Unusual Machines, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The unaudited filing was signed May 15, 2024. On February 16, the company completed its IPO and acquired Fat Shark and Rotor Riot; results include those businesses only from the acquisition date. Accordingly, reported Q1 comparisons with 2023 are not like-for-like.
Financial results and position
- Revenue: $618,915, versus none in Q1 2023. Sales were from product shipments through Rotor Riot’s retail channel and Fat Shark’s B2B wholesale channel.
- Gross profit and margin: $204,167 and 33.0%. Cost of goods sold was $414,748.
- Operating expenses: $1.29 million, versus $588,897 a year earlier. General and administrative expense was $998,874, including IPO, transition, integration and acquired-business costs.
- Net loss: $1.11 million, versus $588,897; basic and diluted loss per share were $0.18, versus $0.17.
- Cash flow: $1.20 million used in operating activities and $852,876 used in investing activities, principally for the acquisition. Financing provided $4.36 million, primarily IPO proceeds net of costs. Cash rose from $894,773 at year-end to $3.21 million at March 31.
- Liquidity: Current assets were $6.13 million and current liabilities $691,978, leaving working capital of $5.44 million. Management said available cash and IPO proceeds were expected to fund current plans for at least 12 months, subject to assumptions and possible earlier need for capital. The filing reports cash of approximately $2.6 million as of its report date.
- Debt: A $2.0 million note payable to Red Cat bears 8% annual interest and matures August 16, 2025, subject to conditions. Interest expense was $19,649 for the quarter. Conversion is available to the seller upon specified events of default, at a 10% discount to a three-day VWAP.
Major transactions and changes
- The company acquired Fat Shark and Rotor Riot for stated consideration of $20.1 million: $1.1 million cash (including a prior deposit), a $2.0 million promissory note and 4.25 million common shares valued at $17.0 million. The acquired businesses design and market consumer drones and FPV goggles; Rotor Riot also resells third-party drones.
- Acquisition accounting remains preliminary. The $17.67 million recorded as goodwill and intangible assets is an unallocated purchase-price amount subject to adjustment during the measurement period.
- The IPO sold 1.25 million shares at $4.00 each for $5.0 million gross proceeds. The cash-flow statement reports $3.85 million net proceeds after specified offering costs; MD&A separately describes approximately $4.5 million net proceeds after offering costs and says approximately $2.9 million remained after acquisition cash payment and other expenses. Investors should reconcile these presentations.
- Common shares outstanding increased from 3.22 million at December 31, 2023 to 9.33 million at March 31, 2024, reflecting the IPO, acquisition consideration and preferred-share conversions, among other issuances.
Outlook, risks and unusual items
- Management expects gross margin to fluctuate with product mix and promotions. It says future operating cash flow will depend on revenue, growth investment, and public-company costs; the filing provides no numerical revenue or earnings guidance.
- A working-capital adjustment with Red Cat is unresolved and expected by management to be material. It may be settled in cash, through an adjustment to the note, or both; the timing of the preliminary calculation may be deferred.
- The acquisition was a related-party transaction: Red Cat’s CEO, Jeffrey Thompson, is also a company director and founder. Review the transaction terms and related-party disclosures.
- Management identified a material weakness in internal control over financial reporting: inadequate controls and segregation of duties, with limited personnel initiating and reviewing transactions. Remediation steps include hiring accounting staff, using outside consultants, documenting controls and implementing an ERP/accounting system; implementation and assessment were ongoing.
- After quarter-end, the company reincorporated in Nevada on April 22. It also disclosed executive and director restricted-stock grants approved in late April and early May, including 488,000 fully vested shares for the CEO through a consultant and other grants. The filing states these awards’ fair values and applicable forfeiture or service terms.
- The company reported no legal proceedings believed likely to have a material adverse effect and no defaults upon senior securities. It cautions that forward-looking statements are subject to risks, including those in its 2023 Form 10-K.
Important facts for investors to verify
- Final purchase-price allocation, goodwill and intangible-asset values, and any impairment implications.
- Amount, timing and settlement method of the potentially material Red Cat working-capital adjustment.
- Reconciliation of the IPO proceeds and cash figures across the cash-flow statement, MD&A and report-date disclosure.
- Cash burn, revenue growth and gross margins as subsequent quarters include full-period acquired-business results, and whether liquidity supports the stated 12-month outlook.
- Progress in remediating the material weakness and establishing effective financial-reporting controls.
- Dilution from issued shares, remaining preferred shares, underwriter warrants and the convertible note, as well as the costs and terms of post-quarter equity awards.