What changed in this filing

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Item 1. Financial Statements

2026-05-14 compared with 2025-11-06 · 801 added, 993 removed, 347 unchanged (84% of the section changed)

1 unchanged sentence

Unusual Machines, Inc.

Consolidated Condensed

Balance Sheets

September 30,

Consolidated Condensed Balance Sheets

Current assets:

Cash and cash equivalents

Short-term investments

$ 222,939,674

$ 103,261,397

Short term investments at fair value

Short term investments at cost

Accounts receivable

Related party accounts receivable

Prepaid inventory

3 unchanged sentences

Property and equipment, net

Operating lease right-of-use asset, net

Operating lease right-of-use assets

Intangible assets, net

Unallocated purchase price provisional, Rotor Lab (See note 3)

Total non-current assets

$ 339,703,053

$ 182,708,414

LIABILITIES AND STOCKHOLDERS' EQUITY

1 unchanged sentence

Accounts payable and accrued expenses

Operating lease liability

Deferred revenue

Contingent consideration

Operating lease liability

Total current liabilities

Non-current liabilities

Long-term liabilities

Deferred tax liability

Operating lease liability – non-current

Total non-current liabilities

Operating lease liability – long term

Contingent consideration

Total current liabilities

Total liabilities

1 unchanged sentence

Stockholders’ equity:

Preferred stock - $ 0.01 par value, 10,000,000 authorized (See note 10)

Series A preferred stock - $ 0.01 par value, 4,250 designated and 0 and 0 shares issued and outstanding at September 30, 2025 and December 31, 2024, respectively

Series B preferred stock - $ 0.01 par value, 1,000 designated and 0 and 0 shares issued and outstanding at September 30, 2025 and December 31, 2024, respectively

Series C preferred stock - $ 0.01 par value, 3,000 designated and 0 and 0 shares issued and outstanding at September 30, 2025 and December 31, 2024, respectively

Common stock - $ 0.01 par value, 500,000,000 authorized and 31,568,949 and 15,122,018 shares issued and outstanding at September 30, 2025 and December 31, 2024, respectively

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

Additional paid in capital

2 unchanged sentences

( 55,107,131 )

Cumulative foreign currency translation adjustment

Accumulated other comprehensive income

Total stockholders’ equity

1 unchanged sentence

$ 339,703,053

See accompanying unaudited notes to the consolidated

$ 182,708,414

See accompanying condensed unaudited notes to the consolidated

condensed financial statements.

Unusual Machines, Inc.

Consolidated Condensed Statement of Operations

For the Three and Nine Months Ended September

30, 2025 and 2024

Three months ended September 30,

Nine months ended September 30,

Consolidated Condensed

Statement of Operations and Comprehensive Income (loss)

For the Three Months Ended March 31, 2026 and 2025

Three Months Ended March 31,

Cost of goods sold

1 unchanged sentence

Research and development

Sales and marketing

Selling and marketing

General and administrative

4 unchanged sentences

( 3,267,811 )

( 15,420,021 )

( 4,119,109 )

Other income and (expense):

Interest income

Unrealized gain in short term investments

Unrealized gain from investments

Realized gain from investments

Loss from foreign currency transactions

Interest expense

Loss on debt extinguishment

Change in fair value of derivatives and warrant liabilities

Other income and (expense)

Total other income and (expense), net

Net income (loss) before income tax

( 3,266,279 )

Income tax benefit (expense)

Net income (loss)

$ ( 3,266,279 )

STATEMENT OF COMPREHENSIVE INCOME

Net income (loss)

( 3,266,279 )

Foreign currency translation adjustment

Comprehensive income (loss)

$ ( 3,266,279 )

Net income (loss) per share attributable to common

Net loss per share

Weighted average common shares outstanding

See accompanying unaudited notes to the consolidated

See accompanying condensed unaudited notes to the consolidated

condensed financial statements.

Unusual Machines, Inc.

Consolidated Condensed Statement of Changes

in Stockholders’ Equity

For the Three and Nine Months Ended September

30, 2025 and 2024

Three and Nine Months Ended September 30, 2024

Series A, Preferred Stock

Series B, Preferred Stock

Series C, Preferred Stock

Additional Paid-In

Total Stockholders’

Balance, December 31, 2023

$ ( 3,933,046 ) –

Issuance of common shares as settlement

Issuance of common shares, initial public offering, net of offering costs

Issuance of common shares, business combination

Conversion of preferred shares

( 1,106,002 )

Balance, March 31, 2024

$ ( 5,039,048 ) –

Conversion of preferred shares

Issuance of common shares, equity incentive plan

Stock compensation expense - vested stock

Stock option compensation expense

( 1,612,238 )

Balance, June 30, 2024

$ ( 6,651,286 ) –

Issuance of common shares, equity incentive plan

Exchange of common shares for Series A preferred

( 4,250,000 )

Exchange of convertible note for Series C preferred

Stock compensation expense – vested stock

Stock option compensation expense

( 2,144,250 )

Balance, September 30, 2024

$ ( 8,795,536 ) –

Three and Nine Months Ended September 30, 2025

Unusual Machines, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

For the Three and

Nine Months September 30, 2025 and 2024

Series A, Preferred Stock

Series B, Preferred Stock

Series C, Preferred Stock

Consolidated Condensed Statement of Changes in Stockholders’

For the Three Months Ended March 31, 2026 and 2025

Additional Paid-In

Other Comprehensive

Accumulated Other Comprehensive

Total Stockholders’

2 unchanged sentences

Issuance of common shares, equity incentive plan

Issuance of common shares for exercise of warrants

Cash exercise of warrants

Stock compensation expense - vested stock

4 unchanged sentences

$ ( 39,179,793 )

Issuance of common shares, Management/BOD

Issuance of common shares, Option exercises

Issuance of common shares, consulting services

Issuance of common shares, advisory board

Issuance of common shares, public offering

Stock option compensation expense

Stock Compensation expense - vested stock

Balance, December 31, 2025

$ 229,665,736

$ ( 55,107,131 )

Balance, June 30, 2025

$ 174,939,670

Issuance of common shares, Management/BOD

Issuance of common shares, employees, officers, and directors

Issuance of common shares, option exercises

Issuance of common shares, consulting services

Issuance of common shares, public offering

Issuance of common shares, Rotor Lab acquisition

Issuance of common shares - warrant exercises

Stock compensation expense

Issuance of common shares, confidentially marketed public

Issuance of common shares, warrant exercise

Stock compensation expense - options

Stock compensation expense - vested stock

Equity adjustment from foreign currency translation

Balance, September 30, 2025

Foreign currency translation

Balance, March 31, 2026

$ 375,960,699

1 unchanged sentence

$ 331,637,400

See accompanying unaudited notes to the consolidated

See accompanying condensed unaudited notes to the consolidated

condensed financial statements.

1 unchanged sentence

Consolidated Condensed Statement of Cash Flows

For the Nine Months Ended September 30, 2025

Nine Months Ended September 30,

For the Three Months Ended March 31, 2026 and 2025

Three Months Ended March 31,

Cash flows from operating activities:

$ ( 8,627,553 )

Net income (loss)

$ ( 3,266,279 )

Depreciation and amortization

Stock compensation expense as settlement

Stock compensation expense

Unrealized gains from short term investments

Share-based compensation expense

Unrealized gain on short term investments

( 9,492,076 )

Change in fair value for warrant and derivative liabilities

Loss on debt extinguishment, non-cash component

Change in assets:

Realized gain on short term investments

( 7,264,743 )

Change in assets and liabilities:

Accounts receivable

( 1,817,598 )

( 8,510,541 )

Prepaid inventory

( 3,817,595 )

Operating lease right-of-use asset

Change in liabilities:

Right of use asset

Accounts payable and accrued expenses

Operating lease liabilities

Customer deposits and other current liabilities

Deferred revenue and other current liabilities

Net cash used in operating activities

2 unchanged sentences

Cash flows from investing activities

Cash portion of consideration paid for acquisition of businesses, net of cash received

Investments in short term securities

( 11,000,000 )

Purchases of property and equipment

Purchase of short term investments

( 17,500,000 )

Proceeds from sale of short-term investments

Purchase of property and equipment

Net cash used in investing activities

1 unchanged sentence

Cash flows from financing activities:

Proceeds from issuance of common shares, IPO

Proceeds from issuance of common shares, public offering

Proceeds from issuance of common shares, registered direct

Gross proceeds from issuance of common shares, public offering

Proceeds from option exercises

3 unchanged sentences

Net cash provided by financing activities

Net increase in cash

Effect of exchange rate changes on cash

Cash, beginning of period

Cash, end of period

Supplemental disclosures of cash flow information:

Non-cash consideration paid for assets acquired and liabilities assumed

Non-cash right of use asset and liability

Deferred acquisition costs

Deferred offering costs recorded as reduction of proceeds

See accompanying unaudited notes to the consolidated

Net increase in cash and cash equivalents

Effect of exchange rates changes on cash

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

$ 222,939,674

See accompanying condensed unaudited notes to the consolidated

condensed financial statements.

1 unchanged sentence

Notes to Consolidated Condensed Financial Statements

September 30, 2025

For the Three Months Ended March 31,

2026 and 2025

Note 1 – Organization and nature of business

2 unchanged sentences

is a Nevada corporation engaged in the commercial drone industry.

The Company reincorporated from Puerto Rico to Nevada on April 22, 2024.

On February 16, 2024, the Company closed its Initial

Public Offering (the “IPO”) of 1,250,000 shares of common stock at a public offering price of $4.00 per share (“IPO

The shares are traded on NYSE American.

Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings

(“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc.

(“Red Cat”) (See

On September 3, 2025, the Company acquired Rotor

On September 3, 2025, the Company acquired Rotor Lab

Ltd., an Australian company (“Rotor Lab).

See Note 3 for additional information.

Note 2 – Summary of significant accounting policies

Principles of Consolidation

The consolidated financial statements include

accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024 and Rotor

Lab since the acquisition on September 3, 2025.

Intercompany transactions and balances have been eliminated upon consolidation.

Basis of Presentation

Note 2 – Summary of significant accounting

of Presentation

The consolidated condensed financial statements

7 unchanged sentences

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

4 unchanged sentences

Accordingly, actual results could differ from those estimates, and such results could be material.

The condensed consolidated 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, (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 and (vi) the deferred tax asset valuation allowance.

Reclassification

In the condensed consolidated financial statements,

the Company has reclassified $5,470 for the nine months ended September 30, 2024 from depreciation and amortization to general and administrative

expense to conform to the current period presentation.

This reclassification did not affect previously reported total operating expenses,

loss before income taxes, or net loss in the condensed consolidated statements of operations.

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

and other short-term investments with maturities of three months or less, when purchased, to be cash equivalents.

The Company maintains

cash deposits in multiple commercial banks and financial services companies.

These financial institutions are insured by the Federal Deposit

Insurance Corporation up to $250,000.

The Company’s cash balance may at times exceed these limits.

At September 30, 2025 and December

31, 2024, the Company had approximately $ 63.8 million and $ 3 .0 million, respectively, in excess of federally insured limits.

continually monitors its positions with, and the credit quality of the financial institutions with which it invests.

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.

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.

Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC

326, Financial Instruments – Credit Losses, 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.

The Company carries its accounts receivable at invoiced

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.

30, 2025 and December 31, 2024, the Company considers accounts receivable to be fully collectible;

accordingly, no allowance for credit

losses has been established.

Short-Term Equity Investments

The Company measures its investments in

marketable equity securities and non-public warrants at fair value with changes in value recognized in net income (loss) per ASC

During the third quarter, the Company made multiple investments totaling $ 11 .0

As of September 30, 2025 the unrealized gain from short-term investments is approximately $ 5.85

The Company holds less than 5% in each of the investee companies as of September 30, 2025.

Inventory, which consists of raw materials, work

in process and finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out

Cost components include direct materials and direct labor, 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.

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.

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

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.

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

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 for owned assets

of three years.

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.

The Company applies Accounting Standards Codification

(ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements.

recognized a lease liability obligation and a right-of-use asset for the facilities leased in Orlando, FL and Canberra Australia 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.

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 11.49% 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.

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.

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

Determining the fair value of certain acquired assets and liabilities 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.

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.

The Company recorded an impairment loss on goodwill of $ 10,073,326 in 2024 based on

the Company’s estimated future net cash flows from the acquisitions.

The estimate of fair value of a reporting unit

is computed using either an income approach, a market approach, or a combination of both.

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”).

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.

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

11 unchanged sentences

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 as of September 30, 2025.

The Company has 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.

a quantitative analysis is required, the Company utilizes the relief-from-royalty method, which is a form of the income approach and requires

us to make significant estimates and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount

rate and estimate of the terminal year revenue growth rate.

The Company did not record an impairment as of September 30, 2025, related

to the indefinite-lived assets.

Fair Values, Inputs and Valuation Techniques

for Financial Assets and Liabilities, and Related Disclosures

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.

intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be

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.

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.

based on this assessment, management determines that impairment is not more than likely, then no further quantitative testing is

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.

Value Measurements and Fair Value of Financial Instruments

The fair value measurements and disclosure guidance

14 unchanged sentences

value hierarchy as follows:

Inputs are unadjusted,

quoted prices in active markets for identical assets or liabilities at the measurement date;

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;

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.

Inputs are unadjusted, quoted

prices in active markets for identical assets or liabilities at the measurement date;

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;

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 September 30, 2025:

of the Company’s financial assets and liabilities as of March 31, 2026:

Schedule of financial assets and liabilities

Short term investments

Contingent consideration from Rotor Lab acquisition

Changes in Level 3 financial instruments are as

Schedule of level 3 financial instruments

Issuances and

September 30,

Short term investments – assets:

Pre-funded warrants

Non-public warrants

Total short-term investments – assets

Contingent consideration from Rotor Lab acquisition

The Company calculated the fair value of the

non-public warrants 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, and the risk-free interest rate over the expected life of the warrant.

The Company used the following inputs related to the warrant fair value as of September 30, 2025:

Assumptions used

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 life of the warrants (years)

Fair market value

$ 3.78 – 7.02

Warrant strike price

Expected term of the warrants (years)

Warrant exercise price

Risk free interest rate

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

Issuances and

Non-public warrants investment

$ ( 450,000 )

The contingent consideration from the Rotor Lab

acquisition is based on the maximum amount of $3,000,000, which is provisional based on the pending fair value analysis.

See Note 3 for

additional information.

Disclosures for Non-Financial Assets Measured

at Fair Value on a Non-Recurring Basis

Contingent consideration from Rotor Lab acquisition

$ ( 450,000 )

The Company's financial instruments mainly consist

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receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these

Our cash and short-term investments consisted

of the following as of September 30, 2025:

Schedule of cash and short-term investments

Gross Unrealized Gains (Losses)

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

Cumulative Unrealized Gains (Losses)

Pre-funded warrants

Non-public warrants

Short-term investments at cost

Adjusted Cost

Preferred stock

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

Accrued Warranty

Fat Shark products are warranted against defects

in materials and workmanship for a period of two years 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

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 $ 19,874 and $ 28,944 as of September 30, 2025 and December 31, 2024, 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 Lab does not provide any warranty, but does provide for a seven

day defect period.

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

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

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.

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

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

Revenue Recognition

The Company recognizes revenue in accordance with

The Company will recognize revenue in accordance with

ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”).

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Identify the contract with a customer;

Identify the performance obligations in

the contract;

Identify the performance obligations in the

Determine the transaction price;

3 unchanged sentences

satisfies a performance obligation at a point in time.

The Company receives revenues from the sale

of products from both retail distributers and individual consumers.

Sales revenue is recognized when the products are shipped and

the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable.

recognized when the title to the products has been passed to the customer, which is generally the date the products are shipped to

the customer.

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.

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

Retail revenue

Enterprise revenue

Total revenue

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.

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 $ 1,518,736 and $ 197,117 as of September 30, 2025 and December 31, 2024,

respectively.

The Company has recognized $ 180,868 of deferred revenue that was outstanding

as of December 31, 2024 during the nine months ended September 30, 2025.

The increase in deferred revenue relates to current year orders

that have not yet been fulfilled, most of which were received during the third quarter of 2025.

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, direct

packaging costs and production related depreciation, if any.

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

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 operations expenses and amounted to $ 226,530 and $ 123,690 for the nine months ended September 30,

2025 and 2024, respectively.

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.

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Research and development expenses also include

third-party development costs, materials, and a proportionate share of overhead costs.

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

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.

third-party development costs, materials, and are expensed as incurred.

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

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.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

Stock-Based Compensation

Stock options and warrants are valued using the estimated grant-date

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 which includes the use of comparable public companies

due to the lack of trading history of the Company’s stock, term and future dividends.

The Company recognizes forfeitures as they

The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the date of grant.

cost is recognized on a straight-line basis over the service period which is typically the vesting term.

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

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.

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.

Company recognizes forfeitures as they occur.

The fair value of stock grants is based on our stock price on the date of grant.

costs are recognized on a straight-line basis over the requisite service period which is the vesting term.

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.

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

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

Foreign currency translation adjustment related to Rotor Lab

Balance as of March 31, 2026

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

Net Loss per Share

4 unchanged sentences

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.

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

For the Nine months Ended

Weighted average shares used in computing net income per share of common stock, basic

Add incremental shares:

Unvested restricted stock

Stock based awards (options)

and restricted stock units)

Weighted average shares

used in computing net income per share of common stock, diluted

Weighted average shares used in computing net income per share of common stock, diluted

The following table presents the potentially dilutive

shares that were excluded for the nine months ended September 30, 2025 and the three and nine months ended September 30, 2024 from the

computation of diluted net loss per share of common stock attributable to common stockholders, because their effect was anti-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 Nine months Ended

For the Three and Nine months Ended

For the Three months Ended

Unvested stock options

Unvested restricted stock awards

Convertible preferred stock

Convertible debt

Representative warrants

PIPE warrants

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

manufactures and 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 assets and liabilities consistent with

those presented in the consolidated balance sheets.

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.

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.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

Recent Accounting Pronouncements

In December 2023, new accounting guidance was

issued related to income tax disclosures.

The new guidance requires disaggregated information about a reporting entity’s effective

tax rate reconciliation as well as additional information on income taxes paid.

The new guidance is effective on a prospective basis for

annual periods beginning after December 15, 2024.

Early adoption is also permitted for annual financial statements that have not yet been

issued or made available for issuance.

This new guidance will likely not result in additional required disclosures when adopted.

In November 2024, the FASB issued ASU No.

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payable to a customer.

This new guidance will likely have an impact on the Company.

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

Fat Shark and Rotor Riot

On February 16, 2024, the Company closed on the

acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the

“Business Combination”) (See Note 12 – Related Party Transactions for additional information).

Fat Shark and Rotor Riot

are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles.

Rotor Riot is also a

licensed authorized reseller of consumer drones manufactured by third parties.

The Company specializes in the production and

sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a

strong curated retail channel in the FPV drone market segment.

This Business Combination is a realization of the Company’s strategy

to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical

drone components.

With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for

customers that require a domestic supply chain.

The Business Combination was based on a share

purchase agreement (the “Purchase Agreement”) that was executed on November 21, 2022.

From November 21, 2022 to February 16,

2024, the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments.

Under the terms of

the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $ 1 .0 million in cash and a cash deposit

of $ 0.1 million made in 2022, (ii) issuance of a $ 4 .0 million 18 month promissory note to Red Cat (see Note 9 “Promissory and Convertible

Notes” for further details), and (iii) the issuance of 4,250,000 shares of the Company’s common stock, which represented approximately

48.66% of the outstanding common stock of the Company on February 16, 2024, after the effect of the issued shares (collectively the “Consideration

The Company valued the Red Cat common stock at $4.00 per share for $ 17,000,000 which represents the IPO price of the Company’s

common stock on February 15, 2024.

Accordingly, the value of the Consideration Paid is equal to $ 22,100,000 .

The acquisitions 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

The following represents the fair value allocation of Fat Shark and

Rotor Riot Purchase Price:

Schedule of purchase fair value allocation

Accounts receivable (approximates contractual value)

Inventories (on hand and prepaid)

Other current assets

Right of use asset – operating

Other long-term assets

Intangible assets

Accounts payable and accrued liabilities

Deferred revenue

Deferred tax liability

Operating lease liability – current and long-term

Total liabilities

Total purchase price

On December 31, 2024, the Company recorded a measurement

period adjustment to the above fair value allocation to report a deferred tax liability of $ 107,153 and increase goodwill by the same

Goodwill and intangible assets relate to Fat Shark

and Rotor Riot being FPV market leaders and their well-known and established brands within the industry and related patents.

these entities and their existing customer base along with Unusual Machines’ strategy of extending to B2B sales of drone components

will provide a strategic advantage.

The results of Fat Shark and Rotor Riot have been

included in the Consolidated Financial Statements from the date of acquisition of February 16, 2024.

The financial activity for the 2024

period prior to the acquisition is not considered material and pro forma information has not been included in the unaudited consolidated

condensed financial statements.

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.

The Company is currently building out a motor

production facility in Orlando, FL in which the Company will start producing motors for drones in the fourth quarter of 2025.

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

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

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

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

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.

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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 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.

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 acquisitions 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

The Company has not completed its evaluation of the fair value of assets acquired and liabilities assumed of Rotor Lab for the

purpose of its 2025 fiscal year financial reporting and as such has not fully determined the unallocated purchase price between goodwill

and other intangible assets.

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.

Contingent purchase price has provisionally been recorded at the maximum amount of $ 3,000,000 , which is provisional

based on the pending fair value of such consideration.

Such amounts are subject to adjustment during the one-year measurement period.

(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.

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.

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.

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

Schedule of purchase fair value allocation

Accounts receivable (approximates contractual value)

Accounts receivable

Prepaid expenses

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Other current assets

Unallocated purchase price

Customer Relationships

Non-Compete Agreements

Accounts payable and accrued liabilities

6 unchanged sentences

Total purchase price

The results of Rotor Lab have been included in

the Consolidated Financial Statements from the date of acquisition.

Revenues included $ 128,024 and net income included $ 42,883 from the

date of acquisition through September 30, 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

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):

On September 3, 2025, the Company acquired 100 % of

the issued shares of Rotor Lab.

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.

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.

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 Nine months Ended

September 30, 2025

September 30, 2024

For the Year Ended

December 31, 2025

December 31, 2024

Gross profit/(loss)

2 unchanged sentences

Net earnings per share:

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.

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

work in process and finished goods, totaled $ 3,118,491 and $ 1,335,503 as of September 30, 2025 and December 31, 2024, respectively.

and finished goods was as follows as of March 31, 2026 and December 31, 2025, respectively.

Schedule of inventories

September 30,

Raw materials

Work in process

Finished goods

Total inventory

In addition, the Company had prepaid deposits for inventory totaling

$ 6,921,679 and $ 904,728 as of September 30, 2025 and December 31, 2024, respectively.

Note 5 – Other Current Assets

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

September 30,

March 31, 2026

December 31, 2025

Prepaid insurance

Prepaid expenses

Other current assets

Prepaid benefits

Total other current assets

Non-current other assets include rent deposits

of $ 84,693 and $ 59,426 related to the operating leases for our Orlando, FL facilities as of September 30, 2025 and December 31, 2024,

respectively.

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 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

September 30,

Computer equipment

Motor production equipment

Office Equipment

Tenant improvements

2 unchanged sentences

Total property and equipment, net

Depreciation expense totaled $ 2,369 and $ 171

for the nine months ended September 30, 2025 and 2024, respectively.

The Company has open commitments of approximately $ 3.2 million

related to the purchase of motor production equipment and $ 0.9 million related to tenant improvements.

These assets are expected to

be placed into service during Q4 2025.

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 $ 93 k 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 a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida.

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 .

The Company has no finance leases.

Operating lease expense totaled $ 78,859 and $ 61,335 , respectively for the nine months

ended September 30, 2025 and 2024.

In June 2025, the Company signed a lease agreement

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.

3 unchanged sentences

liability, as of August 1, 2025, at $ 973,443 .

The Company has no finance leases.

Operating lease expense totaled $ 42,287 and $ 0 , respectively

for the nine months ended September 30, 2025 and 2024.

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.

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.

Company has valued the ROUA and the associated liability, as of December 1, 2025, at $ 1,430,522 .

Operating lease expense totaled $ 123,359

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.

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

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.

Company has valued the ROUA and the associated liability, as of February 1, 2026, at $ 613,657 .

Operating lease expense totaled $ 33,309

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 .

lease expense totaled $ 10,364 and $ 0 , respectively for the three months ended March 31, 2026 and 2025.

The Company has no finance leases.

Operating lease expense totaled $ 3,271 and $ 0 , respectively for the nine months ended September 30,

2025 and 2024.

The following is a summary of the operating lease

right-of-use assets and liabilities at September 30, 2025:

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

Operating Lease

Operating lease right-of-use assets

accumulated amortization

Operating lease right-of-use assets, as of September 30, 2025

Operating lease right-of-use assets, as of March 31

Operating lease liability

accumulated reduction

Operating lease liability, as of September 30, 2025

Operating lease liability, as of March 31

Current operating lease liability

1 unchanged sentence

Total operating lease liability

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

4 unchanged sentences

$ ( 244,062 )

$ ( 828,815 )

Schedule of supplemental information

3 unchanged sentences

Note 8 – Goodwill and Intangible Assets

There were no changes in the carrying amount

of goodwill during the nine months ended September 30, 2025.

The carrying value of goodwill was $ 7,402,906 as of September 30,

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 September 30, 2025, the balances of intangible assets were as

As of March 31, 2026, the balances of intangible assets were as follows:

Schedule of intangible assets

Accumulated Amortization

Patents/IP – Fat Shark

$ ( 173,587 )

Trademark – Rotor Riot

Indefinite-lived

Trade name – Rotor Lab

Customer relationships – Rotor Lab

Non-Compete Agreements – Rotor Lab

Total intangible assets, net

$ ( 262,745 )

Patents and intellectual property relate to the

patents and technology know-how from the acquisition of Fat Shark in February 2024.

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.

Amortization was $ 61,266 and $ 0 for the nine months

ended September 30, 2025 and 2024, and $ 20,422 and $ 0 for the three months ended September 30, 2025 and 2024, related to the Patents.

Note 9 – Promissory and Convertible Notes

In February 2024 and in conjunction with the acquisition

of Fat Shark and Rotor Riot, as discussed in Note 3, the Company issued a promissory note (“Note”) with Red Cat Holdings,

(“Red Cat”) for $ 2 .0 million.

In July 2024, the Company finalized its working capital adjustment with Red Cat which increased

the overall purchase price by an additional $ 2 .0 million.

In accordance with ASC 470, Debt, the additional $2.0 million was treated as

a modification that was not treated as a debt extinguishment and expenses related to the debt were expensed as incurred.

The additional

$2.0 million was added to the existing Note and was reflected as an adjustment to the opening purchase price and was included in the opening

balance sheet as of February 16, 2024 as an increase to goodwill and intangible assets.

Accordingly, the Note was amended to increase

the principal amount of the Note to $ 4 .0 million.

Subsequently and in July 2024, in conjunction

with a private sale of Red Cat’s common stock and its promissory note to two accredited investors (“Investors”), the

Company issued new notes to the new Investors (the “July Notes”) and cancelled the original Note.

The July Notes contained

8% per annum interest.

In addition, the maturity date of the July Notes was extended to November 30, 2025, subject to certain conditions.

On August 21, 2024, the Company entered into two

exchange agreements with the Investors, under which the Investors exchanged their respective 8% July Notes for new 4% Convertible Notes

(the “August Notes”).

Pursuant to the exchange agreements, the Investors exchanged the $ 4,000,000 of July Notes for an aggregate

of (i) $ 3,000,000 for the August Notes, (ii) 210 shares of Series C preferred stock, which converts into 630,000 shares of the Company’s

common stock, and (iii) 630,000 warrants with a five-year term and an exercise price of $1.99 per share, subject to certain adjustments.

The July Notes were cancelled as a part of the exchange agreement.

In accordance with ASC 470, since the August Notes were considered

a greater than 10% change from the July Notes and a substantive conversion option was added to the August Notes, this exchange was treated

as a debt extinguishment.

The August Notes bear interest at 4 % annually with interest payable monthly and the principal due on November

The August Notes are convertible into common stock at a fixed $1.99 per share, except in the Event of Default as defined in

the August Notes, which the conversion price for an Event of Default Conversion is calculated at a 10% discount of the average three-day

volume-weighted average price prior to the conversion date.

During the third quarter 2024, the Company recognized

a loss on debt extinguishment of $ 685,151 related to the exchange agreement discussed above.

The loss on extinguishment related to the

August Notes included $ 315,303 fair value related to the warrant liability issued, $ 347,947 fair value related to the optional conversion

feature derivative liability of the remaining principal balance, and $ 21,901 cash fees paid for legal costs related to the August Notes.

The Company used the binomial option pricing method for calculating the derivative fair value related to the warrants and optional conversion

In December 2024, the Investors exercised their

conversion option to convert the remaining $ 3,000,000 in August Notes to Common Stock at a fixed $ 1.99 conversion price.

the Company issued 1,507,538 shares of common stock, cancelled the $3,000,000 in August Notes, and recorded $ 17,864,325 to common stock

and additional paid in capital related to the conversion of the August Notes to Common Stock.

This value is based on the closing price

of the Company’s common stock on December 3, 2024 of $11.85 per share.

This resulted in a loss on debt extinguishment of $ 14,864,325 .

The settlement of the related conversion option derivative resulted in a gain on extinguishment of $ 16,503,923 .

The net gain was $ 1,639,598 .

Total interest expense for the nine months ended

September 30, 2025 and 2024 was $ 0 and $ 101,648 , respectively.

Total interest expense for the three months ended September 30, 2025 and

2024 was $ 0 and $ 41,465 , respectively

Note 10 – Earnings Per Share and Stockholders’ Equity

Preferred Stock

As of September 30, 2025 and December 31, 2024,

there are no issued and outstanding Series A, B, and C Preferred Stock.

The Series A was convertible into common stock

at a ratio of 1,000 shares of common stock for each share of Series A stock held, subject to certain limitations.

The Series A shares

were not entitled to vote on any matters submitted to shareholders of the Company.

The Series B was convertible into common stock

at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations.

The Series B shares

were not entitled to vote on any matters submitted to shareholders of the Company.

The Series C was convertible into common stock

at a ratio of 3,000 shares of common stock for each share of Series C stock held, subject to certain limitations.

The Series C shares

were not entitled to vote on any matters submitted to shareholders of the Company.

On April 10, 2025, the Company filed a Withdrawal

of Designation with the Secretary of State of the State of Nevada withdrawing the certificates of designation for each of the Series A,

Series B and Series C.

2024 Preferred Stock Transactions

During the nine months ended September 30, 2024,

shareholders converted 140 shares of Series B into 700,000 shares of common stock.

The Company cancelled the 140 shares of Series B upon

the conversion.

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.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

Note 9 – Stockholders’ Equity

2026 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 during the nine months ended

September 30, 2025.

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 $ 4,154,839 was recognized during the nine months ended September 30, 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.

On May 7, 2025, in a confidentially marketed public

offering the Company sold 8,000,000 shares of common stock at $5.00 per share resulting in gross proceeds of $ 40,000,000 , prior to payment

of placement agent fees of $ 3,200,000 and $ 304,000 of other offering expenses resulting in net proceeds of $ 36,496,000 .

Dominari Securities,

LLC acted as the sole placement agent and also received a warrant to purchase 640,000 shares of the Company’s common stock at $5.00

per share over a two-year period expiring on May 6, 2027.

On May 19, 2025, the Company issued 33,336 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 $5.40 per share, which was the value the Company’s common stock on the date

of grant, respectively for a total of approximately $ 180,000 to be recognized as stock compensation expense during the nine months ended

September 30, 2025.

On May 19, 2025, the Company issued 4,630 immediately

vested shares of common stock to a consultant of the Company related to services provided.

The shares of common stock were granted under

the 2022 Equity Incentive Plan.

The shares were valued at $5.40 per share, which was the value the Company’s common stock on the

date of grant, respectively for a total of approximately $ 25,000 to be recognized as stock compensation expense during the nine months

ended September 30, 2025.

On May 22, 2025, the Company issued 150,000 shares

of common stock related to vested restricted stock units for our advisory board members.

The restricted stock units are valued at $4.40

per share, the closing price of our common stock as of the date of the grant, for a total value of $ 660,000 .

On June 30, 2025, the Board of Directors of the

Company awarded the Company’s Chief Executive Officer 175,000 restricted shares of the Company’s common stock under the 2022

Equity Incentive Plan as a bonus related to the May 2025 public offering.

The restricted shares are valued at $8.57 per share, the closing

price of our common stock as of the date of the grant, for a total value of $ 1,499,750 that was recognized immediately based on the vesting

of the awards for each of the Company’s Officers.

The shares are subject to the Company’s clawback policy.

On July 15, 2025, in a registered direct offering

the Company sold 5,000,000 shares of common stock at $9.70 per share resulting in gross proceeds of $ 48,500,000 , prior to the payment

of placement fees of $ 3,395,000 and $ 204,000 of other offering expenses resulting in net proceeds of $ 44,901,000 .

Dominari Securities,

LLC acted as the sole placement agent and also received a warrant to purchase 350,000 shares of the Company’s common stock at $9.70

per share over a two-year period expiring on May 6, 2027 .

On August 1, 2025, the Company issued 150,000

shares of common stock related to the delivery of vested restricted stock units under the 2022 Equity Incentive Plan to certain executives

of the Company as a bonus related to the May 2025 public offering.

The shares were valued at $ 1,285,500 based on the $8.57 based on the

quoted trading price on grant date.

The shares are subject to the Company’s clawback policy.

On August 7, 2025, the Company issued 100,000

restricted shares of common stock to certain employees of the Company.

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

1 unchanged sentence

The restricted shares issued to employees are subject to pro-rata forfeiture over a four-year period.

shares were valued at $9.59 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively

for a total of $ 959,000 to be recognized as stock compensation expense pro-rata over the vesting period.

Stock compensation expense of

$ 35,638 was recognized during the nine months ended September 30, 2025.

On August 19, 2025, the Company issued 9,232 immediately

vested restricted shares of common stock to non-employee directors of the Company.

The shares of restricted stock were granted under the

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 shares were valued at $9.75 per share, which was the quoted trading price the Company’s common stock

on the date of grant, respectively, for a total of approximately $ 90,000 to be recognized as stock compensation expense during the nine

months ended September 30, 2025.

On August 19, 2025, the Company issued 1,539 immediately

vested shares of common stock to a consultant of the Company related to services provided.

The shares of common stock were granted under

the 2022 Equity Incentive Plan.

The shares were valued at $9.75 per share, which was the quoted trading price the Company’s common

stock on the date of grant, respectively for a total of approximately $ 15,000 which is recognized as stock compensation expense during

the nine months ended September 30, 2025 and included in stock compensation expense – vested stock on the statement of stockholder’s

On September 2, 2025, the Company issued 280,000

restricted shares of common stock to certain employees of the Company.

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

1 unchanged sentence

The restricted shares issued to employees are subject to pro-rata forfeiture over a four-year period.

shares were valued at $9.16 per share, which was the value of the Company’s common stock on the date of grant, respectively for

a total of $2,564,800 to be recognized as stock compensation expense pro-rata over the vesting period.

Stock compensation expense of $ 51,085

was recognized during the nine months ended September 30, 2025.

On September 3, 2025, the Company issued 656,642

of common stock related to the closing of the Rotor Lab acquisition (see Note 3).

The shares were valued at $9.02 per shares which was

the closing trading price of the Company’s common stock on September 3, 2025, the closing date of the acquisition, resulting in

an aggregate value of $ 5,922,911 .

On September 24, 2025, the Company issued 8,500

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

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

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 $ 42,500 related to

the warrant exercises.

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.

In September 2025, the Company issued 50,000 shares

of common stock related to the vesting of certain employee restricted stock units in which the Company issued 50,000 shares of common

stock related to the vesting of these restricted stock units.

During the nine months ended September 30, 2025,

several employees of the Company exercised 119,900 of their vested stock options in which the Company issued 119,900 shares of common

stock related to these exercises.

The Company received total cash proceeds of $ 501,610 related to the exercise of the stock options.

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 .

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

2025 Transactions

On January 2, 2024, the Company issued 16,086

shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of

$ 64,344 or $4 per share, the value of the IPO in February 2024.

On February 16, 2024 the Company completed its

IPO and issued 1,250,000 shares of common stock at the IPO Price for total net proceeds of $ 3,849,555 .

The Company incurred $ 510,000 direct

deduction from proceeds, $ 127,687 in cash disbursements related to offering costs and $ 512,758 in prior year paid and deferred offering

costs as of December 31, 2023 for a total of $ 1,150,445 offering costs, associated with the IPO which consisted of underwriter, legal,

accounting, and other associated filing fees.

These costs have been recorded as a reduction of the gross proceeds from the IPO in stockholder’s

The 62,500 of representative warrants are exercisable for common stock at a price of $5.00 per share (125% of the IPO Price) at

any time beginning on August 15, 2024 through and including February 16, 2029, the expiration date.

Simultaneously with its IPO and as a part of the

Purchase Agreement as discussed in Note 3, the Company issued Red Cat 4,250,000 shares of common stock as consideration of the business

These were subsequently exchanged into 4,250 Series A preferred shares as discussed above.

As agreed in the Purchase Agreement,

$ 17 .0 million of the purchase price would be issued in common stock based on the IPO price of $4.00 per share.

During the nine months ended September 30, 2024,

the Company issued 700,000 shares of common stock related to certain shareholders converting 140 Series B shares into common stock.

On April 30, 2024, the Company issued 937,249

restricted shares of common stock to executive officers and board members 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 February 14, 2025.

On May 2, 2024, the Company issued an additional

40,650 of restricted shares of common stock to a company controlled by Allan Evans, the Company’s CEO, related to an agreed upon

reduction of the consulting fee paid to the company.

The shares of restricted stock were granted under the Company’s 2022 Equity

Incentive Plan.

The April 30, 2024 and May 2, 2024 shares were

valued at $ 1.20 and $ 1.23 per share, respectively for a total of $ 1,174,698 to be recognized pro-rata over the vesting period through

February 14, 2025, which is the forfeiture period.

Stock compensation expense of $ 679,699 was recognized during the nine months ended

September 30, 2024.

On July 22, 2024, Red Cat sold all of its securities

in the Company to two accredited investors in a private transaction.

As part of the transaction, Red Cat entered into an Exchange Agreement

with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s common stock for 4,250 shares of the Company’s

There was no gain or loss on this exchange as both the common and preferred shares were determined to have the same fair value

as of the exchange date.

On July 30, 2024, the Company issued 23,743 immediately

vested restricted shares of common stock to board members of the Company.

The shares of restricted stock were granted under the Plan.

The shares were valued at $ 1.79 per share, which was the value of the Company’s common stock on the date of grant, respectively

for a total of $ 42,500 to be recognized as stock compensation expense during the three months ended September 30, 2024.

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.

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.

stock awards and restricted stock units are granted on a quarterly basis.

All stock awards which have been granted to individuals who

do no t 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.

As of September 30, 2025, the Plan is authorized to

issue up to 5,136,228 of awards after the 5% increase on January 1, 2025.

The following table presents the activity for

stock options outstanding as of September 30, 2025:

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

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

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

respectively of stock options under the Plan to certain employees.

The stock options are subject to certain vesting provisions.

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.

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

5 unchanged sentences

Forfeited/canceled

Outstanding – September 30, 2025

Exercisable – September 30, 2025

The Company recognized $ 714,731 in stock-based

compensation expense related to stock options during the nine months ended September 30, 2025.

As of September 30, 2025, there was $ 2,642,646

of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term through

Outstanding – March 31, 2026

Exercisable – March 31, 2026

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

Exercise Price

Stock Price on date of grant

Risk-free interest rate

Dividend yield

Expected term (years)

The total grant date fair value of stock options

granted was $ 1,287,801

during the three months ended March 31, 2026 and 2025, respectively.

The Company recognized $ 291,412

in stock-based compensation expense related to stock options during the three months ended March 31, 2026 and 2025, respectively.

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

The following table presents the activity for

restricted stock outstanding:

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.

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

4 unchanged sentences

Forfeited/canceled

Unvested – September 30, 2025

Restricted stock awards are equity grants to officers,

directors and employees of the Company in which restricted common stock is issued on the grant date subject to vesting and claw-back provisions.

Restricted stock units are equity grants to employees and advisors of the Company in which common stock is issued upon meeting certain

vesting requirements.

The total value of restricted stock awards

and restricted stock units granted during the nine months ended September 30, 2025 is $ 13,021,600 .

Unvested – March 31, 2026

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

in stock-based compensation expense related to restricted stock awards and restricted stock units during the nine months ended

September 30, 2025.

As of September 30, 2025, there was $ 4,894,495 of unrecognized stock-based compensation expense related to

unvested restricted stock awards and units to be recognized over the remaining vesting term through March 2029.

The following table presents the activity for warrants outstanding

as of September 30, 2025:

$ 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.

The following table presents the activity for warrants outstanding as of

March 31, 2026:

Schedule of warrant activity

2 unchanged sentences

Forfeited/cancelled/restored

( 1,233,106 )

Outstanding – September 30, 2025

As Discussed in Note 10, “Earnings Per Share

and Stockholders’ Equity”, in connection with the May 2025 public offering and July 2025 registered direct offering, the Company

issued 990,000 warrants to the underwriter.

The warrants have an average exercise price of $ 6.66 .

In addition, certain warrant holders exercised

1,233,106 warrants related to our October 2024 private placement during the nine months ended September 30, 2025.

All warrants outstanding have a weighted average

remaining contractual life of approximately 2.08 years as of September 30, 2025.

The aggregate intrinsic value of the warrants at September

30, 2025 is $ 10,510,241 .

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

In November 2022, the Company entered into the

Purchase Agreement, as amended with Red Cat and Jeffrey Thompson, the Company’s former Chief Executive Officer and President and

a current director.

Thompson is also the current Chief Executive Officer of Red Cat, pursuant to which, among other things, Mr.

and the Company have agreed to indemnification obligations, which shall survive for a period of nine months from February 16, 2024, subject

to certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of 100,000 shares

of our common stock owned by him to secure any indemnification obligations, which stock is our sole remedy, except for fraud.

Chief Executive Officer, Mr.

Brandon Torres Declet, negotiated the terms of the Purchase Agreement on an arms’ length basis with

Joe Freedman who was the head of Red Cat’s Special Committee.

The transaction was ultimately approved by the Company’s and

Red Cat’s board of directors.

On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated

in the Purchase Agreement in a special meeting.

Thompson recused himself from such vote.

In February 2024, the Company completed the acquisitions

to purchase Fat Shark and Rotor Riot from Red Cat.

Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat.

Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines.

the acquisition, Mr.

Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the

acquisition and IPO.

On April 30, 2024 (“Grant

Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the

“Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr.

Evans, whereby the Consultant agreed to cause Dr.

Evans to perform his services as the Company’s Chief Executive Officer and the

Consultant will be compensated on behalf of Dr.

Evans by the Company in connection with his performance of such services.

The Agreement

Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in

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.

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 will perform the duties and responsibilities that are customary for a chief executive

officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed

with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities.

The Consultant agreed to cause Dr.

Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects

of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company

with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive

officer of the Company;

(ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations

(iii) to report to the Company’s board of directors;

(iv) to perform services for such subsidiaries of the Company as

may be necessary.

The Consultant receives

a $ 250,000 fee per year payable in monthly installments.

In addition, the Consultant was granted 488,000 fully vested shares of restricted

common stock.

The fair value of the shares was $ 585,600 based on the $1.20 quoted trading price on the Grant Date and will be recognized

over the service period (see below).

The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan.

The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event

Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal

Revenue Code.

The Company and Dr.

Evans previously entered into an Offer Letter dated November 27,

2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023.

The Agreement terminates

and replaces the Offer Letter dated November 27, 2023.

In October 2024, in relation to the Private Placement

as described in more detail in Note 10, “Earnings Per Share and Stockholders’ Equity”, the Company’s CEO and two

directors (collectively, the “Insiders”) invested $ 250,000 in the Private Placement on identical terms to the other Investors.

In addition, the Insiders were required to pay an additional $ 92,105 to the Company related to the greater of book or market value for

the warrants.

In May 2025, in relation to the confidentially

marketed public offering as described in more detail in Note 10, “Earnings Per Share and Stockholders’ Equity”, the

Company’s CEO and three directors invested $ 420,000 in the offering on identical terms to the other Investors and received a total

of 84,000 shares of common stock.

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

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,

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.

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

million as of March 31, 2026

Note 12 – Commitments and Contingencies

4 unchanged sentences

See Note 7 – Operating Leases for additional

On June 4, 2025, the Company entered into a

Lease Agreement to lease approximately 17,000 square feet of space for the Company’s drone motor manufacturing facility in

Orlando, Florida, at an average monthly rental of $21.1k over a five year period.

The lease commenced on August 1, 2025 and expires

in August 2030.

As of September 30, 2025, the Company has open commitments of approximately $3.2 million related to the purchase of

motor production equipment and $0.9 million related to tenant improvements.

These assets are expected to be placed into service

during Q4 2025.

As a part of the business combination that occurred on September 3,

2025, 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.

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

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.

Aloft Material Definitive Agreement

On February 1, 2025, the Company entered into

an Agreement and Plan of Merger and Reorganization (the “Agreement”) with Aloft Technologies, Inc., a Delaware corporation

(“Aloft”), and UMAC Merger Sub, Inc.

a Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub”).

Aloft is a leader in the drone fleet and airspace management sector, powering a majority of all FAA-approved Low Altitude Authorization

and Notification Capability airspace authorizations in the United States and the related software is complimentary to the Company’s

overall position to provide drone related components and drone services made in the United States.

Under the terms of the Agreement and subject to

customary closing conditions and a working capital adjustment, on the closing date of the Agreement Aloft will merge into Merger Sub,

and Merger Sub will continue as a wholly owned subsidiary of the Company.

In addition, each issued and outstanding share of Aloft capital

stock that is not a dissenting share will be cancelled and each Aloft Stockholder (as defined in the Agreement) will receive their pro

rata share of the merger consideration payable by the Company as provided for in the Agreement.

The merger consideration of $ 14.5 million

consists of 1,204,319 shares of common stock of the Company and expected not to exceed $100,000 in cash payable to unaccredited investors.

Customary closing conditions by the parties including

Aloft shareholder approval must be met before being able to close the merger.

On May 6, 2025, the Company and Aloft executed

an Amendment and Waiver to the Merger Agreement (the “Aloft Amendment”) which (i) waives the exclusivity provision in the

Agreement, (ii) extends the end date in the Agreement from April 30, 2025 to August 31, 2025, (iii) adds a $100,000 breakup fee in the

event Aloft consummates an alternative transaction while the Agreement remains in effect, and (iv) permits the Company to terminate the

Agreement at any time upon written notice, however, the Company will forfeit the breakup fee.

On June 9, 2025, the Company terminated the Agreement

with Aloft and forfeited its right to receive the $100,000 breakup fee.

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

At the Market Agreement

On August 28, 2025, the Company entered into a

Capital on Demand Sales Agreement (the "Sales Agreement”) with Jones Trading Institutional Services LLC ("Jones”),

pursuant to which the Company may issue and sell over time and from time to time up to $300,000,000 worth of shares of the Company’s

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, 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 the Company

all the Shares requested to be sold by the Company, consistent with its normal trading and sales practices, subject to the terms of the

Sales Agreement.

Under the Sales 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, the Company has

agreed to reimburse Jones for the fees and disbursements of its counsel, in an amount not to exceed $55,000.

In addition, the Company

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, the Company

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.

The Company paid Jones $2.16 million related to the sales of common stock under the Agreement.

Fulfillment Lease

On October 30, 2025, the Company entered into

a lease agreement for an additional 25,000 square feet of warehouse/office space in Orlando, FL.

This space will be used primarily as

a fulfillment center.

The lease commencement date is December 1, 2025 and currently runs through December 31, 2030.

Warrants Exercise

On November 5, 2025, warrant holders exercised

640,000 warrants at $5.00 per warrant in connection with the the May 2025 confidentially marketed public offering and the Company issued

640,000 shares of Common Stock.

The Company received cash proceeds of $3,200,000 in relation to the exercise.

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

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements