What changed in this filing

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Item 1. Financial Statements

2026-08-06 compared with 2026-05-14 · 747 added, 598 removed, 550 unchanged (71% of the section changed)

2 unchanged sentences

Consolidated Condensed Balance Sheets

June 30, 2026

Current assets:

3 unchanged sentences

Short-term investments at fair value

Short term investments at cost

Short-term investment at cost

Accounts receivable

15 unchanged sentences

Operating lease liability

Total current liabilities

Long-term liabilities

Deferred tax liability

Operating lease liability – long term

Contingent consideration

Total current liabilities

Non-current liabilities

Deferred tax liability

Operating lease liability – less current portion

Total non-current liabilities

Total liabilities

1 unchanged sentence

Stockholders’ equity:

Common stock - $ 0.01 par value, 500,000,000 authorized and 47,793,923 and 37,759,911 shares issued and outstanding at March 31, 2026 and December 31, 2025, respectively

Common stock - $ 0.01 par value, 500,000,000 authorized and 49,956,505 and 37,759,911 shares issued and outstanding at June 30, 2026 and December 31, 2025, respectively

Additional paid in capital

7 unchanged sentences

$ 182,708,414

See accompanying condensed unaudited notes to the consolidated

See accompanying unaudited notes to the consolidated

condensed financial statements.

Unusual Machines, Inc.

Consolidated Condensed

Statement of Operations and Comprehensive Income (loss)

For the Three Months Ended March 31, 2026 and 2025

Three Months Ended March 31,

Condensed Statements of Operations and Comprehensive Income (Loss)

For the Three and Six Months Ended June 30,

2026 and 2025

Three months ended June 30,

Six months ended June 30,

Cost of goods sold

1 unchanged sentence

Research and development

Selling and marketing

Sales and marketing

General and administrative

4 unchanged sentences

( 7,190,473 )

( 15,093,130 )

( 10,458,284 )

Other income and (expense)

Interest income

Unrealized gain from investments

Unrealized gain (loss) from investments

( 3,883,535 )

Realized gain from investments

Change in contingent consideration for Rotor Lab

Loss from foreign currency transactions

Interest expense

Total other income and (expense), net

Net income (loss) before income tax

( 3,266,279 )

Income tax benefit (expense)

Other income, net

Net income (loss)

$ ( 7,783,553 )

STATEMENT OF COMPREHENSIVE INCOME

$ ( 6,964,739 )

$ ( 10,231,018 )

STATEMENT OF COMPREHENSIVE INCOME (LOSS)

Net income (loss)

( 7,783,553 )

( 6,964,739 )

( 10,231,018 )

Foreign currency translation adjustment

1 unchanged sentence

$ ( 7,768,239 )

Net loss per share

$ ( 6,964,739 )

$ ( 10,231,018 )

Net income (loss) per share

Weighted average common shares outstanding

See accompanying condensed unaudited notes to the consolidated

See accompanying unaudited notes to the consolidated

condensed financial statements.

Unusual Machines, Inc.

Consolidated Condensed Statement of Changes in Stockholders’

For the Three Months Ended March 31, 2026 and 2025

Consolidated Condensed Statements of Changes

in Stockholders’ Equity

For the Three and Six Months Ended June 30,

2026 and 2025

Additional Paid-In

3 unchanged sentences

$ ( 35,913,514 )

Issuance of common shares, equity incentive plan

Issuance of common shares, equity

incentive plan

Cash exercise of warrants

Stock compensation expense - vested stock

Stock compensation expense - vested

Stock compensation expense

3 unchanged sentences

$ ( 39,179,793 )

Issuance of common shares, employees, officers, and directors

Issuance of common shares, option

Issuance of common shares, consulting

Issuance of common shares, advisory

Issuance of common shares, public

Stock compensation expense

Stock compensation expense - vested

( 6,964,739 )

Balance, June 30, 2025

$ ( 46,144,532 )

Balance, December 31, 2025

2 unchanged sentences

$ 174,939,670

Issuance of common shares, employees, officers, and directors

Issuance of common shares, option exercises

Issuance of common shares, consulting services

Issuance of common shares, confidentially marketed public

Issuance of common shares, warrant exercise

Stock compensation expense - options

Stock compensation expense - vested stock

Foreign currency translation

Issuance of common shares,

employees, officers, and directors

Issuance of common shares, option

Issuance of common shares, consulting

Issuance of common shares,

confidentially marketed public offering, net of offering costs

Issuance of common shares, warrant

Stock compensation expense -

Stock compensation expense - vested

Currency Translation

Balance, March 31, 2026

2 unchanged sentences

$ 331,637,400

See accompanying condensed unaudited notes to the consolidated

Issuance of common shares, employees, officers, and directors

Issuance of common shares, option

Issuance of common shares, advisory

Issuance of common shares,

at-the-market offering, net of issuance costs

Stock compensation expense

Stock compensation expense - vested

( 7,783,554 )

( 7,783,553 )

Currency Translation

Balance, June 30, 2026

$ 440,110,645

$ ( 52,607,690 )

$ 388,040,737

See accompanying unaudited notes to the consolidated

condensed financial statements.

Unusual Machines, Inc.

Consolidated Condensed Statement of Cash Flows

For the Three Months Ended March 31, 2026 and 2025

Three Months Ended March 31,

Consolidated Condensed Statements of Cash Flows

For the Six Months Ended June 30, 2026 and 2025

Six Months Ended June 30,

Cash flows from operating activities:

2 unchanged sentences

Depreciation and amortization

Share-based compensation expense

Stock-based compensation expense

Unrealized gain on short-term investments

2 unchanged sentences

( 9,532,673 )

Amortization of right of use asset

Change in assets and liabilities:

4 unchanged sentences

( 10,795,249 )

Right of use asset

Accounts payable and accrued expenses

Operating lease liabilities

Deferred revenue and other current liabilities

Contingent consideration

Deferred revenue

Net cash used in operating activities

2 unchanged sentences

Cash flows from investing activities

Purchase of short term investments

Investments in short-term securities

( 52,500,000 )

1 unchanged sentence

Purchase of property and equipment

Deposits for property and equipment

( 2,861,101 )

Net cash used in investing activities

2 unchanged sentences

Gross proceeds from issuance of common shares, public offering

Gross proceeds from issuance of common shares, at the market

Proceeds from option exercises

2 unchanged sentences

( 13,001,236 )

( 3,504,000 )

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net increase in cash

Effect of exchange rates changes on cash

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Cash, beginning of period

Cash, end of period

$ 229,598,776

See accompanying condensed unaudited notes to the consolidated

See accompanying unaudited notes to the consolidated

condensed financial statements.

1 unchanged sentence

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31,

2026 and 2025

June 30, 2026

Note 1 – Organization and nature of business

2 unchanged sentences

is a Nevada corporation engaged in the commercial drone industry.

On September 3, 2025, the Company acquired Rotor Lab

On September 3, 2025, the Company acquired Rotor

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

See Note 3 for additional information.

Note 2 – Summary of significant accounting

of Presentation

Note 2 – Summary of significant accounting policies

Basis of Presentation

The consolidated condensed financial statements

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Certain information and footnote disclosures normally included in financial statements prepared in

accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations.

these condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included

in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2026.

The results for any interim period are not necessarily

indicative of results for any future period.

accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted from this Quarterly Report,

as is permitted by such rules and regulations.

Accordingly, these condensed financial statements should be read in conjunction with the

consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March

The results for any interim period are not necessarily indicative of results for any future period.

Prior-year and current-year

year-to-date amounts have been conformed to the current presentation where applicable.

These reclassifications affect only the presentation

of operating expenses among departments and had no impact on total operating expenses, operating loss, net loss, earnings (loss) per share,

total assets, liabilities, stockholders' equity, or cash flows.

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.

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,

Rotor Riot and Rotor Lab since acquired on September 3, 2025.

Intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

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

The financial statements include some amounts that

are based on management's best estimates and judgments.

Significant estimates reflected in these consolidated financial statements include

those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations,

the fair value of shares issued as consideration and the fair value of contingent consideration in business combinations, (iii) reserves

and allowances related to accounts receivable, and inventory, (iv) the evaluation of long-lived assets, including intangibles and goodwill,

for impairment, (v) the fair value of lease liabilities and related right of use assets, (vi) the fair value of short-term investments

including the value of unexercised warrants received, (vi) the warranty liability and sales returns reserves, and (vii) the deferred tax

asset valuation allowance.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments

purchased with an original maturity of three months or less to be cash equivalents.

The Company maintains cash deposits at a financial

institution that is insured by the Federal Deposit Insurance Corporation up to $ 250,000 .

The Company’s cash balance may at times

exceed these limits.

At March 31, 2026 and December 31, 2025, the Company had approximately $ 222.6 million and $ 102.6 million, respectively,

in excess of federally insured limits.

The Company continually monitors its positions with, and the credit quality of the financial institutions

with which it invests.

The financial statements include some amounts

that are based on management's best estimates and judgments.

Significant estimates reflected in these consolidated condensed 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.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

June 30, 2026

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 June 30, 2026 and December

31, 2025, the Company had approximately $ 229.1 million and $ 103 .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.

Accounts Receivable, net

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.

The Company carries its accounts receivable at

invoiced amounts.

The Company follows ASC 326, Financial Instruments – Credit Losses and has early adopted in fiscal year 2025,

ASU 2025-05, under which the Company evaluates all credit losses as of the reporting date.

On a periodic basis, the Company evaluates

its accounts receivable and establishes an allowance for credit losses based on a history of past write-offs and collections and current

credit conditions.

Accounts are written-off as uncollectible at the discretion of management.

At March 31, 2026 and December 31, 2025, the Company considers

accounts receivable to be fully collectible;

At June 30, 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

Short-Term Equity Investments at Fair Value

The Company measures its investments in equity

securities, consisting of common stock, preferred stock, and non-public warrants at fair value with unrealized changes in value

recognized in net income (loss) per ASC 321.

For the quarter ended March 31, 2026 the realized gain from short-term equity

investments was approximately $ 7.2

million and unrealized gain from short-term equity investments was approximately $ 9.5

The Company holds less than a 5% equity interest in each of the companies it invested in as of March 31, 2026.

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.

The Company holds less than a 5% equity interest in each of the companies it invested in as of June

Short-Term Equity Investments at Cost

The Company measures its investment is privately

The Company measures its investment in privately

held companies without readily determinable fair values using the Measurement Alternative per ASC 321.

1 unchanged sentence

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.

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

3 unchanged sentences

Property and equipment, net

Property and equipment is stated at cost, net of accumulated

depreciation.

Depreciation is provided utilizing the straight-line method over the estimated useful lives which includes computer equipment

of three to five years , motor production equipment of ten to fifteen years and tenant improvements of five to fifteen years.

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 and office equipment of three to five years, motor production equipment of ten to fifteen years and tenant improvements of five

to fifteen years.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

The Company applies Accounting Standards Codification

2 unchanged sentences

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 determines if a contract is a lease

or contains a lease at inception.

Operating lease liabilities are measured, on each reporting date, based on the present value of the

future minimum lease payments over the remaining lease term.

The Company's leases do not provide an implicit rate.

Therefore, the Company used

an effective discount rate of 8.24% based on its last debt financings.

Operating lease assets are measured by adjusting the lease liability

for lease incentives, initial direct costs incurred and asset impairments.

Lease expense for minimum lease payments is recognized on a

straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense.

The Company has elected to

account for lease and non-lease components together as a single lease component for all underlying assets.

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 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.

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.

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”).

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.

Goodwill represents the future economic benefit

arising from other assets acquired in an acquisition that are not individually identified and separately recognized.

The Company tests

goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”).

Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate

that goodwill might be impaired.

ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether

the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit

is less than its carrying amount.

If, after assessing the totality of events or circumstances, an entity determines it is not more likely

than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required.

However, if an entity concludes otherwise, then it is required to perform an impairment test.

The impairment test involves comparing the

estimated fair value of a reporting unit with its book value, including goodwill.

If the estimated fair value exceeds book value, goodwill

is considered not to be impaired.

If, however, the fair value of the reporting unit is less than book value, then an impairment loss is

recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total

amount of goodwill allocated to the reporting unit.

No impairment loss on goodwill was recognized during the six months ended June 30,

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

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based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.

The Company reviews long-lived assets, including

tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances

indicate that the asset’s carrying amount may not be recoverable.

The Company conducts its long-lived asset impairment

analyses in accordance with ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets”.

ASC 360 requires the Company

to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of

other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows.

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

June 30, 2026

The Company reviews long-lived assets, including

tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate

that the asset’s carrying amount may not be recoverable.

The Company conducts its long-lived asset impairment analyses in accordance

with ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets”.

ASC 360 requires the Company to group assets and liabilities

at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate

the asset group against the sum of the undiscounted future cash flows.

Amortizable intangible assets are assessed for impairment upon

triggering events that indicate that the carrying value of an asset may not be recovered.

Recoverability is measured by a comparison of

the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset.

If such assets are determined

to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of

the intangible assets.

No impairment charges were recorded by the Company during the six months ended June 30, 2026 and 2025, respectively.

The Company has certain indefinite-lived trademark

assets that are reviewed for impairment by first performing a qualitative analysis in accordance with ASC 350-30 to determine whether

it is more likely than not that the fair value of the indefinite-lived asset is less than its carrying value.

If based on this assessment,

management determines that impairment is not more than likely, then no further quantitative testing is required.

However, if performing

a qualitative analysis determines that is more likely than not that the fair value is less than its carrying value, then a quantitative

analysis is performed in accordance with ASC 350-30-35, which occurs annually in the fourth quarter, or whenever events or changes in

circumstances indicate that the carrying value of an asset may not be recoverable.

Recoverability is measured by a comparison of the carrying

amount to future net undiscounted cash flows expected to be generated by the associated asset.

If such assets are determined to be impaired,

the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets.

Company performed only a qualitative analysis for 2025.

The Company did no t record an impairment during the six months ended June 30,

2026 and 2025, respectively related to the indefinite-lived assets.

Fair Values, Inputs and Valuation Techniques

for Financial Assets and Liabilities, and Related Disclosures

The fair value measurements and disclosure guidance

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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.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

The following table details the fair value measurements

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

of the Company’s financial assets and liabilities as of June 30, 2026:

Schedule of financial assets and liabilities

4 unchanged sentences

Contingent consideration from Rotor Lab acquisition

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 Company as of June 30, 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 June 30, 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

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:

The Company used the following inputs related

to the non-public warrants fair value as of June 30, 2026:

Schedule of assumptions used

Supplemental Information

Non-public Warrants

Expected term of the warrants (years)

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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:

The contingent consideration from the Rotor

Lab acquisition was based on management’s estimate at the acquisition date 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.

The Company updated the expected contingent consideration from the Rotor Lab acquisition to

as of June 30, 2026 based on actual sales during the period based on managements updated estimate.

See Note 3 for additional

Changes in Level 3 financial instruments are as

Schedule of level 3 financial instruments

1 unchanged sentence

Non-public warrants investment

$ ( 450,000 )

Contingent consideration from Rotor Lab acquisition

$ ( 450,000 )

The Company's financial instruments mainly consist

2 unchanged sentences

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

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

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:

accounted for at fair value and investments accounted for at cost were as follows as of June 30, 2026:

Schedule of short-term investments

Short-term investments at fair value

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Preferred stock

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

Pre-funded warrants

Accrued Warranty

Fat Shark generally provides a one-year warranty on

all of its products, except in certain European countries where it can be two years for some consumer-focused products from the date of

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

If a defect arises during the warranty period, Fat Shark will either (i) repair the affected product at no charge using new

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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

liability is included in accrued expenses on the accompanying consolidated balance sheets and amounted to $ 16,207 and $ 19,602 as of June

30, 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 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.

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

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.

liability is included in accrued expenses on the accompanying consolidated balance sheets and amounted to $ 317,009

as of June 30, 2026, and $ 0 as of December 31, 2025.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

Revenue Recognition

The Company will recognize revenue in accordance with

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

The Company will recognize revenue in accordance

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

This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:

Identify the contract with a customer;

Identify the performance obligations in the

Identify the performance obligations in

the contract;

Determine the transaction price;

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satisfies a performance obligation at a point in time.

The Company receives revenues from the sale of drone

and drone parts to enterprise customers and distributors (“Enterprise Revenue”) and individual consumers (“Retail Revenue”).

Sales revenue is recognized at a point in time when the products are shipped and the price is fixed or determinable, no other significant

obligations of the Company exist and collectability is probable.

Revenue is recognized when the title to the products has been passed

to the customer, which is the date the products are shipped to the customer.

This is the date the performance obligation has been met.

The Company’s retail return policy allows for certain non-custom or built-to-order products to be returned up to 15 days after the

original order is placed so long as it meets specific requirements as outlined in its return policy.

The Company’s enterprise return

policy allows for returns related to defective product so long as it meets the requirements in its policy.

The historical sales returns

for retail customers is de minimis and the Company does not have a specific sales return allowance for retail orders.

The Company does

not have any historical returns for enterprise orders and as such has not recorded a sales returns allowance.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

The Company receives revenues from the sale of

drone and drone parts to enterprise customers and distributors (“Enterprise Revenue”) and individual consumers (“Retail

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.

Company does not have any historical returns for enterprise orders and as such has not recorded a sales returns allowance.

Disaggregation of Revenue

The following table presents the Company’s revenue

disaggregated by revenue type for the period ended:

The following table presents the Company’s

revenue disaggregated by revenue type for the period ended:

Schedule of disaggregated by revenue

For the Six months Ended

Retail revenue

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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.

The following table presents the Company’s

revenue disaggregated by revenue type for the period ended:

For the Three months Ended

Retail revenue

Enterprise revenue

Total revenue

The Company had revenue outside the United States

of approximately $ 1.4 million and $ 0.2 million for the six months ended June 30, 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 $ 672,568 and $ 638,125 as of March 31, 2026 and December 31, 2025, respectively.

Deferred revenue related to

orders placed, but not yet fulfilled totaled $ 286,056 and $ 638,125 as of June 30, 2026 and December 31, 2025, respectively.

Cost of Goods Sold

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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.

Depreciation included in cost of goods sold for the six months ended June 30, 2026 and 2025 was $ 74,133 and $ 0 , respectively.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

Shipping and Handling Costs

Shipping and handling costs incurred for products

shipped to customers are included in general and administrative expenses and amounted to $ 198,642 and $ 70,161 for the three months ended

March 31, 2026 and March 31, 2025, respectively.

shipped to customers are included in operations expenses and amounted to $ 722,116 and $ 147,572 for the six months ended June 30, 2026

and 2025, respectively.

Shipping and handling costs charged to customers are included in sales.

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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

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.

Stock-Based Compensation

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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

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.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

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.

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

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.

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:

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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

Balance as of June 30, 2026

Net Loss per Share

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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 and diluted net income (loss) per common share:

Schedule of income (loss) per

For the Six months Ended

Net (loss) income per common share – basic:

Net (loss) income

$ ( 10,231,018 )

other adjustments

Net (loss) income allocated to common stockholders

$ ( 10,231,018 )

Weighted average common shares outstanding - basic

Net (loss) income per common share - basic

Net (loss) income per common share – diluted:

Net (loss) income

$ ( 10,231,018 )

other adjustments

Numerator for net (loss) income per common share - diluted

$ ( 10,231,018 )

Weighted average common shares outstanding - diluted

Net (loss) income per common share - diluted

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

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 Six months Ended

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

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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 three months ended March 31, 2025, from the computation of diluted net loss per share of common

The following table presents the potentially

dilutive shares that were excluded for the three months ended June 30, 2026, from the computation of diluted net loss per share of common

stock attributable to common stockholders, because their effect was anti-dilutive:

Schedule of effect anti-dilutive

For the Three months Ended

Schedule of antidilutive shares

Unvested stock options

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Segment Reporting

Operating segments are defined as components of an

enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or

decision making group, in deciding how to allocate resources and in assessing performance.

Unusual Machines, which sells drones and drone-related

components, operates as a single reportable segment entity.

Our chief operating decision maker, our Chief Executive Officer, reviews financial

information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.

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.

Operating segments are defined as components of

an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker,

or decision making group, in deciding how to allocate resources and in assessing performance.

Unusual Machines, which sells drones and

drone-related components, operates as a single reportable segment entity.

Our chief operating decision maker, our Chief Executive Officer,

reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.

The Chief Executive Officer is regularly provided with consolidated revenue and expenses consistent with those presented in the consolidated

statements of operations and 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

June 30, 2026

Recent Accounting Pronouncements

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Note 3 – Acquisitions

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.

On September 3, 2025, the Company closed on the

acquisition of Rotor Lab.

Rotor Lab is an Australian developer and manufacturer of electric motors and propulsion systems for unmanned

aerial systems (“UAS”).

Its product line includes precision-wound electric motors across multiple classes, from sub-400W units

for small UAS to high-power motors supporting large rotary and fixed wing platforms.

In addition to the motor production facility in

Australia, the Company built out a motor production facility in Orlando, FL and started producing motors for drones in the fourth quarter

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

The acquisition helps the Company accelerate their goals of building a resilient drone supply chain through their team and technology.

In addition, Rotor Lab will continue to serve as the engineering center for the Company’s motor design, prototyping, and low to

medium volume production of orders.

The Business Combination was based on a share

purchase agreement (the “Rotor Lab Purchase Agreement”) that was executed on June 12, 2025, subject to customary closing conditions

and was completed on September 3, 2025.

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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

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

The Company issued 656,642 shares of its common stock based on the formula as noted above, which resulted in an initial purchase

price of $ 5,922,911 based on the Company’s stock price of $ 9.02 on September 3, 2025, which was the closing date of the acquisition.

The contingent purchase price has been initially recorded at $ 2,847,000 .

The fair value of contingent consideration was determined using

the Monte-Carlo variable scenario model which values the liability at the measurement date using certain assumptions including the expected

revenue over the calculation period, a discount rate applied to revenue projections, the risk-free interest rate over the earnout period

and certain estimates and probabilities of different outcomes.

Such fair value amounts are subject to adjustment

during the one-year measurement period.

The Company updated the estimated contingent consideration from the Rotor

Lab acquisition to $ 3,000,000 as of June 30, 2026 based on actual sales during the period based on management’s updated estimate.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

June 30, 2026

Such fair value amounts are subject to adjustment

during the one-year measurement period.

The following represents the fair value allocation of Rotor Lab Purchase

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Total purchase price

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

the issued shares of Rotor Lab.

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.

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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.

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

13 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.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

The unaudited consolidated pro forma financial

information is presented for informational purposes only.

The unaudited consolidated pro forma adjustments are based on preliminary estimates,

information available and certain assumptions, and may be revised as additional information becomes available.

In addition, the unaudited

pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.

Note 4 – Inventories

Inventories, which consist solely of raw materials

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

and finished goods was as follows as of June 30, 2026 and December 31, 2025, respectively.

Schedule of inventories

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Total inventory

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

In addition, the Company had prepaid deposits

for inventory totaling $ 20,543,732 and $ 9,748,483 as of June 30, 2026 and December 31, 2025, respectively.

Note 5 – Other Current Assets

Other current assets included as of:

Schedule of other current assets

March 31, 2026

June 30, 2026

December 31, 2025

1 unchanged sentence

Prepaid benefits

Prepaid other

Total other current assets

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.

security deposits of $ 195,056 related to the operating leases for the Orlando, FL facilities and the Rotor Lab facility in Australia as

of June 30, 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:

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Total property and equipment, net

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

Depreciation expense totaled $ 97,004

and $ 342 for the six months ended June 30, 2026

and 2025, respectively.

A total of $ 74,133

of depreciation expense was recorded to cost of goods sold in related to the production of motors for the six months ended June 30,

2026 and 2025, respectively.

The Company has paid deposits of approximately $ 2.8

million related to the purchase of motor production equipment and $ 47,494

related to tenant improvements, which is included in Other non-current Assets.

These assets are expected to be received and placed

into service during the third and fourth quarters of 2026.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

7 – Operating Leases

The Company has assumed in the February 2024 business

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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.

Operating lease expense totaled $ 52,572 and $ 52,572 , respectively for the six months ended June 30, 2026

A total of $ 52,239 was recorded to costs of goods sold for the six months ended June 30, 2026.

In June 2025, Unusual Machines signed a lease

agreement for an additional 17,000 square feet of warehouse/office space in Orlando, FL.

This space will be used primarily for motor production.

2 unchanged sentences

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

Operating lease expense totaled $ 67,273 and $ 0 , respectively for the three months ended

March 31, 2026 and 2025.

A total of $ 67,273 was recorded to cost of goods sold for the three months ended March 31, 2026.

Operating lease expense totaled $ 126,862 and $ 0 , respectively for the six months ended June

30, 2026 and 2025.

A total of $ 126,862 was recorded to cost of goods sold for the six months ended June 30, 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.

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

The Company has valued

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

Operating lease expense totaled $ 186,430 and $ 0 , respectively

for the six months ended June 30, 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.

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.

The Company has valued the ROUA and the associated

liability, as of January 1, 2026, at $ 204,749 .

Operating lease expense totaled $ 38,633 and $ 0 , respectively for the six months ended June

30, 2026 and 2025.

A total of $ 37,125 was recorded to cost of goods sold for the six months ended June 30, 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.

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 February 1, 2026, at $ 613,657 .

Operating lease expense totaled $ 115,786 and $ 0 , respectively

for the six months ended June 30, 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.

Operating lease expense totaled $ 21,175 and $ 0 , respectively for the six months ended June 30, 2026 and 2025.

The Company has no finance leases.

The following is a summary of the operating lease right-of-use assets and

liabilities at March 31, 2026 and 2025:

The following is a summary of the operating lease right-of-use assets

and liabilities at June 30, 2026 and 2025:

Schedule of operating lease right-of-use

1 unchanged sentence

accumulated amortization

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

Operating lease right-of-use assets, as of June 30

Operating lease liability

accumulated reduction

Operating lease liability, as of March 31

Operating lease liability, as of June 30

Current operating lease liability

3 unchanged sentences

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

June 30, 2026

The following is a summary of future lease payments

11 unchanged sentences

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.

goodwill during the six months ending June 30, 2026.

The carrying value of goodwill was $ 15,596,105 and $ 15,596,105 as of June 30, 2026

and December 31, 2025 respectively.

Intangible Assets

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

As of June 30, 2026, the balances of intangible

assets were as follows:

Schedule of intangible assets

1 unchanged sentence

Patents/IP – Fat Shark

$ ( 173,587 )

Trademark – Rotor Riot

4 unchanged sentences

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.

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.

Amortization expense for the six months ended

June 30, 2026 and 2025 was $ 117,265 and $ 40,841 , respectively.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

June 30, 2026

Note 9 – Stockholders’ Equity

2026 Transactions

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.

Common stock 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

1 unchanged sentence

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

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.

shares were valued at $13.57 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively,

for a total of $ 949,900 to be recognized as stock compensation expense pro-rata over the vesting period.

On January 23, 2026, the Company issued 550,000

restricted shares of common stock to executive officers of the Company.

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

1 unchanged sentence

The restricted shares issued to executive officers are subject to pro rata forfeiture through December 31,

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 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

1 unchanged sentence

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

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

shares were valued at $16.70 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively,

for a total of $ 2,004,000 to be recognized as stock compensation expense pro-rata over the vesting period.

On March 13, 2026, the Company issued 5,883

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

The restricted stock units are valued

at $20.40 per share, the closing price of our common stock as of the date of the grant, for a total value of $ 120,013

and expensed on the grant date.

On May 20, 2026, the Company issued 8,352 shares

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

1 unchanged sentence

per share, the closing price of our common stock as of the date of the grant, for a total value of $ 120,018 and expensed on the grant

Common shares issued for services

Common stock issued

for services to non-employees

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 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.

On May 22, 2026, the Company issued 108,000 shares

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

The restricted stock units are valued at $16.78

per share, the closing price of our common stock as of the date of the grant, for a total value of $ 1,812,240 and expensed on the grant

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

Common stock issued related to option exercises

During the six months ended June 30, 2026, several

employees of the Company exercised 120,830 of their vested stock options in which the Company issued 120,830 shares of common stock related

to these exercises.

The Company received total cash proceeds of $ 587,585 related to the exercise of the stock options.

Common shares issued related to warrant

Common stock issued related to warrant

On January 9, 2026 the Company issued 350,000

2 unchanged sentences

to the warrant exercises.

The Company cancelled the 350,000 warrants upon issuance of the common shares.

Common shares issued related to public offering

The Company cancelled the 350,000 warrants upon issuance of the common stock.

Common stock issued related to public offering

On March 19, 2026, in a confidentially marketed

1 unchanged sentence

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 .

On May 29, 2026, we completed an at the market

offering for the sale of 2,000,000 shares of Common Stock at a price of $30.00 per share for aggregate gross proceeds of approximately

$ 60 .0 million before deducting fees to the placement agent and other expenses payable by us in connection with the offering.

retained approximately $ 58.2 million in net proceeds after offering expenses.

2025 Transactions

On January 14, 2025, the Company issued 3,546

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

The shares of restricted stock were granted

under the 2022 Equity Incentive Plan.

The shares were valued at $11.99 per share, which was the value the Company’s common stock

on the date of grant, respectively for a total of $ 42,517 to be recognized as stock compensation expense on the grant date.

On February 3, 2025, the Company issued 480,000

restricted shares of common stock to executive officers and certain employees of the Company.

The shares of restricted stock were granted

under the Company’s 2022 Equity Incentive Plan.

The restricted shares issued to executive officers are subject to pro rata forfeiture

through December 31, 2025.

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

The shares were valued at $12.00 per share, which was the value of the Company’s common stock on the date of grant, respectively

for a total of $ 5,760,000 to be recognized as stock compensation expense pro-rata over the vesting period.

Stock compensation expense

of $ 5,007,742 was recognized during the year ended December 31, 2025.

In February 2025, the Company issued 1,224,606

shares of common stock related to warrant holders exercising their warrants at an exercise price of $ 1.99 .

The Company received gross

proceeds of $ 2,436,966 related to the warrant exercises.

The Company cancelled the 1,224,606 warrants upon issuance of the common shares.

On May 6, 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.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

2025 Transactions

On January 14, 2025, the Company issued 3,546 immediately

June 30, 2026

On May 19, 2025, the Company issued 33,336 immediately

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

2 unchanged sentences

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 $ 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.

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

June 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 six months

ended June 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 .

During the six months ended June 30, 2025, several

employees of the Company exercised 94,650 of their vested stock options in which the Company issued 94,650 shares of common stock related

to these stock option exercises.

The Company received total cash proceeds of $ 367,870 related to the exercise of these options.

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.

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.

authority to the Chief Executive Officer to grant stock options to employees who are not executive officers.

Any issuance of restricted

stock awards or restricted stock units must be approved by the Company’s Compensation Committee.

Stock options are granted for employees

on a monthly to quarterly basis.

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

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

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 Plan allows the Company to incentivize key employees and directors with long term compensation awards such as stock options, restricted stock,

and other similar types of awards.

The Plan is authorized to issue up to 15% of the outstanding shares on a fully diluted basis giving

effect to the exercise and conversion of all outstanding common stock equivalents issued outside of the Plan.

In addition, the Plan has

an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards

under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five

percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and

(b) such smaller number of shares of stock as determined by our board of directors.

The Plan allows for awards to be issued up to a contractual

maximum term of 10 years from the grant date.

As of June 30, 2026, the Plan is authorized to issue up to 9,283,338 of awards, with 3,779,601

shares available for issuance.

During the six months ended June 30, 2026 and

2025, the Company’s Board of Directors approved the grant of 280,000 and 177,500 , 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.

Standard vesting on stock options have a six-month cliff

vesting in which the first two quarters vest at the six-month mark and quarterly thereafter over a total of four years, however, certain

stock options may have immediate vesting or shorter periods as approved.

Stock options contractual term range from 5 to 10 years.

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:

June 30, 2026

The following table presents the activity for

stock options outstanding:

Schedule of stock option activity

5 unchanged sentences

Forfeited/canceled

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:

Outstanding – June 30, 2026

Exercisable – June 30, 2026

The range of assumptions used to calculate the

fair value of options granted during the period ended June 30, 2026 was:

Schedule of stock options assumptions

Exercise Price

12.34 - 16.70

Stock Price on date of grant

12.34 - 16.70

Risk-free interest rate

3.72 % – 3.88 %

Dividend yield

Expected term (years)

149.99 % – 151.22 %

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.

granted was $ 3,290,306 and $ 814,485 during the six months ended June 30, 2026 and 2025, respectively.

The Company recognized $ 657,213

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.

and $ 599,771 in stock-based compensation expense related to stock options during the six months ended June 30, 2026 and 2025, respectively.

As of June 30, 2026, there was $ 4,960,077 of unrecognized stock-based compensation expense related to unvested stock options to be recognized

over the remaining vesting term through 2030.

Restricted Stock

11 unchanged sentences

Forfeited/canceled

Unvested – March 31, 2026

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

For the Three Months Ended March 31, 2026 and 2025

Unvested – June 30, 2026

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.

stock units was $ 14,733,972 and $ 9,392,782 granted during the six months ended June 30, 2026 and 2025, respectively.

The Company recognized

$ 3,648,567 and $ 1,883,432 in stock-based compensation expense related to restricted stock and restricted stock units during the three

months ended March 31, 2026 and 2025, respectively.

As of March 31, 2026, there was $ 13,866,825 of unrecognized stock-based compensation

expense related to unvested restricted stock to be recognized over the remaining vesting term through 2030.

The following table presents the activity for warrants outstanding as of

March 31, 2026:

$ 8,928,327 and $ 6,819,929 in stock-based compensation expense related to restricted stock and restricted stock units during the six months

ended June 30, 2026 and 2025, respectively.

As of June 30, 2026, there was $ 10,519,323 of unrecognized stock-based compensation expense

related to unvested restricted stock to be recognized over the remaining vesting term through 2030.

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

The following table presents the activity for warrants outstanding

as of June 30, 2026:

Schedule of warrant activity

2 unchanged sentences

Forfeited/cancelled/restored

Outstanding – March 31, 2026

Outstanding – June 30, 2026

On January 9, 2026, 350,000 warrants were exercised

1 unchanged sentence

Note 11 – Related Party Transactions

On April 30, 2024 (“Grant Date”), the

Company has been a party to a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”)

for the services of our Chief Executive Officer, Dr.

On April 30, 2024 (“Grant

Date”), the Company entered into 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 performs

the duties and responsibilities that are customary for a chief executive officer of a public company similar to the Company.

The Consultant received

receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who performs such services in Puerto Rico.

to the Agreement, Dr.

Evans performs the duties and responsibilities that are customary for a chief executive officer of a public

company similar to the Company.

The Consultant received a $ 250,000

fee per year, until October 2025 at which time it was increased to $ 300,000

per year, payable in monthly installments.

On April 1, 2026, the Compensation Committee renewed the Consultants contract for an additional

two years and increased the annual fee to $ 350,000 .

On March 13, 2026, the Company issued 1,961

vested shares of common stock to each of three of its independent directors as compensation for the three months ended March 31,

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.

On April 1, 2026, the Compensation Committee extended the Consultants contract through

December 31, 2026 and increased the annual fee to $ 350,000 .

See Note 13 - Subsequent Events.

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 first quarter 2026;

the fourth independent

director elected to receive cash compensation.

The shares were valued at an aggregate of $ 120,013 and were immediately recognized as stock

compensation expense.

On April 1, 2026, the Company paid $ 217,943

to its investment committee, which includes the Chief Executive Officer and two independent Directors of the Company.

The payment is

based on a 1 %

per committee member based on the realized gains from investments during the previous quarter.

In January 2026, the Company received a

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.

million order in addition to several smaller orders 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 was

delivered in the first half of 2026 and includes several different drone components manufactured and sourced from the Company.

Company recognized approximately $ 2.2

million in revenue from this related party for the six months ended June 30, 2026.

The Company had related party receivables of

million as of March 31, 2026

million as of June 30, 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 five -year

operating lease agreement for approximately 17,000 square feet of space for the Company’s drone motor manufacturing facility in

Orlando, Florida.

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

Unusual Machines, Inc.

Notes to Consolidated Condensed Financial Statements

June 30, 2026

As a part of the business combination that occurred

2 unchanged sentences

See Note 7 – Operating Leases for additional information.

On October 30, 2025, the Company entered into a five-year

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

The lease commencement date is

December 1, 2025 and expires in December 2030.

On December 10, 2025, the Company entered into a three-year

operating lease agreement for an additional 9,125 square feet of space in Orlando, FL.

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

1 unchanged sentence

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.

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

The lease commenced on January 1, 2026 and expires in December 2028.

Note 13 – Subsequent Events

Equity Grants to Employees & Consultants

In April 2026, the Company granted certain employees

common stock options.

The Company issued a total of 190,000 stock options to employees.

The shares were valued at $12.34, which was the

quoted trading price of the Company’s common stock on the date of the grant.

All shares and options vest in quarterly installments

over a four-year period starting from the grant date.

Definitive Agreement to acquire Upgrade

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.

Equity Grants

On July 24, 2026, the Compensation Committee granted

5,000,000 of unvested five-year warrants to the Company’s Chief Executive Officer.

The warrants have exercise price at $25 per share.

The closing price of the Company’s common stock on the grant date was $19.36.

The warrants will vest in increments of 1,000,000

shares upon any 20-day average closing price of the Company’s common stock at each of the following tranches:

$25, $40, $60, $80

The Company will seek to obtain stockholder approval as required by the NYSE American.

On July 24, 2026 the Compensation Committee granted

a total of 1,275,000 five-year stock options, exercisable at $19.36 per share, the closing price of the Company’s stock on the grant

date, to the Company’s three other executive officers in increments of 375,000, 375,000 and 525,000 stock options, respectively.

The stock options vest quarterly over a three-year period subject to each person, as applicable, remaining to be employed by the Company.

On July 24, 2026, the Company granted approximately

1.6 million five-year stock options, exercisable at $19.36 per share, the closing price of the Company’s stock on the grant date,

to specific employees.

The options vest over four years of continued service with the Company.

On June 24, 2026, the Company entered into a three-year

operating lease agreement for an additional 14,000 square feet of space in Orlando, FL.

This space will be used for battery production.

The lease commenced on August 1, 2026 and expires in December 2028.

On July 23, 2026, the Company entered into a

lease amendment related to its corporate headquarters in Orlando, FL.

The amendment increases the existing space from 9,125 square feet

to a total of 19,389.

In addition, the original lease term was extended from March 31, 2029 to December 31, 2031.

The Company anticipates

the additional space to commence on September 1, 2026.

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