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 (“B2B”) 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. The Company recently opened a drone motor manufacturing facility in Orlando, Florida, is expecting to open a fulfillment facility in Orlando, Florida in December 2025, and expects to open a drone manufacturing facility in the coming months in Orlando, Florida. Recent Developments, Challenges and Uncertainties At the Market Agreement On August 28, 2025, we entered into a Capital on Demand Sales Agreement (the "Sales Agreement”) with Jones Trading Institutional Services LLC ("Jones”), pursuant to which we may issue and sell over time and from time to time up to $300,000,000 worth of shares of our common stock (the "Shares”). Sales of the Shares, if any, may be made by any method permitted by law deemed to be an "at the market” offering as defined in Rule 415 of the Securities Act of 1933 (the "Securities Act”), including without limitation sales made directly on or through the NYSE American, the trading market for the Company’s common stock, or any other existing trading market in the United States for the Company’s common stock, sales made to or through a dealer other than on an exchange or otherwise, sales made directly to Jones as principal in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices, and/or in any other method permitted by law. Jones will use commercially reasonable efforts to sell on behalf of us all the Shares requested to be sold by us, consistent with its normal trading and sales practices, subject to the terms of the Sales Agreement. Under the Agreement, Jones will be entitled to compensation of 3.0% of the gross proceeds from the sales of the Shares sold under the Sales Agreement. In addition, we have agreed to reimburse Jones for the fees and disbursements of its counsel, in an amount not to exceed $55,000. In addition, we shall reimburse Jones for legal fees of its counsel up to $3,750 for each quarterly due diligence update. The Shares are being offered and sold pursuant to a prospectus supplement filed with the SEC. During the month of October 2025, we sold 4,666,600 shares of common stock at an average price of $15.46 per share under the Agreement for total gross proceeds of approximately $72.1 million. We paid Jones approximately $2.2 million related to the sales of common stock under the Sales Agreement. 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. 32 With the funds received from our recent offerings, we are focusing on growing both our enterprise and retail 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 recently opened a drone motor manufacturing plant. See Note 7 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 consumer business (“B2C”) 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. Rotor Lab Acquisition 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 acquisition of Rotor Lab was finalized on September 3, 2025 with the issuance of 656,642 shares of our common stock. Recent Customer Purchase Orders On October 15, 2025, we secured an order from the U.S. Army’s 101 st Airborne Division for 3,500 NDAA-compliance motors produced at our new U.S. based manufacturing facility. The motors will support the Division’s deployment of the new Attritable Battlefield Enabler V1.01 drones. The Army has also indicated plans to expand procurement, targeting an additional order of 20,000 components including motors from us in 2026. On October 3, 2025, we secured an $800,000 purchase order for high-performance drone components from Red Cat. The order includes several of our Blue UAS products and motors that will be integrated into Red Cat’s FANG™ drones, supporting ongoing demand for U.S. made, NDAA compliant systems in defense, public safety, and other government agency applications. On September 30, 2025, we secured a $12.8 million defense purchase order supplying Strategic Logix’s RRSL Drone Systems. We are the primary supplier of NDAA compliant components including our Blue UAS listed Aura Analog Camera, Aura VTX, Brave Flight Controller, and Brace ESCs for the RRSL line. The RRSL developed by Strategic Logix is an interoperable UAV platform with configurations starting at $800, including manual, autonomous, and fiber enabled options. The order covers more than 160,000 of our manufactured components, including ground control systems, highlighting both the demand scale and our central role in enabling production. 33 Recent Investments On September 29, 2025, we entered into a Securities Purchase Agreement with Kopin Corporation (“Kopin”) pursuant to which we purchased 2,380,952 shares of Kopin’s common stock at a purchase price of $2.10 per share, for an aggregate purchase price of $5.0 million In addition, on September 29, 2025, Kopin and Unusual Machines entered into a Registration Rights Agreement, pursuant to which Kopin agreed to file a registration statement with the SEC on or prior to the 40th calendar day following the date of the Securities Purchase Agreement. On September 16, 2025, we entered into a Securities Purchase Agreement with Lightpath Technologies, Inc. (“Lightpath”) pursuant to which we purchased 800,000 of Lightpath’s common stock at a purchase price of $5.00 per share for an aggregate purchase price of $4.0 million. On October 1, 2025, Lightpath filed a registration statement on Form S-3 to register the issuance of such shares of common stock. On August 19, 2025, we entered into a Securities Purchase Agreement with Safe Pro Group Inc. (“Safe Pro”) pursuant to which we purchased for an aggregate purchase price of $2.0 million an aggregate of: (i) 500,000 shares of Safe Pro’s common stock, and (ii) three-year warrants to purchase up to 500,000 shares of Safe Pro’s common stock (the “Warrants”). The Warrants were issued on August 21, 2025, have an initial exercise price equal to $6.00 per share, are immediately exercisable, and will expire three years from the date of issuance. The combined purchase price of one share of common stock and one accompanying Warrant was $4.00. The issuance of the shares of common stock and the shares of common stock underlying the warrants are registered pursuant an effective registration statement (No. 333-290107) and are freely tradeable. Recent Hires On October 1, 2025, Unusual Machines appointed Mr. Al Ducharme as Vice President of Engineering. Mr. Ducharme has more than 25 years of experience in photonics, optics, embedded systems, and unmanned aerial vehicle (UAV) technologies. At Hoverfly, he grew the company from startup to global supplier, launching more than 20 products, including one of the world's first drone flight controllers. He holds 30 U.S. and international patents and a proven record in product development, IP strategy, and scaling engineering teams. In his new role, Ducharme wil report to COO Andrew Camden and partner with Unusual Machines' production team to align design and engineering, focusing on speed, quality, and anticipating customer needs. On September 19, 2025, Unusual Machines appointed Mr. Nathaniel Kennedy as Vice President of Marketing. With over 25 years of experience in e-commerce, consumer, enterprise, and licensing, Mr. Kennedy has led digital transformation, forged high-profile partnerships-including a NASCAR collaboration-and scaled businesses into national leaders. At Unusual Machines, he will oversee marketing for Rotor Riot, Fat Shark, and the broader portfolio, in addition to supporting enterprise and defense growth. On September 4, 2025, Unusual Machines appointed Mr. Craig McIntyre as Vice President of Enterprises Sales. Mr. McIntyre brings more than 20 years of leadership in sales and business development, including senior roles building drone solutions ecosystems and navigating government procurement. Most recently, he served as Head of Commercial Market Development for Drone Solutions at BT Group, where he oversaw counter UAS and infrastructure contracts, introduced the world's first 4G drone SIM, and launched national drone survey services. He has also founded and scaled multiple start-ups focused on UAV, counter-UAS, and emerging technology markets. On August 11, 2025, Unusual Machines appointed Mr. Tom Mercier as Vice President of Headsets. Mr. Mercier brings deep technical and operational experience in developing and scaling specialty optical systems-from early prototypes through high-yield manufacturing. His leadership at Magic Leap, Google, and Broadcom demonstrates his ability to bring sophisticated hardware to market efficiently, with an emphasis on yield, quality, and operational discipline. On July 7, 2025, Unusual Machines promoted Stacey Wright to executive Vice President of Revenue. Ms. Wright joined Rotor Riot in 2020 as Vice President and was promoted to President in 2024 following its acquisition by Unusual Machines. She has been instrumental in scaling operations and laying the foundation for sustained growth. At the time she joined, Rotor Riot's annual revenue stood at $1.7 million. 34 Results of operations Three Months Ended September 30, 2025 compared to the Three Months Ended September 30, 2024 Revenue During the three months ended September 30, 2025 we generated revenues totaling $2,134,588 compared to $1,531,264 during the three months ended September 30, 2024, representing an increase of $603,324 or 39%. The growth in revenue is primarily driven from growth in our enterprise channel as we are manufacturing Blue UAS products along with growth in our retail channel. Cost of Goods Sold & Gross Profit During the three months ended September 30, 2025, our cost of goods sold was $1,294,200 compared to $1,131,777 during the three months ended September 30, 2024, resulting in an increase of $162,423 or 14%. The increase is cost of goods sold relates to our increase in sales during the period. During the three months ended September 30, 2025, our gross profit was $840,388 compared to $399,487 during the three months ended September 30, 2024, resulting in an increase of $440,901 or 110%. Our gross margin, as a percentage of sales, totaled 39.4% during the three months ended September 30, 2025, compared to gross margin of 26.1% during the three months ended September 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. We continue to see higher gross margins on our enterprise sales. Our gross margin is also subject to additional fluctuations based on the increased tariffs being imposed on certain products, which have been passed on to customers and will have an overall impact on our gross margin. Operating Expenses During the three months ended September 30, 2025, operations expenses totaled $636,705 compared to $218,126 during the three months ended September 30, 2024, resulting in an increase of $418,579 or 192%. 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 the opening of our motor factory and its pre-opening operations along with additional shipping costs from the increase in revenue. During the three months ended September 30, 2025, research and development expenses totaled $39,369 compared to $15,000 for the three months ended September 30, 2024, resulting in a increase of $24,369 or 162%. 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 September 30, 2025, sales and marketing expenses totaled $373,539 compared to $252,253 for the three months ended September 30, 2024, resulting in an increase of $121,286 or 48%. The increase primarily relates to additional costs related to marketing of our retail operations and additional staff that we’ve hired during the quarter. During the three months ended September 30, 2025, general and administrative expenses totaling $4,730,063 compared to $1,374,989 for the three months ended September 30, 2024, resulting in an increase of $3,355,074 or 244%. The increase primarily relates to the increase in non-cash stock compensation expense which was approximately $2.1 million for the quarter and an increase in professional fees and other public company expenses. During the three months ended September 30, 2025, non-cash depreciation and amortization expenses totaled $22,449 compared to $171 for the three months ended September 30, 2024, resulting in an increase of $22,278. The increase relates to an increase in depreciation expense for equipment acquired from the Rotor Lab acquisition and amortization related to intangibles. 35 Net Income Our net income for the three months ended September 30, 2025, totaled $1,603,465 compared to a net loss of $2,144,250 for the three months ended September 30, 2024, resulting in an increase in net income of $3,747,715 or 174%. The increase in net income relates to the unrealized gain from our short term investments for approximately $5.8 million offset by an increase in SG&A expenses. With our minority investments in public companies, we are required to mark to market our portfolio and report the corresponding gain or loss. Results of Operations – Nine Months Ended September 30, 2025 compared to the Nine Months Ended September 30, 2024 Revenue During the nine months ended September 30, 2025 we generated revenues totaling $6,300,857 compared to $3,561,303 during the nine months ended September 30, 2024, representing an increase of $2,739,554 or 77%. The growth in revenue is driven from growth in our existing retail channel and the expansion of our enterprise sales. Cost of Goods Sold During the nine months ended September 30, 2025, we incurred cost of goods sold of $4,168,984 compared to $2,569,209 during the nine months ended September 30, 2024, resulting in an increase of $1,599,775 or 62%. 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 nine months ended September 30, 2025, our gross margin was $2,131,873 compared to $992,094 during the nine months ended September 30, 2024, resulting in an increase of $1,139,779 or 115%. Our gross margin, as a percentage of sales, totaled 33.8% during the nine months ended September 30, 2025, compared to 27.9% during the nine months ended September 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 nine months ended September 30, 2025, operations expenses totaled $1,343,584 compared to $544,220 during the nine months ended September 30, 2024, resulting in an increase of $799,364 or 147%. 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 nine months ended September 30, 2025, research and development expenses totaled $110,002 compared to $42,078 for the nine months ended September 30, 2024, resulting in an increase of $67,924 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. 36 During the nine months ended September 30, 2025, sales and marketing expenses totaled $883,513 compared to $795,643 for the nine months ended September 30, 2024, resulting in an increase of $87,870 or 11%. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses. The increase relates mainly to adding additional staffing in our sales team. During the nine months ended September 30, 2025, general and administrative expenses totaling $15,151,160 compared to $3,728,749 for the nine months ended September 30, 2024, resulting in an increase of $11,422,411 or 306%. The increase relates primarily to increased non-cash expenses totaling $9,522,260 related to stock based compensation expense compared to the expense in 2024 of $759,673 and the additional increase is from increase in professional fees and other public company related expenses. During the nine months ended September 30, 2025, depreciation and amortization expenses totaled $63,635 compared to $513 for the nine months ended September 30, 2024, resulting in an increase of $63,122. The increase relates to depreciation during the third quarter from the acquisition of Rotor Lab assets and amortization related to intangible assets. Net Loss Our net loss for the nine months ended September 30, 2025, totaled $8,627,553 compared to $4,862,490 for the nine months ended September 30, 2024, resulting in an increase in net loss of $3,765,063 or 77%. The increase primarily relates to an increase of approximately $8.7 million increase over year 2024 in non-cash stock based compensation expense offset by unrealized gains from short term investments of approximately $5.8 million. Cash Flow Analysis 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 achieve our business objectives. Operating Activities Net cash used in operating activities was $11,394,294 during the nine months ended September 30, 2025, compared to net cash used in operating activities of $2,718,513 during the nine months ended September 30, 2024, representing an increase of $8,675,781 or 319%. This increase in net cash used in operating activities primarily resulted from our increase in net loss of $3,765,063, increase in inventory of $2,083,662, prepaid inventory of $5,697,419, other assets of $1,037,670, and unrealized gain on trading securities of $5,849,713, offset by the change in share based compensation expense of $8,762,588 and customer deposits of $951,877. Investing Activities Net cash used in investing activities was $12,457,633 during the nine months ended September 30, 2025 compared to net cash used in investing activities of $852,801 during the nine months ended September 30, 2024, representing an increase of $11,604,832 or 1,361%. The cash used in investing activities during the nine months ended September 30, 2025 related to the purchasing of equipment related to our motor factory and our investment in short-term equity securities of $11.0 million. Financing Activities Net cash provided by financing activities totaled $84,378,076 during the nine months ended September 30, 2025, compared to net cash provided by financing activities of $4,362,313 during the nine months ended September 30, 2024, resulting in an increase in net cash provided by financing activities of $80,015,763. The increase primarily relates to net proceeds received from our common stock offerings totaling $81,397,000 after deducting offering expenses. 37 Liquidity and capital resources As of September 30, 2025, we had current assets totaling $91,704,048 primarily consisting of cash balances of $64,285,750, short-term investments of $16,849,713, accounts receivable of $309,544, inventory of $3,118,491, other current assets of $218,871 and deposits for inventory of $6,921,679. Our current liabilities as of September 30, 2025 totaled $5,933,935, primarily consisting of accounts payable and accrued expenses of $1,167,242, deferred revenue of $1,518,736,current operating lease liability of $247,957, and contingent consideration related to the Rotor Lab acquisition of $3,000,000. Our net working capital as of September 30, 2025 was $85,770,113. During the month of October 2025, we sold 4,666,600 shares of common stock at an average price of $15.46 per share under our At The Market Agreement and after deducting fees and other expenses, we received approximately $69.9 million in net cash proceeds. 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. As of November 6, 2025, we have approximately $133.0 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 $69.9 million of net proceeds we received in October 2025 from our ATM, the $3.2 million we received iu November 2025 in relation to certain warrant exercises, and our existing cash balances, we have substantial liquidity to support our business. For more information about our ATM, see “Item II – Other Information – Item 5”. 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. 38 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.