Insiders ranked by realized 90-day signed return on their open-market trades at Unusual MacHines, Inc.. Minimum 3 scored trades. Returns are signed - a sale followed by a rally counts against the insider.
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.15pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.49pp
Lean -
Net-tone change vs last year's 10-K.
MD&A
+0.79pp
Lean +
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
loss+4
adverse+3
damage+3
defects+3
disruptions+3
Positive rising
adequately+3
effective+2
achieve+1
achieving+1
efficiency+1
Risk Factors (Item 1A)
15,800 words
Item 1A.
Risk Factors
This Annual Report on Form 10-K contains forward-looking information based on our current expectations. Because our business is subject to many risks and our actual results may differ materially from any forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our business, operating results, financial condition and the trading price of our securities. This discussion should be read in conjunction with the other information in this Annual Report on Form 10-K, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below could have a material adverse effect on our business, results of operations, financial condition, prospects and securities trading prices. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risk Factors Summary
Our business and an investment in our Common Stock are subject to numerous risks and uncertainties, including those highlighted in this “ Risk Factors ” section below. Some of these risks include:
Risks Related to Our Sale of Drone-Related Products and Operations in the Drone Industry
Our to effectively manage our rapid growth could our business and result in material effects on our future operating results.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
volatility+1
limitation+1
decline+1
Positive rising
improve+4
efficiencies+4
gains+3
gain+2
efficient+2
MD&A (Item 7)
4,747 words
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited financial statements (prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)) and related notes included elsewhere in this Annual Report on Form 10-K (this “Form 10-K”). The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” “Unusual Machines,” and the “Company” refer to Unusual Machines, Inc. and its subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted.
Recent Developments
At the Market Agreement
On August 28, 2025, we entered into a Capital on Demand Sales Agreement (the "Sales Agreement”) with Jones Trading Institutional Services LLC ("Jones”), pursuant to which we may issue and sell over time and from time to time up to $300,000,000 worth of shares of our common stock (the "Shares”). Sales of the Shares, if any, may be made by any method permitted by law deemed to be an "at the market” offering as defined in Rule 415 of the Securities Act of 1933 (the "Securities Act”), including without sales made directly on or through the NYSE American, the trading market for the Company’s common stock, or any other existing trading market in the United States for the Company’s common stock, sales made to or through a dealer other than on an exchange or otherwise, sales made directly to Jones as principal in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices, and/or in any other method permitted by law. Jones will use commercially reasonable efforts to sell on behalf of us all the Shares requested to be sold by us, consistent with its normal trading and sales practices, subject to the terms of the Sales Agreement.
We have substantial inventory and the lack of sufficient purchase orders may have a material adverse effect on our gross margins and results of operations.
We rely on significant customers, thus any failure to generate revenue from such customers may have a material adverse effect on our financial results.
The efficiency of our revenue growth is highly dependent on are ability to attract new customers and grow our existing customer relationships in a cost-effective manner.
We rely on a limited number of suppliers and do not have long-term binding contracts, thus a shortage or unavailability of components or materials used in our manufacturing process may cause significant delays in product delivery which could have a material adverse effect on our business and financial condition.
Our entry into a new manufacturing business may require additional working capital and issues with the manufacturing process may lead to an adverse impact on our business.
Product quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.
The loss of key personnel and the inability to attract qualified personnel may have a material adverse effect on our future success.
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.
Damage to our facilities as a result of unforeseen events or unauthorized access and disruptions to our information technology systems could result in significant costs, reputational damage and an inability to efficiently and effectively conduct our business.
If we fail to comply with United States and foreign laws related to privacy, data security, and data protection, it could adversely affect our operating results and financial condition.
If we are involved in litigation, it could harm our business or otherwise distract management.
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.
We operate in an emerging and rapidly evolving industry which makes it difficult to evaluate our business and future prospects.
The imposition of rising tariffs or other factors that result in significant inflation may have a material adverse effect on our business and financial results.
Risks Related to Government Regulation of Our Operations and Industry
Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies by us, our customers, or others who use our products, or limitations put on the use of UAS, in response to public privacy or safety concerns, may prevent us from expanding the sales of our drone solutions in the United States.
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.
Legal and regulatory uncertainty surrounding the U.S. trade policy may cause significant disruption in our supply chain and have a material adverse effect on our business and operations.
Risks Related to Intellectual Property Protection
If third-party intellectual property infringementclaims 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.
Risks Related to our Financial Condition
Because the Company has a very limited operating history, any investment in us is highly speculative.
We have incurred net losses since inception and may fail to achieve or maintain profitability.
Various factors may lead to significant fluctuation in our future operating results and key metrics from period-to-period, which makes our future results difficult to predict.
Risks Related to our Common Stock
The market price of our common stock is subject to significant fluctuation and volatility which may result in substantial losses for our investors.
Because our common stock is listed on the NYSE American, we are subject to additional regulations and continued listing requirements.
Our failure to maintain effective disclosure controls and internal controls over financial reporting could have an adverse impact on us.
If securities or industry analysts 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.
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 Articles of Incorporation contain certain provisions which may result in difficulty in bringing actions against or on behalf of the Company or its affiliates.
RISK FACTORS
Investing in our Common Stock involves a high degree of risk. Investors should carefully consider the following Risk Factors before deciding whether to invest in the Company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of our securities could decline.
Risks Related to Our Sale of Drone-Related Products and Operations in the Drone Industry
Our failure to effectively manage our rapid growth could harm our business and result in material adverse effects on our future operating results.
Businesses which grow rapidly may have difficulty managing their growth. With our recent enterprise orders and commencement of manufacturing, we are experiencing explosive growth. In addition to our legacy facility which we are presently using to assemble drones for a customer, we have opened two manufacturing facilities and a fulfillment facility. We also plan to open a battery pack assembly and drone camera facility late in 2026. With this growth, we have increased our headcount from 18 employees as of March 31, 2025, to 81 employees as of December 31, 2025, and have approximately 141 employees as of March 6, 2026. This growth will place a strain on our executive management team. We may be unable to effectively manage the growth, oversee our manufacturing facilities and maintain quality control, integrate our new hires into our company culture and effectively deal with any human resource issues that may arise. In addition, with our rapid growth, we need to retain an OSHA consultant to identify, evaluate and control potential workplace hazards to prevent injuries, illnesses and fatalities. We intend to retain a consultant to conduct such an assessment but there can be no assurance that any workplace hazards, injuries, illnesses and fatalities may occur. As a result of these factors, we may face a material adverse effect on our business and future result of operations.
Because we have ordered substantial inventory in some cases prior to receipt of purchase orders, if our assumptions about future purchase orders are incorrect, it is possible that we may have to write off some of the inventory in the future.
Based upon communications with customers and potential customers, we order inventory to not only fulfill actual purchase orders from customers but also to be able to fulfill future customer orders assuming we receive them. If we do not receive the anticipated orders for this inventory and if we are unable to otherwise sell it, we may be required to increase our reserves or write off inventory in the future because it is obsolete. Any such write off could be material.
Increased inventory levels can also 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.
Because of our dependence on significant customers, our failure to generate revenue from those customers may impair our ability achieve projected financial results.
Beginning on September 30, 2025, we obtained a number of new purchase orders from a limited number of customers. On September 30, 2025, we announced a $12.8 million purchase order for components supplying Strategic Logix’s (“SL”) Rapid Reconfigurable Systems Line. There is no formal contract backstopping this purchase order. This purchase order represents the largest order that we have received.
We have, in the past, and expect for the foreseeable future, to be dependent on a small number of customers, to generate a significant portion of our revenue, and these customers may change periodically. As a result, our financial results may be adversely affected if purchase orders from new or existing customers do not meet our assumptions or if there is a default in a significant payment by any of our customers. Furthermore, to the extent that any one customer accounts for a large percentage of our revenue, the loss of that customer, or changes in their buying patterns or decisions, could materially affect our financial results. If our customers experience financial difficulties or business reversals, or lose orders or anticipated orders, which may reduce or eliminate the need for the products which they ordered from us, they may be unable or unwilling to fulfill their contracts with us.
There is also a risk that our customers will attempt to impose new or additional requirements on us that reduce the profitability of the orders placed by those customers with us. Further, even if the orders are not changed, these orders may not generate margins equal to our recent historical or targeted results. If we do not book more orders with existing customers, or develop relationships with new customers, we may not be able to increase, or even maintain, our revenue, and our financial condition, results of operations, business and/or prospects may be materially adversely affected.
If we are unable to attract new customers or maintain and grow our 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.
In order to grow and increases revenues, we are subject to the following:
In our enterprise channel, we must significantly grow our existing customer base;
While we have not sold any drone components for use in the Middle East, the consequences of the ongoing conflicts are uncertain;
While Russia’s war with Ukraine remains ongoing, if that conflict is resolved, it many reduce on the need for our drone components;
Both the United States and the global economies can impact our enterprise drone components business since an economic downturn or a period of high inflation can reduce orders;
Similarly, with our retail business, a recession or a period of high inflation would be expected to adversely affect sales in our retail channel.
If critical components or raw materials used to manufacture our products or used in its development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products, which could damage our business.
Our ability to meet customers’ demands depends, in part, on its ability to obtain timely and adequate delivery of high-quality materials, components and subsystems, many of which are obtained from a select group of specialized suppliers, including some sole-source providers. In order to mitigate potential disruptions, we maintain long-term, non-binding agreements with several key suppliers that help stabilize pricing, reduce lead times and enhance planning accuracy. We do not have long-term agreements with all suppliers that obligate them to continue to sell components, products required to build our systems or products. Our reliance on suppliers without long-term binding contracts involves significant risks and uncertainties, including whether our suppliers will provide an adequate supply of required components or products of sufficient quality, will increase prices for the components or products and will perform their obligations on a timely basis.
If any of our supplier’s face capacity constraints, financial instability, or an unwillingness to provide raw materials or components to us, it may need to seek alternative suppliers or revise its designs, particularly because some of the components are sourced from foreign countries. Locating alternative sources may take significant time, and even then, we may encounter significant delays in manufacturing and shipping and encounter increased costs. Additionally, credit constraints among key suppliers could impact our cash flow. We have also experienced rising costs for components, shipping, tariffs, warehousing, and inventory. Our domestic suppliers have experienced increased demand for their products due to tariffs, which could impact the availability or price of our components. The permanence of these cost increases remains uncertain, and obtaining replacement components within our required time frames may prove challenging. Shortages could lead to excess inventory and potential obsolescence risks.
In addition, certain raw materials and components used in the manufacture of our products and in our development programs, are periodically subject to supply shortages, and our business is subject to the risks of price increases and periodic delays in delivery.
Our ability to stay competitive within our markets may be dependent upon increasing manufacturing capacity to support anticipated growth and achieving cost reductions and projected economies of scale from increasing manufacturing quantities of its products. Failing to adequately increase production capacity and achieve such reductions in manufacturing costs and projected economies of scale could materially and adversely affect our business.
Our future growth depends on increasing manufacturing capacity of its products, and any failure to adequately increase such capacity could have a material adverse impact on our business and operating results. We do not know whether or when we will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable it to manufacture its products in commercial quantities while meeting the volume, speed, quality, price, engineering, design and production standards required to successfully market such products. Our failure to develop such manufacturing processes and capabilities that can efficiently service its clients and markets could have a material adverse effect on its business, financial condition, results of operations and prospects. Our ability to remain competitive is, in part, dependent upon achieving increased savings from volume purchases of raw materials and component parts, achieving acceptable manufacturing yield and capitalizing on machinery efficiencies.
We are subject to a number of supply risks concerning our Blue List products which could adversely impact our ability to deliver such products to the United States Government and commercial customers.
We purchase certain Blue UAS products from a privately-held United States based manufacturer pursuant to purchase orders. We are subject to a number of risks including:
we do not have a supply agreement requiring the manufacturer to produce a specified volume per year;
the manufacturer expects to deliver product quantities to us over a pre-determined period which increases the likelihood we may be unable to meet a large order from one or more customers;
beyond the initial purchase orders, we have no assurances on future pricing which means future costs could adversely affect our marketing and future gross margins;
because we have no non-compete from the manufacturer, it could manufacture the same products for our competitors;
we have no representations from the manufacturer on its intellectual property ownership of our products; and
because we are not the manufacturer, we are subject to a number of risks including timely deliveries and quality control.
Because we rely on a limited number of suppliers, for our component parts our business may be adversely affected .
The drone industry relies on limited sources to supply certain components and materials used in the manufacturing of drone components. We are seeking to purchase certain components or sub-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 margins and operating results. In addition, the outcome of the United States tariff policies could significantly increase the cost of our component parts. We will also be forced to increase prices to our customers which could result in decreased sales, especially if there is an economic recession. Our operating results could be materially and 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.
Some of the key components used to manufacture our products come from a limited 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. We order inventory 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 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. 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. 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 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 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.
The development and manufacturing of headsets encompasses several complex processes and several steps of our production processes are dependent upon third party vendors, supply chains, the availability of PCBs, optics, and certain chips. Any change in availability of these components, manufacturing or design partners could result in delivery interruptions, which could adversely affect our operating results.
As we continue to develop our products, we must progress through the complex and challenging processes involved in the technology and designs on which Fat Shark and Rotor Riot products are based. 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 manufacture and market our component parts. 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;
the impact of tariffs, the availability of United States supply sources and the impact of higher prices;
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 United States 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 our subsidiaries;
Our subsidiaries do not always execute definitive written agreements with their vendors, particularly those located in China, which exposes them to possible disputes concerning the existence or terms of their agreements and their intellectual property rights;
the reliance on a few sources, and sometimes, single sources for raw materials and components, such that if they cannot secure a sufficient supply of these product components, they cannot manufacture and sell products in a timely fashion, in sufficient quantities or under acceptable terms;
operations of these third-party manufacturers, suppliers or service providers could be disrupted by conditions unrelated to our subsidiaries’ business or operations, including the bankruptcy of the party;
carrier disruptions or increased costs beyond our subsidiaries’ control;
possible misappropriation of our subsidiaries’ proprietary technology; and
failing to deliver products under specified storage conditions and in a timely manner.
Any of these factors could result in a material and adverse affect upon our results of operations.
Because our new manufacturing business has inherent risks, such risks may adversely impact us.
We have recently opened drone motor and drone headset manufacturing facilities. We are using our initial facility to assemble drones for a customer, and plan to open a battery pack assembly and drone camera manufacturing facility in late 2026. There are inherent risks in connection with launching our component manufacturing business, which include:
the need to expend working capital to purchase manufacturing equipment, rent facilities and to hire personnel with the requisite skills to fabricate drone motors, headsets, batteries and cameras which could initially have an adverse effect on our working capital;
the manufacturing equipment and software that we acquire may have bugs or may not be in sound working order and the products we manufacture may not be manufactured in accordance with our or our customers specifications, which result in conflicts with customers, the loss of revenues or damage to our reputation; and
we may encounter cost overruns for a variety of reasons which due to fixed priced customer orders leads to operating losses.
Our products, including motors, batteries, and other advanced components, rely on rare earth metals for their manufacturing, of which a significant majority are sourced from China. Any disruption in the supply of these metals could adversely affect our ability to produce and deliver our products. Factors that might lead to such disruptions include geopolitical tensions, trade restrictions, supply chain bottlenecks, and environmental regulations affecting mining operations. A limited supply or increased cost of rare earth metals could lead to higher production costs, delays in manufacturing schedules, and potential inability to meet customer demand, thereby impacting our revenue and growth plans. Managing these risks necessitates close monitoring of supply chains, diversification of suppliers, and the pursuit of alternative materials or technologies where possible.
Escalating restrictions between the U.S. and China contribute to supply chain complexities. Some of our components sourced from foreign countries, including China, are at risk of further sanctions and other trade restrictive actions, and any escalation in global trade tensions or trade restrictions may hinder our ability to obtain these components from new suppliers. Restrictions on semiconductor manufacturing equipment and raw materials could lead to higher material costs, material unavailability, and transportation uncertainty.
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 including the new drone motors, headsets and cameras we manufacture could contain defects in design or manufacture. There can be no assurance we will be able to detect and remedy all defects in the products 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 protracteddelay necessary to remedy a quality issue or defect in a new product could be substantial.
Fat Shark generally provides a one-year warranty on all of its products, except in certain European countries where it can be two years for some consumer-focused products.
Rotor Lab does not provide any warranty, but does provide for a seven day defect period.
Unusual Machines, the parent company which manufactures motors, has a limited warranty in which it warrants to customers that their products will be free from defects in material and workmanship under normal use and service for up to 90 days. The limited warranty covers manufacturing defects and prematurefailures and extends only to the original customer and is non-transferrable.
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 policies, any failure rate of our products that exceeds our expectations may result in unanticipatedlosses. Any negative publicity related to the perceived quality of our products could affect our brand images and decrease retailer, distributor and consumer confidence and demand, which could adversely affect our operating results and financial condition. Further, accidentaldamage 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 accidentaldamage vary from country-to-country. Changes in interpretation of the regulations concerning extended warranties and accidentaldamage 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 its support services. Our failure to comply with past, present and future similar laws could result in reduced sales of its products, reputational damage, penalties and other sanctions, which could harm our business.
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 the warranty obligations are higher than anticipated. 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, Fat Shark could end up incurring materially higher warranty or recall expenses than anticipated, which would materially adversely affect our business.
If we lose key personnel, it may adversely affect our business.
Our future success depends in large part on the continued contributions of our executive officers, members of senior management and other key personnel, particularly Dr. Allan Evans, our Chief Executive Officer and Mr. Andrew Camden, our President. In particular, we believe that Dr. Evans’ leadership, knowledge and experience in the drone industry has been critical to our growth, our significant working capital and any future successes and progress we may experience. The loss of the services of Dr. Evans or Mr. Camden could therefore materially and adversely affect our business and prospects. Our executive officers, senior management and key personnel can terminate their services 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.
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 middle management 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. Potential new employees may be unwilling or unable to relocate to the Orlando, Forida area. 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 employees. 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. 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.
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.
If our facilities and information technology systems or those of our key suppliers are damaged as a result of disasters or unpredictable events, it could have an adverse effect on our business operations.
Our new manufacturing facilities are located in Orlando, Florida. We also rely on third-party manufacturing plants in the U.S., Asia and other parts of the world to provide key components for our products. If major disasters such as hurricanes, tornadoes, pandemics, earthquakes, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur in any of these locations, or our information technology systems or communications network or those of any of its key component suppliers breaks down or operates improperly as a result of such events, its facilities or those of its key suppliers may be seriouslydamaged, and we may have to stop or delay production and shipment of its products. We may also incur expenses relating to such damages. If production or shipment of our products or components is stopped or delayed or if we incur any increased expenses as a result of damage to its facilities, its business, operating results and financial condition could be materially and adversely affected.
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 cybersecurity attacks, could result in significant costs, reputational damage and limits on our ability to conduct our business activities.
Our operations 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, a number of companies have sufferedsuccessful cybersecurity 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 cybersecurity 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. Cybersecurity 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 cybersecurity threats or improve and adapt such systems and measures as such threats evolve and advance in their ability to avoid detection.
A cybersecurity incident, or a failure to protect our technology infrastructure, systems and information and our customers, suppliers and others’ information against cybersecurity 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 with respect to the resiliency of its systems and the adequacy of its control environment with respect to such systems may increase as the risk of cybersecurity attacks, and the consequences of those attacks become more pronounced. We may not be successful in meeting those expectations or in its efforts to identify, detect, prevent, mitigate and respond to such cybersecurity incidents or for its systems to recover in a manner that does not disrupt its ability to provide products and services to its customers or product personal, private or sensitive information about its business, customers or other third parties.
The failure to maintain an adequate technology infrastructure and applications with effective cybersecurity 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 cybersecurity threats. Failing to prevent or properly respond to a cybersecurity attack could expose to civil liability, cause us to lose customers or suppliers, impair its ability to maintain continuous operations, and inhibit our ability to meet regulatory requirements.
If we fail to comply with United States 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”) (collectively, the “GDPR”) and Canada’s Personal Information Protection and Electronic Documents Act (“PIPEDA”). Other countries where we may seek to do business also may have data privacy laws we will be required to comply with. 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 the United States federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data and privacy laws, consumer protection laws and other similar laws. Certain U.S. states have enacted comprehensive consumer privacy laws that impose significant and costly obligations on covered business, including providing specific disclosures in privacy notices and affording residents with certain rights concerning their personal data. As applicable, such rights may include the right to access, correct or delete certain personal data, and to opt-out of certain data processing activities, such as targeted advertising, profiling and automated decision-making. The exercise of these rights may impact our business and ability to effectively provide our products and services..
Moreover, specific states also impose more stringent requirements for processing certain personal data, including sensitive information, such as conducting data privacy impact assessments. These state laws allow for statutory fines for noncompliance. For example, the California Consumer Privacy Act of 2018 applies to personal data of consumers, business representatives and employees who are California residents, and requires businesses subject to the law to provide specific disclosures in privacy notices and respond to requests of such individuals to exercise certain privacy rights. In September 2025, (and effective January 1, 2026) California amended the CCPA to (i) regulate technologies that replace or substantially replace human decisions, (ii) require comprehensive risk assessment reports that address specific processing activities that present a significant risk to a consumer’s privacy, and (iii) clarify when a cyber security audit must be conducted. These updated regulations expand the scope and compliance obligations of the CCPA. The CCPA provides for fines of up to $2,500 per unintentionalviolation and up to $7,500 per intentionalviolation (as adjusted from time to time) and allows individuals affected by certain data breaches to recover statutory damages up to $750 per consumer per incident. The costs of compliance with, and other burdens imposed by, the CCPA, GDPR, 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.
As noted, in addition to the CCPA, the United States currently has a number of states that have data privacy laws in place, or data privacy laws set to soon take effect ranging from narrow to comprehensive in nature. During the 2025 legislative cycle, comprehensive privacy reform was not prevalent in state legislatures, but several states with existing privacy statutes expanded the scope of their privacy frameworks, including Colorado, Connecticut, Virginia, Utah, Texas, Oregon, Montana, and Kentucky. This patchwork approach to privacy legislation could pose compliance and liability risks for companies that have multistate operations. Proposed and enacted bills in various states have similar rights in preexisting privacy legislation but differ in implementation and enforcement.
Outside of the United States, an increasing number of laws, regulations and industry standards govern data privacy and security. For example, the EU GDPR, the UK GDPR, and PIPEDA (as well as various related provincial laws) impose strict requirements for processing personal data. Specifically, in Europe and the United Kingdom, companies may face temporary or definitive bans on data processing and other corrective actions including fines of up to €20 million under the EU GDPR, £17.5 million under the UK GDPR or, in each case, 4% of annual global revenue, whichever is greater or private litigation related to processing of personal data brought by classes of data subjects or consumer protection organizations authorized at law to represent their interests. In Europe, the Network and Information Security Directive (“NIS2”) regulates resilience and incident response capabilities of entities operating in a number of sectors. Non-compliance with NIS2 may lead to administrative fines of up to €10 million or up to 2% of the total worldwide revenue of the preceding fiscal year.
We seek to comply with all applicable laws, policies, legal obligations, and industry codes of conduct relating to privacy, data security, and data protection. Our cash 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.
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 management team 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.
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 a Rotor Riot drone, it as a reseller of the drone could be sued for selling an allegedlydefective product. The possibility that the foregoing events occur from events involving our B2B and business to consumer (“B2C”) channels products is particularly high, because we supply technology used in the operation of drones which is relatively novel. Drones 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 our enterprise products are used as ancillary or supplemental components of a drone’s functions, it 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 claimsagainst us, regardless of their merit, could severelyharm 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 successfullydefendagainst 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 business expands. 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 againstlosses 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.
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 markets in which we operate include a range of established manufacturers, distributors, and emerging companies that develop and supply components used in small unmanned aerial systems. These components include flight controllers, electronic speed controllers, motors, FPV cameras, video transmission systems, and related electronics. Competitors in these markets include companies such as ePropelled, ARK Electronics, ModalAI, Orqa, Lumenier, and other drone and FPV component manufacturers, as well as a large number of smaller private companies that specialize in individual components or subsystems within the drone ecosystem.
Some competitors have significantly greater financial, manufacturing, technical, and marketing resources than we do. These companies may benefit from established global supply chains, broader product portfolios, larger engineering teams, and greater brand recognition. Larger competitors may also be able to leverage economies of scale to offer products at lower prices or devote greater resources to research and development and marketing. At the same time, the industry includes numerous smaller competitors that may operate with lower overhead costs, narrow product specialization, or established relationships within specific drone markets or communities.
Competition in our industry is driven by several factors, including product performance and reliability, pricing, product availability, supply chain stability, speed of product development, customer support, and brand reputation. Rapid technological development in the drone industry results in frequent product introductions and relatively short product life cycles. As a result, companies must continuously invest in product development and manufacturing capabilities to remain competitive.
In addition, regulatory developments and government procurement requirements are influencing the competitive landscape for drone components. Certain government and commercial customers increasingly require components that comply with U.S. regulatory frameworks, including the NDAA and related procurement requirements. Recent regulatory actions by U.S. agencies, including the Federal Communications Commission, as well as government initiatives intended to strengthen domestic drone manufacturing capabilities, may further shape the market for drone components. Our strategy includes developing and manufacturing certain drone components in the United States and pursuing compliance with applicable regulatory frameworks. However, there can be no assurance that these efforts will provide a competitive advantage or that customers will adopt such products at scale.
Our ability to compete effectively will depend on a number of factors, including our ability to develop and introduce new products, maintain product quality and reliability, manage manufacturing and supply chain operations, expand production capacity, maintain effective sales and distribution channels, and provide responsive customer support. Increased competition could result in pricing pressure, reduced margins, or loss of market share, any of which could have a material adverse effect on our business, financial condition, and operating results.
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 challenging supply chain issues which may arise;
complying with developing regulatory requirements;
the possibility that favorable estimates or projections prove to be incorrect; and
responding effectively to changing technology, evolving industry standards, and changing customer needs or requirements.
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 challengessuccessfully, our business, financial condition, results of operations, and prospects may be adversely affected by such failure.
If we fail to respond to commercial industry cycles in terms of its cost structure, manufacturing capacity, and/or personnel needs, our business could be seriouslyharmed.
The timing, length, and severity of the up-and-down cycles in the commercial and defense industries are difficult to predict. This cyclical nature of the industries in which we operate affects our ability to accurately predict future revenue, and in some cases, future expense levels. During down cycles in its industry, the financial results of our customers may be negatively impacted, which could result not only in a decrease in orders but also a weakening of their financial condition that could impair our ability to recognize revenue or to collect on outstanding receivables. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. We must be in a position to adjust its cost and expense structure to reflect prevailing market conditions and to continue to motivate and retain its key employees. If we fail to respond to fluctuating market conditions its business could be seriouslyharmed. In addition, during periods of rapid growth, we must be able to increase engineering and manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. Each of these factors could adversely impact our operating results and financial condition.
If the tariffs or other factors result in increased inflation and a recession, our business may be materially harmed .
A direct impact from rising tariffs on our business has been increases in the prices of inventory we acquire and an increase in our selling prices (with one exception relating to our Unusual Machines branded B2C products). Further, due to the tariffs, possibly large cuts in the size of the government and possibly artificial intelligence (“AI”), there may be increased unemployment and other economic factors which could result in a recession. In such event, our B2C business may be materially and adversely affected. Further, our enterprise business including our manufacturing of drone components in the United States may also be adversely affected by a recessionary economy and inflation caused not only by tariffs but also by United States interest rate cuts.
The uncertainty and change in U.S. Trade and Tariff Policy could adversely affect our business.
Recent judicial rulings have introduced significant uncertainty regarding the legal basis for U.S. tariff policy. On February 20, 2026, the U.S. Supreme Court held that the International Emergency Economic Powers Act (“IEEPA” ) does not authorize the President to impose broad tariffs, invalidating major tariff measures that had been implemented under that statute. The decision emphasized that tariff-setting authority resides with Congress and that IEEPA does not include an express grant of such authority. As a result, tariffs collected under IEEPA may be subject to refund actions, and lower courts may provide further guidance on refunds and enforcement.
Although the ruling applies to tariffs imposed under IEEPA, the President has publicly signaled intentions to pursue alternative tariff measures (such as a 15% tariff on imported goods) under other statutory frameworks. These alternative legal authorities (e.g., provisions of the Trade Act of 1974 , Trade Expansion Act, or other trade statutes) may be subject to legal challenge, statutory limitations, procedural requirements, and potential judicial scrutiny. There is no assurance that such alternative tariffs will withstand litigation, will not be delayed, will be upheld by courts, or will not be amended or repealed by future administrations or Congress.
The implementation, alteration, or invalidation of tariffs and other trade measures could materially and adversely affect the Company’s business, including by increasing the cost of imported goods and components, disrupting supply chains, altering competitive conditions in domestic and international markets, triggering retaliatory measures by trading partners, and increasing volatility in foreign currency and commodity markets. These developments could materially impact revenues, operating costs, margins, and overall financial performance.
Uncertainty in U.S.–China Trade Policy and Tariff Authority Could Disrupt Our Supply Chain and Increase Our Costs.
Our manufacturing operations depend on the timely procurement of raw materials, subcomponents, and finished parts, some of which are sourced from suppliers located in China. Recent developments in U.S. trade policy have introduced significant legal and regulatory uncertainty. On February 20, 2026, the Supreme Court of the United States held that the IEEPA does not authorize the imposition of broad-based tariffs. Following that decision, the President issued an executive order on February 24, 2026 imposing a 10% tariff on all countries for certain imported goods based on an alternative statutory authority and indicated a potential future increase to 15%.
Although the recent ruling addressed tariffs imposed under IEEPA, the Administration may seek to impose tariffs under other trade statutes, including Section 301 of the Trade Act of 1974 or Section 232 of the Trade Expansion Act of 1962, each of which carries distinct procedural requirements and legal standards. Any such tariffs may be subject to additional legal challenges, modifications, delays, or reversal by courts, Congress, or future administrations.
The imposition, expansion, modification, or invalidation of tariffs on imports from China, or retaliatory measures by China or other trading partners, could materially and adversely affect our business in several ways:
Increased input costs. Tariffs could increase the cost of imported components and raw materials, which may compress margins if we are unable to pass increased costs through to customers in a timely manner, or at all.
Supply shortages and delays. Trade restrictions, customs enforcement actions, port congestion, export controls, or supplier disruptions in China could delay shipments or reduce available supply, potentially interrupting our production schedules.
Supplier concentration risk. Certain specialized components may be available from a limited number of qualified suppliers, some of which are located in China. Rapid transition to alternative suppliers may not be feasible due to tooling, qualification, regulatory, contractual, capacity, or cost constraints.
Operational disruption. Uncertainty regarding tariff rates and enforcement may complicate procurement planning, inventory management, pricing decisions, and long-term supply agreements.
Retaliatory actions and geopolitical risk. Escalation of trade tensions between the United States and China could result in additional duties, export restrictions, licensing requirements, sanctions, or other governmental measures that disrupt cross-border supply chains.
Given the evolving nature of U.S.–China trade policy and ongoing legal and political developments, we cannot predict the scope, timing, or duration of future trade measures. Any of the foregoing developments could materially disrupt our supply chain, increase our operating costs, reduce demand for our products, and materially and adversely affect our business, financial condition, and results of operations.
If the United States experiences significant inflation, it could adversely affect our business and financial results.
Following the end of the COVID 19 pandemic, the United States experienced significant inflationary pressures. Though the current rate of inflation in the United States is much lower, if inflationary pressures occur again, including as a result of future United States interest rate declines, such inflation can adversely affect us in a variety of ways. A rise in inflation can adversely affect us by increasing our operating costs, including by increasing the costs of materials, freight and labor. The Company has not identified, planned or taken any actions to mitigate inflationary pressures. Further, in the United States, the Federal Reserve has historically 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 and adversely affect our business, results of operations and financial condition.
Risks Related to Government Regulation of Our Operations and Industry
If we fail to have other drone products approved for the Department of War’s Blue UAS Cleared List which we refer to as the “Blue List”, our future results of operations may be materially and adversely affected.
We have had multiple United States made drone products that have been approved and added to the Department of War’s Blue List. By virtue of being on the Blue List, it enables us to receive orders from agencies of the United States federal government. It also provides credibility to potential enterprise customers who might be interested in purchasing drone components from us. We are seeking to add additional products to the Blue List. If these additional products are not added to the Blue List, our future results of operations may be materially and adversely affected.
If we fail to obtain necessary regulatory approvals from the FAA or other governmental agencies or limitations are put on the use of drones in response to public privacy or safety concerns, it may prevent us from expanding the sales of our drone components in the United States.
The regulation of drones and drones 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 drones offered by third parties. 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 harmalleged did not arise from our conduct or products. Generally, under current FAA regulations the failure to register a drone, 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. Criminalpenalties include fines of up to $250,000 and/or imprisonment for up to three years. However, the FAA and other government bodies and agencies are considering changes to address the drone industry, which is relatively new and rapidly evolving. In addition, there exists public concern regarding the privacy and safety implications of the use of drones. This concern has included calls to develop explicit written policies and procedures establishing usage limitations. There is no assurance that the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the adoption of drones 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.
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.
During 2024, we commenced sales of our Blue UAS products including to a European customer as part of a larger order. The United States 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 United States 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, United States export control laws and economic sanctions prohibit the provision of products and services to countries, governments, and persons targeted by United States sanctions. Even though we take precautions to prevent our products from being provided to targets of United States 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 our 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 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.
Risks Related to Intellectual Property Protection
If third-party intellectual property infringementclaims 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, artificial intelligence, information technology, and display industries steadfastly pursue and protect intellectual property rights, often times resulting in considerable and costlylitigation 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 defendagainstinfringementclaims, we may face costlylitigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement are unwarranted. Intellectual property litigation is often extremely expensive and entails high legal fees and costs of expert witnesses.
Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the drone business in which we are pursuing product development and sales. As the drone industries and consumer electronics 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 claimsagainst 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 a claim of patent infringementagainst 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 infringementagainst us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, it could materially adversely affect our business.
We may depend on intellectual property rights including patent rights that have not yet been and may not be obtained by us, and our intellectual property rights and proprietary rights may not adequately protect our products.
Our commercial success will depend substantially on the ability to obtain patents and other intellectual property rights and maintain adequate legal protection for products in the United States and other countries. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that these assets are covered by valid and enforceable patents, trademarks, copyrights or other intellectual property rights, or are effectively maintained as trade secrets. We currently have 29 issued patents, including five issued in the United States, and three pending patent applications. Certain patents were assigned to a wholly-owned subsidiary of the Company by UAV Patent Corp. (“UAV”) a wholly-owned subsidiary of Red Cat Holdings, Inc. (“Red Cat”), in each case with a non-exclusive, non-sublicensable royalty free perpetual license back to UAV for Red Cat to make, use and sell products subject to such assigned patents and applications solely with respect to military and defense drone applications.
We will apply for patents covering our products, services, technologies, and designs, as we deem appropriate. We may fail to apply for patents on important products, services, technologies or designs in a timely fashion, or at all. We do not know whether, and there can be no assurance that, any of our patent applications will result in the issuance of any patents. Even if patents are issued, they may not be sufficient to protect our products, technologies, or designs. Our existing and future patents may not be sufficiently broad to prevent others from developing competing products, technologies, or designs. Intellectual property protection and patent rights outside of the United States, particularly in China, are even less predictable. As a result, the validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:
we were the first to conceive, reduce to practice, invent, or file the inventions covered by each of our issued patents and pending patent applications;
others will independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies, services or designs;
any patents issued to us will provide us with any competitive advantages, or will be challenged by third parties;
we will develop additional proprietary products, services, technologies or designs that are patentable; or
the patents of others will have an adverse effect on our business.
The patents we own or license and those that may be issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages. Moreover, third parties could practice our inventions in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technology where patented. Such third parties may then try to import products made using our inventions into the United States or other territories. We cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth, validity and enforceability of the claims upheld in our and other companies’ patents. Further, patents have a limited lifespan. In the United States, the natural expiration of a patent is 20 years after it is filed, although various extensions may be available. The life of a patent, and the protection it affords, is limited. When the patent life has expired for a product, we will become vulnerable to competition from competitors attempting to replicate the technology that was formerly patent protected. Further, if we encounter delays such as due to regulatory approvals, the time during which we will be able to market and commercialize a product under patent protection could be reduced.
Unauthorized parties may attempt to copy or otherwise use aspects of our processes and products that we regard as proprietary. While we plan to enter into written agreements with certain of our employees and consultants with terms designed to protect our intellectual property rights, there cannot be any assurance that these provisions will provide us with the protection sought. In addition to the inadvertentloss of a trade secret due to the failure to enter into a confidentiality agreement, the language of a particular confidentiality agreement may not protect our intellectual property. 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 generally requires 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 and a failure to obtain such an agreement could have seriousadverse consequences.
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 adequatelyagainstunauthorized 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 litigationagainst 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.
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.
Risks Related to our Financial Condition
Because the Company has a limited operating history, any investment in us is highly speculative.
We essentially had no business operations or revenue until we acquired Fat Shark and Rotor Riot simultaneously with the closing of our initial public offering (the “IPO”) in February 2024. Both companies, prior to the completion of the acquisitions, were operated by Red Cat since their acquisition by Red Cat in 2020. Since the IPO, we have grown rapidly particularly in 2025 which growth is continuing this year.
Unusual Machines must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages of operations, and growth process. For all these reasons, we may be unable to achieve or maintain profitability in a timely manner or at all.
We have incurred net losses since inception and may fail to achieve or maintain profitability.
Since inception, we have incurred net losses for each reported quarter other than the quarter ended September 30, 2025. In the quarter ended September 30, 2025, we incurred net income of $1,603,465, which was related to an unrealized gain in short-term investments rather than our core operations. For the year ended December 31, 2025, we sustained an operating loss of $25,152,060 and a net loss of $19,193,617. We will need to generate higher revenues and control operating costs in order to attainprofitability. 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 expects costs to increase in future periods as we expend substantial financial and other resources on, among other things:
expanding from 18 employees as of March 31, 2025 to 80 employees as of December 31, 2025 to approximately 141 employees as of March 6, 2026;
Opening four new production facilities during 2025 and Q1 2026;
Ordering new manufacturing equipment and acquiring inventory in advance of purchase orders;
general and administrative expenditures, including significantly increasing expenses to support the growth;
training and integrating new employees;
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;
maintaining the quality of our technology infrastructure;
establishing and increasing market awareness of our Company and enhancing our brand;
consummating and integrating acquisitions; and
maintaining compliance with applicable governmental regulations and other legal obligations, including those related to intellectual property and drones.
These expenditures may not result in additional revenue or the growth of our business in the manner or to the extent anticipated or intended or at all. If we fail to grow revenue or to achieve or sustain profitability, our business, financial condition, results of operations, and prospects could be materially adversely affected and the market price of our Common Stock could be adversely affected.
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 period-to-period as a result of various factors, some of which are outside of our control, including:
delays in the receipt of orders from customers that are dependent on government orders;
the effect that tariffs, a trade war and a potential recession may have on our business;
delays in getting U.S. Department of War Blue List approval for additional drone components that we develop;
the expansion or contraction of our customer base and the amount of products ordered;
the size, duration and terms of our contracts with both existing and new customers, including distributors we may contract with;
enterprise customers ordering of products that may be affected by their budgets and fiscal years;
seasonality of retail sales which generally has experienced higher sales volumes in the fourth quarters than in other three-month periods as a result of holiday purchases and its e-commerce focus;
Our ability to sell inventory that we purchased for anticipated orders which orders may or may not be received;
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;
the introduction of products and product enhancements by competitors, and changes in pricing for products offered by us or our competitors;
customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors or otherwise;
changes in customers’ budgets;
the amount and timing of payment for expenses, including infrastructure, research and development, sales and marketing expenses, employee benefit and stock-based compensation expenses;
costs related to the hiring, training and maintenance of our employees;
any future impact from the ongoing geopolitical military conflicts (including the wars in Ukraine and the Middle East and instability in Latin America, and tensions between China and Taiwan). In particular, there is a risk that rising oil prices caused by the Middle East war could be disruptive and have follow-on effects that could impact the economy;
supply chain issues;
political unrest affecting our relationship with China and future tariffs;
our lack of long-term agreements (including “requirements agreements”) with our suppliers which can affect the availability of parts and future costs; and
changes in laws and regulations or other regulatory developments that impact our business.
Any one of these or other factors discussed elsewhere in these Risk Factors may result in fluctuations in our operating results, meaning that period-to-period comparisons may not necessarily be indicative of our future performance.
Risks Related to our Common Stock
The market price of our common stock has been volatile, which could result in substantial losses for investors holding our shares.
The trading price of our common stock has been volatile and may fluctuate substantially as it has in the past. The price of our common stock in the market may be higher or lower than the price you paid, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose part or all of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include, but are not limited to the other Risk Factors included in this Report and also include:
the impact of the United States tariff policy and resulting litigation;
our ability to manage our rapid growth;
our success in managing our new drone motor, headset and other manufacturing facilities, the impact of bugs or defects in the equipment we are purchasing and the drone motors, headsets and camera components that we will manufacture, and our ability to recruit qualified employees for such facilities;
our failure to adequately increase production capacity and achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our business;
our facing significant risks in the management of our inventory, and failure to effectively manage the inventory levels may result in supply imbalances that could harm our business.
our facilities and information technologies systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events which could have an adverse effect on our business operations;
if critical components or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business;
our ability to stay competitive within our markets may be dependent upon increasing manufacturing capacity to support anticipated growth and achieving cost reductions and projected economies of scale from increasing manufacturing quantities of our products;
any softening in the economy and increases in inflation in the United States;
the announcement of new products by our competitors;
our ability to obtain patents for our products and defend our intellectual property from misappropriation and competitive use;
progress and publications of the commercial acceptance of similar technologies to those we utilize;
our ability to grow revenues and achieveprofitability from operations;
additions or departures of key personnel including our executive officers;
actual or anticipated variations in operating results;
business disruptions caused by natural disasters and uncontrollable events such as severe weather conditions including hurricanes or geopolitical turmoil;
disclosure of cybersecurity attacks or data privacy issues involving our products or operations;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, significant contracts, or other material developments that may affect our prospects;
adverse regulatory developments; and
general market conditions including factors unrelated to our operating performance
These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance and could prevent you from selling your common stock at or above your purchase price. In addition, the stock markets may experience extreme price and volume fluctuations that may be unrelated or disproportionate to a company’s operating performance.
Because our common stock is listed on the NYSE American, we are subject to additional regulations and continued listing requirements.
Because our common stock is listed on the NYSE American, we are required to meet the continued listing standards for NYSE American. If we fail to meet NYSE American’s listing standards, its common stock may be delisted. 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.
If we fail to maintain effective disclosure controls and internal controls over financial reporting, it could have an adverse impact on us .
We are required to establish and maintain appropriate disclosure controls and internal controls over financial reporting. In the past we have identified material weaknesses in our internal controls over financial reporting, which have been remediated.
Our current controls and any new controls that we develop may become inadequate because of changes in the conditions in our business, including our rapid growth. Further, we may discover weaknesses in our disclosure controls or our internal controls over financial reporting. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports. Ineffective disclosure controls and procedures, and internal control over financial reporting could also cause investors to lose confidence in our reported financials and other information, which would likely have a negative effect on the market price of our common stock.
If securities or industry analysts 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. If one or more analysts who cover us downgrade ours common stock, the market price for our common stock would likely decline.
Because we are an emerging growth company under the federal securities laws and regulations, we do not have to comply with certain disclosure requirement.
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 stockholder 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 fifth anniversary of the completion of our IPO; (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 Securities Exchange Act of 1934 (the “Exchange Act”), which would occur as of the end of any fiscal year if the market value of share 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.
Our Board may authorize and issue shares of a new series of preferred stock that could be superior to or adversely affect current holders of our Common Stock.
Our Board has the power to authorize and issue shares of classes of stock, including preferred stock that have voting powers, designations, preferences, limitations and special rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights without further stockholder 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 the 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 its 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.
Our Articles of Incorporation contain certain provisions which may result in difficulty in bringing actions against or on behalf of the Company or its affiliates.
Section 7 of our Articles of Incorporation provides that our internal affairs, including derivative actions, shall be brought exclusively in the courts located in Clark County, Nevada. To the extent that any such action asserts a claim under the Exchange Act, that claim must be brought in federal court. Section 7 also provides that the United States federal courts generally shall have exclusive jurisdiction over claims brought under the Securities Act, the effect of which is that an action under the Securities Act with respect to the Company may only be brought in the federal courts, while absent such provision the federal and state courts would otherwise have concurrent jurisdiction over such a matter. Further, Section 7 also provides for the United States District Court for the District of Nevada as the exclusive venue for any cause of action under either the Securities Act or the Exchange Act, meaning such federal court is the only court in which such a case may be brought and heard. These provisions may have the effect of precluding stockholders from bringing suit in their forum or venue of choice. Further, these provisions may give rise to a potential ambiguity as to which courts – state or federal – should preside over certain cases such as cases with overlapping claims under both Nevada corporate law and the Securities Act and the rules and regulations thereunder. While the Supreme Court of Delaware has upheld a charter provision designating federal courts as the exclusive forum for actions brought under the Securities Act, it is unclear how a court in Nevada, might rule. Therefore, an investor seeking to bring a claim against or on behalf of the Company or its affiliates under Nevada law or the federal securities laws may be forced to litigate their case in a court which poses geographic or other hardships, and could face uncertainty as to which jurisdiction and venue the case will ultimately be heard in, which may delay, prevent or impose additional obstacles on the investor in such litigation. Investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder, and there is uncertainty as to whether a state or federal court would enforce this charter provision.
limitation
Under the Agreement, Jones will be entitled to compensation of 3.0% of the gross proceeds from the sales of the Shares sold under the Sales Agreement. In addition, we have agreed to reimburse Jones for the fees and disbursements of its counsel, in an amount not to exceed $55,000. In addition, we shall reimburse Jones for legal fees of its counsel up to $3,750 for each quarterly due diligence update. The Shares are being offered and sold pursuant to a prospectus supplement filed with the Securities and Exchange Commission (the “SEC”).
During the month of October 2025, we sold 4,666,600 shares of common stock at an average price of $15.46 per share under the Agreement for total gross proceeds of approximately $72.1 million. We paid Jones approximately $2.2 million related to the sales of common stock under the Sales Agreement.
Recent Customer Purchase Orders
On January 15, 2026, we secured a $2.1 million order from a customer for domestically assembled drone systems for defense and government applications which includes Rotor Riot Brave flight controllers and ESCs, Fat Shark Aura analog cameras and video transmitters, HDO+ headsets and Unusual Machines motors. The order is expected to be fulfilled over the first two quarters of 2026.
On December 22, 2025, we secured a $3.75 million order from Performance Drone Works (“PDW”) to support the scaling of PDW’s FPV program. The order includes FPV headsets as the Company continues to expand and scale their U.S. based manufacturing including domestic motors and other components.
On October 15, 2025, we secured an order from the U.S. Army’s 101 st Airborne Division for 3,500 NDAA-compliance motors produced at our new U.S. based manufacturing facility. The motors will support the Division’s deployment of the new Attritable Battlefield Enabler V1.01 drones. The Army has also indicated plans to expand procurement, targeting an additional order of 20,000 components including motors from us in 2026.
On October 3, 2025, we secured an $800,000 purchase order for high-performance drone components from Red Cat. The order includes several of our Blue UAS products and motors that will be integrated into Red Cat’s FANG™ drones, supporting ongoing demand for U.S. made, NDAA compliant systems in defense, public safety, and other government agency applications.
Recent Investments
During the first quarter of 2026, we have entered into and made several key investments with three different private drone related companies. We invested a total $17.5 million between the three different companies, all of which will include registration rights upon completion of their initial public offering or merger with a publicly traded company.
These investments are ancillary to our core drone components business and were made because we believe the investments will provide future drone related revenues. In all cases, we also believed that apart from the future sales benefits, each investment potential outweighed the risks.
Recent Hires
On February 2, 2026, we appointed Chadd Cole as Vice President of FP&A. Mr. Cole has more than 12 years of experience in financial planning and analysis roles at Verizon, Electronic Arts (EA) and most recently was the Director of FP&A at Carrier. Mr. Cole led the financial planning and analysis function including budgeting, planning and financial reporting through automation and technology.
On January 1, 2026, we promoted Stacy Wright to Chief Revenue Officer. Ms. Wright joined Rotor Riot in 2020 as Vice President and was promoted to President in 2024 following its acquisition by Unusual Machines. She has been instrumental in scaling operations evolve the business from a community-driven e-commerce platform into a diversified revenue operation service enterprise and defense customers.
Results of Operations
We acquired Fat Shark and Rotor Riot on February 16, 2024 and generated no revenue from January 1, 2024 through the date of acquisition. For pro forma information unaudited result of operations reflecting our performance if we had owned these subsidiaries as of January 1, 2024, See Note 3 to our Consolidated Financial Statements.
Years Ended December 31, 2025 and 2024
Revenue
During the year ended December 31, 2025 we generated revenues totaling $11,199,217 compared to $5,565,319 during the year ended December 31, 2024, representing an increase of $5,633,898 or 101%. Our revenues during 2024 consisted primarily of retail revenue in our B2C business line. The increase in revenue during 2025 primarily relates to the increase and establishment of our B2B business and revenue related to our NDAA and Blue UAS products. During the fourth quarter of 2025, we started manufacturing production on certain products including drone motors and we continue to see increased interest and demand in our manufactured products heading into 2026. We expect our revenue to continue to grow quarterly in 2026 as we continue to build out our capacity including our manufacturing facilities and products as well increasing our staffing to handle additional demand from the market.
Cost of Goods Sold
During the year ended December 31, 2025, we incurred cost of goods sold of $7,292,370 compared to $4,019,068 during the year ended December 31, 2024, resulting in an increase of $3,273,302 or 81%. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs including tariffs. During the fourth quarter of 2025, cost of goods sold also include direct payroll costs, a portion of rent expense and depreciation expense related to our manufactured products. The increase in cost of goods sold is primarily driven by the increase in our revenue and growth in B2B sales along with the increase in tariffs during 2025. We expect our total cost of goods sold to increase in 2026 in conjunction with our revenue increases as we sell additional product.
Gross Margin
During the year ended December 31, 2025, our gross profit was $3,906,847 compared to $1,546,251 during the year ended December 31, 2024, resulting in an increase of $2,360,596 or 153%. Our gross margin, as a percentage of sales, totaled 35% during the year ended December 31, 2025, compared to 28% during the year ended December 31, 2024. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the year including the mix between retail and enterprise sales. The increase in gross margin during the year was based on our larger mix of enterprise orders during 2025. While the margins we generated during the year are in line with our expectations and normal operating margins, we do anticipate continued fluctuations in our manufactured products into 2026 as we continue to improve our manufacturing process and become more efficient. We anticipate our gross margins to have fluctuations in 2026 as we start scaling our manufacturing process. We anticipate our gross margins will have a decline in the first two quarters of 2026 as we bring on and train our staff, work to scale production, increase to multiple shifts, and build out efficiencies. We anticipate our margins will improve in the second half of 2026 as we have more trained staff and efficient processes and as we bring on our highly-automated production line for motors.
Operating Expenses
During the year ended December 31, 2025, operations expenses totaled $3,234,706 compared to $959,740 during the year ended December 31, 2024, resulting in an increase of $2,274,966 or 237%. Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses. In addition, we have started incurring additional operations related expenses as we start incurring non-product costs related to our motor production and headset facilities. We expect our operations expense to increase as we continue to hire additional staff to support our operations including engineering staff to help improve process and gainefficiencies. We are also setting up our headset factory and anticipate building out a battery facility and camera facility in the second half of 2026.
During the year ended December 31, 2025, research and development expenses totaled $202,585 compared to $90,584 for the year ended December 31, 2024, resulting in an increase of $112,001 or 124%. Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component manufacturing to the United States. We expect our research and development expenses to increase some as we continue to build out our products, however, we do not anticipate a significant growth as compared to revenue and other costs.
During the year ended December 31, 2025, sales and marketing expenses totaled $1,581,716 compared to $1,091,268 for the year ended December 31, 2024, resulting in an increase of $490,448 or 45%. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot, marketing events and payroll expenses for our sales and marketing team. The increase relates mainly to adding additional staffing to our sales and marketing team. We anticipate our sales and marketing costs to increase in 2026 related to building out our enterprise sales team, however, we expect these increases to be at a lower rate than our revenue and other expenses as our enterprise sales are more dedicated efforts, while our retail revenue is driven off of advertising sales.
During the year ended December 31, 2025, general and administrative expenses totaling $23,898,633 compared to $6,250,939 for the year ended December 31, 2024, resulting in an increase of $17,647,694 or 282%. General and administrative expenses incurred during 2025 include expenses related to operations for a public company including legal and other professional fees, public company insurance expense, and other costs associated with being public. We’ve also increased our headcount to support our growth which includes building out our accounting, HR, and facilities staff. The above amount includes $15,619,929 in non-cash stock compensation expense during 2025 as compared to $2,309,531 during 2024. We expect our general and administrative expenses to increase during 2026 as we continue to build out our infrastructure with additional hires and systems. We also anticipate things like professional fees and other expenses related to being a public company to increase. In addition, we anticipate our non-cash stock compensation expense to be higher in 2026. We do not anticipate the increase in our general and administrative expenses to increase at the same rate as our revenue as we start to gain operational efficiencies at scale.
During the year ended December 31, 2025, we recognized a loss on impairment of goodwill of $0 compared to $10,073,326 for the year ended December 31, 2024, resulting in a decrease of $10,073,326 or 100%. The loss on goodwill impairment in 2024 relates to the difference in the fair value calculation of goodwill from the acquisitions of Rotor Riot and Fat Shark as compared to the carrying value as of December 31, 2024. We did not have any goodwill impairment in 2025.
Other Income (Expense)
During the year ended December 31, 2025, other income and expense totaled $5,922,191 compared to ($15,002,061) during the year ended December 31, 2024. During 2025, we generated $1,830,944 in interest income from our preferred savings account related to our cash balances. We also generated $1,623,317 in realized gains from our investments and an additional $2,469,908 in unrealized gains from our investments in the drone industry. During 2024, other income and expenses mostly consisted of non-cash related charges including $16,146,205 for the change in fair value from our derivatives including the conversional option feature on the note payable and the warrant liability. It was offset by a non-cash gain on debt extinguishment of $1,259,979. Finally, other expenses included $116,981 for interest expense that the Company paid in relation to its note payable during the year and interest income of $1,146.
Net Loss
Our net loss for the year ended December 31, 2025, totaled $19,193,617. This compared to $31,980,468 for the year ended December 31, 2024, resulting in a decrease in net loss of $12,786,851. The change in net loss primarily consists of an increase in our revenue, offset by a large increase in G&A expenses, mainly from non-cash stock compensation expense of $15.6 million and the net change in other income and expense during the year based on our interest income and realized and unrealized gains from investments during the year. We anticipate our net loss position to improve during 2026 as we start scaling our revenue and gain some operational efficiencies on the general and administrative expenses. This will partially be offset by anticipated fluctuations in our margins during the first half of the year.
Cash Flows
Operating Activities
Net cash used in operating activities was $21,177,620 during the year ended December 31, 2025, compared to net cash used in operating activities of $3,966,368 during the year ended December 31, 2024, representing an increase of $17,181,252 or 433%. This change in net cash used in operating activities includes a net impact of non-cash adjustments to reconcile our net loss to net cash used in operating activities of $15,666,817 primarily driven by not having an impairment charge on goodwill and change in fair value of derivatives during 2025 and offset by the increase in stock based compensation expense during the year. The net impact of non-cash activities was offset by an increase in our net loss this year of $12,786,852. Our change in assets and liabilities was the other primary driver of the change in net cash used in operating activities with the primarily impact being a result from an increase in prepaid inventory of $8,760,006, inventory of $4,399,358, and accounts receivable of $1,538,774. This was offset by an increase in operating lease liabilities of $2,288,458 with the addition of our additional facilities and increase in our accounts payable and accrued expenses of $479,259.
Investing Activities
Net cash used in investing activities was $37,090,810 during the year ended December 31, 2025 compared to net cash used in investing activities of $852,801 during the year ended December 31, 2024, representing an increase of $36,238,009. This change in net cash used in investing activities is related to the $38,550,000 used for short-term investments in other drone related companies during the year and $2,062,181 related to purchase of property and equipment for our motor and headset factories which was offset by proceeds from the sale of short-term investments of $3,428,317.
Financing Activities
Net cash provided by financing activities totaled $157,769,034 during the year ended December 31, 2025, compared to net cash provided by financing activities of $7,711,718 during the year ended December 31, 2024, resulting in an increase in net cash provided by financing activities of $150,057,316. The change relates to proceeds received from multiple financings during 2025 including our confidentially marketed public offering of $40,000,000 in May 2025, our registered direct offering of $48,500,000 in July 2025, and our at-the-market offering of $72,145,636 in October 2025. We received $5,000,000 related to our IPO in 2024 and an additional $2,047,105 from a private placement in October 2024. We also had $5,744,927 related to cash proceeds received during 2025 for warrant exercises as compared to $1,523,700 during 2024. This was all offset by fees related to our financings of $9,268,101 in 2025 and $859,087 in 2024.
Liquidity and Capital Resources
As of December 31, 2025, we had current assets totaling $159,511,482 primarily consisting of cash balances of $103,261,397, trading security investments of $39,214,909, accounts receivable of $1,779,423, inventory of $5,316,648 and prepaid deposits for inventory of $9,748,483, and other current assets of $190,622. Our current liabilities as of December 31, 2025 totaled $2,601,347, primarily consisting of accounts payable and accrued expenses of $1,506,793, operating lease liabilities of $456,429 and customer deposits of $638,125. Our net working capital as of December 31, 2025 was $156,910,135.
On October 29, 2024, we completed a private placement offering for the sale of 1,286,184 shares of Common Stock at a price of $1.52 per share for aggregate gross proceeds of $1.95 million before deducting fees to the placement agent and other expenses payable by us in connection with the private placement. We retained approximately $1.8 million in net proceeds.
In December 2024, two investors and note holders exercised their option to convert $3.0 million of the then outstanding Convertible Note into 1,507,538 shares of Common Stock at a price of $1.99 per share. After the conversion and as of December 31, 2024, we no longer have any debt outstanding.
In December 2024, we also had several investors exercise 684,000 warrants with cash and we issued 684,000 shares of our Common Stock for total cash proceeds of approximately $1.5 million.
On February 26, 2025, multiple investors exercised 1,224,606 warrants at $1.99 per warrant from the October 2024 Private Placement and we issued 1,224,606 shares of our Common Stock and received cash proceeds of approximately $2.4 million.
On May 7, 2025, we completed a confidentially marketed public offering in which we sold 8,000,000 shares of our common stock at $5.00 per share and after deducting underwriting discounts and expenses, we received approximately $36.5 million in net cash proceeds.
On July 14, 2025, we entered into a Securities Purchase Agreement with certain investors for the purchase and sale of 5,000,000 shares of common stock in a registered direct offering at a public offering price of $9.70 per share. We received net cash proceeds of approximately $44.9 million.
During the month of October 2025, we sold a total of 4,666,600 shares of common stock at an average price of $15.46 per share under our Sales Agreement and after deducting fees and other expenses, we received approximately $69.9 million in net cash proceeds.
On November 5, 2025, warrant holders exercised 640,000 warrants at $5.00 per warrant in connection with the May 2025 confidentially marketed public offering and the Company issued 640,000 shares of Common Stock. The Company received cash proceeds of $3.2 million in relation to the exercise.
As of March 6, 2026, we have approximately $90 million in cash and $27 million in inventory and prepaid inventory. We believe that the net proceeds from our 2025 financings, warrant exercises, revenues, and existing cash balances will be sufficient to fund our current operating plans through at least the next 12 months. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate.
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.
Business Combinations
The Fat Shark, Rotor Riot, and Rotor Lab acquisitions were accounted for as a business combination under ASC 805. We recognized the assets acquired and liabilities assumed at fair value as of the date of acquisition. The fair value is determined based on assumptions used in valuations and estimates determined by management, which are subjective.
The Rotor Lab acquisition included a contingent consideration of up to $3.0 million based on the Company producing and recognizing revenue, dollar for dollar related to internally manufactured motors during the first two years after the acquisition closing date. The fair value of contingent consideration is determined using the Monte-Carlo variable scenario model which values the liability at the measurement date using certain assumptions including the expected revenue over the calculation period, a discount rate related to revenue projections, the risk-free interest rate over the earnout period and certain estimates and probabilities of different outcomes.
Impairment of goodwill and long-lived assets
Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets from acquired business are recognized at fair value on the acquisition date. Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired.
Valuation of Inventory
Our policy for valuation of inventory requires us to evaluate the net realizable value of our inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence. We may be required to record inventory write-downs if actual inventory values are less favorable than those estimates by management.
Accounts Receivable
We carry our accounts receivable at invoiced amounts. We evaluate our accounts receivable on a periodic basis and establish an allowance for credit losses 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.
Revenue Recognition
We receive revenues from the sale of drone and drone parts from enterprise customers and distributers (enterprise revenue) and individual consumers (retail revenue). Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met.
Investments
We have several short-term investments in other publicly traded drone and drone related companies. Since the investments are not part of the company’s primary business, the Investments are valued under ASC 820 – Fair Value Measurement. Common stock, preferred stock and warrants are both measured at Fair Value each quarter, with changes recognized through net income each reporting period. We value the fair value of preferred stock based on the conversion calculation of preferred shares into common shares outlined in the certificate of designation into a common stock equivalent multiplied by the quoted trading price of the common stock as of the close of market on the reporting period. Due to the warrants being non-tradable, we estimate fair value using a Black-Scholes model based on the current stock price, the exercise price of the warrant, the estimated volatility of the stock, the risk-free interest rate, and the expected life of the warrant.
Stock Based Compensation
Certain employees and directors have received grants of restricted common shares in our company. Other employees received grants of stock options in our Company. These awards are accounted for in accordance with guidance prescribed for accounting for equity-based compensation. Based on this guidance and the terms of the awards, the awards are equity classified.
The fair value of restricted stock awards is based on the fair value of the Company’s Common Stock on the date of grant and expensed over the vesting period.
The fair value of each stock option award is determined using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option. The expected volatility was determined considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available from the St. Louis Federal Reserve Bank with a term equal to the expected life of the option. The expected life of the option was estimated based on a mid-point method calculation.
Derivatives and Fair Value
The fair value of our derivative liabilities are determined using the binomial option pricing model which values the liability on the stock price at the grant date, the estimate volatility of the stock, the estimate of the expected term, the risk-free interest rate over the expected term, and certain estimates and probabilities of different outcomes.
Management performed an assessment on the convertible option feature included in the note payable to determine if the optional conversion feature should be bifurcated from the host contract and accounted for separately as a liability pursuant to ASC 815. This assessment includes judgment from management to determine if the derivative is clearly and closely related to the debt and if it meets certain definitions of a derivative.
The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their fair value.
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.
