Unusual Machines, Inc S-1/A, filed Aug 7, 2023
Unusual Machines, Inc. (UMAC)
Registration No. 333-270519
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4 to
FORM S-1/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
UNUSUAL MACHINES, INC.
(Exact name of registrant as specified in its charter)
| Puerto Rico | 3663 | 66-0927642 | ||
| (State or jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer | ||
| incorporation or organization) | Classification Code Number) | Identification No.) |
151 Calle De San Francisco
Ste. 200 PMB 2106
San Juan, Puerto Rico 00901-1607
+1 855-921-4600
(Address, including zip code, and telephone number, including area code of registrant’s principal executive offices)
Brandon Torres Declet
151 Calle De San Francisco
Ste. 200 PMB 2106
San Juan, Puerto Rico 00901-1607
+1 855-921-4600
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
| Michael D. Harris, Esq. | Ross Carmel, Esq. |
| Edward Schauder, Esq. | Carmel, Milazzo & Feil LLP |
| Constantine Christakis, Esq. | 55 West 39th Street, 18th Floor |
| Nason, Yeager, Gerson, Harris & Fumero, P.A. | New York, NY 10018 |
| 3001 PGA Boulevard | Telephone: (212) 658-0458 |
| Palm Beach Gardens, FL 33410 | |
| Telephone: (561) 644-2222 |
FAT SHARK HOLDINGS, LTD
(Rule 140 Co-Registrant No. 1)
ROTOR RIOT LLC
(Rule 140 Co-Registrant No. 2)
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
Explanatory Note
Our board of directors and a majority of our stockholders have approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock. Outstanding share and per share information including dilution and our outstanding restricted stock units in the Prospectus reflects the reverse split.
The information contained in this preliminary Prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS |
SUBJECT TO COMPLETION | DATED AUGUST 7, 2023 |
1,500,000 Shares
of Common Stock
Unusual Machines, Inc.
This is a firm commitment initial public offering (“Offering”) of 1,500,000 shares of common stock, of Unusual Machines, Inc. We currently expect the initial offering price to be between $4.00 and $6.00 per share and the 1,500,000 shares offered hereby is based on an assumed offering price of the initial public offering price of $5.00 per share, the midpoint of such estimated price range. 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 $2.0 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 submitted an application to list the shares of our Common Stock on NYSE American (“NYSE American”) under the symbol “UMAC.” This Offering is contingent upon final approval of our listing on NYSE American.
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.”
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 | $ | 5.00 | $ | 7,500,000 | |||
| Underwriting discounts and commissions(1) | $ | 0.38 | $ | 562,500 | |||
| Proceeds to us, before expenses | $ | 4.62 | $ | 6,937,500 |
| (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 225,000 additional shares of common stock solely to cover overallotments, if any.
The underwriters expect to deliver the shares to purchasers on or about , 2023.
Maxim Group LLC
Dominari Securities
The date of this Prospectus is , 2023.
TABLE OF CONTENTS
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 comprised of (i) $2.0 million in cash from the proceeds of the Offering, (i) $1.0 million of the Company’s existing cash which the Company will deposit into escrow with the Company’s counsel upon the effectiveness of the Registration Statement which contains this Prospectus, and (iii) $17.0 million of the Company’s common stock or 3,400,000 shares of common stock. These 3,400,000 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 Offering price) of our common stock as a security for the Principal Stockholder’s indemnification obligations under Article VII of the Purchase Agreement.
In addition, Unusual agreed to use its best efforts to prepare and file a registration statement with respect to 300,000 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. 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.
Recent Developments
Rotor Riot’s revenues for the year ended April 30, 2023 increased by 70% to $3,447,149 from $2,028,149 for the year ended April 30, 2022. For the same periods, Fat Shark’s revenues decreased 11% to $2,317,444 from $2,627,792 for the prior year.
The Company recently entered into an agreement with the Drone Racing League, a leading professional drone racing company. See “Business- Drone Racing League.”
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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. | |
| · | 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 management team 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 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: | 1,500,000 shares of our common stock (1,725,000 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): | 6,617,255 shares | |
| Shares of common stock outstanding after the Offering (2): | 8,117,255 shares (8,342,255 shares if the underwriters exercise their over-allotment option in full), based on the initial public offering price of $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus. | |
| Over-allotment option: | The underwriters have an option for a period of 45 days to purchase up to 225,000 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 $5,887,500 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 (which includes a $500,000 sponsorship for the first year with the drone racing league in connection with a sponsorship agreement that we will enter into contingent upon the consummation of the Offering). | |
| Representative’s warrants: | We have agreed to issue warrants to the underwriters (“Representative’s Warrants”) to purchase 75,000 (or five percent (5%)) shares of our common stock (sold in the Offering not including the over-allotment option) to Maxim Group, 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 $6.25 (one hundred and twenty-five percent (125%) of the public offering price per share), based upon the midpoint of the initial public offering price range reflected on the cover page of this prospectus. The shares of our common stock underlying the Representative’s Warrants are being registered in this Offering. | |
| NYSE American symbol: | We have submitted an application to have the shares of our common stock listed on NYSE American under the symbol “UMAC” upon the Closing of this Offering. We will not proceed with the Business Combination or this Offering unless our common stock is approved for listing on NYSE American. | |
| 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: | All of the Company’s common stock issued prior to this Offering and held by its directors, officers, 5% shareholders and holders of our Series B Preferred Stock 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) | Assumes 3,217,255 shares of common stock currently outstanding, reflecting the 1-for-2 reverse stock split. In addition, it assumes 3,400,000 shares of our common stock 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 excludes the following: |
| · | 906,726 shares of our common stock available for future issuance under our 2022 Equity Incentive Plan; | |
| · | shares of common stock deliverable under grants of restricted stock units to our executives; and | |
| · | 75,000 shares of our common stock issuable upon the exercise of the Representative’s Warrant. |
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Summary Combined Pro Forma Financial Data
The following summary combined pro forma statements of operations for the periods ended June 30, 2023 and 2022 and summary combined pro forma balance sheet data as of June 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 June 30, 2023 |
Period Ended June 30, 2022 |
||||||
| Cash and cash equivalents | $ | 4,544,863 | $ | 4,568,187 | ||||
| Total assets | $ | 25,116,196 | $ | 14,578,129 | ||||
| Total liabilities | $ | 854,921 | $ | 6,378,044 | ||||
| Total shareholders’ equity | $ | 24,216,275 | $ | 8,200,085 | ||||
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Pro Forma Statements of Operations (unaudited) | ||||||||
| Revenues | $ | 2,662,724 | $ | 2,022,235 | ||||
| Gross margin | $ | 361,560 | $ | 260,009 | ||||
| Operating loss | $ | (3,287,282 | ) | $ | (1,035,179 | ) | ||
| Other income (expense) | $ | (35,979 | ) | $ | 13,909 | |||
| Net loss | $ | (3,323,261 | ) | $ | (1,021,270 | ) | ||
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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 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.
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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 experience 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 Brandon Torres Declet, our Chief Executive Officer and Chairman of the Board. As more fully described elsewhere in this Prospectus, Mr. Declet’s 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 Mr. Declet’s services would therefore materially adversely affect our business and prospects. We have “key person” insurance in place for Mr. Declet 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 management team and other parties could materially harm our business.
Our management team 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. For example, Brandon Torres Declet, our Chief Executive Officer has business interests in ventures that operate in the drone industry outside our Company. See “Management and Board of Directors.” These arrangements could cause Mr. Declet 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 management may not devote their full 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. Other members of our management team and Mr. Jeffrey Thompson and Thomas Walker, members of our Board of Directors also have significant roles and interests in other drone companies, which pose similar threats to us as those described as to Mr. Declet.
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. These relationships could result in Mr. French diverting his time, resources and corporate opportunities to this other entity rather than the Company. The Company expects to procure Mr. French’s services as a consultant of Fat Shark in connection with the Business Combination.
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.
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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; |
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| · | 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.
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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. |
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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.
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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. |
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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.
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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.
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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.
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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.
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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.
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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 June 30, 2023, we had $13,873,795 of estimated goodwill and $1,297,690 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 June 30, 2023, we also had $1,297,690 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.
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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.
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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”). 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., at least 35 states and the District of Columbia introduced or considered almost 200 consumer privacy bills in 2022. More and more states will continue to enact similar laws. Additionally, in June 2022 the American Data Privacy and Protection Act was introduced in the U.S. House of Representatives. 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 the Drone Racing League and Red Cat for the purchase of Fat Shark and Rotor Riot, and if the Red Cat Note is not converted, 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 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 a purchase price of $20.0 million to acquire Fat Shark and Rotor Riot comprised of (i) $2.0 million in cash from the proceeds of the Offering, (i) $1.0 million of our existing cash which the Company will deposit into escrow upon the effectiveness of the Registration Statement, of which this Prospectus is a part and (iii) $17.0 million of the Company’s common stock or 3,400,000 shares. 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 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 the multiple that 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:
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our ability to integrate the operations of Fat Shark and Red Cat; | |
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the announcement of new products by our competitors; | |
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our ability to obtain patents for our products and defend our intellectual property from misappropriation and competitive use; | |
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progress and publications of the commercial acceptance of similar technologies to those we utilize; | |
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our ability to grow the revenues of Fat Shark and Red Cat and achieve consistent profitability; | |
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our ability to execute our business plan; | |
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actual or anticipated variations in operating results; | |
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additions or departures of key personnel including our executive officers; | |
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business disruptions caused by natural disasters and uncontrollable events such as severe weather conditions or geopolitical turmoil; | |
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cyber security attacks or data privacy issues involving our products or operations; | |
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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; | |
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adverse regulatory developments; | |
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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 $3.89 per share, representing the difference between the public Offering price of $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus and our pro forma as adjusted net tangible book value per share as of June 30, 2023 immediately upon the completion of this Offering.
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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.
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.
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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 will not proceed with this Offering unless our common stock is 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 300,000 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, 5% shareholders and holders of our Series B Preferred Stock have entered into. From time-to-time after the expiration of the lock-up period, our stockholders may be eligible to sell all or some of their common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933 (the “Securities Act”), subject to certain limitations. In general, Rule 144 provides that any non-affiliate of the Company who has held restricted common stock for at least six months, is entitled to publicly sell their restricted stock, provided that the Company stays current in its SEC filings. Affiliates, which would include an officer, director or other person in control of the Company may sell after a six month holding period from the date of purchase) with the following restrictions: (i) the Company is current in its SEC filings, (ii) the holders comply with certain manner of sale provisions, (iii) the holders file a Form 144, and (iv) the holders comply with volume limitations limiting the sale of shares within any three-month period to the greater of (1) a number of shares that does not exceed 1% of the total number of outstanding shares, or (2) the average weekly trading volume computed over a four week period. A person who has ceased to be an affiliate at least three months immediately preceding the applicable sale and who has owned such shares of common stock for at least six months may sell the shares under Rule 144 without regard to any of the limitations described above except for the current public information requirement.
Future sales of substantial amounts of our common stock in the public market, or the anticipation of these sales, could materially and adversely affect market prices prevailing from time-to-time, and could impair our ability to raise capital through sales of equity or equity-related securities. In addition, the market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales may occur.
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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.
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USE OF PROCEEDS
We estimate that the net proceeds from this Offering will be approximately $3,650,000 after deducting estimated underwriting discounts and estimated offering expenses payable by us. If the underwriter exercises its over-allotment option in full, we estimate that the net proceeds will be approximately $4,328,750.
| Amount | Percent | |||||||
| USE OF NET PROCEEDS1 | ||||||||
| Payment for the Business Combination2 | $ | 2,000,000 | 33.97% | |||||
| Working Capital and General Corporate Purposes3 | $ | 3,887,500 | 66.03% | |||||
| TOTAL APPLICATION OF NET PROCEEDS | $ | 5,887,500 | 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.
2 We intend to use $2,000,000, or approximately 33.97% of the net proceeds of the Offering to pay Red Cat to consummate the Business Combination. See “The Business Combination.”
3 Includes $500,000 sponsorship for the first year with the Drone Racing League in connection with a sponsorship agreement that we will enter into contingent upon the consummation of the Offering and approximately $461,000 that we owe to a related party for unfulfilled orders and potentially an additional $1.4 million for outstanding purchase orders as of June 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 $3,887,500, or 66.03% 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 June 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 1,500,000 shares of common stock by us in this Offering at the public offering price of $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, 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 3,400,000 shares of our common stock at $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, related to the Business Combination as described above, and 1,500,000 shares of our common stock at $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, 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 June 30, 2023 (Presented in $ except for share numbers) |
||||||||||||
| Actual | Pro forma (1) | Pro forma as adjusted (2) |
||||||||||
| Long term debt | 0 | 0 | 0 | |||||||||
| Par Value of preferred stock | 0.01 | 0.01 | 0.01 | |||||||||
| Series B Preferred stock, 190 shares issued and outstanding as of June 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 June 30, 2023; pro forma as adjusted without over-allotment reflects 7,617,250 shares issued and outstanding | 32,173 | 66,173 | 81,173 | |||||||||
| Additional paid in capital | 4,715,790 | 21,681,790 | 27,842,886 | |||||||||
| Accumulated deficit | (2,562,786 | ) | (2,562,786 | ) | (3,662,786 | ) | ||||||
| Total shareholders’ equity | 2,185,179 | 19,185,179 | 24,261,275 | |||||||||
| Total capitalization | 2,185,179 | 19,185,179 | 24,261,275 | |||||||||
________________
| (1) | Reflects the issuance of common stock related to the Business Combination as discussed above at the public offering price of $5.00 share, the midpoint of the initial public offering price range reflected on the cover page of this Prospectus. It also reflects the 1-for-2 reverse stock split. | |
| (2) | Reflectsthe sale of common stock in this Offering at the public offering price of $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this Prospectus 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 $5,887,500 assuming the Underwriter has not exercised the over-allotment option. The net proceeds of $5,887,500 are calculated as follows: $7,500,000 gross offering proceeds, less underwriting discounts and commissions of $562,500, underwriter non-accountable expense allowance of $75,000, bonus payable to the Chief Executive Officer and Chief Financial Officer of $250,000 in the aggregate, and estimated business combination and offering expenses of $725,000. The pro forma as adjusted total equity of $24,261,275 is the sum of the net proceeds of $5,887,500, 16,188,596 related to the business combination, and the actual equity of $2,185,179. |
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MARKET FOR OUR COMMON STOCK
Prior to this Offering, there has been no public market for our common stock. We currently expect the initial offering price to be between $4.00 and $6.00 per share and the 1,500,000 shares offered hereby is based on an assumed offering price of the initial public offering price of $5.00 per share, the midpoint of such estimated price range. We submitted an application to list the common stock on NYSE American under the symbol “UMAC” However, there is no assurance that the Offering will be closed and our common stock will be 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 8,117,255 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 and 1,500,000 shares of common stock eligible for sale after the Offering closes.
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DETERMINATION OF OFFERING PRICE
As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our Board of Directors as of the date of this Prospectus, with input from management, and taking into account recent third-party financings consummated by the Company. In addition, based on the various factors listed below, our underwriters recommended that the range for the initial offering price should be between $4.00 and $6.00 per share and the 1,500,000 shares offered hereby is based on an assumed offering price of the initial public offering price of $5.00 per share, the midpoint of such estimated price range. Our pricing committee of our Board of Directors has agreed with our underwriters’ recommendation and has the authority to set the actual price per share in this Offering.
Our Board of Directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, including:
| · | Our stage of development and material risks related to our business; | |
| · | The per share listing requirement of the NYSE American; | |
| · | Our business conditions and projections; | |
| · | Our financial position and our historical and forecasted performance and operating results; | |
| · | The lack of an active public market for our common stock and the current prevailing market conditions; | |
| · | The prices of our common stock sold to or exchanged between outside investors in arm’s length transactions; | |
| · | The analysis of initial public offerings and the market performance of similar companies in our industry; | |
| · | The likelihood of achieving a liquidity event, such as an initial public offering or sale of our company in light of prevailing market conditions; and | |
| · | The hiring of key personnel and the experience of management. |
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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 June 30, 2023 was $2,182,252, or $0.68 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 June 30, 2023.
Our pro forma net tangible book value as of June 30, 2023 was $3,922,370, or $0.59 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 June 30, 2023 after giving effect to the issuance of the 3,400,000 common shares to Red Cat in the Business Combination based an initial public offering price of $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus.
After giving effect to our issuance and sale of 1,500,000 shares of common stock in this Offering at the assumed initial public offering price of $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus 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 June 30, 2023 would have been $8,998,466, or $1.11 per share. This represents an immediate increase in pro forma as adjusted net tangible book value per share of $0.52 to existing stockholders and immediate dilution of $3.89 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 | $ | 5.00 | ||
| Historical net tangible book value per share as of June 30, 2023 | $ | 0.68 | ||
| Decrease per share attributable to the pro forma adjustments described above | $ | (0.09 | ) | |
| Pro forma net tangible book value per share as of June 30, 2023 | $ | 0.59 | ||
| Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing shares in this Offering | $ | 0.51 | ||
| Pro forma as adjusted net tangible book value per share after this Offering | $ | 1.10 | ||
| Dilution per share to new investors purchasing shares in this Offering | $ | 3.90 |
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 $1.19 per share, representing an immediate increase in pro forma as adjusted net tangible book value per share of $0.59 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 $3.81 to new investors purchasing common stock in this Offering, based on an initial public offering price of $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus 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 $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, 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 | 39.6% | $ | 4,748,000 | 16.2% | $ | 1.48 | |||||||||||||
| Business combination | 3,400,000 | 41.9% | 17,000,000 | 58.1% | $ | 5.00 | ||||||||||||||
| New investors | 1,500,000 | 18.5% | $ | 7,500,000 | 25.6% | $ | 5.00 | |||||||||||||
| Total | 8,117,255 | 100.0% | $ | 29,248,000 | 100.0% | $ | 3.60 | |||||||||||||
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 38.6% 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 20.7% 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, outstanding as of the date of this Prospectus, and excludes the following:
| · | 906,726 shares of our common stock available for future issuance under our 2022 Equity Incentive Plan; and | |
| · | shares of common stock deliverable under grants of restricted stock units to our executives; and | |
| · | 75,000 shares of our common stock issuable upon the exercise of the Representative’s Warrant. |
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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, Golden Eagle II, 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 (as increased for positive working capital and decreased for negative working capital at closing) comprised of (i) $2.0 million in cash from the proceeds of the Offering, (i) $1.0 million of the Company’s existing cash which the Company will deposit into escrow upon the effectiveness of the registration statement which contains this Prospectus, 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 Mr. Brandon Torres Declet, 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.
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. The Purchase Agreement was amended primarily in response to the objections from our previous underwriters and their recommendation that the Company restructure its deal with Red Cat to issue common stock to Red Cat in connection with the Business Combination in lieu of preferred stock and the secured note that included price protection. 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.
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.
In addition, Unusual agreed to use its best efforts to prepare and file a Registration Statement with respect to 300,000 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 use in entertainment, recreational and competitive racing purposes, which we refer to as “consumer” uses, in the drone technology market. 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. 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. 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. 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 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 recreational or commercial photography and videography as well as 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.
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 the popularity of drone racing and 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 racing pilots. The Fat Shark and Rotor Riot product portfolios combine for a total of over 1,500 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 February 16, 2023, Rotor Riot’s YouTube account has 267,000 subscribers, and its Facebook page has 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 (“DRL”), 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 five of the leading pilots on the competitive FPV racing circuit, including the 2019 and 2018 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 $599 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. | |
| · | Attitude V6 Headset (retail price $349 per unit). The Attitude V6 focuses on high definition with 1280 x 960 LCOS panels and adjustable diopters. In addition to the 39-degree field of view, the Attitude V6 has a selectable image ratio, an expanded display control menu, and a configurable power button. The Attitude V6 ships with analog diversity receivers and is fully compatible with the Shark Byte HD module future-proofing your FPV experience. | |
| · | Fat Shark FPV Drone Starter Kit (retail price $799 per unit). The Fat Shark starter kit comes with a fully built drone, goggles, a controller, batteries, a charger, and related tools, to enable first time drone flyers to adopt the hobby quickly and easily. The kits all come with the express long range system (ELRS) receiver system to ensure users can easily add more drones to their arsenal later with minimal effort. |
Rotor Riot Retail Sales
In addition to marketing Fat Shark’s products, Rotor Riot also resells a variety of drones and drone-related products, including competitor FPV goggles as well as competitor offerings, through its website. Rotor Riot had 94,214 unique visitors to its e-commerce website in May 2023 with 113,927 total sessions. Rotor Riot has 86,387 customers.
Product Warranties
Fat Shark provides a two-year warranty on its products.
Rotor Riot does not provide warranties for the products it sells. Rotor Riot has launched Kwad Care, a program that helps pilots cover damages to their Rotor Riot Built and Tuned Drones. Kwad Care is a monthly paid membership that grants customers that have bought built and tuned drones from Rotor Riot access to free repair labor, discounts on replacement parts, and VIP customer care. Current Rotor Riot customers are charged $19.99 per month which includes labor on repairs and 20% discount on replacement parts.
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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 24.8% and 17.1% of Fat Shark’s revenues for the six months ended June 30, 2023 and in its fiscal 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. 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. |
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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.
Drone Racing League Agreement
The Company has entered into a Sponsorship Agreement (the “Agreement”) by and between Drone Racing League, Inc., a Delaware corporation (“DRL”), whereby following the closing of this offering the Company will receive certain sponsorship benefits from DRL. The DRL is a leading professional drone racing company. The Agreement will be effective for a term of up to three years. The Agreement provides the Company the following benefits, but not limited to: (i) exclusively utilize Fat Shark’s goggles through the DRL World Championship season; (ii) subject to separate license agreements, DRL and Fat Shark will exclusively produce co-branded products; (iii) DRL will showcase the Company’s brand across marketing and promotional channels.
Pursuant to the Agreement, in the first year (ending March 31, 2024), the Company will pay DRL $500,000 consisting of $400,000 for marketing and promotional benefits, a $50,000 minimum annual exclusive license fee, and $50,000 of Fat Shark goggles. The Company will also pay DRL royalties on the Company’s net sales of DRL products. In each of year two and three, the Company will be required to increase each payment by 5%, assuming neither party elects to terminate the Agreement after year one or year two.
The foregoing description of the Agreement does not purport to be complete and is qualified in its entirety by reference to its respective form which is annexed hereto as Exhibit 10.19 to the Registration Statement of which this Prospectus forms a part.
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 Brandon Torres Declet, our Chief Executive Officer, has a significant background in the drone business which we believe is a competitive advantage. 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 February 22, 2023 has more than 41,000 members and our Rotor Riot YouTube channel which as of February 22, 2023 has more than 260,000 subscribers. The Rotor Riot brand has been at the center of the racing and freestyle culture of drones since 2015. Rotor Riot sponsors five leading FPV pilots on the competitive racing circuit, including the Drone Racing League champion pilot in 2018 and 2019.
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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 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, of which our CEO and Chairman Brandon Torres Declet was a member, announced that all drones weighing more than 250 grams, or 0.55 pounds, must be registered with the FAA. As of July 2022, the FAA reported the registration of 858,550 drones, of which 318,455 were commercial and 536,482 were recreational. In addition, more than 286,184 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 will be 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”), of which our CEO and Chairman Brandon Torres Declet was a member, 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, 2022 and 2021, Fat Shark’s research and development costs were approximately 15.5% and 5.7%, 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 and one consultant. We currently have one consultant who we pay $10,000 a month. Upon the consummation of the Business Combination, we intend to continue Fat Shark’s relationship with Greg French and will pay Mr. French an annual consulting fee of $150,000 or $12,500 per month. 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. Rotor Riot also has a three-year lease for a 3,700 sq. foot facility in Orlando, FL. As the Company expands, we will seek to expand our facilities to support engineers, technical and support staff we intend to hire. There is a large pool of available properties in Florida and Puerto Rico. Specifically, we will also be looking for additional warehouse and office space in South Florida with immediate access to airports and multi-modal logistics (air, sea, land) for more rapid shipping of FPV products.
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
Six Months Ended June 30, 2023 and 2022
Revenue
During the six months ended June 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 six months ended June 30, 2023, we incurred general and administrative expenses totaling $1,024,195 compared to $470,586 for the six months ended June 30, 2022, resulting in an increase of $553,609 or 117.6%. 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 six months ended June 30, 2023, totaled $1,024,195 compared to $470,533 for the six months ended June 30, 2022, resulting in an increase of $553,662 or 117.7%. 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 becoming a public company.
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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.
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
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 of our products mature. Lower revenues for the 2023 period related to its newest product, the Dominator, which was launched at the beginning of Fiscal 2023, 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 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.
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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 Fiscal 2022 related to price reductions of the prior digital goggle as Fat Shark prepared for the launch of the Dominator in early Fiscal 2023. 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 Fiscal 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
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 we sell. 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
Six Months Ended June 30, 2023 and 2022
Operating Activities
Net cash used in operating activities was $1,246,439 during the six months ended June 30, 2023 compared to net cash used in operating activities of $437,482 during the six months ended June 30, 2022, representing an increase of $808,957 or 184.9%. This increase in net cash used primarily resulted from our increase in net loss of $553,662, increase in deferred offering costs of $223,579 and changes in non-cash expenses and working capital of $31,716.
Investing Activities
Net cash used in investing activities was $0 during the six months ended June 30, 2023 compared to net cash used in investing activities of $2,522 during the six months ended June 30, 2022, representing an increase of $2,522 or 100%. This increase in net cash used resulted from our purchase of computer equipment during the six months ended June 30, 2022.
Financing Activities
Net cash provided by financing activities totaled $0 during the six months ended June 30, 2023 compared to $549,900 during the six months ended June 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
Year 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
Year 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
Year 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 2022 consisted entirely of proceeds from a related party offset by payments on debt obligations of $269,045. 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 June 30, 2023, we had current assets totaling $2,281,262 primarily consisting of cash balances of $1,852,983. Our current liabilities as of June 30, 2023 totaled $99,010, consisting entirely of accounts payable and accrued expenses. Our net working capital as of June 30, 2023 was $2,182,252. Our cash balance as of the date of this Prospectus was approximately $1,600,000.
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 1,500,000 shares of common stock at an assumed price of $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, for anticipated gross proceeds of $7,500,000. After deducting anticipated offering and business combination related expenses, we anticipate to have a cash balance of approximately $4.5 million at the time of closing of this Offering. 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, 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”).
| Name | Age | Position |
| Brandon Torres Declet | 47 | Chief Executive Officer, and Chairman of the Board of the Directors |
| Matthew Newman | 48 | President |
| Brian Hoff | 37 | Chief Financial Officer |
| Robert Lowry | 64 | Director |
| Thomas Walker | 55 | Director |
| Jeffrey Thompson | 59 | Director |
| Cristina A. Colón | 35 | 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
Brandon Torres Declet, Chief Executive Officer, and Chairman of the Board of the Directors
Brandon Torres Declet has served as the Chief Executive Officer and Chairman of the Board of the Company since April 2022. Prior to that, he provided strategic and fiduciary leadership at AgEagle Aerial Systems, Inc. (NYSE: UAVS), a leading commercial drone company, as Chief Executive Officer and Director from May 2021 to January 2022, and as Chief Operating Officer from April 2021 to May 2021. Previously, he founded Measure UAS, Inc. (“Measure”) in May 2014 and served as its Chief Executive Officer from its founding until November 2019, where he built and grew this aerial intelligence company to the top 5% of drone firms by revenue – subsequently selling the Measure drone services business to the Aerodyne Group in November 2019, where he served as Chairman of Aerodyne Measure until April 2021. After his first successful exit, he founded and developed a drone SaaS platform Ground Control at Measure Global, Inc., which provides drone mission planning, data collection, processing, analysis, and intelligence reporting, he had his second successful exit selling that SaaS business to AgEagle for combination of cash and stock valued at $45 million less certain adjustments in April 2021. In March 2023, Mr. Declet was appointed as a Director of Workhorse Group, Inc. (Nasdaq: WKHS).
Mr. Declet and his team at Measure earned a Technology and Engineering Emmy™ Award for technical work in drone cinematography and was recognized with the Frost & Sullivan Award for Growth Excellence. In public service, he was appointed Senior Advisor to Oxford University’s Centre for Technology and Global Affairs and by the U.S. Secretary of Transportation to the FAA’s Advanced Aviation Advisory Committee (AAAC). He has also served as Counsel to U.S. House of Representatives; Homeland Security Committee; Counsel on Capitol Hill to Senator Feinstein, Congresswoman Harman, and Counsel to the Senate Intelligence and Judiciary Committees.
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As a global Chief Executive Officer, Chief Operating Officer, and Board Director with extensive operational experience, he has built, led, and advised public and private companies during complex business evolutions and exits through challenging turnarounds, disruptive transformations, scaling, and strategic pivots. Recognized and trusted by the Fortune 500 as a leading Latino and Puerto Rican drone industry entrepreneur and policy expert, he has 20+ years’ experience intersecting top government agencies and corporate industry in highly regulated markets and has firsthand experience successfully navigating regulatory challenges.
A drone industry thought leader, Mr. Declet has been featured on CNN, CNBC, Fox News, and Commercial UAV News among others. In 2018 and 2019, he was named a Tech Titan by Washingtonian Magazine.
Mr. Declet’s 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.
Matthew Newman, President
Mr. Newman has served as the Company’s President since September 2020. From January 2014 to September 2019, he served as a Director of Sales at SRC Solutions Inc., a 5G test solutions company.
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.
Thomas Walker, Director
Mr. Walker has served as a director of the Company since November 2022. He has served as Chief Executive Officer of DroneUp LLC, a drone services and logistics company since November 2016. Mr. Walker’s experience as an entrepreneur and Chief Executive Officer of a drone company led to his appointment as a director.
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, 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 Mr. Declet and Mr. Thompson. Our Board determined that, under the NYSE Listing Rules, Mr. Declet 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. Walker, 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. Lowry (Chair), Mr. Walker, 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. Lowry is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC, in compliance with the Sarbanes-Oxley Act of 2002.
Compensation Committee
The Compensation Committee currently consists of Mr. Walker (Chair), Ms. Colón, and Mr. Lowry 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. Walker, 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 2022
In the fiscal year ended December 31, 2022, the Board had three meetings and acted on 4 occasions by unanimous consent. We did not have any Committees during 2022.
There were no directors who attended fewer than 75 percent of the number of Board meetings during the fiscal year ended December 31, 2022.
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
Brandon Torres Declet serves as the Chairman of the Board and actively interfaces with management, the Board and counsel regularly. We have chosen to combine the Chief Executive Officer and Board Chairman positions, as we believe that this Board leadership structure is the most appropriate for the Company. Because we are a small company, it is more efficient to have the leadership of the Board in the same hands as the Chief Executive Officer. 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– are most efficiently dealt with by one person who is familiar 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. Brandon Torres Declet, 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 $100,000 during the fiscal years ended December 31, 2022 and 2021, and two additional individuals for whom the foregoing would apply but for the fact that they were not executive officers of the Company as of December 31, 2022 (each a “Named Executive Officer”).
| Name and Principal Position | Year | Salary ($) | Total ($) | ||||||||
| Jeffrey Thompson(1) | 2022 | 203,000 | $ | 203,333 | |||||||
| Former Chief Executive Officer and President | 2021 | $ | 66,667 | $ | 66,667 | ||||||
| Brandon Torres Declet(2) | 2022 | $ | 80,000 | $ | 80,000 | ||||||
| Chief Executive Officer | 2021 | $ | – | $ | – | ||||||
(1) 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.
(2) Mr. Declet was appointed Chief Executive Officer in May 2022 and did not serve during the 2021 fiscal year.
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.
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.
The Company has reserved 906,726 shares of common stock for issuance under the Plan, which represents approximately 10% 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.
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Employment Agreements
Employment Agreement with Brandon Torres Declet, Chief Executive Officer and Chairman
The Employment Agreement with Mr. Declet effective January 1, 2023 provides that he will serve as our Chief Executive Officer of the Company, on an at will basis. In August 2023, the Employment Agreement was amended (the “First Declet Amendment”) to increase the percentage of restricted stock units from 1% to 7% (as discussed below), increase his salary from $250,000 a year to $300,000 upon the consummation of the Offering and to include certain customary non-compete provisions. In addition, Mr. Declet’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. | |
| · | 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 restricted stock units (“RSUs”) equal to 7% of the outstanding common stock of the Company (after giving effect to the First Declet 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. Declet 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 Board of Directors, (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.
Mr. Declet’s Employment Agreement will be reviewed by our Board of Directors upon the consummation of this Offering.
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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 restricted stock units 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 restricted stock units (“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 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 and a consultant of Fat Shark. Since January 1, 2020, Fat Shark has paid or accrued a total of $12,261,440 in purchase orders to the Supplier. As of June 30, 2023, Fat Shark owed the related party Supplier $461,000, which does not include unfilled purchase orders of approximately $1.4 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 assuming the mid-point of the Offering gives effect to the 1-for-2 reverse stock split, the 3,400,000 shares of common stock issued as a part of the Business Combination, and the issuance of 1,500,000 shares of common stock in this Offering, based on an assumed price of $5.00 per share, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, and excludes 225,000 shares of common stock issuable if the underwriter exercises its option to purchase additional shares.
Applicable percentage ownership assuming the low-point of the Offering gives effect to the 1-for-2 reverse stock split, the 4,250,000 shares of common stock issued as a part of the Business Combination and the issuance of 1,875,000 shares of common stock in this Offering, based on an assumed price of $4.00 per share, the low point of the initial public offering price range, and excludes 281,250 shares of common stock issuable if the underwriter exercises its 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 Assuming Offering at Mid-Point of the Range (5) | Percentage of Beneficial Ownership Assuming Offering at the Low-Point of the Range (5) | |||||||||||
| Named Executive Officers and Directors: | ||||||||||||||||
| Brandon Torres Declet | 0 | * | 0 | * | * | |||||||||||
| Brian Hoff | 0 | * | 0 | * | * | |||||||||||
| Robert Lowry | 0 | * | 0 | * | * | |||||||||||
| Thomas Walker | 0 | * | 0 | * | * | |||||||||||
| Jeffrey Thompson(1) | 328,500 | 10.21% | 328,500 | 4.05% | 3.52% | |||||||||||
| Cristina A. Colón | 0 | * | 0 | * | * | |||||||||||
| All executive officers and directors as a group (6 persons) | 328,500 | 10.21% | 328,500 | 4.05% | 3.52% | |||||||||||
| Other 5% Holders | ||||||||||||||||
| Gordon Holmes (2) | 362,500 | 11.27% | 362,500 | 4.47% | 3.88% | |||||||||||
| Michael Laughlin (3) | 200,000 | 6.22% | 200,000 | 2.46% | 2.14% | |||||||||||
| Aikido Labs (4) | 307,189 | 9.55% | 307,189 | 3.78% | 3.29% | |||||||||||
________________
*Less than 1%
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(1) 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, Mary Beth Long, Christopher Moe and Nicholas Liuzza.
(2) Address is 295 Palmas Inn Way, Ste 104 PMB 115, Humacao, PR 00791.
(3) Address is 145 Sandy Hook Rd N, Sarasota, FL 34242.
(4) Address is 1 Rockefeller Center, 11th Floor, New York, NY 10020
(5) The numbers and percentages outstanding in these columns, exclude:
| · | 906,726 shares of our common stock available for future issuance under the Plan at the mid-point of the range; and | |
| · | 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; and | |
| · | 75,000 shares of our common stock issuable upon the exercise of the Representative’s Warrant. |
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 Articles of Incorporation, and the Certificate of Designation setting forth the terms of our authorized series of 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 Articles of Incorporation, our Bylaws and Puerto Rico Law
Certain provisions in our Amended and Restated Articles of Incorporation and Bylaws summarized below may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the market price for the shares held by stockholders.
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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.
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. Maxim Group LLC (“Maxim”) is acting as representative of the underwriters. We have entered into an underwriting agreement, dated [*], 2023, with Maxim. 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 | |
| Maxim Group LLC | ||
| Dominari Securities | ||
| Total |
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 150,000 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 150,000 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. The underwriters may offer shares to securities dealers at that price less a concession of not more than $0.[*] per share. 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 150,000 additional common shares:
| Total | ||||||||||||
| Per Share | Without Over- Allotment |
With Over- Allotment |
||||||||||
| Public offering price | $ | 5.00 | $ | 7,500,000 | $ | 8,625,000 | ||||||
| Underwriting discount (7.5%) (1) | $ | 0.38 | $ | 562,500 | $ | 646,875 | ||||||
| Proceeds, before expenses, to us | $ | 4.62 | $ | 6,937,500 | $ | 7,978,125 | ||||||
______________
(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 Maxim, 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 Maxim.
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 any holder(s) of 5.0% or more of the outstanding common stock of the Company (and all holders of securities exercisable for or convertible into common stock) are expected to enter into lock-up agreements with the Representative to agree not to, except for certain exceptions, 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.
Listing
We have applied to list our common stock on the NYSE American under the symbol “UMAC.” The approval of our common stock for listing on NYSE American is a condition to the closing of this Offering. We cannot assure you that such listing will be approved.
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.
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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. Maxim Group LLC has 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.
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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.
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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. |
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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.
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. |
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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. Carmel, Milazzo & Feil 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.
INTERESTS OF NAMED EXPERTS AND COUNSEL
None.
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.
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UNUSUAL MACHINES, INC.
INDEX TO FINANCIAL STATEMENTS
| 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 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 |
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|
June 30, 2023 |
June 30, 2023 |
June 30, 2023 |
June 30, 2023 |
June 30, 2023 |
|||||||||||||||||
| Assets | |||||||||||||||||||||
| Current Assets | |||||||||||||||||||||
| Cash | $ | 1,852,983 | $ | 42,974 | $ | 261,406 | $ | 2,387,500 | A | $ | 4,544,863 | ||||||||||
| Accounts receivable, net | – | 253,009 | 1,795 | (184,152 | ) | B | 70,652 | ||||||||||||||
| Inventories, net | – | 3,025,834 | 834,603 | (24,180 | ) | C | 3,836,257 | ||||||||||||||
| Deferred offering costs | 311,404 | – | – | (311,404 | ) | D | – | ||||||||||||||
| Other current assets | 116,875 | 990,000 | 294,740 | – | 1,401,615 | ||||||||||||||||
| Total Current Assets | 2,281,262 | 4,311,817 | 1,392,544 | 1,867,764 | 9,853,387 | ||||||||||||||||
| Right-of-use asset | – | – | 84,544 | – | 84,544 | ||||||||||||||||
| Other non-current asset | 2,927 | – | 3,853 | – | 6,780 | ||||||||||||||||
| Goodwill | – | 6,168,260 | – | 7,705,535 | E | 13,873,795 | |||||||||||||||
| Intangible assets, net | – | 1,277,690 | 20,000 | – | 1,297,690 | ||||||||||||||||
| Total Assets | $ | 2,284,189 | $ | 11,757,767 | $ | 1,500,941 | $ | 9,573,299 | $ | 25,116,196 | |||||||||||
| Liabilities and Stockholders’ Equity (Deficit) | |||||||||||||||||||||
| Accounts payable and accrued expenses | $ | 99,010 | $ | 528,754 | $ | 252,081 | $ | (184,152 | ) | F | $ | 695,693 | |||||||||
| Customer deposits | – | 25,340 | 42,613 | – | 67,953 | ||||||||||||||||
| Debt obligations | – | – | 262,856 | (262,856 | ) | G | – | ||||||||||||||
| Due to related party | – | 6,368,178 | 3,277,305 | (9,645,483 | ) | G | – | ||||||||||||||
| Operating lease liability – current | – | – | 49,461 | – | 49,461 | ||||||||||||||||
| Total Current Liabilities | 99,010 | 6,922,272 | 3,884,316 | (10,092,491 | ) | 813,107 | |||||||||||||||
| Operating lease liability - non-current | – | – | 41,814 | – | 41,814 | ||||||||||||||||
| Total Liabilities | 99,010 | 6,922,272 | 3,926,130 | (10,092,491 | ) | 854,921 | |||||||||||||||
| Stockholders’ Equity (Deficit) | |||||||||||||||||||||
| Preferred stock | 2 | – | – | – | 2 | ||||||||||||||||
| Common stock | 32,173 | 1 | – | 48,999 | H | 81,173 | |||||||||||||||
| Additional paid-in capital | 4,715,790 | 6,351,076 | – | 16,776,020 | I | 27,842,886 | |||||||||||||||
| Accumulated deficit | (2,562,786 | ) | (1,515,582 | ) | (2,425,189 | ) | 2,840,771 | J | (3,662,786 | ) | |||||||||||
| Total Stockholders’ Equity (Deficit) | 2,185,179 | 4,835,495 | (2,425,189 | ) | 19,665,790 | 24,261,275 | |||||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 2,284,189 | $ | 11,757,767 | $ | 1,500,941 | $ | 9,573,299 | $ | 25,116,196 | |||||||||||
| F-3 |
Notes:
| A | Estimated cash proceeds of $7,500,000 from this Offering, less estimated underwriter fees of $562,500, $75,000 in underwriter non-accountable expense allowance, $200,000 in additional underwriting expenses, $1,100,000 in other acquisition and offering related costs, $250,000 in bonus payments to the CEO and CFO in accordance with their employment agreements, $500,000 in relation to the drone racing league sponsorship and $3 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 $13,873,795. 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. | |
|
G
|
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 |
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 an estimated $5.00 per share price, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, for approximately 3.4 million 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 $7.5 million on an estimated $5.00 per share price, the midpoint of the initial public offering price range reflected on the cover page of this prospectus, which estimates approximately 1.5 million common shares issued. | |
| I | 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. | |
| J | 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 six months ended | Unusual Historical | Fat
Shark Historical |
Rotor Riot Historical | Pro
Forma Adjustments |
Pro
Forma Combined |
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June 30, 2023 |
June 30, 2023 |
June 30, 2023 |
June 30, 2023 |
||||||||||||||||||
| Revenue | $ | – | $ | 473,455 | $ | 2,306,789 | $ | (117,520 | ) | K | $ | 2,662,724 | |||||||||
| Cost of revenues | – | 655,536 | 1,738,968 | (93,340 | ) | L | 2,301,164 | ||||||||||||||
| Gross profit | – | (182,081 | ) | 567,821 | (24,180 | ) | 361,560 | ||||||||||||||
| Gross margin | n/a | (38.5% | ) | 24.6% | n/a | 13.6% | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||
| Operations | – | 105,412 | 237,316 | 342,728 | |||||||||||||||||
| Research and development | – | 106,200 | 48,781 | – | 154,981 | ||||||||||||||||
| Selling and marketing | – | 4,552 | 732,488 | 500,000 | M | 1,237,040 | |||||||||||||||
| General and administrative | 1,024,195 | 28,040 | 145,227 | 600,000 | N | 1,797,462 | |||||||||||||||
| Stock based compensation | – | 15,910 | 100,721 | – | 116,631 | ||||||||||||||||
| Total operating expenses | 1,024,195 | 260,114 | 1,264,533 | 1,100,000 | 3,648,842 | ||||||||||||||||
| Operating loss | (1,024,195 | ) | (442,195 | ) | (696,712 | ) | (1,124,180 | ) | (3,287,282 | ) | |||||||||||
| Other income (expenses) | – | (13,123 | ) | – | – | (13,123 | ) | ||||||||||||||
| Interest income | – | – | – | – | – | ||||||||||||||||
| Interest expense | – | – | 22,856 | – | 22,856 | ||||||||||||||||
| Loss before taxes | (1,024,195 | ) | (455,318 | ) | (719,568 | ) | (1,124,180 | ) | (3,323,261 | ) | |||||||||||
| Provision for taxes | – | – | – | – | – | ||||||||||||||||
| Net loss | $ | (1,024,195 | ) | $ | (455,318 | ) | $ | (719,568 | ) | $ | (1,124,180 | ) | $ | (3,323,261 | ) | ||||||
| Net loss per share attributable to common shareholders | |||||||||||||||||||||
| Basic and diluted | $ | (0.30 | ) | $ | (455.32 | ) | n/a | n/a | $ | (0.41 | ) | ||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||
| Basic and diluted | 3,412,250 | 1,000 | n/a | n/a | O | 8,117,255 | |||||||||||||||
Notes:
| K | 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. | |
| L | 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. | |
| M | Estimated expenses of $500,000 related to the drone racing league sponsorship | |
| N | Estimated expenses of $350,000 incurred related to the business combination of Rotor Riot and Fat Shark and $250,000 related to anticipated bonuses to be paid to the CEO and CFO as per the terms of their employment agreements. | |
| O | Historical weighted average common shares outstanding retroactively reflects the 1-for-2 reverse stock split. |
| F-5 |
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 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) $2.0 million in cash from the proceeds of the Offering, (i) $1.0 million of the Company’s existing cash which the Company will deposit into escrow upon the effectiveness of the Registration Statement which contains this Prospectus, 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-6 |
Note 2 — Summary of Significant Accounting Policies
The unaudited pro forma condensed combined balance sheet as of June 30, 2023, gives pro forma effect to both the business combination and this Offering as if they had been consummated as of June 30, 2023. The unaudited proforma condensed combined statements of operations for the six months ended June 30, 2023 give pro forma effect to both the business combination and this Offering as if they had been consummated as of June 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 June 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 | 3,000,000 | |||
| 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 | 42,974 | 261,406 | 304,380 | |||||||||||||
| Accounts receivable | 253,009 | 1,795 | (184,152 | ) | 70,652 | |||||||||||
| Inventory | 3,025,834 | 834,603 | (24,180 | ) | 3,836,257 | |||||||||||
| Other current assets | 990,000 | 294,740 | 1,284,740 | |||||||||||||
| Estimated intangible assets | 1,277,690 | 20,000 | 1,297,690 | |||||||||||||
| Operating lease right-of-use assets | – | 84,544 | 84,544 | |||||||||||||
| Other assets | – | 3,853 | 3,853 | |||||||||||||
| Total estimated assets acquired | 5,589,507 | 1,500,941 | (208,332 | ) | 6,882,116 | |||||||||||
| Estimated liabilities assumed | ||||||||||||||||
| Accounts payable and accrued expenses | 528,754 | 252,081 | (184,152 | ) | 596,683 | |||||||||||
| Customer deposits | 25,340 | 42,613 | 67,953 | |||||||||||||
| Operating lease liabilities | – | 91,275 | 91,275 | |||||||||||||
| Total estimated liabilities assumed | 554,094 | 385,969 | (184,152 | ) | 755,911 | |||||||||||
| Total estimated fair value of net assets acquired | 5,035,413 | 1,114,972 | (24,180 | ) | 6,126,205 | |||||||||||
| Estimated goodwill | $ | 8,964,587 | $ | 4,885,028 | $ | 24,180 | $ | 13,873,795 | ||||||||
| F-7 |
The Company will engage a valuation services firm to value the intangible assets acquired once the transactions contemplated by the Agreement have closed and final balances as of the closing date for the target companies are provided. 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. To the extent that the parties do not agree on the final allocation of the purchase price, a final allocation of the purchase price will be determined in accordance with Section 2.01 of Agreement with the assistance of a nationally-recognized accounting firm that is reasonably acceptable to Unusual and Red Cat. The Unaudited Pro Forma Condensed Combined Financial Statements and estimated goodwill 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.
Note 4 — Pro Forma Transaction Accounting Adjustments
The pro forma transaction accounting adjustments are based on the Company’s preliminary estimates, valuations, and assumptions that are subject to change.
Note 5 – Related Party Transactions
Fat Shark Ltd. sells products to Rotor Riot, LLC which is included in revenue for Fat Shark and cost of goods sold for Rotor Riot. Sales totaled $117,520 during the pro forma six months ended June 30, 2023. Cost of goods sold totaled $93,340 during the pro forma six months ended June 30, 2023. These transactions have been eliminated as a part of the unaudited pro forma condensed combined statement of operations.
Note 6 – Reconciliation of Target Company Interim Statement of Operations to Pro Forma Statement of Operations
The following statement of operations provides a reconciliation between the Fat Shark audited statement of operations for the fiscal year ended April 30, 2023 to the Fat Shark unaudited pro forma statement of operations for the six months ended June 30, 2023 to conform the target company’s fiscal year end to the Company’s fiscal year end.
| Fat Shark Interim Financials | Fat Shark Adjustment Period 1 |
Fat Shark Adjustment Period 2 |
Fat Shark Pro Forma Financials |
|||||||||||||
| (unaudited) | Year Ended April 30, 2023 |
Less: May through December 2022 | Add: May through June 2023 | 6 Months Ended June 30, 2023 |
||||||||||||
| Revenue | $ | 2,317,444 | $ | 2,160,948 | $ | 316,959 | $ | 473,455 | ||||||||
| Cost of revenues | 2,159,159 | 1,758,533 | 254,910 | 655,536 | ||||||||||||
| Gross profit | 158,285 | 402,415 | 62,049 | (182,081 | ) | |||||||||||
| Gross margin | 6.8% | 18.6% | 19.6% | (38.5% | ) | |||||||||||
| Operating expenses: | ||||||||||||||||
| Operations | 240,945 | 163,241 | 27,708 | 105,412 | ||||||||||||
| Research and development | 280,515 | 190,050 | 15,735 | 106,200 | ||||||||||||
| Selling and marketing | 16,858 | 11,421 | (885 | ) | 4,552 | |||||||||||
| General and administrative | 88,277 | 59,808 | (429 | ) | 28,040 | |||||||||||
| Stock based compensation | 34,946 | 23,297 | 4,261 | 15,910 | ||||||||||||
| Total operating expenses | 661,541 | 447,817 | 46,390 | 260,114 | ||||||||||||
| Operating income (loss) | (503,256 | ) | (45,402 | ) | 15,659 | (442,195 | ) | |||||||||
| Other income (expenses) | (42,865 | ) | (124 | ) | 29,866 | (13,123 | ) | |||||||||
| Interest income | – | – | – | – | ||||||||||||
| Interest expense | – | – | – | – | ||||||||||||
| Income (loss) before taxes | (546,121 | ) | (45,278 | ) | 45,525 | (455,318 | ) | |||||||||
| Provision for taxes | – | – | – | – | ||||||||||||
| Net income (loss) | $ | (546,121 | ) | $ | (45,278 | ) | $ | 45,525 | $ | (455,318 | ) | |||||
| F-8 |
The following statement of operations provides a reconciliation between the Rotor Riot audited statement of operations for the fiscal year ended April 30, 2023 to the Rotor Riot unaudited pro forma statement of operations for the six months ended June 30, 2023 to conform the target company’s fiscal year end to the Company’s fiscal year end.
| Rotor Riot Interim Financials | Rotor Riot Adjustment Period 1 |
Rotor Riot Adjustment Period 2 |
Rotor Riot Pro Forma Financials |
|||||||||||||
| (unaudited) | Year Ended April 30, 2023 |
Less: May through December 2022 | Add: May through June 2023 | 6 Months Ended June 30, 2023 |
||||||||||||
| Revenue | $ | 3,447,149 | $ | 2,034,404 | $ | 894,044 | $ | 2,306,789 | ||||||||
| Cost of revenues | 3,015,398 | 1,863,636 | 587,206 | 1,738,968 | ||||||||||||
| Gross profit | 431,751 | 170,768 | 306,838 | 567,821 | ||||||||||||
| Gross margin | 12.5% | 8.4% | 34.3% | 24.6% | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Operations | 403,912 | 237,310 | 70,714 | 237,316 | ||||||||||||
| Research and development | 65,487 | 38,476 | 21,770 | 48,781 | ||||||||||||
| Selling and marketing | 845,526 | 496,771 | 383,733 | 732,488 | ||||||||||||
| General and administrative | 311,301 | 182,898 | 16,824 | 145,227 | ||||||||||||
| Stock based compensation | 201,442 | 134,295 | 33,574 | 100,721 | ||||||||||||
| Total operating expenses | 1,827,668 | 1,089,750 | 526,615 | 1,264,533 | ||||||||||||
| Operating income (loss) | (1,395,917 | ) | (918,982 | ) | (219,777 | ) | (696,712 | ) | ||||||||
| Other income (expenses) | 8,051 | 8,051 | – | – | ||||||||||||
| Interest income | – | – | – | – | ||||||||||||
| Interest expense | – | – | 22,856 | 22,856 | ||||||||||||
| Income (loss) before taxes | (1,387,866 | ) | (910,931 | ) | (242,633 | ) | (719,568 | ) | ||||||||
| Provision for taxes | – | – | – | – | ||||||||||||
| Net income (loss) | $ | (1,387,866 | ) | $ | (910,931 | ) | $ | (242,633 | ) | $ | (719,568 | ) | ||||
| F-9 |
Unusual Machines, Inc.
| As of | ||||||||
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,852,983 | $ | 3,099,422 | ||||
| Deferred offering costs | 311,404 | 87,825 | ||||||
| Other current assets | 116,875 | 139,375 | ||||||
| Total current assets | 2,281,262 | 3,326,622 | ||||||
| Property and equipment, net | 2,927 | 3,690 | ||||||
| Total non-current assets | ||||||||
| Total assets | $ | 2,284,189 | $ | 3,330,312 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 99,010 | $ | 120,938 | ||||
| Total current liabilities | $ | 99,010 | $ | 120,938 | ||||
| Stockholders’ equity: | ||||||||
| Series B preferred stock - $0.01 par value, 10,000,000 authorized and 190 and 140 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | $ | 2 | $ | 1 | ||||
| Common stock - $0.01 par value, 90,000,000 authorized and 3,217,255 and 3,392,250 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | 32,173 | 33,923 | ||||||
| Additional paid in capital | 4,715,790 | 4,714,041 | ||||||
| Stocks to be issued | – | – | ||||||
| Accumulated deficit | (2,562,786 | ) | (1,538,591 | ) | ||||
| Total stockholders’ equity | $ | 2,185,179 | $ | 3,209,374 | ||||
| Total liabilities and stockholders’ equity | $ | 2,284,189 | $ | 3,330,312 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| F-10 |
Unusual Machines, Inc.
Condensed Statement of Operations
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | – | $ | – | $ | – | $ | – | ||||||||
| Cost of goods sold | – | – | – | – | ||||||||||||
| Gross margin | – | – | – | – | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 434,917 | 335,902 | 1,023,433 | 470,586 | ||||||||||||
| Depreciation and amortization | 381 | – | 762 | – | ||||||||||||
| Total operating expenses | 435,298 | 335,902 | 1,024,195 | 470,586 | ||||||||||||
| Loss from operations | (435,298 | ) | (335,902 | ) | (1,024,195 | ) | (470,586 | ) | ||||||||
| Other income: | ||||||||||||||||
| Interest income | – | 43 | – | 53 | ||||||||||||
| Total other income | – | 43 | – | 53 | ||||||||||||
| Net loss before income tax | (435,298 | ) | (335,859 | ) | (1,024,195 | ) | (470,533 | ) | ||||||||
| Income tax benefit (expense) | – | – | – | – | ||||||||||||
| Net loss | $ | (435,298 | ) | $ | (335,859 | ) | $ | (1,024,195 | ) | $ | (470,533 | ) | ||||
| Net loss per share attributable to common stockholders | ||||||||||||||||
| Basic and diluted | $ | (0.13 | ) | $ | (0.08 | ) | $ | (0.30 | ) | $ | (0.12 | ) | ||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic and diluted | 3,384,837 | 4,017,250 | 3,398,470 | 4,002,588 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| F-11 |
Unusual Machines, Inc.
Condensed Statements of Changes in Stockholders’ Equity
(Unaudited)
Six Months Ended June 30, 2022
| Common Stock | Additional Paid-In | Stocks to be | Accumulated | |||||||||||||||||||||
| Shares | Value | Capital | Issued | Deficit | Total | |||||||||||||||||||
| Balance, December 31, 2021 | 3,776,000 | $ | 37,760 | $ | 2,268,240 | $ | 1,892,065 | $ | (296,007 | ) | $ | 3,902,058 | ||||||||||||
| Issuance of common shares | 241,250 | 2,413 | 1,889,652 | (1,892,065 | ) | – | – | |||||||||||||||||
| Stocks to be issued | – | – | – | 549,900 | – | 549,900 | ||||||||||||||||||
| Net loss | – | – | – | – | (470,533 | ) | (470,533 | ) | ||||||||||||||||
| Balance, June 30, 2022 | 4,017,250 | $ | 40,173 | $ | 4,157,892 | $ | 549,900 | $ | (766,540 | ) | $ | 3,981,425 | ||||||||||||
Six Months Ended June 30, 2023
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance, December 31, 2022 | 140 | $ | 1 | 3,392,255 | $ | 33,923 | $ | 4,714,041 | $ | (1,538,591 | ) | $ | 3,209,374 | |||||||||||||||
| Issuance of common shares | – | – | 75,000 | 750 | (750 | ) | – | – | ||||||||||||||||||||
| Conversion of preferred shares | 50 | 1 | (250,000 | ) | (2,500 | ) | 2,499 | – | – | |||||||||||||||||||
| Net loss | – | – | – | – | – | (1,024,195 | ) | (1,024,195 | ) | |||||||||||||||||||
| Balance, June 30, 2023 | 190 | $ | 2 | 3,217,255 | $ | 32,173 | $ | 4,715,790 | $ | (2,562,786 | ) | $ | 2,185,179 | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| F-12 |
Unusual Machines, Inc.
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,024,195 | ) | $ | (470,533 | ) | ||
| Depreciation | 763 | – | ||||||
| Change in assets and liabilities: | ||||||||
| Deferred offering costs | (233,576 | ) | – | |||||
| Other current assets | 22,500 | – | ||||||
| Accounts payable and accrued expenses | (21,928 | ) | 33,051 | |||||
| Net cash used in operating activities | (1,246,439 | ) | (437,482 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | – | (2,522 | ) | |||||
| Net cash used in investing activities | – | (2,522 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Issuance of common stock | – | 549,900 | ||||||
| Net cash provided by financing activities | – | 549,900 | ||||||
| Net increase (decrease) in cash | (1,246,439 | ) | 109,896 | |||||
| Cash, beginning of period | 3,099,422 | 3,785,891 | ||||||
| Cash, end of period | $ | 1,852,983 | $ | 3,895,787 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | – | $ | – | ||||
| Cash paid for income tax | $ | – | $ | – | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| F-13 |
Unusual Machines, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Note 1 – Organization and nature of business
Unusual Machines, Inc., formerly AerocarveUS Corporation, (“The Company) is a corporation engaged in the commercial drone industry. AerocarveUS Corporation was originally formed as a limited liability company registered with the Department of State under the laws of the Commonwealth of Puerto Rico on July 11, 2019.
Note 2 – Summary of significant accounting policies
Basis of Accounting
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.
Cash
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at June 30, 2023 or December 31, 2022.
The Company maintains cash deposits at a financial institution that is insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. At June 30, 2023 and December 31, 2022, the Company had approximately $1.6 million and $2.8 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests.
Deferred offering costs
The Company deferred direct incremental costs associated with its ongoing initial public offering (“IPO”). The Company capitalized $223,579 and $0 during the six months ended June 30, 2023 and 2022, respectively. These deferred offering costs will be netted against IPO proceeds upon successful completion of the IPO. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation and preparation of the IPO.
Note Receivable
During the fiscal years ended December 31, 2021 and 2020, the Company made multiple unsecured and demand loans to Rotor Riot, LLC for a total of $115,222 to be used for general operating expenses. The notes do not bear interest. The note receivable was fully repaid during the year ended December 31, 2022.
| F-14 |
Property and equipment, net
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from two to five years.
Net Loss per Share
Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.
Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include 1,900,000 shares of Series B Preferred Stock, as converted as of June 30, 2023. There were not any shares not included in the computation of diluted loss per share as of June 30, 2022.
Note 3 – Other Current Assets
Other current assets included:
| June 30, 2023 | December 31, 2022 | |||||||
| Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions | $ | 100,000 | $ | 100,000 | ||||
| Prepaid insurance | 16,875 | 39,375 | ||||||
| Total other current assets | $ | 116,875 | $ | 139,375 | ||||
Note 4 – Property and equipment, net
Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically assessed for impairment. Property and equipment as of June 30, 2023 and December 31, 2022 was as follows:
| June 30, 2023 | December 31, 2022 | |||||||
| Computer equipment | $ | 4,575 | $ | 4,575 | ||||
| Accumulated depreciation | (1,648 | ) | (885 | |||||
| Total property and equipment, net | $ | 2,927 | $ | 3,690 | ||||
Depreciation expense totaled $762 and $0 for the six months ended June 30, 2023 and 2022, respectively.
| F-15 |
Note 5 – Common Stock
The Company issued 632,500 shares of common stock during the year ended December 31, 2022 for gross proceeds of $2,530,000, of which the Company received net proceeds of $2,442,000, due to fees and other expenses. The Company received $1,892,065 of these proceeds in advance of the shares being issued during the year ended December 31, 2021 and recorded stocks to be issued for these proceeds received in advance.
The Company issued 7,552,000 shares of common stock during the year ended December 31, 2021 for total proceeds of $2,306,000. $250,000 of proceeds were received in advance and recorded as stocks to be issued.
On December 13, 2022, the Company cancelled 1,400,000 common shares and converted these shares into Series B preferred stock.
On December 14, 2022, the Company amended its Articles of Incorporation to, among other things, increase the number of authorized shares of common stock from 90,000,000 to 500,000,000.
On March 7, 2023, the Company issued 150,000 shares of common stock to the investors in the July 2022 private placement. The shares were issued as consideration for its agreement with Revere Securities to modify its engagement letter with the Company.
On June 1, 2023, the Company cancelled 500,000 common shares and converted these shares into Series B preferred stock.
On July 10, 2023, the Company’s Board of Directors approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock. In accordance with Staff Accounting Bulletin Topic 4.C, the Company has given retroactive effect to the reverse stock split. In addition and in accordance with FASB ASC 260, Earnings Per Share, the Company has retroactively adjusted the computations of basic and diluted share calculations. The issued and outstanding shares of common stock prior to the 1-for-2 reverse stock split were 6,434,500 and 6,784,500 as of June 30, 2023 and December 31, 2022, respectively. The issued and outstanding shares of common stock after giving effect to the 1-for-2 reverse stock split is 3,217,255 and 3,392,250 as of June 30, 2023 and December 31, 2022, respectively. Net loss per share attributable to common stockholders’ before giving effect to the 1-for-2 reverse stock split was ($0.15) and ($0.06) for the six months ended June 30, 2023 and 2022, respectively. Net loss per share attributable to common stockholders’ after giving effect to the 1-for-2 reverse stock split is ($0.30) and ($0.12) for the six months ended June 30, 2023 and 2022, respectively.
The common stock par value is $0.01.
Note 6 – Preferred Stock
On December 13, 2022, the Company issued 140 Series B preferred shares in connection with the cancellation of 1,400,000 shares of common stock.
On June 1, 2023, the Company issued an additional 50 Series B preferred shares in connection with the cancellation of 500,000 shares of common stock.
The Series B preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company.
Shares outstanding at June 30, 2023 totaled 190 which are convertible into 1,900,000 shares of common stock. The preferred stock par value is $0.01.
| F-16 |
Note 7 – Business Combination
On November 21, 2022, the Company 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”) (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 April 13, 2023. Under the terms of the Purchase Agreement, as amended, upon satisfaction of closing conditions, the Company will purchase from Red Cat its Rotor Riot and Fat Shark subsidiaries for $20 million comprised of (i) $2.0 million in cash from the proceeds of the Company’s Initial Public Offering (“Offering”), (i) $1.0 million of the Company’s existing cash which the Company will deposit into escrow with the Company’s counsel upon the effectiveness of the Company’s Registration Statement, and (iii) $17.0 million of the Company’s common stock or 3,400,000 shares of common stock. The Red Cat shareholders approved the transaction contemplated in the Purchase Agreement in a special meeting on March 8, 2023.
The Purchase Agreement was further amended in July 2023 in which the Company has agreed to register 300,000 shares of common stock within 120 days after the consummation of the Offering and declared effective within 180 days after consummation of the Offering with a lock-up agreement effective for 180 days following the closing of the Offering or such lesser period as may be agreed upon by the Company and their Underwriter. In addition, the Company has agreed to reimburse Red Cat up to $100,000 for documented legal and other out-of-pocket expenses incurred in connection with the transaction.
Note 8 – Subsequent Events
The Company has evaluated events through August 7, 2023, which is the date the financial statements were available to be issued. There were no material subsequent events that require recognition or disclosure in these financial statements except as set forth below.
| F-17 |
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Unusual Machines, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Unusual Machines, Inc. as of December 31, 2022 and 2021, the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/S/ BF Borgers CPA PC
BF Borgers CPA PC (PCAOB ID 5041)
We have served as the Company's auditor since 2022
Lakewood, CO
March 14, 2023, except for the effects of the stock split described in Note 5 and Note 8 (Subsequent Events) as to which the date is June 14, 2023
| F-18 |
Unusual Machines, Inc.
Balance Sheets
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,099,422 | $ | 3,785,891 | ||||
| Accounts receivable, net | – | 945 | ||||||
| Deferred offering costs | 87,825 | – | ||||||
| Other current assets | 139,375 | 115,222 | ||||||
| Total current assets | 3,326,622 | 3,902,058 | ||||||
| Property and equipment, net | 3,690 | – | ||||||
| Total non-current assets | ||||||||
| Total assets | $ | 3,330,312 | $ | 3,902,058 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 120,938 | $ | – | ||||
| Total current liabilities | 120,938 | – | ||||||
| Stockholders’ equity: | ||||||||
| Series B preferred stock - $0.01 par value, 10,000,000 authorized and 140 and 0 shares issued and outstanding at December 31, 2022 and 2021, respectively | 1 | – | ||||||
| Common stock - $0.01 par value, 90,000,000 authorized and 3,392,250 and 3,776,000 shares issued and outstanding at December 31, 2022 and 2021, respectively | 33,923 | 37,760 | ||||||
| Additional paid in capital | 4,714,041 |
2,268,240 | ||||||
| Stocks to be issued | – | 1,892,065 | ||||||
| Accumulated deficit | (1,538,591 | ) | (296,007 | ) | ||||
| Total stockholders’ equity | 3,209,374 | 3,902,058 | ||||||
| Total liabilities and stockholders’ equity | $ | 3,330,312 | $ | 3,902,058 | ||||
See accompanying independent auditor’s report and notes to the financial statements.
| F-19 |
Unusual Machines, Inc.
Statement of Operations
For the Years Ended December 31, 2022 and 2021
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | – | $ | 4,989 | ||||
| Cost of goods sold | – | – | ||||||
| Gross margin | – | 4,989 | ||||||
| Operating expenses: | ||||||||
| Research and development | 91,325 | – | ||||||
| General and administrative | 1,150,522 | 166,868 | ||||||
| Depreciation and amortization | 885 | – | ||||||
| Total operating expenses | 1,242,732 | 166,868 | ||||||
| Loss from operations | (1,242,732 | ) | (161,879 | ) | ||||
| Other income: | ||||||||
| Interest income | 148 | 3 | ||||||
| Total other income | 148 | 3 | ||||||
| Net loss before income tax | (1,242,584 | ) | (161,876 | ) | ||||
| Income tax benefit (expense) | – | – | ||||||
| Net loss | $ | (1,242,584 | ) | $ | (161,876 | ) | ||
| Net loss per share attributable to common stockholders | ||||||||
| Basic and diluted | $ | (0.31 | ) | $ | (0.17 | ) | ||
| Weighted average common shares outstanding | ||||||||
| Basic and diluted | 4,007,925 | 970,016 | ||||||
See accompanying independent auditor’s report and notes to financial statements.
| F-20 |
Unusual Machines, Inc.
Statement of Changes in Stockholders’ Equity
For the Years Ended December 31, 2022 and 2021
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Stocks to be | Accumulated | ||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Issued | Deficit | Total | |||||||||||||||||||||||||
| Balance, December 31, 2020 | – | $ | – | – | $ | – | $ | – | $ | 250,000 | $ | (134,131 | ) | $ | 115,869 | |||||||||||||||||
| Issuance of common stock | – | – | 3,776,000 | 37,760 | 2,268,240 | (250,000 | ) | – | 2,056,000 | |||||||||||||||||||||||
| Stocks to be issued | – | – | – | – | – | 1,892,065 | – | 1,892,065 | ||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | (161,876 | ) | (161,876 | ) | ||||||||||||||||||||||
| Balance, December 31, 2021 | – | $ | – | 3,776,000 | $ | 37,760 | $ | 2,268,240 | $ | 1,892,065 | $ | (296,007 | ) | $ | 3,902,058 | |||||||||||||||||
| Issuance of common shares | – | – | 316,250 | 3,163 | 2,438,802 | (1,892,065 | ) | – | 549,900 | |||||||||||||||||||||||
| Conversion to preferred shares | 140 | 1 | (700,000 | ) | (7,000 | ) | 6,999 | – | – | – | ||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | (1,242,584 | ) | (1,242,584 | ) | ||||||||||||||||||||||
| Balance, December 31, 2022 | 140 | $ | 1 | 3,392,250 | $ | 33,923 | $ | 4,714,041 | $ | – | $ | (1,538,591 | ) | $ | 3,209,374 | |||||||||||||||||
See accompanying independent auditor’s report and notes to financial statements.
| F-21 |
Unusual Machines, Inc.
Statement of Cash Flows
For the Years Ended December 31, 2022 and 2021
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,242,584 | ) | $ | (161,876 | ) | ||
| Depreciation | 885 | – | ||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | 945 | (945 | ) | |||||
| Deferred offering costs | (87,825 | ) | – | |||||
| Other current assets | (24,153 | ) | – | |||||
| Accounts payable and accrued expenses | 120,938 | – | ||||||
| Net cash used in operating activities | (1,231,794 | ) | (162,821 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (4,575 | ) | – | |||||
| Net cash used in investing activities | (4,575 | ) | – | |||||
| Cash flows from financing activities: | ||||||||
| Issuance of common stock | 549,900 | 2,056,000 | ||||||
| Proceeds from stocks to be issued | – | 1,892,065 | ||||||
| Net cash provided by financing activities | 549,900 | 3,948,065 | ||||||
| Net increase (decrease) in cash | (686,469 | ) | 3,785,244 | |||||
| Cash, beginning of year | 3,785,891 | 647 | ||||||
| Cash, end of year | $ | 3,099,422 | $ | 3,785,891 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | – | $ | – | ||||
| Cash paid for income tax | $ | – | $ | – | ||||
See accompanying independent auditor’s report and notes to financial statements.
| F-22 |
Unusual Machines, Inc.
Notes to Financial Statements
For the Year Ended December 31, 2022
Note 1 – Organization and nature of business
Unusual Machines, Inc., formerly AerocarveUS Corporation, (“The Company) is a corporation engaged in the commercial drone industry. AerocarveUS Corporation was originally formed as a limited liability company registered with the Department of State under the laws of the Commonwealth of Puerto Rico on July 11, 2019.
Note 2 – Summary of significant accounting policies
Basis of Accounting
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.
Cash
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at December 31, 2022 or December 31, 2021.
The Company maintains cash deposits at a financial institution that is insured by the Federal Deposit Insurance Corporation of up to $250,000. The Company’s cash balance may at times exceed these limits. At December 31, 2022 and December 31, 2021, the Company had approximately $2.8 million and $3.5 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests.
Accounts Receivable, net
The Company carries its accounts receivable. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At December 31, 2022 and 2021, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established.
| F-23 |
Deferred offering costs
The Company deferred direct incremental costs associated with its ongoing initial public offering (“IPO”). The Company capitalized $87,825 during the year ended December 31, 2022. These deferred offering costs will be netted against IPO proceeds upon successful completion of the IPO. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation and preparation of the IPO.
Note Receivable
During the fiscal year ended December 31, 2021 and 2020, the Company made multiple unsecured and demand loans to Rotor Riot, LLC for a total of $115,222 to be used for general operating expenses. The notes do not bear interest. The note receivable was fully repaid during the year ended December 31, 2022.
Property and equipment, net
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from two to five years.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:
Step 1: Identify the contract with a customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to the performance obligations in the contract; and
Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.
The Company receives revenues from the sale of products. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is reasonably assured. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are delivered to the designated locations and the previously discussed requirements are met.
Income Taxes
The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.
The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.
The Company’s current provision for the years ending December 31, 2022 and 2021 consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. Since the Company has not generated an operating profit since inception, there are no deferred tax assets as of December 31, 2022 and 2021.
| F-24 |
Net Loss per Share
Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.
Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include 1,400,000 shares of Series B Preferred Stock, as converted as of December 31, 2022. There were not any shares not included in the computation of diluted loss per share as of December 31, 2021.
Note 3 – Other Current Assets
Other current assets at December 31 included:
| December 31, 2022 | December 31, 2021 | |||||||
| Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions | $ | 100,000 | $ | – | ||||
| Prepaid insurance | 39,375 | – | ||||||
| Note receivable from Rotor Riot, LLC | – | 115,222 | ||||||
| Total other current assets | $ | 139,375 | $ | 115,222 | ||||
Note 4 – Property and equipment, net
Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically assessed for impairment. Property and equipment as of December 31 was as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Computer equipment | $ | 4,575 | $ | – | ||||
| Accumulated depreciation | (885 | ) | – | |||||
| Total property and equipment, net | $ | 3,690 | $ | – | ||||
Depreciation expense totaled $885 and $0 for the year ended December 31, 2022 and 2021, respectively.
Note 5 – Common Stock
The Company issued 632,500 shares of common stock during the year ended December 31, 2022 for gross proceeds of $2,530,000, of which the Company received net proceeds of $2,442,000, due to fees and other expenses. The Company received $1,892,065 of these proceeds in advance of the shares being issued during the year ended December 31, 2021 and recorded stocks to be issued for these proceeds received in advance.
The Company issued 7,552,000 shares of common stock during the year ended December 31, 2021 for total proceeds of $2,306,000. $250,000 of proceeds were received in advance and recorded as stocks to be issued.
On December 13, 2022, the Company cancelled 1,400,000 common shares and exchanged these shares into Series B preferred stock.
| F-25 |
On December 14, 2022, the Company amended its Articles of Incorporation to, among other things, increase the number of authorized shares of common stock from 90,000,000 to 500,000,000.
In June 2023, the Company’s Board of Directors and a majority of our stockholders approved a 1-for-2 reverse stock split of its issued and outstanding shares of common stock. In accordance with Staff Accounting Bulletin Topic 4.C, the Company has given retroactive effect to the reverse stock split. In addition and in accordance with FASB ASC 260, Earnings Per Share, the Company has retroactively adjusted the computations of basic and diluted share calculations. The issued and outstanding shares of common stock prior to the 1-for-2 reverse stock split were 6,784,500 and 7,552,000 as of December 31, 2022 and 2021, respectively. The issued and outstanding shares of common stock after giving effect to the 1-for-2 reverse stock split is 3,392,250 and 3,776,000 as of December 31, 2022 and 2021, respectively. Net loss per share attributable to common stockholders’ before giving effect to the 1-for-2 reverse stock split was ($0.16) and ($0.09) for the years ended December 31, 2022 and 2021, respectively. Net loss per share attributable to common stockholders’ after giving effect to the 1-for-2 reverse stock split is ($0.31) and ($0.17) for the years ended December 31, 2022 and 2021, respectively.
The common stock par value is $0.01.
Note 6 – Preferred Stock
On December 13, 2022, the Company issued 140 Series B preferred shares in connection with the cancellation of 1,400,000 shares of common stock. The Series B preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company.
Shares outstanding at December 31, 2022 totaled 140 which are convertible into 1,400,000 shares of common stock. The preferred stock par value is $0.01.
Note 7 – Business Combination
On November 21, 2022 the Company entered into a Share Purchase Agreement (“Purchase Agreement”) with Red Cat Holdings, Inc. to purchase 100% of Rotor Riot, LLC and Fat Shark Ltd. for total consideration of $20.0 million comprised of (i) $2.0 million in cash from the proceeds of the Offering, (i) $1.0 million of the Company’s existing cash which the Company will deposit into escrow upon the effectiveness of the Registration Statement, and (iii) $17.0 million of the Company’s common stock (see, “Business Combination” for more information). The consummation of the transactions contemplated by the Purchase Agreement, as amended, 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.
Note 8 – Subsequent Events
The Company has evaluated events through March 14, 2023, which is the date the financial statements were available to be issued. There were no material subsequent events that require recognition or disclosure in these financial statements except as set forth below.
In June 2023, the Company’s Board of Directors and a majority of our stockholders have approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock. In accordance with Staff Accounting Bulletin Topic 4.C, the Company has given retroactive effect to the reverse stock split. In addition and in accordance with FASB ASC 260, Earnings Per Share, the Company has retroactively adjusted the computations of basic and diluted share calculations.
| F-26 |
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Fat Shark Holdings, Ltd.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Fat Shark Holdings, Ltd. as of April 30, 2023 and April 30, 2022, the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2023 and April 30, 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s Liabilities exceeding Assets raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/S/ BF Borgers CPA PC
BF Borgers CPA PC (PCAOB ID 5041)
We have served as the Company's auditor since 2020
Lakewood, CO
August 7, 2023
| F-27 |
Fat Shark Holdings, Ltd.
| April 30, | April 30, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 85,744 | $ | 109,223 | ||||
| Accounts receivable, net | 236,921 | 64,630 | ||||||
| Inventory | 2,307,070 | 317,556 | ||||||
| Other | 1,908,921 | 286,148 | ||||||
| Total current assets | 4,538,656 | 777,557 | ||||||
| Goodwill | 6,168,260 | 6,168,260 | ||||||
| Intangible assets, net | 1,282,667 | 1,342,401 | ||||||
| TOTAL ASSETS | $ | 11,989,583 | $ | 8,288,218 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 596,154 | $ | 49,035 | ||||
| Accrued expenses | 67,468 | 83,000 | ||||||
| Customer deposits | 25,340 | 9,119 | ||||||
| Due to related party | 6,434,278 | 2,734,600 | ||||||
| Total current liabilities | 7,123,240 | 2,875,754 | ||||||
| Commitments and contingencies | – | – | ||||||
| Stockholders’ equity | ||||||||
| Common stock | 1 | 1 | ||||||
| Additional paid-in capital | 6,351,076 | 6,351,076 | ||||||
| Accumulated deficit | (1,484,734 | ) | (938,613 | |||||
| Total stockholders' equity | 4,866,343 | 5,412,464 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 11,989,583 | $ | 8,288,218 | ||||
See accompanying notes.
| F-28 |
Fat Shark Holdings, Ltd.
| Year ended April 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | 2,317,444 | $ | 2,627,792 | ||||
| Cost of goods sold | 2,159,159 | 2,569,307 | ||||||
| Gross margin | 158,285 | 58,485 | ||||||
| Operating expenses | ||||||||
| Operations | 240,945 | 252,545 | ||||||
| Research and development | 280,515 | 407,881 | ||||||
| Sales and marketing | 16,858 | 60,616 | ||||||
| General and administrative | 88,277 | 169,096 | ||||||
| Stock based compensation | 34,946 | 15,606 | ||||||
| Total operating expenses | 661,541 | 905,744 | ||||||
| Operating (loss) income | (503,256 | ) | (847,259 | |||||
| Other expense | ||||||||
| Interest expense | – | 19,338 | ||||||
| Other, net | 42,865 | 44,126 | ||||||
| Other expense | 42,865 | 63,464 | ||||||
| Net loss | $ | (546,121 | ) | $ | (910,723 | |||
See accompanying notes.
| F-29 |
Fat Shark Holdings, Ltd.
Statements of Stockholders’ Equity
| Common Stock | ||||||||||||||||||||
| Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Equity | ||||||||||||||||
| Balances, April 30, 2021 | 1,000 | $ | 1 | $ | 6,351,076 | $ | (27,890 | ) | $ | 6,323,187 | ||||||||||
| Net loss | – | – | – | (910,723 | ) | $ | (910,723 | |||||||||||||
| Balances, April 30, 2022 | 1,000 | $ | 1 | $ | 6,351,076 | $ | (938,613 | ) | $ | 5,412,464 | ||||||||||
| Net loss | – | – | – | (546,121 | ) | (546,121 | ||||||||||||||
| Balances, April 30, 2023 | 1,000 | $ | 1 | $ | 6,351,076 | $ | (1,484,734 | ) | $ | 4,866,343 | ||||||||||
See accompanying notes.
| F-30 |
Fat Shark Holdings, Ltd.
| Year ended April 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (546,121 | ) | $ | (910,723 | |||
| Stock based compensation | 34,946 | 15,606 | ||||||
| Amortization of intangible assets | 59,734 | 59,733 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Inventory | (1,989,514 | ) | (156,597 | |||||
| Accounts receivable | (172,291 | ) | 263,778 | |||||
| Other | (1,622,773 | ) | 151,946 | |||||
| Customer deposits | 16,221 | (8,550 | ||||||
| Accounts payable | 547,119 | (180,700 | ||||||
| Accrued expenses | (15,532 | ) | (18,303 | |||||
| Net cash used in operating activities | (3,688,211 | ) | (783,810 | |||||
| Cash flows from financing activities | ||||||||
| Cash acquired through acquisition | – | – | ||||||
| Proceeds from related party obligations | 3,664,732 | 2,468,995 | ||||||
| Payments under debt obligations | – | (1,620,800 | ||||||
| Net cash provided by financing activities | 3,664,732 | 848,195 | ||||||
| Net (decrease) increase in Cash | (23,479 | ) | 64,385 | |||||
| Cash, beginning of period | 109,223 | 44,838 | ||||||
| Cash, end of period | $ | 85,744 | $ | 109,223 | ||||
| Cash paid for interest | – | 45,129 | ||||||
| Cash paid for income taxes | – | – | ||||||
| Non-cash transactions | ||||||||
| Indirect payment of debt obligation | $ | – | $ | 132,200 | ||||
See accompanying notes.
| F-31 |
Fat Shark Holdings, Ltd.
April 30, 2023 and 2022
Note 1 – The Business
Originally founded in September 2020 as FS Acquisition Corp. ("FSA" or the “Company”), the company was formed by Red Cat Holdings, Inc., its wholly owned parent, to complete the acquisition of Fat Shark Holdings, LTD (“Holdings”). As further described in Note 3, the acquisition closed on November 2, 2020. In April 2022, the Company re-incorporated in Nevada, United States and formally changed its name to Fat Shark Holdings, Ltd. The Company sells consumer electronics products to the first-person view (“FPV”) sector of the drone industry.
Note 2 – Basis of Accounting and Going Concern
These financial statements reflect the operating results of the Company for the two years ended April 30, 2023, including the financial support received from its Parent. These financial statements may not be indicative of the company’s operating results if it had operated without financial support from its Parent.
The financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the financial statements, the Company has incurred net losses totaling $1,484,734 since its inception, and reported negative working capital of $2,584,584 at April 30, 2023. Management recognizes that these operating results and our financial position raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and the classification of liabilities that might be necessary should we be unable to continue as a going concern.
Note 3 – Acquisition of Fat Shark Holdings, LTD
In September 2020, the Company entered into a share purchase agreement ("Share Purchase Agreement") with Greg French ("French"), the founder and sole shareholder of Holdings to acquire all of the issued and outstanding shares of Holdings and its wholly owned subsidiaries, Fat Shark Tech, LTD and Fat Shark Technology SEZC. The transaction closed on November 2, 2020. At closing, the Parent delivered to the Seller, on behalf of the Company, 5,227,273 shares of the Parent's common stock with a fair value of $6,351,076. The Company recognized the shares issued on its behalf by the Parent as an additional capital investment. In addition, a senior secured promissory note was issued to the Seller which was recorded on the Company's balance sheet. Finally, the Seller received a cash payment of $250,000, which was funded by the Parent, and recognized by the Company due to related party.
A summary of the purchase price and its related allocation was as follows:
| Shares issued | $ | 6,351,076 | ||
| Promissory note issued | 1,753,000 | |||
| Cash | 250,000 | |||
| Total Purchase Price | $ | 8,354,076 |
| F-32 |
| Assets acquired | ||||
| Cash | 201,632 | |||
| Accounts receivable | 249,159 | |||
| Other assets | 384,232 | |||
| Inventory | 223,380 | |||
| Brand name | 1,144,000 | |||
| Proprietary technology | 272,000 | |||
| Non-compete agreement | 16,000 | |||
| Goodwill | 6,168,260 | |||
| Total assets acquired | 8,658,663 | |||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | 279,393 | |||
| Customer deposits | 25,194 | |||
| Total liabilities assumed | 304,587 | |||
| Total fair value of net assets acquired | $ | 8,354,076 | ||
The Company engaged a valuation services firm to value the intangible assets acquired and the purchase price allocation is now complete. Intangible assets included proprietary technology and a non-compete agreement which are being amortized over 5 and 3 years, respectively. The carrying value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.
Note 4 – Summary of Significant Accounting Policies
Basis of Accounting – The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Certain prior period amounts have been restated to conform to the current year presentation.
Use of Estimates – The preparation of financial statements in accordance 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) accounting for derivatives.
Cash and Cash Equivalents – At April 30, 2023 and 2022, we held cash of $85,744 and $109,223, respectively, in multiple commercial banks and financial services companies. We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
| F-33 |
The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
Revenue Recognition – The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The Company’s revenue transactions include a single component, specifically, the shipment of goods to customers as orders are fulfilled. The Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $25,340 and $9,119 at April 30, 2023 and 2022, respectively.
Research and Development – Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research and development expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.
Income Taxes – Deferred taxes are provided on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Recent Accounting Pronouncements – Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Stock-Based Compensation – For stock options, we use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. We recognize forfeitures as they occur. For restricted stock, we determine the fair value based on our stock price on the date of grant. For both stock options and restricted stock, we recognize compensation costs on a straight-line basis over the service period which is the vesting term.
Related Parties – Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors. Related Party transactions are disclosed in Note 12.
| F-34 |
Note 5 – Inventories
Inventories, consisting solely of finished goods, totaled $2,307,070 and $317,556 at April 30, 2023 and 2022, respectively.
Note 6 – Other Assets
Other assets, short term, included.
| April 30, 2023 | April 30, 2022 | |||||||
| Prepaid inventory | $ | 1,908,921 | $ | 271,500 | ||||
| Prepaid expenses | – | 14,648 | ||||||
| Total | $ | 1,908,921 | $ | 286,148 | ||||
Note 7 – Intangible Assets
Intangible assets relate to acquisitions completed by the Company, including those described in Note 3. Intangible assets as of April 30 were as follows:
| April 30, 2023 | April 30, 2022 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||
| Proprietary technology | $ | 272,000 | $ | (136,000 | ) | $ | 136,000 | $ | 272,000 | $ | (81,600 | ) | $ | 190,400 | ||||||||||
| Non-compete agreements | 16,000 | (13,333 | ) | 2,667 | 16,000 | (7,999 | ) | 8,001 | ||||||||||||||||
| Total finite-lived | 288,000 | (149,333 | ) | 138,667 | 288,000 | (89,599 | ) | 198,401 | ||||||||||||||||
| Indefinite-lived– Brand name | 1,144,000 | – | 1,144,000 | 1,144,000 | – | 1,144,000 | ||||||||||||||||||
| Total, net | $ | 1,432,000 | $ | (149,333 | ) | $ | 1,282,667 | $ | 1,432,000 | $ | (89,599 | ) | $ | 1,342,401 | ||||||||||
As of April 30, 2023, expected amortization expense for the next five years is as follows:
| Fiscal Year Ended: | ||||
| 2024 | $ | 57,067 | ||
| 2025 | 54,400 | |||
| 2026 | 27,200 | |||
| Total | $ | 138,667 | ||
Proprietary technology and non-compete agreements are being amortized over 5 and 3 years, respectively. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.
Goodwill is a separately stated intangible asset and represents the excess of the purchase price of acquisitions above the net assets acquired. The balance was $6,168,260 as of April 30, 2023 and 2022.
| F-35 |
Note 8 – Debt Obligations
In connection with the acquisition of Holdings in November 2020, the Company issued a secured promissory note in the amount of $1,753,000 to the seller. The note bore interest at 3% annually and was scheduled to mature in full in November 2023. In May 2021, the Company made an initial payment of $132,200 by directing a refund from a vendor based in China to the noteholder who is also based in China. The remaining balance of $1,620,800 plus accrued interest totaling $45,129 was paid in September 2021.
Note 9 – Income Taxes
The Company was originally founded in November 2020 as an entity based in the Cayman Islands. While based in the Cayman Islands, the Company qualified as a Caymans Island Exempted Company which qualified it as a tax exempt entity. In April 2022, the Company changed its name to Fat Shark Holdings, Ltd. and reincorporated in Nevada, United States. Since incorporating in the United States, the Company has incurred net losses through April 30, 2023. Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. In addition, there was no deferred provision for any of these reporting periods. Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will be realized. Based on the fact that we have not generated an operating profit since incorporating in the United States, we have applied a full valuation allowance against our deferred tax assets at April 30, 2023.
Note 10 – Share Based Awards
Red Cat has established the 2019 Equity Incentive Plan (the "Plan") to incentive key employees, consultants, and directors with long term compensation awards such as stock options, restricted stock, and restricted stock units (collectively, the "Awards"). The Company recognized stock based compensation expense in connect with Awards to its employees.
Options
The range of assumptions used to calculate the fair value of options granted during the year ended April 30 was:
| 2023 | 2022 | |||||||
| Exercise Price | – | $ | 2.52 | |||||
| Stock price on date of grant | – | 2.52 | ||||||
| Risk-free interest rate | – | 1.50% | ||||||
| Dividend yield | – | – | ||||||
| Expected term (years) | – | 8.25 | ||||||
| Volatility | – | 270.30% | ||||||
| F-36 |
A summary of options activity under the Plan since April 30, 2021 is as follows:
| Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of April 30, 2021 | – | $ | – | |||||||||||||
| Granted | 45,000 | $ | 2.52 | – | ||||||||||||
| Exercised | – | – | ||||||||||||||
| Forfeited or expired | – | – | ||||||||||||||
| Outstanding as of April 30, 2022 | 45,000 | 2.52 | 9.56 | – | ||||||||||||
| Granted | – | – | ||||||||||||||
| Exercised | – | – | ||||||||||||||
| Forfeited or expired | – | – | ||||||||||||||
| Outstanding as of April 30, 2023 | 45,000 | 2.52 | 8.56 | – | ||||||||||||
| Exercisable as of April 30, 2023 | 18,750 | $ | 2.52 | 8.56 | $ | – | ||||||||||
The aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price of each option. As of April 30, 2023 and April 30, 2022, there was $54,287 and $89,233 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of 1.56 and 2.56 years, respectively.
Stock Compensation
Stock compensation expense for the years ended April 30, 2023 and 2022 was as follows:
| 2023 | 2022 | |||||||
| General and administrative | $ | – | $ | – | ||||
| Research and development | 17,473 | 7,803 | ||||||
| Operations | 17,473 | 7,803 | ||||||
| Sales and marketing | – | – | ||||||
| Total | $ | 34,946 | $ | 15,606 | ||||
Note 11 – Statement of Stockholders’ Equity
The Company is authorized to issue 3,000 shares of common stock having a par value of $0.001 per share. Upon its formation, the Company issued 1,000 shares of common stock to its Parent for $1.00.
In connection with its acquisition of Holdings in November 2020, the Company's parent, Red Cat Holdings, issued 5,227,273 of its shares with a fair value of $6,351,076 to the seller of Holdings. The Company recognized the fair value of the capital provided as additional paid in capital.
In April 2022, the Company sold Fat Shark Technology SEZC to French for $1. SEZC was a duly registered company in the Cayman Islands but had no assets or liabilities, and was basically a dormant entity.
| F-37 |
Note 12 - Related-Party Transactions
The Company sells product to Rotor Riot LLC (“Rotor Riot”) which is also wholly owned by Red Cat. Sales totaled $400,619 and $104,961 during the fiscal years ended April 30, 2023 and 2022, respectively.
Since its founding in November 2020, the Company has received funding from its Parent to support its operations. The Company received net funding of $2,484,601 during the fiscal year ended April 30, 2022. The balance due to Red Cat at April 30, 2022 totaled $2,734,600. The Company received net funding of $3,699,678 during the fiscal year ended April 30, 2023, primarily related to inventory deposits and purchases and a net loss of $546,121. The balance due to Red Cat at April 30, 2023 totaled $6,434,278.
Note 13 – Sale of Consumer Segment
On November 21, 2022, the Company’s sole shareholder, Red Cat Holdings, Inc. (“Red Cat”) approved a Stock Purchase Agreement (the "SPA") between Red Cat, Unusual Machines, Inc. (“UM”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, related to the sale of the Red Cat’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings (“FS”), to UM for cash and stock consideration totaling $18 million.
On November 21, 2022, Red Cat approved the SPA and its submission to shareholders for approval. On March 8, 2023, shareholders approved the sale to UM.
On April 13, 2023, the SPA was amended (the “Amendment”) and the total purchase price increased to $20 million. Under the Amendment, the cash consideration payable at closing was reduced to $3.0 million, as may be adjusted for working capital on the closing date (increased for positive working capital and decreased for negative working capital), and the non-cash consideration adjusted to provide for payment of $17 million in shares of UM’s common stock (the “Unusual Common Stock”) issued at the initial public offering price for the Unusual Common Stock. All of the Unusual Common Stock will be subject to a lock-up of 180 days and be eligible for registration. The Company estimates that working capital at closing will range between $2.0 to $4.5 million. In addition, closing of the SPA is subject to successful completion of an initial public offering (the “IPO”) by UM in the minimum amount of $10 million, and the listing of UM’s common stock on NASDAQ.
UM filed a registration statement on Form S-1 for an initial public offering of its Common Stock with the SEC. UM is required to deposit $1.0 million cash with Red Cat upon effectiveness of the registration statement with the SEC.
Note 14 – Subsequent Events
Subsequent events have been evaluated through the date of this filing and there are no subsequent events which require disclosure.
| F-38 |
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Rotor Riot, LLC
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Rotor Riot, LLC as of April 30, 2023 and April 30, 2022, the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2023 and April 30, 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s Liabilities exceeding Assets raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/S/ BF Borgers CPA PC
BF Borgers CPA PC (PCAOB ID 5041)
We have served as the Company's auditor since 2020
Lakewood, CO
August 7, 2023
| F-39 |
Rotor Riot, LLC
| April 30, | April 30, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 912 | $ | 20,041 | ||||
| Inventory | 861,708 | 375,570 | ||||||
| Other | 160,517 | 245,341 | ||||||
| Total current assets | 1,023,137 | 640,952 | ||||||
| Operating lease right-of-use assets | 84,544 | 133,293 | ||||||
| Intangible assets, net | 20,000 | 20,000 | ||||||
| Other | 3,853 | 3,853 | ||||||
| Total long term assets | 108,397 | 157,146 | ||||||
| TOTAL ASSETS | $ | 1,131,534 | $ | 798,098 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 178,420 | $ | 11,965 | ||||
| Accrued expenses | 42,012 | 68,266 | ||||||
| Due to related party | 3,070,304 | 1,529,371 | ||||||
| Customer deposits | 227,460 | 136,197 | ||||||
| Operating lease liabilities | 49,461 | 51,095 | ||||||
| Total current liabilities | 3,567,657 | 1,796,894 | ||||||
| Operating lease liabilities – long term | 41,814 | 91,275 | ||||||
| Commitments and contingencies | ||||||||
| Members’ equity | ||||||||
| Cumulative contributions | 151,000 | 151,000 | ||||||
| Cumulative deficit | (2,228,614 | ) | (840,748 | ) | ||||
| Cumulative distributions | (400,323 | ) | (400,323 | ) | ||||
| Total members' equity | (2,477,937 | ) | (1,090,071 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,131,534 | $ | 798,098 | ||||
See accompanying notes.
| F-40 |
Rotor Riot, LLC
| Year ended April 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | 3,447,149 | $ | 2,028,149 | ||||
| Cost of goods sold | 3,015,398 | 1,587,674 | ||||||
| Gross margin | 431,751 | 440,475 | ||||||
| Operating expenses | ||||||||
| Operations | 403,912 | 372,473 | ||||||
| Research and development | 65,487 | 58,719 | ||||||
| Sales and marketing | 845,526 | 220,007 | ||||||
| General and administrative | 311,301 | 220,366 | ||||||
| Stock based compensation | 201,442 | 161,087 | ||||||
| Total operating expenses | 1,827,668 | 1,032,652 | ||||||
| Operating loss | (1,395,917 | ) | (592,177 | ) | ||||
| Other expense (income) | ||||||||
| Interest expense | – | 4,701 | ||||||
| Other, net | (8,051 | ) | – | |||||
| Other expense (income) | (8,051 | ) | 4,701 | |||||
| Net loss | $ | (1,387,866 | ) | $ | (596,878 | ) | ||
See accompanying notes.
| F-41 |
Rotor Riot, LLC
| Cumulative Contributions | Cumulative Deficit | Cumulative Distributions | Total Members’ Equity | |||||||||||||
| Balances, April 30, 2021 | $ | 151,000 | $ | (243,870 | ) | $ | (400,323 | ) | $ | (493,193 | ) | |||||
| Net loss | – | (596,878 | ) | – | (596,878 | ) | ||||||||||
| Balances, April 30, 2022 | $ | 151,000 | $ | (840,748 | ) | $ | (400,323 | ) | $ | (1,090,071 | ) | |||||
| Net loss | – | (1,387,866 | ) | – | (1,387,866 | ) | ||||||||||
| Balances, April 30, 2023 | $ | 151,000 | $ | (2,228,614 | ) | $ | (400,323 | ) | $ | (2,477,937 | ) | |||||
See accompanying notes.
| F-42 |
Rotor Riot, LLC
| Year ended April 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (1,387,866 | ) | $ | (596,878 | ) | ||
| Stock based compensation | 201,442 | 161,087 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Inventory | (486,138 | ) | (161,581 | ) | ||||
| Other | 84,824 | (236,737 | ) | |||||
| Operating lease right-of-use assets and liabilities | (2,346 | ) | 9,077 | |||||
| Customer deposits | 91,263 | 107,770 | ||||||
| Accounts payable | 166,455 | 4,145 | ||||||
| Accrued expenses | (26,254 | ) | 34,911 | |||||
| Net cash used in operating activities | (1,358,620 | ) | (678,206 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from related party obligations | 1,339,491 | 860,384 | ||||||
| Payments under debt obligations | – | (269,045 | ) | |||||
| Net cash provided by financing activities | 1,339,491 | 591,339 | ||||||
| Net decrease in Cash | (19,129 | ) | (86,867 | ) | ||||
| Cash, beginning of period | 20,041 | 106,908 | ||||||
| Cash, end of period | $ | 912 | $ | 20,041 | ||||
| Cash paid for interest | – | 4,701 | ||||||
| Cash paid for income taxes | – | – | ||||||
See accompanying notes.
| F-43 |
Rotor Riot, LLC
April 30, 2023 and 2022
Note 1 – The Business
Originally founded in 2016, Rotor Riot, LLC (“Rotor Riot” or the “Company”) was acquired by and became a wholly owned subsidiary of Red Cat Holdings (“Red Cat” or the “Parent”) in January 2020. The Company sells drones, parts and related equipment to the consumer marketplace through its digital storefront located at www.rotorriot.com.
Note 2 – Going Concern
The Company has incurred net losses since its acquisition by Red Cat which has provided funding to enable the company to continue to operate. These financial statements reflect the operating results of the Company for the two years ended April 30, 2023, including the financial support received from its Parent. These financial statements may not be indicative of the company’s operating results if it had operated without financial support from its Parent.
The financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying financial statements, we had negative working capital of $2,544,520 at April 30, 2023 and have accumulated losses totaling $2,228,614 through April 30, 2023. Management recognizes that these operating results and our financial position raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and the classification of liabilities that might be necessary should we be unable to continue as a going concern.
Note 3 – Summary of Significant Accounting Policies
Basis of Accounting – The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Certain prior period amounts have been restated to conform to the current year presentation.
Use of Estimates – The preparation of financial statements in accordance 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) accounting for derivatives.
Cash and Cash Equivalents – At April 30, 2023 and 2022, we held cash of $912 and $20,041, respectively, in multiple commercial banks and financial services companies. We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.
Leases – Effective August 1, 2021, the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of assets and liabilities associated with lease agreements. The Company adopted ASC 842 on a modified retrospective transition basis which means that it did not restate financial information for any periods prior to August 1, 2021. Upon adoption, the Company recognized a lease liability obligation of $260,305 and a right-of-use asset for the same amount.
| F-44 |
The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company uses an effective discount rate of 12% based on its last debt financings. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
Revenue Recognition – The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The Company’s revenue transactions include a single component, specifically, the shipment of goods to customers as orders are fulfilled. The Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $227,460 and $136,197 at April 30, 2023 and 2022, respectively.
| F-45 |
Research and Development – Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research and development expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.
Income Taxes – Deferred taxes are provided on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Recent Accounting Pronouncements – Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Stock-Based Compensation – For stock options, we use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. We recognize forfeitures as they occur. For restricted stock, we determine the fair value based on our stock price on the date of grant. For both stock options and restricted stock, we recognize compensation costs on a straight-line basis over the service period which is the vesting term.
Related Parties – Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors. Related Party transactions are disclosed in Note 12.
Note 4 – Inventories
Inventories, consisting solely of finished goods, totaled $861,708 and $375,570 at April 30, 2023 and 2022, respectively.
Note 5 – Other Assets
Other assets, short term, included.
| April 30, 2023 | April 30, 2022 | |||||||
| Prepaid inventory | $ | 153,117 | $ | 231,467 | ||||
| Prepaid expenses | 7,400 | 13,874 | ||||||
| Total | $ | 160,517 | $ | 245,341 | ||||
Other assets, long term, represented security deposits at April 30, 2023 and 2022.
Note 6 – Intangible Assets
Intangible assets relate solely to trademarks acquired in an acquisition completed in 2016.
| F-46 |
Note 7 – Operating Leases
As of April 30, 2023, the Company had operating type leases for real estate and no finance type leases. The Company’s leases have remaining lease terms of up to 1.75 years. Operating lease expense totaled $54,238 for the fiscal year ended April 30, 2023.
| |-Future Lease Payments-| | ||||||||||||||||||
| Location | Monthly Rent | Expiration | Fiscal 2024 | Fiscal 2025 |
Total | |||||||||||||
| Orlando, Florida | $ | 4,692 | January 2025 | 57,716 | 43,933 | 101,649 | ||||||||||||
| Year Ended | ||||
| Supplemental Information | April 30, 2023 | |||
| Operating cash paid to settle lease liabilities | $ | 56,584 | ||
| Right of use asset additions in exchange for lease liabilities | $ | – | ||
| Weighted average remaining lease term (in years) | 1.75 | |||
| Weighted average discount rate | 12% | |||
Note 8 – Debt Obligations
| A. | Shopify Capital |
Shopify Capital is an affiliate of Shopify, Inc. which provides sales software and services to the Company. The Company processes customer transactions ordered on the e-commerce site for Rotor Riot through Shopify. Shopify Capital has entered into multiple agreements with the Company in which it has "purchased receivables" at a discount. Shopify retains a portion of the Company's daily receipts until the purchased receivables have been paid. The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement is executed. Agreements with activity during the two years ended April 30, 2023 included:
| Date of Transaction | Purchased Receivables | Payment to Company | Transaction Fees |
Withholding Rate |
Fully Repaid In | |||||
| September 2020 | $209,050 | $185,000 | $24,050 | 17% | May 2021 | |||||
| April 2021 | $236,500 | $215,000 | $21,500 | 17% | January 2022 |
| B. | PayPal |
PayPal is an electronic commerce company that facilitates payments between parties through online funds transfers. The Company processes certain customer payments ordered on its e-commerce site through PayPal. The Company has entered into multiple agreements under which PayPal provides an advance on customer payments, and then retains a portion of customer payments until the advance is repaid. PayPal charges a fee which the Company recognizes in full upon entering an agreement. A November 2019 agreement under which PayPal advanced $100,000 and charged a transaction fee of $6,900 was completed in January 2021. A January 2021 agreement under which PayPal advanced $75,444 and charged a transaction fee of $2,444 was completed in August 2021.
| F-47 |
Note 9 – Income Taxes
Rotor Riot is an LLC based in the United States and files its annual income tax return on a Form 1120. Since inception, we have incurred net losses in each year of operations. Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. In addition, there was no deferred provision for any of these reporting periods.
At April 30, 2023 and 2022, we had accumulated deficits of approximately $2,230,000 and $841,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $334,500 and $126,150, respectively, calculated using the minimum U.S. corporate tax rate of 15%. Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will be realized. Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation allowance against our deferred tax assets at April 30, 2023 and 2022.
Note 10 – Members’ Equity
In January 2020, Red Cat Holdings acquired 8,000,001 Membership Interests, representing 100% ownership of the Company.
Note 11 – Share Based Awards
Red Cat has established the 2019 Equity Incentive Plan (the "Plan") to incentive key employees, consultants, and directors with long term compensation awards such as stock options, restricted stock, and restricted stock units (collectively, the "Awards"). The Company recognized stock based compensation expense in connect with Awards to its employees.
Options
The range of assumptions used to calculate the fair value of options granted during the year ended April 30 was:
| 2023 | 2022 | |||||||
| Exercise Price | $1.06 – 2.38 | $2.52 – 2.60 | ||||||
| Stock price on date of grant | 1.06 – 2.38 | 2.52 – 2.60 | ||||||
| Risk-free interest rate | 3.34 – 4.18% | 1.32 – 1.57% | ||||||
| Dividend yield | – | – | ||||||
| Expected term (years) | 8.25 | 8.25 – 10.00 | ||||||
| Volatility | 253.52 – 260.06% | 214.53 – 270.30% | ||||||
| F-48 |
A summary of options activity under the Plan since April 30, 2021 is as follows:
| Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of April 30, 2021 | 147,475 | $ | 0.82 | 8.99 | 474,870 | |||||||||||
| Granted | 221,000 | 2.58 | ||||||||||||||
| Exercised | – | – | ||||||||||||||
| Forfeited or expired | (1,000 | ) | 2.60 | |||||||||||||
| Outstanding as of April 30, 2022 | 367,475 | 1.88 | 8.59 | 178,445 | ||||||||||||
| Granted | 50,000 | 1.32 | ||||||||||||||
| Exercised | – | – | ||||||||||||||
| Forfeited or expired | – | – | ||||||||||||||
| Outstanding as of April 30, 2023 | 417,475 | 1.81 | 7.82 | 9,586 | ||||||||||||
| Exercisable as of April 30, 2023 | 277,973 | $ | 1.63 | 7.43 | $ | 9,586 | ||||||||||
The aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price of each option. As of April 30, 2023 and April 30, 2022, there was $207,986 and $405,863 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of 1.58 and 1.44 years, respectively.
Stock Compensation
Stock compensation expense for the years ended April 30, 2023 and 2022 was as follows:
| 2023 | 2022 | |||||||
| General and administrative | $ | 11,756 | $ | 9,136 | ||||
| Research and development | 22,117 | 18,349 | ||||||
| Operations | 115,419 | 108,487 | ||||||
| Sales and marketing | 52,150 | 25,115 | ||||||
| Total | $ | 201,442 | $ | 161,087 | ||||
Note 12 – Related-Party Transactions
The Company purchases drones from Fat Shark Holdings, Ltd, which is also wholly owned by Red Cat Holdings. Purchases from Fat Shark totaled $400,619 and $104,961 during the fiscal years ended April 30, 2023 and 2022, respectively.
Since becoming a wholly owned subsidiary of Red Cat, the Company has received funding from its Parent to support its operations. During the fiscal year ended April 30, 2022, the Company received net funding of $1,021,471 primarily related to inventory which increased $398,318, payments of accounts payable and accrued expenses of $269,045, and a net loss of $596,878. The balance due to Red Cat at April 30, 2022 totaled $1,529,371. During the fiscal year ended April 30, 2023, the Company received net funding of $1,540,933 primarily related to increased inventory purchases and a net loss of $1,387,866. The balance due to Red Cat at April 30, 2023 totaled $3,070,304.
| F-49 |
Note 13 – Sale of Consumer Segment
On November 21, 2022, the Company’s sole shareholder, Red Cat Holdings, Inc. (“Red Cat”) approved a Stock Purchase Agreement (the "SPA") between Red Cat, Unusual Machines, Inc. (“UM”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, related to the sale of the Red Cat’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings (“FS”), to UM for cash and stock consideration totaling $18 million.
On November 21, 2022, Red Cat approved the SPA and its submission to shareholders for approval. On March 8, 2023, shareholders approved the sale to UM.
On April 13, 2023, the SPA was amended (the “Amendment”) and the total purchase price increased to $20 million. Under the Amendment, the cash consideration payable at closing was reduced to $3.0 million, as may be adjusted for working capital on the closing date (increased for positive working capital and decreased for negative working capital), and the non-cash consideration adjusted to provide for payment of $17 million in shares of UM’s common stock (the “Unusual Common Stock”) issued at the initial public offering price for the Unusual Common Stock. All of the Unusual Common Stock will be subject to a lock-up of 180 days and be eligible for registration. The Company estimates that working capital at closing will range between $2.0 to $4.5 million. In addition, closing of the SPA is subject to successful completion of an initial public offering (the “IPO”) by UM in the minimum amount of $10 million, and the listing of UM’s common stock on NASDAQ.
UM filed a registration statement on Form S-1 for an initial public offering of its Common Stock with the SEC. UM is required to deposit $1.0 million cash with Red Cat upon effectiveness of the registration statement with the SEC.
Note 14 – Subsequent Events
Subsequent events have been evaluated through the date of this filing and there are no subsequent events which require disclosure except as set forth below:
In June 2023, the Company entered into an agreement with PayPal under which PayPal provides an advance on customer payments of $240,000, and then retains a portion of customer payments until the advance is repaid. PayPal charges a transaction fee of $22,856 which the Company recognizes in full upon entering the agreement.
| F-50 |
1,500,000 Shares of Common Stock
Unusual Machines, Inc.
| PRELIMINARY PROSPECTUS |
Maxim Group LLC
Dominari Securities
The date of this Prospectus is , 2023.
Through and including , 2023 (the 25th day after the date of this offering), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
INFORMATION NOT REQUIRED IN A PROSPECTUS
Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of the various expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of securities being registered. All amounts are estimates except for the SEC registration fee, the FINRA filing fee and the NYSE American initial listing fee.
| Item | Amount to be paid | |||
| SEC registration fee | $ | 2,218 | ||
| FINRA filing fee | 5,000 | |||
| NYSE American initial listing fee | 5,000 | |||
| Legal fees and expenses | 300,000 | |||
| Accounting fees and expenses | 320,000 | |||
| Transfer agent and registrar fees and expenses | 4,200 | |||
| Underwriter’s Non-Accountable Expense Allowance | 75,000 | |||
| Miscellaneous expenses | 180,000 | |||
| Total | $891,418 | |||
Indemnification of Directors and Officers.
The law of the Commonwealth of Puerto Rico provides for discretionary indemnification for each person who serves as or at our request as an officer or director. We may indemnify such individual against all costs, expenses, and liabilities incurred in a threatened, pending or completed action, suit, or proceeding brought because such individual is a director or officer. Such individual must have conducted himself in good faith and reasonably believed that his conduct was in, or not opposed to, our best interests. In a criminal action, he/she must not have had a reasonable cause to believe his conduct was unlawful.
Our Bylaws provide that our Company shall indemnify its officers and directors to the fullest extent permitted by the Commonwealth of Puerto Rico General Corporation Act, and as provided for in the Company’s Articles of Incorporation and our Bylaws.
Our Bylaws provide that each person who was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation or other entity, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Company to the fullest extent authorized by the Commonwealth of Puerto Rico General Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), against all expense, liability and loss actually and reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 3 of the bylaws, the Company shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company.
The right to indemnification conferred in our bylaws is a contract right and shall include the right to be paid by the Company the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Commonwealth of Puerto Rico Corporation Act requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Company of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under the bylaws. The Company may, by action of its Board of Directors, provide indemnification to employees and agents of the Company with the same scope and effect as the foregoing indemnification of directors and officers.
| II-1 |
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers and controlling persons pursuant to the foregoing, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.
Recent Sales of Unregistered Securities
The following is a summary of all securities that we have sold during the last three years without registration under the Securities Act of 1933, as amended (the “Securities Act”).
On September 10, 2021, we closed a private offering pursuant to Rule 506(b) under the Securities Act. Our founders purchased 3,000,000 shares of common stock at a price of $0.01 per share for total proceeds of $30,000. The shares were issued pursuant to the exemption provided under Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506(b) promulgated thereunder.
| Subscriber Name | Shares Issued | Subscription price |
| Jeffrey Thompson | 2,400,000 | $24,000 |
| Brains Riding In Tanks, LLC | 150,000 | $1,500 |
| John J. Laxague | 150,000 | $1,500 |
| Matthew Newman | 150,000 | $1,500 |
| James T. Connell | 150,000 | $1,500 |
| Total | 3,000,000 | $30,000 |
On September 14, 2021, we closed a private offering pursuant to Rule 506(b) under the Securities Act of 4,552,000 shares of common stock at a price of $0.50 per share for total proceeds of $2,276,000, including 52,000 shares of common stock issued to Jeffrey Thompson for a total of $26,000. The shares were issued pursuant to the exemption provided under Rule 506(b) of Regulation D of the Securities Act of 1933, as amended.
On January 12, 2022, we closed a private offering pursuant to Rule 506(b) under the Securities Act of 482,500 shares of common stock at a price of $4.00 per share for total proceeds of $1,930,000.
On July 27, 2022, we closed a private offering pursuant to Rule 506(b) under the Securities Act of 150,000 shares of common stock at a price of $4.00 per share for total proceeds of $600,000.
On December 13, 2022, the Company issued 140 Series B preferred shares to three accredited investors in connection with the cancellation of 1,400,000 shares of common stock. The Series B preferred stock is convertible into common stock at a ratio of 10,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company. Shares outstanding at December 31, 2022 totaled 140 which are convertible into 1,400,000 shares of common stock. The preferred stock par value is $0.01.
On March 7, 2023, we issued 150,000 shares of our common stock to the investors in the July 27, 2022 private placement. The shares were issued at the request of Revere Securities as partial consideration for its agreement to modify its engagement letter with the Company. The shares were exempt from registration under Rule 506(b) under the Securities Act.
On June 1, 2023, the Company issued 50 Series B preferred shares to an accredited investor in connection with the cancellation of 500,000 shares of common stock. The Series B preferred stock is convertible into common stock at a ratio of 10,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company. Preferred shares outstanding at June 5, 2023, totaled 190 which are convertible into 1,900,000 shares of common stock. The preferred stock par value is $0.01.
| II-2 |
EXHIBIT INDEX
____________
| (1) | Contained in Exhibit 5.1 |
| ** | Incorporated by reference to Form S-1/A filed March 14, 2023. |
| *** | Incorporated by reference to Form S-1/A filed May 3, 2023. |
| **** | Incorporated by reference to Form S-1/A filed June 14, 2023. |
| # | Indicates management contract or compensatory plan, contract or agreement. |
| + | Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC Staff upon request. |
| II-3 |
UNDERTAKINGS
The undersigned registrant hereby undertakes:
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| (i) | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; | |
| (ii) | To reflect in the Prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. | |
| (iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
| (2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| (4) | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: |
| (i) | If the registrant is relying on Rule 430B: |
| (A) | Each Prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed Prospectus was deemed part of and included in the registration statement; and | ||
| (B) | Each Prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of Prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the Prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that Prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or Prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or Prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or Prospectus that was part of the registration statement or made in any such document immediately prior to such effective date. |
| II-4 |
| (5) | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: |
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
| (i) | Any preliminary Prospectus or Prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; | |
| (ii) | Any free writing Prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; | |
| (iii) | The portion of any other free writing Prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and | |
| (iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
| (6) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
| (7) | The undersigned registrant hereby undertakes that: |
| (1) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. | |
| (2) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| II-5 |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in San Juan, Puerto Rico on August 7, 2023.
| UNUSUAL MACHINES, INC. | |||
| By: | /s/ Brandon Torres Declet | ||
| Brandon Torres Declet | |||
|
Chief Executive Officer (Principal Executive Officer) | |||
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
/s/ Brandon Torres Declet |
Chief Executive Officer and Director |
August 7, 2023 | ||
| Brandon Torres Declet | (Principal executive officer) | |||
/s/ Brian Hoff |
Chief Financial Officer |
August 7, 2023 | ||
| Brian Hoff | (Principal financial and accounting officer) | |||
/s/ Cristina Colón |
Director | August 7, 2023 | ||
| Cristina Colón | ||||
/s/ Jeffrey Thompson |
Director | August 7, 2023 | ||
| Jeffrey Thompson | ||||
/s/ Robert Lowry |
Director | August 7, 2023 | ||
| Robert Lowry | ||||
|
/s/ Thomas Walker |
Director | August 7, 2023 | ||
| Thomas Walker |
Pursuant to the requirements of the Securities Act of 1933, as amended, the Rule 140 co-registrant No. 1 has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in San Juan, Puerto Rico on August 7, 2023.
| FAT SHARK, LTD. | |||
| By: | /s/ Jeffrey Thompson | ||
| Jeffrey Thompson | |||
|
Chief Executive Officer (Principal Executive Officer) | |||
Pursuant to the requirements of the Securities Act of 1933, as amended, the Rule 140 co-registrant No. 2 has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in San Juan, Puerto Rico on August 7, 2023.
| ROTOR RIOT, LLC | |||
| By: | /s/ Jeffrey Thompson | ||
| Jeffrey Thompson | |||
|
Chief Executive Officer (Principal Executive Officer) | |||
| II-6 |
Exhibit 1.1
UNUSUAL MACHINES, INC.
UNDERWRITING AGREEMENT
[●], 2023
Maxim Group LLC
300 Park Avenue, 16th Floor
New York, New York 10022
As Representative of the Underwriters
named on Schedule A hereto
Ladies and Gentlemen:
Unusual Machines, Inc., a Puerto Rico corporation (the “Company”), proposes, subject to the terms and conditions stated herein, to issue and sell an aggregate of [●] shares (“Shares”) of the Company’s common stock $0.01 par value per share (the “Common Stock”) (each a “Firm Share” and one or more, the “Firm Shares”) to the several underwriters (such underwriters, for whom Maxim Group LLC (“Maxim” or the “Representative”) is acting as representative, the “Underwriters” and each an “Underwriter”). The Company has also agreed to grant to the Representative on behalf of the Underwriters an option (the “Option”) to purchase up to an additional [●] Shares (the “Option Shares.” The Company has also agreed to issue to the Representative the Underwriters’ Warrants (as defined in Section 1(c)), which together with the Common Stock underlying such warrants are referred to herein as the “Underwriters’ Securities.” The Firm Shares and the Option Shares, together with the Underwriters’ Securities are herein collectively called the “Securities” or the “Offered Securities”). The offering of such Offered Securities is hereinafter called the “Offering”. For purposes of this Agreement, the U.S. territory of Puerto Rico is considered to be a “state” of the United States.
The Company confirms as follows its agreement with each of the Underwriters:
1. Agreement to Sell and Purchase.
(a) Purchase of Firm Shares. On the basis of the representations, warranties and agreements of the Company contained herein and subject to all the terms and conditions of this Agreement, the Company agrees to sell to the Underwriters, severally and not jointly, and the Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Shares set forth opposite the name of such underwriter on Schedule A hereof, at a purchase price (the “Purchase Price”) (prior to discount and commissions of 7.5% of the public offering price per Firm Share.
(b) Purchase of Option Shares. Subject to all the terms and conditions of this Agreement, the Company grants to the Representative on behalf of the Underwriters the Option to purchase, severally and not jointly, all or less than all of the Option Shares. The purchase price (net of discount and commissions) to be paid for each Option Share will be the same Purchase Price (net of discount and commissions) allocated to each Firm Share. The Option may be exercised in whole or in part at any time and from time to time on or before the 45th day after the date of this Agreement, upon written notice (the “Option Notice”) by the Representative to the Company no later than 12:00 noon, New York City time, at least one and no more than five business days before the date specified for closing in the Option Notice (the “Option Closing Date”) setting forth the aggregate number of Firm Shares to be purchased and the time and date for such purchase. Upon exercise of the Option, the Company will become obligated to convey to the Underwriters, and, subject to the terms and conditions set forth herein, the Underwriters will become obligated to purchase, the number of Firm Shares specified in the Option Notice. If any Option Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares that, together with the number of Firm Shares, is set forth on Schedule A opposite such Underwriter’s name. For purposes of this Agreement, “business day” means any day except Saturday, Sunday and any day which is a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
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(c) Underwriters’ Warrants. The Company hereby agrees to issue to the Underwriters (and/or their respective designees) on the Closing Date, Warrants to purchase an aggregate of five percent (5.0%) of the shares of Common Stock issued in the Offering in the form as set forth in Exhibit F hereto (the “Underwriters’ Warrants”). The Underwriters’ Warrants shall be exercisable, in whole or in part, commencing 181 days after the date of the commencement of the sales of the public securities and expiring on the five-year anniversary of the date on which the Underwriters’ Warrants first become exercisable, at an initial exercise price of $[*] per share, which is equal to one hundred and twenty five percent (125.0%) of the initial public offering price of the Firm Shares issued at such closing.
2. Delivery and Payment.
(a) Closing. Delivery of the Firm Shares shall be made to the Representative through the facilities of the Depository Trust Company (“DTC”) for the respective accounts of the Underwriters against payment of the Purchase Price by wire transfer of immediately available funds to the order of the Company. Such payment shall be made at 10:00 a.m., New York City time, on the second business day (the third business day, should the Offering be priced after 4:00 p.m., New York City Time) after the date of this Agreement or at such time on such other date, not later than ten business days after such date, as may be agreed upon by the Company and the Representative (such date is hereinafter referred to as the “Closing Date”).
(b) Option Closing. To the extent the Option is exercised, delivery of the Option Shares against payment by the Underwriters (in the manner and at the location specified above) shall take place at the time and date (which may be the Closing Date, but not earlier than the Closing Date) specified in the Option Notice.
(c) Electronic Transfer. Electronic transfer of the Offered Securities shall be made at the time of purchase in such names and in such denominations as the Representative shall specify.
(d) Tax Stamps. The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Offered Securities by the Company to the Underwriters shall be borne by the Company. The Company shall pay and hold each Underwriter and any subsequent holder of the Offered Securities harmless from any and all liabilities with respect to or resulting from any failure or delay in paying United States federal and state and foreign stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance, sale and delivery to such Underwriter of the Offered Securities.
3. Representations and Warranties of the Company. The Company represents and warrants to, and covenants with, each of the Underwriters as follows:
(a) Compliance with Registration Requirements. A registration statement on Form S-1 (Registration No. 333-270519) relating to the Offered Securities, including a preliminary prospectus and such amendments to such registration statement as may have been required prior to the date of this Agreement, has been prepared by the Company under the provisions of the Securities Act of 1933, as amended (the “Act”), and the rules and regulations (collectively referred to as the “Rules and Regulations”) of the Securities and Exchange Commission (the “Commission” or “SEC”) thereunder, and has been filed with the Commission. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectuses, heretofore filed by the Company with the Commission have been delivered to the Underwriters. The term “Registration Statement” means such registration statement on Form S-1 as amended at the time it becomes or became effective, including financial statements, all exhibits and any information deemed to be included or incorporated by reference therein, including any information deemed to be included pursuant to Rule 430A or Rule 430B of the Rules and Regulations, as applicable. If the Company files a registration statement to register a portion of the Offered Securities and relies on Rule 462(b) of the Rules and Regulations for such registration statement to become effective upon filing with the Commission (the “Rule 462 Registration Statement”), then any reference to the “Registration Statement” shall be deemed to include the Rule 462 Registration Statement, as amended from time to time. The term “preliminary prospectus” as used herein means a preliminary prospectus as contemplated by Rule 430 or Rule 430A of the Rules and Regulations included at any time as part of, or deemed to be part of or included in, the Registration Statement. The term “Prospectus” means the final prospectus in connection with this Offering as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus included in the Registration Statement at the effective date, except that if any revised prospectus or prospectus supplement shall be provided to the Representative by the Company for use in connection with the Offered Securities which differs from the Prospectus (whether or not such revised prospectus or prospectus supplement is required to be filed by the Company pursuant to Rule 424(b)), the term “Prospectus” shall also refer to such revised prospectus or prospectus supplement, as the case may be, from and after the time it is first provided to the Representative for such use. Any reference herein to the terms “amend”, “amendment” or “supplement” with respect to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to refer to and include: (i) the filing of any document under the Securities Exchange Act of 1934, as amended, and together with the rules and regulations promulgated thereunder (collectively, the “Exchange Act”) after the effective date of the Registration Statement, the date of such preliminary prospectus or the date of the Prospectus, as the case may be, which is incorporated therein by reference, and (ii) any such document so filed.
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(b) Effectiveness of Registration. The Registration Statement, any Rule 462 Registration Statement and any post-effective amendment thereto have been declared effective by the Commission under the Act or have become effective pursuant to Rule 462 of the Rules and Regulations. The Company has responded to all requests, if any, of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462 Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the knowledge of the Company, are threatened by the Commission. For purposes of this Agreement, the term “knowledge” means the actual knowledge of the members of the Board of Directors and the senior executive officers of the Company after due inquiry (which shall not require any such officer to hire a third party to verify any facts or individually search any public records).
(c) Accuracy of Registration Statement. Each of the Registration Statement, any Rule 462 Registration Statement and any post-effective amendment thereto, at the time it became effective, when any document filed under the Exchange Act was or is filed and at all subsequent times, complied and will comply in all material respects with the Act and the Rules and Regulations, and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times when a prospectus is delivered or required (or, but for the provisions of Rule 172, would be required) by applicable law to be delivered in connection with sales of the Offered Securities, complied and will comply in all material respects with the Act, the Exchange Act and the Rules and Regulations, and did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in the light of the circumstances under which they were made. Each preliminary prospectus (including the preliminary prospectus or prospectuses filed as part of the Registration Statement or any amendment thereto) complied when so filed in all material respects with Act, the Exchange Act and the Rules and Regulations, and each preliminary prospectus and the Prospectus delivered to the Representative for use in connection with this Offering is identical to the electronically transmitted copies thereof filed with the Commission on EDGAR, except to the extent permitted by Regulation S-T. The foregoing representations and warranties in this Section 3(c) do not apply to any statements or omissions made in reliance on and in conformity with information relating to the Underwriters furnished in writing to the Company by the Underwriters through the Representative specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto. For all purposes of this Agreement, the information set forth in the Prospectus (i) in the first paragraph under the caption “Underwriting-Discounts and Commissions” setting forth the amount of the selling concession and (ii) in the section entitled “Underwriting – Price Stabilization, Short Positions and Penalty Bids” regarding stabilization, short positions and penalty bids constitutes the only information (the “Underwriters’ Information”) relating to the Underwriters furnished in writing to the Company by the Underwriters through the Representative specifically for inclusion in the preliminary prospectus, the Registration Statement or the Prospectus.
(d) Company Is An Ineligible Issuer. (i) At the time of filing the Registration Statement relating to the Offered Securities and (ii) as of the date of the execution and delivery of this Agreement (with such date being used as the determination date for purposes of this clause (ii)), the Company was and is an “ineligible issuer” (as defined in Rule 405 of the Rules and Regulations). Accordingly, the Company cannot utilize a Free Writing Prospectus.
(e) Distribution of Offering Material by the Company. The Company has not distributed and will not distribute, prior to the later of the Closing Date, any Option Closing Date and the completion of the Underwriters’ distribution of the Offered Securities, any offering material in connection with the offering or sale of the Offered Securities, the Registration Statement, the most recent preliminary prospectus (which, with the information set forth in Schedule I, is the “General Disclosure Package”) reviewed and consented to by the Representative hereto, and the Prospectus. None of the Marketing Materials, as of their respective issue dates and at all subsequent times through the Prospectus Delivery Period, include any information that conflicts with the information contained in the Registration Statement. If at any time following the issuance of any Marketing Materials (defined in Section 6 hereof) there occurred an event or development as a result of which such Marketing Materials conflicted with the information contained in the Registration Statement relating to the Offered Securities or included an untrue statement of material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances prevailing at that subsequent time, not misleading, the Company has promptly notified the Representative and has promptly amended or supplemented, at its own expense, such Marketing Materials to eliminate or correct such conflict, untrue statement or omission.
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(f) Subsidiaries. All of the direct and indirect material subsidiaries of the Company and each of Fat Shark Holdings, Ltd. and Rotor Riot LLC that will be acquired immediately after the Offering (each, a “Subsidiary”) are set forth in the Registration Statement, the General Disclosure Package and the Prospectus. The Company will own, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any lien, charge, pledge, security interest, encumbrance, right of first refusal, preemptive right or other similar restriction (each, a “Lien”), and all of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities.
(g) Organization and Qualification. The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation nor default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not have or reasonably be expected to result in: (i) a material adverse effect on the legality, validity or enforceability of this Agreement or any other agreement, document, certificate or instrument required to be delivered pursuant to this Agreement or the Share Purchase Agreement by and between the Company and Red Cat Holdings, Inc. (“Red Cat”) dated November 21, 2022, as amended (collectively, the “Transaction Documents”), (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no action, claim, suit or proceeding (including, without limitation, a partial proceeding, such as a deposition), whether commenced or threatened (each, a “Proceeding”) has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.
(h) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and each of the other Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and each of the other Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, the board of directors of the Company (the “Board of Directors”) and the Company’s stockholders in connection herewith or therewith other than in connection with the Required Approvals (as defined below). This Agreement and each other Transaction Document to which it is a party has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, assuming due authorization, execution and delivery by the Representative, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
(i) No Conflicts. The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to which it is a party, the issuance and sale of the Offered Securities and the consummation by it of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected or (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as would not have or reasonably be expected to result in a Material Adverse Effect.
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(j) Filings, Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person (as defined below) in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than: (i) the filing with the Commission of the Registration Statement and the Prospectus, (ii) application(s) to the NYSE American stock exchange for the listing of the Offered Securities for trading thereon in the time and manner required thereby, (iii) such filings, if any, as are required to be made under applicable state securities laws, (iv) such notices, filings or authorizations as are required to be obtained or made under applicable rules of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the NYSE American, and (v) such notices, filings or authorizations as have been obtained, given or made as of the date hereof (collectively, the “Required Approvals”).
(k) Issuance of the Offered Securities. The Offered Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company. The Company has reserved from its duly authorized capital stock the maximum number of Firm Shares issuable pursuant to this Agreement.
(l) Capitalization. The capitalization of the Company as of the date hereof is as set forth in the Registration Statement, the General Disclosure Package and the Prospectus. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company has not issued any capital stock since March 31, 2023, other than pursuant to the Company’s equity incentive plans, the issuance of shares of the Company’s Common Stock to employees, directors or consultants pursuant to the Company’s equity incentive plans and pursuant to the conversion and/or exercise of any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time shares of Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, shares of Common Stock (“Common Stock Equivalents”) and is outstanding as of the date of this Agreement. No individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind (each, a “Person”) has any right of first refusal, preemptive right, right of participation or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Offered Securities or as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock or the capital stock of any Subsidiary, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares or Common Stock Equivalents or capital stock of any Subsidiary. The issuance and sale of the Offered Securities will not obligate the Company or any Subsidiary to issue shares of Common Stock or other securities to any Person (other than the Underwriters) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. There are no securities of the Company or any Subsidiary that have any anti-dilution or similar adjustment rights (other than adjustments for stock splits, recapitalizations and the like) to the exercise or conversion price, have any exchange rights, or reset rights. Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, there are no outstanding securities or instruments of the Company or any Subsidiary that contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to redeem a security of the Company or such Subsidiary. The Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement. All of the outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable, have been issued in compliance in all material respects with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale of the Offered Securities. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.
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(m) Financial Statements. The financial statements of the Company included in the Registration Statement, the General Disclosure Package and the Prospectus comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. The agreements and documents described in the Registration Statement, the General Disclosure Package and the Prospectus conform to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the rules and regulations thereunder to be described in the Registration Statement, the General Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the General Disclosure Package and the Prospectus or (ii) is material to the Company’s business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefore may be brought. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, none of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. Performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses, including, without limitation, those relating to environmental laws and regulations.
(n) Material Changes; Undisclosed Events, Liabilities or Developments. Since the date of the latest audited financial statements included within the Registration Statement, the General Disclosure Package and the Prospectus, except as reflected or specifically disclosed in the Registration Statement, the General Disclosure Package and the Prospectus filed prior to the date hereof, (i) there has been no event, occurrence or development that has had or that would reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any material liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or Affiliate (as defined below), except pursuant to existing Company equity incentive plans or as set forth in the Registration Statement, the General Disclosure Package and the Prospectus. The Company does not have pending before the Commission any request for confidential treatment of information. Except for the issuance of the Offered Securities contemplated by this Agreement, no event, liability, fact, circumstance, occurrence or development has occurred or exists or is reasonably expected to occur or exist with respect to the Company or its Subsidiaries or their respective businesses, prospects, properties, operations, assets or financial condition that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made or deemed made that has not been publicly disclosed at least one trading day prior to the date that this representation is made.
(o) Litigation. There is no action, suit, inquiry, notice of violation or proceeding pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Offered Securities or (ii) would, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.
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(p) Labor Relations. No labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company, which would reasonably be expected to result in a Material Adverse Effect. None of the Company’s or its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company or such Subsidiary, and neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relationships with their employees are good. To the knowledge of the Company, no executive officer of the Company or any Subsidiary, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters. The Company and its Subsidiaries are in compliance in all material respects with all United States federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(q) Compliance. Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, to the knowledge of the Company, neither the Company nor any Subsidiary: (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any judgment, decree or order of any court, arbitrator or other governmental authority or (iii) is or has been in violation of any statute, rule, ordinance or regulation of any governmental authority, including, without limitation, all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as would not have or reasonably be expected to result in a Material Adverse Effect.
(r) Environmental Laws. The Company and its Subsidiaries (i) are in compliance in all material respects with all federal, state, local and foreign laws relating to pollution or protection of human health or the environment (including ambient air, surface water, groundwater, land surface or subsurface strata), including laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations, issued, entered, promulgated or approved thereunder (“Environmental Laws”); (ii) have received all permits licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (iii) are in compliance with all terms and conditions of any such permit, license or approval where in each clause (i), (ii) and (iii), the failure to so comply would be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.
(s) Regulatory Permits. To the knowledge of the Company, the Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the Registration Statement, the General Disclosure Package and the Prospectus, except where the failure to possess such permits would not reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any written notice of proceedings relating to the revocation or modification of any Material Permit.
(t) Title to Assets. The Company and its Subsidiaries have good and marketable title to all real property owned by them, if any, and good and marketable title in all personal property owned by them, in each case, that is material to the business of the Company and the Subsidiaries, and in such case free and clear of all Liens, except for Liens that (i) are described in the Registration Statement, the General Disclosure Package and the Prospectus, (ii) would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect, (iii) do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries or (iv) are for the payment of federal, state or other taxes, for which appropriate reserves have been made therefor in accordance with GAAP and, the payment of which is neither delinquent nor subject to penalties. To the knowledge of the Company, any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in compliance in all material respects.
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(u) Intellectual Property. To the knowledge of the Company, the Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights necessary or required for use in connection with their respective businesses as described in the Registration Statement, the General Disclosure Package and the Prospectus and which the failure to so have could have a Material Adverse Effect (collectively, the “Intellectual Property Rights”). None of, and neither the Company nor any Subsidiary has received a notice (written or otherwise) that any of, the Intellectual Property Rights has expired, terminated or been abandoned, or is expected to expire or be abandoned, within three years from the date of this Agreement, except where such action would not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Subsidiary has received, since the date of the latest audited financial statements included within the Registration Statement, the General Disclosure Package and the Prospectus, a written notice of a claim or otherwise has any knowledge that the Intellectual Property Rights violate or infringe upon the rights of any Person, except as would not have or reasonably be expected to not have a Material Adverse Effect. All such Intellectual Property Rights are enforceable and, to the knowledge of the Company, there is no existing infringement by another Person of any of the Intellectual Property Rights. The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has no knowledge that it lacks or will be unable to obtain any rights or licenses to use all Intellectual Property Rights that are necessary to conduct its business.
(v) Insurance. The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged, including, but not limited to, directors and officers insurance coverage at least equal to $5.0 million. Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.
(w) Transactions With Affiliates and Employees. Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, none of the officers or directors of the Company or any Subsidiary and, to the knowledge of the Company, none of the employees of the Company or any Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, providing for the borrowing of money from or lending of money to or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee, stockholder, member or partner, in each case in excess of $120,000 other than for (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) other employee benefits, including stock option agreements under any stock option plan of the Company.
(x) Sarbanes-Oxley; Internal Accounting Controls. As of the date of this Agreement, the Company and the Subsidiaries will be in compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective and applicable to the Company as of the date hereof, and any and all applicable rules and regulations promulgated by the Commission thereunder that are effective as of the date hereof and as of the Closing Date or the Option Closing Date, as applicable. Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, the Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company and the Subsidiaries have established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and the Subsidiaries and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. The Company’s certifying officers have evaluated the effectiveness of the disclosure controls and procedures of the Company and the Subsidiaries as of June 30, 2023 (such date, the “Evaluation Date”).
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(y) Certain Fees; FINRA Affiliation. Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, no brokerage or finder’s fees or commissions are or will be payable by the Company or any Subsidiary to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents. There are no other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of the Company stockholders that may affect the Underwriters’ compensation, as determined by FINRA. The Company has not made any direct or indirect payments (in cash, securities or otherwise) to (i) any person, as a finder’s fee, investing fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who provided capital to the Company, (ii) any FINRA member or (iii) any person or entity that has any direct or indirect affiliation or association with any FINRA member within the 12-month period prior to the date on which the Registration Statement was filed with the Commission (the “Filing Date”) or thereafter. To the Company’s knowledge, no (i) officer or director of the Company or its Subsidiaries, (ii) owner of five percent (5%) or more of the Company’s unregistered securities or that of its subsidiaries and holders of the Company’s Series B preferred stock or (iii) owner of any amount of the Company’s unregistered securities acquired within the 180-day period prior to the Filing Date, has any direct or indirect affiliation or association with any FINRA member. The Company will advise the Underwriters and their respective counsel if it becomes aware that any officer, director or stockholder of the Company or its subsidiaries is or becomes an affiliate or associated person of a FINRA member participating in the Offering.
(z) Investment Company. The Company is not, and is not an affiliate of, and immediately after receipt of payment for the Offered Securities, will not be or be an affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
(aa) Registration Rights. Except for Red Cat, no Person has any right to cause the Company or any Subsidiary to effect the registration under the Securities Act of any securities of the Company or any Subsidiary.
(bb) Listing and Maintenance Requirements. The Firm Shares are registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Firm Shares under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements for the NYSE American. The Firm Shares are currently eligible for electronic transfer through the Depository Trust Company or another established clearing corporation and the Company is current in payment of the fees to the Depository Trust Company (or such other established clearing corporation) in connection with such electronic transfer. The issuance and sale of the Offered Securities hereunder does not contravene the rules and regulations of the NYSE American.
(cc) No Integrated Offering. Neither the Company or any Person acting on its behalf, nor, to the Company’s knowledge, any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Company (as such terms are used in and construed under Rule 405 under the Securities Act) (each, an “Affiliate”) or any Person acting on their behalf, has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Offered Securities to be integrated with prior offerings by the Company for purposes the Securities Act or of any applicable shareholder approval provisions of the NYSE American.
(dd) Solvency. Based on the consolidated financial condition of the Company as of the Closing Date and as of the Option Closing Date, after giving effect to the receipt by the Company of the proceeds from the sale of the Offered Securities hereunder, the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, will be sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, the Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date or the Option Closing Date, as applicable. The Registration Statement, the General Disclosure Package and the Prospectus sets forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” means (x) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Company’s consolidated balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (z) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with GAAP. Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, neither the Company nor any Subsidiary is in default with respect to any Indebtedness.
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(ee) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, each of the Company and, to the knowledge of the Company, its Subsidiaries (i) has made or filed all United States federal, state and local income and all foreign income and franchise tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations and (iii) has set aside on its books provision reasonably adequate for the payment of all material taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company or of any Subsidiary know of no basis for any such claim.
(ff) Foreign Corrupt Practices. Neither the Company nor any Subsidiary, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company or any Subsidiary, has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company or any Subsidiary (or made by any person acting on its behalf of which the Company is aware) which is in violation of law or (iv) violated in any material respect any provision of Foreign Corrupt Practices Act of 1977, as amended.
(gg) Accountants. The Company’s accounting firm is BF Borgers, CPA, PC (the “Accountants”). To the knowledge and belief of the Company, such accounting firm (i) is a registered public accounting firm as required by the Exchange Act and (ii) shall express its opinion with respect to the financial statements to be included in the Registration Statement, the General Disclosure Package and the Prospectus for the fiscal years ending December 31, 2022 and 2021.
(hh) Regulation M Compliance. The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Offered Securities, (ii) sold, bid for, purchased or paid any compensation for soliciting purchases of any of the Offered Securities or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Underwriters in connection with the Offering.
(ii) Office of Foreign Assets Control. Neither the Company nor any Subsidiary nor, to the Company’s knowledge, any director, officer, agent, employee or Affiliate of the Company or any Subsidiary is currently subject to any United States sanctions administered by the Office of Foreign Assets Control of the United States Treasury Department (“OFAC”).
(jj) United States Real Property Holding Corporation. The Company is not and has never been a United States real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon the Representative’s request.
(kk) Bank Holding Company Act. To the Company’s knowledge, neither the Company nor any of its Subsidiaries or Affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”), and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries or Affiliates owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of any class of voting securities or twenty-five percent or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or Affiliates exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.
(ll) Money Laundering. To the Company’s knowledge, the operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial record-keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, applicable money laundering statutes and applicable rules and regulations thereunder (collectively, the “Money Laundering Laws”), and no Action or Proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any Subsidiary with respect to the Money Laundering Laws is pending or, to the knowledge of the Company or any Subsidiary, threatened.
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(mm) Share Option Plans. Each share option granted by the Company under the Company’s share option plans was granted (i) in accordance with the terms of the Company’s share option plans and (ii) with an exercise price at least equal to the fair market value of the Firm Shares on the date such share option would be considered granted under GAAP and applicable law. No share option granted under the Company’s share option plan has been backdated. The Company has not knowingly granted, and there is no and has been no Company policy or practice to knowingly grant, share options prior to, or otherwise knowingly coordinate the grant of share options with, the release or other public announcement of material information regarding the Company or its Subsidiaries or their financial results or prospects.
(nn) Officer’s Certificates. Any certificate signed by any officer of the Company or any of its Subsidiaries delivered to the Representative or its counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.
4. Agreements of the Company. The Company agrees with the Underwriters as follows:
(a) Amendments and Supplements to Registration Statement. The Company shall not, either prior to any effective date or thereafter during such period as the Prospectus is required by law to be delivered (whether physically or through compliance with Rule 172 of the Rules and Regulations or any similar rule) (the “Prospectus Delivery Period”) in connection with sales of the Offered Securities by an Underwriter or dealer, amend or supplement the Registration Statement, the General Disclosure Package or the Prospectus, unless a copy of such amendment or supplement thereof shall first have been submitted to the Representative within a reasonable period of time prior to the filing or, if no filing is required, the use thereof and the Representative shall not have objected thereto in good faith.
(b) Amendments and Supplements to the Registration Statement, the General Disclosure Package and the Prospectus and Other Securities Act Matters. During the Prospectus Delivery Period, the Company will comply with all requirements imposed upon it by the Securities Act, as now and hereafter amended, and by the Rules and Regulations, as from time to time in force, and by the Exchange Act so far as necessary to permit the continuance of sales of or dealings in the Offered Securities as contemplated by the provisions hereof, the General Disclosure Package, the Registration Statement and the Prospectus. If, during the Prospectus Delivery Period, any event or development shall occur or condition exist as a result of which the General Disclosure Package or the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances then prevailing or under which they were made, as the case may be, not misleading, or if it shall be necessary to amend or supplement the General Disclosure Package or the Prospectus in order to make the statements therein, in the light of the circumstances then prevailing or under which they were made, as the case may be, not misleading, or if in the opinion of the Representative it is otherwise necessary to amend or supplement the Registration Statement, the General Disclosure Package or the Prospectus, or to file a new registration statement containing the Prospectus, in order to comply with the Act, the Rules and Regulations, the Exchange Act or the Exchange Act Rules, including in connection with the delivery of the Prospectus, the Company agrees to (i) promptly notify the Representative of any such event or condition and (ii) promptly prepare (subject to Section 4(a) and 4(f) hereof), file with the Commission (and use its commercially reasonable efforts to have any amendment to the Registration Statement or any new registration statement to be declared effective) and furnish at its own expense to the Representative (and, if applicable, to dealers), amendments or supplements to the Registration Statement, the General Disclosure Package or the Prospectus, or any new registration statement, necessary in order to make the statements in the General Disclosure Package or the Prospectus as so amended or supplemented, in the light of the circumstances then prevailing or under which they were made, as the case may be, not misleading, or so that the Registration Statement or the Prospectus, as amended or supplemented, will comply with the Act, the Rules and Regulations, the Exchange Act or the Exchange Act Rules or any other applicable law.
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(c) Notifications to the Underwriters. The Company shall use its commercially reasonable efforts to cause the Registration Statement to become effective, and shall notify the Representative promptly, and shall confirm such advice in writing, (i) when any post-effective amendment to the Registration Statement has become effective and when any post-effective amendment thereto becomes effective, (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (iii) of the commencement by the Commission or by any state securities commission of any proceedings for the suspension of the qualification of any of the Offered Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, including, without limitation, the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the threat thereof, (iv) of the happening of any event during the Prospectus Delivery Period that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus misleading (including by omission) or untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not misleading (including by omission), and (v) of receipt by the Company or any representative of the Company of any other communication from the Commission relating to the Company, the Registration Statement, any preliminary prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company shall use its commercially efforts to obtain the withdrawal of such order at the earliest possible moment. The Company shall comply with the provisions of and make all requisite filings with the Commission pursuant to Rules 424(b), 430A, 430B and 462(b) of the Rules and Regulations and to notify the Representative promptly of all such filings.
(d) Executed Registration Statement. The Company shall furnish to the Representative, without charge, one signed copy of the Registration Statement, and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto, and shall furnish to the Representative, without charge, a copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules but without exhibits.
(e) Undertakings. The Company shall comply with all the provisions of any undertakings contained and required to be contained in the Registration Statement.
(f) Prospectus. The Company shall prepare the Prospectus in a form approved by the Representative and shall file such Prospectus with the Commission pursuant to Rule 424(b) of the Rules and Regulations with a filing date not later than the second business day following the execution and delivery of this Agreement. Promptly after the effective date of the Registration Statement, and thereafter from time to time during the period when the Prospectus is required (or, but for the provisions of Rule 172 under the Act, would be required) to be delivered, the Company shall deliver to the Representative, without charge, as many electronic copies of the Prospectus and any amendment or supplement thereto as the Representative may reasonably request. The Company consents to the use of the Prospectus and any amendment or supplement thereto by the Representative and by all dealers to whom the Offered Securities may be sold, both in connection with the offering or sale of the Offered Securities and for any period of time thereafter during the Prospectus Delivery Period. If, during the Prospectus Delivery Period any event shall occur that in the judgment of the Company or counsel to the Underwriters should be set forth in the Prospectus in order to make any statement therein, in the light of the circumstances under which it was made, not misleading (including by omission), or if it is necessary to supplement or amend the Prospectus to comply with law, the Company shall forthwith prepare and duly file with the Commission an appropriate supplement or amendment thereto, and shall deliver to the Representative, without charge, such number of electronic copies thereof as the Representative may reasonably request.
(g) Permitted Free Writing Prospectuses. The Company represents and agrees that it not eligible to use and will not use any “free writing prospectus” as defined in Rule 405 of the Rules and Regulations. Commission any electronic road show.
(h) Compliance with Blue Sky Laws. Prior to any public offering of the Offered Securities by the Underwriters, the Company shall cooperate with the Representative and counsel to the Underwriters in connection with the registration or qualification (or the obtaining of exemptions from the application thereof) of the Offered Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representative may request limitation, provided, however, that in no event shall the Company be obligated to qualify a public offering outside the United States or to do business as a foreign corporation in any jurisdiction where it is not now so qualified, to qualify or register as a dealer in securities, to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject or subject itself to ongoing taxation in respect of doing business in any jurisdiction in which it is not so subject.
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(i) Delivery of Financial Statements. During the period of five years commencing on the effective date of the Registration Statement applicable to the Underwriters, the Company shall furnish to the Representative and each other Underwriter who may so request copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to the Representative and each other Underwriter who may so request a copy of each annual or other report it shall be required to file with the Commission; provided, however, that the availability of electronically transmitted copies filed with the Commission pursuant to EDGAR shall satisfy the Company’s obligation to furnish copies hereunder.
(j) Availability of Earnings Statements. The Company shall make generally available to holders of its securities as soon as may be practicable but in no event later than the last day of the 15th full calendar month following the calendar quarter in which the most recent effective date occurs in accordance with Rule 158 of the Rules and Regulations, an earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months ended commencing after the effective date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations).
(k) Consideration; Payment of Expenses. In consideration of the services to be provided for hereunder, the Underwriters or their respective designees their pro rata portion (based on the Offered Securities purchased) of the following aggregate compensation with respect to the Offered Securities they are offering plus any other funds remitted by the Company to pay costs and expenses that are incurred by the Underwriters (including Underwriters’ counsel’s fees and expenses) (“Additional Advanced Amounts”).
(i) An underwriting discount equal to seven and one half percent (7.5%) of the aggregate gross proceeds raised in the Offering; and
(ii) The Underwriters’ Warrants; and
(iii) If the Closing occurs, the Company grants the Representative the right of first refusal for a period of 18 months from the Closing Date to act as sole managing underwriter and sole book runner for any and all future public or private equity, equity-linked or debt (excluding commercial bank debt) offerings undertaken by the Company, or any successor to or any subsidiary of the Company. The Company shall provide written notice to the Representative with the terms of such offering and if the Representative fails to accept in writing any such proposal within ten business days after receipt of such written notice, then the Representative will have no claim or right with respect to any such offering(s). 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 Maxim; and
(iv) The Representative reserves the right to reduce any item of compensation or adjust the terms thereof as specified herein in the event that a determination shall be made by FINRA to the effect that the Underwriters’ aggregate compensation is in excess of FINRA rules or that the terms thereof require adjustment.
(v) Whether or not the transactions contemplated by this Agreement, the Registration Statement and the Prospectus are consummated or this Agreement is terminated, the Company hereby agrees to pay the following:
(1) all expenses in connection with the preparation, printing, formatting for EDGAR and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and any and all exhibits, amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers;
(2) all filing fees in connection with filings with FINRA’s Public Offering System;
(3) all fees, disbursements and expenses of the Company’s counsel, accountants and other agents and representatives in connection with the registration of the Securities under the Act and the Offering;
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(4) all expenses in connection with the qualifications of the Securities for offering and sale under state or foreign securities or blue sky laws (including, without limitation, all filing and registration fees, and the fees and disbursements of Underwriters’ counsel),
(5) all fees and expenses in connection with listing the Securities on a national securities exchange;
(6) all expenses, including travel and lodging expenses, of the Company’s officers, directors and employees and any other expense of the Company incurred in connection with attending or hosting meetings with prospective purchasers of the Securities and any fees and expenses associated with the i-Deal system and NetRoadshow;
(7) any stock transfer taxes or other taxes incurred in connection with this Agreement or the offering, including any stock transfer taxes payable upon the transfer of securities to the Underwriters;
(8) the costs associated with preparing, printing and delivering certificates representing the Securities;
(9) the cost and charges of any transfer agent or registrar for the Securities;
(10) subject to the following proviso, other costs (including Underwriters’ counsel’s fees and expenses) and expenses incident to the Offering that are not otherwise specifically provided for in this Section 4(k); provided, however, that all such costs and expenses (including Underwriters’ counsel’s reasonable and documented fees and expenses) that are incurred by the Underwriters shall not exceed $125,000 in the aggregate in the event the Offering is consummated and shall not exceed $50,000 in the event that the Offering is not consummated and, in each event, less the $50,000 advance previously paid by the Company; and
(11) costs relating to background checks of the Company’s officers and directors.
(l) Non-accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 4(k), on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1.0%) of the aggregate gross proceeds raised in the Offering, provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriters pursuant to Section 4(m) hereof.
(m) Reimbursement of Expenses upon Termination of Agreement. If this Agreement shall be terminated by the Company pursuant to any of the provisions hereof or if for any reason the Company shall be unable to perform its obligations or to fulfill any conditions hereunder, or if the Underwriters shall terminate this Agreement pursuant to the last paragraph of Section 5, Section 7(a), Section 7(e) or Section 7(f), the Company shall reimburse the Underwriters for all out-of-pocket expenses (including the reasonable fees, disbursements and other charges of counsel to the Underwriter) actually incurred by the Underwriters in connection herewith and as allowed under FINRA Rule 5110; provided, however, that the maximum amount of costs and expenses to be reimbursed by Company to the Underwriters pursuant to this Section 4(l) shall not exceed $75,000 (including the reasonable fees, disbursements and other charges of counsel to the Underwriters).
(n) No Stabilization or Manipulation. The Company shall not at any time, directly or indirectly, take any action intended to cause or result in, or which might reasonably be expected to cause or result in, or which will constitute, stabilization or manipulation, under the Act or otherwise, of the price of the Shares or the Securities to facilitate the sale or resale of any of the Securities.
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(o) Use of Proceeds. The Company shall apply the net proceeds from the offering and sale of the Securities to be sold by the Company in the manner set forth in the General Disclosure Package and the Prospectus under “Use of Proceeds” and shall file such reports with the Commission with respect to the sale of the Securities and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(p) Lock-Up Agreements of Company, Management and Affiliates. The Company shall not, for a period of one hundred eighty (180) days after the Closing Date (the “Lock-Up Period”), without the prior written consent of the Representative (which consent may be withheld in its sole discretion), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, or file with the Commission a registration statement under the Act to register, any shares of Common Stock, warrants, or any securities convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, directly or indirectly, any of the economic benefits or risks of ownership of shares of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, or publicly disclose the intention to enter into any transaction described in clause (1) or (2) above. The foregoing sentence shall not apply to: (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 of Common Stock 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 of Common Stock (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 of Common stock 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 this Lock-Up Agreement, or (f) the transfer of shares or any security convertible into or exercisable or exchangeable for Common Stock 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 shares of Common Stock subject to this Lock-Up Agreement shall remain subject to the restrictions herein. The Company has caused each of its officers and directors, holders of the Company’s Series B preferred stock and certain shareholders of five percent (5%) or more of the outstanding Common Stock of the Company to enter into agreements with the Representative in the form set forth in Exhibit A.
(q) Lock-Up Releases. If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in a lock-up letter described in Section 4(p) hereof for an officer or director of the Company, 5% stockholder or holder of the Company’s Series B preferred stock and provides the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit B hereto through a major news service at least two Business Days before the effective date of such release or waiver, or any other method that satisfies the obligations described in FINRA Rule 5131(d)(2) at least two Business Days before the effective date of the release or waiver.
(r) NYSE American listing. The Company will use its commercially reasonable efforts to effect and maintain the listing of the Common Stock on the NYSE American for at least three (3) years after the Closing Date.
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(s) Effectiveness. The Company shall use its commercially reasonable efforts to maintain the effectiveness of the Registration Statement and a current Prospectus relating thereto for a period of one year from the Closing Date.
(t) Key Person. The Company shall have procured and shall covenant to maintain “key man” life insurance (in amounts agreed to by the Representative and with the Company as the sole beneficiary thereof) with an insurer rated at least AA or better in the most recent edition of “Best’s Life Reports” on the life of Mr. Brandon Torres Declet .
(u) Variable Rate Transactions. From the date hereof through and including the one-year anniversary of the Closing Date, neither the Company nor any Subsidiary shall enter into, announce the entering into, or proposed entering into, a Variable Rate Transaction. For purposes hereof, a “Variable Rate Transaction” shall mean, collectively, an Equity Line of Credit or similar agreement, or a Variable Priced Equity Linked Instrument. For purposes hereof, “Equity Line of Credit” means any transaction involving a written agreement between the Company and an investor or underwriter whereby the Company has the right to “put” its securities to the investor or underwriter over an agreed period of time and at future determined price or price formula (other than customary “preemptive” or “participation” rights or “weighted average” or “full-ratchet” anti-dilution provisions or in connection with fixed-price rights offerings and similar transactions that are not Variable Priced Equity Linked Instruments), and “Variable Priced Equity Linked Instruments” means: (A) any debt or equity securities which are convertible into, exercisable or exchangeable for, or carry the right to receive additional Shares either (1) at any conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the Shares at any time after the initial issuance of such debt or equity security or (2) with a conversion, exercise or exchange price that is subject to being reset on more than one occasion at some future date at any time after the initial issuance of such debt or equity security due to a change in the market price of the Shares since date of initial issuance (other than customary “preemptive” or “participation” rights or “weighted average” or “full-ratchet” anti-dilution provisions or in connection with fixed-price rights offerings and similar transactions) and (B) any amortizing convertible security which amortizes prior to its maturity date, where the Company is required or has the option to (or any investor in such transaction has the option to require the Company to) make such amortization payments in Shares which are valued at a price that is based upon and/or varies with the trading prices of or quotations for the Shares at any time after the initial issuance of such debt or equity security (whether or not such payments in stock are subject to certain equity conditions). For the avoidance of doubt, the foregoing shall not prevent the Company from conducting “at-the-market” offerings or similar equity distribution programs.
(v) Tail Fee. If, within eighteen (18) months following the Closing Date, the Company completes any financing of equity, equity-linked, convertible or debt securities, or other capital raising activity (other than the exercise by any person or entity of any options, warrants or other convertible securities) with any of the investors contacted or introduced to the Company by the Underwriters in connection with the Offering, then the Company will pay to the Underwriters: (i) an underwriting discount or spread of seven and one half percent (7.5%) of the offering price; (ii) a non-accountable expense allowance equal to one percent (1.0%) of the offering price; (iii) and warrants to purchase an aggregate of five percent (5.0%) of the shares issued in such offering, which shall be exercisable at a price equal to one hundred and twenty-five percent (125.0%) of the applicable offering price.
5. Conditions of the Obligations of the Underwriters. The obligation of the Underwriters to purchase the Firm Shares on the Closing Date or the Option Shares on the Option Closing Date, as the case may be, as provided herein is subject to the accuracy of the representations and warranties of the Company, the performance by the Company of its covenants and other obligations hereunder and to the following additional conditions:
(a) Post Effective Amendments and Prospectus Filings. Notification that the Registration Statement has become effective shall be received by the Representative not later than 4:30 p.m., New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Representative and all filings made pursuant to Rules 424, 430A, or 430B of the Rules and Regulations, as applicable, shall have been made or will be made prior to the Closing Date in accordance with all such applicable rules.
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(b) No Stop Orders, Requests for Information and No Amendments. (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or are, to the knowledge of the Company, threatened by the Commission, (ii) no order suspending the qualification or registration of the Offered Securities under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Representative and the Representative did not object thereto in good faith, and the Representative shall have received certificates, dated the Closing Date and the Option Closing Date and signed by the Chief Executive Officer or the Chairman of the Board of Directors and the Chief Financial Officer of the Company in their capacities as such, and not individually, (who may, as to proceedings threatened, certify to their knowledge), to the effect of clauses (i), (ii) and (iii).
(c) No Material Adverse Changes. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus (i) no material adverse change in the financial position or results of operations of the Company, nor any change or development that, singularly or in the aggregate, would involve a material adverse change or a prospective material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company (a “Material Adverse Change”) , (ii) the Company shall not have incurred any material liabilities or obligations, direct or contingent, (iii) the Company shall not have entered into any material transactions not in the ordinary course of business other than pursuant to this Agreement and the transactions referred to herein, (iv) the Company shall not have issued any securities (other than Common Stock issued in the ordinary course of business pursuant to existing employee benefit plans of the Company referred to in the Registration Statement, General Disclosure Package and the Prospectus) or declared or paid any dividend or made any distribution in respect of its capital stock of any class or debt (long-term or short-term), and (v) no material amount of the assets of the Company shall have been pledged, mortgaged or otherwise encumbered.
(d) No Actions, Suits or Proceedings. Since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus, there shall have been no actions, suits or proceedings instituted, or to the Company’s knowledge, threatened against or affecting, the Company or its subsidiaries or any of their respective officers in their capacity as such, before or by any federal, state or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign.
(e) All Representations True and Correct and All Conditions Fulfilled. Each of the representations and warranties of the Company contained herein shall be true and correct in all material respects as of the date of the Agreement and at the Closing Date as if made at the Closing Date and any Option Closing Date, as the case may be, and all covenants and agreements contained herein to be performed by the Company and all conditions contained herein to be fulfilled or complied with by the Company in all materials respects at or prior to the Closing Date and any Option Closing Date, shall have been duly performed, fulfilled or complied with.
(f) Opinions of Counsel to the Company. The Underwriters shall have received the opinions and letters, each dated the Closing Date and any Option Closing Date, as the case may be, each reasonably satisfactory in form and substance to the Representative and counsel for the Underwriters, from Nason, Yeager, Gerson, Harris & Fumero, P.A, as United States corporate/securities counsel as set forth in Exhibit C hereto, Reichard & Escalera LLC , as Puerto Rico corporate counsel as set forth as Exhibit D hereto, and McHale & Slavin, P.A., intellectual property counsel to the Company and as set forth in Exhibit E hereto.
(g) Opinion of Counsel to the Underwriters. The Representative shall have received an opinion, dated the Closing Date and any Option Closing Date, as the case may be, from Carmel Milazzo & Feil LLP, securities counsel to the Underwriters, with respect to the Registration Statement, the Prospectus and this Agreement, which opinions shall be satisfactory in all respects to the Representative.
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(h) Accountants’ Comfort Letter. On the date of the Prospectus, the Representative shall have received from the Accountants a letter dated the date of its delivery, addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative and counsel to the Underwriters, containing statements and information of the type ordinarily included in accountant’s “comfort letters” to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus. At the Closing Date and any Option Closing Date, as the case may be, the Representative shall have received from the Accountants a letter dated such date, in form and substance reasonably satisfactory to the Representative and counsel to the Underwriters, to the effect that they reaffirm the statements made in the letter furnished by them pursuant to the preceding sentence and have conducted additional procedures with respect to certain financial figures included in the Prospectus, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the Closing Date or any Option Closing Date, as the case may be.
(i) Officers’ Certificates. At the Closing Date and any Option Closing Date, there shall be furnished to the Representative an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company, in their capacities as such, and not individually, in form and substance satisfactory to the Representative and counsel to the Underwriters, to the effect that:
(i) each signer of such certificate has carefully examined the Registration Statement and the Prospectus;
(ii) there has not been a Material Adverse Effect; and
(iii) with respect to the matters set forth in Sections 5(b)(i) and 5(e).
(j) Transfer Agent’s Certificate. The Company’s transfer agent shall have furnished or caused to be furnished to the Representative a certificate satisfactory to the Representative of one of its authorized officers with respect to the issuance of the Shares and such other customary matters related thereto as the Representative may reasonably request.
(k) Eligible for DTC Clearance. At or prior to the Closing Date and each Option Closing Date, the Shares shall be eligible for clearance and settlement through the facilities of the DTC.
(l) Lock-Up Agreements. At the date of this Agreement, the Representative shall have received the executed “lock-up” agreements referred to in Section 4(p) hereof from the Company’s officers and directors, 5% stockholders and the holders of the Company’s Series B preferred stock.
(m) Compliance with Blue Sky Laws. The Offered Securities shall be qualified for sale in such states and jurisdictions as the Representative may reasonably request, including, without limitation, qualification for exemption from registration or prospectus delivery requirements in the provinces and territories of Canada and other jurisdictions outside the United States, and each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date and the Option Closing Date.
(n) Stock Exchange Listing. The Shares shall have been duly authorized for listing on the NYSE American, subject to official notice of issuance.
(o) Exchange Act Registration. One or more registration statements in respect of the Shares have been filed on Form 8-A pursuant to Section 12(b) of the Exchange Act, each of which registration statement complies in all material respects with the Exchange Act.
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(p) Good Standing. At the Closing Date and any Option Closing Date, the Company shall have furnished to the Representative satisfactory evidence of the good standing of the Company and its subsidiaries, in their respective jurisdictions of organization (to the extent the concept of “good standing” or such equivalent concept exists under the laws of the applicable jurisdictions) and their good standing as foreign entities in such other jurisdictions as the Representative may reasonably request, in each case in writing or any standard form of telecommunication from the appropriate governmental authorities of such jurisdictions. If the applicable jurisdiction does not have a concept of “good standing,” the Company will furnish evidence in writing or any standard form of telecommunication from the appropriate governmental authorities that the relevant company was duly incorporated and remains duly registered in the jurisdiction of its incorporation.
(q) Company Certificates. The Company shall have furnished to the Representative such certificates, in addition to those specifically mentioned herein, as the Representative may have reasonably requested as to the accuracy and completeness at the Closing Date and any Option Closing Date of any statement in the Registration Statement, the General Disclosure Package or the Prospectus, as to the accuracy at the Closing Date and any Option Closing Date of the representations and warranties of the Company herein, as to the performance by the Company of its obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to the obligations hereunder of the Underwriters.
(r) No Objection. FINRA has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements relating to the offering of the Offered Securities.
If any of the conditions hereinabove provided for in this Section 5 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representative by notifying the Company of such termination in writing at or prior to the Closing Date or any Option Closing Date, as the case may be.
6. Indemnification.
(a) Indemnification of the Underwriters. The Company shall indemnify and hold harmless each Underwriter, its affiliates, the directors, officers, employees and agents of such Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, liabilities, expenses and damages (including any and all investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding between any of the indemnified parties and any indemnifying parties or between any indemnified party and any third party, or otherwise, or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the information deemed to be a part of the Registration Statement at the time of effectiveness and at any subsequent time pursuant to Rules 430A and 430B of the Rules and Regulations, as applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, any preliminary prospectus supplement, any Issuer Free Writing Prospectus or the Prospectus (or any amendment or supplement to any of the foregoing) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the offering of the Securities, including any roadshow or investor presentations made to investors by the Company (whether in person or electronically) (collectively, Marketing Materials”) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iv) in whole or in part any inaccuracy in any material respect in the representations and warranties of the Company contained herein; provided, however, that the Company shall not be liable to the extent that such loss, claim, liability, expense or damage is based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with Underwriters’ Information. This indemnity agreement will be in addition to any liability that the Company might otherwise have.
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(b) Indemnification of the Company. Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its affiliates, the directors, officers, employees and agents of the Company and each other person or entity, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever, as incurred (including but not limited to reasonable attorneys’ fees and any and all reasonable expenses whatsoever, incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement at the time of effectiveness and at any subsequent time pursuant to Rules 430A and 430B of the Rules and Regulations, any Preliminary Prospectus, the Prospectus, or any amendment or supplement to any of them, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense (or action in respect thereof) arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon the Underwriters’ Information; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount and commissions applicable to the Securities purchased by such Underwriter hereunder. The parties agree that such information provided by or on behalf of the Underwriters through the Representative consists solely of the material referred to in the last sentence of Section 3(c) hereof.
(c) Indemnification Procedures. Any party that proposes to assert the right to be indemnified under this Section 6 shall, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 6, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party shall not relieve the indemnifying party from any liability that it may have to any indemnified party under the foregoing provisions of this Section 6 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel reasonably satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable out-of-pocket costs of investigation subsequently incurred by the indemnified party in connection with the defense it being understood and agreed that the amount of such retainer shall not exceed $20,000 and that such retainer shall be credited to fees incurred with the balance (if any) refundable to the Company . The indemnified party will have the right to employ one law firm as its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (i) the employment of counsel by the indemnified party has been authorized in writing by one of the indemnifying parties in connection with the defense of such action and that indemnifying party agrees to pay the fees and expenses of such counsel, (ii) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (iii) the indemnified party has reasonably concluded that a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party), (iv) the indemnifying party does not diligently defend the action after assumption of the defense, or (v) the indemnifying party has not in fact employed counsel satisfactory to the indemnified party to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel shall be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such reasonable fees, disbursements and other charges shall be reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party shall not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld or delayed). No indemnifying party shall, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated by this Section 6 (whether or not any indemnified party is a party thereto), unless (x) such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising or that may arise out of such claim, action or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party, and (y) the indemnifying party confirms in writing its indemnification obligations hereunder with respect to such settlement, compromise or judgment. Notwithstanding the foregoing, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a) effected without its written consent if (A) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (B) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.
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(d) Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 6 is applicable in accordance with its terms but for any reason is held to be unavailable, the Company and the Underwriters shall contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, such as persons who control the Company within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who may also be liable for contribution), to which the Company and the Underwriter may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities pursuant to this Agreement. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the Offering (net of underwriting discount and commissions but before deducting expenses) received by the Company bears to (y) the underwriting discount and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were to be determined by pro rata allocation or by any other method of allocation (even if the Underwriters were treated as one entity for such purpose) which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 6(d) shall be deemed to include, for purpose of this Section 6(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions received by it. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 6(d), any person who controls a party to this Agreement within the meaning of the Act will have the same rights to contribution as that party, and each officer of the Company who signed the Registration Statement will have the same rights to contribution (but no personal obligation to contribute) as the Company, and each director, officer, employee, counsel or agent of an Underwriter will have the same rights to contribution as such Underwriter (but no personal obligation to contribute), subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 6(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 6(d). The obligations of the Underwriters to contribute pursuant to this Section 6(d) are several in proportion to the respective number of Securities to be purchased by each of the Underwriters hereunder and not joint. No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld).
(e) Survival. The indemnity and contribution agreements contained in this Section 6 and the representations and warranties of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or any controlling Person thereof, (ii) acceptance of any of the Securities and payment therefor or (iii) any termination of this Agreement.
7. Termination. The obligations of the Underwriters under this Agreement may be terminated at any time prior to the Closing Date (or, with respect to the Option Securities, on or prior to the Option Closing Date), by notice to the Company from the Representative, without liability on the part of the Underwriters to the Company, if, prior to delivery and payment for the Firm Shares (or the Option Shares, as the case may be), in the sole judgment of the Representative, any of the following shall occur:
(a) trading or quotation in any of the equity securities of the Company shall have been suspended or limited by the Commission, the NYSE American or by an exchange or otherwise;
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(b) trading in securities generally on the New York Stock Exchange, the NYSE American, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global Select Market shall have been suspended or limited or minimum or maximum prices shall have been generally established on such exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by such exchange or by order of the Commission or any court or other governmental authority;
(c) a general banking moratorium shall have been declared by any of United States federal or New York state authorities;
(d) the United States shall have become engaged in new hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or there shall have occurred such a material adverse change in general economic, political or financial conditions, including, without limitation, as a result of terrorist activities after the date hereof (or the effect of international conditions on the financial markets in the United States shall be such), or any other calamity or crisis shall have occurred, the effect of any of which is such as to make it impracticable or inadvisable to market the Offered Securities on the terms and in the manner contemplated by the Prospectus;
(e) the Company shall have sustained a loss material or substantial to the Company by reason of flood, fire, accident, hurricane, earthquake, theft, sabotage, or other calamity or malicious act, whether or not such loss shall have been insured, the effect of any of which is such as to make it impracticable or inadvisable to market the Securities on the terms and in the manner contemplated by the Prospectus; or
(f) there shall have been a Material Adverse Change.
8. Underwriter Default.
(a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares hereunder, and if the Shares with respect to which such default relates (the “Default Securities”) do not (after giving effect to arrangements, if any, made by the Representative pursuant to subsection (b) below) exceed in the aggregate 10% of the number of the Firm Shares, each non-defaulting Underwriter, acting severally and not jointly, agrees to purchase from the Company that number of Default Securities that bears the same proportion to the total number of Default Securities then being purchased as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule A hereto bears to the aggregate number of Firm Shares set forth opposite the names of the non-defaulting Underwriters; subject, however, to such adjustments to eliminate fractional shares as the Representative in its discretion shall make.
(b) In the event that the aggregate number of Default Securities exceeds 10% of the number of Firm Shares, the Representative may in their discretion arrange for itself or for another party or parties (including any non-defaulting Underwriter or Underwriters who so agree) to purchase the Default Securities on the terms contained herein. In the event that within five (5) calendar days after such a default the Representative does not arrange for the purchase of the Default Securities as provided in this Section 8, this Agreement shall thereupon terminate, without liability on the part of the Company with respect thereto (except in each case as provided in Sections 4(k), 4(m), and 6) or the Underwriters (except as provided in Section 6), but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters and the Company for damages occasioned by its or their default hereunder.
(c) In the event that any Default Securities are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representatives or the Company shall have the right to postpone the Closing Date for a period, not exceeding five (5) Business Days, in order to effect whatever changes may thereby be necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the reasonable opinion of Underwriters’ Counsel, may be necessary or advisable. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 8 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares.
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9. Miscellaneous.
(a) Notices. Notice given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed, hand delivered, sent by e-mail or telecopied (a) if to the Company, at the office of the Company, 151 Calle De San Francisco, Ste. 200 PMB 2106, San Juan, Puerto Rico 00901-1607, telephone number: 1 855-921-4600, Attention: Chief Executive Officer with a copy (which shall not constitute notice) to Michael D. Harris (email: mharris@nasonyeager.com), or (b) if to the Representative or any Underwriter, to Maxim Group LLC, 300 Park Avenue, 16th Floor, New York, New York 10022, Attention: Legal Department, telecopy number: (212) 895-3555. Any such notice shall be effective only upon receipt. Any notice under Section 6 hereof may be made by telecopy or telephone, but if so made shall be subsequently confirmed in writing.
(b) No Third Party Beneficiaries. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and, with respect to Section 6, the controlling persons, directors, officers, employees, counsel and agents referred to in Section 6 hereof, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term “successors and assigns” as used in this Agreement shall not include a purchaser of Securities from any Underwriter in his, her or its capacity as such a purchaser, as such purchaser of Securities from such Underwriter.
(c) Survival of Representations and Warranties. All representations, warranties and agreements of the Company contained herein or in certificates or other instruments delivered pursuant hereto shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Underwriters or any of their controlling persons and shall survive delivery of and payment for the Securities hereunder.
(d) Disclaimer of Fiduciary Relationship. The Company acknowledges and agrees that (i) the purchase and sale of the Securities pursuant to this Agreement, including the determination of the public offering price of the Offered Securities and any related discounts and commissions, is an arm’s-length commercial transaction between the Company, on the one hand, and the Underwriters, on the other hand, (ii) in connection with the Offering contemplated by this Agreement and the process leading to such transaction, the Underwriters are and have been acting pursuant to a contractual relationship created solely by this Agreement and are not agents or fiduciaries of the Company or its securityholders, creditors, employees or any other party, (iii) no Underwriter has assumed nor will it assume any advisory or fiduciary responsibility in favor of the Company with respect to the offering of the Securities contemplated by this Agreement or the process leading thereto (irrespective of whether such Underwriter or its affiliates has advised or is currently advising the Company on other matters) and each such Underwriter has no obligation to the Company with respect to the offering of the Securities contemplated by this Agreement except the obligations expressly set forth in this Agreement, (iv) the Underwriters and their affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Company, and (v) no Underwriter has provided any legal, accounting, regulatory or tax advice with respect to the Offering contemplated by this Agreement and the Company has consulted its own legal, accounting, regulatory and tax advisors to the extent it deemed appropriate.
(e) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.
(f) Submission to Jurisdiction. The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or United States federal court sitting in The City of New York, Borough of Manhattan, over any suit, action or proceeding arising out of or relating to this Agreement, the Disclosure Package, the Prospectus, the Registration Statement, or the offering of the Securities. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. To the extent that the Company has or hereafter may acquire any immunity (on the grounds of sovereignty or otherwise) from the jurisdiction of any court or from any legal process with respect to itself or its property, the Company irrevocably waives, to the fullest extent permitted by law, such immunity in respect of any such suit, action or proceeding including without limitation, any immunity pursuant to the U.S. Foreign Sovereign Immunities Act of 1976, as amended. Each of the Underwriters and the Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail or delivered by Federal Express via overnight delivery to the Company’s address shall be deemed in every respect effective service of process upon the Company in any such suit, action or proceeding, and service of process upon an Underwriter mailed by certified mail or delivered by Federal Express via overnight delivery to the Underwriters’ address shall be deemed in every respect effective service of process upon such Underwriter in any such suit, action or proceeding.
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(g) Judgment Currency. If for the purposes of obtaining judgment in any court it is necessary to convert a sum due hereunder into any currency other than United States dollars, the parties hereto agree, to the fullest extent permitted by law, that the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Underwriters could purchase United States dollars with such other currency in The City of New York on the business day preceding that on which final judgment is given. The obligation of the Company with respect to any sum due from it to an Underwriter or any person controlling such Underwriter shall, notwithstanding any judgment in a currency other than United States dollars, not be discharged until the first business day following receipt by such Underwriter or controlling person of any sum in such other currency, and only to the extent that such Underwriter or controlling person may in accordance with normal banking procedures purchase United States dollars with such other currency. If the United States dollars so purchased are less than the sum originally due to such Underwriter or controlling person hereunder, the Company agrees as a separate obligation and notwithstanding any such judgment, to indemnify such Underwriter or controlling person against such loss. If the United States dollars so purchased are greater than the sum originally due to such Underwriter or controlling person hereunder, such Underwriter or controlling person agrees to pay to the Company an amount equal to the excess of the dollars so purchased over the sum originally due to such Underwriter or controlling person hereunder.
(h) Counterparts. This Agreement may be signed in two or more counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument.
(i) Survival of Provisions Upon Invalidity of Any Single Provision. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
(j) Waiver of Jury Trial. The Company and each Underwriter each hereby irrevocably waive any right they may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby.
(k) Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience and reference only and are not to be considered in construing this Agreement.
(l) Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. This Agreement may not be amended or otherwise modified or any provision hereof waived except by an instrument in writing signed by the parties hereto.
[Signature page follows]
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If the foregoing correctly sets forth your understanding, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us.
| Very truly yours, | ||
| UNUSUAL MACHINES, INC. | ||
| By: | ||
| Name: | Brandon Torres Declet | |
| Title: | Chief Executive Officer | |
Accepted by the Representatives, acting for themselves and as Representatives of the Underwriters named on Schedule A hereto, as of the date first written above:
Maxim Group LLC
| By: | ||
| Name: Clifford A. Teller | ||
| Title: Executive Managing Director, | ||
| Investment Banking |
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SCHEDULE A
| Name of Underwriter |
Number of Firm Shares Being Purchased |
Number of Option Shares Being Purchased if the Option is Fully Exercised |
| Maxim Group LLC | [●] | |
| Dominari Securities | ||
| Total | [●] |
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SCHEDULE I
| 1. | The public offering price per Firm Share and Option Share shall be $[●]. |
| 2. | The Company is selling [●] Firm Shares. |
| 3. | The Company has granted an option to the Representative, on behalf of the Underwriters, to purchase up to an additional Option Shares. |
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Exhibit 3.1(a)
Amendment to Articles of Incorporation Government of Puerto Rico Department of State Transaction Date: 10 - Jul - 2023 Register No: 430601 Order No: 28367762 430601 - UNUSUAL MACHINES, INC. A resolution was adopted setting forth (a) proposed amendment(s) to the Certificate of Incorporation of said corporation, declaring said amendment(s) to be advisable. RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the following Article(s) STATEMENT UNDER PENALTY OF PERJURY IN WITNESS WHEREOF, I, Conway, Annick [Attorney/Paralegal - Paralegal] the undersigned, being authorized to file amendment(s) for the corporation, hereby swear that the facts herein stated in this certificate are true, this 10th day of July, 2023. Supporting Documents Amendment Description Certificate of Amendment to the Amended and Restated Certificate of Incorporation Document Date Issued Other Corporate Resolution 10 - Jul - 2023 10 - Jul - 2023 Amendment to Articles of Incorporation Page 1 of 1
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CERTIFICATE OF AMENDMENT I, Omar J. Marrero Díaz, Secretary of State of the Government of Puerto Rico, CERTIFY : That on July 10, 2023 , at 09:34 PM , "UNUSUAL MACHINES, INC." , registry number 430601 , performed the following amendment : Description Certificate of Amendment to the Amended and Restated Certificate of Incorporation IN WITNESS WHEREOF , the undersigned by virtue of the authority vested by law, hereby issues this certificate and affixes the Great Seal of the Government of Puerto Rico, in the City of San Juan, Puerto Rico, today, July 10, 2023. Omar J. Marrero Díaz Secretary of State Page 1 of 1
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Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of
Unusual Machines, Inc.
Pursuant to Section 3682 of the Puerto Rico General Corporations Act, the undersigned corporation hereby submits this Certificate of Amendment for the purpose of amending its Amended and Restated Certificate of Incorporation:
| 1. | The name of the corporation is Unusual Machines, Inc. (the “Corporation”). |
2. The Amended and Restated Certificate of Incorporation of the Corporation is hereby amended as follows:
Article 4 of the Amended and Restated Certificate of Incorporation is hereby amended by adding the following:
As of 12:01 am Puerto Rico Time on July 10, 2023, or such later date as may be required by the Puerto Rican Secretary of State (the “Effective Time”), there shall be effected a reverse stock split (the “Reverse Stock Split”) pursuant to which each two shares of common stock of the Corporation issued and outstanding immediately prior to the Effective Time (“Old Common Stock”) shall, automatically and without any action on the part of the respective holders thereof, be combined and reclassified into one share of common stock of the Corporation (“New Common Stock”). No fractional shares of New Common Stock shall be issued in connection with the Reverse Stock Split. To the extent that any stockholder would have otherwise been deemed to own a fractional share of New Common Stock after the Effective Time as a result of the Reverse Stock Split, such fractional share resulting from the Reverse Stock Split shall instead be rounded up to the nearest whole share. Each holder of a certificate or certificates that immediately prior to the Effective Time represented outstanding shares of Old Common Stock (each, an “Old Certificate”) will be entitled to receive, upon surrender of such Old Certificates to the Company for cancellation, a certificate or certificates (each, a “New Certificate”) representing the number of whole shares (rounded up to the nearest whole share) of the New Common Stock into which and for which the shares of the Old Common Stock formerly represented by such Old Certificate(s) so surrendered are reclassified under the terms hereof. From and after the Effective Time, Old Certificates shall represent only the right to receive New Certificates pursuant to the provisions hereof. If more than one Old Certificate shall be surrendered at one time for the account of the same stockholder, the number of full shares of New Common Stock for which New Certificates shall be issued shall be computed on the basis of the aggregate number of shares represented by the Old Certificates so surrendered by such stockholder. The Old Certificates surrendered for exchange shall be properly endorsed and otherwise in proper form for transfer.
3. The foregoing amendment was approved by, and proposed and recommended to the Corporation’s stockholders by the Board of Directors of the Company on May 3, 2023 and July 1, 2023, and approved by the stockholders of the Corporation on June 23, 2023 in accordance with Section 3657 of the Puerto Rico General Corporations Act.
IN WITNESS WHEREOF, I have hereunto set my hand this 7th day of July, 2023.
| Unusual Machines, Inc. | ||
| By: | /s/ Brandon Torres Declet | |
| Name: Brandon Torres Declet | ||
| Title: Chief Executive Officer | ||
| 3 |
UNANIMOUS WRITTEN CONSENT OF
THE BOARD OF DIRECTORS OF
UNUSUAL MACHINES, INC.
The undersigned, being all the members of the Board of Directors (the “Board”) of Unusual Machines, Inc., a Puerto Rico corporation (the “Company”), hereby consent to the following action in lieu of holding a meeting, all pursuant to Section 35561(e) of the Puerto Rico General Corporations Act.
WHEREAS, as of June 23, 2023, stockholders of the Company holding a majority of outstanding voting power approved amending the Company’s Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a ratio of one-for-two, thereby combining every two outstanding shares of common stock of the Company into one share of common stock (the “Reverse Stock Split Amendment”).
NOW, THEREFORE, BE IT:
RESOLVED, that the Board deems it advisable and in the best interests of the Company and its stockholders to approve an amendment to the Company’s Certificate of Incorporation to effect the Reverse Stock Split Amendment, with any fractional shares rounded up to the nearest whole share; it is further
RESOLVED, that the Board authorizes the Company to file a Certificate of Amendment to the Certificate of Incorporation with the Puerto Rico Secretary of State and to pay any and all fees related to such filing to effect the Reverse Stock Split Amendment; it is further
RESOLVED, that the proper officers of the Company are authorized and empowered to take such further action as is reasonably necessary to carry out fully the effect of the foregoing resolutions; and it is further
RESOLVED, that this Unanimous Written Consent may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. The execution of this Unanimous Written Consent may be by actual, electronic (including DocuSign or email), or facsimile signature.
[Signature page follows]
| 4 |
IN WITNESS WHEREOF, the undersigned member of the Board of Directors have executed this Unanimous Written Consent effective as of the date set forth below.
| 6/30/2023 | /s/ Brandon Torres Declet |
| Brandon Torres Declet, Director | |
| 6/30/2023 | /s/ Cristina Colon, Director |
| Cristina Colon, Director | |
| 6/30/2023 | /s/ Jeffrey Thompson, Director |
| Jeffrey Thompson, Director | |
| 6/30/2023 | /s/ Robert Lowry |
| Robert Lowry, Director | |
| 6/30/2023 | /s/ Thomas Walker |
| Thomas Walker, Director |
| 5 |
Exhibit 5.1
August 7, 2023
Unusual Machines, Inc.
151 Calle de San Francisco
STE 200 PMB 2106
San Juan, PR 00901-1607
Attention: Brandon Torres Declet, CEO
Re: Registration Statement on Form S-1 (SEC File No. 333-270519)
Ladies and Gentlemen:
We have acted as counsel to Unusual Machines, Inc., a Puerto Rico corporation (the “Company”), in connection with its filing on the date hereof with the Securities and Exchange Commission (the “Commission”) of a registration statement on Form S-1 (the “Registration Statement”) under the Securities Act of 1933, as amended (the “Act”), relating to the proposed public offering of: (i) 1,500,000 shares of common stock of the Company, par value $0.001 per share (the “Shares”), (ii) up to 225,000 additional Shares ( the “Over-Allotment Securities”) for which the underwriters have been granted an over-allotment option; and (iii) an underwriter’s warrant (the “Underwriter’s Warrant”) to acquire up to 75,000 shares of Common Stock granted to Maxim Group LLC, the representative of the underwriters.
The Shares will be sold by the Company pursuant to an underwriting agreement to be entered into by and between the Company and Maxim Group LLC (the “Underwriting Agreement”).
This opinion is being furnished in connection with the requirements of Item 601(b)(5) of Regulation S-K under the Act, and no opinion is expressed herein as to any matter pertaining to the contents of the Registration Statement or related prospectus or prospectus supplement (collectively, the “Prospectus”), other than as expressly stated herein with respect to the issuance of the Shares.
As such counsel, we have examined the Registration Statement and originals, or copies certified or otherwise identified to our satisfaction of the Company’s Articles of Incorporation, as amended, and Bylaws and such other documents, records and instruments as we have deemed appropriate for purposes of the opinion set forth herein. With your consent, we have relied upon certificates and other assurances of officers of the Company and others as to factual matters material to this opinion without having independently verified such factual matters. We are opining herein as to the laws of Puerto Rico and we express no opinion with respect to any other laws. In addition, the foregoing opinions are qualified to the extent that (a) enforceability may be limited by and be subject to general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law (including, without limitation, concepts of notice and materiality), and by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ and debtors’ rights generally (including, without limitation, any state or federal law in respect of fraudulent transfers); and (b) no opinion is expressed herein as to compliance with or the effect of federal or state securities or blue sky laws.
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Unusual Machines Inc.
August 7, 2023
Page 2
We have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of the documents submitted to us as originals, the conformity with the originals of all documents submitted to us as certified, facsimile, or photostatic copies and the authenticity of the originals of all documents submitted to us as copies.
Subject to the foregoing and the other matters set forth herein, we are of the opinions that:
1. The Shares and the Over-Allotment Securities have been duly authorized by the Company and, when issued and sold by the Company and delivered by the Company against receipt of the purchase price therefor, in the manner contemplated by the Registration Statement, will be valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms.
2. The Underwriter’s Warrant has been duly authorized by the Company and, when issued and sold by the Company and delivered by the Company and delivered by the Company against payment therefor upon exercise of the Underwriter’s Warrant in accordance with the terms therein, will be valid and legally binding obligations of the Company.
3. The Shares (including any Shares in the Over-Allotment Securities and the Shares underlying the Underwriter’s Warrant) have been duly authorized by the Company and, when issued and sold by the Company and delivered by the Company against receipt of the purchase price therefor, in the manner contemplated by the Registration Statement, will be validly issued, fully paid and non-assessable.
This opinion is for your benefit in connection with the Registration Statement and may be relied upon by you and by persons entitled to rely upon it pursuant to the applicable provisions of the Act. We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to us under the caption “Legal Matters” in the Prospectus included in the Registration Statement. In giving such consent, we do not hereby admit that we are acting within the category of persons whose consent is required under Section 7 of the Securities Act or the rules or regulations of the Commission thereunder.
|
Very truly yours,
/s/ Nason, Yeager, Gerson, Harris & Fumero, P.A. | |
| Nason, Yeager, Gerson, Harris & Fumero, P.A. |
| 2 |
Exhibit 10.3
AMENDMENT NO. 2 TO
SHARE PURCHASE AGREEMENT
This AMENDMENT NO. 2 TO SHARE PURCHASE AGREEMENT (this “Amendment”), dated July __, 2023, is by and among Unusual Machines, Inc., a Puerto Rico corporation (“Unusual”), Red Cat Holdings, Inc., a Nevada corporation (“Red Cat”), and Jeffrey Thompson, an individual, (the “Principal Stockholder,” and together with Unusual and Red Cat, the “Parties”).
WHEREAS, the Parties entered into a Share Purchase Agreement as of November 21, 2022, as amended March 31, 2023 (the “Agreement”); and
WHEREAS, the Parties desire to amend the Agreement to (A) reflect a revision to eliminate the escrow requirement set forth in Section 2.03 of the Agreement and add the Principal Stockholder lock-up in connection with Red Cat’s and the Principal Stockholder’s indemnification obligations in Article VII including, without limitation, in connection with a breach of any representation and warranty made by Red Cat or the Principal Stockholder, (B) extend the End Date from June 12, 2023 to September 30, 2023 as provided in Section 11.02(a) of the Agreement, (C) revise Section 6.05 of the Agreement, (D) revise Section 8.01 of the Agreement and (E) modify certain registration rights granted by Unusual to Red Cat, and its assigns.
NOW, THEREFORE, the Parties, each intending to be legally bound hereby, do mutually covenant and agree as follows, subject to and effective as of the Effective Time (as defined below):
1. All capitalized terms herein shall have the meaning ascribed to such terms in the Agreement.
2. Section 2.03 of the Agreement is hereby amended and restated as follows:
“Section 2.03 Principal Stockholder Lock-Up Shares.
On the Closing Date, the Principal Stockholder shall enter into a Principal Stockholder Lock-up Agreement, in form and substance mutually agreeable to the Principal Stockholder and Unusual (the “Principal Stockholder Lock-Up Agreement”) whereby the principal Stockholder will agree not to sell 100,000 shares of Unusual Common Stock (after giving effect to the 1-for-2 reverse stock split) or such other number of shares with an agreed upon with a value on the Closing Date of $500,000 using the public offering price of the Company’s Common Stock (the “Principal Stockholder Lock-Up Shares Shares”) for nine (9) months from the Closing Date of the offering made pursuant to the Registration Statement (Registration No. 333-270519) filed with the SEC.
(a) The Principal Stockholder Lock-Up Shares shall provide security for Red Cat’s and the Principal Stockholder’s indemnification obligations in Article VII including, without limitation, in connection with a breach of any representation and warranty made by Red Cat or the Principal Stockholder.
(b) Any claim against the Principal Stockholder Lock-Up Shares must be made within nine (9) months following the Closing. If a written claim is timely made, the Principal Stockholder Lock-Up Agreement will also contain provisions pertaining to the release of the Principal Stockholder Lock-Up Shares to Unusual under certain circumstances.
(c) All references related to Escrow Shares in the Agreement shall be deemed to be references to the Principal Stockholder Lock-Up Shares. All references to the Escrow Agreement shall be deleted and constitute references to the Principal Stockholder Lock-Up Agreement. All references to the Escrow Agent in the Agreement are hereby deleted.”
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3. Section 11.02(a) is hereby amended and restated as follows:
“(a) if the Purchase and Sale has not been consummated on or before September 30, 2023 (the “End Date”); provided, however, that the right to terminate this Agreement pursuant to this Section 11.02 shall not be available to any Party whose breach of any representation, warranty, covenant, or agreement set forth in this Agreement has been the principal cause of, or that resulted in, the failure of the Purchase and Sale to be consummated on or before the End Date;”
4. Section 6.05 of the Agreement is hereby amended and restated as follows:
“Section 6.05 Ownership of the Principal Stockholder Lock-Up Shares. The Principal Stockholder is and will immediately prior to the Closing be the record and beneficial owner of the Principal Stockholder Lock-Up Shares, as such term is defined by the Principal Stockholder Lock-Up Agreement, by and among the Principal Stockholder and Unusual and the Escrow Agent dated as of the Closing Date. Prior to the Closing such Principal Stockholder Lock-Up Shares will be owned free and clear of any Liens (other than restrictions pursuant to the rules and regulations promulgated by the SEC and pursuant to the Lock-Up Agreement contemplated in Section 8.19 of the Agreement), including, without limitation, claims or rights under any Voting Trust Agreements, Proxies, Stockholder Agreements or other Agreements.. No written or oral agreement or understanding with respect to the disposition of the Principal Stockholder Lock-Up Shares or any rights therein, other than this Agreement and the Principal Stockholder Lock-Up Agreement, exists.”
5. Section 8.01 of the Agreement is hereby amended and restated as follows:
“Section 8.01 Form S-1. As soon as practicable following the Effective Date, Unusual shall file a Form S-1 Registration Statement (the “Registration Statement”) with the SEC providing for Unusual to sell at least $5 million of Unusual Common Stock (the “Offering”). Red Cat shall co-operate with Unusual in connection with the Offering. Unusual shall not file the Form S-1 Registration Statement or any amendment thereto, absent the express prior written approval therefor by Red Cat, such consent not to be unreasonably withheld, delayed or denied.”
6. Unusual hereby agrees to register 300,000 shares of Unusual Common Stock that it will issue to Red Cat in connection with the Business Combination and to use its 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 after consummation of the Offering pursuaant to a registration rights agreement that will be filed as an Exhibit to the Registration Statement prior to the Registration Statement being declared effective by the SEC; provided, however, Red Cat shall execute and deliver a Lock-Up Agreement restricting the public sale of the Common Stock for 180 days or such lesser period as may be agreed upon by the managing underwriter for Unusual’s initial public offering.
7. In the event of any conflict between the Agreement and this Amendment, the terms as contained in this Amendment shall control. In all other respects the Agreement is hereby ratified and confirmed.
8. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be one and the same agreement. Facsimile and electronic signatures shall be treated in all respects and for all purposes as originals.
9. Within fifteen (15) days of request, Unusual shall reimburse Red Cat up to an additional $100,000 of its reasonable and documented legal and out-of-pocket expenses incurred in connection with the preparation for the Business Combination, including without limitation, Red Cat’s costs in connection with valuation, investment banking fees, proxy, mailing, SEC filings and reports, and legal, audit and accounting costs.
[Signature Page to Follow]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.
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UNUSUAL MACHINES, INC. a Puerto Rico corporation
By: _______________________________ Name: Brandon Torres Declet, Title: Chief Executive Officer
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RED CAT HOLDINGS, INC. a Nevada corporation
By: _______________________________ Name: Joe Freedman Title: Lead Director
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PRINCIPAL STOCKHOLDER:
__________________________ Jeffrey Thompson |
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Exhibit 10.4
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (“Agreement”) is entered into as of the ____ day of _________, 2023 by and among Unusual Machines, Inc., a Puerto Rico corporation (the “Company”), and Red Cat Holdings, Inc., a Nevada corporation (the “Investor”).
WHEREAS, the Company has entered into a Securities Purchase Agreement (as amended, the “Purchase Agreement”) with the Investor and Jeffrey Thompson, dated the date of this Agreement;
WHEREAS, the Company has filed a Registration Statement on Form S-1 for the initial public offering of the Company (File No. 333-270519) (the “Company Registration”); and
WHEREAS, the Company has agreed in the Purchase Agreement to provide certain registration rights to the Investor.
Now, therefore, in consideration of the mutual promises and the covenants as set forth herein, the parties hereto hereby agree as follows:
1. Definitions. Unless the context otherwise requires, the terms defined in this Section 1 shall have the meanings herein specified for all purposes of this Agreement, applicable to both the singular and plural forms of any of the terms herein defined.
“Agreement” means this Registration Rights Agreement, as the same may be amended, modified or supplemented in accordance with the terms hereof.
“Board” means the Board of Directors of the Company.
“Common Stock” means the Company’s authorized common stock, as constituted on the date of this Agreement, any stock into which such Common Stock may thereafter be changed and any stock of the Company of any other class, which is not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption, issued to the holders of shares of such Common Stock upon any re-classification thereof.
“Commission” means the United States Securities and Exchange Commission.
“Company” has the meaning assigned to it in the introductory paragraph of this Agreement.
“Effectiveness Date” means, with respect to the Registration Statement required to be filed hereunder, the 180th calendar day following the effectiveness of the Company Registration Statement.
“Exchange Act” means the Securities Exchange Act of 1934 (or successor statute).
“Filing Date” has the meaning ascribed to it in Section 2 of this Agreement.
“Investor” has the meaning assigned to it in the introductory paragraph of this Agreement.
“Other Shares” has the meaning assigned to it in Section 4(f) of this Agreement.
“Person” includes any natural person, corporation, trust, association, company, partnership, joint venture, limited liability company and other entity and any government, governmental agency, instrumentality or political subdivision.
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“Purchase Agreement” has the meaning assigned to it in the second Whereas clause.
“Lock-Up Period” means 180 days after the Company Registration is declared effective by the SEC.
The terms “register” “registered” and “registration” refer to a registration effected by preparing and filing a registration statement on other than any of the Excluded Forms in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement.
“Registrable Securities” means 300,000 shares of the Common Stock issued or issuable to the Investor upon the effectiveness of the Company Registration and closing of the transactions contemplated in the Purchase Agreement, and any securities of the Company issued or issuable to Investor with respect to such Common Stock by way of a stock dividend or stock split or in connection with a combination, recapitalization, share exchange, consolidation or other reorganization of the Company.
“Selling Expenses” means all selling commissions or discounts, finder’s fees and stock transfer taxes applicable to the Registrable Securities registered by the Investor and all fees and disbursements of counsel for the Investor.
“Securities Act” means the Securities Act of 1933, as amended (or successor statute).
2. Required Registration. As soon as practicable but no later than 120 calendar days following the effectiveness of the Company Registration (the “Filing Date”) , the Company shall file a registration statement on Form S-1 with the Commission for the Registrable Securities (the “Registration Statement”) The Company shall use its best efforts to have the Registration Statement be declared effective by the Commission by the Effectiveness Date. The Company may later register any unsold shares of Common Stock held by the Investor on Form S-3 and withdraw the Form S-1.
2.1. Intentionally Omitted.
2.2 Intentionally omitted.
2.3 Form S-3. Whenever the Company is eligible to use Form S-3, it shall use that Form rather than Form S-1.
3. Obligations of the Company. The Company shall:
(a) use its best efforts to prepare and file with the Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become and remain effective;
(b) use its best efforts to prepare and file with the Commission such amendments to such registration statement (including post-effective amendments) and supplements to the prospectus included therein as may be necessary to keep such registration statement effective, subject to the qualifications in Section 4(a), and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Investor set forth in such registration statement;
(c) furnish to the Investor and its assigns such number of copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as the Investor may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities held by the Investor and any assignees of Investor (including, without limitation, and holders of Registrable Securities who secure such Registrable Securities by virtue of any dividend or distribution by Investor to its own stockholders);
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(d) use its best efforts to make such filings under the securities or blue sky laws reasonably requested by the Investor (or New York if the Company’s Common Stock is not listed on the Nasdaq Stock market or the New York Stock Exchange or NYSE American to enable the Investor to consummate the sale in such jurisdiction of the Registrable Securities owned by the Investor;
(e) notify the Investor at any time when a prospectus relating to their Registrable Securities is required to be delivered under the Securities Act, of the Company’s becoming aware that the prospectus included in the related registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and promptly prepare and furnish to the Investor a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing;
(f) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission;
(g) cause the Registrable Securities to be quoted on each trading market and/or in each quotation service on which the Common Stock of the Company is then quoted promptly following filing the registration statement for the Registrable Securities and conform to the rules and regulations of the trading market on which the Common Stock is then trading; and
(h) notify the Investor of any stop order threatened or issued by the Commission and take all actions reasonably necessary to prevent the entry of such stop order or to remove it if entered.
4. Other Procedures.
(a) Subject to the remaining provisions of this Section 4(a) and the Company’s obligation to use best efforts under Section 3, the Company shall be required to maintain the effectiveness of a registration statement (under Form S-1 or Form S-3) until the earlier of (i) the sale of all Registrable Securities or (ii) forty-eight (48) months from the effective date of the registration statement. The Company shall have no liability to the Investor for delays in the Investor being able to sell the Registrable Securities (i) as long as the Company uses its best efforts to file a registration statement, amendments to a registration statement, post-effective amendments to a registration statement or supplements to a prospectus contained in a registration statement (including any amendment or post effective amendments), (ii) where the required financial statements or auditor’s consents are unavailable or (iii) where the Company would be required to disclose information at a time when it has no duty to disclose such information under the Securities Act, the Exchange Act, or the rules and regulations of the Commission, provided, however, any suspension under clauses (ii) or (iii) shall not exceed 180 days in any 12 month period.
(b) In consideration of the Company’s obligations under this Agreement, the Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e) herein, the Investor shall forthwith discontinue his sale of Registrable Securities pursuant to the registration statement covering such Registrable Securities until the Investor’s receipt of the copies of the supplemented or amended prospectus contemplated by said Section 3(e) and, if so directed by the Company, shall deliver to the Company (at the Company’s expense) all copies, other than permanent file copies, then in the Investor’s possession of the prospectus covering such Registrable Securities current at the time of receipt of such notice.
(c) The Company’s obligation to file any registration statement or amendment including a post-effective amendment, shall be subject to the Investor, as applicable, furnishing to the Company in writing such information and documents regarding the Investor and the distribution of such Registrable Securities as may reasonably be required to be disclosed in the registration statement in question by the rules and regulations under the Securities Act or under any other applicable securities or blue sky laws of the jurisdiction referred to in Section 3(d) herein.
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(d) If any such registration or comparable statement refers to the Investor by name or otherwise as a stockholder of the Company, but such reference to the Investor by name or otherwise is not required by the Securities Act or the rules thereunder, then each Investor shall have the right to require the deletion of the reference to the Investor, as may be applicable.
(e) In connection with the sale of Registrable Securities, the Investor shall deliver to each purchaser a copy of the necessary prospectus and, if applicable, prospectus supplement, within the time required by Section 5(b) of the Securities Act.
5. Registration Expenses. In connection with any registration of Registrable Securities pursuant to Section 2, the Company shall, whether or not any such registration shall become effective, from time to time, pay all expenses (other than Selling Expenses) incident to its performance of or compliance, including, without limitation, all registration, and filing fees, fees and expenses of compliance with securities or blue sky laws, word processing, printing and copying expenses, messenger and delivery expenses, fees and disbursements of counsel for the Company, transfer agent and stock exchange fees, and all independent public accountants and other Persons retained by the Company (the “Registration Expenses”).
6. Indemnification.
(a) In the event of any registration of any shares of Common Stock under the Securities Act pursuant to this Agreement, the Company shall indemnify and hold harmless each Investor, from and against any losses, claims, damages or liabilities, joint or several, to which each Investor may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or any document incident to registration or qualification of any Registrable Securities pursuant to Section 3(d) herein, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or, with respect to any prospectus, necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or any violation by the Company of the Securities Act, the Exchange Act, or state securities or blue sky laws applicable to the Company and relating to action or inaction required of the Company in connection with such registration or qualification under the Securities Act or such state securities or blue sky laws. If the Company fails to defend the Investor as required by Section 6(c) herein, it shall reimburse (after receipt of appropriate documentation) each Investor for any legal or any other out-of-pocket expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable to an Investor in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said prospectus, or said amendment or supplement or any document incident to registration or qualification of any Registrable Securities pursuant to Section 3(d) hereof in reliance upon and in conformity with written information furnished to the Company by such Investor specifically for use in the preparation thereof or information omitted to be furnished by such Investor or (ii) any act or failure to act of such Investor including the failure of any Investor to deliver a prospectus as required by Section 5(b) of the Securities Act.
(b) In the event of any registration of any Registrable Securities under the Securities Act pursuant to this Agreement, each Investor shall indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 6(a)) the Company, each director of the Company, each officer of the Company who signs such registration statement, the Company’s attorneys and auditors and any Person who controls the Company within the meaning of the Securities Act, with respect to (i) any untrue statement or omission from such registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, if such untrue statement or omission was made solely in reliance upon and in conformity with written information furnished to the Company by such Investor specifically for use in the preparation of such registration statement, preliminary prospectus, final prospectus or amendment or supplement or (ii) from any other act or failure to act of the Investor.
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(c) Promptly after receipt by an indemnified party of notice of the commencement of any action involving a claim referred to in Section 6(a) or (b), such indemnified party shall, if a claim in respect thereof is made against an indemnifying party, give written notice to the Indemnifying Party of the commencement of such action. The indemnifying party shall be relieved of its obligations under this Section 6(c) to the extent that the indemnified party delays in giving notice and the indemnifying party is damaged or prejudiced by the delay. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so as to assume the defense thereof, the indemnifying party shall be responsible for any legal or other expenses subsequently incurred by the indemnifying party in connection with the defense thereof, provided, however, that, if counsel for an indemnified party shall have reasonably concluded that there is an actual or potential conflict of interest between the indemnified and the indemnifying party the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party, and such indemnifying party shall reimburse such indemnified party and any Person controlling such indemnified party for the fees and expenses of counsel retained by the indemnified party which are reasonably related to the matters covered by the indemnity agreement provided in this Section 6; provided, however, that in no event shall any indemnification by an Investor under this Section 6 exceed the net proceeds from the sale of Registered Securities received by the Investor. No indemnified party shall make any settlement of any claims indemnified against hereunder without the written consent of the indemnifying party, which consent shall not be unreasonably withheld. In the event that any indemnifying party enters into any settlement without the written consent of the indemnified party the indemnifying party shall not, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff of a release of such indemnified party from all liability in respect to such claim or litigation.
(d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which under any indemnified party makes a claim for indemnification pursuant to this Section 6, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 6 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required in circumstances for which indemnification is provided under this Section 6; then, in each such case, the Company and such Investor shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject as is appropriate to reflect the relative fault of the Company and such Investor in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, it being understood that the parties acknowledge that the overriding equitable consideration to be given effect in connection with this provision is the ability of one party or the other to correct the statement or omission (or avoid the conduct or take an act) which resulted in such losses, claims, damages or liabilities, and that it would not be just and equitable if contribution pursuant hereto were to be determined by pro-rata allocation or by any other method of allocation which does not take into consideration the foregoing equitable considerations. Notwithstanding the foregoing, (i) no such Investor shall be required to contribute any amount in excess of the net proceeds to him of all Registrable Securities sold by him pursuant to such registration statement, and (ii) no Person who is guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the Securities Act shall be entitled to contribution from any Person who is not guilty of such fraudulent misrepresentation.
(e) Notwithstanding any of the foregoing, if, in connection with an underwritten public offering of the Registrable Securities, the Company, any of the Investor and the underwriters enter into an underwriting agreement relating to such offering which contains provisions covering indemnification among the parties, then the indemnification provision of this Section 6 shall be deemed inoperative for purposes of such offering.
7. Intentionally omitted.
8. Intentionally omitted.
9. Rule 144. The Company covenants that it will file the reports required to be filed under the Securities Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder (or, in the event that the Company is not required to file such reports, it will make publicly available information as set forth in Rule 144(c)(2) promulgated under the Securities Act), and it will take such further action as the Investor may reasonably request, or to the extent required from time to time to enable the Investor to sell their Registrable Securities without registration under the Securities Act within the limitation of the exemption provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission (collectively, “Rule 144”). Upon request of Investor, the Company will deliver to the Investor a written statement as to whether it has complied with such requirements.
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11. Severability. In the event any parts of this Agreement are found to be void, the remaining provisions of this Agreement shall nevertheless be binding with the same effect as though the void parts were deleted.
12. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. The execution of this Agreement may be by actual or facsimile signature.
13. Benefit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their legal representatives, successors and assigns.
14. Notices and Addresses. All notices, offers, acceptance and any other acts under this Agreement (except payment) shall be in writing, and shall be sufficiently given if delivered to the addressees in person, by Federal Express or similar overnight next business day delivery, or by facsimile delivery followed by overnight next business day delivery, as follows:
| To the Company: | Unusual Machines, Inc. |
151 Calle de San Francisco, Ste. 200 PMB 2106
San Juan, PR 00901-1607
Attention: Brandon Torres-Declet, CEO
Email: brandon@unusualmachines.com
| With a Copy to: | Nason, Yeager, Gerson, Harris & Fumero, P.A. |
3001 PGA Boulevard, Suite 305
Palm Beach Gardens, FL 33410
Attention: Michael D. Harris, Esq.
Email: Mharris@nasonyeager.com
| To the Investor: | Red Cat Holdings, Inc. |
15 Ave Munoz Rivera, Suite 2200
San Juan, Puerto Rico 00901
Attention: Joe Freedman, Lead Director
Email: JF@redcat.red
| With a Copy to: | Law Office of Harvey Kesner |
305 Broadway
Suite 700
New York, NY 10007
Attention: Harvey Kesner, Esq.
Harvey@hkesnerlaw.com
or to such other address as any of them, by notice to the other may designate from time to time.
15. Attorneys’ Fees. In the event that there is any controversy or claim arising out of or relating to this Agreement, or to the interpretation, breach or enforcement thereof, and any action or proceeding relating to this Agreement is filed, the prevailing party shall be entitled to an award by the court of reasonable attorneys’ fees, costs and expenses.
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16. Oral Evidence. This Agreement constitutes the entire Agreement between the parties and supersedes all prior oral and written agreements between the parties hereto with respect to the subject matter hereof. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, except by a statement in writing signed by the party or parties against which enforcement or the change, waiver discharge or termination is sought.
17. Additional Documents. The parties hereto shall execute such additional instruments as may be reasonably required by their counsel in order to carry out the purpose and intent of this Agreement and to fulfill the obligations of the parties hereunder. The Company agrees that it shall use it best efforts to require all officers, directors, Series B Preferred Stock stockholders and holders of more than 5% of the of the Company’s common stock immediately prior to the date hereof to execute lock-up agreements required by the Company’s underwriters for the Lock-Up Period in form and substance reasonably satisfactory to the Investor.
18. Governing Law. This Agreement and any dispute, disagreement, or issue of construction or interpretation arising hereunder whether relating to its execution, its validity, the obligations provided herein or performance shall be governed or interpreted according to the internal laws of the State of New York without regard to choice of law considerations.
19. Arbitration. Any controversy, dispute or claim arising out of or relating to this Agreement, or its interpretation, application, implementation, breach or enforcement which the parties are unable to resolve by mutual agreement, shall be settled by submission by either party of the controversy, claim or dispute to binding arbitration in San Juan, Puerto Rico (unless the parties agree in writing to a different location), before a single arbitrator in accordance with the rules of the American Arbitration Association then in effect. In any such arbitration proceeding the parties agree to provide all discovery deemed necessary by the arbitrator. The decision and award made by the arbitrator shall be final, binding and conclusive on all parties hereto for all purposes, and judgment may be entered thereon in any court having jurisdiction thereof.
20. Section or Paragraph Headings. Section headings herein have been inserted for reference only and shall not be deemed to limit or otherwise affect, in any matter, or be deemed to interpret in whole or in part any of the terms or provisions of this Agreement.
21. Force Majure. The Company shall be excused from any delay in performance or for non-performance of any of the terms and conditions of this Agreement caused by any circumstances beyond its control, including, but not limited to, any Act of God, fire, flood, or government regulation, direction or request, or accident, interruption of telecommunications facilities, labor dispute, unavoidable breakdown, civil unrest or disruption to the extent that any such circumstances affect the Company’s ability to perform its obligations under this Agreement or the ability of the Commission to perform its responsibilities under the Securities Act.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed personally or by a duly authorized representative thereof as of the day and year first above written.
THE COMPANY:
UNUSUAL MACHINES, INC.
By:
Brandon Torres-Declet
Chief Executive Officer
INVESTOR:
RED CAT HOLDINGS, INC.
By:
Signature
Printed Name of Investor
Title of Authorized Signatory if Investor
is a corporation or other entity
Signature Page to Registration Rights Agreement
Exhibit 10.5
THE REGISTERED HOLDER OF THIS WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS WARRANT FOR A PERIOD OF ONE HUNDRED EIGHTY DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) MAXIM GROUP LLC OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF MAXIM GROUP LLC OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER.
UNUSUAL MACHINES, INC.
WARRANT
| Warrant No. [ ] | Original Issue Date: [ ], 2023 |
Unusual Machines, Inc., a corporation organized under the laws of Puerto Rico (the “Company”), hereby certifies that, for value received, Maxim Group LLC or its registered assigns (the “Holder”), is entitled to purchase from the Company up to a total of [*] shares of Common Stock (each such share, a “Warrant Share” and all such shares, the “Warrant Shares”), at any time and from time to time from and after the 181st day (the “Commencement Date”) immediately following the Closing Date and through and including the 60 month anniversary of the date of effectiveness of that certain registration statement on Form S-1 (File No. 333-270519), which such date is [*], 2028, which such date shall not be more than five years from the Closing Date.
1. Definitions. As used in this Warrant, the following terms shall have the respective definitions set forth in this Section 1.
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144.
“Business Day” means any day except Saturday, Sunday and any day which is a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
“Closing Date” shall have the meaning ascribed to such term in Section 2(a) of the Underwriting Agreement.
“Common Stock” means the common stock of the Company, $0.01 par value per share, and any securities into which such common stock may hereafter be reclassified or for which it may be exchanged as a class.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Exercise Price” means $[ ], subject to adjustment in accordance with Section 9.
“Fundamental Transaction” means any of the following: (1) the Company effects any merger or consolidation of the Company with or into another Person, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property.
“New York Courts” means the state and federal courts sitting in the City of New York, Borough of Manhattan.
“Original Issue Date” means the Original Issue Date first set forth on the first page of this Warrant.
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“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Rule 144” means Rule 144 promulgated by the Securities and Exchange Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission having substantially the same effect as such Rule.
“Securities Act” means the Securities Act of 1933, as amended.
“Subsidiary” means any “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X promulgated by the Securities and Exchange Commission under the Exchange Act.
“Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market, or (ii) if the Common Stock is not quoted on any Trading Market, a day on which the Common Stock is quoted in the over-the-counter market as reported by the OTC Markets Group, Inc. (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i) or (ii) hereof, then Trading Day shall mean a Business Day.
“Trading Market” means whichever of the New York Stock Exchange, the NYSE MKT, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market, OTC Bulletin Board, or the OTC Markets Group, Inc. OTCQX or OTCQB tier on which the Common Stock is listed or quoted for trading on the date in question.
“Underwriting Agreement” means that certain underwriting agreement dated the date hereof between the Company and the Holder as representative of the underwriters named therein.
“Warrant Shares” means the shares of Common Stock issuable upon exercise of this Warrant.
2. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
3. Transfers. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address specified herein. Upon any such registration of transfer, a new Warrant to purchase Common Stock, in substantially the form of this Warrant (any such new Warrant, a “New Warrant”), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant.
(b) This Warrant may not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the Closing Date.
4. Exercise and Duration of Warrants. This Warrant shall be exercisable by the registered Holder at any time and from time to time from the Commencement Date and through and including the Expiration Date. At 5:30 p.m., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. The Company may not call or redeem any portion of this Warrant without the prior written consent of the affected Holder.
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5. Delivery of Warrant Shares.
(a) To effect exercises hereunder, the Holder shall not be required to physically surrender this Warrant unless the aggregate Warrant Shares represented by this Warrant is being exercised. Upon delivery of the Exercise Notice (in the form attached hereto) to the Company (with the attached Warrant Shares Exercise Log) at its address for notice set forth herein and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, the Company shall promptly (but in no event later than three Trading Days after the Date of Exercise (as defined herein)) issue and deliver to the Holder, a certificate for the Warrant Shares issuable upon such exercise. The Company shall, upon request of the Holder and subsequent to the date on which a registration statement covering the resale of the Warrant Shares has been declared effective by the Securities and Exchange Commission, use its reasonable best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust & Clearing Corporation or another established clearing corporation performing similar functions, if available, provided, that, the Company may, but will not be required to change its transfer agent if its current transfer agent cannot deliver Warrant Shares electronically through the Depository Trust Corporation. A “Date of Exercise” means the date on which the Holder shall have delivered to the Company: (i) the Exercise Notice (with the Warrant Exercise Log attached to it), appropriately completed and duly signed and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased.
(b) If by the third Trading Day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 5(a), then the Holder will have the right to rescind such exercise.
(c) If by the third Trading Day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 5(a), and if after such third Trading Day and prior to the receipt of such Warrant Shares, the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "Buy-In"), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue by (B) the closing bid price of the Common Stock on the Date of Exercise and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In.
(d) The Company’s obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing Warrant Shares upon exercise of the Warrant as required pursuant to the terms hereof.
6. Charges, Taxes and Expenses. Issuance and delivery of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.
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7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity (which shall not include a surety bond), if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition precedent to the Company’s obligation to issue the New Warrant.
8. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of Persons other than the Holder (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly authorized, validly issued and fully paid and nonassessable.
9. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9.
(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination.
(b) Fundamental Transactions. If, at any time while this Warrant is outstanding there is a Fundamental Transaction, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the “Alternate Consideration”). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. At the Holder’s option and request, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant substantially in the form of this Warrant and consistent with the foregoing provisions and evidencing the Holder’s right to purchase the Alternate Consideration for the aggregate Exercise Price upon exercise thereof. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (b) and ensuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.
(c) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to this Section 9, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.
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(d) Calculations. All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.
(e) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company’s Transfer Agent.
(f) Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction (but only to the extent such disclosure would not result in the dissemination of material, non-public information to the Holder) at least 10 calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to ensure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.
10. Payment of Exercise Price. The Holder may pay the Exercise Price in one of the following manners:
(a) Cash Exercise. The Holder may deliver immediately available funds; or
(b) Cashless Exercise. The Holder may notify the Company in an Exercise Notice of its election to utilize cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued to the Holder.
Y = the number of Warrant Shares with respect to which this Warrant is being exercised.
A = the average of the daily volume weighted average price for the five Trading Days immediately prior to (but not including) the Exercise Date.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued.
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11. Limitations on Exercise. Notwithstanding anything to the contrary contained herein, the number of Warrant Shares that may be acquired by the Holder upon any exercise of this Warrant (or otherwise in respect hereof) shall be limited to the extent necessary to ensure that, following such exercise (or other issuance), the total number of shares of Common Stock then beneficially owned by such Holder and its Affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with the Holder’s for purposes of Section 13(d) of the Exchange Act, does not exceed 4.99% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such exercise). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. This provision shall not restrict the number of shares of Common Stock which a Holder may receive or beneficially own in order to determine the amount of securities or other consideration that such Holder may receive in the event of a Fundamental Transaction as contemplated in Section 9 of this Warrant. This restriction may not be waived. Notwithstanding anything to the contrary contained in this Warrant, (a) no term of this Section may be waived by any party, nor amended such that the threshold percentage of ownership would be directly or indirectly increased, (b) this restriction runs with the Warrant and may not be modified or waived by any subsequent holder hereof and (c) any attempted waiver, modification or amendment of this Section will be void ab initio.
12. No Fractional Shares. No fractional shares of Warrant Shares will be issued in connection with any exercise of this Warrant. In lieu of any fractional shares which would, otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the closing price of one Warrant Share as reported by the applicable Trading Market on the date of exercise.
13. Notices. Any and all notices or other communications or deliveries hereunder (including, without limitation, any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 5:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 151 Calle De San Francisco, Ste. 200 PMB 2106, San Juan, Puerto Rico 00901-1607, Attn: Chief Executive Officer, or via email to brandon@unusualmachines.com (or such other address as the Company shall indicate in writing in accordance with this Section), or (ii) if to the Holder, to the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section.
14. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon 10 days’ notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last address as shown on the Warrant Register.
15. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. The foregoing sentence shall be subject to the restrictions on waivers and amendments set forth in Section 11 of this Warrant.
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(b) All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of this Warrant and the transactions herein contemplated (“Proceedings”) (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the New York Courts. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any New York Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Warrant or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of this Warrant, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.
(c) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.
(d) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.
(e) Prior to exercise of this Warrant, the Holder hereof shall not, by reason of being a Holder, be entitled to any rights of a stockholder with respect to the Warrant Shares.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.
| UNUSUAL MACHINES, INC. | |||
| By: | |||
| Name: Brandon Torres Declet | |||
| Title: Chief Executive Officer | |||
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EXERCISE NOTICE
UNUSUAL MACHINES, INC.
WARRANT DATED [ ], 2023
The undersigned Holder hereby irrevocably elects to purchase _____________ shares of Common Stock pursuant to the above referenced Warrant. Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant.
| (1) | The undersigned Holder hereby exercises its right to purchase _________________ Warrant Shares pursuant to the Warrant. |
| (2) | The holder shall pay the sum of $____________ to the Company in accordance with the terms of the Warrant. |
| (3) | Pursuant to this Exercise Notice, the Company shall deliver to the holder _______________ Warrant Shares in accordance with the terms of the Warrant. |
| (4) | By its delivery of this Exercise Notice, the undersigned represents and warrants to the Company that in giving effect to the exercise evidenced hereby the Holder will not beneficially own in excess of the number of shares of Common Stock (determined in accordance with Section 13(d) of the Securities Exchange Act of 1934) permitted to be owned under Section 11 of this Warrant to which this notice relates. |
| Dated: , | Name of Holder: | ||
| (Print) | |||
| By: | |||
| Name: | |||
| Title: | |||
| (Signature must conform in all respects to name of holder as specified on the face of the Warrant) | |||
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Warrant Shares Exercise Log
| Date | Number of Warrant Shares Available to be Exercised |
Number of Warrant Shares Exercised |
Number of Warrant Shares Remaining to be Exercised | |||
|
|
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UNUSUAL MACHINES, INC.
WARRANT DATED [ ], 2023
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the above-captioned Warrant to purchase ____________ shares of Common Stock to which such Warrant relates and appoints ________________ attorney to transfer said right on the books of the Company with full power of substitution in the premises.
Dated: _______________, ____
| (Signature must conform in all respects to name of holder as specified on the face of the Warrant) | |
| Address of Transferee | |
| In the presence of: | |
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Exhibit 10.6
PATENT ASSIGNMENT AND LICENSE BACK ASSIGNOR: UAV Patent Corp. Status: a Nevada corporation Address: 701 S. Carson Street, Suite 200 City: Carson City State/Zip: NV 89701 UMAC IP HOLDINGS Corp. Status: a Florida corporation Address: 3001 PGA Boulevard, Suite 305 City: Palm Beach Gardens State/Zip: FL 33410 ASSIGNEE: PATENTS/PATENT APPLICATION(S): SEE ATTACHED APPENDIX WHEREAS, Assignor owns a number of patents and patent applications including those listed in the attached Appendix and the Subject Matter identified therein (“Subject Matter”), which includes the rights to pursue all causes of action, now in existence or arising in the future resulting from acts of infringement of ( 1 ) any patent within the Assignor’s patents or ( 2 ) any patent issued from a patent application with the Assignor’s patents, before or after the date of this Assignment, including, without limitation, the right to sue and recover for past, present, and future infringement ; and WHEREAS, Assignee desires to acquire all the Assignor’s rights, title and interest in and to the patents and patent applications and the Subject Matter identified therein and to any and all patents which may evolve therefrom ; NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, Assignor does hereby : assign, transfer and set over, unto Assignee, its successors, legal representatives, and assigns, the entire right, title and interest to all patents within the Subject Matter, and all reissues, reexaminations, and extensions thereof ; assign, transfer, and set over, unto Assignee, its successors, legal representatives, and assigns, the entire right, title and interest throughout the world in, to and under all patent applications within the Subject Matter, and all divisions, renewals, and continuations thereof, and all Letters Patents of the United States that may be granted thereof, and all reissues, reexaminations, and extensions thereof, and all rights of priority under International Conventions and applications for Letters Patents that may hereafter be filed claiming priority to the patent applications within the Subject Matter in any country or countries foreign to the United States and all extensions, renewals and reissues thereof ; Page 1 of 6 PATENT ASSIGNMENT AND LICENSE BACK
Page 2 of 6 PATENT ASSIGNMENT AND LICENSE BACK authorize and request the Commissioner of Patents of the United States, and any Official of any country or countries foreign to the United States, whose duty is to issue patents on applications as aforesaid, to issue all Letters Patents for the patent applications within the Subject Matter to Assignee, its successors, legal representatives, and assigns, in accordance with the terms of this Assignment ; and assign, transfer and set over, unto Assignee, its successors, legal representatives, and assigns, the rights to pursue all causes of action, now in existence or arising in the future, resulting from acts of infringement of ( 1 ) any patent within the Subject Matter or ( 2 ) any patent issued from a patent application within the Subject Matter or from a patent application claiming priority to a patent application within the Subject Matter, before or after the date of this Assignment, including, without limitation, the right to sue and recover for past, present, and future infringement . Assignee hereby grants to Assignor a limited, non - transferrable, non - assignable, royalty - free, fully paid - up, perpetual, worldwide, non - exclusive license to (i) all patents listed in the Appendix, and all reissues, reexaminations, and extensions thereof ; (ii) all patent applications listed in the Appendix, and all divisions, renewals, and continuations thereof, and all Letters Patents of the United States or any country or countries foreign to the United States that may be granted thereof, and all reissues, reexaminations, and extensions thereof ; and (iii) all applications for Letters Patents that may hereafter be filed claiming priority to the patent applications listed in the Appendix in any country or countries foreign to the United States and all extensions, renewals, and reissues thereof . Assignor may grant sublicenses only to Affiliates of Red Cat Holdings, Inc . , where an Affiliate is as defined by Section 405 of the Securities Act : “An affiliate of, or person affiliated with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified . ” Assignor represents and warrants that (a) it has the full right, power and authority to enter into this Assignment and to perform its obligations hereunder ; (b) the execution of this Assignment by its representative whose signature is set forth at the end hereof has been duly authorized ; and (c) when executed and delivered, this Assignment will constitute the legal, valid, and binding obligation in accordance with its terms . Assignor agrees to execute any papers or perform any acts required to establish, vest or protect the Assignee’s rights therein and required by Assignee to obtain said Subject Matter, without any additional payment therefor, but without any expense to the Assignor .
Page 3 of 6 PATENT ASSIGNMENT AND LICENSE BACK This Patent Assignment and License Back may be executed in one or more counterparts, each of which shall be deemed an original and all of which may be taken together as one and the same . UAV PATENT CORP. Date: By: Title: Officer STATE OF COUNTY OF ) ) Before me this day of 2023 , personally appeared the above named individual, to me known to be the person described in, and who executed the foregoing assignment instrument and acknowledge to me that he executed the same on his own free will for the purpose therein expressed . Notary Public (Notary Stamp) Commission Expires Personally known or Product Identification Type of Identification Produced UMAC IP HOLDINGS Corp. Date: By: Title: Officer STATE OF COUNTY OF ) ) Before me this day of 2023 , personally appeared the above named individual, to me known to be the person described in, and who executed the foregoing assignment instrument and acknowledge to me that he executed the same on his own free will for the purpose therein expressed . Notary Public (Notary Stamp) Commission Expires Personally known or Product Identification Type of Identification Produced
Page 4 of 6 PATENT ASSIGNMENT AND LICENSE BACK APPENDIX Filing Date Country Status Issue Date Application No. Patent No. Type Title 7/13/2017 U.S. Issued 8/14/2018 29/610,543 D825,381 Design UNMANNED AERIAL VEHICLE 1/11/2018 Canada Issued 5/30/2019 179088 D179088 Design UNMANNED AERIAL VEHICLE 1/11/2018 China Issued 8/3/2018 201830008387.4 201830008387.4 Design UNMANNED AERIAL VEHICLE 1/12/2018 Europe Issued 1/12/2018 004665040 - 0001 004665040 - 0001 Design UNMANNED AERIAL VEHICLE 1/12/2018 United Kingdom Issued 1/12/2018 90046650400001 90046650400001 Design UNMANNED AERIAL VEHICLE 1/11/2018 Korea Issued 7/3/2018 30 - 2018 - 1689 30 - 0963991 Utility DRONE 8/23/2017 U.S. Issued 1/15/2019 15/684,814 10,179,647 Utility UNMANNED AERIAL VEHICLE 6/26/2018 Canada Abandoned Abandoned 3009413 Abandoned Abandoned UNMANNED AERIAL VEHICLE 8/8/2018 China Pending Pending 201810895541.3 Pending Utility UNMANNED AERIAL VEHICLE 6/25/2018 Europe Pending Pending EP18176512.1 Pending Utility UNMANNED AERIAL VEHICLE 7/13/2017 U.S. Issued 5/14/2019 29/610,554 D848,383 Design PRINTED CIRCUIT BOARD 1/11/2018 Canada Issued 5/30/2019 179089 D179089 Design PRINTED CIRCUIT BOARD
Page 5 of 6 PATENT ASSIGNMENT AND LICENSE BACK 1/11/2018 China Issued 8/3/2018 201830008497.7 201830008494.7 Design PRINTED CIRCUIT BOARD 1/12/2018 Europe Issued 1/12/2018 004665032 - 0001 004665032 - 0001 Design PRINTED CIRCUIT BOARD 1/12/2018 United Kingdom Issued 1/12/2018 90046650320001 90046650320001 Design PRINTED CIRCUIT BOARD 1/11/2018 Korea Issued 7/13/2018 3020180001690 30 - 0965570 Design PRINTED CIRCUIT BOARD 6/7/2018 U.S. Issued 10/27/2020 16/002,200 10/819,973 Utility SINGLE - PANEL - HEAD MOUNTED DISPLAY 4/12/2018 China Issued 11/19/2021 201810324925.X 201810324925.X Utility SINGLE - PANEL - HEAD MOUNTED DISPLAY 3/4/2019 Europe Pending Pending EP19159958.8 Pending Utility SINGLE - PANEL - HEAD - MOUNTED DISPLAY 2/28/2021 U.S. Published Pending 17/187,838 Pending Utility APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST - PERSON VIEW HEADSET 3/6/2020 China Pending Pending 202010150301.8 Pending Utility EQUIPMENT FOR ATTACHING ATTACHMENTS TO A FIRST - VIEW HEADSET 5/17/2021 U.S. Pending Pending 29/783,966 Pending Design HEADSET
Page 6 of 6 PATENT ASSIGNMENT AND LICENSE BACK 5/17/2021 Hague International Patent Claiming Canada, EU, UK and Japan Issued 5/17/2021 DM218069 DM218069 Design HEADSET 11/11/2021 China Pending Pending 202130741102.X Pending Design HEADSET
Exhibit 10.7
TRADEMARK ASSIGNMENT ASSIGNOR: UAV Patent Corp. Status: a Nevada corporation Address: 701 S. Carson Street, Suite 200 City: Carson City State/Zip: NV 89701 UMAC IP HOLDINGS Corp. Status: a Florida corporation Address: 3001 PGA Boulevard, Suite 305 City: Palm Beach Gardens State/Zip: FL 33410 ASSIGNEE: TRADEMARK/SERVICE MARK(S): SEE ATTACHED APPENDIX The Assignor having used, filed for, and/or obtained registration of the Trademark(s) set forth in the attached Appendix, and the Assignee being desirous of acquiring the same ; in consideration of good and valuable consideration, the receipt of which is hereby acknowledged, the Assignor hereby assigns to the Assignee, including their successors, assigns, heirs, administrators, all of the Assignor's right, title and interest and goodwill associated with the Trademark(s), and all common law rights and other rights therein, including any applications and registrations which may evolve or have evolved therefrom, including the right to prepare derivative marks ; and including, without limitation, the right to sue and collect damages for any past infringement thereof . The Assignor further assigns all right, title and interest in and to said Trademark(s) in all foreign countries, and all applications for Trademark Registration in foreign countries and any registrations which may evolve or have evolved therefrom, including the right to claim International Convention priority ; and The Assignor agrees to execute any papers or perform any acts required to establish, vest or protect the Assignee's rights therein or required by Assignee to obtain said Trademarks, without any additional payment therefor, but without any expense to Assignor . The Assignee grants to the Assignor and to any Affiliate(s) of Red Cat Holdings, Inc . that are using the Trademark(s) as of the earlier date of execution of this Trademark Assignment (“the Trademark - Using Affiliate(s)”) a temporary, limited, non - transferrable, non - assignable, royalty - free, fully paid - up, worldwide, non - exclusive license to the Trademark(s) . This license shall allow the Assignor and the Trademark - Using Affiliates to continue only their current use of the Trademark(s) during a sunset period . This license shall expire six months after the later date of execution of this Trademark Assignment . As used herein, an Affiliate is as defined by Section 405 of the Securities Act : “An affiliate of, or person affiliated with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified . ” Page 1 of 3 Trademark Assignment
Page 2 of 3 Trademark Assignment This Trademark Assignment may be executed in one or more counterparts, each of which shall be deemed an original and all of which may be taken together as one and the same. UAV PATENT CORP. Date: By: Title: Officer STATE OF COUNTY OF ) ) Before me this day of 2023 , personally appeared the above named individual, to me known to be the person described in, and who executed the foregoing assignment instrument and acknowledge to me that he executed the same on his own free will for the purpose therein expressed . Notary Public (Notary Stamp) Commission Expires Personally known or Product Identification Type of Identification Produced UMAC IP HOLDINGS Corp. Date: By: Title: Officer STATE OF COUNTY OF ) ) Before me this day of 2023 , personally appeared the above named individual, to me known to be the person described in, and who executed the foregoing assignment instrument and acknowledge to me that he executed the same on his own free will for the purpose therein expressed . Notary Public (Notary Stamp) Commission Expires Personally known or Product Identification Type of Identification Produced
APPENDIX Country Mark Reg. No. Class United States ROTOR RIOT 5,175,159 16, 25, 35, 41 Australia ROTOR RIOT 1814854 16, 25, 35, 41 Canada ROTOR RIOT TMA1013525 16, 25, 35, 41 European Union ROTOR RIOT 016152688 16, 25,35, 41 United Kingdom ROTOR RIOT UK00916152688 16, 25, 35, 41 United States 5,175,160 16, 25, 35, 41 Australia 1814855 16, 25, 35, 41 Canada TMA1013624 16, 25 ,35 ,41 European Union 016152837 16, 25 ,35, 41 United Kingdom UK00916152837 16, 25 ,35, 41 Page 3 of 3 Trademark Assignment
Exhibit 10.8
NON-COMPETITION AGREEMENT
This Non-Competition Agreement (the “Agreement”) is entered into as of _____ __, 2023 (the “Effective Date”) by and among Unusual Machines, Inc., a Puerto Rico corporation (“Unusual”), Rotor Riot, LLC, an Ohio limited liability company (“Rotor Riot”) and Fat Shark Holdings, Ltd, a Nevada corporation (collectively, the “Restricted Parties”) and Red Cat Holdings, Inc., a Nevada corporation (“Red Cat”) The Restricted Parties and Red Cat are collectively referred to herein as the “Parties”) for all purposes under this Agreement.
WHEREAS, on November 21, 2022, Unusual, Red Cat, and Jeffrey Thompson, entered into a share purchase agreement (as amended, the Purchase Agreement) for the purchase and sale of Rotor Riot and Fat Shark from Red Cat to Unusual;
WHEREAS, pursuant to the Purchase Agreement, the consummation of the Acquisition is conditioned upon the execution and delivery of this Agreement by the Restricted Parties.
NOW, THEREFORE, in consideration of the Parties agreeing to consummate the Acquisition and for other good and valuable consideration, the Parties hereby agree as follows:
1. Non-Competition Agreement.
(a) Non-Competition with Red Cat. For a period commencing with the Effective Date continuing for a period of 5 years (the “Restricted Period”), the Restricted Parties hereby agree to restrict its activities and shall not design, manufacture, market, import, build or sell any Group 1 or Group 2 UAV drone (as defined below) to customers which are a Governmental Authority (as defined below) and/or any third-party intermediary to customers which are a Governmental Authority, without the prior written consent of Red Cat. As used in this Agreement, a “Group 1 UAV” drone is defined as a small, lightweight unmanned system (such as the Teal 2 and RQ-11 Raven drones) weighing up to 20 pounds that are designed for operation at lower altitudes (capable of reaching up to 1,200 feet above ground level at speeds of less than 100 knots. As used in this Agreement, a “Group 2 UAV” drone is defined as drones that weigh between 21 and 55 pounds (such as the RQ-7 Shadow) and are designed for medium range missions, capable of reaching altitudes up to 3,500 feet above ground level and fly at speed less than 250 knots. As used in this Agreement, “Governmental Authority” means any customer, national, state, municipal, local, or foreign government, any instrumentality, subdivision, court, administrative agency or commission, or other governmental authority, or any quasi-governmental or private body exercising any regulatory or other governmental or quasi-governmental authority.
(b) Unusual shall be entitled to be paid 10% of net collected revenue as and when collected for sales made by Teal Drones Inc. or any successor or affiliated company of Teal (“Teal”) referred by Unusual (a “UMAC Referral”) for sales of Group 1 or Group 2 UAV drones to a Government Authority not previously in contact with Teal and Unusual shall be obligated during the Restricted Period to refer all such opportunities to Teal during the Restricted Period.
Such referral fees shall be payable to Unusual after the expiration of the Restricted Period if Teal continues to sell Group 1 UAV or Group 2 UAV drones to a third party that was a UMAC Referral.
2. Non-Solicitation. For the duration of the Restricted Period, each Restricted Party agrees that such party will not induce any employee of Red Cat to leave the employ of Red Cat, nor shall such party use or disclose to any person, partnership, entity, association, or corporation any information concerning the names, addresses or personal telephone numbers of any employees of Red Cat. This shall not apply to employees of the Restricted Parties or in response to a general public solicitation that a Red Cat employee responds to through no breach of this Agreement by the Restricted Parties.
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3. Non-Solicitation of Customers, Vendors, and Business Partners or Consultants. For the duration of the Restricted Period, each Restricted Party agrees that such party will not do business with, consult with or in any manner attempt directly or indirectly to influence, induce, or encourage any customer, vendor, business partner, or consultant of Red Cat to reduce or materially change its business relationship with Red Cat or solicit the business of any client or customer of Red Cat .
4. Equitable Relief.
(a) The Restricted Parties recognize that the restrictive covenants pursuant to Sections 1, 2 and 3 under this Agreement by the Restricted Parties are special, unique and of extraordinary character, and that in the event of the breach by of the terms and conditions of this Agreement or if any Restricted Party shall or take any action in violation of Section 1, 2 and/or Section 3, Red Cat shall be entitled to, in addition to any other remedy which may be available at law or in equity, specific performance and injunctive relief without posting a bond or proving actual damages, in order to prevent any actual, intended or likely breach.
(b) Any action arising from or under this Agreement must be commenced only in accordance with Section 7. Each Restricted Party irrevocably waives any objection that they now have or hereafter may have to the laying of venue of any suit, action or proceeding brought in any such court and further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment against any Restricted in any such suit shall be conclusive and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and the amount of any liability of such Restricted therein described, or by appropriate proceedings under any applicable treaty or otherwise.
5. Defined Terms. Capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Purchase Agreement.
6. Governing Law. This Agreement and all Legal Proceedings (whether based on contract, tort, or statute) arising out of, relating to, or in connection with this Agreement or the actions of any of the Parties hereto in the negotiation, administration, performance, or enforcement hereof, shall be governed by and construed in accordance with the internal Laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of Laws of any jurisdiction other than those of the State of New York.
7. Submission to Jurisdiction. Each of the Parties hereto irrevocably agrees that any Legal Proceeding (as defined below) with respect to this Agreement and the rights and obligations arising hereunder, or for recognition and enforcement of any judgment in respect of this Agreement and the rights and obligations arising hereunder brought by any other Party hereto or its successors or assigns shall be brought and determined exclusively in the federal or state court located in New York County, New York. Each of the Parties hereto hereby irrevocably submits with regard to any such Legal Proceeding for itself and in respect of its property, generally and unconditionally, to the personal jurisdiction of the aforesaid courts and agrees that it will not bring any Legal Proceeding relating to this Agreement or any of the transactions contemplated by this Agreement in any court or tribunal other than the aforesaid courts. Each of the Parties hereto hereby irrevocably waives, and agrees not to assert, by way of motion, as a defense, counterclaim, or otherwise, in any Legal Proceeding with respect to this Agreement and the rights and obligations arising hereunder, or for recognition and enforcement of any judgment in respect of this Agreement and the rights and obligations arising hereunder: (a) any claim that it is not personally subject to the jurisdiction of the above named courts for any reason; (b) any claim that it or its property is exempt or immune from jurisdiction of any such court or from any legal process commenced in such courts (whether through service of notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise); and (c) to the fullest extent permitted by the applicable Law, any claim that (i) the suit, action, or proceeding in such court is brought in an inconvenient forum, (ii) the venue of such suit, action, or proceeding is improper, or (iii) this Agreement, or the subject matter hereof, may not be enforced in or by such courts. As used un this Agreement, “Legal Proceeding” means any action, suit, litigation, proceeding (including any civil proceeding), hearing, claim, commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Authority .
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8. Notices and Addresses. All notices, offers, acceptance and any other acts under this Agreement shall be in writing, and shall be sufficiently given if delivered in accordance with Section 12.07 of the Purchase Agreement.
9. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. The execution of this Agreement may be by actual or facsimile signature.
10. Severability. If any term or provision of this Agreement is invalid, illegal, or unenforceable in any jurisdiction, such invalidity, illegality, or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal, or unenforceable, the Parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.
11. Entire Agreement. This Agreement constitutes the entire Agreement between the parties and supersedes all prior oral and written agreements between the parties hereto with respect to the subject matter hereof. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, except by a statement in writing signed by the party or parties against which enforcement or the change, waiver discharge or termination is sought.
12. Section and Paragraph Headings. The section and paragraph headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
13. Amendment. This Agreement shall not be amended, modified or supplemented at any time or terminated without the consent of all parties to the Agreement and the prior written consent of Parties.
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date above.
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UNUSUAL MACHINES, INC. a Puerto Rico corporation
By: _______________________________ Name: Brandon Torres Declet, Title: Chief Executive Officer
FAT SHARK HOLDINGS, LTD. a Nevada corporation
By: _______________________________ Name: Brandon Torres Declet, Title: Chief Executive Officer
ROTOR RIOT, LLC an Ohio limited liability company
By: _______________________________ Name: Brandon Torres Declet, Title: Managing Member
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RED CAT HOLDINGS, INC. a Nevada corporation
By: _______________________________ Name: Joe Freedman Title: Lead Director
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Exhibit 10.10
January 12, 2023
Brandon Torres Declet
4408 29th St NW
Washington DC 20008
Re: Offer Letter for the Position of Chief Executive Officer at Unusual Machines, Inc.
Dear Brandon,
We are pleased to offer you the position of Chief Executive Officer and Chairman of the Board for Unusual Machines, Inc. ("Company") commencing January 1, 2023 (the "Effective Date"), reporting directly to the Company's Board of Directors. This letter, if accepted by you, sets forth our agreement regarding the material terms and conditions of your employment by the Company and may be referred to as the Employment Agreement. It is subject to review by the Board or Brandon Torres Declet upon the SEC finding the S-1 effective.
1. Responsibilities. As a key player in the Company's growth, you will be responsible for managing all aspects of the Company as its Chief Executive Officer and Chairman of the Board.
2. Indemnification. The Company shall, to the maximum extent permitted by law, indemnify, defend and hold you harmless from and against any claims that be asserted against you based upon any actions and/or decisions you make during the course and scope of your employment which are taken or made in good faith in carrying our job duties and responsibilities. To the same extent, the Company will pay, and subject to any legal limitations, advance to you all expenses, including reasonable attorneys' fees and costs, actually and necessarily incurred by you in connection with the defense of any action, suit or proceeding and in connection with any appeal, which has been brought against you by reason of your service as an officer or agent of the Company.
3. Compensation and Benefits
3.1 Salary. You will be compensated at the rate of $250,000 per year in base salary paid in accordance with the Company's normal payroll schedule and processes.
3.2 Performance Bonus. You will be eligible to earn an annual bonus of 50% of your annual base salary (the "Performance Bonus"), which will be prorated based on your start date. Within 30 days of your start date, you will work with the Board of Directors to agree upon and draft key performance indicators ("KPIs") upon which your annual Performance Bonus will be based. Annual Performance Bonuses will be paid to you within 120 days of the fiscal year end or upon the determination of your achievement of the KPIs by the Board of Directors, whichever is sooner.
3.3 Benefits. You will have the same comprehensive employee benefits package enjoyed by all the C-suite executives of the Company, including group medical and dental insurance, and the 401(k) program, subject to the eligibility requirements of each such plan. You will be reimbursed for all health insurance costs you incur prior to implementation of the new Company benefits plans.
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3.4 Equity Grant. Subject to Board approval, you will be granted restricted stock units (RSUs) under the Company's equity incentive plan, which RSUs will represent 1% of the issued and outstanding capital stock of the Company on a fully diluted basis as of the grant date. You may be granted up to 7% of the issued and outstanding capital stock pending board approval and the Board will meet to make an additional grant prior to the company IPO. The RSUs will be granted to you no later than 30 days following the earlier of (i) the closing of the Rotor Riot, LLC and Fat Shark Holdings, Ltd. acquisition transactions, or (ii) the date on which the Company reasonably determines that the acquisition transactions will not proceed to closing. Twenty-five percent (25%) of the RSUs will vest on the 12-month anniversary of your employment start date, twenty-five percent (25%) of the RSUs will vest on the 24-month anniversary of your employment start date, twenty-five percent (25%) of the RSUs will vest on the 36-month anniversary of your employment start date, and the remaining twenty-five percent (25%) of the RSUs will vest on the 48-month anniversary of your employment start date.
3.5 Acquisition Bonus / Capital Raise Bonus. You are eligible for cash and equity bonuses upon each successful acquisition completed by the Company. Upon each successful acquisition completed by the Company, you will receive a bonus in an amount up to $125,000 (the "Acquisition Bonus"). Each Acquisition Bonus shall be paid in a lump sum within 30 days following a determination of eligibility by the Board of Directors. You will also be eligible for a bonus of $125,000 upon the completion of a capital raise event (e.g., a secondary offering on the NASDAQ, a private placement offering, an at-the-marked ("ATM") offering, a private investment in public equity ("PIPE") offering, etc.) (the "Capital Raise Bonus"). The Capital Raise Bonus shall be paid in a lump sum within 30 days following a determination of eligibility by the Board of Directors.
3.6 Vacation. Our Company offers unlimited paid vacation. You will work with the Board of Directors in advance to coordinate expected time-off.
3.7 Severance Benefits. See Section 5.3 below.
4. At-Will Employment. Subject to the provisions of this Section 4, your employment with the Company is for no specified period and is considered to be at-will. You are free to resign your employment at any time, for any reason or for no reason, and the Company is free to terminate its employment relationship with you at any time, with or without any reason.
4.1 Termination by Mutual Agreement. This Employment Agreement, and your employment hereunder, may be terminated at any time upon the mutual written agreement of you and the Company.
4.2 Termination due to Death or Disability. This Employment Agreement and your employment hereunder will terminate automatically upon your death and may be terminated by the Company in the event of your Disability. For purposes of this Employment Agreement, "Disability" means a physical or mental disability that prevents you from performing your duties hereunder, with or without reasonable accommodation, lasting for a period of one hundred (100) consecutive days or for a period of one hundred twenty-five (125) days in any twelve-month period.
4.3 Termination by the Company. The Company may terminate this Employment Agreement and your employment hereunder with or without Cause. For purposes of this Agreement, "Cause" means: (i) your refusal, or failure, to perform your material duties under this Employment Agreement that are (A) consistent with your role as Chief Executive Officer, and (B) not illegal or unethical, which refusal or failure continues for a period of thirty (30) days after you have received written notice from the Company describing in reasonable detail the material duties you have refused or failed to perform and the cure requested by the Company, provided your right to cure will not apply if the circumstances and consequences of your refusal or failure to perform do not permit a reasonable cure; (ii) you have engaged in willful misconduct or gross negligence, or have breached any fiduciary duty, with respect to the Company; (iii) you have been convicted of, or you have entered a plea of guilty or nolo contendere to, a felony, or any other criminal offense involving moral turpitude; (iv) you have committed any other act or omission involving dishonesty, disloyalty or fraud, which has caused, or is reasonably expected to cause, significant economic harm to the Company; or (v) you have committed a material breach of this Employment Agreement or a material written policy of the Company to which you are subject or any other material written agreement between you and the Company, which is not reasonably cured by you within thirty (30) days of your receipt of a written notice from the Company describing in reasonable detail the violation or breach and the cure requested by the Company. In any instance where advanced notice and an opportunity to cure is required according to the foregoing terms, the Company must give notice no later than 30 days after the Company becomes aware of the relevant act or omission, and it must terminate your employment no later than 90 days after such date by delivering a Notice of Termination in accordance with Section 4.5 below.
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4.4 Termination by You. You may terminate this Employment Agreement and your employment hereunder with or without Good Reason. For purposes of this Employment Agreement, "Good Reason" means the occurrence of any of the following events without your prior written consent: (i) any reduction in your base salary, (ii) any material diminution in your authorities, titles or offices, or the assignment to you of duties that materially impair your ability to perform the duties normally assigned to a Chief Executive Officer, (iii) any change in your reporting structure so that you report to someone other than to the Company's Board of Directors; (iv) a request by the Company that you relocate so that you can perform your job duties and responsibilities from a location other than your current home office; or (v) any material breach by the Company of the Employment Agreement or any other material written agreement between you and the Company (including for the avoidance of doubt, any equity documents); so long as (A) written notice, in reasonable detail, describing the event constituting Good Reason (the "Good Reason Event") has been delivered to the Company within 30 days after you first become aware of the Good Reason Event, (B) the Company has been given 30 days after receipt of such written notice to cure such Good Reason Event (and, if the Company cures such Good Reason Event within such 30-day period, there shall be no Good Reason for termination), and (C) you terminate this Employment Agreement and your employment hereunder within 90 days following the date your first became aware of such Good Reason Event by delivering a Notice of Termination in accordance with Section 4.5 below.
4.5 Notice of Termination. Any termination of this Employment Agreement and your employment hereunder, other than by reason of your death, shall be communicated by the party terminating this Employment Agreement to the other party by written Notice of Termination. For purposes of this Employment Agreement, a "Notice of Termination" means a written notice that (i) indicates the specific provision in this Employment Agreement being relied upon for such termination, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the termination of your employment under the provision so indicated, and (iii) specifies the Date of Termination (as defined below). The failure by you or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Cause or Good Reason, respectively, shall not waive any right that you or the Company has hereunder or preclude your or the Company from asserting such fact or circumstance in enforcing your or the Company's rights hereunder.
5. Compensation and other Benefits Upon Termination.
5.1 Termination upon the Mutual Agreement of the Parties; Termination as a Result of Your Death or Disability; Termination by the Company for Cause; Termination by You for a Reason other than Good Reason. Upon the termination of your employment pursuant to Section 4.1 [termination upon the mutual agreement of the parties], Section 4.2 [termination as a result of your death or disability], Section 4.3 [termination by the Company for Cause], or Section 4.4 [termination by you for a reason other than Good Reason], you shall be entitled to receive (1) any base salary earned but unpaid as of the date of termination, (2) any Performance Bonus, Acquisition Bonus and/or Capital Raise Bonus which has been earned and determined as of the date of termination but not yet paid, and (3) any authorized business expenses that were incurred but not reimbursed as of the date of termination.
5.2 Termination by the Company without Cause; Termination by You for Good Reason. In the event the Company terminates your employment without Cause pursuant to Section 4.3 above, or in the event you terminate your employment for Good Reason pursuant to Section 4.4 above, you shall be entitled to receive (1) any base salary earned but unpaid as of the date of termination, (2) any Performance Bonus, Acquisition Bonus and/or Capital Raise Bonus which has been earned and determined as of the date of termination but not yet paid, and (3) any authorized business expenses that were incurred but not reimbursed as of the date of termination. In addition, you will be entitled to receive the following severance benefits:
5.2.1 You will be entitled to severance pay equal to six (6) months of your base salary as of the date of your termination. The severance will be paid in the form of salary continuation during the six-month period immediately following your termination pursuant to the Company's normal payroll schedule and practices.
5.2.2 The Company will reimburse you for your COBRA premiums during the six (6) month period immediately following your employment termination date.
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5.2.3 The vesting of your unvested RSUs will be accelerated such that 50% of your RSUs that were not yet vested immediately prior to your employment termination date will be deemed fully vested as of your employment termination date.
6. Other Conditions
6.1 The Company will furnish you a laptop and cell phone where all your Company business is expected to be transacted. No use of personal laptop or cell phone is permitted.
6.2 Your duties are expected to include extensive travel to achieve the objectives of the Company. This may be self-initiated travel or at the direction of the Board of Directors.
As a condition of employment, you agree to sign this Employment Agreement no later than the January 31, 2023.
I look forward to your decision regarding your new position at the Company and I am confident that the relationship will be a mutually rewarding one. Please let me know your decision in due time. In addition, please indicate your acceptance of the terms and conditions set forth in this Employment Agreement by signing and returning. Thanks!
Regards,
Unusual Machines, Inc.
/s/ Tom Walker
Tom Walker
Chair, Compensation Committee
Unusual Machines, Inc.
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AGREED AND ACCEPTED
Brandon Torres Declet
By:____________________
Date:___________________________
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Exhibit 10.10(a)
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
This AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this “Amendment”), dated _____ __, 2023, is by and among Unusual Machines, Inc., a Puerto Rico corporation (the “Company”) and Bandon Torres Declet, an individual, (the “Executive,” and together with the Company, the “Parties”).
WHEREAS, the Parties entered into an Employment Agreement as of January12, 2023 (the “Agreement”); and
WHEREAS, the Parties desire to amend the Agreement to (A) reflect a revision to increase the Executive’s salary upon the consummation of the Company’s initial public offering (the “Offering”), (B) increase the percentage of RSUs and change the vesting terms of the RSUs, (C) add pertaining to Section 409A compliance, (D) add a non-compete provision and (E) add a governing law and jurisdiction provision.
NOW, THEREFORE, the Parties, each intending to be legally bound hereby, do mutually covenant and agree as follows:
1. All capitalized terms herein shall have the meaning ascribed to such terms in the Agreement.
2. Section 3.1 of the Agreement is hereby amended and restated as follows:
“Section 3.1 Salary.
“You will be compensated at the rate of $250,000 per year in base salary paid in accordance with the Company's normal payroll schedule and processes. Upon the consummation of the Offering your base salary will be increased to $300,000 per year.”
3. Section 3.4 is hereby amended and restated as follows:
| • | “3.4 Equity Grant. Subject to Board approval, you will be granted restricted stock units (RSUs) under the Company's equity incentive plan, which RSUs will represent 1% of the issued and outstanding capital stock of the Company on a fully diluted basis as of the grant date. You will be granted 7% (in lieu of the 1%) of the issued and outstanding capital stock pending board approval and the Board simultaneously with the consummation of the Offering. The RSUs will be granted to you no later than 30 days following the earlier of (i) the closing of the Rotor Riot, LLC and Fat Shark Holdings, Ltd. acquisition transactions, or (ii) the date on which the Company reasonably determines that the acquisition transactions will not proceed to closing. 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.” |
4. Section 5.2.3 of the Agreement is hereby amended and restated as follows:
“5.2.3 The vesting of your unvested RSUs will be accelerated such that 100% of your RSUs that were not yet vested immediately prior to your employment termination date will be deemed fully vested as of your employment termination date.”
5. In the event of any conflict between the Agreement and this Amendment, the terms as contained in this Amendment shall control. In all other respects the Agreement is hereby ratified and confirmed.
6. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be one and the same agreement. Facsimile and electronic signatures shall be treated in all respects and for all purposes as originals.
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7. A new Section 7. is added to the Agreement as follows:
“7. . Section 409A Compliance.
(a) This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), or an exemption thereunder. This Agreement shall be construed and administered in accordance with Section 409A. Notwithstanding any other provision of this Agreement to the contrary, payments provided under this Agreement may only be made upon an event and in a manner that complies with Section 409A or an applicable exemption. Any payments under this Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation from service (including a voluntary separation from service for good reason that is considered an involuntary separation for purposes of the separation pay exception under Treasury Regulation 1.409A-1(n)(2)) or as a short-term deferral shall be excluded from Section 409A to the maximum extent possible. For purposes of Section 409A, each installment payment provided under this Agreement shall be treated as a separate payment. Any payments to be made under this Agreement upon a termination of employment shall only be made if such termination of employment constitutes a “separation from service” under Section 409A. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Agreement comply with Section 409A and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest, or other expenses that may be incurred by the Executive on account of non-compliance with Section 409A.
(b) Notwithstanding any other provision of this Agreement, if at the time of the Executive's termination of employment, the Executive is a "specified employee", determined in accordance with Section 409A, any payments and benefits provided under this Agreement that constitute "nonqualified deferred compensation" subject to Section 409A (e.g., payments and benefits that do not qualify as a short-term deferral or as a separation pay exception) that are provided to the Executive on account of the Executive’s separation from service shall not be paid until the first payroll date to occur following the six-month anniversary of the Executive's termination date ("Specified Employee Payment Date"). The aggregate amount of any payments that would otherwise have been made during such six-month period shall be paid in a lump sum on the Specified Employee Payment Date without interest and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule. If the Executive dies during the six-month period, any delayed payments shall be paid to the Executive's estate in a lump sum upon the Executive's death.
(c) To the extent required by Section 409A, each reimbursement or in-kind benefit provided under this Agreement shall be provided in accordance with the following:
(1) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during each calendar year cannot affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year;
(2) any reimbursement of an eligible expense shall be paid to the Executive on or before the last day of the calendar year following the calendar year in which the expense was incurred; and
(3) any right to reimbursements or in-kind benefits under this Agreement shall not be subject to liquidation or exchange for another benefit.
(d) In the event the Company determines that the Executive is a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code at the time of the Executive’s separation from service, then to the extent any payment or benefit that the Executive becomes entitled to under this Agreement on account of the Executive’s separation from service would be considered deferred compensation subject to Section 409A as a result of the application of Section 409A(a)(2)(B)(i) of the Code, such payment shall not be payable and such benefit shall not be provided until the date that is the earlier of (i) six months and one day after the Executive’s separation from service, or (ii) the Executive’s death (the “Six Month Delay Rule”).
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(1) For purposes of this subparagraph, amounts payable under the Agreement should not provide for a deferral of compensation subject to Section 409A to the extent provided in Treasury Regulation Section 1.409A-1(b)(4) (e.g., short-term deferrals), Treasury Regulation Section 1.409A-1(b)(9) (e.g., separation pay plans, including the exception under subparagraph (iii)), and other applicable provisions of the Treasury Regulations.
(2) To the extent that the Six Month Delay Rule applies to payments otherwise payable on an installment basis, the first payment shall include a catch-up payment covering amounts that would otherwise have been paid during the six-month period but for the application of the Six Month Delay Rule, and the balance of the installments shall be payable in accordance with their original schedule.
(3) To the extent that the Six Month Delay Rule applies to the provision of benefits (including, but not limited to, life insurance and medical insurance), such benefit coverage shall nonetheless be provided to the Executive during the first six months following his separation from service (the “Six Month Period”), provided that, during such Six-Month Period, the Executive pays to the Company, on a monthly basis in advance, an amount equal to the Monthly Cost (as defined below) of such benefit coverage. The Company shall reimburse the Executive for any such payments made by the Executive in a lump sum not later than 30 days following the sixth month anniversary of the Executive’s separation from service. For purposes of this subparagraph, “Monthly Cost” means the minimum dollar amount which, if paid by the Executive on a monthly basis in advance, results in the Executive not being required to recognize any federal income tax on receipt of the benefit coverage during the Six Month Period.
(e) The parties intend that this Agreement will be administered in accordance with Section 409A. To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A, the provision shall be read in such a manner so that all payments hereunder comply with Section 409A. The parties agree that this Agreement may be amended, as reasonably requested by either party, and as may be necessary to fully comply with Section 409A and all related rules and regulations in order to preserve the payments and benefits provided hereunder without additional cost to either party.
(f) The Company makes no representation or warranty and shall have no liability to the Executive or any other person if any provisions of this Agreement are determined to constitute deferred compensation subject to Section 409A but do not satisfy an exemption from, or the conditions of, such Section.”
8. A new Section 8 is added to the Agreement as follows:
“Section 8. Non-compete. For a period of 12 months after the Employee is no longer employed by the Company, the Employee 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 the Employee's 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. The parties acknowledge that this Section may not be waived by the Company without the consent of Red Cat Holdings, Inc.”
.9. A new Section 9. is added to the Agreement as follows:
“9. Governing Law and Jurisdiction. This Agreement shall be governed or interpreted according to the internal laws of the State of New York without regard to choice of law considerations and all claims relating to or arising out of this Agreement, or the breach thereof, whether sounding in contract, tort, or otherwise, shall also be governed by the laws of the State of New York without regard to choice of law considerations. Any action arising from or under this Agreement must be commenced only in the appropriate state or federal court located in New York County, New York. The Executive and the Company irrevocably and unconditionally submit to the exclusive jurisdiction of such courts and agree to take any and all future action necessary to submit to the jurisdiction of such courts. The Executive and the Company irrevocably waive any objection that they now have or hereafter may have to the laying of venue of any suit, action or proceeding brought in any such court and further irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment against the Executive or the Company in any such suit shall be conclusive and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and the amount of any liability of the Executive or the Company therein described, or by appropriate proceedings under any applicable treaty or otherwise.”
[Signature Page to Follow]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.
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UNUSUAL MACHINES, INC. a Puerto Rico corporation
By: _______________________________ Name: Tom Walker Title: Chair, Compensation Committee
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EXECUTIVE:
__________________________ Brandon Torres Declet |
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Exhibit 10.11(a)
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
This AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this “Amendment”), dated _____ __, 2023, is by and among Unusual Machines, Inc., a Puerto Rico corporation (the “Company”) and Brian Hoff , an individual, (the “Executive,” and together with the Company, the “Parties”).
WHEREAS, the Parties entered into an Employment Agreement as of January12, 2023 (the “Agreement”); and
WHEREAS, the Parties desire to amend the Agreement to (A) increase the percentage of RSUs and change the vesting terms of the RSUs, and (B) add pertaining to Section 409A compliance.
NOW, THEREFORE, the Parties, each intending to be legally bound hereby, do mutually covenant and agree as follows:
1. All capitalized terms herein shall have the meaning ascribed to such terms in the Agreement.
2. Section 3.4 is hereby amended and restated as follows:
| • | “3.4 Equity Grant. Subject to Board approval, you will be granted restricted stock units (RSUs) under the Company's equity incentive plan, which RSUs will represent 1% of the issued and outstanding capital stock of the Company on a fully diluted basis as of the grant date. You will be granted 3% (in lieu of the 1%) of the issued and outstanding capital stock pending board approval and the Board simultaneously with the consummation of the the Company’s initial public offering (the “Offering”). The RSUs will be granted to you no later than 30 days following the earlier of (i) the closing of the Rotor Riot, LLC and Fat Shark Holdings, Ltd. acquisition transactions, or (ii) the date on which the Company reasonably determines that the acquisition transactions will not proceed to closing. 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.” |
3. Section 5.2.3 of the Agreement is hereby amended and restated as follows:
“5.2.3 The vesting of your unvested RSUs will be accelerated such that 100% of your RSUs that were not yet vested immediately prior to your employment termination date will be deemed fully vested as of your employment termination date.”
4. In the event of any conflict between the Agreement and this Amendment, the terms as contained in this Amendment shall control. In all other respects the Agreement is hereby ratified and confirmed.
5. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be one and the same agreement. Facsimile and electronic signatures shall be treated in all respects and for all purposes as originals.
6. A new Section 7 is added to the Agreement as follows:
“7. Section 409A Compliance.
(a) This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), or an exemption thereunder. This Agreement shall be construed and administered in accordance with Section 409A. Notwithstanding any other provision of this Agreement to the contrary, payments provided under this Agreement may only be made upon an event and in a manner that complies with Section 409A or an applicable exemption. Any payments under this Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation from service (including a voluntary separation from service for good reason that is considered an involuntary separation for purposes of the separation pay exception under Treasury Regulation 1.409A-1(n)(2)) or as a short-term deferral shall be excluded from Section 409A to the maximum extent possible. For purposes of Section 409A, each installment payment provided under this Agreement shall be treated as a separate payment. Any payments to be made under this Agreement upon a termination of employment shall only be made if such termination of employment constitutes a “separation from service” under Section 409A. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Agreement comply with Section 409A and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest, or other expenses that may be incurred by the Executive on account of non-compliance with Section 409A.
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(b) Notwithstanding any other provision of this Agreement, if at the time of the Executive's termination of employment, the Executive is a "specified employee", determined in accordance with Section 409A, any payments and benefits provided under this Agreement that constitute "nonqualified deferred compensation" subject to Section 409A (e.g., payments and benefits that do not qualify as a short-term deferral or as a separation pay exception) that are provided to the Executive on account of the Executive’s separation from service shall not be paid until the first payroll date to occur following the six-month anniversary of the Executive's termination date ("Specified Employee Payment Date"). The aggregate amount of any payments that would otherwise have been made during such six-month period shall be paid in a lump sum on the Specified Employee Payment Date without interest and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule. If the Executive dies during the six-month period, any delayed payments shall be paid to the Executive's estate in a lump sum upon the Executive's death.
(c) To the extent required by Section 409A, each reimbursement or in-kind benefit provided under this Agreement shall be provided in accordance with the following:
(1) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during each calendar year cannot affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year;
(2) any reimbursement of an eligible expense shall be paid to the Executive on or before the last day of the calendar year following the calendar year in which the expense was incurred; and
(3) any right to reimbursements or in-kind benefits under this Agreement shall not be subject to liquidation or exchange for another benefit.
(d) In the event the Company determines that the Executive is a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code at the time of the Executive’s separation from service, then to the extent any payment or benefit that the Executive becomes entitled to under this Agreement on account of the Executive’s separation from service would be considered deferred compensation subject to Section 409A as a result of the application of Section 409A(a)(2)(B)(i) of the Code, such payment shall not be payable and such benefit shall not be provided until the date that is the earlier of (i) six months and one day after the Executive’s separation from service, or (ii) the Executive’s death (the “Six Month Delay Rule”).
(1) For purposes of this subparagraph, amounts payable under the Agreement should not provide for a deferral of compensation subject to Section 409A to the extent provided in Treasury Regulation Section 1.409A-1(b)(4) (e.g., short-term deferrals), Treasury Regulation Section 1.409A-1(b)(9) (e.g., separation pay plans, including the exception under subparagraph (iii)), and other applicable provisions of the Treasury Regulations.
(2) To the extent that the Six Month Delay Rule applies to payments otherwise payable on an installment basis, the first payment shall include a catch-up payment covering amounts that would otherwise have been paid during the six-month period but for the application of the Six Month Delay Rule, and the balance of the installments shall be payable in accordance with their original schedule.
(3) To the extent that the Six Month Delay Rule applies to the provision of benefits (including, but not limited to, life insurance and medical insurance), such benefit coverage shall nonetheless be provided to the Executive during the first six months following his separation from service (the “Six Month Period”), provided that, during such Six-Month Period, the Executive pays to the Company, on a monthly basis in advance, an amount equal to the Monthly Cost (as defined below) of such benefit coverage. The Company shall reimburse the Executive for any such payments made by the Executive in a lump sum not later than 30 days following the sixth month anniversary of the Executive’s separation from service. For purposes of this subparagraph, “Monthly Cost” means the minimum dollar amount which, if paid by the Executive on a monthly basis in advance, results in the Executive not being required to recognize any federal income tax on receipt of the benefit coverage during the Six Month Period.
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(e) The parties intend that this Agreement will be administered in accordance with Section 409A. To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A, the provision shall be read in such a manner so that all payments hereunder comply with Section 409A. The parties agree that this Agreement may be amended, as reasonably requested by either party, and as may be necessary to fully comply with Section 409A and all related rules and regulations in order to preserve the payments and benefits provided hereunder without additional cost to either party.
(f) The Company makes no representation or warranty and shall have no liability to the Executive or any other person if any provisions of this Agreement are determined to constitute deferred compensation subject to Section 409A but do not satisfy an exemption from, or the conditions of, such Section.”
7. A new Section 9. is added to the Agreement as follows:
“9. Governing Law and Jurisdiction. This Agreement shall be governed or interpreted according to the internal laws of the State of New York without regard to choice of law considerations and all claims relating to or arising out of this Agreement, or the breach thereof, whether sounding in contract, tort, or otherwise, shall also be governed by the laws of the State of New York without regard to choice of law considerations. Any action arising from or under this Agreement must be commenced only in the appropriate state or federal court located in New York County, New York. The Executive and the Company irrevocably and unconditionally submit to the exclusive jurisdiction of such courts and agree to take any and all future action necessary to submit to the jurisdiction of such courts. The Executive and the Company irrevocably waive any objection that they now have or hereafter may have to the laying of venue of any suit, action or proceeding brought in any such court and further irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment against the Executive or the Company in any such suit shall be conclusive and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and the amount of any liability of the Executive or the Company therein described, or by appropriate proceedings under any applicable treaty or otherwise.”
[Signature Page to Follow]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.
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UNUSUAL MACHINES, INC. a Puerto Rico corporation
By: _______________________________ Name: Tom Walker Title: Chair, Compensation Committee
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EXECUTIVE:
_________________________Brian Hoff |
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Exhibit 10.12
LOCK-UP AGREEMENT
[___], 2023
Maxim Group LLC
300 Park Avenue, 16th Floor
New York, NY 10022
| Re: | Unusual Machines, Inc. |
Ladies and Gentlemen:
As an inducement to Maxim Group LLC, as representative of the underwriters (the “Representative”), to execute an underwriting agreement (the “Underwriting Agreement”) providing for a public offering (the “Offering”) of shares of the common stock (“Common Stock”), par value $0.01 per share (the “Shares” or the “Securities”), of Unusual Machines, Inc., a Puerto Rico corporation (the “Company”), the undersigned hereby agrees that without, in each case, the prior written consent of the Representative, during the period specified in the second succeeding paragraph (the “Lock-Up Period”), the undersigned will not: (1) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, any Shares or any securities convertible into, exercisable or exchangeable for or that represent the right to receive Shares (including, without limitation, Shares which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and securities which may be issued upon exercise of warrants or a stock option) whether now owned or hereafter acquired (the “Undersigned’s Securities”) or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Undersigned’s Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Shares or such other securities, in cash or otherwise. The foregoing restriction is expressly agreed to preclude the undersigned from engaging in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Undersigned’s Securities even if such Undersigned’s Securities would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include, without limitation, any short sale or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any of the Undersigned’s Securities or with respect to any security that includes, relates to, or derives any significant part of its value from such Undersigned’s Securities.
In addition, the undersigned agrees that, without the prior written consent of the Representative, it will not, during the Lock-Up Period, make any demand for or exercise any right with respect to, the registration of any Shares or any security convertible into or exercisable or exchangeable for Shares other than as contemplated in the registration statement relating to the Offering.
The Lock-Up Period shall mean the period commencing on the date of this Lock-Up Agreement and continue and include the date one hundred and eighty (180) days after the date of the final prospectus used to sell Shares in the Offering pursuant to the Underwriting Agreement.
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Notwithstanding the foregoing shall not apply to: (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 this 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 Undersigned’s Relevant Securities subject to this Lock-Up Agreement shall remain subject to the restrictions herein.
In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of Shares if such transfer would constitute a violation or breach of this Lock-Up Agreement.
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Agreement and that, upon request, the undersigned will execute any additional documents necessary in connection with the enforcement hereof. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.
The undersigned understands that the undersigned shall be released from all obligations under this Lock-Up Agreement if (i) the Company or the Representative informs the other that it does not intend to proceed with the Offering, (ii) the Underwriting Agreement does not become effective or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the common stock to be sold thereunder, or (iii) the Offering is not completed by September 30, 2023.
The undersigned understands that the Representative is entering into the Underwriting Agreement and proceeding with the Offering in reliance upon this Lock-Up Agreement.
This Lock-Up Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.
Whether or not the Offering actually occurs depends on a number of factors, including market conditions. Any Offering will only be made pursuant to the Underwriting Agreement, the terms of which are subject to negotiation among the parties thereto.
[Signature page follows]
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Very truly yours, |
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| (Name - Please Print) | |
| (Signature) |
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Exhibit 10.13
LOCK-UP AGREEMENT
[___], 2023
Maxim Group LLC
300 Park Avenue, 16th Floor
New York, NY 10022
| Re: | Unusual Machines, Inc. |
Ladies and Gentlemen:
As an inducement to Maxim Group LLC, as representative of the underwriters (the “Representative”), to execute an underwriting agreement (the “Underwriting Agreement”) providing for a public offering (the “Offering”) of shares of the common stock (“Common Stock”), par value $0.01 per share (the “Shares” or the “Securities”), of Unusual Machines, Inc., a Puerto Rico corporation (the “Company”), the undersigned hereby agrees that without, in each case, the prior written consent of the Representative, during the period specified in the second succeeding paragraph (the “Lock-Up Period”), the undersigned will not: (1) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, any Shares or any securities convertible into, exercisable or exchangeable for or that represent the right to receive Shares (including, without limitation, Shares which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and securities which may be issued upon exercise of warrants or a stock option) whether now owned or hereafter acquired (the “Undersigned’s Securities”) or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Undersigned’s Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Shares or such other securities, in cash or otherwise. The foregoing restriction is expressly agreed to preclude the undersigned from engaging in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Undersigned’s Securities even if such Undersigned’s Securities would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include, without limitation, any short sale or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any of the Undersigned’s Securities or with respect to any security that includes, relates to, or derives any significant part of its value from such Undersigned’s Securities.
In addition, the undersigned agrees that, without the prior written consent of the Representative, it will not, during the Lock-Up Period and the Extended Lockup Period (as defined below), make any demand for or exercise any right with respect to, the registration of any Shares or any security convertible into or exercisable or exchangeable for Shares other than as contemplated in the registration statement relating to the Offering.
With respect to all shares other than the Security Shares (as defined below), the Lock-Up Period shall mean the period commencing on the date of this Lock-Up Agreement and continue and include the date one hundred and eighty (180) days after the date of the final prospectus used to sell Shares in the Offering pursuant to the Underwriting Agreement.
Reference is made to that certain Securities Purchase Agreement dated November 21, 2022, as amended (the SPA”) by and among Red Cat Holdings, Inc. (“RC”), the Company and the undersigned Jeffrey Thompson (the “Principal Stockholder”). Upon the expiration of the Lock-Up Period, shares of the Company’s common stock valued at $500,000 based on the price per share in the Offering (the “Security Shares”) shall remain locked-up subject to this Lock-Up Agreement for an additional ninety (90) days, or for such longer period until there is a Settled Claim or resolution of a Disputed Claim (each as defined below) (the “Extended Lock-Up Period”) to provide security for RC’s and the Principal Stockholder’s indemnification obligations in Article VII of the SPA including, without limitation, in connection with a breach of any representation and warranty made by RC or the Principal Stockholder. For avoidance of the doubt, if the price per share of the Offering is $5.00 per share, the Security Shares will be 100,000 shares of the Company’s common stock.
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If the Company has not asserted a claim for an Indemnified Loss (as defined below) and provided the Principal Stockholder with written evidence of such claim prior to the 9 months anniversary of the date hereof (the “Termination Date”), then the Security Shares shall be released from this Lock-Up Agreement. “Indemnified Loss” means any and all actions, suits, proceedings, demands, liabilities, damages, claims, deficiencies, fines, penalties, interest, assessments, judgments, losses, Taxes, costs and expenses, including, without limitation, reasonable fees and disbursements of counsel with respect to a Claim under Article VII of the SPA.
If the Company has asserted a claim for an Indemnified Loss and provided the Principal Stockholder with written evidence of such claim prior to the Termination Date, then the Security Shares shall remain locked-Up during the Extended Lock-Up Period until the claim is settled (a “Settled Claim”). Following the date of any Settled Claim(s); the balance of any Security Shares (after cancelling any Security Shares based on the value of any such Settled Claim(s) shall be released from this Lock-Up Agreement. If the Principal Stockholder disputes any such claim(s) (a, “Disputed Claim”), the Security Shares shall remain subject to the Extended Lock-Up Period until a court of competent jurisdiction shall resolve this such Disputed Claim(s) with a non-appealable judgment (the “Settled Disputed Claim”). Following the date of any Settled Disputed Claim(s); the balance of any Security Shares (after cancelling any Security Shares based on the value of any such Settled Disputed Claim(s) shall be released from this Lock-Up Agreement.
Notwithstanding the foregoing shall not apply to: (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 this 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 Undersigned’s Relevant Securities subject to this Lock-Up Agreement shall remain subject to the restrictions herein.
In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of Shares if such transfer would constitute a violation or breach of this Lock-Up Agreement.
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Agreement and that, upon request, the undersigned will execute any additional documents necessary in connection with the enforcement hereof. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.
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The undersigned understands that the undersigned shall be released from all obligations under this Lock-Up Agreement if (i) the Company or the Representative informs the other that it does not intend to proceed with the Offering, (ii) the Underwriting Agreement does not become effective or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the common stock to be sold thereunder, or (iii) the Offering is not completed by September 30, 2023.
The undersigned understands that the Representative is entering into the Underwriting Agreement and proceeding with the Offering in reliance upon this Lock-Up Agreement. The undersigned also acknowledges that with respect to the provisions pertaining to the Security Shares, the Extended Lock-Up Period and related provisions the Company is intended to be a third party beneficiary of this Agreement.
This Lock-Up Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.
Whether or not the Offering actually occurs depends on a number of factors, including market conditions. Any Offering will only be made pursuant to the Underwriting Agreement, the terms of which are subject to negotiation among the parties thereto.
[Signature page follows]
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Very truly yours, |
|
| Jeffrey Thompson | |
| (Signature) |
Agreed to and Accepted:
Unusual Machines, Inc.
By:________________________________
Name: Brandon Torres Declet
Title: Chief Executive Officer
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Exhibit 10.14
UNUSUAL MACHINES, INC.
Audit Committee Charter
Members
Chair (Independent Board Member)
Member Name 1
Member Name 2
Purpose
The Audit Committee (the “Committee”) is appointed by the Board of Directors of Unusual Machines, Inc. to assist the Board in its oversight of: (1) the integrity of the financial statements of the Company, (2) the independent auditor’s qualifications and independence, (3) the performance of the Company’s internal audit function and independent auditors, and (4) the compliance by the Company with legal and regulatory requirements. References in this Charter to the “Company” shall be to Unusual Machines, Inc. and its consolidated subsidiaries, unless the context requires otherwise.
The Committee shall prepare a report required by the rules of the Securities and Exchange Commission (the “Commission”) to be included in the Company’s proxy statement for the Annual Meeting of Stockholders.
Committee Membership
At the first meeting of the Board of Directors following each Annual Meeting of Stockholders, the Board, after receiving the recommendations of the Corporate Governance and Nominating Committee, shall appoint the members of the Committee and shall determine the Chairperson of the Committee. Because each serves at the pleasure of the Board, Committee members shall not have a fixed term. The Committee shall consist of no fewer than three members, including the Chairperson. Each member of the Committee shall meet the independence and experience requirements of the listing standards of the NYSE American and the independence requirements of Section 10A(m)(3) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules of the Commission thereunder. The Board shall periodically determine (i) whether each Committee member meets such independence and experience requirements and (ii) whether any member of the Committee is an “audit committee financial expert” as defined by the rules and regulations of the Commission. Committee members may not accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the Company other than in their capacity as a Director.
Procedures
The Committee shall meet as often as it determines necessary, but not less than four times a year. The Committee shall meet periodically with management, the senior internal auditing executive, and the independent auditor in separate executive sessions. The Committee may request any officer or associate of the Company, the Company's outside counsel, or independent auditor to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee. After the Committee meets or otherwise takes action, it shall, as soon as practicable, make a report of its activities at a meeting of the Board.
The Committee may form and delegate authority to subcommittees when the Committee determines it is necessary or appropriate.
Committee Responsibilities and Authority
The Committee shall have the authority, to the extent it deems necessary or appropriate, to conduct investigations and to retain independent legal, accounting, or other advisors. The Committee may authorize and direct the payment of compensation by the Company to the independent auditor for the purpose of preparing or issuing an audit report or for other services and to any advisors employed by the Committee as well as the payment of ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.
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The Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Corporate Governance and Nominating Committee. The Committee shall annually evaluate the Committee’s own performance and share findings in an evaluation report with the Corporate Governance and Nominating Committee.
Oversight of the Company’s Relationship with the Independent Auditor
The Committee shall be directly responsible for the appointment, compensation, retention, and oversight of the work of the independent auditor employed by the Company for the purpose of preparing or issuing an audit report or performing other audit, review, or attestation services (including resolution of disagreements between management and the independent auditor regarding financial reporting). The independent auditor shall report directly to the Committee.
The independent auditor may be engaged by the Company to perform audit services and, to the extent permitted by applicable Federal securities laws and rules thereunder, non-audit services, in each case only where the Committee has preapproved each such service, subject to the de minimum exception for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act. The Committee may either approve such audit and non-audit services or adopt preapproval policies and procedures provided that the policies and procedures are detailed as to the particular service provided, and the Committee is informed of each such service. As a part of such policies and procedures, the Committee may delegate authority to subcommittees consisting of one or more members to grant preapprovals of audit and permitted non-audit services.
The Committee shall establish policies for the Company’s hiring of associates or former associates of the independent auditor.
The Committee shall obtain and review a report from the independent auditor, at least annually, regarding: (a) the independent auditor's internal quality-control procedures; (b) any material issues raised by the most recent internal quality control review or peer review of the firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out by the firm; (c) any steps taken to deal with any such issues; and (d) all relationships between the independent auditor and the Company. After reviewing the foregoing report and the independent auditor’s work during the year, the Committee shall evaluate the qualifications, performance, and independence of the independent auditor, taking into account the opinions of management and the senior internal auditing executive. As a part of that evaluation, the Committee shall review and evaluate the performance and qualifications of the lead partner of the independent auditor.
The Committee shall, as appropriate, discuss with management the timing and process for the rotation of the lead audit partner, the concurring partner, and any other active audit engagement team partner and consider whether, to assure continuing auditor independence, it is appropriate to rotate the independent auditing firm.
The Committee shall meet with the independent auditor prior to the audit to discuss the planning and staffing of the audit.
Financial Statement and Disclosure Matters
The Committee shall review and discuss with management and the independent auditor, prior to filing the Company's Form 10-K with the Commission, the annual audited financial statements, including the specific disclosures made under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and recommend to the Board whether the audited financial statements should be included in the Company’s Form 10-K.
The Committee shall review and discuss with management and the independent auditor, prior to filing the Company's Form 10-Q with the Commission, the quarterly financial statements, including disclosures made under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the results of the independent auditor’s review of the quarterly financial statements.
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The Committee shall periodically review and discuss with management and the independent auditor: (a) any major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies; (b) analyses prepared by management and/or the independent auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements; and (c) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company.
The Committee shall review and discuss with management and the independent auditor reports from the independent auditor on:
| a) | All critical accounting policies and practices to be used; | |
| b) | All alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor; and | |
| c) | Other material written communications between the independent auditor and management, such as any management letter or schedule of unadjusted differences. |
The Committee shall review and discuss with management the Company’s earnings press releases as well as financial information and earnings guidance provided to analysts and rating agencies. Such discussion may be done generally (i.e., discussion of the types of information to be disclosed and the type of presentation to be made). The Committee need not discuss in advance each earnings release or each instance in which the Company may provide earnings guidance.
The Committee shall review and discuss with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk management policies. This would include, among other matters, evaluating risk in the context of financial policies, counterparty and credit risk, and the appropriate mitigation of risk, including through the use of insurance where appropriate.
The Committee shall annually discuss with the independent auditor the matters required to be discussed by Auditing Standard No. 16, Communications with Audit Committees, including any difficulties encountered in the course of the audit work, any restrictions on the scope of activities or access to requested information, and any significant disagreements with management. The discussion shall address, to the extent applicable, any accounting adjustments that were noted or proposed by the independent auditor but were “passed” (as immaterial or otherwise), any communications between the audit team and the auditor’s national office with respect to auditing or accounting issues presented by the engagement, and any “management” or “internal control” letter issued, or proposed to be issued, by the independent auditor.
The Committee shall review disclosures made to the Committee by the Company’s chief executive officer and chief financial officer during their certification process for the Form 10-K and Form 10-Q about significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting and any fraud involving management or other associates who have a significant role in the Company’s internal control over financial reporting. The Committee shall review with management, the senior internal auditing executive, and the independent auditor, as appropriate, attestations and reports by the independent auditor on internal control over financial reporting.
Oversight of the Company’s Internal Audit Function
The Committee shall review with management the appointment and replacement of the senior internal auditing executive and shall annually evaluate his or her performance. The Committee shall provide the senior internal auditing executive with access to communicate personally and directly with the members of the Audit Committee at any time on any auditing or internal control matter.
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The Committee shall review with the senior internal auditing executive the significant reports to management prepared by the internal auditing department and management’s responses.
The Committee shall review with the senior internal auditing executive, the independent auditor, and management the internal audit department responsibilities, budget and staffing, and the internal audit plan for the coming year.
Compliance Oversight Responsibilities
The Committee shall obtain from the independent auditor assurance that Section 10A(b) of the Exchange Act (relating to reports by the independent auditor made to the Company of illegal acts discovered) has not been implicated.
The Committee shall establish procedures for the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by associates or other interested persons of concerns regarding questionable accounting or auditing matters.
The Committee shall discuss with management and the independent auditor any correspondence with regulators or governmental agencies and any published reports made known to the Company executive officers that raise material issues regarding the Company’s financial statements or accounting policies.
The Committee shall discuss with the Company’s General Counsel any significant legal, compliance, or regulatory matters that may have a material impact on the financial statements or the Company’s compliance policies.
Other
The Committee shall meet periodically, but no less than annually, with the Company’s chief executive officer (“CEO”) regarding the CEO’s assessment of the Company’s compliance and ethics risks, the effectiveness of the Company’s Corporate Compliance Program, and any other compliance-related matters that either the Committee or the CEO deems appropriate. The Committee shall provide the CEO with access to communicate personally and directly with the members of the Audit Committee at any time on any matter of compliance and ethics. The Committee shall oversee the administration and enforcement of the Company’s Code of Ethics and Corporate Compliance programs.
The Committee shall be responsible for any other matters expressly delegated to the Committee by the Board occasionally.
Limitation of Committee’s Role
While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to determine that the Company’s financial statements and disclosures are complete and accurate and are in accordance with generally accepted accounting principles and applicable rules and regulations. Those are the responsibilities of the management team and of the independent auditor.
Effective as of June __, 2023.
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Exhibit 10.15
UNUSUAL MACHINES, INC.
Compensation Committee Charter
Members
Chair -
Member Name 1
Member Name 2
Purpose
The Compensation Committee (the "Committee") is appointed by the Board of Directors of Unusual Machines, Inc. to discharge the Board's responsibilities relating to compensation of the Company's executives and other compensation matters. References in this Charter to the "Company" shall be to Unusual Machines, Inc. and its consolidated subsidiaries unless the context requires otherwise.
The Committee shall prepare a report required by the rules and regulations of the Securities and Exchange Commission to be in the Company's proxy statement for its Annual Meeting of Stockholders.
Committee Membership
At the first meeting of the Board following each Annual Meeting of Stockholders, the Board, after receiving the recommendations of the Corporate Governance and Nominating Committee, shall appoint the members of the Committee and shall determine the Chairperson of the Committee, each to serve at the pleasure of the Board. Committee members shall not have a fixed term. The Committee shall consist of no fewer than three members, including the Chairperson. Each member of the Committee shall be independent under the listing standards of the NYSE American.
In accordance with the NYSE American listing standards, in determining the independence of Committee members, the Board shall consider all factors specifically relevant to determining whether a Committee member has a relationship to the Company which is material to that Committee member's ability to be independent from management in connection with the duties of a Committee member, including, but not limited to:
| a) | the source of compensation of such Committee member, including any consulting, advisory or other compensatory fee paid by the Company to such Committee member; and | |
| b) | whether such Committee member is affiliated with the Company, a subsidiary of the Company or an affiliate of a subsidiary of the Company. |
Procedures
The Committee shall meet as often as it determines necessary, but not less than four times a year. The Committee may request any officer or associate of the Company to attend a meeting of the Committee or to meet with any compensation or other consultant to the Committee. After the Committee meets or otherwise takes action, it shall, as soon as practicable, make a report of its activities at a meeting of the Board.
The Committee may form and delegate authority to subcommittees when determined by the Committee to be necessary or appropriate.
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Committee Responsibilities and Authority
The Committee shall have the authority, to the extent it deems necessary or appropriate, to conduct investigations and to retain compensation consultants, independent legal counsel or other advisers in connection with its responsibilities. The Committee may authorize and direct the payment of compensation by the Company to any such compensation consultants, independent legal counsel or other advisers and the payment of ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.
The Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Corporate Governance and Nominating Committee. The Committee shall annually evaluate the Committee's own performance and share such evaluation with the Corporate Governance and Nominating Committee.
General Compensation Oversight
Compensation Strategy: Periodically, the Committee shall review the compensation strategy of the Company in consultation with the chief executive officer and its effect on the achievement of Company goals. The Committee shall annually review the compensation of the chief executive officer, other executive officers and to the extent the Committee deems appropriate, other associates. The Committee shall review market and industry data as it deems necessary for evaluating compensation.
Administration of Plans: The Committee shall administer, and/or where appropriate oversee the administration of, executive and equity compensation plans and such other compensation and benefit plans as it deems appropriate, subject, however, to the Board's authority to also appoint other committees to administer awards made to non-executive officers. In administering the plans, the Committee may make awards, determine eligible participants, modify plans, impose limitations and conditions and take such other actions as it deems appropriate.
Stock Ownership Guidelines: The Committee shall establish and periodically review stock ownership guidelines for the officers of the Company.
Compensation and Benefit Plans: Periodically, the Committee shall review and make recommendations to the Board with respect to the adoption of compensation and benefit plans. Provided, however, the Committee shall have full authority on behalf of the Company to adopt, amend or terminate any compensation or benefit plan as it deems appropriate, including but not limited to equity based plans and the related issuance of stock, other than Director plans. The Committee shall report all significant plan adoptions; modifications or terminations it makes to the Board. This provision shall not limit any other delegation of authority to adopt, amend, or terminate plans.
Perquisites: Periodically, the Committee shall review and modify, or make recommendations to the Board regarding, the perquisites and benefits for the chief executive officer and other associates, as appropriate.
Management
Succession Plan: The Committee shall develop, in consultation with the chief executive officer, a management succession plan to be discussed at least annually with the Board. In the event of a vacancy in the position of chief executive officer, the Committee shall make a recommendation to the Board.
Evaluation of Management: The Committee shall oversee the evaluation of management.
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Consultants
The Committee shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, independent legal counsel or other adviser retained by the Committee. The Committee may select a compensation consultant, legal counsel or other adviser to the Committee only after taking into consideration all factors relevant to that person's independence from management, including the following:
| a) | The provision of other services to the Company by the person that employs the compensation consultant, legal counsel or other adviser; | |
| b) | The amount of fees received from the Company by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser; | |
| c) | The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest; | |
| d) | Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the Committee; | |
| e) | Any stock of the Company owned by the compensation consultant, legal counsel or other adviser; and | |
| f) | Any business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an executive officer of the Company. |
Other
The Committee shall be responsible for any other matters expressly delegated to the Committee by the Board from time to time.
Effective as of June __, 2023.
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Exhibit 10.16
UNUSUAL MACHINES, INC.
Corporate Governance & Nominating Committee Charter
Members
Chair (Independent Board Member) –
Member Name 1
Member Name 2
Purpose
The Corporate Governance and Nominating Committee (the “Committee”) is appointed by the Board of Directors of Unusual Machines, Inc. to (1) identify individuals qualified to serve as members of the Board of Directors and, where appropriate, recommend individuals to be nominated by the Board of Directors for election by the stockholders or to be appointed by the Board of Directors to fill vacancies consistent with the criteria approved by the Board; (2) develop and periodically review and assess a set of corporate governance guidelines applicable to the Company and make appropriate recommendations to the Board for adoption and, where appropriate, modification of such principles; (3) recommend to the Board of Directors the compensation of directors; (4) take a leadership role in shaping the corporate governance of the Company; and (5) oversee an annual evaluation of the performance of the Board of Directors. References in this charter to the “Company” shall be to Unusual Machines, Inc., and its consolidated subsidiaries unless the context requires otherwise.
Committee Membership
At the first meeting of the Board of Directors following each annual meeting of stockholders, the Board, after receiving the recommendations of the Committee, shall appoint the members of the Committee and shall determine the chairperson of the Committee, each to serve at the pleasure of the Board. Committee members shall not have fixed terms. The Committee shall consist of no fewer than three members, including the chairperson. Each member of the Committee shall be independent under the listing standards of the NYSE American.
Procedures
The Committee shall meet as often as it determines but not less than four times a year. The Committee may request any officer or associate of the Company to attend a meeting of the Committee or to meet with any director search firm it employs. After the Committee meets or otherwise takes action, it shall, as soon as practicable, make a report of its activities at a meeting of the Board.
The Committee may form and delegate authority to subcommittees when the Committee determines it necessary or appropriate to do so.
Committee Authority and Responsibilities
The Committee shall have the authority, to the extent it deems necessary or appropriate, to conduct investigations and retain compensation or other consultants as well as to search firms for director candidates. The Committee may authorize and direct the payment of compensation by the Company to any such firm and the payment of ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties. The Committee shall review and reassess the adequacy of this charter annually and recommend any proposed changes to the Board. The Committee shall annually evaluate the Committee's own performance.
Directors
Board Candidates: The Committee shall identify candidates who are eligible under the qualification standards set forth in the corporate governance guidelines to serve as members of the Board of Directors and, after consultation with the chairman of the Board, recommend candidates to be nominated by the Board of Directors for election by the stockholders or to be appointed by the Board of Directors to fill vacancies. In evaluating a director in anticipation of nomination for reelection to the Board, the Committee shall review the director’s independence.
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Review of Board Membership Criteria: Periodically, the Committee shall review the Board’s criteria for selecting new directors and nominating incumbent directors for reelection as set forth in the Company’s Corporate Governance Guidelines and recommend to the Board appropriate changes.
Operation of the Board
Size and Structure of the Board and Election of Directors: Periodically, the Committee will evaluate and make recommendations to the Board of Directors concerning the size and structure of the Board and Committees thereof as well as the manner of election of directors.
Compensation of Directors: On an annual basis the Committee shall review the compensation of the directors, including benefits, for their service as directors and make a recommendation to the Board. The Board/Committee shall also monitor the amount of compensation proposed to be paid to any director and its effect on director independence.
Committees: Periodically, the Committee shall evaluate and make recommendations to the Board regarding the nature and duties of the Board’s committees. The Committee shall be responsible, after consultation with the chairman of the Board and other directors, for recommending to the Board the assignment of Board members to various committees and, where applicable, the designation of chairpersons.
Corporate Governance of the Company
General Corporate Governance: The Committee shall periodically review corporate governance trends and, where appropriate, make recommendations about the governance of the Company to the Board of Directors.
Governing Documents: Periodically, the Committee shall review the Company’s principal corporate governance documents, including the certificate of incorporation, bylaws, and committee charters, and make appropriate recommendations to the Board for modifications in such documents.
Corporate Governance Guidelines: The Committee shall develop, and periodically review in order to recommend to the Board changes in, a set of corporate governance guidelines and a code of ethics applicable to directors, officers, and associates. The Committee shall recommend to the Board guidelines for determining director independence. The Committee shall oversee director orientation and education programs.
Board Evaluations: Through a formal survey or other appropriate means, the Committee shall lead the Board through an annual self-evaluation to determine whether it and its committees are functioning effectively. As soon as possible following completion of each annual self-evaluation, the Committee shall report the results of the self-evaluation to the Board.
Other
The Committee shall be responsible for any other matters expressly delegated to the Committee by the Board from time to time.
Effective as of June __, 2023
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Exhibit 10.17
Unusual Machines, Inc.
Code of Ethics
Introduction
This Code of Ethics (the “Code”) of Unusual Machines, Inc. (the “Company”) covers a wide spectrum of business practices and procedures. They do not cover every issue that may arise, but they set out some basic principles to guide all directors, officers, employees and certain selected consultants of the Company1. We expect all of our directors, officers, employees and those consultants to comply with them and to seek to avoid even the appearance of improper behavior. This Code should also be provided to and followed by the Company’s agents and representatives, including consultants.
If a law conflicts with a policy in this Code, you must comply with the law. If you have any questions about these conflicts, you should ask your supervisor how to handle the situation. Those who violate this Code may be subject to disciplinary action. Depending on the nature of the violation, the disciplinary action may include termination of employment. If you are in a situation, which you believe may violate or lead to a violation of this Code, follow the recommendations described below.
Compliance with Laws, Rules and Regulations
Obeying the law, both in letter and in spirit, is the foundation on which the Company’s ethical standards and our reputation are built. All employees must respect and obey the laws of the cities, states and nations in which we operate. Although not all employees are expected to know the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers, the Company’s legal counsel or other appropriate personnel. If requested, the Company will hold information and training sessions to promote compliance with laws, rules and regulations, including insider trading laws.
Conflicts of Interest
A “conflict of interest” exists when a person’s private interest interferes in any way with the interests of the Company. A conflict may arise when an employee takes actions or has interests that may make it difficult to perform duties for the Company objectively and effectively. Conflicts of interest arise whenever a family member of an employee provides goods or services (including as an employee) or otherwise engages in business with the Company. All of these relationships require prior approval of our Audit Committee. Conflicts of interest may also arise when an employee, or members of his or her family, receives improper personal benefits as a result of his or her position with the Company. For example, loans to, or guarantees of obligations of, employees and their family members may create conflicts of interest. By law, the Company cannot make any loans to its executive officers and directors. It is almost always a conflict of interest for the Company’s employee to work simultaneously for a competitor, client or supplier. You are not allowed to provide services for a competitor as a consultant or act as a board member. The best policy is to avoid any direct or indirect business connection with our clients, suppliers or competitors, except on our behalf. Conflicts of interest are prohibited as a matter of company policy, except under specific guidelines approved by the Company’s board of directors (the “Board”). Conflicts of interest may not always be clear-cut, so if you have a question, you should consult with higher levels of management or the Company’s legal counsel. Any employee who becomes aware of a conflict or potential conflict should bring it to the attention of a supervisor, manager or other appropriate personnel or consult the procedures described below. Our executive officers and directors and certain other persons must also comply with our Insider Trading Policy.
Insider Trading
Employees who have access to confidential information are not permitted to use or share that information for trading purposes or for any other purpose except the conduct of our business. All non-public information about the Company should be considered confidential information. To use non-public information for personal benefit (financial or otherwise) or to “tip” others who might make an investment decision on the basis of this information is not only unethical but also illegal under the federal securities laws. In order to comply with the securities laws against insider trading, the Company has adopted a specific policy governing employees’ trading in securities of the Company. The Company is required to provide you with a copy of our Insider Trading Policy. If you have not received this Policy, please notify your supervisor.
___________________________
1 When the Code discusses employees, it also should be understood to include all officers and directors and certain consultants who are officers are subject to the Code.
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Corporate Opportunities
Employees are prohibited from taking for themselves personally, opportunities that are discovered through the use of the Company’s property, information or from their position with the Company without the consent of the Board. No employee may use the Company’s property, information, or their position with the Company, for improper personal gain. Under no circumstances may an employee compete with the Company directly or indirectly. Employees owe a duty of loyalty to the Company to advance its legitimate interests when the opportunity to do so arises.
Competition and Fair Dealing
We seek to outperform our competition fairly and honestly. Stealing proprietary information, possessing trade secret information that was obtained without the owner’s consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each employee should endeavor to respect the rights of and deal fairly with the Company’s clients, suppliers, competitors and other employees. No employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair dealing practice. The purpose of business entertainment and gifts in a commercial setting is to create goodwill and sound working relationships, not to gain unfair advantage with clients. No gift or entertainment should be offered, given, provided or accepted by any employee, family member of an employee, or agent unless it: (1) is not a cash gift, (2) is consistent with customary business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff and (5) does not violate any laws or regulations. Please discuss with your supervisor any gifts or proposed gifts which you are not certain are appropriate.
Discrimination and Harassment
The diversity of the Company’s employees is a tremendous asset. We are firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment. Examples may include derogatory comments based on racial, religious, sexual identity, disability, or ethnic characteristics and unwelcome sexual advances. If you believe that any type of discrimination or harassment has occurred, the Company has a Whistleblower Policy which provides for an anonymous procedure. See “Reporting Any Illegal or Unethical Behavior” at page 4 of the Code.
Health and Safety
The Company strives to provide each employee with a safe and healthy work environment. Each employee has responsibility for maintaining a safe and healthy workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions. Violence and threatening behavior are not permitted. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol. The use of alcohol or illegal drugs (or the use of legal prescriptions contrary to a physician’s advice) in the workplace will not be tolerated.
Record-Keeping
The
Company requires honest and accurate recording and reporting of information in order to make responsible business decisions. For example,
only the true and actual number of hours worked should be reported. Some employees are authorized to use business expense accounts, which
must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or our Chief
Financial Officer. All of the Company’s books, records, accounts and financial statements must be maintained in reasonable detail,
must appropriately reflect the Company’s transactions and must conform both to applicable legal requirements and to the Company’s
system of internal controls. Unrecorded or “off the books” funds or assets should not be maintained unless permitted by applicable
law or regulation. Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork,
or inappropriate characterizations of people and companies that can be misunderstood. “Side” letters with suppliers or customers
are forbidden unless approved by our legal counsel. This applies equally to e-mail, internal memos, and formal reports. Records should
always be retained or destroyed according to the Company’s record retention policies. In accordance with those policies, in the
event of litigation or governmental investigation please consult the Company’s legal counsel.
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Emails, Texts and Social Media
Before you send an email or text, think. Will you be embarrassed or will the Company be subject to liability if the email or text becomes public or is obtained by a party that is antagonistic to the Company? Nobody is authorized to use social media, email or text messaging for the business of the Company, except as expressly authorized by the Chief Executive Officer.
Confidentiality
Employees must maintain the confidentiality of confidential information entrusted to them by the Company or its clients except when disclosure is authorized by the Company’s legal counsel or required by laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its clients if disclosed. It also includes information that suppliers and clients have entrusted to us. The obligation to preserve confidential information continues even after employment ends.
Protection and Proper Use of the Company’s Assets
All employees should endeavor to protect the Company’s assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company’s profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. The Company’s equipment should not be used for non-Company business, though incidental personal use may be permitted. The obligation of employees to protect the Company’s assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks, and copyrights, as well as business, marketing and service plans, ideas, designs, databases, records, salary information and any unpublished financial data and reports. While unauthorized use or distribution of this information would violate company policy, it could also be illegal and result in civil or even criminal penalties.
Payments to Government Personnel
The U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. It is strictly prohibited to make illegal payments to government officials of any country. This also applies to the making of improper payments to obtain business from commercial clients in the United States. In addition, the U.S. government has a number of laws and regulations regarding business gratuities which may be accepted by U.S. government personnel. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. Our legal counsel can provide guidance to you in this area.
Reporting Any Illegal or Unethical Behavior
Employees are encouraged to talk to supervisors, managers or other appropriate personnel about observed illegal or unethical behavior and when in doubt about the best course of action in a particular situation. It is the policy of the Company not to allow retaliation for reports of misconduct by others made in good faith by employees. Employees are expected to cooperate in internal investigations of misconduct. Any employee may submit a good faith concern regarding questionable accounting or auditing matters or other matters without fear of dismissal or retaliation of any kind to the chairman of our Audit Committee or the Company’s legal counsel who are listed on the last page of this Code. A full statement of the Company’s Whistleblower Policy for Reporting Violations, Complaints or Concerns is attached as Appendix A to this Code.
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Compliance Procedures
We must all work to ensure prompt and consistent action against violations of this Code. However, in some situations it is difficult to know if a violation has occurred. Since we cannot anticipate every situation that will arise, it is important that we have a way to approach a new question or problem. These are the steps to keep in mind:
| · | Make sure you have all the facts in order to reach the right solutions; we must be as fully informed as possible. | |
| · | Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This will enable you to focus on the specific question you are faced with, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is. | |
| · | Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem. | |
| · | Discuss the problem with your supervisor. |
This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Remember that it is your supervisor’s responsibility to help solve problems.
Seek help from Company resources. In the rare case where it may not be appropriate to discuss an issue with your supervisor, or where you do not feel comfortable approaching your supervisor with your question, discuss it with your office manager or with a human resources officer.
You may report ethical violations in confidence and without fear of retaliation. Additionally, if your situation requires that your identity be kept confidential, your anonymity will be protected. Further, you may speak with the Company’s legal counsel on any of these matters. Under no circumstances does the Company permit or tolerate any form of retaliation against employees for good faith reports of potential ethical violations.
Always ask first, act later. If you are unsure of what to do in any situation, seek guidance before you act.
Special Policies with Respect to Certain Officers
The Chief Executive Officer (“CEO”) and all financial officers, including the Chief Financial Officer (“CFO”) and principal accounting officer, are bound by the provisions set forth above including those relating to ethical conduct, conflicts of interest and compliance with law. In addition, the CEO, CFO and any other financial officers and employees are subject to the following additional specific policies:
| · | The CEO, CFO and all financial officers and employees are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company with the Securities and Exchange Commission. Accordingly, it is the responsibility of the CEO, CFO and each financial officer or employee promptly to bring to the attention of the Board or the Audit Committee any material information of which he or she may become aware that affects the disclosures made by the Company in its public filings or otherwise assist the Board and the Audit Committee, in fulfilling their responsibilities. | |
| · | The CEO, CFO and each financial officer or employee shall promptly bring to the attention of the Board and the Audit Committee, any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s financial reporting, disclosures or internal controls. | |
| · | The CEO, CFO and each financial officer and employee shall promptly bring to the attention of our legal counsel or the CEO and to the Audit Committee any information he or she may have concerning any violation of this Code, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significant role in the Company’s financial reporting, disclosures or internal controls. | |
| · | The CEO, CFO and each financial officer and employee shall promptly bring to the attention of the Company’s legal counsel or the CEO and to the Audit Committee any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof, or of violation of this Code or of these additional special policies and procedures. |
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The Board shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of this Code or these additional special procedures by the CEO, CFO and the Company’s financial officers and employees. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to this Code and to these additional special procedures, and shall include written notices to the individual involved that the Board has determined that there has been a violation, censure by the Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits (as determined by the Board) and termination of the individual’s employment. In determining what action is appropriate in a particular case, the Board or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past.
To insure your confidentiality, we have supplied the phone numbers of our Chief Executive Officer, Chief Financial Officer, Chairman of our Board, Chairman of our Audit Committee and legal counsel including their personal email addresses.
Chief Executive Officer and Chairman of the Board:
Brandon Torres Declet
Office: XXX-XXX-XXXX
Email: brandon@unusualmachines.com
Chief Financial Officer:
Brian Hoff
Office: XXX-XXX-XXXX
Email: Brian@UnusualMachines.com
Outside Legal Counsel:
Michael D. Harris, Esq.
Nason, Yeager, Gerson, Harris & Fumero, P.A.
Office: 561-686-3307
Email: mharris@nasonyeager.com
[Signature page follows]
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I acknowledge that I have read and understand and agree to abide by this Code of Ethics of the Company.
| Dated: ________ ___, 2023 | ||
| Signature | ||
| Print Name |
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Appendix A
UNUSUAL MACHINES, INC.
________________________
Whistleblower Policy for Reporting Violations, Complaints or Concerns
| I. | Policy Statement |
Unusual Machines, Inc. (the “Company”) has established a Code of Ethics (the “Code”) to help our employees comply with the law and regulations applicable to our business and to maintain the highest standards of ethical conduct. This Whistleblower Policy for Reporting Violations, Complaints or Concerns (this “Policy”) is meant to supplement the Code by encouraging employees to report any suspected violations or concerns as to compliance with laws, regulations, the Code or other Company policies, or any complaints or concerns regarding the Company’s accounting, internal accounting controls, or auditing matters, or any concerns regarding any questionable accounting or auditing matters.
| II. | Obligation to Report Suspected or Actual Violations; Anonymous Reporting |
A. Reporting Generally
It is every employee’s obligation to report suspected or actual violations of laws, government rules and regulations, or the Code or other Company policies. Employees must report any suspected violations of the laws and rules that govern the reporting of the Company’s financial performance, and any complaint or concern regarding the Company’s accounting, internal accounting controls, or auditing matters, or any concerns regarding any questionable accounting or auditing matters.
Employees can report any such matters directly to his or her supervisor or manager or by the procedures set forth below. As noted below, supervisors and managers are required to report to the Chief Executive Officer, the Chief Financial Officer and/or our Board of Directors (the “Board”) or Audit Committee Chairman (who are identified in the Code) any time they receive a report of a concern about our compliance with laws, the Code or other Company policy, any notice of any suspected wrong-doing by any Company employee, officer or director, any complaint or concern about the Company’s accounting, internal accounting controls, or auditing matters, or any concerns regarding any questionable accounting or auditing matters.
B. Anonymous Reporting
Alternatively, if you wish to report any such matters anonymously, you may do so as follows: mail a description of the suspected violation or other complaint or concern to our outside legal counsel:
Michael D. Harris, Esq.
Nason, Yeager, Gerson, Harris & Fumero, P.A.
3001 PGA Boulevard, Ste. 305
Palm Beach Gardens, FL 33410
Email: mharris@nasonyeager.com
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| III. | Treatment and Retention of Complaints and Reports |
Each supervisor and manager shall report any suspected violation, concern or complaint reported to such person by employees or other sources to the Chief Executive Officer, the Chief Financial Officer and/or the Board or Audit Committee Chairman to assure proper treatment and retention of complaints, concerns or notices of potential violations. In addition, employees should take note that persons outside the Company may report complaints or concerns about suspected violations, or concerns regarding internal accounting controls, accounting or auditing matters. These concerns and complaints should be reported immediately on receipt to the Chief Executive Officer, the Chief Financial Officer and/or the Board or Audit Committee Chairman.
Supervisors and managers as well as the Chief Executive Officer, the Chief Financial Officer and the Board or Audit Committee Chairman shall promptly consider the information, reports or notices received by them under this Policy or otherwise. Each person shall take appropriate action, including investigation as appropriate, in accordance with the law, governmental rules and regulations, the Code and otherwise consistent with good business practice.
Upon a report to the Chief
Executive Officer, the Chief Financial Officer and/or the Board or Audit Committee Chairman, all notices or reports of suspected violations,
complaints or concerns received pursuant to this Policy shall be recorded in a log, indicating the description of the matter reported,
the date of the report and the disposition thereof, and the log shall be retained with the Company’s documents. This log shall be
maintained by the Chief Executive Officer.
| IV. | Statement of Non-Retaliation |
It is a federal crime for anyone to retaliate intentionally against any person who provides truthful information to a law enforcement official concerning a possible violation of any federal law. Moreover, the Company will not permit any form of intimidation or retaliation by any officer, employee, contractor, subcontractor or agent of the Company against any employee because of any lawful act done by that employee to:
| · | provide information or assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of laws, rules, regulations, the Code, or any Company policies; or | |
| · | file, testify, participate in, or otherwise assist in a proceeding relating to a violation of any law, rule or regulation. |
Any such action is a violation of Company policy and should be reported immediately under this Policy.
| V. | Statement of Confidentiality |
The Company will, to the extent reasonably possible, keep confidential both the information and concerns reported under this Policy, and its discussions and actions in response to these reports and concerns. In the course of its investigation, however, the Company may find it necessary to share information with others on a “need to know” basis.
| VI. | Notice of Immunity under the Economic Espionage Act of 1996, as amended by the Defend Trade Secrets Act of 2016. |
An employee will not be held criminally or civilly liable under any federal or state trade secret law for any disclosure of a trade secret that:
(a) is made: (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or
(b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding.
If an employee files a lawsuit for retaliation by the Company for reporting a suspected violation of law, such employee may disclose the Company’s trade secrets to the employee’s attorney and use the trade secret information in the court proceeding if the employee:
(a) files any document containing the trade secret under seal; and
(b) does not disclose the trade secret, except pursuant to court order.
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Exhibit 10.18
RESTRICTED STOCK UNIT AGREEMENT
This Restricted Stock Unit Agreement (this “Agreement”), entered into as of ________ __, 2023 (the “Grant Date”), sets forth the terms and conditions of an award (this “Award”) of restricted stock units (“Units”) granted by Unusual Machines, Inc., a Puerto Rico corporation (the “Company”), to ______________ (the “Recipient”).
1. Definition and Incorporation of Certain Terms. This Award is made pursuant to the Company’s 2022 Equity Incentive Plan (the “Plan”) and the equity award granted hereunder shall be made from the pool of equity awards authorized under the Plan. The terms of the Plan are otherwise incorporated in this Agreement. Capitalized terms used in this Agreement that are not defined in this Agreement have the meanings as used or defined in the Plan. The Recipient hereby acknowledges receipt of the Plan.
2. Award. Effective as of the date of this Agreement, the Recipient was granted _______ Units.
3. Vesting/Forfeiture.
(a) The Units shall 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 Company’s initial public offering.
Vested Units shall be paid out in the form of shares of the Company’s Common Stock with delivery of the Common Stock 10 days upon vesting. The Units shall fully vest upon a Change of Control as defined in the Plan, with delivery of the shares of Common Stock to be issued immediately prior to the occurrence of such Change of Control.
(b) Notwithstanding any other provision of this Agreement, upon resolution of the Board, all Units and shares of Common Stock issued under this Agreement, whether vested or unvested, will be immediately forfeited if any of the events specified in Section 24 of the Plan occur.
4. Profits on the Sale of Certain Shares; Cancellation. If any of the events specified in Section 24 of the Plan occur within 12 months following the date the Recipient last performed services as an employee of the Company (the “Termination Date”) (or such longer period required by any written employment agreement), all profits earned from the Recipient’s sale of the Company’s Common Stock during the two-year period commencing one year prior to the Termination Date shall be forfeited and forthwith paid by the Recipient to the Company. Further, in such event, the Company may at its option cancel the Units and/or the Common Stock underlying the Units. The Company’s rights under this Section 4 do not lapse one year from the Termination Date but are a contract right subject to any appropriate statutory limitation period.
5. Rights. The Recipient will receive no benefit or adjustment to the Units with respect to any cash or stock dividend, or other distributions except as provided for in the Plan. Further, the Recipient will have no voting rights with respect to the Units until the shares of Common Stock are issued.
6. Restriction on Transfer. The Recipient shall not sell, transfer, pledge, hypothecate or otherwise dispose of any Units prior to the applicable vesting date.
7. Reservation of Right to Terminate Relationship. Nothing contained in this Agreement shall restrict the right of the Company to terminate the relationship of the Recipient at any time, with or without cause.
8. Tax Withholding. The Recipient acknowledges and agrees that the Company may require the Recipient to pay, or may withhold from sums owed by the Company to the Recipient, any amount necessary to comply with the minimum applicable withholding requirements that the Company deems necessary to comply with any federal, state or local withholding requirements for income and employment tax purposes.
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9. No Obligation to Minimize Taxes. The Company has no duty or obligation to minimize the tax consequences of this Award to the Recipient and will not be liable to the Recipient for any adverse tax consequences arising in connection with this Award. The Recipient has been advised to consult with his own personal tax, financial and/or legal advisors regarding the tax consequences of this Award.
10. 409A Compliance. The provisions of this Agreement and the issuance of the shares of Common Stock in respect of the Units is intended to comply with the short-term deferral exception as specified in Treas. Reg. § 1.409A-l(b)(4).
11. Notices and Addresses. All notices, offers, acceptance and any other acts under this Agreement (except payment) shall be in writing, and shall be sufficiently given if delivered to the addressees in person, by FedEx or similar receipted delivery, as follows:
| The Recipient: | To the Recipient at the address on the signature page of this Agreement |
| The Company: | Unusual Machines, Inc. |
| 151 Calle De San Francisco | |
| Ste. 200 PMB 2106 | |
| San Juan, PR 00901-1607 | |
| Attention: _______________ | |
| Email: __________________ | |
| with a copy to: | Michael D. Harris, Esq. |
| Nason, Yeager, Gerson, Harris & Fumero, P.A. | |
| 3001 PGA Boulevard, Suite 305 | |
| Palm Beach Gardens, Florida 33410 | |
| Email: mharris@nasonyeager.com |
or to such other address as either of them, by notice to the other may designate from time to time.
12. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. The execution of this Agreement may be by actual or facsimile signature.
13. Attorney’s Fees. In the event that there is any controversy or claim arising out of or relating to this Agreement, or to the interpretation, breach or enforcement thereof, and any action or proceeding is commenced to enforce the provisions of this Agreement, the prevailing party shall be entitled to a reasonable attorney’s fee, costs and expenses.
14. Severability. If any term or condition of this Agreement shall be invalid or unenforceable to any extent or in any application, then the remainder of this Agreement, and such term or condition except to such extent or in such application, shall not be affected hereby and each and every term and condition of this Agreement shall be valid and enforced to the fullest extent and in the broadest application permitted by law.
15. Entire Agreement. This Agreement represents the entire agreement and understanding between the parties and supersedes all prior negotiations, understandings, representations (if any), and agreements made by and between the parties. Each party specifically acknowledges, represents and warrants that they have not been induced to sign this Agreement.
16. Governing Law; Exclusive Jurisdiction. This Agreement and any dispute, disagreement, or issue of construction or interpretation arising hereunder whether relating to its execution, its validity, the obligations provided therein or performance shall be governed or interpreted according to the internal laws of the Commonwealth of Puerto Rico without regard to choice of law considerations. Any action arising out of or related to this Agreement shall only be brought in the state or federal courts located in San Juan, Puerto Rico. The parties agree not to raise any objection to the venue including whether it is an inconvenient forum in the federal courts.
17. Headings. The headings in this Agreement are for the purpose of convenience only and are not intended to define or limit the construction of the provisions hereof.
[Signature Page to Follow]
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the date aforesaid.
| Unusual Machines, Inc. | |
| By: ___________________ | |
| __________________ | |
| __________________ | |
| RECIPIENT | |
| __________________ | |
| Address: | |
| __________________ | |
| __________________ |
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Exhibit 10.19
This Sponsorship Agreement (“Agreement”), is between Drone Racing League, Inc., a Delaware corporation (“DRL”), and Unusual Machines, Inc., a Puerto Rico corporation (“Sponsor” or “UM”). DRL and Sponsor are sometimes referred to herein individually as a “party” or together as the “parties”.
WHEREAS, Sponsor is in the process of acquiring Fat Shark Ltd. (“Fat Shark”) and Rotor Riot LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (the “Acquisition”);
WHEREAS, DRL Is in the business of operating a professional drone racing circuit, the results of which are included in the calculation of the standings naming a DRL World Champion at the conclusion of each annual season (such races “DRL Events”); and
WHEREAS, Sponsor wishes to receive certain sponsorship benefits from DRL.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants set forth herein and other good and valuable consideration, the adequacy and value of which are hereby acknowledged, and intending to be legally bound, the parties agree as follows:
1. TERM
This agreement and any payments associated herein are contingent and shall only become effective on the Sponsor when (1) the Sponsor’s Board of Directors provides unanimous written consent to approve this agreement as executed by the CEO; and (2) Sponsor has completed its contemplated IPO; and (3) Sponsor has closed its transaction to acquire Rotor Riot and Fat Shark.
Sponsor has no obligations under this agreement until these actions are taken and DRL is notified in writing that the Sponsor intends to be bound. The date of this written notification shall become (“the Effective Date”)
This Agreement commences as of the Effective Date and continues in full force and effect as follows (each, a “Contract Year”):
| l | Effective Date to March 31, 2024 (“Year One”) | |
| l | April 1, 2024 to March 31, 2025 (“Year Two”) | |
| l | April 1, 2025 to March 31, 2026 (“Year Three”) |
The parties acknowledge that this Agreement is contingent. If the agreement does not become effective prior to September 30, 2023, this Agreement shall be terminated without any further obligation by either party and the Agreement shall be considered null and void ab initio. The parties shall each have the option to terminate this Agreement after Year One or Year Two, and such option is exercisable by either party providing written notice of the party’s intention to terminate this Agreement on or before February 1, 2024 for Year Two, or on or before February 1, 2025 for Year Three, as applicable.
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2. SPONSOR BENEFITS
(a) Subject to the performance of Sponsor’s obligations hereunder DRL will provide to sponsor, during the Term, the benefits specified in Exhibit A (each, a “Benefit” and collectively, the “Benefits”).
(b) All Benefits will be subject to (i) the standards and practices of any applicable broadcasters, telecasters, social media platforms, or publishers, and (ii) all applicable statutes, rules, and regulations of any type applicable to the drone racing industry (collectively, “Rules and Regulations”).
(c) Except for the Benefits expressly granted to Sponsor under this Agreement, all other rights, benefits and privileges relating to DRL or its affiliated properties are expressly reserved by DRL. Except as otherwise provided for in this Agreement, nothing in this Agreement shall prevent or restrict DRL from using, or granting any other third party any rights, privileges or benefits DRL may have the right to grant for any purpose.
(d) The parties may, from time to time, mutually agree in writing to modify, supplement or substitute the Benefits set forth in this Agreement and Exhibit A, in whole or in part.
3. CONSIDERATION AND PAYMENT TERMS
(a) Consideration Per Contract Year
The consideration payable by Sponsor to DRL for each year of this Agreement is as follows:
| l | Year 1 - $500,000 |
| ¡ | $400,000 marketing and promotional benefits (“Marketing Investment”) | |
| ¡ | $50,000 minimum annual exclusive license fee (the “Guarantee”) License granted to sponsor to sell co-branded DRL merchandise or products under terms to be set forth in separate license agreements (the “Licensed Products”) that include a 5-8% royalty to DRL (the “Royalty”) on Sponsor’s Net Sales , "Net Sales" shall mean the Sponsor’s gross sales (the gross invoice amount billed customers) of the Licensed Products, less discounts and allowances actually shown on the invoice (except cash discounts, transportation costs and commissions not deductible in the calculation of Royalty) and less any bona fide returns (net of all returns actually made or allowed as supported by credit memoranda actually issued to the customers not to exceed 5% in any reporting cycle), the aggregate of which discounts and allowances shall not exceed 5% in any reporting cycle. No other costs incurred in the manufacturing, selling, advertising, and distribution of the Licensed Products shall be deducted nor shall any deduction be allowed for any uncollectible accounts, allowances or bad debt. | |
| ¡ | $50,000 of product in-kind (including a minimum of 70 pairs of Fat Shark Goggles per contract Year, 65 of which will be delivered by Red Cat pursuant to a separate agreement) |
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| l | Year 2 - $525,000 (5% escalator on the above) |
| ¡ | $420,000 marketing and promotional benefits (“Marketing Investment”) | |
| ¡ | $52,500 minimum annual exclusive license fee | |
| ¡ | $52,500 of product in-kind (based on wholesale pricing) (including a minimum of 70 pairs of Fat Shark Goggles) |
| l | Year 3 - $551,250 (5% escalator on the above) |
| ¡ | $441,000 marketing and promotional benefits (“Marketing Investment”) | |
| ¡ | $55,125 minimum annual exclusive license fee | |
| ¡ | $55,125 of product in-kind (based on wholesale pricing) (including a minimum of 70 pairs of Fat Shark Goggles) |
(b) Marketing Investment Payment Schedule - Year 1
The yearly Marketing Investment payable to DRL will be paid in four (4) equal quarterly installment payments due as follows:
1. Upon the Effective Date and each anniversary thereof during the Term
2. On or before 9/1/2023 and each 9/1 during the Term
3. On or before 12/1/23 and each 12/1 during the Term
4. On on before 3/1/24 and each 3/1 during the Term
DRL will invoice Sponsor 30 days prior to the payment due date.
4. USE OF INTELLECTUAL PROPERTY AND MARKS
(a) DRL hereby grants to Sponsor, subject to the terms and conditions of this Agreement, during the Term, a limited, exclusive, non-transferable license and right to use (i) those DRL Marks provided to Sponsor by DRL hereunder, (ii) the DRL Composite Logo, and (iii) certain graphics, animations, images, videos and such other creative assets and/or content as provided to Sponsor by DRL hereunder from time to time (collectively, “DRL Creative Assets”), in each case for Sponsor’s advertising, or the Licensed Products contemplated hereunder, solely as permitted herein; provided, however, Sponsor’s use of the DRL Marks and DRL Creative Assets must be approved in accordance with Section 5. During the Term, Sponsor shall have the exclusive right, and DRL shall not grant any third party a license, to use the DRL Creative Assets in the categories of FPV goggles and retail stores for FPV drones. .
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(b) For purposes of this Agreement, (i) “DRL Marks” means those names, trademarks, service marks, designs, icons, logos, catch phrases and/or slogans, and other source-identifying elements or variations thereof owned or controlled by DRL and that identify or otherwise relate to DRL. Sponsor shall use the DRL Marks and the DRL Creative Assets in accordance with graphic standards and similar criteria provided by DRL to Sponsor in writing.
(d) Sponsor hereby grants to DRL and its affiliates, subject to the terms and conditions of this Agreement, during the Term, a limited, non-exclusive, non-transferable, royalty-free, irrevocable license and right to use (i) those Sponsor Marks provided to DRL hereunder, and (ii) certain graphics, animations, images, videos and such other creative assets and/or content as provided to Sponsor by DRL hereunder from time to time (collectively, “Sponsor Creative Assets”), in each case in connection with any advertising, marketing, operation, production, distribution, telecast, promotion, public relations, merchandising or other exploitation of DRL or any of the DRL Events, or in connection with delivery of the Benefits and any Promotional Activities; provided, however, DRL’s use of Sponsor Marks and Sponsor Creative Assets must be approved in accordance with Section 5.
(e) For purposes of this Agreement, “Sponsor Marks” means those names, trademarks, service marks, designs, icons, logos, catch phrases and/or slogans, and other source-identifying elements or variations thereof owned or controlled by Sponsor and that identify or otherwise relate to Sponsor. DRL shall use Sponsor Marks and Sponsor Creative Assets in accordance with graphic standards and similar criteria provided by Sponsor in writing.
5. APPROVALS
(a) The following procedures shall apply when Sponsor seeks approval of uses of the DRL Marks or the DRL Creative Assets (in which case, Sponsor is the “Requesting Party” and DRL is the “Trademark Party”), or when DRL seeks approval of uses of the Sponsor Marks or Sponsor Creative Assets (in which case, DRL is the “Requesting Party” and Sponsor is the “Trademark Party”). The Requesting Party shall furnish to the Trademark Party, free of cost, the proposed rendering of the use of the relevant materials, no less than five (5) business days prior to the anticipated use. Upon request and when commercially reasonable, Requesting Party shall provide actual samples of the proposed advertisements, promotions, premiums, products and any other merchandise on which the Requesting Party plans to use the requested Marks or Creative Assets and an explanation of the manner and place in which they are to be used. The Trademark Party shall promptly advise the Requesting Party of its decision regarding the proposed use of the Marks or Creative Assets and, if it does not approve said use, shall provide an explanation of the reasons. Approval shall be in the Trademark Party’s reasonable discretion. The Trademark Party shall use all reasonable efforts to approve or reject a proposed use within five (5) business days; provided, that Sponsor and DRL acknowledge that in certain circumstances such process may take longer than five (5) business days and in such circumstances DRL will provide Sponsor with a written timeline for such process in advance. All proposed uses not approved or disapproved within 10 business days shall be deemed disapproved.
(c) Further, notwithstanding anything to the contrary herein (and without further Sponsor approval required), Sponsor hereby grants to DRL and its affiliates a perpetual, non-exclusive right to continue to distribute or have distributed the DRL Events including Sponsor Marks and/or Sponsor Creative Assets as incorporated therein during the Term with all required approvals from Sponsor (i.e. DRL may not incorporate Sponsor Marks or Sponsor Creative Assets anew after the Term, but Sponsor Marks or Sponsor Creative Assets included in DRL Events initially distributed during the Term in accordance with this Agreement do not need to be removed for post-Term distribution).
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6. INTELLECTUAL PROPERTY OWNERSHIP
(a) Sponsor acknowledges DRL’s (and its affiliates’) ownership of and proprietary interest in the DRL Marks and the DRL Creative Assets. Sponsor agrees and acknowledges that (i) it acquires no right, title or interest in or to any of the DRL Marks or DRL Creative Assets, by virtue of this Agreement or other writing between the parties and hereby waives any right to or interest in such other than the specific limited rights granted hereunder or under any such other writing between the parties; (ii) it will not challenge the exclusive ownership of the DRL Marks or DRL Creative Assets, or assist anyone else in doing so; and (ii) the goodwill associated with Sponsor’s use of the DRL Marks and the DRL Creative Assets will inure solely to the benefit of DRL.
(b) DRL acknowledges Sponsor’s (and its affiliates’) ownership of and proprietary interest in the Sponsor Marks. DRL agrees and acknowledges that (i) it acquires no right, title or interest in or to any of the Sponsor Marks by virtue of this Agreement or any other writing between the parties and hereby waives any right to or interest in such other than the specific limited rights granted hereunder or under any such other writing between the parties; (ii) it will not challenge Sponsor’s exclusive ownership of the Sponsor Marks or assist anyone else in doing so; and (ii) the goodwill associated with DRL’s use of the Sponsor Marks will inure solely to the benefit of Sponsor.
7. UNAVAILABLE BENEFITS
(a) Sponsor and DRL acknowledge that from time to time during the Term, certain of the Benefits otherwise contemplated under this Agreement may: (i) become prevented, canceled, postponed or delayed (including, for example, due to a Force Majeure Event); (ii) otherwise become impossible or impracticable to provide (including, for example, because DRL or its affiliates have terminated a particular business activity to which a Benefit relates or because of a change in the Rules and Regulations), or (iii) impose an economic burden on DRL or its affiliates materially greater than the burden it could reasonably have expected to incur on the date hereof (each, an “Unavailable Benefit”). For purposes of this Agreement, a “Force Majeure Event” means any act, event or condition (except, in each case, for the payment of money) which is beyond DRL’s reasonable control, which wholly or partially prevents or delays the performance of any of its duties, responsibilities or obligations, and shall include an act of God; an act of a public enemy; civil disturbance or unrest; lawsuits; injunctions; lightning; fire, explosion or other serious casualty; water damage; terrorist attack (or threats thereof); pandemics (including COVID-19); epidemics; strike, lock-out or labor dispute (without regard to the reasonableness of any party’s demands or any party’s ability to satisfy such demands); accident or sabotage; unusually severe weather; war; blockades; embargoes; condemnation or other taking by the action of any governmental body on behalf of any public, quasi-governmental or private entity; other governmental action or change in Applicable Laws; shortages or failures of sources of labor, material, energy, fuel, water, other vital utility, equipment or transportation; or termination or postponement of programming or failure of technical, production or television equipment.
(b) With respect to any Unavailable Benefit for which a remedy is not otherwise provided in this Agreement, DRL, after consultation with Sponsor, shall provide to Sponsor, in lieu of such Unavailable Benefit: (i) if and as applicable, the Unavailable Benefit on a rescheduled date or in a different manner; (ii) reexpress such Unavailable Benefit into one or more different promotions, advertisements or benefits of comparable or otherwise mutually agreed upon value to the portion of the Unavailable Benefit; or (iii) relieve Sponsor of a mutually agreed upon portion of its financial obligations with respect to the Unavailable Benefit. By doing so, DRL will satisfy all of its obligations with respect to (and shall not be in default with respect to) the Unavailable Benefit.
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(c) DRL shall, as soon as reasonably practicable, give Sponsor written notice of the occurrence of the relevant Force Majeure Event or other circumstance that has resulted in or is expected to result in, an Unavailable Benefit, the nature thereof, and the extent to which DRL will be unable fully to perform its obligations hereunder.
8. REPRESENTATIONS AND WARRANTIES
(a) Sponsor represents and warrants to DRL that upon the Effective Date: (i) Sponsor has the necessary rights and authority to enter into and perform this Agreement; (ii) nothing contained in this Agreement will place Sponsor in breach of any other contract or obligations; (iii) the rights DRL has acquired from Sponsor under this Agreement, and DRL’s use of such rights in accordance with the terms of this Agreement, will not infringe, misappropriate, or violate the rights of any third party or violate any law; and (iv) it will comply in all material respects with all applicable laws, except when such failure to comply will not reasonably result in a material adverse effect on the Sponsor.
(b) DRL represents and warrants to Sponsor that: (i) DRL has and will continue to have the necessary rights and authority to enter into and perform this Agreement; (ii) nothing contained in this Agreement will place DRL in breach of any other contract or obligations; (iii) the rights Sponsor has acquired from DRL under this Agreement, and Sponsor’s use of such rights in accordance with the terms of this Agreement, will not infringe, misappropriate, or violate the rights of any third party or violate any law; and (iv) it will comply with all applicable laws.
9. INSURANCE
DRL shall, at its own expense, secure and maintain in full force and effect during the Term of this Agreement:
(a) commercial general liability insurance policy, with a limit of not less than Five Million Dollars ($5,000,000.00) combined single limit per occurrence, covering bodily injury, death and property damage, for incidents that may occur involving any drone race;
(d) workers' compensation and employers' liability insurance as required by state law; and
(e) fire and extended coverage in at least the amount of the replacement value of the advertising and signage.
DRL will provide Sponsor with certificates of insurance evidencing such coverage (including a Waiver of Subrogation in favor of Sponsor) naming Sponsor as an additional insured (excluding worker’s compensation). All policies will provide that the insurer(s) shall give Sponsor written notice of any termination, alteration, or change therein within seven (7) days of DRL receiving such notice from its insurer as per its insurer’s notice policy (or the day of receiving such notice, if an event falls within such 7-day period). Upon any cancellation and/or material adverse amendment of any insurance policy, and prior to the effective date thereof, DRL will deliver evidence of replacement insurance to Sponsor. All insurance will be primary and will not require contribution from any coverage maintained by Sponsor.
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10. INDEMNIFICATION
(a) Sponsor shall indemnify, defend and hold harmless DRL and its affiliates, and each of its and their respective directors, officers, members, employees, agents and licensees (“DRL Indemnitees”) from and against any and all losses, liabilities, claims, damages, injuries, expenses and costs (including court costs and reasonable attorneys’ and other professional fees) (“Damages”) incurred in connection with any third-party claims, actions, demands or proceedings (collectively, “Claims”) arising out of:
(i) the breach or alleged breach of any representation, warranty or agreement made by Sponsor under this Agreement or of applicable laws;
(ii) any negligent acts or omissions or acts of intentional misconduct of Sponsor or any of its employees, directors, officers, members, agents, contractors or licensees in connection with the performance or exercise of Sponsor’s rights and obligations under this Agreement, including those that result in personal injury or property damage;
(iii) any product liability claim, or any other claim, for injuries or damages related to the use of any Sponsor products or services provided to DRL or sold to the public in connection with the performance or exercise of Sponsor’s rights and obligations under this Agreement, including, but not limited to, any claim for injuries or damages related to Sponsor’s sale of any co-branded products or services as may be permitted by the Agreement; and
(iv) any infringement action involving any Sponsor Marks and/or Sponsor Creative Assets, to the extent that DRL or its affiliates’ uses such Sponsor Marks or Sponsor Creative Assets in accordance with the terms, conditions and approvals set forth in this Agreement.
All defense costs related to any indemnifiable claim will be paid or reimbursed by Sponsor as they are incurred by DRL in defending against any such claim.
(b) DRL shall indemnify, defend and hold harmless Sponsor, its affiliates, and each of its and their respective directors, officers, members, employees, agents and licensees (“Sponsor Indemnitees”) from and against any and all Damages incurred in connection with any Claims arising out of:
(i) the breach or alleged breach of any representation, warranty or agreement made by DRL under this Agreement or of applicable laws;
(ii) any negligent acts or omissions or acts of intentional misconduct of DRL or any of its employees, directors, officers, members, agents, contractors or licensees in connection with the performance or exercise of DRL’s rights and obligations under this Agreement, including those that result in personal injury or property damage;
(iii) any product liability claim related to the use of any DRL products or services provided in connection with the performance or exercise of DRL’s rights and obligations under this Agreement; and
(iv) any infringement action involving any DRL Marks and/or DRL Creative Assets, to the extent that Sponsor uses such DRL Marks or DRL Creative Assets in accordance with the terms, conditions and approvals set forth in this Agreement.
11. INDEPENDENT CONTRACTORS
Sponsor and DRL are independent contractors with respect to each other. Nothing in this Agreement creates any association, partnership, joint venture or agency relationship between them and neither has any authority to represent or bind the other in any manner or to any extent. All persons employed by Sponsor or DRL in connection with its performance under this Agreement shall be such party’s employees or agents and such party shall be fully responsible for them, except as otherwise specifically and explicitly provided in this Agreement.
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12. CONFIDENTIALITY
For purposes of this Agreement, “Confidential Information” means this Agreement and any information concerning its terms, conditions or contents; any trade secret; sales and marketing materials and strategies; customer information; product and pricing information and any other confidential or nonpublic information the disclosing party designates in writing as being proprietary or confidential. During the Term of this Agreement and for three (3) years thereafter, each party shall hold in strict confidence all such information. This obligation shall not apply to any information which: (a) becomes known to the general public through no fault of either party; (b) is required to be disclosed in the enforcement of rights hereunder, or (c) is required to be disclosed by any state or federal statue, regulation or court order.
13. TERMINATION
(a) Either party may immediately terminate this Agreement upon written notice in the event the other party materially breaches this Agreement and the breaching party fails to cure such breach within thirty (30) days of written notice thereof.
(b) Either party may immediately terminate this Agreement upon written notice if the other party is subject to proceedings in bankruptcy or insolvency, voluntarily or involuntarily, if a receiver is appointed with or without the other party’s consent, if the other party assigns its property to its creditors or performs any other act of bankruptcy or if the other party becomes insolvent and cannot pay its debts or provide rights and benefits when they are due.
14. MISCELLANEOUS
(a) LIMITATION OF LIABILITY.
EXCEPT FOR EACH PARTY’S INDEMNIFICATION AND CONFIDENTIALITY OBLIGATIONS HEREUNDER, AND EXCEPT WITH RESPECT TO LIABILITY CAUSED BY EITHER PARTY’S FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES, INCLUDING LOST PROFITS, ARISING OUT OF THIS AGREEMENT OR ITS TERMINATION, WHETHER LIABILITY IS ASSERTED IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, OR OTHERWISE, AND IRRESPECTIVE OF WHETHER SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE.
(b) Assignment. This Agreement and any rights or Benefits granted under this Agreement by DRL are personal to Sponsor and shall not be sold, assigned, sublicensed, encumbered or otherwise transferred (each, a “Transfer”), directly or indirectly, by operation of law or otherwise, without the prior written consent of DRL (which shall not be unreasonably withheld, conditioned or delayed). Any attempted unauthorized assignment shall be void ab initio and a material breach of this Agreement.
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(c) Dispute Resolution by JAMS Arbitration; Waiver of Jury Trial. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiation between executives who have authority to settle the controversy and who are at a higher level of management than the persons with direct responsibility for administration of this Agreement. After a reasonable negotiation period, the parties irrevocably waive any right to a jury trial and agree that any dispute, controversy or claim arising out of or relating to this Agreement, including the formation, interpretation, breach or termination thereof, including whether the claims asserted are arbitrable, shall be determined exclusively by arbitration in New York, NY, before one (1) JAMS arbitrator to be selected by the then-current JAMS case manager. Any arbitration shall be administered by JAMS pursuant to its Streamlined Arbitration Rules and Procedures. The arbitrator shall award the prevailing party their arbitration costs and attorneys fees in proportion to the relative success of their claims (e.g., a party prevailing on four out of five claims shall be awarded 80% of their arbitration costs and attorneys fees). Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
(d) Waiver. A waiver or failure of either party at any time to require performance by the other party of any provision hereof will not affect the full right to require such performance at any time thereafter.
(e) Interpretation. This Agreement contains the entire understanding of the parties relating to Sponsor’s sponsorship of the Benefits as contained herein, and this Agreement supersedes all prior agreements on this subject matter, and this Agreement cannot be changed or terminated orally.
(f) Severability. If any provision of this Agreement is deemed to be invalid or unenforceable, such invalidity or unenforceability will not invalidate or render unenforceable the entire Agreement. The parties shall negotiate in good faith to reformulate any such invalid provision, or part thereof, or related provision, to reflect as closely as possible the original intent of the parties consistent with applicable law, and to effectuate such portions thereof as may be valid without defeating the intent of such provision.
(g) Survival. Obligations and rights under this Agreement, which by their nature or as expressly stated would reasonably continue beyond the termination or expiration of this Agreement, shall survive the termination or expiration of this Agreement.
(h) Notices. All notices under this Agreement will be deemed given: (i) if delivered by email; (ii) if delivered by express courier, one business day after receipt from this courier (with written confirmation of receipt); or (iii) if delivered by post office, one business day after having been received by registered or certified mail, return receipt requested and postage prepaid.
(i) Governing Law. This Agreement shall be governed by the laws of the State of New York, without regard to any conflicts of laws principles that would result in the application of the laws of any other jurisdiction.
(j) Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, and both of which taken together will constitute one of the same instrument. Any signature page delivered by facsimile or electronically (e.g., DocuSign, in scan .pdf format) will be binding to the same extent as an original signature page.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed and are thereby bound to the terms of this Agreement as of the Effective Date.
DRL:
/s/ Ari Mark
Name: Ari Mark
Title: SVP, Head of Partnership Development
Email: arimark@drl.io
Date: 7/19/2023
Unusual Machines:
/s/ Brandon Torres Declet
Name: Brandon Torres Declet
Title: Chief Executive Officer
Email: brandon@unusualmachines.com
Date: 7/19/2023
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Exhibit A
DRL will provide the following partnership benefits to Unusual Machines:
PARTNERSHIP ELEMENTS
| 1. | Fat Shark FPV Goggles in DRL World Championship Season | |
| DRL will exclusively utilize Fat Shark’s goggles throughout the DRL Algorand World Championship season: |
| l | Short Term Product Requirements (Analog) |
¡ Testing Goggles
| n | Ten (10) goggles samples needed for testing purposes (already received) | |
| n | DRL to provide written feedback on testing and overall goggle performance |
| ¡ | Competition Goggles (same model as the testing samples and to be provided as soon as practicable) |
| n | Five (5) Fat Shark FPV goggle sets per pilot (sixty-five sets total) needed by July 31 of each Year | |
| n | Goggles to be customized to match pilot jersey colors | |
| n | Fat Shark to perform necessary goggle maintenance, repairs, and replacements | |
| n | Fat Shark to supply necessary goggle batteries |
¡ Press and Promotion Goggles
| n | Five (5) goggle sets per season to be used for press, promotion, and mobile activations such as ‘Ride Alongs’ and ‘Learn to Fly’ | |
| n | Goggles to be approved DRL brand colors |
| l | Long Term Product Requirements (Digital) |
| ¡ | DRL and Fat Shark will co-innovate a new digital goggle system with the intent to transform the current analog feed to digital | |
| ¡ | DRL and Fat Shark to work together to outline necessary requirements and create separate agreement / SOW |
| 2. | Exclusive Licensed Products | |
| Subject to separate license agreements, DRL and Fat Shark will exclusively produce co-branded products such as the following: |
| l | Products to be developed under separate license: |
| ¡ | DRL Branded FPV Goggles |
15. DRL Branded Controllers
| ¡ | DRL Branded FPV Drone Kits |
| l | Fat Shark and Rotor Riot to manage production and distribution and create a DRL branded store at drl.rotorriot.com | |
| l | DRL to license its IP, provide technical and design support and manage marketing and promotion across its global channels | |
| l | Specific revenue share to be determined on a product by product basis |
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| 3. | Marketing & Promotional Benefits | |
| DRL will showcase Sponsor’s brands across the following marketing and promotional channels. |
| l | Marketing |
| ¡ | Benefits |
| n | Fat Shark designation as the Official FPV Goggle Supplier of the Drone Racing League | |
| n | Rotor Riot designation as the Official FPV Drone Retail Store of the Drone Racing League | |
| n | Use of DRL marks, logos and pilot imagery in Sponsor’s marketing and sales materials, subject to DRL’s prior approval (such approval to not be unreasonably withheld, delayed or denied) | |
| n | Joint press release timed with potential UMAC initial public offering |
| l | Broadcast |
| ¡ | Ad Inventory & Branded Programming |
| n | Two (2) :30 ad units per race broadcast; twenty-eight (28) total across the DRL season |
| ¡ | Upon request, DRL to develop custom :30 ad spot utilizing DRL pilots/footage |
| n | One (1) :05 second brand billboard per race broadcast; fourteen (14) total across the DRL season | |
| n | Four (4) branded :30 features across the season |
| ¡ | Additional Broadcast Integrations |
| n | One (1) verbal mention per race broadcast (e.g., “DRL pilots compete with Fat Shark FPV goggles”) | |
| n | Two (2) QR code graphics overlays per race broadcast (e.g., Scan QR code to visit Rotorriot.com) |
| ¡ | Live Event Integrations |
| n | Four (4) LED banners per live race and one (1) light cube on-course |
| l | Digital & Social |
| ¡ | Call to Action “CTAs” |
| n | Inclusion in six (6) DRL newsletters with “Plus Ups” during key timeframes (e.g., Holiday) | |
| n | Rotor Riot store link integration into DRL website | |
| n | Sixteen (16) co-branded social posts with special offers and rewards (e.g., Branded Leaderboards with swipe up feature) |
| ¡ | Amplifying Brand Awareness |
| n | Ten (10) branded social videos across DRL channels (e.g., Pilot Perspectives) | |
| n | Fat Shark & Rotor Riot will receive social tags, hashtag integrations, custom graphics, and CTAs across co-branded social posts |
| l | DRL SIM |
| ¡ | Benefits |
| n | Two (2) high-impact placements in the DRL SIM: |
| ¡ | One (1) branded banner on-map (e.g., Rotor Riot banner in the Campground SIM map) | |
| ¡ | One (1) custom skin in the DRL workbench |
| n | DRL to provide free downloads of the DRL SIM for use in GWPs for relevant Rotor Riot / Fat Shark products | |
| n | Fat Shark and Rotor Riot integration into DRL Sim Tryouts with prizing to tournament participants / winners subject to contract execution and product deliverable timelines |
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| l | DRL Pilots |
| ¡ | Benefits |
| n | Ability to feature DRL pilots as Rotor Riot brand ambassadors in their DRL uniforms and leverage official DRL race footage in custom content and Rotor Riot events (e.g., Rotor Rampage) | |
| n | DRL to support distribution of brand ambassador content across DRL digital channels (e.g., YouTube, Instagram, Facebook, Twitter, TikTok) | |
| n | Rotor Riot and Fat Shark permitted to distribute DRL content on its owned and operated channels |
| l | Events & Hospitality |
| ¡ | Benefits |
| n | Fifty (50) GA tickets to each live race for Rotor Riot social sweepstakes and/or gift with purchase (GWP)s | |
| n | On-site experiences for Ten (10) customers and/or employees (e.g., course tours, pilot meet & greets, fan giveaways, DRL SIM stations) | |
| n | Footprint on site during DRL races in the DRL Fan Zone to activate Rotor Riot / Fat Shark (if desired) | |
| n | Joint Participation and branding at events, such as Rotor Riot’s signature “Rampage” FPV event |
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation in this Form S-1-A4 of our report dated March 14, 2023 (except for the effects of the stock split described in Note 5 and Note 8 (Subsequent Events) as to which the date is June 14, 2023), relating to the financial statements of Unusual Machines, Inc. as of December 31, 2022 and 2021 and to our report dated August 7, 2023, related to the financial statements of Fat Shark Holdings, Ltd. as of April 30, 2023 and 2022 and to our report dated August 7, 2023, related to the financial statements of Rotor Riot, LLC as of April 30, 2023 and 2022 and to all references to our firm included in this registration statement.
Certified Public Accountants
Lakewood, CO
August 7, 2023