to achieve optimal performance by investing time and resources to develop quality products, and consulting top drone pilots for feedback and improvement in its product development and design efforts. The result is a high-quality product offering which has gained significant popularity and brand recognition within the freestyle flight and drone racing culture, including more casual hobbyists and enthusiasts.

 

Fat Shark and Rotor Riot operate in the drone first-person view, or “FPV,” market of the drone industry. This segment focuses on drones piloted with wearable display devices. These devices are head mounted displays, or “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. The pilot operates the aircraft with a view as if they were within the cockpit of the drone. 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. Fat Shark’s FPV drone goggles enable the user to operate a drone to be remotely flown for as far as 5-10 miles away.

 

 

 

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There are three common categories of FPV flight – freestyle, racing, and aerial cinematography. In freestyle, the pilot navigates and explores environments while performing acrobatics and flying the aircraft through gaps and small openings. FPV racing describes a spectator sport where pilots compete for the fastest flying time flying their drones through a set course of obstacles, flags and gates. Aerial photography is the process of recording a subject matter from the air from the viewpoint of the pilot. FPV provides a unique form of aerial cinematography recording video that is faster, more dynamic and closer in subject proximity.

 

Rotor Riot – Drone-Focused E-commerce Platform and Digital Marketing

 

Rotor Riot is an e-commerce business focused on drones and drone-related parts, with a marketing strategy which emphasizes drone culture and drone pilots within that culture. Rotor Riot sells drones and starter kits, flight design cameras, video transmitters, and FPV goggles, as well as the mounts, airframes and accessories to build or operate drone aircraft. Rotor Riot in partnership with Fat Shark designs, develops, assembles, and sells each of these FPV components both individually and in packages containing competitor product offerings. These products have gained popularity in FPV racing, and Rotor Riot sponsors multiple drone pilots. The Fat Shark and Rotor Riot product portfolios combine for a total of over 1,800 SKUs, managed at its own state of the art fulfillment center in Orlando, FL. Rotor Riot also purchases and resells drones and components from leading manufacturers, including industry leader DJI, while custom designing and building its own line of branded products and accessories.

 

Rotor Riot also offers customer support services, repair services and replacement parts for upkeep and maintenance for drone flyers seeking to improve upon their drone system’s hardware. These offerings are focused on capitalizing on the resulting need and enhancing customer experience long-term, in the hopes of achieving and maintaining customer loyalty and recurring revenue streams.

 

Rotor Riot markets through social media and attracts buyers to its e-commerce platforms through digital advertising aimed towards drone enthusiasts. Rotor Riot maintains a robust presence on Facebook and YouTube, and also sponsors real-world drone competitions and in-person educational experiences. As of December 2023, Rotor Riot’s YouTube account has over 270,000 subscribers, and its Facebook page has over 42,000 followers. In addition, sports networks, and sponsors such as NBC, Sky, Liberty Media, Fox Sports, MGM, Hearst, and Twitter broadcast and sponsor global events where professional drone pilots and amateurs compete for prizes and sponsorships. Drone racing is a global sport with chapters, leagues, and pilots and established guidelines, rules and regulations for participation adopted by organizations such as MultiGP, Drone Racing League, IUDRO, DR1 Racing, Rotomatch League, FPVR, and Freespace Drone Racing. Pilots specially design their custom-built aircraft, selecting and customizing frames, motors, propellors and controllers for speed and maneuverability from Rotor Riot. Rotor Riot sponsors eight of the top FPV drone pilots, including the 2019 Drone Racing League champion. Drone pilots and spectators alike experience real-time flight through their own HMD. In addition, Fat Shark sponsored its first drone racing championship in 2015.

 

Rotor Riot also leverages the popularity of its products among competitive racing pilots by entering into agreements with the pilots to market its products. Under these agreements, each pilot agrees to represent the Rotor Riot brand to the public and periodically provide marketing materials, typically videos, that the Company can publish on its website and social media platforms, in exchange for cash payments. In addition, the Company pays the pilots a percentage of the proceeds from the sales of that pilot’s “signature” products, and of sales generated from the pilot’s online marketing materials.

 

 

 

 

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Products

 

Set forth below are overviews of our principal product offerings and product development efforts.

 

Fat Shark FPV Products

 

·Dominator Headset (retail price $380 per unit). The Dominators are digital FPV goggles recently launched in May 2022 as the first digital successor to the HDO2. The Dominator uses big 1280 x 960 OLED panels to provide an improved image with a 46-degree field of view (FOV). Display customization is now possible using a new on-screen display (OSD) with expanded controls. The Dominator can also be further personalized with adjustable focus, adjustable IPD, adjustable face plate curvature, selectable image ratio, and a configurable power button. The Dominator is designed for use by experienced pilots looking for an optimal flight experience. Support for Betaflight Canvas Mode puts the flight controller in control of the onscreen display. IPD stands for interpupillary distance; this is the distance between the user’s eyes. Adjustable IPD means that a user can move the optics modules independently side to side to adjust for the IPD for the user’s face. This provides better viewability and reduction in eye strain. Betaflight Canvas Mode refers to the video system being able to integrate with the flight controller so that the on-screen display can be fully rendered by the flight controller. This provides for a much richer set of flight data and configurability.
   
·Recon HD Headset (retail price $279 per unit). The ReconHD’s offer enhanced image quality with a 1080p display viewed through Fat Shark’s patented folded optical engine. The 3.5” panel delivers a crisp 44-degree FOV image at 60 frames per second (fps) with compatibility with WalkSnail transmitters. Recon retains a reputation as a high-performance goggle at an affordable price while maintaining anti-fog fan features, comfortable form factor, and glasses accommodating faceplate.
   
·Scout Headset (retail price $199 per unit). The Scout uses a patented panel goggle optical module to deliver a 50 degree FOV, 1136 x 640 resolution and a 60 fps refresh rate in a comfortable to wear headset. In addition to an advanced display, the Scout has completely overhauled electronics performance. It has a diversity RX with an embedded 10 dB patch antenna to maximize reception, a new OSD, an updated DVR, and simple USB charging. The Scout is also designed to offer several user conveniences including an embedded fan, removable foam to allow for pilots to wear glasses while flying and an LED indicator on the antenna to provide channel notification.
   

 

Rotor Riot Retail Sales

 

Through its e-commerce website, Rotor Riot builds and sells fully assembled ready-to-fly FPV drones and FPV drone kits. Rotor Riot also resells a variety of drones and drone-related products, including competitor FPV goggles as well as competitor offerings. Rotor Riot had over 87,000 visitors to its e-commerce website in November 2023 with approximately 107,000 total sessions. Rotor Riot has approximately 94,000 unique registered customers.

 

Product Warranties

 

Fat Shark provides a two-year warranty on its products.

 

Rotor Riot guarantees its fully assembled ready-to-fly FPV drones against manufacturing defects. For user inflicted damages, Rotor Riot will offer to repair these drones at cost to the customer. For all other retail products, Rotor Riot provides warranty and support at its discretion.

 

 

 

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Suppliers

 

Rotor Riot purchases its inventory from over 60 suppliers. A majority of the inventory is purchased from the following vendors: T-Motor, ASI, Caddx, and Drone Nerds.

 

Fat Shark’s primary contract manufacturer is Shenzhen Fat Shark Technology Ltd., referred to elsewhere in this Prospectus as the “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. See “Related Party Transactions” for more information. Also see the Risk Factor titled “Rising threats of international tariffs, including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.” on page 25 for more information.

 

Tariffs

 

Because we contract with foreign vendors to obtain our inventory, we are subject to tariffs and import/export regulations. In particular, because Fat Shark’s principal manufacturer is located in China, and approximately 68% of Rotor Riot’s inventory is purchased directly from China-based vendors, all of these items are subject to tariffs. Further, because of these tariffs and Rotor Riot’s reliance on Chinese vendors, Rotor Riot has had to raise prices from some of the products it sells. See the Risk Factor titled “Rising threats of international tariffs, including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.” on page 25 for more information.

 

Customers

 

Fat Shark’s sales model is a “B2B2C” model, meaning it sells to retail distributors which in turn sell the products to end users. Rotor Riot is a principal customer of Fat Shark accounting for approximately 26.5% and 17.1% of Fat Shark’s revenues for the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively. Rotor Riot’s customers are therefore end users of the drones and drone products it sells to drone enthusiasts, hobbyists and competitive racers, which includes the Fat Shark FPV goggles as well as drones and drone components offered by third parties. Fat Shark’s other customers are also competitors of Rotor Riot, as these customers purchase Fat Shark inventory and sell it to drone users. Because their products are presently focused on recreational drone uses, the end users who purchase these products are mainly enthusiasts, hobbyists, competitive droner racers, photographers and videographers.

 

The culture of FPV flight has and we believe will continue to inspire a new generation of pilots. These are the people and customers who enjoy exploring the world through a new and unique perspective, the people who find solace in the world of flight, and the people who innovate new technologies to enable the culture to thrive. There has been a broader and renewed awareness related to the FPV community with the ongoing war conflicts in Ukraine and Israel and the extensive use of FPV drones in warfare. Production of FPV drones has significantly increased since the war in Ukraine which will continue to expand and develop the industry and technology. The FPV community has taken the knowledge of 80 years of model aviation to the next level, allowing for a more immersive experience with new and emerging technologies.

 

Sales and Marketing Strategy

 

Following the planned acquisition, and assuming we can raise sufficient capital in this Offering or subsequent financings, we will deploy a robust sales and marketing strategy. We intend to sell and market our products in the following ways, in addition to Rotor Riot’s existing marketing and sales channels described above:

 

·Direct to consumer via a best-in-class e-commerce platform prospecting globally with our own internal salespeople supported by a robust multichannel marketing approach. Our goal is to leverage the “right” channels. This can include websites, search engines, social media, email, mobile, promotional events, conventional storefronts, and direct mail. We plan to increase our reach thereby boosting brand awareness of Unusual Machines, Rotor Riot, and Fat Shark.
   
·Direct to system integrators that may derive value combining Unusual Machine’s products as part of a larger offering.
   
·Direct to original equipment managers prospects.
   
·To specialized FPV goggle resellers with previous experience selling components and systems to the private sector.

 

In addition, as we strive to grow our operations, we intend to deploy 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. We believe the acquisition of Fat Shark and Rotor Riot, and the product quality and brand recognition they have developed, will be an important component of this strategy.

 

 

 

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Growth Strategy

 

We plan to organically grow by building and selling best in class FPV drone technologies. In parallel, we are investing in the development of products, services and go-to-market strategies that serve a broader set of industries. Lastly, we will take a proactive approach to search for and acquire promising private companies with complementary businesses. Our business strategy includes the following:

 

·Increasing Our Overall Customer Base. We believe the market for FPV drone technologies manufactured in the United States is large and underdeveloped, with further room for growth. As the drone industry expands and drone technology is adopted by more consumers, businesses, and industries, we believe there is substantial opportunity to add additional customers.
   
·Investing in Product Innovation for Growth. We intend to invest in new products, features and functionality. In addition, we also plan to explore and pursue acquisitions of products, teams and technologies that complement and expand the functionality of our products, add to our technology expertise and bolster our position by providing access to new customers and markets.
   
·Expand Our Base with Existing Customers. We believe there is a significant opportunity to further expand within our existing customer base. As the drone industry grows, we intend to grow with our customers.
   
·Strategic Partnerships with Leading Technology Companies. We expect to partner with leading technology companies to leverage our drone industry expertise and our products to reach more markets and customers. We intend to continue to seek strategic partnerships, investments, and acquisitions with companies that provide key building blocks of the drone industry (computer vision, machine learning, and airspace) that weave into our vision of dominating the FPV drone segment.
   
·Leverage Marketing Channels and Relationships with Pilots and Other Industry Participants. Rotor Riot engages customers via its social media and online platforms. It has developed a following on Facebook, Instagram and YouTube of drone racing and flying enthusiasts who could also be prospective customers in new product launches. Rotor Riot also engages competitive drone racing pilots to serve as brand ambassadors and producers of advertising materials in exchange for cash fees, royalties on product sales, and other benefits. The Company intends to leverage and grow this network to enable further expansion of its market presence and brand strength.

 

Competition

 

While competition as described below is a concern, we believe that Dr. Allan Evans, our Chief Executive Officer and former Chief Operating Officer of Red Cat, has a significant background in the drone business which we believe is a competitive advantage. In addition, we believe that Dr. Evans relationships with Fat Shark and Rotor Riot’s customers and suppliers will help us with the integration of the Business Combination. See “Management and Board of Directors.”

 

Rotor Riot competes with a number of significantly larger, better capitalized companies. SZ DJI Technology Company, Ltd., commonly known as DJI, is a leader in the consumer drone segment with a global market share estimated at more than 70%, according to industry research firms. In addition to competing with DJI, Rotor Riot purchases and sells DJI products on its website. Other Rotor Riot competitors include GetFPV, Race Day Quads, PyroDrone, Parrot, and Lumenier. Race Day Quads is a larger, direct competitor in the FPV sector. We will compete against these companies by leveraging our visibility on the Internet through Rotor Riot’s Facebook page which as of November 2023 has more than 42,000 members and our Rotor Riot YouTube channel which as of November 2023 has more than 270,000 subscribers. The Rotor Riot brand has been at the center of the racing and freestyle culture of drones since 2015. Rotor Riot sponsors eight of the top FPV drone pilots, including the 2019 Drone Racing League champion.

 

 

 

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Fat Shark competes against DJI which is the dominant market leader in the consumer segment. Fat Shark also competes with other FPV headset companies that include Skyzone, Orqa, and HD Zero. The Fat Shark brand has been synonymous with FPV headsets to many industry participants since the emergence of the market in 2008. Fat Shark continues to compete through partnerships with other FPV companies and a focus on superior design, manufacturing customer service and product quality.

 

There has also been a proliferation of startups in the drone industry, driving fragmentation and lowering prices. We believe that this fragmentation does little to address the needs of users of drones or our future customers. We expect that as the industry grows, customers will ultimately rely on companies and platforms that consolidate solutions to unify the key categories of the drone industry. As part of our acquisition strategy, the Company is engaging companies with industry-leading technology and intellectual property, or customers that can be brought together under our brand. We believe that this consolidation strategy will enable us to grow faster in the developing drone industry.

 

We expect competition in the drone industry, which is already intense, to increase as other companies enter the drone market, as customers’ requirements evolve, and as new products and technologies are introduced. Several of our competitors have greater name recognition, much longer operating histories, greater financial resources, more and better-established customer relationships, larger sales forces and significantly greater resources. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than us, hampering our ability to successfully compete with respect to certain of these factors. Increased competition may lead to price cuts or the introduction of products available for free or at a nominal price, fewer customer orders, reduced gross margins, longer sales cycles and loss of market share. We may not be able to compete successfully against current and future competitors, and our business, results of operations and financial condition may be harmed if we fail to meet these competitive pressures.

 

Government Regulation of Drones

 

In the U.S., the FAA 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” to describe aircraft systems without a flight crew on board. More common names include: drone, UAS, 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’s UAS Registration Task Force announced that all drones weighing more than 250 grams, or 0.55 pounds, must be registered with the FAA. As of September 2023, the FAA reported the registration of 863,728 drones, of which 352,222 were commercial and 506,635 were recreational. In addition, more than 331,573 remote pilots were certified.

 

In December 2015, the FAA enacted the primary regulation governing the use of drones, 14 CFR Part 107 (“Part 107”), which governs the use of drones weighing less than 55 pounds, on takeoff, including everything that is on board or otherwise attached to the drone. Key provisions of Part 107 include the following: (1) the drone must remain within either the visual line of sight (“VLOS”) of the remote pilot in command and the person manipulating the flight controls or the VLOS of a visual observer; (2) the drone must at all times remain close enough to the remote pilot and person manipulating the flight controls for these people to see it with unaided vision; (3) drones may only operate in daylight or civil twilight (30 minutes before official sunrise to 30 minutes after official sunset); (4) drones may not exceed a maximum groundspeed of 100 mph; (5) drones may not exceed a maximum altitude of 400 feet above ground level, or if they exceed this altitude, must remain within 400 feet of a structure; (6) drones cannot operate in Class B, C, D, and E airspace without permission; (7) the pilot in command must conduct a pre-flight inspection; (8) to operate a drone, the pilot must either hold a remote pilot airman certificate or be under the direct supervision of someone with such a certificate; and (9) drone operators must register their drones with the FAA.

 

In January 2021, the FAA finalized rules requiring that drones be identifiable remotely. These rules became effective for drone manufacturers in September 2022 and became effective 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.

 

 

 

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On March 10, 2022, the FAA’s Unmanned Aircraft Systems Beyond Visual Line of Sight Aviation Rulemaking Committee (“ARC”) issued its final report to the FAA. In terms of key recommendations, the ARC recommends that the FAA set an acceptable level of risk (“ALR”) for UAS that is consistent across all types of operations being performed. The ARC envisions that this approach will allow the FAA to adopt a common and consistent set of regulations and guidance, giving operators the flexibility to meet the ALR through qualitative or quantitative methods, or a hybrid approach. Next, the ARC recommends a series of modifications to the right of way rules in Low Altitude Shielded Areas (within 100’ of a structure or critical infrastructure as defined in 42 U.S.C. § 5195(c)(2) and in Low Altitude Non-Shielded Areas (below 400’) to accommodate unmanned aircraft (“UA”) operations.

 

We cannot assure you that any final legislation or rules enacted in furtherance of the FAA’s or other regulatory bodies’ announced proposals will result in the expanded use of our products, or that they will not limit or restrict their use or our market share.

 

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. Because Fat Shark only develops and produces FPV goggles and associated components, FAA regulations do not currently govern the sale, registration or operation of Fat Shark products.

 

Environmental Considerations

 

Compliance with applicable environmental laws since inception has not had a material effect upon our 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 we sell burn carbon which negatively affects the environment. Further, the SEC’s climate change rules, when passed will likely increase our compliance costs.

 

Research and Development

 

Research and development activities are part of Fat Shark’s business, and we will follow a disciplined approach to investing our resources to create new drone technologies and solutions. In the years ending April 30, 2023 and 2022, Fat Shark’s research and development costs were approximately 12.1% and 15.5%, respectively, of its revenues. 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. Our research will include the enhancement of our goggle products for consumers that enjoy FPV flight and to enterprise customers whose problems could be solved via FPV flight.

 

Employees and Human Capital Resources

 

As of the date of this prospectus, we had three full-time employees. We believe that we maintain good relations with our employees. However, with our acquisition of Fat Shark and Rotor Riot, we expect to add 12 employees We intend to evaluate how we attract and retain the best talent in the industry and create a world class culture. Since our business is new and evolving, we have not evaluated these factors historically.

 

Legal Proceedings

 

From time-to-time, we may become involved in various legal proceedings that arise in the ordinary course of business or otherwise. Legal proceedings are subject to inherent uncertainties as to timing, outcomes, costs, expenses and time expenditures by our management and others on our behalf. We are currently not a party to any litigation and have been advised in writing by Red Cat’s Chief Executive Officer that as of April 13, 2023, he is unaware of Fat Shark and Rotor Riot being involved in any litigation.

 

 

 

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Facilities

 

Our principal executive offices are located at 151 Calle De San Francisco Ste. 200 PMB 2106 San Juan, Puerto Rico 00901-1607. In October 2023, Rotor Riot signed a new five year lease for a 6,900 sq. foot facility in Orlando, FL which provides additional warehouse and office space to accommodate the current and expected growth.

 

Intellectual Property

 

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.

 

We recently filed for a trademark on our logo. We expect to acquire from Red Cat the following patents and trademarks related to the Fat Shark and Rotor Riot brands and products following the acquisition of those entities:

 

The following table summarizes currently issued patents (indicated by “Issued”) including the grant dates thereof, and patent applications (indicated by “Pending or Published”), currently held and/or used by Red Cat and its subsidiaries in connection with Fat Shark’s and Rotor Riot’s operations. 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

 

 

 

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Trademark Portfolio

The following table summarizes current registered trademarks (indicated by “Registered”) including the registration dates, held and/or used by Red Cat and its subsidiaries in connection with Fat Shark’s and Rotor Riot’s operations. 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

 

 

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations should be read together with our financial statements and accompanying notes, and our appearing elsewhere in this Prospectus. This Management’s Discussion and Analysis contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” set forth in the beginning of this Prospectus and see “Risk Factors” beginning on page 8 for a discussion of certain risk factors applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative of results that may occur in future periods. Please note that because we and Red Cat have different fiscal years, the period-to-period results are not comparable.

 

Overview

 

We are a Puerto Rico corporation organized in 2019. We are engaged in the commercial drone industry but to date have not generated any material revenues. Our current primary business objective is to consummate the Business Combination which we believe will accelerate our role in this industry. See “The Business Combination”.

 

Simultaneous with the closing of this Offering, we will acquire Fat Shark and Rotor Riot from Red Cat with a goal of becoming a first-person view, or “FPV,” technology market leader. Fat Shark is a leader in FPV, designing and manufacturing ultra-low latency video goggles for drone pilots. Rotor Riot is an e-commerce marketplace, backed by the largest community of FPV drone pilots in the world. Over the next two years, our goal is to materially grow these businesses, while expanding into new enterprise verticals like drone delivery. This is part of our vision to enable people to be part of the robotics revolution. Red Cat acquired Rotor Riot in January 2020 and Fat Shark in November 2020.

 

The following management discussion and analysis includes the results of operations, cash flow activities and liquidity and capital resources for each Unusual Machines, Fat Shark and Rotor Riot and are marked accordingly below.

 

Unusual Machines Results of Operations

 

Nine Months Ended September 30, 2023 and 2022

 

Revenue

 

During the nine months ended September 30, 2023 and 2022, we did not generate any revenues and as such did not incur any cost of goods sold.

 

Operating Expenses

 

During the nine months ended September 30, 2023, we incurred general and administrative expenses totaling $1,377,859 compared to $777,909 for the nine months ended September 30, 2022, resulting in an increase of $599,960 or 77.1%. The increase primarily relates to Unusual Machines building out its operations. This includes hiring an executive team, legal expenses related to the business combination, and professional fees for preparation of becoming a public company.

 

Net Loss

 

Net loss for the nine months ended September 30, 2023 totaled $1,377,859 compared to $777,805 for the nine months ended September 30, 2022, resulting in an increase of $600,064 or 77.1%. The increase in net loss is entirely related to the increase in general and administrative expenses as we start to build out our operations for the business combination and in preparation for becoming a public company.

 

Unusual Machines Results of Operations

 

Years Ended December 31, 2022 and 2021

 

Revenue

 

During the year ended December 31, 2022, we did not generate any revenues compared to $4,989 revenues during the year ended December 31, 2021; representing a decrease of $4,989 or 100%. Revenues from 2021 related to limited sales to Rotor Riot which did not occur in 2022.

 

 

 

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Operating Expenses

 

During the year ended December 31, 2022, we incurred research and development expenses totaling $91,325 compared to $0 for the year ended December 31, 2021; resulting in an increase of $91,325 or 100%. The increase relates to professional fees for product design work that was subsequently placed on hold given the proposed business combinations of Fat Shark and Rotor Riot.

 

During the year ended December 31, 2022, we incurred general and administrative expenses totaling $1,150,522 compared to $166,868 for the year ended December 31, 2021, resulting in an increase of $983,654 or 589.5%. The increase primarily relates to Unusual Machines building out its operations. This includes hiring an executive team, legal expenses related to the business combination, and professional fees for preparation of becoming a public company.

 

Net Loss

 

Net loss for the year ended December 31, 2022, totaled $1,242,584 compared to $161,876 for the year ended December 31, 2021, resulting in an increase of $1,080,708. The increase in net loss is almost entirely related to the increase in general and administrative expenses and research and development expenses as we start to build out our operations for the business combination and becoming a public company.

 

Fat Shark Results of Operations

 

Six Months Ended October 31, 2023 and 2022

 

Revenue

 

During the six months ended October 31, 2023 (or the “2023 period”), Fat Shark generated revenues totaling $1,011,135 compared to $1,983,871 during the six months ended October 31, 2022 (or the “2022 period”), representing a decrease of $972,736 or 49.0%. Revenues can fluctuate from period to period and are generally reflective of normal changes as the life cycles of the company’s products mature. Lower revenues for the 2023 period related to its newest product, the Dominator, which was launched at the beginning of the 2022 period, and while it generated strong initial sales in the first quarter, sales declined significantly since the 2022 period.

 

Cost of Goods Sold

 

During the six months ended October 31, 2023, Fat Shark incurred cost of goods sold of $1,255,326 compared to $1,727,121 during the six months ended October 31, 2022; resulting in a decrease of $471,795 or 27.3%. The decrease related to lower revenues during the 2023 period.

 

Gross Margin

 

During the six months ended October 31, 2023, Fat Shark’s gross margin was ($244,191) compared to $256,750 during the six months ended October 31, 2022, resulting in a decrease of $500,941 or 195.1%. Fat Shark’s gross margin, as a percentage of sales, totaled (24.2%) during the six months ended October 31, 2023 compared to 12.9% during the six months ended October 31, 2022. The reported gross margin was adversely impacted by a charge of approximately $317,000 related to the write-off of excess quantities of Dominator inventory based on sales volumes and product discounts.

 

Operating Expenses

 

During the six months ended October 31, 2023, Fat Shark’s operations expenses totaled $86,093 compared to $135,030 during the six months ended October 31, 2022, resulting in a decrease of $48,937 or 36.2%. The decrease during the 2023 period reflects lower professional services fees compared to the 2022 period.

 

During the six months ended October 31, 2023, Fat Shark incurred research and development expenses totaling $29,843 compared to $143,469 for the six months ended October 31, 2022, resulting in a decrease of $113,626 or 79.2%. The decrease during the 2023 period reflects lower payroll costs compared to the 2022 period.

 

During the six months ended October 31, 2023, Fat Shark’s sales and marketing expenses totaled $159 compared to $9,726 for the six months ended October 31, 2022, resulting in a decrease of $9,567 or 98.4%. Sales and marketing expenses were higher during the 2022 period as the Company was preparing for the launch of the Dominator.

 

During the six months ended October 31, 2023, Fat Shark incurred general and administrative expenses totaling $9,715 compared to $60,893 for the six months ended October 31, 2022, resulting in a decrease of $51,178 or 84.0%. The decrease primarily relates to lower office, insurance, and facilities costs compared to the 2022 period.

 

 

 

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Net Loss

 

Fat Shark’s net loss for the six months ended October 31, 2023 totaled $417,168 compared to $139,728 for the six months ended October 31, 2022, resulting in a decrease of $277,440 or 198.6%. This increase in net loss relates to the write-off of excess quantities of Dominator inventory resulting in lower gross margins during the 2023 period. This was partially offset by lower operating expenses compared to the 2022 period. The release of Fat Shark’s new generation product, the Dominator, took place during the 2022 period which resulted in higher revenues and gross margins in the 2022 period.

 

Fat Shark Results of Operations

 

Years Ended April 30, 2023 and 2022

 

Revenue

 

During the year ended April 30, 2023 (or the “2023 period”), Fat Shark generated revenues totaling $2,317,444 compared to $2,627,792 during the year ended April 30, 2022 (or the “2022 period”), representing a decrease of $310,348 or 11.8%. Revenues can fluctuate from period to period and are generally reflective of normal changes as the life cycles the company’s products mature. Lower revenues for the 2023 period related to its newest product, the Dominator, which was launched at the beginning of the 2022 period, and while it generated strong initial sales in the first quarter, sales declined significantly over the remaining quarters in Fiscal 2023.

 

Cost of Goods Sold

 

During the year ended April 30, 2023, Fat Shark’s incurred cost of goods sold of $2,159,159 compared to $2,569,307 during the year ended April 30, 2022; resulting in a decrease of $410,148 or 16.0%. The decrease related to lower revenues during the 2023 period.

 

Gross Margin

 

During the year ended April 30, 2023, Fat Shark gross margin was $158,285 compared to $58,485 during the year ended April 30, 2022, resulting in an increase of $99,800 or 170.6%. Fat Shark’s gross margin, as a percentage of sales, totaled 6.8% during the year ended April 30, 2023 compared to 2.2% during the year ended April 30, 2022. The lower gross margin in the 2022 period related to price reductions of the prior digital goggle as Fat Shark prepared for the launch of the Dominator early in the 2023 period. Separately, Fat Shark recorded a charge of $182,845 related to the write-off of excess quantities of Dominator inventory based on sales volumes during the second half of the year ended April 30, 2023.

 

Operating Expenses

 

During the year ended April 30, 2023, Fat Shark’s operations expenses totaled $240,945 compared to $252,545 during the year ended April 30, 2022, resulting in a decrease of $11,600 or 4.6%. The decrease during the 2023 period reflects lower professional services fees compared to the 2022 period.

 

During the year ended April 30, 2023, Fat Shark incurred research and development expenses totaling $280,515 compared to $407,881 for the year ended April 30, 2022, resulting in a decrease of $127,366 or 31.2%. The decrease during the 2023 period reflects lower payroll and material costs compared to the 2022 period. During the 2022 period, Fat Shark incurred higher payroll and material costs related to its next generation product release.

 

During the year ended April 30, 2023, Fat Shark’s sales and marketing expenses totaled $16,858 compared to $60,616 for the year ended April 30, 2022, resulting in a decrease of $43,758 or 72.2%. Sales and marketing expenses were higher during the 2022 period as the Company was preparing for the launch of the Dominator.

 

During the year ended April 30, 2023, Fat Shark incurred general and administrative expenses totaling $88,277 compared to $169,096 for the year ended April 30, 2022, resulting in a decrease of $80,819 or 47.8%. The decrease primarily relates to lower payroll, facilities, and business travel costs compared to the 2022 period.

 

Net Loss

 

Fat Shark’s net loss for the year ended April 30, 2023 totaled $546,121 compared to $910,723 for the year ended April 30, 2022, resulting in a decrease of $364,602. This decrease relates to improved gross margins and lower operating expenses during the 2023 period. During the 2022 period, Fat Shark’s gross margin was lower related to pricing discounts on end-of-life cycle products and higher research and development expenses related to the release of the new generation product, the Dominator.

 

 

 

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Rotor Riot Results of Operations

 

Six Months Ended October 31, 2023 and 2022

 

Revenue

 

During the six months ended October 31, 2023 (or the “2023 period”), Rotor Riot generated revenues totaling $2,180,357 compared to $1,624,947 during the six months ended October 31, 2022 (or the “2022 period”), representing an increase of $555,410 or 34.2%. Revenues can fluctuate from period to period and are generally reflective of normal changes through the life cycles of the products that the company sells. During the 2023 period, higher revenues were generated by a significant increase in digital marketing spending.

 

Cost of Goods Sold

 

During the six months ended October 31, 2023, Rotor Riot incurred cost of goods sold of $1,531,540 compared to $1,394,051 during the six months ended October 31, 2022, resulting in an increase of $137,489 or 9.9%. The increase related to higher revenues during the 2023 period.

 

Gross Margin

 

During the six months ended October 31, 2023, Rotor Riot’s gross margin was $648,817 compared to $230,896 during the six months ended October 31, 2022, resulting in an increase of $417,921 or 181.0%. Gross margin, as a percentage of sales, totaled 29.8% during the six months ended October 31, 2023 compared to 14.2% during the six months ended October 31, 2022. The higher level of gross margin is primarily related to successful efforts to reduce tariff expenses for inventory purchases.

 

Operating Expenses

 

During the six months ended October 31, 2023, Rotor Riot incurred operations expense totaling $297,712 compared to $197,808 during the six months ended October 31, 2022, resulting in an increase of $99,904 or 50.5% primarily related to increased payroll costs. Payroll expenses totaled $204,648 in the 2023 period compared to $135,604 in the 2022 period, resulting in an increase of $69,044 or 51%. This increase represented 69% of the total increase in operations expenses.

 

During the six months ended October 31, 2023, Rotor Riot incurred research and development expenses totaling $47,460 compared to $27,295 for the six months ended October 31, 2022, resulting in an increase of $20,165 or 73.9%. The increase was entirely due to increased payroll costs.

 

During the six months ended October 31, 2023, Rotor Riot incurred sales and marketing expenses totaling $691,358 compared to $353,565 for the six months ended October 31, 2022, resulting in an increase of $337,793 or 95.5%. The increase primarily relates to an increase in payroll and advertising program costs for Rotor Riot. Payroll expenses totaled $201,708 in the 2023 period compared to $109,915 in the 2022 period, resulting in an increase of $91,793 or 84%. Advertising expenses totaled $347,238 in the 2023 period compared to $211,680 in the 2022 period, resulting in an increase of $135,558 or 64%. The increases in payroll and advertising expenses represented 27% and 40%, respectively, of the total increase in operations expenses.

 

During the six months ended October 31, 2023, Rotor Riot incurred general and administrative expenses totaling $43,873 compared to $98,591 for the six months ended October 31, 2022, resulting in a decrease of $54,718 or 55.5%. The decrease is primarily related to lower banking fees in the 2023 period.

 

Net Loss

 

Rotor Riot’s net loss for the six months ended October 31, 2023 totaled $548,470 compared to $535,419 for the six months ended October 31, 2022, resulting in an increase of $13,051 or 2.4%. The increase in net loss is primarily related to increased sales and marketing expenses.

 

 

 

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Rotor Riot Results of Operations

 

Year Ended April 30, 2023 and 2022

 

Revenue

 

During the year ended April 30, 2023 (or the “2023 period”), Rotor Riot generated revenues totaling $3,447,149 compared to $2,028,149 during the year ended April 30, 2022 (or the “2022 period”), representing an increase of $1,419,000 or 70.0%. Revenues can fluctuate from period to period and are generally reflective of normal changes through the life cycles of the products that the company sells. During the 2023 period, higher revenues were generated by a significant increase in digital marketing spending.

 

Cost of Goods Sold

 

During the year ended April 30, 2023, Rotor Riot incurred cost of goods sold of $3,015,398 compared to $1,587,674 during the year ended April 30, 2022, resulting in an increase of $1,427,724 or 89.9%. The increase related to higher revenues during the 2023 period.

 

Gross Margin

 

During the year ended April 30, 2023, Rotor Riot’s gross margin was $431,751 compared to $440,475 during the year ended April 30, 2022, resulting in a decrease of $8,724 or 2.0%. Gross margin, as a percentage of sales, totaled 12.5% during the year ended April 30, 2023 compared to 21.7% during the year ended April 30, 2022. The lower level of gross margin is primarily related to higher costs of products being sold including increases in material costs due to the global supply chain issues.

 

Operating Expenses

 

During the year ended April 30, 2023, Rotor Riot incurred operations expense totaling $403,912 compared to $372,473 during the year ended April 30, 2022, resulting in an increase of $31,439 or 8.4% primarily related to increased payroll costs.

 

During the year ended April 30, 2023, Rotor Riot incurred research and development expenses totaling $65,487 compared to $58,719 for the year ended April 30, 2022, resulting in an increase of $6,768 or 11.5%. The increase primarily relates to increased payroll costs.

 

During the year ended April 30, 2023, Rotor Riot incurred sales and marketing expenses totaling $845,526 compared to $220,007 for the year ended April 30, 2022, resulting in an increase of $625,519 or 284.3%. The increase primarily relates to an increase in payroll and advertising program costs for Rotor Riot.

 

During the year ended April 30, 2023, Rotor Riot incurred general and administrative expenses totaling $311,301 compared to $220,366 for the year ended April 30, 2022, resulting in an increase of $90,935 or 41.3%. The increase is primarily related to increased information technology costs associated with the implementation of more sophisticated software systems. Additionally, payroll, office, travel and professional fees also increased.

 

Net Loss

 

Rotor Riot’s net loss for the year ended April 30, 2023 totaled $1,387,866 compared to $596,878 for the year ended April 30, 2022, resulting in an increase of $790,988 or 132.5%. The increase in net loss is primarily related to increased stock compensation, general and administrative, and sales and marketing expenses.

 

 

 

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Liquidity and Capital Resources

 

Unusual Machines Cash Flows

 

Nine Months Ended September 30, 2023 and 2022

 

Operating Activities

 

Net cash used in operating activities was $1,759,240 during the nine months ended September 30, 2023 compared to net cash used in operating activities of $727,528 during the nine months ended September 30, 2022, representing an increase of $1,031,712 or 141.8%. This increase in net cash used primarily resulted from our increase in net loss of $600,064, increase in deferred offering costs of $376,702 and changes in non-cash expenses and working capital of $54,946.

 

Investing Activities

 

Net cash used in investing activities was $3,164 during the nine months ended September 30, 2023 compared to net cash used in investing activities of $2,521 during the nine months ended September 30, 2022, representing an increase of $643 or 25.5%. This increase in net cash used in investing activities resulted from our purchase of computer equipment during the nine months ended September 30, 2022.

 

Financing Activities

 

Net cash provided by financing activities totaled $0 during the nine months ended September 30, 2023 compared to $549,900 during the nine months ended September 30, 2022, resulting in a decrease in net cash provided by financing activities of $549,900 or 100%. The decrease is entirely related to proceeds received from exempt private offerings of our common stock received in 2022.

 

Unusual Machines Cash Flows

 

Years Ended December 31, 2022 and 2021

 

Operating Activities

 

Net cash used in operating activities was $1,231,794 during the year ended December 31, 2022 compared to net cash used in operating activities of $162,821 during the year ended December 31, 2021, representing an increase of $1,068,973 or 656%. This increase in net cash used primarily resulted from our increase in net loss of $1,242,584 offset by non-cash expenses of $885 and changes in working capital of $9,905.

 

Financing Activities

 

Net cash provided by financing activities totaled $549,900 during the year ended December 31, 2022 compared to $3,948,065 during the year ended December 31, 2021, resulting in a decrease in net cash provided by financing activities of $3,398,165 or 86.1%. The decrease is entirely related to proceeds received from exempt private offerings of our common stock.

 

 

 

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Fat Shark Cash Flows

 

Six Months Ended October 31, 2023 and 2022

 

Operating Activities

 

Fat Shark net cash provided by operating activities was $298,080 during the six months ended October 31, 2023 compared to net cash used in operating activities of $3,053,300 during the six months ended October 31, 2022, representing an increase of $3,351,380 or 109.8% in net cash provided by operating activities. This increase in net cash provided by operating activities primarily resulted from Fat Shark’s change in inventory, other assets which consists primarily of prepaid inventory, and accounts receivable totaling $4,554,154, offset by a decrease in net loss of $277,440, non-cash expenses of $166 and changes in working capital of $925,168.

 

Financing Activities

 

Fat Shark net cash used in financing activities totaled $377,514 during the six months ended October 31, 2023 compared to net cash provided by financing activities of $3,007,298 during the six months ended October 31, 2022. The cash used in financing activities in 2023 consisted entirely of payments under debt obligations. The cash provided by financing activities in 2022 consisted entirely of proceeds from a related party.

 

Fat Shark Cash Flows

 

Years Ended April 30, 2023 and 2022

 

Operating Activities

 

Fat Shark net cash used in operating activities was $3,688,211 during the year ended April 30, 2023 compared to net cash used in operating activities of $783,810 during the year ended April 30, 2022, representing an increase of $2,904,401 or 370.5%. This increase in net cash used primarily resulted from Fat Shark’s increase in inventory and other assets which consists primarily of prepaid inventory of $3,607,636 offset by a decrease in net loss of $364,602, non-cash expenses of $19,341 and changes in working capital of $319,292.

 

Financing Activities

 

Fat Shark net cash provided by financing activities totaled $3,664,732 during the year ended April 30, 2023 compared to $848,195 during the year ended April 30, 2022. The cash provided by financing activities in 2023 consisted entirely of proceeds from a related party. The cash provided by financing activities in 2022 consisted of $2,468,995 of proceeds from a related party offset by $1,620,880 payments on debt obligations.

 

Rotor Riot Cash Flows

 

Six Months Ended October 31, 2023 and 2022

 

Operating Activities

 

Rotor Riot net cash used in operating activities was $848,201 during the six months ended October 31, 2023 compared to net cash used in operating activities of $953,367 during the six months ended October 31, 2022, representing a decrease of $105,166 or 11.0%. This decrease in net cash used primarily resulted from Rotor Riot’s decrease in accounts receivable and inventory of $267,460, offset by an increase in net loss of $13,051 and changes in working capital of $149,243.

 

 

 

 

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Financing Activities

 

Rotor Riot net cash provided by financing activities totaled $847,289 during the six months ended October 31, 2023 compared to $960,915 during the six months ended October 31, 2022. The cash provided by financing activities in 2023 consisted of proceeds from a related party of $681,263, and proceeds from debt obligations of $262,856, offset by payments on debt obligations of $96,830. Cash provided by financing activities in 2022 consisted of $960,915 of proceeds from a related party.

 

Rotor Riot Cash Flows

 

Years Ended April 30, 2023 and 2022

 

Operating Activities

 

Rotor Riot net cash used in operating activities was $1,358,620 during the year ended April 30, 2023 compared to net cash used in operating activities of $678,206 during the year ended April 30, 2022, representing an increase of $680,414 or 100.3%. This increase in net cash used primarily resulted from Rotor Riot’s increase in net loss of $790,988 offset by non-cash expense of $40,355 and changes in working capital of $70,219.

 

Financing Activities

 

Rotor Riot net cash provided by financing activities totaled $1,339,491 during the year ended April 30, 2023 compared to $591,339 during the year ended April 30, 2022. The cash provided by financing activities in 2023 consisted entirely of proceeds from a related party of $1,339,491. Cash provided by financing activities in 2022 consisted of $860,384 of proceeds from a related party offset by payments on debt obligations of $269,045.

 

Unusual Machines Liquidity and Capital Resources

 

As of September 30, 2023, we had current assets totaling $1,907,170 primarily consisting of cash balances of $1,337,018. Our current liabilities as of September 30, 2023 totaled $81,112, consisting entirely of accounts payable and accrued expenses. Our net working capital as of September 30, 2023 was $1,826,058. Our cash balance as of the date of this Prospectus was approximately $1,100,000.

 

To date, our operations and business development have been funded exclusively by exempt private offerings of our common stock. In September of 2021, we closed a private offering of 4,552,000 shares of common stock at a price of $0.50 per share for total proceeds of $2,276,000. On December 31, 2021, we closed an additional private offering of 482,500 shares of common stock at a price of $4.00 per share for total gross proceeds of $1,930,000, of which we received net proceeds of $1,842,000 after fees and other expenses. On July 25, 2022, we closed an additional private offering of 150,000 shares of common stock at a price of $4.00 per share for total proceeds of $600,000.

 

  

 

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While we have sufficient cash resources to support our operations for the next 12 months, we cannot complete the acquisition of Fat Shark and Rotor Riot unless we close this Offering. As a part of this Offering, we expect to sell 1,250,000 shares of common stock at the initial public offering price of $4.00 per share for anticipated gross proceeds of $5,000,000. After deducting anticipated offering and business combination related expenses, our net proceeds from the Offering will be approximately $3.7 million. We do not anticipate any significant cost increases post Fat Shark and Rotor Riot acquisitions and with consideration of the combined companies’ net loss and cash position, we expect we will have sufficient working capital to support our operations for at least 12 months following the closing of this Offering.

 

Going Concern

 

The reports from the independent registered public accounting firm for the fiscal year ended April 30, 2023 for Fat Shark Holdings Ltd. and for the fiscal year ended April 30, 2023 for Rotor Riot, LLC, includes an explanatory paragraph stating each company has recurring net losses from operations, has negative operating cash flows, does not yet generate revenue from operations and will need additional working capital for ongoing operations. These factors, among others, raise substantial doubt about each company's ability to continue as a going concern. If Fat Shark and Rotor Riot obtain sufficient funding, including advances from us with the proceeds of this Offering, we expect each will no longer operate as a going concern. With the closing of this Offering, we will not be a going concern, however, we note our continuing losses in the going concern risk factor on page 8.

 

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. 

 

Property and equipment are stated at cost. Depreciation and amortization are computed using straight-line methods over the estimated useful lives of the related assets. When property and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any resulting gain or loss on disposition is reflected in operations. Repairs and maintenance are expensed as incurred; expenditures for additions, improvements and replacements are capitalized. The various classes of fixed assets are depreciated over their estimated useful lives as follows:

 

Computer equipment – 3 years

 

Goodwill represents the excess of the purchase price of an acquisition over the estimated fair value of identifiable net assets acquired. The measurement periods for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes known, not to exceed 12 months. Adjustments in a purchase price allocation may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

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.

 

  

 

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MANAGEMENT AND BOARD OF DIRECTORS

 

Board of Directors, Executive Officers and Significant Employees

 

Set forth below are our executive officers and members of our Board of Directors (the “Board”) as of the date of this Prospectus.

 

Name Age Position
     
Dr. Allan Evans 40 Chief Executive Officer and Director
     
Brian Hoff 38 Chief Financial Officer
     
Robert Lowry 64 Director
     
Sanford Rich 65 Director
     
Jeffrey Thompson 59 Director
     
Cristina A. Colón, Esq. 36 Director

 

Our directors hold office until the next annual meeting of shareholders of the Company and until their successors have been elected and qualified. Our officers are elected by and serve at the discretion of the Board.

 

Biographies

 

Dr. Allan Evans, Chief Executive Officer and Chairman of the Board of Directors

 

Dr. Allan Evans was appointed to serve as the Chief Executive Officer and a director of the Company effective December 4, 2023. Prior to becoming our Chief Executive Officer, Dr. Evans was the Chief Operating Officer of Red Cat from January 2021 to November 2023 and was the Chief Executive Officer of Fat Shark. As part of his compensation package with Red Cat, Dr. Evans beneficially owns 1,443,395 shares of common stock and 875,000 unvested options in Red Cat. Dr. Evans is a serial entrepreneur with a history of founding and leading technological innovation. He has extensive experience in overseeing different emerging technologies. From August 2017 to October 2020, Dr. Evans served as a board member for Ballast Technologies, a company that specialized in technology for location-based entertainment. In November 2012, he co-founded Avegant, a technology company focused on developing next generation display technology to enable previously impossible augmented reality experiences. He led design, development, and initial production of the Glyph head mounted display and oversaw technology research and patent strategy while serving as Chief Technology Officer of Avegant until 2016. Dr. Evans has 47 pending or issued patents that cover a range of technologies from implantable medical devices to mixed reality headsets. Academically, his work has an h-index of 15, an i-index of 28, and has been cited in more than 1,000 publications. He has extensive experience with new technologies, engineering, business development, and corporate strategy, and his expertise in these areas strengthens the Company’s collective knowledge and capabilities.

 

Dr. Evans’ management and public company experience, his experience in the drone business and his role as President and Chief Executive Officer of the Company, led to his appointment as a director.

 

 

 

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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.

 

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 has served as director and Audit Committee Chair 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.

 

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.

 

 

 

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Composition of our Board of Directors

 

Our Board of Directors currently consists of five members. Our directors hold office until their successors have been elected and qualified or until the earlier of their death, resignation or removal. There are no family relationships among any of our directors or executive officers.

 

Director Independence

 

Our Board has determined that all of our present directors are independent, in accordance with standards under the NYSE Listing Rules, other than Dr. Evans and Mr. Thompson. Our Board determined that, under the NYSE Listing Rules, Dr. Evans is not an independent director because he is the Chief Executive Officer of the Company. It has also been determined that Mr. Thompson is not an independent director, having previously been Chief Executive Officer of the Company in the last three years.

 

Our Board has determined that Mr. Lowry, Mr. Rich, and Ms. Colón are independent under the NYSE Listing Rules’ independence standards for Audit Committee members. Our Board has also determined that they are independent under the NYSE Listing Rules independence standards for Compensation Committee members and for Governance and Nominating committee members.

 

Committees of the Board of Directors

 

Audit Committee

 

The Audit Committee, which 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 and Mr. Lowry are each 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.

 

 

 

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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.

 

 

 

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Board and Committee Meetings in Fiscal Year 2023

 

In the fiscal year ended December 31, 2023, the Board had five meetings and acted on 15 occasions by unanimous consent. The Executive Committee of the Board met once.

 

There were no directors who attended fewer than 75 percent of the number of Board meetings during the fiscal year ended December 31, 2023.

 

Board Diversity

 

While we do not have a formal policy on diversity, the Board considers diversity to include race, ethnicity, gender as well as the skill set, background, reputation, type and length of business experience of the Board members as well as a particular nominee’s contributions to that mix. The Board believes that diversity brings a variety of ideas, judgments and considerations that benefit the Company and its shareholders.  Although there are many other factors, the Board seeks individuals with experience on operating and growing businesses.

 

Board Leadership Structure

 

Allan Evans serves as the Chairman of the Board and actively interfaces with management, the Board and counsel regularly. We believe that Mr. Evans’s experience as an entrepreneur and Chief Executive Officer of a drone company will help the Company with the challenges faced by us at this stage – closing the acquisition of Fat Shark and Rotor Riot and this Offering as well as implementing our business and marketing plans, integrating the acquisitions, continuing and managing our growth. We believe that Mr. Evans, Mr. Thompson and the other members of the Board will assist the Company’s management with both the operational aspects as well as the strategic aspects of our business.

 

Board Risk Oversight

 

The Company’s risk management function is overseen by the Board. The Company’s management keeps the Board apprised of material risks and provides its directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect us, and how management addresses those risks. Allan Evans, Chairman of the Board, works closely together with the other members of the Board when material risks are identified on how to best address such risks. If the identified risk poses an actual or potential conflict with management, the Company’s independent directors may conduct the assessment. Presently, the primary risks affecting us are our liquidity and the lack of revenue.

 

Family Relationships

 

There are no family relationships among any of our officers or directors.

 

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. 

 

 

 

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EXECUTIVE AND DIRECTOR COMPENSATION

 

Summary Compensation Table

 

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our Chief Executive Officer, two most highly paid executive officers with compensation exceeding $100,000 during the fiscal years ended December 31, 2023 and 2022, and two additional individuals for whom the foregoing would apply but for the fact that they were not executive officers of the Company as of December 31, 2023 (each a “Named Executive Officer”). Compensation for 2023 has been calculated through December 31, 2023.

 

Name and Principal Position  Year   Salary
($)
   Total
($)
 
Brandon Torres Declet (1)  2023   $291,667   $291,667 
Former Chief Executive Officer  2022   $80,000   $80,000 
               
Brian Hoff (2)  2023   $250,000   $250,000 
Chief Financial Officer  2022   $41,667   $41,667 
               
Jeffrey Thompson (3)  2023   $   $ 
Former Chief Executive Officer and President  2022   $203,000   $203,000 
               
Allan Evans (4)  2023   $20,833   $20,833 
Chief Executive Officer  2022   $   $ 

 

(1) 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 was replaced by Dr. Allan Evans in December 2023. Mr. Declet executed a termination agreement pursuant to which he will receive three months of salary as severance and three months of medical and insurance premiums. In lieu of 603,208 RSUs that Mr. Declet was to be granted post Offering, Mr. Declet will receive 16,086 shares of our common stock. See “Related Party Transactions” for more information.

 

(2) Mr. Hoff was appointed Chief Financial Officer in November 2022.

 

(3) Mr. Thompson served as the Company’s Chief Executive Officer from July 2019 to May 2022, when he was replaced in such role by Brandon Torres Declet. Mr. Thompson is also the Chief Executive Officer and a director of Red Cat.

 

(4) Mr. Evans was appointed Chief Executive Officer in December 2023 and did not serve during the 2022 fiscal year. Mr. Evans was previously the Chief Operating Officer at Red Cat.

 

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”). See “The Business Combination” for more information. The compensation information relates to the fiscal year end April 30, 2023 and 2022, respectively.

 

Name and Principal Position(1)  Year   Salary
($)
    Bonus
($)
   Option Awards
($)
     Total
($)
 
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.

 

 

 

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2022 Equity Incentive Plan

 

Effective October 1, 2022, the Board approved the Company’s 2022 Equity Incentive Plan (the “Plan). The Plan provides for the award of restricted stock units, stock options (incentive and non-qualified), stock awards and stock appreciation rights to officers, directors, employees and consultants who provide services to the Company. In December 2023, the Board approved an increase of authorized shares issued under the plan from no more than 10% of the outstanding shares of common stock on a fully diluted basis to 15% of the outstanding shares of common stock on a fully diluted basis. In addition, the Board approved a share reserve increase on January 1 of each year, beginning on January 1, 2025 and ending on January 1, 2032, equal to 5% of the common stock outstanding on December 31 of the preceding calendar year authorized to be issued under the plan to retain and attract employees.

 

The Company has reserved 1,292,588 shares of common stock for issuance under the Plan, which represents approximately 15% of the outstanding common stock on a fully-diluted basis after giving effect to the exercise and conversion of all outstanding stock which may be issued outside of the Plan including preferred stock and warrants, giving effect to the 1-for-2 reverse stock split and giving effect to this Offering and the Business Combination, assuming no over-allotment option is exercised by the underwriter(s). This number will increase to the extent of any future issuances of common stock or derivative securities following this Offering. The Board may terminate the Plan at any time. Unless sooner terminated, the Plan will terminate ten years after the effective date of the Plan. The number of shares of common stock covered by each outstanding stock right, and the number of shares of common stock which have been authorized for issuance under the Plan as well as the price per share of common stock (or cash, as applicable) covered by each such outstanding option or SAR, shall be proportionately adjusted for any increases or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification, or any other increase or decrease in the number of issued shares of common stock effected without receipt of consideration by the Company.

 

Employment Agreements

 

Employment Agreement with Dr. Allan Evans, Chief Executive Officer

 

On November 27, 2023, the Company and Dr. Allan Evans entered into an Offer Letter (the “Offer Letter”) under which Dr. Evans serves as the Company’s Chief Executive Officer effective December 4, 2023. The Offer Letter provides that Dr. Evans receives: (i) an annual base salary of $250,000, subject to annual review; (ii) eligibility to earn an annual bonus at the sole discretion of the Company’s Board; (iii) a grant of restricted stock units (“RSUs”) equal to 5% of the outstanding common stock of the Company, vesting on the earlier of (a) a secondary offering, (b) a Change of Control event as defined in Treasury Regulation Section 1.409A-3(i)(5), or (c) the one year anniversary of the signing of the Offer Letter; and (iv) eligibility to participate in employee benefit plans and programs.

 

The Company and Dr. Evans have agreed to negotiate an acceptable Employment Agreement consistent with the terms of the Offer Letter. The Employment Agreement (“Employment Agreement”) shall be for a term of at least two years. The Employment Agreement will contain a non-compete provision that for a period of 12 months after Dr. Evans is no longer employed by the Company, he will not, directly or indirectly, either as proprietor, stockholder, partner, officer, employee or otherwise, distribute, sell, offer to sell, or solicit any orders for the purchase or distribution of any products or services which are similar to those distributed, sold or provided by the Company during the 12 months preceding his termination of employment with the Company, to or from any person, firm or entity which was a customer of the Company during the 12 months preceding such termination of employment. This section in his Employment Agreement may not be waived by the Company without the consent of Red Cat.

 

The foregoing description of the terms of the Offer Letter does not purport to be complete and is qualified in its entirety by reference to the copy or form of such Offer Letter which is filed as Exhibit 10.21 to the Registration Statement of which this Prospectus is a part of.

 

 

 

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Employment Agreement with Brian Hoff, Chief Financial Officer

 

The Employment Agreement with Mr. Hoff effective November 1, 2022 provides that he will serve as the Chief Financial Officer of the Company on an at will basis. In August 2023, the Employment Agreement was amended (the “First Hoff Amendment”) to increase the percentage of RSUs from 1% to 3% (as discussed below). Pursuant to his Employment Agreement, Mr. Hoff receives an annual base salary of $250,000. In addition, Mr. Hoff’s Employment Agreement entitles him to the following:

 

·Eligibility to earn an annual bonus of 50% of his annual base salary based on key performance indicators, as set forth in a bonus plan that is to be established, approved, administered and determined by the Board and the Chief Executive Officer.
   
·A cash and/or equity bonus of up to $125,000 upon the closing of each successful acquisition with the closing of this Offering, he will receive a $125,000 bonus.
   
·A cash bonus and/or equity bonus equal to up to $125,000 upon the completion of a capital raise event, defined as a second offering, a private placement offering, an at-the-market offering, a private investment in public equity offering.
   
·A grant of RSUs equal to 3% of the outstanding common stock of the Company (after giving effect to the First Hoff Amendment). The RSUs will vest on the earlier of (i) a secondary offering, (ii) a Change of Control event as defined in Treasury Regulation Section 1.409A-3(i)(5), or (iii) the one year anniversary of the consummation of the Offering. This grant becomes effective upon the earlier to occur of 30 days following (i) the closing of the Fat Shark and Rotor Riot acquisition and (ii) the date on which the Company reasonably determines not to proceed with the acquisition.

 

Additionally, under his Employment Agreement, if Mr. Hoff is terminated by the Company without Cause or terminates his employment for Good Reason, he will be entitled to six months’ annual base salary and COBRA premiums, as well as accelerated vesting of 100% of the then unvested RSUs, if applicable.

 

For this purpose, Good Reason is generally defined as (i) any reduction in his base salary, (ii) any material diminution of his authorities, titles or offices, (iii) being required to report to anyone other than the Chief Executive Officer, (iv) a request by the Company to relocate, or (v) material breach of his Employment Agreement without cure after 30 days’ written notice.

 

Cause is generally defined as (i) failure to perform his material duties under the Employment Agreement, following 30 days’ written notice without cure, (ii) willful misconduct or gross negligence or breach of a fiduciary duty owed to the Company, (iii) conviction of our guilty pleas to a felony or other criminal offense involving moral turpitude, (iv) any act or omission involving dishonesty, disloyalty, or fraud causing or reasonably expected to cause significant economic harm to the Company, or (v) material breach of his Employment Agreement without cure after 30 days’ written notice.

 

Director Compensation

 

To date, we have not paid our non-employee directors any compensation for services on our Board. We anticipate granting our non-employee directors a quarterly cash grant and/or RSUs, commencing upon the consummation of this Offering.

 

Employee Benefit Plans

 

The Company currently has the Plan, a 401(k) plan, and will adopt the medical, dental, and vision coverage that is currently offered to Rotor Riot’s employees for the Company’s employees upon closing of the Business Combination.

 

 

 

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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 Prospectus, as applicable.

 

On December 8, 2023, our former Chief Executive Officer, Brandon Torres Declet, and the Company executed a termination agreement (the “Termination Agreement”) pursuant to which Mr. Declet received three months of salary severance and three months of medical and insurance premiums. In lieu of 603,208 RSUs that Mr. Declet was to be granted post Offering, Mr. Declet will receive 16,086 shares of our common stock. A copy of the Termination Agreement is filed as Exhibit 10.22 to this Registration Statement of which this Prospectus is a part.

 

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. For more information on the private offering to which this related, see “Recent Sales of Unregistered Securities.” 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 (after giving effect to the 1-for-2 reverse stock split) owned by him to secure any indemnification obligations, which stock is our sole remedy, except for fraud. Mr. Torres Declet negotiated the terms of the Purchase Agreement on an arms’ length basis with Joe Freedman who was the head of Red Cat’s Special Committee. The transaction was ultimately approved by the Company’s and Red Cat’s board of directors. On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated in the Purchase Agreement in a special meeting. Mr. Thompson recused himself from such vote.

 

In November 2020, Red Cat acquired Fat Shark Holdings for a total purchase price of $8.4 million. In January 2020, Red Cat acquired Rotor Riot for a total purchase price of $2.0 million.

 

Since July 2017, Fat Shark has used Shenzhen Fatshark Co, Ltd., referred to herein as the “Supplier,” a drone manufacturing company located in Shenzhen, China, as its primary contract manufacturer for Fat Shark’s drone products. In exchange for the Supplier’s manufacturing services with respect to these products, Fat Shark pays the Supplier amounts equal to 115% of the sum of the bill of material and the labor costs for such production. Ms. Molly Mo, a majority owner of the Supplier, is the wife of Greg French, the founder of Fat Shark. Since January 1, 2020, Fat Shark has paid or accrued a total of $12,422,126 in purchase orders to the Supplier. As of September 30, 2023, Fat Shark owed the related party Supplier $23,095, which does not include unfilled purchase orders of approximately $1.29 million. The unfilled purchase orders relate to anticipated inventory purchases and the timing of fulfilling those purchase orders depends on sales and inventory levels. Unusual Machines may use a portion of the proceeds to fulfill the purchase orders and purchase additional inventory for future sales, however, based on current inventory levels and anticipated sales over the next 12 months, Unusual Machines does not anticipate making any payments to the Supplier related to the unfilled purchase orders within 12 months from the closing of this Offering.

 

 

 

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PRINCIPAL STOCKHOLDERS

 

The following table lists, based on amounts outstanding as of the date of this Prospectus (before the Offering) and estimated amounts to be outstanding after the Offering (based on certain assumptions described below), the number of shares of common stock beneficially owned 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 the executive officers of Fat Shark and Rotor Riot as described under “Executive Compensation”; 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 shareholder's address is c/o Unusual Machines, Inc., 151 Calle De San Francisco, Ste 200 PMB 2106, San Juan, PR 00901-1607.

 

Applicable percentage ownership before the Offering is based on 3,217,255 shares of common stock outstanding as of the date stated above.

 

Applicable percentage ownership after the Offering gives effect to the 4,250,000 shares of common stock issued as a part of the Business Combination and the issuance of 1,250,000 shares of common stock in this Offering, based on the initial public offering price of $4.00 per share, and excludes 187,500 shares of common stock issuable if the underwriters exercise their option to purchase additional shares.

 

Name and Address of Beneficial Owner   Amount of Shares Beneficially Owned Before Offering     Percentage of Beneficial Ownership Before Offering     Amount of Shares Beneficially Owned After Offering     Percentage of Beneficial Ownership After the Offering (6)  
Named Executive Officers and Directors:                                
Allan Evans     0       *       0       *  
Brian Hoff     0       *       0       *  
Brandon Torres Declet(1)     16,086       *       16,086       *  
Robert Lowry     0       *       0       *  
Sanford Rich     0       *       0       *  
Jeffrey Thompson(2)     328,500       10.16%       328,500       3.76%  
Cristina A. Colón     0        *       0       *  
All executive officers and directors as a group (7 persons)     344,586       10.66%       344,586       3.95%  
Other 5% Holders                                
Red Cat Holdings, Inc.     0       *       4,250,000       48.66%  
Gordon Holmes (3)     362,500       11.27%       362,500       4.15%  
Michael Laughlin (4)     200,000       6.22%       200,000       2.29%  
Aikido Labs (5)     307,189       9.55%       307,189       3.52%  

________________

*Less than 1%

  

 

 

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(1) Mr. Declet resigned as Chief Executive Officer on November 21, 2023. As a part of Mr. Declet’s Termination Agreement, the Company issued him 16,086 shares of common stock.

(2) The number of shares beneficially owned by Mr. Thompson before the Offering only includes shares of the Company’s common stock personally owned by Mr. Thompson. Mr. Thompson is the Chief Executive Officer of Red Cat. We have been informed by Red Cat’s counsel that Mr. Thompson is not deemed to be the beneficial owner of the shares beneficially owned by Red Cat and that the Red Cat board of directors will have voting power and investment power for the shares that will be held by Red Cat. Address is 15 Ave. Munoz Rivera Ste 2200, San Juan, PR 00901. As of the date of this Prospectus, the Red Cat board of directors is comprised of Jeffrey Thompson, Joseph Freedman, Christopher Moe and Nicholas Liuzza.

(3) Address is 295 Palmas Inn Way, Ste 104 PMB 115, Humacao, PR 00791.

(4) Address is 145 Sandy Hook Rd N, Sarasota, FL 34242.

(5) Address is 1 Rockefeller Center, 11th Floor, New York, NY 10020

(6) The numbers and percentages outstanding in these columns, exclude:

 

  · 1,461,876 shares of our common stock available for future issuance under the Plan at the mid-point of the range, which includes shares of common stock deliverable under grants of RSUs since the underlying common stock cannot be delivered within 60 days of the date of this Prospectus to our executives;
  · 62,500 shares of our common stock issuable upon the exercise of the Representative’s Warrant; and

 

Change-in-Control Agreements

 

The Company does not have any change-in-control agreements with any of its executive officers.

 

 

 

 

 

 

 

 

 

 

 

 

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DESCRIPTION OF SECURITIES

 

Our authorized capital stock consists of 500,000,000 shares of common stock, par value $0.01 per share, of which 3,217,255 shares are outstanding as of the date of this Prospectus, giving effect to a 1-for-2 reverse stock split, 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 B preferred stock 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 Amended and Restated Certificate of Incorporation, and the Certificate of Designation setting forth the terms of our Series B preferred stock, 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 Puerto Rican law, including the Puerto Rico General Corporate Act.

 

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. 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 B Convertible Preferred Stock

 

We have 190 outstanding shares of Series B Convertible Preferred Stock (the “Series B”). Each share of Series B is convertible into 10,000 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.

 

Anti-Takeover Effects of Provisions of our Certificate of Incorporation, our Bylaws and Puerto Rico Law

 

Certain provisions in our Amended and Restated Certificate 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.

 

 

 

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Advance Notice Requirements for Stockholder Proposals and Director Nominations.

 

Our Bylaws will provide that stockholders seeking to bring business before an annual meeting of stockholders, or 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, or delayed by more than 60 days after, the anniversary of the preceding year’s annual meeting of our stockholders, a stockholder’s notice to be timely must be so delivered not earlier than the close of business on the 120th day prior to such meeting and not later than the close of business on the later of the 90th day prior to such meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. 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, special meetings of the stockholders may be called only by (i) our Board, or (ii) a holder of at least 20% of the shares entitled to vote at the meeting.

 

Jurisdiction and Venue

 

Section 7(a) of our Certificate 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 Puerto Rican corporate law, be governed by the laws of Puerto Rico and providing that resulting proceedings be heard exclusively in commonwealth courts located within Puerto Rico, which may make actions against or on behalf of the Company more difficult to litigate by stockholders. Similarly, Section 7(b) of our Certificate 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 and commonwealth or 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 Puerto Rico 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 Puerto Rico General Corporations Act, 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, in most jurisdictions including in Puerto Rico it remains unclear how a court would interpret and whether it would enforce some of these provisions, resulting in added uncertainty. See the Risk Factor titled “Our Certificate of Incorporation contains certain provisions which may result in difficulty in bringing stockholder actions against or on behalf of the Company or its affiliates” on page 34 for more information. 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.

 

 

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS TO NON-U.S. HOLDERS

 

The following discussion is a summary of the material U.S. federal income tax considerations applicable to Non-U.S. Holders (as defined below) with respect to their acquisition, ownership and disposition of shares of our Common Stock issued pursuant to this Offering. This summary does not provide a complete analysis of all potential U.S. federal income tax considerations relating thereto. The information provided below is based upon provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, administrative rulings, and judicial decisions currently in effect. These authorities may change at any time, possibly retroactively, or the Internal Revenue Service (the “IRS”) might interpret the existing authorities differently. In either case, the tax considerations of owning or disposing of our Common Stock could differ from those described below. As a result, we cannot assure you that the tax consequences described in this discussion will not be challenged by the IRS or will be sustained by a court if challenged by the IRS.

 

This summary does not address the tax considerations arising under the laws of any non-U.S., state or local jurisdiction, or under U.S. federal gift and estate tax laws, except to the limited extent provided below. In addition, this discussion does not address tax considerations applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:

 

  · banks, insurance companies or other financial institutions;
     
  · partnerships or entities or arrangements treated as partnerships or other pass-through entities for U.S. federal tax purposes (or investors in such entities);
     
  · corporations that accumulate earnings to avoid U.S. federal income tax;
     
  · persons subject to the alternative minimum tax or Medicare contribution tax on net investment income;
     
  · tax-exempt organizations or tax-qualified retirement plans;
     
  · controlled foreign corporations or passive foreign investment companies;
     
  · dealers in securities or currencies;
     
  · traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
     
  · persons that own, or are deemed to own, more than 5% of our capital stock (except to the extent specifically set forth below);
     
  · certain former citizens or former long-term residents of the United States;
     
  · persons who hold our Common Stock as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction;
     
  · persons who do not hold our Common Stock as a capital asset within the meaning of Section 1221 of the Code (generally, for investment purposes); or
     
  · persons deemed to sell our Common Stock under the constructive sale provisions of the Code.

 

In addition, if a partnership or entity classified as a partnership for U.S. federal income tax purposes is a beneficial owner of our Common Stock, the tax treatment of a partner in the partnership or an owner of the entity will depend upon the status of the partner or other owner and the activities of the partnership or other entity. Accordingly, this summary does not address tax considerations applicable to partnerships that hold our Common Stock, and partners in such partnerships should consult their tax advisors.

 

INVESTORS CONSIDERING THE PURCHASE OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES OF FOREIGN, STATE OR LOCAL LAWS, AND TAX TREATIES.

 

 

 

 

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Non-U.S. Holder Defined

 

For purposes of this summary, a Non-U.S. Holder is any beneficial owner of our Common Stock, other than a partnership, that is not:

 

  · an individual who is a citizen or resident of the United States;
     
  · a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States, any state therein or the District of Columbia;
     
  · a trust if it (i) is subject to the primary supervision of a U.S. court and one of more U.S. persons have authority to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or
     
  · an estate whose income is subject to U.S. income tax regardless of source.

 

If you are a non-U.S. citizen that is an individual, you may, in many cases, be treated as a resident alien, as opposed to a nonresident alien, by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. For these purposes, all the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year are counted. Resident aliens are subject to U.S. federal income tax as if they were U.S. citizens. Such an individual is urged to consult his or her own tax advisor regarding the U.S. federal income tax consequences of the ownership or disposition of our Common Stock.

 

Dividends

 

As discussed under “Dividend Policy” above, we do not currently expect to declare or pay dividends to our Common Stockholders in the foreseeable future. In the event that we do make distributions of cash or other property on our Common Stock, those distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital, which will first reduce a Non-U.S. Holder’s adjusted tax basis in shares of our Common Stock, but not below zero. Any remaining excess will be treated as gain realized on the sale or other disposition of our Common Stock and will be treated as described below under “Gain on Sale or Other Taxable Disposition of Our Common Stock.”

 

Subject to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder of our Common Stock that is not effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States will generally be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a properly executed IRS Form W-8BEN or W-8BEN-E (or other applicable or successor form) certifying the Non-U.S. Holder’s qualification for the lower treaty rate). A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty. If the Non-U.S. Holder holds the stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to the agent. The holder’s agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS in a timely manner.

 

If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base maintained by the Non-U.S. Holder in the United States), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.

 

 

 

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Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.

 

Gain on Sale or Other Taxable Disposition of Our Common Stock

 

Subject to the discussion below under “Information Reporting and Backup Withholding” and “Foreign Account Tax Compliance Act,” a Non-U.S. Holder will generally not be subject to U.S. federal income tax on any gain realized upon the sale, exchange, or other taxable disposition of our Common Stock unless:

 

  · the gain (i) is effectively connected with the conduct by the Non-U.S. Holder of a U.S. trade or business, and (ii) if required by an applicable income tax treaty between the United States and the Non-U.S. holder’s country of residence, is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States (in which the special rules described below apply);
     
  · the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange or other disposition of our Common Stock, and certain other requirements are met (in which case the gain would be subject to a flat 30% tax, or such reduced rate as may be specified by an applicable income tax treaty, which may be offset by certain U.S. source capital losses, even though the individual is not considered a resident of the United States); or
     
  · the rules of the Foreign Investment in Real Property Tax Act (“FIRPTA”) treat the stock as a “U.S. real property interest” as defined in Section 897 of the Code.

 

The FIRPTA rules may apply to a sale, exchange or other disposition of our Common Stock if we are, or were within the shorter of the five-year period preceding the disposition and the Non-U.S. Holder’s holding period, a “U.S. real property holding corporation” (a “USRPHC”), as defined in Section 897 of the Code. In general, we would be a USRPHC if interests in U.S. real estate comprised at least half of the value of our business assets. We do not believe that we are a USRPHC and we do not anticipate becoming one in the future. Even if we become a USRPHC, as long as our Common Stock is regularly traded on an established securities market, such Common Stock will be treated as U.S. real property interests only if beneficially owned by a Non-U.S. Holder that actually or constructively owned more than 5% of our outstanding Common Stock at sometime within the five-year period preceding the disposition.

 

If any gain from the sale, exchange or other disposition of our Common Stock (1) is effectively connected with a U.S. trade or business conducted by a Non-U.S. Holder, and (2) if required by an applicable income tax treaty between the United States and the Non-U.S. Holder’s country of residence, is attributable to a permanent establishment maintained by such Non-U.S. Holder in the United States, then the gain generally will be subject to U.S. federal income tax at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. If the Non-U.S. Holder is a corporation, under certain circumstances, that portion of its earnings and profits that is effectively connected with its U.S. trade or business, subject to certain adjustments, generally would be subject also to a “branch profits tax.” The branch profits tax rate is 30% unless reduced by applicable income tax treaty.

 

Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.

 

U.S. Federal Estate Tax

 

The estates of nonresident alien individuals generally are subject to U.S. federal estate tax on property with a U.S. situs. Because we are a U.S. corporation, our Common Stock will be U.S. situs property and therefore will be included in the taxable estate of a nonresident alien decedent, unless an applicable estate tax treaty between the United States and the decedent’s country of residence provides otherwise.

 

  

 

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Informational Reporting and Backup Withholding

 

The Code and the Treasury regulations require those who make specified payments to report the payments to the IRS. Among the specified payments are dividends and proceeds paid by brokers to their customers. The required information returns enable the IRS to determine whether the recipient properly included the payments in income. This reporting regime is reinforced by “backup withholding” rules. These rules require the payors to withhold tax from payments subject to information reporting if the recipient fails to cooperate with the reporting regime by failing to provide his taxpayer identification number to the payor, furnishing an incorrect identification number, or failing to report interest or dividends on his returns. The backup withholding tax rate is currently 24%. The backup withholding rules do not apply to payments to corporations, whether domestic or foreign, provided they establish such exemption.

 

Payments to Non-U.S. Holders of dividends on our Common Stock generally will not be subject to backup withholding, and payments of proceeds made to Non-U.S. Holders by a broker upon a sale of Common Stock will not be subject to information reporting or backup withholding, in each case so long as the Non-U.S. Holder certifies its status as a Non-U.S. Holder (and we or our paying agent do not have actual knowledge or reason to know the holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied) or otherwise establishes an exemption. The certification procedures to claim treaty benefits described under “Distributions” will generally satisfy the certification requirements necessary to avoid the backup withholding tax. We must report annually to the IRS any dividends paid to each Non-U.S. Holder and the tax withheld, if any, with respect to these dividends. Copies of these reports may be made available to tax authorities in the country where the Non-U.S. Holder resides. However, under the Treasury regulations, information returns are required to be filed with the IRS in connection with any dividends on our Common Stock paid to the Non-U.S. Holder, regardless of whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our Common Stock within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting, if the beneficial owner certifies, under penalties of perjury, among other things, its status as a Non-U.S. Holder (and the broker does not have actual knowledge or reason to know the holder is a U.S. person) or otherwise establishes an exemption. The payment of proceeds from the disposition of shares of our Common Stock by a Non-U.S. Holder made to or through a non-U.S. office of a broker generally will not be subject to backup withholding and information reporting, except as noted below. Information reporting, but not backup withholding, will apply to a payment of proceeds, even if that payment is made outside of the United States, if you sell our Common Stock through a non-U.S. office of a broker that is:

 

  · a U.S. person (including a foreign branch or office of such person);
     
  · a “controlled foreign corporation” for U.S. federal income tax purposes;
     
  · a foreign person 50% or more of whose gross income from certain periods is effectively connected with a U.S. trade or business; or
     
  · a foreign partnership if at any time during its tax year (a) one or more of its partners are U.S. persons who, in the aggregate, hold more than 50% of the income or capital interests of the partnership or (b) the foreign partnership is engaged in a U.S. trade or business, unless the broker has documentary evidence that the beneficial owner is a Non-U.S. Holder and certain other conditions are satisfied, or the beneficial owner otherwise establishes an exemption (and the broker has no actual knowledge or reason to know to the contrary).

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

 

 

 

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Foreign Account Tax Compliance Act

 

A U.S. federal withholding tax of 30% may apply to dividends and the gross proceeds of a disposition of our Common Stock paid to a foreign financial institution (as specifically defined by the applicable rules) unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). This U.S. federal withholding tax of 30% will also apply to dividends and the gross proceeds of a disposition of our Common Stock paid to a non-financial foreign entity unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding direct and indirect U.S. owners of the entity. The 30% federal withholding tax described in this paragraph cannot be reduced under an income tax treaty with the United States or by providing an IRS Form W-8BEN or similar documentation. The withholding tax described above will not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from the rules and certifies as such on a Form W-8BEN-E (or any successor of such form). Under certain circumstances, a Non-U.S. Holder might be eligible for refunds or credits of such taxes. Holders should consult with their own tax advisors regarding the possible implications of the withholding described herein.

 

The withholding provisions described above generally apply to proceeds from a sale or other disposition of Common Stock and to payments of dividends on our Common Stock.

 

THE PRECEDING DISCUSSION OF U.S. FEDERAL TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.

 

 

 

 

 

 

 

 

 

 

 

 

 

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UNDERWRITING

 

We are offering our common stock described in this prospectus through the underwriters named below. Dominari Securities LLC (“Dominari) is acting as the representative of the underwriters. We have entered into an underwriting agreement, dated February 13, 2024, with the underwriters. Subject to the terms and conditions of the underwriting agreement, each of the underwriters has severally agreed to purchase, and we have agreed to sell to the underwriters, the number of shares of common stock listed next to its name in the following table.

 

Underwriter   Number of Shares
Dominari Securities LLC   500,000
R.F. Lafferty & Co., Inc.   250,000
Revere Securities LLC   500,000
Total   1,250,000

 

All of the shares of common stock to be purchased by the underwriters will be purchased from us.

 

The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the common stock offered by us in this prospectus are subject to various conditions and representations and warranties, including the approval of certain legal matters by their counsel and other conditions specified in the underwriting agreement. The common stock is offered by the underwriters, subject to prior sale, when, as and if issued to and accepted by them. The underwriters reserve the right to withdraw, cancel or modify the offer to the public and to reject orders in whole or in part.

 

The underwriting agreement provides that the underwriters are obligated to take and pay for all of the shares offered by this prospectus if any such shares are taken, other than those shares covered by the option to purchase up to 187,500 additional shares described below. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated.

 

The obligations of the underwriters may be terminated upon the occurrence of certain events specified in the underwriting agreement.

 

Over-allotment Option

 

We have granted an over-allotment option to the underwriters to purchase up to 187,500 shares of our common stock at the public offering price set forth on the cover page of this prospectus, less the underwriting discount and commission. This option is exercisable during the 45-day period after the date of this prospectus. If the underwriters exercise this option in whole or in part, then the underwriters will be severally committed, subject to the conditions described in the underwriting agreement, to purchase the additional shares in proportion to their respective commitments set forth in the prior table.

 

 

 

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Discounts and Commissions

 

The Representative has advised us that the underwriters propose to offer the common stock to the public at the public offering price per share set forth on the cover page of this prospectus. After the offering to the public, the public offering price and other selling terms may be changed by the Representative. The underwriting discounts and commissions are 7.5% of the public offering price per share.

 

The following table summarizes the underwriting discounts and commissions and proceeds, before expenses, to us assuming both no exercise and full exercise by the underwriters of their option to purchase up to 187,500 additional common shares:

 

       Total 
   Per Share   Without
Over-
Allotment
   With
Over-
Allotment
 
Public offering price  $4.00   $5,000,000   $5,750,000 
Underwriting discount (7.5%) (1)  $0.30   $375,000   $431,250 
Proceeds, before expenses, to us  $3.70   $4,625,000   $5,318,750 

 

______________

(1) We have agreed to pay a non-accountable expense allowance to the Representative equal to 1.0% of the gross proceeds received in this offering which is not included in the underwriting discounts and commission.

 

We have paid an expense deposit of $50,000 to the Representative of the underwriters, which will be applied against the actual out-of-pocket accountable expenses that will be incurred by the Representative in connection with this offering, and will be reimbursed to us to the extent not incurred. In addition, we have agreed to pay the Representative’s accountable expenses, including the representative’s legal fees, as well as other fees, expenses and disbursement up to a maximum amount of $125,000 in connection with the offering. We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees, legal and accounting expenses and financial advisory fees, but excluding underwriting discounts and commissions, will be approximately $300,000 all of which are payable by us.

 

Underwriter Warrants

 

We have also agreed to issue to the Representative warrants to purchase an aggregate of 5.0% of the shares of common stock sold in this offering (including any shares sold in the offering to cover over-allotment). The warrants will have an exercise price equal to 125.0% of the offering price of the common stock sold in this offering and may be exercised on a cashless basis. The warrants are exercisable commencing six (6) months from the date of the commencement of the sales of the public securities in this offering and will terminate five (5) years after such date. The warrants are not redeemable by us. We have agreed to one demand registration at our expense, an additional demand registration at the warrant holders’ expense, and unlimited “piggyback” registration rights of the common stock underlying the warrants at our expense for a period of five (5) years after the closing of this offering. The warrants and the shares underlying the warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(e)(1) of FINRA. The Representative (or permitted assignees under the Rule) may not sell, transfer, assign, pledge or hypothecate the warrants or the shares underlying the warrants, nor will they be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the warrants or the underlying shares for a period of 180 days from the effective date of the commencement of the sale of the public securities in this offering, except to any FINRA member participating in the offering and their bona fide officers or partners or as otherwise permitted under FINRA Rule 5110(e)(2). The warrants will provide for adjustment in the number and price of such warrants (and the shares underlying such warrants) in the event of recapitalization, merger or other structural transaction to prevent mechanical dilution or in the event of a future financing undertaken by us. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the Representative’s Warrants other than underwriting commissions incurred and payable by the holders.

 

 

 

 

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Right of First Refusal

 

We have agreed to grant Dominari, for the eighteen (18) month period from the closing of this offering, a right of first refusal to act as to act as sole managing underwriter and sole book runner, sole placement agent, or sole sales agent, for any and all future public or private equity, equity-linked or debt (excluding commercial bank debt) offerings for which the Company retains the service of an underwriter, agent, advisor, finder or other person or entity in connection with such offering during such eighteen (18) month period of the Company, or any successor to or any subsidiary of the Company. The Company shall not offer to retain any entity or person in connection with any such offering on terms more favorable than terms on which it offers to retain Dominari.

 

Indemnification

 

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriter may be required to make in respect of those liabilities.

 

Lock-Up Agreements

 

We, our directors and executive officers and holders of 5.0% or more of the outstanding common stock of the Company are expected to enter into lock-up agreements with the Representative to agree not to, except for certain exceptions described below, without the Representative’s prior written consent, for a period of six (6) months from the closing date of this offering: (i) offer, pledge, sell, contract to sell, grant, lend or otherwise transfer or dispose of, directly or indirectly, any common stock or any securities convertible into or exercisable or exchangeable for common stock; (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; or (iii) make any demand for or exercise any right with respect to the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for our common stock, whether any such transaction described above is to be settled by delivery of shares or such other securities, in cash or otherwise.

 

During the lock-up period, we may, without the prior written consent of the underwriter, file a registration statement on Form S-8 in connection with the registration of our common stock issuable under any employee equity-based compensation plan, incentive plan, stock plan or dividend reinvestment plan adopted and approved by a majority of the disinterested directors of the Company.

 

The lock-up restrictions do not apply to the following: (i) any exercise (including a cashless exercise or broker-assisted exercise and payment of tax obligations), vesting or settlement, as applicable, of options or warrants to purchase shares or other equity awards pursuant to any stock incentive plan or stock purchase plan of the Company; provided that any shares received by the person upon such exercise, conversion or exchange will be subject to the lock-up period, (b) any establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares (a “Trading Plan”); provided that (i) the Trading Plan shall not provide for or permit any transfers, sales or other dispositions of Shares during the lock-up period and (ii) the Trading Plan would not require any filing under Section 16(a) of the Exchange Act and no such filing is voluntarily made, (c) any transfer of shares acquired in open market transactions following the closing of this offering, provided the transfer would not require any filing under Section 16(a) of the Exchange Act and no such filing is voluntarily made, (d) the transfer of the person’s shares or any security convertible into or exercisable or exchangeable for common stock to the Company in connection with the termination of the person’s employment with the Company or pursuant to contractual arrangements under which the Company has the option to repurchase such shares, provided that no filing by any party under the Exchange Act shall be required or shall be made voluntarily within 45 days after the date the person ceases to provide services to the Company, and after such 45th day, if the Person is required to file a report under the Exchange Act reporting a reduction in beneficial ownership of shares of Common Share during the lock-up period, the person shall indicate in the footnotes thereto that the filing relates to the termination of the person’s employment, and no other public announcement shall be made voluntarily in connection with such transfer (other than the filing on a Form 5 made after the expiration of the lock-up period), (e) the conversion of the outstanding securities into shares, provided that any such shares received upon such conversion shall be subject to the restrictions on transfer set forth in the lock-up agreement, or (f) the transfer of shares or any security convertible into or exercisable or exchangeable for shares pursuant to a bona fide third-party tender offer for securities of the Company, merger, consolidation or other similar transaction that is approved by the disinterested members of the board of directors of the Company, made to all holders of common stock involving a change of control, provided that all of the person’s securities subject to the lock-up agreement will remain subject to the restrictions set forth therein.

 

Listing

 

We have been approved to list our common stock on the NYSE American under the symbol “UMAC”.

 

 

 

 

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Electronic Distribution

 

A prospectus in electronic format may be made available on the internet sites or through other online services maintained by the underwriters, or by their affiliates. In those cases, prospective investors may view offering terms online and prospective investors may be allowed to place orders online. Other than the prospectus in electronic format, the information on the underwriter’s website is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the Representative in its capacity as underwriter and should not be relied upon by investors.

 

Price Stabilization, Short Positions and Penalty Bids

 

In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act:

 

·         Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

 

·         Over-allotment involves sales by the underwriter of shares in excess of the number of shares the underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of common stock over-allotted by the underwriter is not greater than the number of shares of common stock that may be purchased in the over-allotment option. In a naked short position, the number of shares of common stock involved is greater than the number of shares in the over-allotment option. The underwriter may close out any covered short position by either exercising the over-allotment option and/or purchasing the common stock in the open market.

 

·         Syndicate covering transactions involve purchases of common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of the common stock to close out the short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase shares through the over-allotment option. If the underwriter sells more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there could be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering.

 

·         Penalty bids permit the underwriter to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. Neither we nor the underwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor the underwriter make any representations that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

 

No Prior Public Market

 

Prior to this offering, there has been no public market for our common stock and the offering price for our common stock will be determined through negotiations between us and the underwriter. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the underwriter believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.

 

We offer no assurances that the offering price will correspond to the price at which our common stock will trade in the public market subsequent to this offering or that an active trading market for our shares will develop and continue after this offering.

 

 

 

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Other Relationships

 

Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions. Dominari Securities LLC, R.F. Lafferty & Co., and Revere Securities LLC have no material relationship with Fat Shark Holdings, Ltd. or Rotor Riot LLC.

 

Offers Outside the United States

 

Other than in the United States, no action has been taken by us or the underwriter that would permit a public offering of the shares offered by this prospectus in any jurisdiction where action for that purpose is required. The shares offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of common stock offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

The underwriter is expected to make offers and sales both in and outside the United States through its selling agents. Any offers and sales in the United States will be conducted by broker-dealers registered with the SEC.

 

Australia

 

No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission (“ASIC”), in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the “Corporations Act”), and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act. Any offer in Australia of the common stock may only be made to persons (the “Exempt Investors”) who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the common stock without disclosure to investors under Chapter 6D of the Corporations Act. The common stock applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring common stock must observe such Australian on-sale restrictions. This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any common stock recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

 

Bermuda

 

The common stock may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 of Bermuda which regulates the sale of securities in Bermuda. Additionally, non-Bermudian persons (including companies) may not carry on or engage in any trade or business in Bermuda unless such persons are permitted to do so under applicable Bermuda legislation.

 

 

 

 

 

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British Virgin Islands

 

The common stock is not being, and may not be offered to the public or to any person in the British Virgin Islands for purchase or subscription by us or on our behalf. The common stock may be offered to companies incorporated under the BVI Business Companies Act, 2004 (British Virgin Islands) (each a BVI Company), but only where the offer will be made to, and received by, the relevant BVI Company entirely outside of the British Virgin Islands.

 

This prospectus has not been, and will not be, registered with the Financial Services Commission of the British Virgin Islands. No registered prospectus has been or will be prepared in respect of the common stock for the purposes of the Securities and Investment Business Act, 2010, or SIBA or the Public Issuers Code of the British Virgin Islands.

 

Canada

 

The common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the common stock must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

 

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus supplement (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

 

Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

 

Cayman Islands

 

This prospectus does not constitute a public offer of the common stock, whether by way of sale or subscription, in the Cayman Islands. Each underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, any shares to the public in the Cayman Islands.

 

Dubai International Financial Center

 

This document relates to an exempt offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority. This document is intended for distribution only to persons of a type specified in those rules. It must not be delivered to, or relied on by, any other person. The Dubai Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with exempt offers. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it, and has no responsibility for it. The common stock which is the subject of the offering contemplated by this document may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the common stock offered should conduct their own due diligence on the common stock. If you do not understand the contents of this document, you should consult an authorized financial advisor.

 

 

 

 

 

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European Economic Area

 

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each underwriter represents and agrees that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, it has not made and will not make an offer of common stock which is the subject of the offering contemplated by this prospectus to the public in that Relevant Member State other than:

 

·         to any legal entity which is a qualified investor as defined in the Prospectus Directive;

 

·         to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or

 

·         in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of the common stock shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive.

 

For the purposes of this provision, the expression an “offer to the public” in relation to any common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the common stock to be offered so as to enable an investor to decide to purchase or subscribe for the common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

 

France

 

Neither this prospectus nor any other offering material relating to the common stock described in this prospectus has been submitted to the clearance procedures of the Autorité des Marchés Financiers or of the competent authority of another member state of the European Economic Area and notified to the Autorité des Marchés Financiers. The common stock has not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. Neither this prospectus nor any other offering material relating to the common stock has been or will be:

 

·         to any legal entity which is a qualified investor as defined in the Prospectus Directive;

 

·         to fewer than 100 or, if the relevant member state has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the relevant Dealer or Dealers nominated by us for any such offer; or

 

·         in any other circumstances falling within Article 3(2) of the Prospectus Directive;

 

·         released, issued, distributed or caused to be released, issued or distributed to the public in France; or

 

·         used in connection with any offer for subscription or sale of the common stock to the public in France.

 

 

 

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Such offers, sales and distributions will be made in France only:

 

·         to qualified investors (investisseurs qualifiés) and/or to a restricted circle of investors (cercle restreint d’investisseurs), in each case investing for their own account, all as defined in, and in accordance with articles L.411-2, D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the French Code monétaire et financier;

 

·         to investment services providers authorized to engage in portfolio management on behalf of third parties; or

 

·         in a transaction that, in accordance with article L.411-2-II-1°-or-2°-or 3° of the French Code monétaire et financier and article 211-2 of the General Regulations (Règlement Général) of the Autorité des Marchés Financiers, does not constitute a public offer (appel public à l’épargne).

 

The common stock may be resold directly or indirectly, only in compliance with articles L.411-1, L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French Code monétaire et financier.

 

Germany

 

This prospectus does not constitute a Prospectus Directive-compliant prospectus in accordance with the German Securities Prospectus Act (Wertpapierprospektgesetz) and does therefore not allow any public offering in the Federal Republic of Germany (“Germany”) or any other Relevant Member State pursuant to § 17 and § 18 of the German Securities Prospectus Act. No action has been or will be taken in Germany that would permit a public offering of the common stock, or distribution of a prospectus or any other offering material relating to the common stock. In particular, no securities prospectus (Wertpapierprospekt) within the meaning of the German Securities Prospectus Act or any other applicable laws of Germany, has been or will be published within Germany, nor has this prospectus been filed with or approved by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) for publication within Germany.

 

Each underwriter will represent, agree and undertake, (i) that it has not offered, sold or delivered and will not offer, sell or deliver the common stock within Germany other than in accordance with the German Securities Prospectus Act (Wertpapierprospektgesetz) and any other applicable laws in Germany governing the issue, sale and offering of the common stock, and (ii) that it will distribute in Germany any offering material relating to the common stock only under circumstances that will result in compliance with the applicable rules and regulations of Germany.

 

This prospectus is strictly for use of the person who has received it. It may not be forwarded to other persons or published in Germany.

 

Hong Kong

 

The common stock may not be offered or sold in Hong Kong by means of any document other than (i) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance, or (ii) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the common stock may be issued or may be in the possession of any person for the purpose of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the common stock which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

 

 

 

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Israel

 

This prospectus does not constitute a prospectus under the Israeli Securities Law, 5728-1968, and has not been filed with or approved by the Israel Securities Authority. In Israel, this prospectus is being distributed only to, and is directed only at, investors listed in the first addendum, or the Addendum, to the Israeli Securities Law, consisting primarily of joint investment in trust funds, provident funds, insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange, underwriters purchasing for their own account, venture capital funds, entities with equity in excess of NIS 50 million and qualified individuals, each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors. Qualified investors may be required to submit written confirmation that they meet the criteria for one of the categories of investors set forth in the prospectus.

 

Italy

 

The offering of the common stock has not been registered with the Commissione Nazionale per le Società e la Borsa(“CONSOB”) pursuant to Italian securities legislation and, accordingly, no shares may be offered, sold or delivered, nor copies of this prospectus or any other documents relating to the common stock may not be distributed in Italy except:

 

·         to “qualified investors”, as referred to in Article 100 of Legislative Decree No. 58 of 24 February 1998, as amended (the “Decree No. 58”) and defined in Article 26, paragraph 1, letter d) of CONSOB Regulation No. 16190 of 29 October 2007, as amended (“Regulation No. 16190”) pursuant to Article 34-ter, paragraph 1, letter b) of CONSOB Regulation No. 11971 of 14 May 1999, as amended (“Regulation No. 11971”); or

 

·         in any other circumstances where an express exemption from compliance with the offer restrictions applies, as provided under Decree No. 58 or Regulation No. 11971.

 

Any offer, sale or delivery of the common stock or distribution of copies of this prospectus or any other documents relating to the common stock in the Republic of Italy must be:

 

·         made by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance with Legislative Decree No. 385 of 1 September 1993, as amended (the “Banking Law”), Decree No. 58 and Regulation No. 16190 and any other applicable laws and regulations;

 

·         in compliance with Article 129 of the Banking Law, and the implementing guidelines of the Bank of Italy, as amended; and

 

·         in compliance with any other applicable notification requirement or limitation which may be imposed, from time to time, by CONSOB or the Bank of Italy or other competent authority.

 

Please note that, in accordance with Article 100-bis of Decree No. 58, where no exemption from the rules on public offerings applies, the subsequent distribution of the common stock on the secondary market in Italy must be made in compliance with the public offer and the prospectus requirement rules provided under Decree No. 58 and Regulation No. 11971.

 

Furthermore, the common stock which is initially offered and placed in Italy or abroad to qualified investors only but in the following year are regularly (“sistematicamente”) distributed on the secondary market in Italy to non-qualified investors become subject to the public offer and the prospectus requirement rules provided under Decree No. 58 and Regulation No. 11971. Failure to comply with such rules may result in the sale of the common stock being declared null and void and in the liability of the intermediary transferring the common stock for any damages suffered by such non-qualified investors.

 

 

 

 88 
 

 

Japan

 

The common stock has not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) and accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese Person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person, except in compliance with all applicable laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities in effect at the relevant time. For the purposes of this paragraph, “Japanese Person” shall mean any person resident in Japan, including any corporation or other entity organized under the laws of Japan.

 

Kuwait

 

Unless all necessary approvals from the Kuwait Ministry of Commerce and Industry required by Law No. 31/1990 “Regulating the Negotiation of Securities and Establishment of Investment Funds,” its Executive Regulations and the various Ministerial Orders issued pursuant thereto or in connection therewith, have been given in relation to the marketing and sale of the common stock, these may not be marketed, offered for sale, nor sold in the State of Kuwait. Neither this prospectus (including any related document), nor any of the information contained therein is intended to lead to the conclusion of any contract of whatsoever nature within Kuwait.

 

Malaysia

 

No prospectus or other offering material or document in connection with the offer and sale of the securities has been or will be registered with the Securities Commission of Malaysia, or Commission, for the Commission’s approval pursuant to the Capital Markets and Services Act 2007. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the securities may not be circulated or distributed, nor may the securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Malaysia other than (i) a closed end fund approved by the Commission; (ii) a holder of a Capital Markets Services License; (iii) a person who acquires the securities as principal, if the offer is on terms that the securities may only be acquired at a consideration of not less than RM250,000 (or its equivalent in foreign currencies) for each transaction; (iv) an individual whose total net personal assets or total net joint assets with his or her spouse exceeds RM3 million (or its equivalent in foreign currencies), excluding the value of the primary residence of the individual; (v) an individual who has a gross annual income exceeding RM300,000 (or its equivalent in foreign currencies) per annum in the preceding twelve months; (vi) an individual who, jointly with his or her spouse, has a gross annual income of RM400,000 (or its equivalent in foreign currencies), per annum in the preceding twelve months; (vii) a corporation with total net assets exceeding RM10 million (or its equivalent in a foreign currencies) based on the last audited accounts; (viii) a partnership with total net assets exceeding RM10 million (or its equivalent in foreign currencies); (ix) a bank licensee or insurance licensee as defined in the Labuan Financial Services and Securities Act 2010; (x) an Islamic bank licensee or takaful licensee as defined in the Labuan Financial Services and Securities Act 2010; and (xi) any other person as may be specified by the Commission; provided that, in the each of the preceding categories (i) to (xi), the distribution of the securities is made by a holder of a Capital Markets Services License who carries on the business of dealing in securities. The distribution in Malaysia of this prospectus is subject to Malaysian laws. This prospectus does not constitute and may not be used for the purpose of public offering or an issue, offer for subscription or purchase, invitation to subscribe for or purchase any securities requiring the registration of a prospectus with the Commission under the Capital Markets and Services Act 2007.

 

PRC

 

This prospectus has not been and will not be circulated or distributed in the PRC, and the common stock may not be offered or sold, and will not be offered or sold, directly or indirectly, to any resident of the PRC or to persons for re-offering or resale, directly or indirectly, to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. For the purpose of this paragraph, the PRC does not include Taiwan and the Special Administrative Regions of Hong Kong and Macao.

 

 

 

 89 
 

 

Qatar

 

The common stock has not been and will not be offered, sold or delivered at any time, directly or indirectly, in the State of Qatar (“Qatar”) in a manner that would constitute a public offering. This prospectus has not been reviewed or approved by or registered with the Qatar Central Bank, the Qatar Exchange or the Qatar Financial Markets Authority. This prospectus is strictly private and confidential, and may not be reproduced or used for any other purpose, nor provided to any person other than the recipient thereof.

 

Saudi Arabia

 

This prospectus may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Offers of Securities Regulations issued by the Capital Market Authority. The Capital Market Authority does not make any representation as to the accuracy or completeness of this prospectus, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this prospectus. Prospective purchasers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities. If you do not understand the contents of this prospectus you should consult an authorized financial adviser.

 

Singapore

 

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the common stock may not be circulated or distributed, nor may the common stock be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than:

 

·         to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”),

 

·         to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified; and

 

·         otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

 

Where the common stock is subscribed or purchased under Section 275 of the SFA by a relevant person which is:

 

·         a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

 

·         a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the common stock pursuant to an offer made under Section 275 of the SFA except:

 

               (a) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

 

                (b) where no consideration is or will be given for the transfer;

 

                (c) where the transfer is by operation of law;

 

                (d) where the transfer is by operation of law;

 

                (e) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

 

 

 

 90 
 

 

Switzerland

 

This document is not intended to constitute an offer or solicitation to purchase or invest in the common stock described herein. The common stock may not be publicly offered, sold or advertised, directly or indirectly, in, into or from Switzerland and will not be listed on the SIX Swiss Exchange or on any other exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the common stock constitutes a prospectus as such term is understood pursuant to article 652a or article 1156 of the Swiss Code of Obligations or a listing prospectus within the meaning of the listing rules of the SIX Swiss Exchange or any other regulated trading facility in Switzerland, and neither this document nor any other offering or marketing material relating to the common stock may be publicly distributed or otherwise made publicly available in Switzerland.

 

Neither this document nor any other offering or marketing material relating to the offering, nor the Company nor the common stock have been or will be filed with or approved by any Swiss regulatory authority. The common stock is not subject to the supervision by any Swiss regulatory authority, e.g., the Swiss Financial Markets Supervisory Authority FINMA (FINMA), and investors in the common stock will not benefit from protection or supervision by such authority.

 

Taiwan

 

The common stock has not been and will not be registered or filed with, or approved by, the Financial Supervisory Commission of Taiwan pursuant to relevant securities laws and regulations and may not be offered or sold in Taiwan through a public offering or in circumstances which constitute an offer within the meaning of the Securities and Exchange Act of Taiwan or relevant laws and regulations that require a registration, filing or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has been authorized to offer or sell the common stock in Taiwan.

 

United Arab Emirates

 

(Excluding the Dubai International Financial Center)

 

The common stock has not been, and are not being, publicly offered, sold, promoted or advertised in the United Arab Emirates (“U.A.E.”) other than in compliance with the laws of the U.A.E. Prospective investors in the Dubai International Financial Centre should have regard to the specific selling restrictions on prospective investors in the Dubai International Financial Centre set out below.

 

The information contained in this prospectus does not constitute a public offer of the common stock in the U.A.E. in accordance with the Commercial Companies Law (Federal Law No. 8 of 1984 of the U.A.E., as amended) or otherwise and is not intended to be a public offer. This prospectus has not been approved by or filed with the Central Bank of the United Arab Emirates, the Emirates Securities and Commodities Authority or the Dubai Financial Services Authority, or DFSA. If you do not understand the contents of this prospectus, you should consult an authorized financial adviser. This prospectus is provided for the benefit of the recipient only, and should not be delivered to, or relied on by, any other person.

 

We have not authorized and do not authorize the making of any offer of securities through any financial intermediary on our behalf, other than offers made by the underwriters and their respective affiliates, with a view to the final placement of the securities as contemplated in this document. Accordingly, no purchaser of the shares, other than the underwriters, is authorized to make any further offer of shares on our behalf or on behalf of the underwriters.

 

 

 

91 

 

 

No action has been taken by us or the Representatives that would permit a public offering of the common stock in any jurisdiction outside the United States where action for that purpose is required. None of our shares included in the offering may be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sales of any such securities offered hereby be distributed or published in any jurisdiction except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to the offering of the common stock and the distribution of this prospectus. This prospectus is neither an offer to sell nor a solicitation of any offer to buy the common stock in any jurisdiction where that would not be permitted or legal.

 

United Kingdom

 

Each of the underwriters severally represents warrants and agrees as follows:

 

·         it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (FSMA) received by it in connection with the issue or sale of the common stock in circumstances in which Section 21 of the FSMA does not apply to us; and

 

·         it has complied with, and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the common stock in, from or otherwise involving the United Kingdom.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 92 

 

 

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., Palm Beach Gardens, Florida. Certain matters related to Puerto Rican law will be passed upon for us by Reichard & Escalera LLC, San Juan, Puerto Rico. Sichenzia Ross Ference Carmel LLP, New York, New York, is acting as counsel to the underwriters.

 

 

EXPERTS

 

The consolidated financial statements of the Company as of December 31, 2022 and 2021, and as of April 30, 2023 and 2022 for Fat Shark and Rotor Riot, and for the years then ended, included in this Prospectus have been so included in reliance on the report of BF Borgers, CPA, PC 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.

 

Upon completion of this Offering, we will be 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 upon completion of this Offering, 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. Upon completion of this Offering, you may also request a copy of these filings, at no cost, by writing or telephoning us at: Unusual Machines, Inc., 151 Calle De San Francisco, Ste 200 PMB 2106 San Juan, Puerto Rico 00901-1607 or contacting us at +1 855-921-4600.

 

 

 

 93 

 

UNUSUAL MACHINES, INC.

INDEX TO FINANCIAL STATEMENTS

 

  Page
   
Unaudited ProForma Condensed Combined Financial Statements  
Explanatory Note F-2
Balance Sheet at September 30, 2023 F-3
Statement of Operations for the nine months ended September 30, 2023 F-5
Notes to Unaudited ProForma Condensed Combined Financial Statements F-7

 

Unusual Machines, Inc. Unaudited Interim Financial Statements  
Balance Sheets at September 30, 2023 and December 31, 2022 F-12
Statement of Operations for the nine months ended September 30, 2023 and 2022 F-13
Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2023 and 2022 F-14
Statement of Cash Flows for the nine months ended September 30, 2023 and 2022 F-15
Notes to Financial Statements F-16

 

Unusual Machines, Inc. Financial Statements  
Report of Independent Registered Public Accounting Firm F-20
Balance Sheets at December 31, 2022 and 2021 F-21
Statement of Operations for the years ended December 31, 2022 and 2021 F-22
Statement of Changes in Stockholders’ Equity for the years ended December 31, 2022 and 2021 F-23
Statement of Cash Flows for the years ended December 31, 2022 and 2021 F-24
Notes to Financial Statements F-25

 

Fat Shark Holdings, Ltd. Unaudited Interim Financial Statements  
Balance Sheets at October 31, 2023 and April 30, 2023 F-29
Statement of Operations for the six months ended October 31, 2023 and 2022 F-30
Statement of Changes in Stockholders’ Equity for the six months ended October 31, 2023 and 2022 F-31
Statement of Cash Flows for the six months ended October 31, 2023 and 2022 F-32
Notes to Financial Statements F-33

 

Fat Shark Holdings, Ltd. Audited Financial Statements  
Report of Independent Registered Public Accounting Firm F-40
Balance Sheets at April 30, 2023 and 2022 F-41
Statements of Operations for the years ended April 30, 2023 and 2022 F-42
Statement of Stockholders’ Equity for the years ended April 30, 2023 and 2022 F-43
Statement of Cash Flows for the years ended April 30, 2023 and 2022 F-44
Notes to Financial Statements F-45

 

Rotor Riot, LLC Unaudited Interim Financial Statements  
Balance Sheets at October 31, 2023 and April 30, 2023 F-52
Statement of Operations for the six months ended October 31, 2023 and 2022 F-53
Statement of Changes in Stockholders’ Equity for the six months ended October 31, 2023 and 2022 F-54
Statement of Cash Flows for the six months ended October 31, 2023 and 2022 F-55
Notes to Financial Statements F-56

 

Rotor Riot, LLC Audited Financial Statements  
Report of Independent Registered Public Accounting Firm F-62
Balance Sheets at April 30, 2023 and 2022 F-63
Statements of Operations for the years ended April 30, 2023 and 2022 F-64
Statement of Members’ Equity for the years ended April 30, 2023 and 2022 F-65
Statement of Cash Flows for the years ended April 30, 2023 and 2022 F-66
Notes to Financial Statements F-67

 

 F-1 

 

 

UNAUDITED PRO FORMA

CONDENSED COMBINED FINANCIAL STATEMENTS

 

The pro forma adjustments related to the Share Purchase Agreement are described in the notes to the unaudited pro forma combined financial information and principally include the following:

 

  ·   Pro forma adjustment to eliminate intercompany transactions between Fat Shark and Rotor Riot
       
  ·   Pro forma adjustment to eliminate the Fat Shark and Rotor Riot goodwill, liabilities and owners’ equity not acquired as a part of the Share Purchase Agreement
       
  ·   Pro forma adjustment to account for the 1-for-2 reverse stock split of our issued and outstanding shares prior to the share purchase agreement and to give effect of this Offering
       
  ·   Pro forma adjustment to record the share purchase
       
  ·   Pro forma adjustment to record estimated proceeds and costs related to this Offering

 

The adjustments to fair value and the other estimates reflected in the accompanying unaudited pro forma condensed consolidated financial statements may be materially different from those reflected in the combined company’s consolidated financial statements subsequent to the Share Purchase. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or results of operations of the combined companies. Reclassifications and adjustments may be required if changes to Fat Shark’s and Rotor Riot’s financial presentation are needed to conform Fat Shark’s and Rotor Riot’s accounting policies to the accounting policies of Unusual Machines, Inc.

 

These unaudited pro forma condensed combined financial statements do not give effect to any anticipated synergies, operating efficiencies or cost savings that may be associated with the Share Purchase Agreement or Initial Public Offering. These financial statements also do not include any integration costs the companies may incur related to the transactions as part of combining the operations of the companies.

 

 

 

 

 

 

 

 

 F-2 

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

 

   Unusual
Historical
   Fat Shark
Historical
   Rotor Riot Historical   Pro Forma Combining Adjustments     Pro Forma
Combined
 
   September 30,
2023
   September 30,
2023
   September 30,
2023
   September 30,
2023
     September 30,
2023
 
Assets                           
Current Assets                           
Cash  $1,337,018   $50,597   $7,694   $2,725,000  A  $4,120,309 
Accounts receivable, net       231,199        (195,500) B   35,699 
Inventories, net       1,987,074    996,480    (20,415) C   2,963,139 
Deferred offering costs   464,527            (464,527) D    
Other current assets   105,625    1,355,000    375,225          1,835,850 
                            
Total Current Assets   1,907,170    3,623,870    1,379,399    2,044,558      8,954,997 
                            
Right-of-use asset           66,090          66,090 
Other non-current asset   5,447        3,853          9,300 
Goodwill       6,168,260        7,948,763  E   14,117,023 
Intangible assets, net       1,262,756    20,000          1,282,756 
                            
Total Assets  $1,912,617   $11,054,886   $1,469,342   $9,993,321     $24,430,166 
                            
Liabilities and Stockholders’ Equity (Deficit)                           
Accounts payable and accrued expenses  $81,112   $94,108   $238,587   $(195,500) F  $218,307 
Customer deposits       25,340    23,049          48,389 
Debt obligations           188,079    (188,079) G    
Due to related party       6,132,153    3,516,035    (9,648,188) G    
Operating lease liability – current           43,202          43,202 
                            
Total Current Liabilities   81,112    6,251,601    4,008,952    (10,031,767)     309,898 
                            
Convertible note               2,000,000  H   2,000,000 
Operating lease liability - non-current           28,290          28,290 
                            
Total Liabilities   81,112    6,251,601    4,037,242    (8,031,767)     2,338,188 
                            
Stockholders’ Equity (Deficit)                           
Preferred stock   2                  2 
Common stock   32,173    1        54,999  I   87,173 
Additional paid-in capital   4,715,790    6,351,076        14,329,397  J   25,396,263 
Accumulated deficit   (2,916,460)   (1,547,792)   (2,567,900)   3,640,692  K   (3,391,460)
                            
Total Stockholders’ Equity (Deficit)   1,831,505    4,803,285    (2,567,900)   18,025,088      22,091,978 
                            
Total Liabilities and Stockholders’ Equity  $1,912,617   $11,054,886   $1,469,342   $9,993,321     $24,430,166 

 

 

 

 F-3 

 

 

Notes:

 

  A Estimated cash proceeds of $5,000,000 from this Offering, less estimated underwriter fees of $375,000, $50,000 in underwriter non-accountable expense allowance, $125,000 in additional underwriting expenses, $600,000 in other acquisition and offering related costs, $125,000 in a bonus payment to the CFO in accordance with his employment agreement and $1.0 million cash payment related to the purchase of Fat Shark and Rotor Riot.
     
  B Eliminated intercompany accounts receivable between Fat Shark and Rotor Riot
     
  C Inventory cost adjustment related to intercompany sales between Fat Shark and Rotor Riot
     
  D Eliminate current deferred offering costs against additional paid in capital related to the anticipated closing of this Offering.
     
  E Goodwill recognized according to Accounting Standards Codification (“ASC”) 805, Business Combinations. Adjustment eliminates non-acquired Fat Shark goodwill of $6,168,260 and recognizes goodwill on the share purchase agreement of $14,117,023. Goodwill is based on management’s estimate and will be finalized upon closing of the share purchase agreement based on final assets acquired and liabilities assumed. Reference Note 3 — Purchase Price Allocation and Goodwill for management’s estimation of goodwill.
     
  F Eliminated intercompany accounts payable between Fat Shark and Rotor Riot.
     
 

Per the terms of the share purchase agreement, on or prior to the closing of the acquisition, Red Cat shall have eliminated any and all indebtedness, relating to the Target Companies.
     
  H Per the terms of the amended share purchase agreement, Unusual Machines will issue a $2.0 million Note to Red Cat subsequent to the closing of the Offering. The principal and any accrued and unpaid interest will be due in full at 18 months from the date of issuance. In the event of default and in lieu of Unusual Machines repaying the Note, Red Cat may convert the Note into shares of common stock at the option of Red Cat. The Note will be subject to other terms and conditions agreeable to both parties.
     
  I

Unusual Machines Board of Directors and a majority of its stockholders have approved a 1-for-2 reverse stock split in July 2023.

 

Per the terms of the share purchase agreement, Unusual Machines will issue $17.0 million in Unusual Machines common stock at a price of $4.00 per share, or 4,250,000 common shares which will be subject to certain lock up requirements as stipulated in the underwriting agreement.

 

In addition and as a part of this Offering, Unusual Machines will issue common stock for estimated proceeds of $5.0 million at a price of $4.00 per share, or 1,250,000 common shares issued.

     
  J Unusual Common Stock issued above par value as a part of the share purchase agreement and Common Stock issued above par value as a part of this Offering, offset by elimination of Fat Shark and Rotor Riot equity acquired and expenses related to this Offering.
     
  K Fat Shark and Rotor Riot accumulated deficit and adjustments related to the Unaudited Pro Forma Condensed Combined Statement of Operations.

 

 

 

 

 

 F-4 

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

 

For the nine months ended  Unusual Historical   Fat Shark
Historical
   Rotor Riot Historical   Pro Forma
Adjustments
     Pro Forma
Combined
 
   September 30,
2023
   September 30,
2023
   September 30,
2023
         September 30,
2023
 
                       
Revenue  $   $1,125,354   $3,288,134   $(298,020) L  $4,115,468 
Cost of revenues       1,287,261    2,400,783    (277,605) M   3,410,439 
                            
Gross profit       (161,907)   887,351    (20,415)     705,029 
                            
Gross margin   n/a    (14.4%)   27.0%    n/a       17.1% 
                            
Operating expenses:                           
Operations       156,817    407,985          564,802 
Research and development       116,042    67,666          183,708 
Selling and marketing       4,711    931,849          936,560 
General and administrative   1,377,869    32,796    168,192    475,000  N   2,053,857 
Stock based compensation       23,865    151,082          174,947 
                            
Total operating expenses   1,377,869    334,231    1,726,774    475,000      3,913,874 
                            
Operating loss   (1,377,869)   (496,138)   (839,423)   (495,415)     (3,208,845)
                            
Other income (expenses)       (27,940)             (27,940)
Interest income                      
Interest expense           (22,856)         (22,856)
                            
Loss before taxes   (1,377,869)   (524,078)   (862,279)   (495,415)     (3,259,641)
                            
Provision for taxes                      
                            
Net loss  $(1,377,869)  $(524,078)  $(862,279)  $(495,415)    $(3,259,641)
                            
Net loss per share attributable to common shareholders                           
Basic and diluted  $(0.41)  $(524.08)   n/a    n/a     $(0.43)
                            
Weighted average common shares outstanding                           
Basic and diluted   3,337,397    1,000    n/a    n/a  O   7,617,255 

 

 

 

 F-5 

 

 

Notes:

 

  L Elimination of intercompany revenues between Fat Shark and Rotor Riot. Fat Shark sells products to Rotor Riot, which is included in total revenue for Fat Shark and have been eliminated in the combined pro forma presentation.
     
  M Elimination of intercompany cost of revenues between Rotor Riot and Fat Shark. Rotor Riot purchases inventory from Fat Shark, which is included in total cost of revenues for Rotor Riot and have been eliminated in the combined pro forma presentation.
     
  N Estimated expenses of $350,000 incurred related to the business combination of Rotor Riot and Fat Shark and $125,000 related to anticipated bonus to be paid to the CFO as per the terms of his employment agreement.
     
  O Historical weighted average common shares outstanding retroactively reflects the 1-for-2 reverse stock split.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 F-6 

 

 

Notes to Unaudited Pro Forma

Condensed Combined Financial Statements

 

Note 1 — Basis of Presentation

 

On November 21, 2022, Unusual Machines, Inc. (the “Company”) entered into a Share Purchase Agreement (the “Agreement”) with Red Cat Holdings, Inc., a Nevada Corporation (“Red Cat”) for the purchase and sale of Fat Shark Holdings, Ltd., a Nevada Corporation (“Fat Shark”) and Rotor Riot, LLC, an Ohio limited liability Company (“Rotor Riot”).

 

The Agreement, as amended, provides that the Company will acquire all of the outstanding shares of capital stock of Fat Shark and Rotor Riot in exchange for a purchase price of $20.0 million (“Purchase Price”) comprised of (i) $1.0 million in cash, (ii) a $2.0 million Note, and (iii) $17.0 million of the Company’s common stock. The Purchase Price is subject to potential adjustments. The consummation of the transactions contemplated by the Agreement are subject to certain closing conditions including, without limitation, the Company completing a public offering (the “Offering”), the related S-1 registration statement being declared effective by the Securities and Exchange Commission, the approval by NYSE American (“NYSE American”) of the Company’s listing application and the commencement of trading on NYSE American simultaneously with the consummation of the Offering (collectively, the “Closing Conditions”).

 

Accounting Standards Codification (“ASC”) 805, Business Combinations, reflects the overall principle that when an entity (the “Acquirer”) takes control of another entity (the “Target”), the fair value of the underlying exchange transaction should be used to establish a new accounting basis of the acquired entity. In accordance with this ASC, the Share Purchase Agreement will be accounted for as an acquisition of Fat Shark and Rotor Riot by the Company. In addition, because obtaining control leaves the acquirer responsible and accountable for all of the acquiree’s assets, liabilities, and operations, the acquirer should recognize and measure the assets acquired and liabilities assumed at their full fair values with limited exceptions as of the date control is obtained.

 

Authoritative guidance

 

1. ASC 805, Business Combinations (“ASC 805”)

2. ASC 820, Fair Value Measurements and Disclosures (“ASC 820”)

3. ASC 350, Intangibles — Goodwill and Other (“ASC 350”)

4. ASC 360, Property, Plant, and Equipment (“ASC 360”)

5. ASC 260, Earnings per Share (“ASC 260”)

 

The unaudited pro forma condensed combined financial statements are based on the Company’s audited and unaudited interim historical consolidated financial statements and Fat Shark and Rotor Riot’s audited and unaudited interim historical combined financial statements as adjusted to give effect to the Company’s acquisition by Unusual Machines.

 

The allocation of the purchase price used in the unaudited pro forma financial statements is based upon management’s estimate of the fair values of the assets and liabilities determined. A final allocation of the purchase price will be determined upon closing of the Share Purchase Agreement with the assistance of a third-party valuation firm. The Unaudited Pro Forma Condensed Combined Financial Statements are provided for informational purpose only and are not necessarily indicative of what the combined company’s financial position and results of operations would have actually been had the transactions been completed on the dates used to prepare these pro forma financial statements. The adjustments to fair value and the other estimates reflected in the accompanying unaudited pro forma condensed combined financial statements may be materially different from those reflected in the combined company’s consolidated financial statements subsequent to the transactions. In addition, the Unaudited Pro Forma Condensed Combined Financial Statements do not purport to project the future financial position or results of operations of the combined companies.

 

These unaudited pro forma condensed combined financial statements do not give effect to any anticipated synergies, operating efficiencies or cost savings that may be associated with the transactions. These financial statements also do not include any integration costs the companies may incur related to the transactions as part of combining the operations of the companies.

 

 

 

 F-7 

 

 

Note 2 — Summary of Significant Accounting Policies

 

The unaudited pro forma condensed combined balance sheet as of September 30, 2023, gives pro forma effect to both the business combination and this Offering as if they had been consummated as of September 30, 2023. The unaudited proforma condensed combined statements of operations for the nine months ended September 30, 2023 give pro forma effect to both the business combination and this Offering as if they had been consummated as of September 30, 2023. The unaudited pro forma condensed combined financial statements have been prepared in a manner consistent with the accounting policies adopted by the Company. The accounting policies followed for financial reporting on a pro forma basis are the same as those disclosed in the audited financial statements included in this Prospectus. The unaudited pro forma condensed combined financial statements do not assume any differences in accounting policies among the Company and Fat Shark and Rotor Riot.

 

Note 3 — Purchase Price Allocation and Goodwill

 

In November 2021, the Company entered into the Agreement with Red Cat to acquire all of the capital stock of Fat Shark and Rotor Riot, subject to the satisfaction of the Closing Conditions. Closing of the Agreement would occur in conjunction with the closing of the Offering as described in this Prospectus.

 

A summary of management’s estimated purchase price and related allocation was as follows as of September 30, 2023. Per the Agreement, the final purchase price allocation will be agreed upon after closing. In addition, final fair values of assets acquired, including the valuation of any intangible assets, and liabilities assumed will be determined after closing.

 

Common stock  $17,000,000 
Cash   1,000,000 
Convertible note   2,000,000 
Total Purchase Price  $20,000,000 

 

   Fat Shark   Rotor Riot   Adjustments   Combined 
                 
Estimated purchase price allocation  $14,000,000   $6,000,000   $   $20,000,000 
                     
Estimated assets acquired                    
Cash   50,597    7,694         58,291 
Accounts receivable   231,199        (195,500)   35,699 
Inventory   1,987,074    996,480    (20,415)   2,963,139 
Other current assets   1,355,000    375,225         1,730,225 
Estimated intangible assets   1,262,756    20,000         1,282,756 
Operating lease right-of-use assets       66,090         66,090 
Other assets       3,853