Unusual Machines, Inc. 10-Q

Item 2. 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, 2024, which was filed with the SEC on March 27, 2025. 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, 2024, 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. Company Overview We are a Nevada corporation with our principal place of business in Orlando, Florida. We sell and manufacture drones and drone components across a diversified brand portfolio, which includes Fat Shark, the leader in FPV (first-person view) ultra-low latency video goggles for drone pilots. We also retail small, acrobatic FPV drones and equipment directly to consumers through the curated Rotor Riot e-commerce store. Beginning in the second half of 2024, we launched our business-to-business channel selling drone parts to commercial customers. With a changing regulatory environment, we seek to be a dominant Tier-1 parts supplier to the fast-growing multi-billion-dollar U.S. drone industry. Recent Developments, Challenges and Uncertainties On July 14, 2025, we entered into a securities purchase agreement with certain investors for the purchase and sale of 5,000,000 shares of common stock in a registered direct offering at a public offering price of $9.70 per share. On July 15, 2025, the offering closed and we received aggregate gross proceeds of $48.5 million before deducting placement agent fees and other related expenses. The Company intends to use the proceeds of this offering for the purchase of our drone motor manufacturing equipment which we estimate to be approximately $4.0 million, general corporate purposes and working capital With the funds received from our recent offerings, we are focusing on growing both our retail and enterprise revenue channels and investing in drone component manufacturing in the United States. During the first quarter of 2025, we added both the Rotor Riot Brave 55A ESC (electronic speed controller), and the Fat Shark Aura FPV (first-person view) Camera to the U.S. Department of Defense Innovation Units Blue UAS Framework (“DIU Blue Framework”). In addition, in July 2025, we added the Fat Shark Aura Video Transmitter (VTX) to the DIU Blue Framework. In furtherance of our B2B business, we have entered into a new lease of a 17,000 square foot facility in Orlando, Florida effectively August 1, 2025, where we plan to open a drone motor manufacturing plant. See Note 8 to Consolidated Financial Statements. While we continued to see top line revenue growth during the first half of 2025, our continued future plans for retail revenue growth and margins are subject to uncertainties outside of our control, including changes to trade policy with respect to tariffs and other impacts to our global supply chain cost structure. We are continually evaluating the tariff landscape and working to find reliable and high quality suppliers in multiple countries including the United States and Taiwan that we anticipate will have the least amount of impact to our retail costs and overall margin. Because of the tariff uncertainties, we cannot predict the impact tariff policies in the United Staes and other countries will have on our business. But our B2C business relies heavily on China so retaliatory tariffs can adversely affect us especially our B2C business. See “Item 1A – Risk Factors” for more information on the risks associated with the uncertainty of the imposition of tariffs on our business. 25 On June 12, 2025, we entered into a Share Purchase Agreement (“SPA”) to acquire 100% of the capital stock of Rotor Lab Pty Ltd., an Australian company (“Rotor Lab”) from its existing shareholders. We agreed to issue the sellers a total of $4,000,000 of shares of our common stock, plus additional earnout consideration of up to $3,000,000 worth of shares of our common stock. $800,000 of the initial consideration will be restricted and subject to forfeiture in the event of a breach of representations and warranties and indemnification. The terms of the SPA are subject to standard closing conditions, in addition to receiving required regulatory approvals from the Australian Foreign Investment Review Board. Results of operations Three Months Ended June 30, 2025 and 2024 Revenue During the three months ended June 30, 2025 we generated revenues totaling $2,123,970 compared to $1,411,124 during the three months ended June 30, 2024, representing an increase of $712,846 or 51%. The growth in revenue is driven from growth in our existing retail channel and expanding our enterprise channel as we are manufacturing additional Blue UAS products. Cost of Goods Sold & Gross Profit During the three months ended June 30, 2025, our cost of goods sold was 1,329,291 compared to $1,022,684 during the three months ended June 30, 2024, resulting in an increase of $306,607 or 30%. Our gross margin, as a percentage of sales, totaled 37.4% during the three months ended June 30, 2025, compared to gross margin of 27.5% during the three months ended June 30, 2024. We try and maintain margins in the 20% - 30% range on majority of our products and anticipate our gross profit to fluctuate period to period depending on certain promotions and products that are sold during the period and the mix of retail and enterprise sales that are sold during the period. Our gross margin is also subject to additional fluctuations based on the increased tariffs being imposed on certain products. We have started passing these additional costs to customers and will have an impact on our overall gross profit percentage. We expect that in the three months ended September 30, 2025, our cost of goods sold will experience an increase from the tariffs and increase in inventory costs as we source inventory from countries outside of China including the United States and Taiwan. See “Item 1A – Risk Factors” for more information on the risks associated with the uncertainty of the imposition of tariffs on our business. During the three months ended June 30, 2025, our gross profit was $794,679 compared to $388,440 during the three months ended June 30, 2024, resulting in an increase of $406,239 or 105%. Our gross margin, as a percentage of sales, totaled 37.4% during the three months ended June 30, 2025, compared to gross margin of approximately 27.5% during the three months ended June 30, 2024. Operating Expenses During the three months ended June 30, 2025, operations expenses totaled $404,277 compared to $213,772 during the three months ended June 30, 2024, resulting in an increase of $190,505 or 89%. Operations expense relate to expenses incurred for fulfilling orders and warehouse related expenditures including our warehouse personnel, supplies, and shipping expenses. The increase primarily relates to additional costs incurred related to our motor factory operations that we are putting in place along with additional shipping costs from the increase in revenue. During the three months ended June 30, 2025, research and development expenses totaled $62,731 compared to $10,282 for the three months ended June 30, 2024, resulting in a increase of $52,449 or 510%. Research and development expense primarily relates to new product development and is subject to fluctuations based on specific research and development projects ongoing during the period. During the three months ended June 30, 2025, sales and marketing expenses totaled $302,358 compared to $386,332 for the three months ended June 30, 2024, resulting in a decrease of $83,974 or 22%. The decrease primarily relates to additional costs incurred during the second quarter of 2024 related to our Rampage marketing event that is expected to occur during the fourth quarter of this year. Other sales and marketing expenses increased slightly based on the increase in revenue and ad spend during the period. During the three months ended June 30, 2025, general and administrative expenses totaling $7,195,193 compared to $1,349,587 for the three months ended June 30, 2024, resulting in an increase of $5,845,606 or 433%. The increase primarily relates to the increase in non-cash stock compensation expense of approximately $5.5 million and increase in professional fees and operating as a public company. 26 Net Loss Our net loss for the three months ended June 30, 2025, totaled $6,964,739 compared to $1,612,238 for the three months ended June 30, 2024, resulting in an increase in net loss of $5,352,501 or 332%. This increase in net loss relates to the increase in general and administrative expenses which was primarily driven by the increase in non-cash stock compensation expense, which was $5,513,328 for the second quarter of 2025. Results of Operations – Six Months Ended June 30, 2025 compared to the Six Months Ended June 30, 2024 Revenue During the six months ended June 30, 2025 we generated revenues totaling $4,166,270 compared to $2,030,039 during the six months ended June 30, 2024, representing an increase of $2,136,231 or 105%. The growth in revenue is driven from growth in our existing retail channel and expanding our enterprise channel as we are manufacturing additional Blue UAS products. Cost of Goods Sold During the six months ended June 30, 2025, we incurred cost of goods sold of $2,874,784 compared to $1,437,432 during the six months ended June 30, 2024, resulting in an increase of $1,437,352 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs. The increase in cost of goods sold is driven entirely by the increase in our revenue. Gross Margin During the six months ended June 30, 2025, our gross margin was $1,291,486 compared to $592,607 during the six months ended June 30, 2024, resulting in an increase of $698,879 or 118%. Our gross margin, as a percentage of sales, totaled 31% during the six months ended June 30, 2025, compared to 29% during the six months ended June 30, 2024. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the period and the mix of retail and enterprise sales during the period. The margins we generated during the quarter are in line with our expectations and normal operating margins. Operating Expenses During the six months ended June 30, 2025, operations expenses totaled $706,879 compared to $326,094 during the six months ended June 30, 2024, resulting in an increase of $380,785 or 117%. Prior to the closing of the acquisitions in February 2024, we did not have any operations. 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 costs related to our motor production facility during the second quarter of 2025. During the six months ended June 30, 2025, research and development expenses totaled $70,633 compared to $27,078 for the six months ended June 30, 2024, resulting in an increase of $43,555 or 161%. 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. During the six months ended June 30, 2025, sales and marketing expenses totaled $509,975 compared to $543,390 for the six months ended June 30, 2024, resulting in a decrease of $33,415 or 6%. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses. The decrease relates to additional costs incurred during the second quarter of 2024 related to our Rampage marketing event, which was then offset by additional ad spend and other sales related expenses from our increase in revenue and sales. During the six months ended June 30, 2025, general and administrative expenses totaling $10,421,097 compared to $2,353,761 for the six months ended June 30, 2024, resulting in an increase of $8,067,336 or 343%. The increase relates primarily to increased non-cash expenses totaling $7,419,701 related to stock based compensation expense and the additional increase is from increase in professional fees and other public company related expenses. Net Loss Our net loss for the six months ended June 30, 2025, totaled $10,231,018 compared to $2,718,240 for the six months ended June 30, 2024, resulting in an increase in net loss of $7,419,701 or 276%. The increase primarily relates to increased non-cash expenses related to stock based compensation expense discussed in the above paragraph. 27 Cash Flow Analysis Prior to the closing of our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cash inflows from operations and all cash outflows related to our activities related to our IPO. Our future cash flows from operating activities will be significantly impacted by revenues received, our investment in sales and marketing to drive growth, and general and administrative expenses related to operating a public company. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives. Operating Activities Net cash used in operating activities was $3,862,349 during the six months ended June 30, 2025, compared to net cash used in operating activities of $2,181,840 during the six months ended June 30, 2024, representing an increase of $1,680,509 or 77%. This increase in net cash used primarily resulted from our increase in accounts receivable of $125,757, inventory of $426,180, prepaid expenses of $156,440, accounts payable and accrued expenses of $444,594 and changes in other operating assets and liabilities of $61,864. This was offset by the change in non-cash stock based compensation of $6,994,114 and changes in other non-cash related expenses of $52,990. Investing Activities Net cash used in investing activities was $262,751 during the six months ended June 30, 2025 compared to net cash used in investing activities of $852,201 during the six months ended June 30, 2024, representing a decrease of $590,050 or 69%. The cash used in investing activities during the six months ended June 30, 2025 related to the purchasing of equipment related to our motor factory while the cash used in investing activities during the six months ended June 30, 2024 related to our acquisitions of Rotor Riot and Fat Shark. Financing Activities Net cash provided by financing activities totaled $39,300,836 during the six months ended June 30, 2025, compared to net cash provided by financing activities of $4,362,313 during the six months ended June 30, 2024, resulting in an increase in net cash provided by financing activities of $34,938,523. The increase primarily relates to proceeds received from our public offering of $36,496,000 in May 2025, proceeds from warrant exercises of $2,436,966, and employee stock option exercises of $367,780 during the period. Liquidity and capital resources As of June 30, 2025, we had current assets totaling $42,222,934 primarily consisting of cash balances of $38,933,059, inventory of $1,609,117 and other current assets of $192,778 and deposits for inventory of $1,314,592. Our current liabilities as of June 30, 2025 totaled $821,698, primarily consisting of accounts payable and accrued expenses of $608,694 and deferred revenue of $139,435 and current operating lease liability of $73,569. Our net working capital as of June 30, 2025 was $41,399,236. On July 15, 2025, we completed a registered direct offering in which we sold 5,000,000 shares of our common stock at $9.70 per share and after deducting underwriting discounts and expenses, we received approximately $44.9 million in net cash proceeds. On May 7, 2025, we completed a confidentially marketed public offering in which we sold 8,000,000 shares of our common stock at $5.00 per share and after deducting underwriting discounts and expenses, we received approximately $36.5 million in cash proceeds. On February 26, 2025, multiple investors exercised 1,224,606 warrants at $1.99 per warrant from the October 2024 Private Placement and we issued 1,224,606 shares of our Common Stock and received cash proceeds of $2,436,966. In December 2024, two investors and note holders exercised their option to convert $3,000,000 of the then outstanding Convertible Note into 1,507,538 shares of Common Stock at a price of $1.99 per share. After the conversion and as of December 31, 2024, we no longer have any debt outstanding. In December 2024, we also had several investors exercise 684,000 warrants with cash and we issued 684,000 shares of our Common Stock for total cash proceeds of $1,523,700. 28 On October 29, 2024, we completed a private placement offering for the sale of 1,286,184 shares of Common Stock at a price of $1.52 per share for aggregate gross proceeds of $1.95 million before deducting fees to the placement agent and other expenses payable by us in connection with the private placement. We retained approximately $1.8 million in net proceeds. As of August 14, 2025, we have approximately $81 million in cash . We believe that the net proceeds from our financings, warrant exercises, revenues, and existing cash balances will be sufficient to fund our current operating plans through more than the next 12 months. With the approximately $45 million of net proceeds we received on July 15, 2025 and our existing cash balances, we have substantial liquidity to support our business. 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, 2024. 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, 2024. 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. Item 3. 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.