# Unusual Machines (UMAC) 10-Q SEC filing - Q1 FY2026
- Filed: May 14, 2026, 4:13 PM EDT
- Fiscal quarter: Q1 FY2026
- Calendar quarter: Q1 2026
- Accession: 0001683168-26-003923
- OpenCapital page: https://www.opencapital.sh/filings/0001683168-26-003923
- Markdown URL: https://www.opencapital.sh/filings/0001683168-26-003923.md
- Official SEC filing index: https://www.sec.gov/Archives/edgar/data/1956955/000168316826003923/0001683168-26-003923-index.htm
## Filing documents
- [10-Q (umac_i10q-033126.htm)](https://www.sec.gov/Archives/edgar/data/1956955/000168316826003923/umac_i10q-033126.htm)
---
## 10-Q
SEC source: [umac_i10q-033126.htm](https://www.sec.gov/Archives/edgar/data/1956955/000168316826003923/umac_i10q-033126.htm)
**UNITED STATES**
**SECURITIES AND EXCHANGE COMMISSION**
**Washington, D.C. 20549**
**FORM 10-Q**
☒ **Quarterly REPORT pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**
**For the quarterly period ended March 31, 2026**
**Or**
☐ **Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**
**For the transition period from \_\_\_\_\_\_\_\_\_\_\_\_\_ to \_\_\_\_\_\_\_\_\_\_\_\_\_**
**Commission File No. 001-41961**
**Unusual Machines, Inc.**
(Exact Name of Registrant as Specified in Its Charter)
**Nevada** **66-0927642**
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
| 5728 Major Blvd Suite 250 Orlando, FL | 32819 |
| --- | --- |
| Address of Principal Executive Offices | Zip Code |
**(720) 383-8983**
(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
**Title of each class** **Trading Symbol(s)** **Name of each exchange on which registered**
Common Stock, par value $0.01 per share UMAC NYSE American
Indicate by check mark whether the registrant: (1)
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Accelerated Filer ☐
Non-accelerated Filer ☒ Smaller Reporting Company ☒
Emerging Growth Company ☒
If an emerging growth company, indicate by check mark
if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ☐ No ☒
As of May 13, 2026, 47,793,923 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
**UNUSUAL MACHINES, INC.**
**2026 QUARTERLY REPORT ON
FORM 10-Q**
**TABLE OF CONTENTS**
| | | **Page No.** |
| --- | --- | --- |
| [**PART I – FINANCIAL INFORMATION**](#q1_001) | | |
| Item 1. | [Financial Statements (Unaudited)](#q1_002) | 4 |
| | [Consolidated Condensed Balance Sheets](#q1_003) | 4 |
| | [Consolidated Condensed Statements of Operations](#q1_004) | 5 |
| | [Consolidated Condensed Statements of Changes in Stockholders’ Equity](#q1_005) | 6 |
| | [Consolidated Condensed Statements of Cash Flows](#q1_006) | 7 |
| | [Notes to Consolidated Condensed Financial Statements](#q1_007) | 8 |
| Item 2. | [Management’s Discussion and Analysis of Financial Condition and Results of Operations](#q1_008) | 28 |
| Item 3. | [Quantitative and Qualitative Disclosures About Market Risk](#q1_009) | 32 |
| Item 4. | [Controls and Procedures](#q1_010) | 32 |
| [**PART II – OTHER INFORMATION**](#q1_011) | | |
| Item 1. | [Legal Proceedings](#q1_012) | 34 |
| Item 1A. | [Risk Factors](#q1_013) | 34 |
| Item 2. | [Unregistered Sales of Equity Securities and Use of Proceeds](#q1_014) | 34 |
| Item 3. | [Defaults Upon Senior Securities](#q1_015) | 34 |
| Item 4. | [Mine Safety Disclosures](#q1_016) | 34 |
| Item 5. | [Other Information](#q1_017) | 34 |
| Item 6. | [Exhibits](#q1_018) | 35 |
| | [Signatures](#q1_019) | 36 |
2
*Unless we state otherwise or the context otherwise
requires, the terms “Unusual Machines,” “we,” “us,” “our” and the “Company”
refer to Unusual Machines, Inc., a Nevada corporation.*
**SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS**
This Quarterly Report on
Form 10-Q, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking
statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities
laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”,
“expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”,
“predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology.
Forward-looking
statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs,
expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and
trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to
inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our
control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual
results and financial condition to differ materially from those indicated in the forward-looking statements include but are not
limited to: our reliance on third parties to deliver parts needed to manufacture our drone components; risks related to inventory
management and potential obsolescence; uncertainty regarding government procurement programs and timelines; risks associated with
our rapid expansion, and the various risk factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on
Form 10-K for the year ended December 31, 2025.
These forward-looking statements
speak only as of the date of this Form 10-Q and are subject to business and economic risks. We do not undertake any obligation to update
or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements
were made, except to the extent required by law.
3
**PART I – FINANCIAL INFORMATION**
## Item 1. Item 1. Financial Statements (Unaudited) Financial Statements
**Unusual Machines, Inc.**
**Consolidated Condensed Balance Sheets**
| Line item | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| | (Unaudited) | |
| ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | $222,939,674 | $103,261,397 |
| Short term investments at fair value | 48,156,983 | 39,217,909 |
| Short term investments at cost | 12,500,000 | – |
| Accounts receivable | 3,128,885 | 1,564,739 |
| Related party accounts receivable | 468,136 | 214,684 |
| Inventories | 13,827,189 | 5,316,648 |
| Prepaid inventory | 13,566,078 | 9,748,483 |
| Other current assets | 618,626 | 190,622 |
| Total current assets | 315,205,571 | 159,511,482 |
| Non-current assets: | | |
| Property and equipment, net | 2,925,948 | 2,233,891 |
| Operating lease right-of-use assets | 3,273,433 | 2,607,256 |
| Other assets | 198,734 | 197,785 |
| Goodwill | 15,596,105 | 15,596,105 |
| Intangible assets, net | 2,503,262 | 2,561,895 |
| Total non-current assets | 24,497,482 | 23,196,932 |
| Total assets | $339,703,053 | $182,708,414 |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| Current liabilities | | |
| Accounts payable and accrued expenses | $1,071,486 | $1,506,793 |
| Deferred revenue | 672,568 | 638,125 |
| Operating lease liability | 714,139 | 456,429 |
| Total current liabilities | 2,458,193 | 2,601,347 |
| Long-term liabilities | | |
| Deferred tax liability | 146,772 | 146,772 |
| Operating lease liability – long term | 2,613,688 | 2,173,626 |
| Contingent consideration | 2,847,000 | 2,847,000 |
| Total current liabilities | 5,607,460 | 5,167,398 |
| Total liabilities | 8,065,653 | 7,768,745 |
| Commitments and contingencies (See note 12) | – | – |
| Stockholders’ equity: | | |
| Common stock - $0.01 par value, 500,000,000 authorized and 47,793,923 and 37,759,911 shares issued and outstanding at March 31, 2026 and December 31, 2025, respectively | 477,938 | 377,596 |
| Additional paid in capital | 375,960,699 | 229,665,735 |
| Accumulated deficit | (44,824,137) | (55,107,131) |
| Accumulated other comprehensive income | 22,901 | 3,470 |
| Total stockholders’ equity | 331,637,400 | 174,939,670 |
| Total liabilities and stockholders’ equity | $339,703,053 | $182,708,414 |
See accompanying condensed unaudited notes to the consolidated
condensed financial statements.
4
**Unusual Machines, Inc.**
**Consolidated Condensed
Statement of Operations and Comprehensive Income (loss)**
**For the Three Months Ended March 31, 2026 and 2025**
**(Unaudited)**
| Line item | Three Months Ended March 31, 2026 | Three Months Ended March 31, 2025 |
| --- | --- | --- |
| Sales | $8,095,836 | $2,042,300 |
| Cost of goods sold | 5,441,729 | 1,545,493 |
| Gross profit | 2,654,107 | 496,807 |
| Operating expenses: | | |
| Operations | 1,948,899 | 302,602 |
| Research and development | 91,143 | 7,903 |
| Selling and marketing | 580,039 | 207,616 |
| General and administrative | 7,228,200 | 3,225,904 |
| Depreciation and amortization | 64,813 | 20,593 |
| Total operating expenses | 9,913,094 | 3,764,618 |
| Loss from operations | (7,258,987) | (3,267,811) |
| Other income and (expense): | | |
| Interest income | 792,078 | 1,532 |
| Unrealized gain from investments | 9,492,076 | – |
| Realized gain from investments | 7,264,743 | – |
| Loss from foreign currency transactions | (6,548) | – |
| Interest expense | (368) | – |
| Total other income and (expense), net | 17,541,981 | 1,532 |
| Net income (loss) before income tax | 10,282,994 | (3,266,279) |
| Income tax benefit (expense) | – | – |
| Net income (loss) | $10,282,994 | $(3,266,279) |
| STATEMENT OF COMPREHENSIVE INCOME | | |
| Net income (loss) | 10,282,994 | (3,266,279) |
| Foreign currency translation adjustment | 19,431 | – |
| Comprehensive income (loss) | $10,302,425 | $(3,266,279) |
| Net loss per share | | |
| Basic | $0.22 | $(0.21) |
| Diluted | $0.21 | $(0.21) |
| Weighted average common shares outstanding | | |
| Basic | 46,708,842 | 15,902,473 |
| Diluted | 48,134,348 | 15,902,473 |
See accompanying condensed unaudited notes to the consolidated
condensed financial statements.
5
**Unusual Machines, Inc.**
**Consolidated Condensed Statement of Changes in Stockholders’
Equity**
**For the Three Months Ended March 31, 2026 and 2025**
**(Unaudited)**
| Line item | Common Stock / Shares | Common Stock / Value | Additional Paid-In / Capital | Accumulated / Deficit | Accumulated Other Comprehensive / Income | Total Stockholders’ / Equity |
| --- | --- | --- | --- | --- | --- | --- |
| Balance, December 31, 2024 | 15,122,018 | $151,221 | $50,580,235 | $(35,913,514) | – | $14,817,942 |
| Issuance of common shares, equity incentive plan | 483,546 | 4,835 | (4,835) | – | – | – |
| Cash exercise of warrants | 1,224,606 | 12,246 | 2,424,720 | – | – | 2,436,966 |
| Stock compensation expense - vested stock | – | – | 1,883,433 | – | – | 1,883,433 |
| Stock compensation expense | – | – | 22,940 | – | – | 22,940 |
| Net loss | – | – | – | (3,266,279) | – | (3,266,279) |
| Balance, March 31, 2025 | 16,830,170 | $168,302 | $54,906,493 | $(39,179,793) | – | $15,895,002 |
| Balance, December 31, 2025 | 37,759,911 | $377,596 | $229,665,736 | $(55,107,131) | $3,470 | $174,939,670 |
| Issuance of common shares, employees, officers, and directors | 745,883 | 7,460 | (7,460) | – | – | – |
| Issuance of common shares, option exercises | 74,600 | 747 | 259,587 | – | – | 260,334 |
| Issuance of common shares, consulting services | 40,000 | 400 | (400) | – | – | – |
| Issuance of common shares, confidentially marketed public offering | 8,823,529 | 88,235 | 138,711,758 | – | – | 138,799,993 |
| Issuance of common shares, warrant exercise | 350,000 | 3,500 | 3,391,500 | – | – | 3,395,000 |
| Stock compensation expense - options | – | – | 291,412 | – | – | 291,412 |
| Stock compensation expense - vested stock | – | – | 3,648,567 | – | – | 3,648,567 |
| Net income | – | – | – | 10,282,994 | – | 10,282,994 |
| Foreign currency translation | – | – | – | – | 19,431 | 19,431 |
| Balance, March 31, 2026 | 47,793,923 | $477,938 | $375,960,699 | $(44,824,137) | $22,901 | $331,637,400 |
See accompanying condensed unaudited notes to the consolidated
condensed financial statements.
6
**Unusual Machines, Inc.**
**Consolidated Condensed Statement of Cash Flows**
**For the Three Months Ended March 31, 2026 and 2025**
**(Unaudited)**
| Line item | Three Months Ended March 31, 2026 | Three Months Ended March 31, 2025 |
| --- | --- | --- |
| Cash flows from operating activities: | | |
| Net income (loss) | $10,282,994 | $(3,266,279) |
| Depreciation and amortization | 64,813 | 20,593 |
| Share-based compensation expense | 3,939,979 | 1,906,373 |
| Unrealized gain on short term investments | (9,492,076) | – |
| Realized gain on short term investments | (7,264,743) | – |
| Change in assets and liabilities: | | |
| Accounts receivable | (1,817,598) | 15,625 |
| Inventory | (8,510,541) | 121,213 |
| Prepaid inventory | (3,817,595) | 69,449 |
| Other assets | (428,004) | (173,647) |
| Right of use asset | (667,125) | 17,264 |
| Accounts payable and accrued expenses | (435,307) | 191,822 |
| Operating lease liabilities | 697,772 | (16,095) |
| Deferred revenue and other current liabilities | 34,443 | (79,946) |
| Net cash used in operating activities | (17,412,987) | (1,193,628) |
| Cash flows from investing activities | | |
| Purchase of short term investments | (17,500,000) | – |
| Proceeds from sale of short-term investments | 12,814,743 | – |
| Purchase of property and equipment | (698,237) | – |
| Net cash used in investing activities | (5,383,494) | – |
| Cash flows from financing activities: | | |
| Gross proceeds from issuance of common shares, public offering | 149,999,993 | – |
| Proceeds from option exercises | 260,334 | – |
| Proceeds from issuance of common shares, warrant exercises | 3,395,000 | 2,436,966 |
| Common share issuance offering costs | (11,200,000) | – |
| Net cash provided by financing activities | 142,455,327 | 2,436,966 |
| Net increase in cash and cash equivalents | 119,658,846 | 1,243,338 |
| Effect of exchange rates changes on cash | 19,431 | – |
| Cash and cash equivalents, beginning of period | 103,261,397 | 3,757,323 |
| Cash and cash equivalents, end of period | $222,939,674 | $5,000,661 |
See accompanying condensed unaudited notes to the consolidated
condensed financial statements.
7
**Unusual Machines, Inc.**
### **Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31,
2026 and 2025**
### **Note 1 – Organization and nature of business**
Unusual Machines, Inc. (“the Company”)
is a Nevada corporation engaged in the commercial drone industry.
On September 3, 2025, the Company acquired Rotor Lab
Pty. Ltd., an Australian company (“Rotor Lab). See Note 3 for additional information.
### **Note 2 – Summary of significant accounting policies**
*Basis
of Presentation*
The consolidated condensed financial statements
of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly,
these condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2026. The results for any interim period are not necessarily
indicative of results for any future period.
*Principles of Consolidation*
The consolidated financial statements include accounts
of the Company and its wholly owned subsidiaries including UMAC IP Holdings Corp., Unusual Machines of Florida, Inc, Fat Shark and Rotor
Riot since acquired on February 16, 2024 and Rotor Lab since acquired on September 3, 2025. Intercompany transactions and balances have
been eliminated upon consolidation.
*Use of Estimates*
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.
The financial statements include some amounts that
are based on management's best estimates and judgments. Significant estimates reflected in these consolidated financial statements include
those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations,
the fair value of shares issued as consideration and the fair value of contingent consideration in business combinations, (iii) reserves
and allowances related to accounts receivable, and inventory, (iv) the evaluation of long-lived assets, including intangibles and goodwill,
for impairment, (v) the fair value of lease liabilities and related right of use assets, (vi) the fair value of short-term investments
including the value of unexercised warrants received, (vi) the warranty liability and sales returns reserves, and (vii) the deferred tax
asset valuation allowance.
*Cash and Cash Equivalents*
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash deposits at a financial
institution that is insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times
exceed these limits. At March 31, 2026 and December 31, 2025, the Company had approximately $222.6 million and $102.6 million, respectively,
in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions
with which it invests.
8
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
*Accounts Receivable, net*
The Company carries its accounts receivable at invoiced
amounts. The Company follows ASC 326, Financial Instruments – Credit Losses and has early adopted in fiscal year 2025, ASU 2025-05,
under which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for 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. At March 31, 2026 and December 31, 2025, the Company considers
accounts receivable to be fully collectible; accordingly, no allowance for credit losses has been established.
*Short-Term
Equity Investments at Fair Value*
The Company measures its investments in equity
securities, consisting of common stock, preferred stock, and non-public warrants at fair value with unrealized changes in value
recognized in net income (loss) per ASC 321. For the quarter ended March 31, 2026 the realized gain from short-term equity
investments was approximately $7.2 million and unrealized gain from short-term equity investments was approximately $9.5 million. The Company holds less than a 5% equity interest in each of the companies it invested in as of March 31, 2026.
*Short-Term Equity Investments at Cost*
The Company measures its investment is privately
held companies without readily determinable fair values using the Measurement Alternative per ASC 321. Investments are recorded at cost
and subsequently adjusted only when there is an observable transaction or impairment under the Measurement Alternative.
*Inventory*
Inventories, which consist of finished goods and raw
materials, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components
include direct materials, direct labor, an allocation of rent expense and depreciation for manufactured products, as well as in-bound
freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures
including current product selling prices, as well as evaluating for excess quantities and obsolescence.
*Property and equipment, net*
Property and equipment is stated at cost, net of accumulated
depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives which includes computer equipment
of three to five years, motor production equipment of ten to fifteen years and tenant improvements of five to fifteen years.
*Leases*
The Company applies Accounting Standards Codification
(ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. The Company
recognized a lease liability obligation and a right-of-use asset for the facilities leases in Orlando, FL and for the Canberra Australia
lease related to the Rotor Lab acquisition as discussed in Note 3.
The Company determines if a contract is a lease or
contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future
minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company used
an effective discount rate of 8.24% based on its last debt financings. Operating lease assets are measured by adjusting the lease liability
for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a
straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. The Company has elected to
account for lease and non-lease components together as a single lease component for all underlying assets. Lease terms do not include
an option to renew.
9
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
*Business Combinations*
The Company accounts for business combinations under
ASC 805 using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective
estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Determining the fair value of certain acquired assets and liabilities and certain purchase price components is subjective in nature and
often involves the use of significant estimates and assumptions used in valuations and estimates determined by management. Business acquisitions
are included in the Company’s consolidated financial statements as of the date of the acquisition.
*Goodwill and Long-lived Assets*
Goodwill represents the future economic benefit arising
from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill
for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill
is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill
might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than
its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However,
if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated
fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered
not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in
an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill
allocated to the reporting unit. No impairment loss on goodwill was recognized during the three months ended March 31, 2026 and 2025, respectively.
The estimate of fair value of a reporting unit is
computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted
cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include
the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures),
and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of
capital (i.e., the selected discount rate). Management’s assumptions are based on historical data, supplemented by current and anticipated
market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics
of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is
based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.
The Company reviews long-lived assets, including
tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances
indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment
analyses in accordance with ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company
to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of
other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. Amortizable
intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be
recovered. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be
generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount exceeds the fair market value of the intangible assets. No impairment charges were recorded by
the Company during the three months ended March 31, 2026 and 2025, respectively.
10
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
The Company has certain indefinite-lived
trademark assets that are reviewed for impairment by first performing a qualitative analysis in accordance with ASC 350-30 to
determine whether it is more likely than not that the fair value of the indefinite-lived asset is less than its carrying value. If
based on this assessment, management determines that impairment is not more than likely, then no further quantitative testing is
required. However, if performing a qualitative analysis determines that is more likely than not that the fair value is less than its
carrying value, then a quantitative analysis is performed in accordance with ASC 350-30-35, which occurs annually in the fourth
quarter, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by
the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount exceeds the fair market value of the assets. The Company performed only a qualitative analysis for 2025.
The Company did not record an impairment during the three months ended March 31, 2026 and 2025, respectively related to the
indefinite-lived assets.
*Fair
Value Measurements and Fair Value of Financial Instruments*
The fair value measurements and disclosure guidance
defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement
date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level
fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level
3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the
fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input
to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The guidance establishes three levels of the fair
value hierarchy as follows:
*Level 1*: Inputs are unadjusted, quoted
prices in active markets for identical assets or liabilities at the measurement date;
*Level 2*: Inputs are observable, unadjusted
quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities
in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the related assets or liabilities; and
*Level 3*: Unobservable inputs that
are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
The following table details the fair value measurements
of the Company’s financial assets and liabilities as of March 31, 2026:
| Schedule of financial assets and liabilities | Total | Level 1 | Level 2 | Level 3 |
| --- | --- | --- | --- | --- |
| Short term investments – assets: | | | | |
| Common stock | $44,251,483 | $44,251,483 | – | – |
| Pre-funded warrants | 3,220,500 | – | 3,220,500 | – |
| Non-public warrants | 685,000 | – | – | 685,000 |
| Total short-term investments – assets | $48,156,983 | $44,251,483 | $3,220,500 | $685,000 |
| Contingent consideration from Rotor Lab acquisition | 2,847,000 | – | – | 2,847,000 |
| Total | $51,003,983 | $44,251,483 | $3,220,500 | $3,532,000 |
11
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
The Company calculated the fair value for common
stock for short-term investments based on the quoted trading price as of the close of the market multiplied by the total shares held by
the Company as of March 31, 2026.
The Company calculated the fair value for
pre-funded warrants for short-term investments based on the quoted trading price as of the close of the market multiplied by the
total common equivalent shares held by the Company as of March 31, 2026.
The fair value of the non-public warrants investment
in 2026 was determined using a Black-Scholes pricing model which values the warrants based on the stock price at the valuation date,
the expected life of the warrant, the estimated volatility of the stock of the investee, and the risk-free interest rate over the expected
life of the warrant.
The Company used the following inputs related to the
non-public warrants fair value as of March 31, 2026:
| Schedule of assumptions used / Supplemental Information | Non-public Warrants |
| --- | --- |
| Expected term of the warrants (years) | 1.00 |
| Stock price | $3.81 |
| Warrant exercise price | $6.00 |
| Risk free interest rate | 3.68% |
| Volatility | 125.45% |
The contingent consideration from the Rotor Lab acquisition
is based on managements estimate of $2,847,000, which is based on the fair value of contingent consideration 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 applied to revenue projections, the risk-free interest rate over the earnout period and certain
estimates and probabilities of different outcomes. See Note 3 for additional information.
Changes in Level 3 financial instruments are as follows:
| Schedule of level 3 financial instruments | December 31, 2025 | Purchases, Issuances and / Settlements | Change in / Fair Value | March 31, 2026 |
| --- | --- | --- | --- | --- |
| Non-public warrants investment | $1,135,000 | – | $(450,000) | $685,000 |
| Contingent consideration from Rotor Lab acquisition | 2,847,000 | – | – | 2,847,000 |
| Total | $3,982,000 | – | $(450,000) | $3,532,000 |
The Company's financial instruments mainly consist
of cash, receivables, short-term investments, other current assets, accounts payable, and accrued expenses. The carrying amounts of cash,
receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these
instruments.
*Short Term Investments*
Our short-term investments consisting of investments
accounted for at fair value and investments accounted for at cost were as follows as of March 31, 2026:
| Short term investments at fair value | Cost | Cumulative Unrealized Gains (Losses) | Fair Value |
| --- | --- | --- | --- |
| Common stock | $33,150,000 | $11,101,483 | $44,251,483 |
| Pre-funded warrants | 2,850,000 | 370,500 | 3,220,500 |
| Non-public warrants | 195,000 | 490,000 | 685,000 |
| Total | $36,195,000 | $11,961,983 | $48,156,983 |
| Short-term investments at cost | Cost | Impairment | Adjusted Cost |
| --- | --- | --- | --- |
| Common stock | $7,500,000 | – | $7,500,000 |
| Preferred stock | 5,000,000 | – | 5,000,000 |
| Total | $12,500,000 | – | $12,500,000 |
12
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
*Accrued Warranty*
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 from the date of
shipment. If a defect arises during the warranty period, Fat Shark will either (i) repair the affected product at no charge using new
parts or parts that are equivalent to new in performance and reliability; (ii) exchange the affected product with a functionally equivalent
product; or (iii) refund the original purchase price for the affected product. Allowances for estimated warranty costs are recorded during
the period of sale. The determination of such allowances requires the Company to make estimates of product warranty claim rates and expected
costs to repair or to replace the products under warranty. The Company currently establishes warranty reserves based on historical warranty
costs for each product line combined with liability estimates based on the prior 24 months’ sales activities. If actual return rates
and/or repair and replacement costs differ significantly from the Company’s estimates, adjustments to recognize the additional cost
of sales may be required in future periods. Historically the warranty accrual and the expense amounts have been immaterial. The warranty
liability is included in accrued expenses on the accompanying consolidated balance sheets and amounted to $16,514 and $19,602 as of March
31, 2026 and December 31, 2025, respectively.
Rotor Riot does not provide any warranty of any kind
for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor
Riot.
Rotor Lab does not provide any warranty, but does provide for a seven day
defect period. Rotor Lab has not had any material defects for products sold.
Effective September 2025, 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 premature
failures and extends only to the original customer and is non-transferrable. The Company did not have any warranty claims as of March
31, 2026.
*Revenue Recognition*
The Company will recognize revenue in accordance with
ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”).
This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:
Step 1: Identify the contract with a customer;
Step 2: Identify the performance obligations in the
contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to the performance
obligations in the contract; and
Step 5: Recognize revenue when (or as) the Company
satisfies a performance obligation at a point in time.
The Company receives revenues from the sale of drone
and drone parts to enterprise customers and distributors (“Enterprise Revenue”) and individual consumers (“Retail Revenue”).
Sales revenue is recognized at a point in time 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.
The Company’s retail return policy allows for certain non-custom or built-to-order products to be returned up to 15 days after the
original order is placed so long as it meets specific requirements as outlined in its return policy. The Company’s enterprise return
policy allows for returns related to defective product so long as it meets the requirements in its policy. The historical sales returns
for retail customers is de minimis and the Company does not have a specific sales return allowance for retail orders. The Company does
not have any historical returns for enterprise orders and as such has not recorded a sales returns allowance.
13
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
*Disaggregation of Revenue*
The following table presents the Company’s revenue
disaggregated by revenue type for the period ended:
| Schedule of disaggregated by revenue | March 31, 2026 | March 31, 2025 |
| --- | --- | --- |
| Retail revenue | $777,580 | $1,648,270 |
| Enterprise revenue | 7,318,256 | 394,030 |
| Total revenue | $8,095,836 | $2,042,300 |
The Company had sales outside the United States of
approximately $0.6 million and $0.1 million for the three months ended March 31, 2026 and 2025, respectively.
*Deferred Revenue*
Deferred revenue relates to orders placed and payment
received, but not yet fulfilled. All deferred revenue is expected to be recognized within one year. Deferred revenue related to orders
placed, but not yet fulfilled totaled $672,568 and $638,125 as of March 31, 2026 and December 31, 2025, respectively.
*Cost of Goods Sold*
Cost of goods sold includes inventory costs which
includes an allocation for labor and rent for our manufactured products, direct packaging costs and production related depreciation, if
any. Depreciation included in cost of goods sold for the three months ended March 31, 2026 and 2025 was $39,330 and $0, respectively.
*Shipping and Handling Costs*
Shipping and handling costs incurred for products
shipped to customers are included in general and administrative expenses and amounted to $198,642 and $70,161 for the three months ended
March 31, 2026 and March 31, 2025, respectively. Shipping and handling costs charged to customers are included in sales.
*Research and Development*
Research and development expenses include payroll,
employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include
third-party development costs, materials, and are expensed as incurred.
*Income Taxes*
The Company accounts for income taxes using an asset
and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of
events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of
management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.
The Company recognizes benefits of uncertain tax positions
if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest
amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize
interest and penalties related to unrecognized tax benefits as a part of income tax expense.
14
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
*Stock-Based Compensation*
Stock options are valued using the estimated grant-date
fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based
on the Black-Scholes Model using inputs reflecting our estimates of expected volatility based on comparative companies through December
31, 2025, and historical volatility beginning of January 1, 2026, expected term using the simplified method and future dividends. The
Company recognizes forfeitures as they occur. The fair value of stock grants is based on our stock price on the date of grant. Compensation
costs are recognized on a straight-line basis over the requisite service period which is the vesting term.
*Warrants*
The Company accounts for warrants to purchase shares
of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC
815, Derivatives and Hedging (“ASC 815”). The Company classifies warrants issued for the purchase of shares of its common
stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract.
The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants
meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether
the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional
judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the
criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued
or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities
at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the
warrants classified as liabilities are recognized as a non-cash gain or loss in the consolidated statements of operations and comprehensive
loss.
*Foreign Currency*
The Company’s wholly owned
subsidiary’s functional currency is the Australia dollar (AUD). For financial reporting purposes, the Australia dollar has
been translated into the Company’s reporting currency, which is the United States dollar (USD). Assets and liabilities are
translated at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at the average rate of
exchange prevailing during the reporting period. Equity transactions are translated at each historical transaction date spot rate.
Translation adjustments arising from the use of different exchange rates from period to period are included as a component of
stockholders’ equity (deficit) as “Accumulated other comprehensive income (loss).” Gains and losses resulting from
foreign currency translations are included in the statement of operations and comprehensive income (loss) as a component of other
comprehensive income (loss). There have been no significant fluctuations in the exchange rate for the conversion of Australian
dollars to USD after the balance sheet date. Transaction gains and losses from transactions denominated in a foreign currency are
recognized in other income (expense) in the statement of operations.
Changes in the cumulative translation adjustments were as follows:
| Schedule of cumulative translation adjustments | |
| --- | --- |
| Balance as of December 31, 2025 | $3,470 |
| Foreign currency translation adjustment related to Rotor Lab | 19,431 |
| Balance as of March 31, 2026 | $22,901 |
15
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
*Net Loss per Share*
Basic and diluted net loss per share is calculated
based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, *Earnings per Share*. Diluted net
loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common
shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect
would be anti-dilutive.
The following table presents the reconciliation of
basic to diluted weighted average shares used in computing net income per share of common stock attributable to common stockholders.
| Schedule of reconciliation of basic to diluted weighted average shares | For the Three months Ended / March 31 / 2026 | For the Three months Ended / March 31 / 2025 |
| --- | --- | --- |
| Weighted average shares used in computing net income per share of common stock, basic | 46,708,842 | 15,902,473 |
| Add incremental shares: | | |
| Unvested restricted stock | 1,085,081 | – |
| Stock based awards (options) | 340,425 | – |
| Weighted average shares used in computing net income per share of common stock, diluted | 48,134,348 | 15,902,473 |
The following table presents the potentially dilutive
shares that were excluded for the three months ended March 31, 2025, from the computation of diluted net loss per share of common
stock attributable to common stockholders, because their effect was anti-dilutive:
| Schedule of effect anti-dilutive | For the Three months Ended / March 31 | For the Three months Ended / March 31 |
| --- | --- | --- |
| | 2025 | |
| Unvested stock options | | 330,000 |
| Unvested restricted stock awards | | 200,000 |
| Representative warrants | | 8,500 |
| PIPE warrants | | 164,473 |
| Total | | 702,973 |
*Segment Reporting*
Operating segments are defined as components of an
enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing performance. Unusual Machines, which sells drones and drone-related
components, operates as a single reportable segment entity. Our chief operating decision maker, our Chief Executive Officer, reviews financial
information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The Chief
Executive Officer is regularly provided with consolidated revenue and expenses consistent with those presented in the consolidated statements
of operations and is provided with consolidated assets and liabilities consistent with those presented in the consolidated balance sheets.
16
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
*Recent Accounting Pronouncements*
In November 2024, the FASB issued ASU No. 2024-03,
“Disaggregation of Income Statement Expenses” which requires disaggregated disclosure of income statement expenses into specified
categories in disclosures within the footnotes to the financial statements. The standard is effective for annual reporting periods beginning
after December 15, 2026. The Company is currently evaluating the effect of this ASU on the consolidated financial statements and disclosures.
In May 2025, the FASB issued ASU No. 2025-4, “Compensation
– Stock Compensation and Revenue From Contracts With Customers” which provides clarifications to share-based consideration
payable to a customer. The standard is effective for annual reporting periods beginning after December 15, 2026. The Company is currently
evaluating the effect of this ASU on the consolidated financial statements and disclosures.
### **Note 3 – Acquisitions**
*Rotor Lab*
On September 3, 2025, the Company closed on the acquisition
of Rotor Lab. Rotor Lab is an Australian developer and manufacturer of electric motors and propulsion systems for unmanned aerial systems
(“UAS”). Its product line includes precision-wound electric motors across multiple classes, from sub-400W units for small
UAS to high-power motors supporting large rotary and fixed wing platforms.
In addition to the motor production facility in Australia,
the Company built out a motor production facility in Orlando, FL and started producing motors for drones in the fourth quarter of 2025.
The Company and Rotor Lab have been working together prior to the acquisition on co-developing several motor designs and sizes. The acquisition
helps the Company accelerate their goals of building a resilient drone supply chain through their team and technology. In addition, Rotor
Lab will continue to serve as the engineering center for the Company’s motor design, prototyping, and low to medium volume production
of orders.
The Business Combination was based on a share purchase
agreement (the “Rotor Lab Purchase Agreement”) that was executed on June 12, 2025, subject to customary closing conditions
and was completed on September 3, 2025. Under the terms of the Rotor Lab Purchase Agreement, the consideration paid for the acquired assets
consisted of (i) the issuance of common stock for a value of $4.0 million based on the preceding 20 day average Volume Weighted Average
Price (“VWAP”) of the Company’s stock from the date of the signing the Rotor Lab Purchase Agreement in June 2025, and
(ii) the issuance of common stock (“Contingent Shares”) for up to a total value of an additional $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 Contingent Shares will be calculated and issued based on the Company’s VWAP for the preceding
20 days on each anniversary date of the closing of the transaction.
The acquisition met the definition of a business combination
under ASC 805, Business Combinations, and therefore the assets acquired, and liabilities assumed are accounted for at fair value. The
Company issued 656,642 shares of its common stock based on the formula as noted above, which resulted in an initial purchase price of
$5,922,911 based on the Company’s stock price of $9.02 on September 3, 2025, which was the closing date of the acquisition. The
contingent purchase price has been initially recorded at $2,847,000. The fair value of contingent consideration was 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 applied to revenue projections, the risk-free interest rate over the earnout period
and certain estimates and probabilities of different outcomes.
Such fair value amounts are subject to adjustment
during the one-year measurement period.
17
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
The following represents the fair value allocation of Rotor Lab Purchase
Price:
| Schedule of purchase fair value allocation | |
| --- | --- |
| Cash | $93,054 |
| Accounts receivable | 132,419 |
| Inventories | 36,888 |
| Prepaid expenses | 21,843 |
| Property and equipment | 179,772 |
| Right of use asset – operating | 58,524 |
| Other current assets | 10,266 |
| Customer Relationships | 190,000 |
| Non-Compete Agreements | 233,000 |
| Trade Names | 46,000 |
| Goodwill | 8,193,199 |
| Total assets | 9,194,965 |
| Accounts payable and accrued liabilities | 92,113 |
| Deferred revenue | 183,666 |
| Deferred tax liability | 89,231 |
| Operating lease liability – current and long-term | 60,044 |
| Total liabilities | 425,054 |
| Initial consideration | 5,922,911 |
| Contingent consideration | 2,847,000 |
| Total purchase price | $8,769,911 |
On September 3, 2025, the Company acquired 100% of
the issued shares of Rotor Lab. For U.S. federal income tax purposes, the acquisition is treated as a stock purchase. The Company did
not make an election under Section 338 of the Internal Revenue Code. As a result, the tax bases of Rotor Lab’s assets and liabilities
carry over from their historical amounts, and no step-up in tax basis was recorded for U.S. tax purposes. Goodwill for tax purposes will
be amortized over 15 years.
18
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
The results of Rotor Lab have been included in the
Consolidated Financial Statements from the date of acquisition. Revenue was $183,481 and net loss was $80,581 from the date of acquisition
through December 31, 2025 in the consolidated statement of operations. The table below presents the results as reported by the Company
and unaudited pro forma results of the Company, assuming that the acquisition of Rotor Lab occurred at the beginning of each period. The
unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for
the periods presented (in thousands, except per share data):
| Schedule of unaudited pro forma results | For the Year Ended / December 31, 2025 / As Reported (unaudited) | For the Year Ended / December 31, 2025 / Proforma (unaudited) | For the Year Ended / December 31, 2024 / As Reported (unaudited) | For the Year Ended / December 31, 2024 / Proforma (unaudited) |
| --- | --- | --- | --- | --- |
| Revenue | $11,199 | $11,721 | $5,565 | $6,019 |
| Gross profit/(loss) | 3,906 | 4,161 | 1,546 | 1,960 |
| Loss from operations | (25,152) | (25,399) | (16,991) | (6,962) |
| Other expense | 5,922 | 5,879 | (15,002) | (25,062) |
| Net loss | $(19,193) | $(19,520) | $(31,980) | $(32,024) |
| Net earnings per share: | | | | |
| Basic | $(0.74) | $(0.86) | $(3.84) | $(4.11) |
The unaudited consolidated pro forma financial information
is presented for informational purposes only. The unaudited consolidated pro forma adjustments are based on preliminary estimates, information
available and certain assumptions, and may be revised as additional information becomes available. In addition, the unaudited pro forma
financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.
### **Note 4 – Inventories**
Inventories, which consist solely of raw materials
and finished goods was as follows as of March 31, 2026 and December 31, 2025, respectively.
| Schedule of inventories | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Raw materials | $12,193,535 | $4,232,774 |
| Finished goods | 1,633,654 | 1,083,874 |
| Total inventory | $13,827,189 | $5,316,648 |
In addition, the Company had prepaid deposits for
inventory totaling $13,566,078 and $9,748,483 as of March 31, 2026 and December 31, 2025, respectively.
### **Note 5 – Other Assets**
Other current assets included as of:
| Schedule of other current assets | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Prepaid insurance | $520,358 | $101,689 |
| Prepaid benefits | 75,334 | 48,606 |
| Prepaid rent | 22,934 | 40,327 |
| Total other current assets | $618,626 | $190,622 |
19
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
Non-current other assets primarily include rent
security deposits of $184,091 related to the operating leases for the Orlando, FL facilities and the Rotor Lab facility in Australia as of March 31, 2026.
### **Note 6 – Property and Equipment, net**
Property and equipment consist of assets with an estimated
useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically
assessed for impairment. Property and equipment as of:
| Schedule of property and equipment | March 31, 2026 | December 31, 2025 |
| --- | --- | --- |
| Computer equipment | $22,000 | $35,973 |
| Motor production equipment | 2,569,855 | 2,083,354 |
| Office Equipment | 231,477 | – |
| Tenant improvements | 181,429 | 149,280 |
| Total Property and Equipment | 3,004,761 | 2,268,607 |
| Accumulated depreciation | (78,813) | (34,716) |
| Total property and equipment, net | $2,925,948 | $2,233,891 |
Depreciation expense totaled $45,511 and $27,548 for
the three months ended March 31, 2026 and 2025, respectively. A total of $39,330 and $0 of depreciation expense was recorded to cost of
goods sold in related to the production of motors for the three months ended March 31, 2026 and 2025, respectively. The Company has open
commitments of approximately $1.33 million related to the purchase of motor production equipment and $93k related to tenant improvements.
These assets are expected to be placed into service during the second quarter of 2026.
### **Note 7 – Operating Leases**
The Company has assumed in the February 2024 business
combination of Rotor Riot, a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida.
The lease commenced in November 2023 and expires in October 2028. The Company has valued the ROUA and the associated liability, as of
February 16, 2024, at $378,430. Operating lease expense totaled $26,286 and $26,286, respectively for the three months ended March 31,
2026 and 2025. A total of $26,119 was recorded to costs of goods sold for the three months ended March 31, 2026.
In June 2025, Unusual Machines signed a lease agreement
for an additional 17,000 square feet of warehouse/office space in Orlando, FL. This space will be used primarily for motor production.
The lease commencement date is August 1, 2025 and currently runs through August 21, 2030. The Company has valued the ROUA and the associated
liability, as of August 1, 2025, at $973,443. Operating lease expense totaled $67,273 and $0, respectively for the three months ended
March 31, 2026 and 2025. A total of $67,273 was recorded to cost of goods sold for the three months ended March 31, 2026.
In October 2025, Unusual Machines signed a lease
agreement for an additional 25,000 square feet of warehouse/office space in Orlando, FL. This space will be used primarily for order
fulfillment and inventory storage. The lease commencement date is December 1, 2025 and currently runs through December 31, 2030. The
Company has valued the ROUA and the associated liability, as of December 1, 2025, at $1,430,522.
Operating lease expense totaled $123,359 and $0,
respectively for the three months ended March 31, 2026 and 2025. A total of $10,198 was recorded to cost of goods sold for the three
months ended March 31, 2026.
20
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
On December 15, 2025, the Company parent entity
entered into a three-year operating lease agreement for an additional 4,500 square feet of space in Orlando, FL. This space will be
used for headset production. The lease commenced on January 1, 2026 and expires in December 2028. The Company has valued the ROUA
and the associated liability, as of January 1, 2026, at $204,749.
Operating lease expense totaled $19,316 and $0,
respectively for the three months ended March 31, 2026 and 2025. A total of $18,562 was recorded to cost of goods sold for the three months ended March 31, 2026.
On December 10, 2025, the Company parent entity
entered into a three-year operating lease agreement for an additional 9,125 square feet of space in Orlando, FL. This space will be
used as the Company’s corporate headquarters. The lease commenced on February 1, 2026 and expires in February 2029. The
Company has valued the ROUA and the associated liability, as of February 1, 2026, at $613,657.
Operating lease expense totaled $33,309 and $0,
respectively for the three months ended March 31, 2026 and 2025.
The Company has assumed in the acquisition of Rotor
Lab on September 3, 2025, a three-year operating lease of warehouse and office space in Canberra, Australia. The leased commenced in May
2024 and expires in April 2027. The Company has valued the ROUA and the associated liability, as of September 3, 2025, at $58,524. Operating
lease expense totaled $10,364 and $0, respectively for the three months ended March 31, 2026 and 2025.
The Company has no finance leases.
The following is a summary of the operating lease right-of-use assets and
liabilities at March 31, 2026 and 2025:
| Schedule of operating lease right-of-use | 2026 | 2025 |
| --- | --- | --- |
| Operating lease right-of-use assets | $3,704,205 | $378,430 |
| Less: accumulated amortization | (430,772) | (72,180) |
| Operating lease right-of-use assets, as of March 31 | 3,273,433 | 306,250 |
| Operating lease liability | 3,704,205 | 378,430 |
| Less: accumulated reduction | (376,378) | (64,534) |
| Operating lease liability, as of March 31 | 3,327,827 | 313,896 |
| Current operating lease liability | 714,139 | 70,654 |
| Non-current operating lease liability | 2,613,688 | 243,242 |
| Total operating lease liability | $3,327,827 | $313,896 |
21
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
The following is a summary of future lease payments
required under the lease agreement:
| Schedule of future lease payments / Year | Future Lease Payments | Operating Lease Discount | Operating Lease Liability |
| --- | --- | --- | --- |
| 2026 | $782,609 | $(244,062) | $538,547 |
| 2027 | 1,029,687 | (260,961) | 768,726 |
| 2028 | 1,055,065 | (206,382) | 848,683 |
| 2029 | 703,927 | (84,939) | 618,988 |
| 2030 | 585,355 | (32,471) | 552,884 |
| Total | $4,156,642 | $(828,815) | $3,327,827 |
| Schedule of supplemental information / Supplemental Information | UMAC | Rotor Riot | Rotor Lab |
| --- | --- | --- | --- |
| Weighted average remaining lease term (in years) | 4.67 | 2.58 | 1.08 |
| Weighted average discount rate | 9.87% | 11.49% | 11.49% |
### **Note 8 – Goodwill and Intangible Assets**
*Goodwill*
There were no changes in the carrying amount of
goodwill during the three months ending March 31, 2026. The carrying value of goodwill was $15,596,105 and $15,596,105 as of March 31, 2026 and December 31, 2025 respectively.
*Intangible Assets*
As of March 31, 2026, the balances of intangible assets were as follows:
| Schedule of intangible assets | Type | Gross Value | Accumulated Amortization | Net Value |
| --- | --- | --- | --- | --- |
| Patents/IP – Fat Shark | Finite-lived | $816,877 | $(173,587) | $643,290 |
| Trademark – Rotor Riot | Indefinite-lived | 1,480,130 | – | 1,480,130 |
| Trade name – Rotor Lab | Finite-lived | 46,000 | (5,367) | 40,633 |
| Customer relationships – Rotor Lab | Finite-lived | 190,000 | (15,833) | 174,167 |
| Non-Compete Agreements – Rotor Lab | Finite-lived | 233,000 | (67,958) | 165,042 |
| Total intangible assets, net | | $2,766,007 | $(262,745) | $2,503,262 |
Patents and intellectual property relate to the patents
and technology know-how from the acquisition of Fat Shark in February 2024. Patents are amortized over 10 years. Trademarks relate to
the brand name and recognition of Rotor Riot from the acquisition in February 2024.
Trade name for Rotor Lab is amortized over 5 years,
customer relationships are amortized over 7 years and non-compete agreements are amortized over 2 years.
Amortization expense for the three months ended March
31, 2026 and 2025 was $58,633 and $20,422, respectively.
22
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
### **Note 9 – Stockholders’ Equity**
*Common Stock*
2026 Transactions
*Common
shares for services issued to employees and directors*
On January 2, 2026, the Company issued 70,000 restricted
shares of common stock to certain employees of the Company. The shares of restricted stock were granted under the Company’s 2022
Equity Incentive Plan. The restricted shares issued to employees are subject to pro-rata forfeiture over a four-year period. The shares
were valued at $13.57 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively, for a total
of $949,900 to be recognized as stock compensation expense pro-rata over the vesting period.
On January 23, 2026, the Company issued 550,000 restricted
shares of common stock to executive officers of the Company. The shares of restricted stock were granted under the Company’s 2022
Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through December 31, 2026.
The shares were valued at $16.70 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively,
for a total of $9,185,000 to be recognized as stock compensation expense pro-rata over the vesting period.
On January 23, 2026, the Company issued 120,000 restricted
shares of common stock to certain employees of the Company. The shares of restricted stock were granted under the Company’s 2022
Equity Incentive Plan. The restricted shares issued to employees are subject to pro-rata forfeiture over a four-year period. The shares
were valued at $16.70 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively, for a total
of $2,004,000 to be recognized as stock compensation expense pro-rata over the vesting period.
On March 13, 2026, the Company issued 5,883 shares
of common stock related to vested restricted stock units for our certain board members. The restricted stock units are valued at $20.40
per share, the closing price of our common stock as of the date of the grant, for a total value of $120,013 and expensed on the grant
date.
*Common shares issued for services*
On January 2, 2026, the Company issued 40,000 restricted shares of common stock to a consultant for service performed. The shares of restricted stock were granted under the
Company’s 2022 Equity Incentive Plan. The restricted shares issued to the consultant are subject to pro-rata forfeiture over a
two-year period. The shares were valued at $13.57 per share, which was the quoted trading price of the Company’s common stock
on the date of grant, respectively, for a total of $542,800 to be recognized as stock compensation expense pro-rata over the vesting period.
*Common shares issued related to option exercises*
During the three months ended March 31, 2026,
several employees of the Company exercised 74,600 of their vested stock options in which the Company issued 74,600 shares of common stock
related to these exercises. The Company received total cash proceeds of $260,334 related to the exercise of the stock options.
*Common shares issued related to warrant
exercises*
On January 9, 2026 the Company issued 350,000 shares of common stock related to warrant holders exercising their warrants. The Company received gross proceeds of $3,395,000 related
to the warrant exercises. The Company cancelled the 350,000 warrants upon issuance of the common shares.
*Common shares issued related to public offering*
On March 19, 2026, in a confidentially marketed
public offering the Company sold 8,823,529 shares of common stock at $17.00 per share resulting in gross proceeds of $149,999,993, prior
to the payment of placement fees of $10,500,000 and $700,000 of other offering expenses resulting in net proceeds of $138,799,993.
23
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
2025 Transactions
On January 14, 2025, the Company issued 3,546 immediately
vested restricted shares of common stock to non-employee directors of the Company. The shares of restricted stock were granted under the
2022 Equity Incentive Plan. The shares were valued at $11.99 per share, which was the value the Company’s common stock on the date
of grant, respectively for a total of $42,517 to be recognized as stock compensation expense on the grant date.
On February 3, 2025, the Company issued 480,000 restricted
shares of common stock to executive officers and certain employees of the Company. The shares of restricted stock were granted under the
Company’s 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through
December 31, 2025. The restricted shares issued to certain employees are subject to pro-rata forfeiture over a four-year period. The shares
were valued at $12.00 per share, which was the value of the Company’s common stock on the date of grant, respectively for a total
of $5,760,000 to be recognized as stock compensation expense pro-rata over the vesting period. Stock compensation expense of $5,007,742 was recognized during the year ended December 31, 2025.
In February 2025, the Company issued 1,224,606 shares
of common stock related to warrant holders exercising their warrants at an exercise price of $1.99. The Company received gross proceeds
of $2,436,966 related to the warrant exercises. The Company cancelled the 1,224,606 warrants upon issuance of the common shares.
### **Note 10 – Share Based Awards**
The Company’s Board of Directors has delegated
authority to the Chief Executive Officer to grant stock options. Any issuance of restricted stock awards or restricted stock units must
be approved by the Company’s compensation committee. Stock options are granted for employees on a monthly to quarterly basis. Restricted
stock awards and restricted stock units are granted on a quarterly basis. All stock awards which have been granted to individuals who
do not have possession of material non-public information at the time of grant.
*Stock Options*
The 2022 Equity Incentive Plan (the
“Plan”) allows the Company to incentivize key employees and directors with long term compensation awards such as stock
options, restricted stock, and other similar types of awards. The Plan is authorized to issue up to 15% of the outstanding shares on
a fully diluted basis giving effect to the exercise and conversion of all outstanding common stock equivalents issued outside of the
Plan. In addition, the Plan has an “evergreen” provision, pursuant to which the number of shares of common stock
reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2025 and
ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the
last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of
directors. The Plan allows for awards to be issued up to a contractual maximum term of 10 years from the grant date. As of March 31, 2026, the Plan is authorized to issue up to 8,983,338 of awards, with 3,654,703 shares available for issuance.
During the three months ended March 31, 2026 and
2025, the Company’s board of directors approved the grant of 90,000 and 0,
respectively of stock options under the Plan to certain employees. The stock options are subject to certain vesting provisions. Standard
vesting on stock options have a six-month cliff vesting in which the first two quarters vest at the six-month mark and quarterly thereafter
over a total of four years, however, certain stock options may have immediate vesting or shorter periods as approved. Stock options contractual
term range from 5 to 10 years.
24
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
The following table presents the activity for stock
options outstanding:
| Schedule of stock option activity | Non-Qualified Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value |
| --- | --- | --- | --- | --- |
| Outstanding - December 31, 2025 | 739,684 | $6.50 | 6.25 | – |
| Granted | 90,000 | 16.70 | – | – |
| Forfeited/canceled | (31,250) | 3.55 | – | – |
| Exercised | (74,600) | 3.49 | – | 664,706 |
| Outstanding – March 31, 2026 | 723,834 | $8.25 | 5.58 | $3,006,286 |
| Exercisable – March 31, 2026 | 69,708 | $5.67 | 5.72 | $469,029 |
The range of assumptions used to calculate the fair
value of options granted during the period ended March 31, 2026 was:
| Schedule of stock options assumptions | 2026 |
| --- | --- |
| Exercise Price | $16.70 |
| Stock Price on date of grant | $16.70 |
| Risk-free interest rate | 3.72% |
| Dividend yield | – |
| Expected term (years) | 3.57 |
| Volatility | 151.00% |
The total grant date fair value of stock options
granted was $1,287,801 and $0 during the three months ended March 31, 2026 and 2025, respectively. The Company recognized $291,412 and $22,940 in stock-based compensation expense related to stock options during the three months ended March 31, 2026 and 2025, respectively. As
of March 31, 2026, there was $4,023,011 of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term
through 2030.
*Restricted Stock*
Restricted stock awards are equity grants in which
the Company issues restricted common stock awards as of the grant date which are subject to certain vesting and clawback provisions. Restricted
stock units are equity grants in which the Company issues a restricted stock unit subject to vesting requirements and common stock is
not issued until the vesting requirements have been met. The following table presents the activity for restricted stock awards and restricted
stock units outstanding:
| Schedule of restricted stock activity | Restricted Stock Awards | Weighted Average Grant Date Fair Value - RSA | Restricted Stock Units | Weighted Average Grant Date Fair Value - RSU |
| --- | --- | --- | --- | --- |
| Unvested - December 31, 2025 | 525,000 | $9.67 | – | – |
| Granted | 785,883 | 16.29 | – | – |
| Forfeited/canceled | – | – | – | – |
| Vested | (207,966) | 12.91 | – | – |
| Unvested – March 31, 2026 | 1,102,917 | $9.08 | – | – |
25
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
The total value of restricted stock and restricted
stock units was $12,801,713 and $6,402,517 granted during the three months ended March 31, 2026 and 2025, respectively. The Company recognized
$3,648,567 and $1,883,432 in stock-based compensation expense related to restricted stock and restricted stock units during the three
months ended March 31, 2026 and 2025, respectively. As of March 31, 2026, there was $13,866,825 of unrecognized stock-based compensation
expense related to unvested restricted stock to be recognized over the remaining vesting term through 2030.
*Warrants*
The following table presents the activity for warrants outstanding as of
March 31, 2026:
| Schedule of warrant activity | Warrants / Outstanding | Weighted / Average / Exercise Price |
| --- | --- | --- |
| Outstanding - December 31, 2025 | 350,000 | $9.70 |
| Granted | – | – |
| Forfeited/cancelled/restored | – | – |
| Exercised | (350,000) | 9.70 |
| Outstanding – March 31, 2026 | – | – |
On January 9, 2026, 350,000 warrants were exercised
related to the July 2025 Registered Direct Offering and the Company received proceeds of $3,395,000.
### **Note 11 – Related Party Transactions**
On April 30, 2024 (“Grant Date”), the
Company has been a party to a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”)
for the services of our Chief Executive Officer, Dr. Allan Evans. The Agreement allows Dr. Evans to receive favorable tax benefits as
a resident of the Commonwealth of Puerto Rico who performs such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans performs
the duties and responsibilities that are customary for a chief executive officer of a public company similar to the Company.
The Consultant received
a $250,000 fee per year, until October 2025 at which time it was increased to $300,000 per year, payable in monthly installments. On April 1, 2026, the Compensation Committee renewed the Consultants contract for an additional
two years and increased the annual fee to $350,000.
On March 13, 2026, the Company issued 1,961 vested shares of common stock to each of three of its independent directors as compensation for the three months ended March 31,
2026; the fourth independent director elected to receive cash compensation. The shares were valued at an aggregate of $120,013 and were immediately recognized as stock compensation expense.
26
**Unusual Machines, Inc.**
**Notes to Consolidated Condensed Financial Statements**
**For the Three Months Ended March 31, 2026 and 2025**
On April 1, 2026, the Company paid $217,943 to its
investment committee, which includes the CEO and two independent Directors of the Company. The payment is based on a 1% per committee
member based on the realized gains during the previous quarter.
In January 2026, the Company received a $2.1 million order from Teal Drones, which is a subsidiary of Red Cat. Red Cat is a related party as Jeff Thompson is the Chief Executive
Officer of Red Cat and is also on the Board of Directors of Unusual Machines. The order is expected to be delivered in the first
half of 2026 and includes several different drone components manufactured and sourced from the Company. The Company recognized
approximately $0.7 million in revenue from this related party for the three months ended March 31, 2026. The Company had related party receivables of
$0.4 million as of March 31, 2026
### **Note 12 – Commitments and Contingencies**
As part of the business combination that occurred
on February 14, 2024, the Company acquired a five-year operating lease for approximately 6,900 square feet of warehouse and office space
in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. See Note 7 – Operating Leases for additional
information.
On June 4, 2025, the Company entered into a five -year
operating lease agreement for approximately 17,000 square feet of space for the Company’s drone motor manufacturing facility in
Orlando, Florida. The lease commenced on August 1, 2025 and expires in August 2030. See Note 7 – Operating Leases for additional
information.
As a part of the business combination that occurred
on September 3, 2025 with Rotor Lab, the Company acquired a three-year operating lease of warehouse and office space in Canberra Australia.
The lease commenced in May 2024 and expires in April 2027. See Note 7 – Operating Leases for additional information.
On October 30, 2025, the Company entered into a five-year
operating lease agreement for an additional 25,000 square feet of warehouse/office space in Orlando, FL. The lease commencement date is
December 1, 2025 and expires in December 2030.
On December 10, 2025, the Company entered into a three-year
operating lease agreement for an additional 9,125 square feet of space in Orlando, FL. This space will be used as the Company’s
corporate headquarters. The lease commenced on February 1, 2026 and expires in February 2029.
On December 15, 2025, the Company entered into a three-year
operating lease agreement for an additional 4,500 square feet of space in Orlando, FL. This space will be used for headset production.
The lease commenced on January 1, 2026 and expires in December 2028.
### **Note 13 – Subsequent Events**
*Equity Grants to Employees & Consultants*
In April 2026, the Company granted certain employees
common stock options. The Company issued a total of 190,000 stock options to employees. The shares were valued at $12.34, which was the
quoted trading price of the Company’s common stock on the date of the grant. All shares and options vest in quarterly installments
over a four-year period starting from the grant date.
*Definitive Agreement to acquire Upgrade
Energy*
On May 7, 2026, the Company signed a definitive
agreement to acquire DroneNX, LLC which operates as Upgrade Energy (“Upgrade Energy”), a manufacturer of battery and power
systems solutions for unmanned aerial systems. The transaction purchase price is estimated at $52.0 million, which includes (i) a fixed
quantity of 1,792,012 shares of the Company’s common stock at $13.9508 per share which was based on the preceding 5 day volume weighted
average share price of the Company’s common stock prior to signing the definitive agreement, which is estimated to be approximately
$25.0 million, which could be subject to change based on the Company’s common stock price at the time of closing, (ii) $1.0 million
in cash upon closing of the transaction, and (iii) up to an additional $26.0 million in cash contingent on the Company recognizing $10.0
million in revenue related to internally manufactured batteries during the first two years after the acquisition closing date. The acquisition
is subject to customary closing conditions, including Upgrade Energy completing their financial audit.
27
## Item 2. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations
*The following discussion and analysis should be
read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and
our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31,
2025, which was filed with the SEC on March 12, 2026. 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 Quarterly Report and of our Annual Report
on Form 10-K for the year ended December 31, 2025, particularly in the section entitled “Risk Factors.” Unless we state otherwise
or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer
to Unusual Machines, Inc. and its subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless
otherwise noted.*
**Recent Developments**
*Confidentially Marketed Public Offering*
On March 23, 2026, we completed a confidentially marketed
public offering in which we sold 8,823,529 shares of common stock at $17.00 per share resulting in gross proceeds of approximately $150.0
million, prior to payment of placement agent fees of $10.5 million, and 0.7 million in other offering expenses resulting in net proceeds
of approximately $138.8 million. We intend to use the net proceeds from the offering to acquire additional inventory, working capital
needs and general corporate purposes.
*Inventory Purchase*
During the month of May, we are initiating purchase
orders of inventory estimated to be approximately $75.0 million to secure materials and inventory across our drone component product lines.
We are continuing to see significant demand increase across the industry and these purchase orders help position the Company and its inventory
availability to meet customer demand through supply chain planning. These purchases are expected to be made over the next several months.
*Definitive Agreement to acquire Upgrade Energy*
On May 7, 2026, we signed a definitive agreement
to acquire DroneNX, LLC which operates as Upgrade Energy (“Upgrade Energy”), a manufacturer of battery and power systems solutions
for unmanned aerial systems. The transaction purchase price is estimated at $52.0 million, which includes (i) a fixed quantity of 1,792,012
shares of the Company’s common stock at $13.9508 per share which was based on the preceding 5 day volume weighted average share
price of the Company’s common stock prior to signing the definitive agreement, which is estimated to be approximately $25.0 million,
which could be subject to change based on the Company’s common stock price at the time of closing, (ii) $1.0 million in cash upon
closing of the transaction, and (iii) an additional $26.0 million in cash based on the Company recognizing $10.0 million in revenue related
to internally manufactured batteries during the first two years after the acquisition closing date. The acquisition is subject to customary
closing conditions, including Upgrade Energy completing their financial audit.
The acquisition adds battery expertise to our
domestic manufacturing and engineering capabilities, adds additional drone components to our product mix, and strengthens our overall
domestic supply chain and manufacturing capabilities.
28
**Results of operations**
***Three Months Ended March 31, 2026 and 2025***
**Revenue**
During the three months ended March 31, 2026 we generated
revenues totaling $8,095,836 compared to $2,042,300 during the three months ended March 31, 2025, representing an increase of $6,053,536
or 296%. The increase in revenue over the last 12 months primarily relates to the increase and establishment of our B2B business and revenue
related to our NDAA and Blue UAS products. Our B2B revenue was $7,318,256 for the three months ended March 31, 2026 compared to $34,030
for the three months ended March 31, 2025.. See Note 2 to our Consolidated Financial Statements We recently started manufacturing production
on certain products including drone motors and we continue to see significant increased interest and demand in our manufactured products
in the first quarter and the remaining of 2026. We expect our revenue to continue to grow quarter over quarter 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 three months ended March 31, 2026,
our cost of goods sold was $5,441,729 compared to $1,545,493 during the three months ended March 31, 2025, resulting in an increase of
$3,896,236 or 252%. 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 first quarter of 2026, cost of goods sold also include direct payroll costs, a portion of
rent expense and depreciation expense related to our manufactured products. We did not incur these costs in 2025 as we did not have manufactured
products at that time. The increase in cost of goods sold is primarily driven by the increase in our revenue and growth in B2B sales.
We expect our total cost of goods sold to increase in 2026 in conjunction with our revenue increases as we sell additional product.
**Gross Profit**
During the three months ended March 31, 2026, our
gross profit was $2,654,107 compared to $496,807 during the three months ended March 31, 2025, resulting in an increase of $2,157,300
or 434%. Our gross margin, as a percentage of sales, totaled 32.8% during the three months ended March 31, 2026, compared to 24.3% during
the three months ended March 31, 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 three months ended March 31, 2026,
operations expenses totaled $1,948,899 compared to $302,602 during the three months ended March 31, 2025, resulting in an increase of
$1,646,297 or 544%. 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 gain efficiencies. We are also setting up our headset factory
and anticipate building out a battery facility and camera facility in the second half of 2026.
29
During the three months ended March 31, 2026,
research and development expenses totaled $91,143 compared to $7,903 for the three months ended March 31, 2025, resulting in an increase
of $83,240 or 1,053%. 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 three months ended March 31, 2026, selling
and marketing expenses totaled $580,039 compared to $207,616 for the three months ended March 31, 2025, resulting in an increase of $372,423
or 179%. 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 three months ended March 31, 2026, general
and administrative expenses totaling $7,228,201 compared to $3,225,904 for the three months ended March 31, 2025, resulting in an increase
of $4,002,297 or 124%. General and administrative expenses incurred 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 $3,939,979
in non-cash stock compensation expense during the first three months of 2026 as compared to $1,906,373 during 2025. 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.
**Other Income (Loss)**
During the three months ended March 31, 2026,
other income totaled $17,541,980 compared to $1,532 during the three months ended March 31, 2025, resulting in an increase of $17,540,448.
This increase relates primarily to our unrealized gain from short term investments of $9,492,076, realized gain from short term investments
of $7,264,743, and increase in interest income of $790,546.
**Operating Income (Loss)**
Our operating loss for the three months ended
March 31, 2026 was $7,258,987, compared to an operating loss for the three months ended March 31, 2025 of $3,267,811. This increase followed
our rapid expansion as we began to apply the cash we had raise to the expansion of our drone components business.
**Cash Flows**
**Operating Activities**
Net cash used in operating activities was $17,412,987
during the three months ended March 31, 2026, compared to net cash used in operating activities of $1,193,628 during the three months
ended March 31, 2025, representing an increase of $16,219,359. The increase was primarily attributable to changes in working capital,
including increase in inventory of $8,510,541, prepaid and deposits for inventory of $3,817,595, accounts receivable of $1,817,598, and
a decrease in accounts payable and accrued expenses of $435,307 . The Company recorded unrealized gains on short term investments of $9,492,076
and realized gains of $7,264,743, which were partially offset by share-based compensation expense of $3,939,979.
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**Investing Activities**
Net cash used in investing activities was $5,383,494 during the three
months ended March 31, 2026 compared to net cash used in operating activities of $0 during the three months ended March 31, 2025. This
increase consisted of $17,500,000 used in our strategic short term investments, $698,237 in purchases of property and equipment, partially
offset by proceeds from sales of short term investments of $12,814,743
**Financing Activities**
Net cash provided by financing activities totaled
$142,455,327 during the three months ended March 31, 2026, compared to $2,436,966 during the three months ended March 31, 2025, resulting
in an increase in net cash provided by financing activities of $140,018,362 or 5,745%. Our first quarter 2026 proceeds are from a public
offering of common shares of $149,999,993 offset by offering costs of $11,200,000 and proceeds from warrant exercises of $3,395,000
**Liquidity and capital
resources**
As of March 31, 2026, we had current assets totaling
$315,205,571 primarily consisting of cash balances of $222,939,674, investments of $60,656,983, inventory of $13,827,189 and deposits
for inventory of $13,566,078. Our current liabilities as of March 31, 2026 totaled $2,458,193, primarily consisting of accounts payable
and accrued expenses of $1,071,486 and deferred revenue and current operating lease liability of $1,386,707. Our net working capital as
of March 31, 2026 was $312,747,378. Subsequent to March 31, 2026, we placed inventory orders of approximately $75 million.
On January 9, 2026, we
received $3,395,000 in proceeds related to the 350,000 warrants that were exercised from the July 2025 Registered Direct Offering.
On March 23, 2026, we completed a public offering
for the sale of 8,823,529 shares of Common Stock at a price of $17.00 per share for aggregate gross proceeds of approximately $150.0
million before deducting fees to the placement agent and other expenses payable by us in connection with the offering. We retained approximately
$138.8 million in net proceeds after offering expenses.
We believe that our existing cash balances will be sufficient to fund
our current operating plans through more than the next 12 months.
**Critical Accounting Policies and Estimates**
For a description of our critical accounting policies
and estimates, refer to Part II, Item 7, *Critical Accounting Policies and Estimates* in our Annual Report on Form 10-K for the year
ended December 31, 2025. There have been no material changes to our critical accounting policies and estimates since our Annual Report
on Form 10-K for the year ended December 31, 2025.
**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.
31
## Item 3. Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule
12b-2 of the Exchange Act and are not required to provide the information required under this item.
## Item 4. Item 4. Controls and Procedures Controls and Procedures
**Evaluation of Disclosure Controls and Procedures**
We carried out an evaluation, under the supervision
and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of March 31, 2026.
The term “disclosure controls and procedures”
as defined in Rules 13a-15(e) and 15d-15(e) means controls and other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in reports, such as this report, that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2026.
**Management’s Report on Internal Control Over
Financial Reporting**
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures that:
- pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies
or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting based on the parameters set forth above and has concluded that as of March 31, 2026, our internal control
over financial reporting were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
32
**Changes In Controls Over Financial Reporting**
During the quarter ended March 31, 2026, the Company
continued to strengthen its internal controls including the implementation of advanced inventory modules within NetSuite for its financial
and transactional reporting. In addition, the Company has successfully hired additional staff within the accounting, finance, and human
resource functions and the Company has updated their process documentation for financial reporting. These changes and documentation of
our internal controls have remediated the previously disclosed material weaknesses in internal controls which includes sufficient segregation
of duties within accounting functions and having written documentation of our internal control policies and procedures.
Other than as discussed above, there have been no
changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter
ended March 31, 2026 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial
reporting.
33
**PART II – OTHER INFORMATION**
## Item 1. Item 1. Legal Proceedings Legal Proceedings
From time to time, we may become involved in legal
proceedings arising in the ordinary course of our business.
## Item 1A. Item 1A. Risk Factors Risk Factors
In addition to the information set forth in this
Form 10-Q, you should carefully consider the risk factors disclosed under the heading “Risk Factors” in Part I, Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2025 as well as the risks we identified under the Special Note Regarding
Forward-Looking Statements earlier in this Report.
## Item 2. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Unregistered Sales of Equity Securities and Use of Proceeds
On January 23, 2026, the Company issued 550,000 restricted
shares of common stock to executive officers of the Company. The shares of restricted stock were granted under the Company’s 2022
Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through December 31, 2026.
On March 13, 2026, the Company issued 1,961 shares
of common stock to each of three of its independent directors as compensation for the three months ended March 31, 2026.
The shares issued above were
exempt from registration under Section 4(a)(2) of the Securities Act of 1933 and Rule 506(b) thereunder.
**Issuer Purchases of Equity Securities**
We did not repurchase any of our equity securities
during the three months ended March 31, 2026.
## Item 3. Item 3. Defaults Upon Senior Securities Defaults Upon Senior Securities
None.
## Item 4. Item 4. Mine Safety Disclosures Mine Safety Disclosures
None.
## Item 5. Item 5. Other Information Other Information
During the three months
ended March 31, 2026, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any
contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense
conditions of Rule 10b5-1(c) under the Exchange Act or any “non-Rule 10b5-1 arrangement” as defined in Item 408(c) of Regulation
S-K, except for Allan Evans, the Company’s Chief Executive Officer terminated his 10b5-1 Plan on March 16, 2026.
34
## Item 6. Item 6. Exhibits Exhibits
The exhibits required by
Item 601 of Regulation S-K and Item 15(b) of this Report are listed in the Exhibit Index below. The exhibits listed in the Exhibit
Index are incorporated by reference herein.
**EXHIBIT INDEX**
| Exhibit No. | Description | Filed/ Furnished Herewith | Incorporated by Reference / Form | Incorporated by Reference / Exhibit No. | Incorporated by Reference / Filing Date |
| --- | --- | --- | --- | --- | --- |
| 1.1 | Capital on DemandTM Sales Agreement | | 8-K | 1.1 | 8/29/25 |
| 2.1 | Agreement and Plan of Merger by and between Unusual machines, Inc., a Puerto Rico corporation and Unusual machines, Inc., a Nevada corporation | | 8-K | 2.1 | 4/23/24 |
| 3.1 | Articles of Incorporation | | 8-K | 3.1 | 4/23/24 |
| 3.2 | Amended and Restated Bylaws | | 8-K | 3.1 | 10/8/24 |
| 3.2(a) | Amendment No. 1 to Amended and Restated Bylaws | | 8-K | 3.1 | 2/5/25 |
| 3.2(b) | Second Amendment to the Amended and Restated Bylaws | | 8-K | 3.1 | 1/29/26 |
| 3.3 | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock | | 8-K | 3.1 | 7/22/24 |
| 3.3(a) | Certificate of Withdrawal for Series A Convertible Preferred Stock | | 10-K | 3.3(a) | 3/12/26 |
| 3.4 | Certificate of Designation of Series B Convertible Preferred Stock | | 8-K | 3.3 | 4/23/24 |
| 3.4(a) | Certificate of Withdrawal for Series B Convertible Preferred Stock | | 10-K | 3.4(a) | 3/12/26 |
| 3.5 | Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock | | 8-K | 3.1 | 8/22/24 |
| 3.5(a) | Certificate of Withdrawal for Series C Convertible Preferred Stock | | 10-K | 3.5(a) | 3/12/26 |
| 4.1 | Placement Agent Warrant, issued to Dominari Securities LLC | | 8-K | 4.1 | 5/7/25 |
| 10.1 | Agreement and Plan of Merger and Reorganization dated February 1, 2025 | | 8-K | 10.1 | 2/4/25 |
| 10.2 | Placement Agency Agreement, dated as of May 5, 2025, by and between Unusual Machines, Inc. and Dominari Securities, LLC | | 8-K | 10.1 | 5/7/25 |
| 10.3 | Form of Restricted Stock Agreement | | 8-K | 10.1 | 5/21/25 |
| 10.4 | Lease Agreement, dated June 4, 2025, between Unusual Machines, Inc. and Icon FL Orlando Industrial Owner Pool 5 GA/FL, LLC | | 8-K | 10.1 | 6/10/25 |
| 10.5 | Rotor Lab Pty Ltd Share Purchase Agreement, dated June 12, 2025 | | 8-K | 10.1 | 6/13/25 |
| 10.6 | Form of Securities Purchase Agreement | | 8-K | 10.1 | 7/15/25 |
| 10.7 | Placement Agency Agreement | | 8-K | 10.2 | 7/15/25 |
| 10.8 | Placement Agent Warrant, issued to Dominari Securities LLC | | 8-K | 10.3 | 7/15/25 |
| 10.9 | Amended and Restated 2022 Equity Incentive Plan # | | S-8 | 4.1 | 2/13/26 |
| 10.10 | Placement Agency Agreement, dated as of March 19, 2026, by and among Unusual Machines, Inc., Dominari Securities, LLC and JonesTrading Institutional Services LLC | | 8-K | 10.1 | 3/23/26 |
| 31.1 | Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | (1) | | | |
| 31.2 | Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | (1) | | | |
| 32.1 | Certification of the Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | (3) | | | |
| 32.2 | Certification of the Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | (3) | | | |
| 101.INS | Inline XBRL Instance Document | (1) | | | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | (1) | | | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | (1) | | | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | (1) | | | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | (1) | | | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | (1) | | | |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | (1) | | | |
+
# Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC Staff upon request.
Indicates management contract or compensatory plan, contract or agreement.
(1) Filed herein
(3) Furnished herein.
35
**SIGNATURES**
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
**Unusual Machines, Inc.**
By: /s/ Allan Evans
Allan Evans Chief Executive Officer
(Principal Executive Officer)
By: /s/ Brian Hoff
Brian Hoff Chief Financial Officer
May 14, 2026
36