Unusual Machines, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC on March 12, 2026. The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report and of our Annual Report on Form 10-K for the year ended December 31, 2025, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Unusual Machines, Inc. and its subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted. Recent Developments Confidentially Marketed Public Offering On March 23, 2026, we completed a confidentially marketed public offering in which we sold 8,823,529 shares of common stock at $17.00 per share resulting in gross proceeds of approximately $150.0 million, prior to payment of placement agent fees of $10.5 million, and 0.7 million in other offering expenses resulting in net proceeds of approximately $138.8 million. We intend to use the net proceeds from the offering to acquire additional inventory, working capital needs and general corporate purposes. Inventory Purchase During the month of May, we are initiating purchase orders of inventory estimated to be approximately $75.0 million to secure materials and inventory across our drone component product lines. We are continuing to see significant demand increase across the industry and these purchase orders help position the Company and its inventory availability to meet customer demand through supply chain planning. These purchases are expected to be made over the next several months. Definitive Agreement to acquire Upgrade Energy On May 7, 2026, we signed a definitive agreement to acquire DroneNX, LLC which operates as Upgrade Energy (“Upgrade Energy”), a manufacturer of battery and power systems solutions for unmanned aerial systems. The transaction purchase price is estimated at $52.0 million, which includes (i) a fixed quantity of 1,792,012 shares of the Company’s common stock at $13.9508 per share which was based on the preceding 5 day volume weighted average share price of the Company’s common stock prior to signing the definitive agreement, which is estimated to be approximately $25.0 million, which could be subject to change based on the Company’s common stock price at the time of closing, (ii) $1.0 million in cash upon closing of the transaction, and (iii) an additional $26.0 million in cash based on the Company recognizing $10.0 million in revenue related to internally manufactured batteries during the first two years after the acquisition closing date. The acquisition is subject to customary closing conditions, including Upgrade Energy completing their financial audit. The acquisition adds battery expertise to our domestic manufacturing and engineering capabilities, adds additional drone components to our product mix, and strengthens our overall domestic supply chain and manufacturing capabilities. 28 Results of operations Three Months Ended March 31, 2026 and 2025 Revenue During the three months ended March 31, 2026 we generated revenues totaling $8,095,836 compared to $2,042,300 during the three months ended March 31, 2025, representing an increase of $6,053,536 or 296%. The increase in revenue over the last 12 months primarily relates to the increase and establishment of our B2B business and revenue related to our NDAA and Blue UAS products. Our B2B revenue was $7,318,256 for the three months ended March 31, 2026 compared to $34,030 for the three months ended March 31, 2025.. See Note 2 to our Consolidated Financial Statements We recently started manufacturing production on certain products including drone motors and we continue to see significant increased interest and demand in our manufactured products in the first quarter and the remaining of 2026. We expect our revenue to continue to grow quarter over quarter in 2026 as we continue to build out our capacity including our manufacturing facilities and products as well increasing our staffing to handle additional demand from the market. Cost of Goods Sold During the three months ended March 31, 2026, our cost of goods sold was $5,441,729 compared to $1,545,493 during the three months ended March 31, 2025, resulting in an increase of $3,896,236 or 252%. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs including tariffs. During the first quarter of 2026, cost of goods sold also include direct payroll costs, a portion of rent expense and depreciation expense related to our manufactured products. We did not incur these costs in 2025 as we did not have manufactured products at that time. The increase in cost of goods sold is primarily driven by the increase in our revenue and growth in B2B sales. We expect our total cost of goods sold to increase in 2026 in conjunction with our revenue increases as we sell additional product. Gross Profit During the three months ended March 31, 2026, our gross profit was $2,654,107 compared to $496,807 during the three months ended March 31, 2025, resulting in an increase of $2,157,300 or 434%. Our gross margin, as a percentage of sales, totaled 32.8% during the three months ended March 31, 2026, compared to 24.3% during the three months ended March 31, 2025. While the margins we generated during the year are in line with our expectations and normal operating margins, we do anticipate continued fluctuations in our manufactured products into 2026 as we continue to improve our manufacturing process and become more efficient. We anticipate our gross margins to have fluctuations in 2026 as we start scaling our manufacturing process. We anticipate our gross margins will have a decline in the first two quarters of 2026 as we bring on and train our staff, work to scale production, increase to multiple shifts, and build out efficiencies. We anticipate our margins will improve in the second half of 2026 as we have more trained staff and efficient processes and as we bring on our highly-automated production line for motors. Operating Expenses During the three months ended March 31, 2026, operations expenses totaled $1,948,899 compared to $302,602 during the three months ended March 31, 2025, resulting in an increase of $1,646,297 or 544%. Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses. In addition, we have started incurring additional operations related expenses as we start incurring non-product costs related to our motor production and headset facilities. We expect our operations expense to increase as we continue to hire additional staff to support our operations including engineering staff to help improve process and gain efficiencies. We are also setting up our headset factory and anticipate building out a battery facility and camera facility in the second half of 2026. 29 During the three months ended March 31, 2026, research and development expenses totaled $91,143 compared to $7,903 for the three months ended March 31, 2025, resulting in an increase of $83,240 or 1,053%. Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component manufacturing to the United States. We expect our research and development expenses to increase some as we continue to build out our products, however, we do not anticipate a significant growth as compared to revenue and other costs. During the three months ended March 31, 2026, selling and marketing expenses totaled $580,039 compared to $207,616 for the three months ended March 31, 2025, resulting in an increase of $372,423 or 179%. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot, marketing events and payroll expenses for our sales and marketing team. The increase relates mainly to adding additional staffing to our sales and marketing team. We anticipate our sales and marketing costs to increase in 2026 related to building out our enterprise sales team, however, we expect these increases to be at a lower rate than our revenue and other expenses as our enterprise sales are more dedicated efforts, while our retail revenue is driven off of advertising sales. During the three months ended March 31, 2026, general and administrative expenses totaling $7,228,201 compared to $3,225,904 for the three months ended March 31, 2025, resulting in an increase of $4,002,297 or 124%. General and administrative expenses incurred include expenses related to operations for a public company including legal and other professional fees, public company insurance expense, and other costs associated with being public. We’ve also increased our headcount to support our growth which includes building out our accounting, HR, and facilities staff. The above amount includes $3,939,979 in non-cash stock compensation expense during the first three months of 2026 as compared to $1,906,373 during 2025. We expect our general and administrative expenses to increase during 2026 as we continue to build out our infrastructure with additional hires and systems. We also anticipate things like professional fees and other expenses related to being a public company to increase. In addition, we anticipate our non-cash stock compensation expense to be higher in 2026. We do not anticipate the increase in our general and administrative expenses to increase at the same rate as our revenue as we start to gain operational efficiencies at scale. Other Income (Loss) During the three months ended March 31, 2026, other income totaled $17,541,980 compared to $1,532 during the three months ended March 31, 2025, resulting in an increase of $17,540,448. This increase relates primarily to our unrealized gain from short term investments of $9,492,076, realized gain from short term investments of $7,264,743, and increase in interest income of $790,546. Operating Income (Loss) Our operating loss for the three months ended March 31, 2026 was $7,258,987, compared to an operating loss for the three months ended March 31, 2025 of $3,267,811. This increase followed our rapid expansion as we began to apply the cash we had raise to the expansion of our drone components business. Cash Flows Operating Activities Net cash used in operating activities was $17,412,987 during the three months ended March 31, 2026, compared to net cash used in operating activities of $1,193,628 during the three months ended March 31, 2025, representing an increase of $16,219,359. The increase was primarily attributable to changes in working capital, including increase in inventory of $8,510,541, prepaid and deposits for inventory of $3,817,595, accounts receivable of $1,817,598, and a decrease in accounts payable and accrued expenses of $435,307 . The Company recorded unrealized gains on short term investments of $9,492,076 and realized gains of $7,264,743, which were partially offset by share-based compensation expense of $3,939,979. 30 Investing Activities Net cash used in investing activities was $5,383,494 during the three months ended March 31, 2026 compared to net cash used in operating activities of $0 during the three months ended March 31, 2025. This increase consisted of $17,500,000 used in our strategic short term investments, $698,237 in purchases of property and equipment, partially offset by proceeds from sales of short term investments of $12,814,743 Financing Activities Net cash provided by financing activities totaled $142,455,327 during the three months ended March 31, 2026, compared to $2,436,966 during the three months ended March 31, 2025, resulting in an increase in net cash provided by financing activities of $140,018,362 or 5,745%. Our first quarter 2026 proceeds are from a public offering of common shares of $149,999,993 offset by offering costs of $11,200,000 and proceeds from warrant exercises of $3,395,000 Liquidity and capital resources As of March 31, 2026, we had current assets totaling $315,205,571 primarily consisting of cash balances of $222,939,674, investments of $60,656,983, inventory of $13,827,189 and deposits for inventory of $13,566,078. Our current liabilities as of March 31, 2026 totaled $2,458,193, primarily consisting of accounts payable and accrued expenses of $1,071,486 and deferred revenue and current operating lease liability of $1,386,707. Our net working capital as of March 31, 2026 was $312,747,378. Subsequent to March 31, 2026, we placed inventory orders of approximately $75 million. On January 9, 2026, we received $3,395,000 in proceeds related to the 350,000 warrants that were exercised from the July 2025 Registered Direct Offering. On March 23, 2026, we completed a public offering for the sale of 8,823,529 shares of Common Stock at a price of $17.00 per share for aggregate gross proceeds of approximately $150.0 million before deducting fees to the placement agent and other expenses payable by us in connection with the offering. We retained approximately $138.8 million in net proceeds after offering expenses. We believe that our existing cash balances will be sufficient to fund our current operating plans through more than the next 12 months. Critical Accounting Policies and Estimates For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2025. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2025. Recently Issued Accounting Pronouncements The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations. 31 Item 3. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.