What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-06 compared with 2026-05-14 · 217 added, 140 removed, 50 unchanged (88% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be

read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and

our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31,

2025, which was filed with the SEC on March 12, 2026.

The following discussion contains forward-looking statements that are subject to

risks and uncertainties.

See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks,

and assumptions associated with those statements.

Actual results could differ materially from those discussed in or implied by forward-looking

statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report and of our Annual Report

on Form 10-K for the year ended December 31, 2025, particularly in the section entitled “Risk Factors.” Unless we state otherwise

or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer

to Unusual Machines, Inc.

The following discussion and analysis should

be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report

and our audited financial statements and related notes thereto included in our Prospectus Supplement dated March 19, 2026 and our Annual

Report on Form 10-K for the year ended December 31, 2025.

The following discussion contains forward-looking statements that are subject

to risks and uncertainties.

See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties,

risks, and assumptions associated with those statements.

Actual results could differ materially from those discussed in or implied by

forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report and

of our Annual Report on Form 10-K for the year ended December 31, 2025, particularly in the section entitled “Risk Factors.”

Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company”

refer to Unusual Machines, Inc.

and its subsidiaries.

All amounts presented in tables, other than per share amounts, are in thousands unless

otherwise noted.

All amounts presented in tables, other than per share amounts, are in thousands

unless otherwise noted.

Recent Developments

Confidentially Marketed Public Offering

On March 23, 2026, we completed a confidentially marketed

public offering in which we sold 8,823,529 shares of common stock at $17.00 per share resulting in gross proceeds of approximately $150.0

million, prior to payment of placement agent fees of $10.5 million, and 0.7 million in other offering expenses resulting in net proceeds

of approximately $138.8 million.

We intend to use the net proceeds from the offering to acquire additional inventory, working capital

needs and general corporate purposes.

Inventory Purchase

During the month of May, we are initiating purchase

orders of inventory estimated to be approximately $75.0 million to secure materials and inventory across our drone component product lines.

We are continuing to see significant demand increase across the industry and these purchase orders help position the Company and its inventory

availability to meet customer demand through supply chain planning.

These purchases are expected to be made over the next several months.

Definitive Agreement to acquire Upgrade Energy

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price of the Company’s common stock prior to signing the definitive agreement, which is estimated to be approximately $25.0 million

which could be subject to change based on the Company’s common stock price at the time of closing, (ii) $1.0 million in cash upon

closing of the transaction, and (iii) an additional $26.0 million in cash based on the Company recognizing $10.0 million in revenue related

to internally manufactured batteries during the first two years after the acquisition closing date.

The acquisition is subject to customary

closing conditions, including Upgrade Energy completing their financial audit.

of purchase price, which the valuation for accounting purposes could be subject to change based on the Company’s common stock price

at the time of closing, (ii) $1.0 million in cash upon closing of the transaction, and (iii) an additional $26.0 million in cash based

on the Company recognizing $10.0 million in revenue related to internally manufactured batteries during the first two years after the

acquisition closing date.

The acquisition is subject to customary closing conditions, including Upgrade Energy completing their financial

audit, which is expected in September 2026.

The acquisition adds battery expertise to our

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domestic supply chain and manufacturing capabilities.

At the Market Capital Raise

In May 2026, we sold 2,000,000 shares of common

stock at a price of $30.00 per share for total gross proceeds of $60.0 million before deducting fees to the placement agent and other

expenses payable by us in connection with the offering.

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

Equity Grants

On July 24, 2026, the Compensation Committee granted

unvested 5,000,000 five-year warrants, exercisable at $25 per share, to our Chief Executive Officer.

The closing price of our common stock

on the grant day was $19.36.

The warrants will vest in increments of 1,000,000 shares upon any 20-day average closing price of our common

stock at each of the following tranches:

$25, $40, $60, $80 and $100.

The grant is subject to shareholder approval.

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 our stock on the grant date, to our

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, we issued approximately 1.6

million five-year stock options, exercisable at $19.36 per share, the closing price of our stock on the grant date, to specific employees.

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

On June 24, 2026, we 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 it’s 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.

Results of operations

Three Months Ended March 31, 2026 and 2025

During the three months ended March 31, 2026 we generated

revenues totaling $8,095,836 compared to $2,042,300 during the three months ended March 31, 2025, representing an increase of $6,053,536

The increase in revenue over the last 12 months primarily relates to the increase and establishment of our B2B business and revenue

related to our NDAA and Blue UAS products.

Our B2B revenue was $7,318,256 for the three months ended March 31, 2026 compared to $34,030

for the three months ended March 31, 2025..

See Note 2 to our Consolidated Financial Statements We recently started manufacturing production

on certain products including drone motors and we continue to see significant increased interest and demand in our manufactured products

in the first quarter and the remaining of 2026.

We expect our revenue to continue to grow quarter over quarter in 2026 as we continue

to build out our capacity including our manufacturing facilities and products as well increasing our staffing to handle additional demand

from the market.

Cost of Goods Sold

During the three months ended March 31, 2026,

our cost of goods sold was $5,441,729 compared to $1,545,493 during the three months ended March 31, 2025, resulting in an increase of

Three Months Ended June 30, 2026 and 2025

During the three months ended June 30, 2026 we

generated revenues totaling $16,722,467 compared to $2,123,970 during the three months ended June 30, 2026, representing an increase of

$14,598,497 or 687%.

Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct

product costs including tariffs.

During the first quarter of 2026, cost of goods sold also include direct payroll costs, a portion of

rent expense and depreciation expense related to our manufactured products.

We did not incur these costs in 2025 as we did not have manufactured

products at that time.

The increase in cost of goods sold is primarily driven by the increase in our revenue and growth in B2B sales.

We expect our total cost of goods sold to increase in 2026 in conjunction with our revenue increases as we sell additional product.

During the three months ended March 31, 2026, our

gross profit was $2,654,107 compared to $496,807 during the three months ended March 31, 2025, resulting in an increase of $2,157,300

Our gross margin, as a percentage of sales, totaled 32.8% during the three months ended March 31, 2026, compared to 24.3% during

the three months ended March 31, 2025.

While the margins we generated during the year are in line with our expectations and normal operating

margins, we do anticipate continued fluctuations in our manufactured products into 2026 as we continue to improve our manufacturing process

and become more efficient.

We anticipate our gross margins to have fluctuations in 2026 as we start scaling our manufacturing process.

We anticipate our gross margins will have a decline in the first two quarters of 2026 as we bring on and train our staff, work to scale

production, increase to multiple shifts, and build out efficiencies.

We anticipate our margins will improve in the second half of 2026

as we have more trained staff and efficient processes and as we bring on our highly-automated production line for motors.

The increase in revenue primarily relates to the increase and establishment of our enterprise business and revenue

related to our National Defense Authorization Act (“NDAA”) and Blue UAS products.

Our enterprise revenue was $14,220,865 for

the three months ended June 30, 2026 compared to $192,090 for the three months ended June 30, 2025.

We started manufacturing production

on certain products including drone motors, headsets, cameras and other drone related products during the first half of 2026.

As we continue

to expand our manufacturing capabilities and the larger drone market develops, we continue to see significant increased interest and demand

in our manufactured products as we head into the second half of 2026.

We expect our revenue to continue to grow as we continue to build

out our capacity including our manufacturing facilities and products and significantly increasing our manufacturing staff to handle additional

demand from the market.

Cost of Goods Sold & Gross Profit

During the three months ended June 30, 2026, our

cost of goods sold was $10,920,334 compared to $1,329,291 during the three months ended June 30, 2025, resulting in an increase of $9,591,043

Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct and indirect

product costs.

The increase in cost of goods sold is driven entirely by the increase in our revenue.

During the three months ended June 30, 2026, our

gross profit was $5,802,134 compared to $794,679 during the three months ended June 30, 2025, resulting in an increase of $5,007,455 or

Our gross margin, as a percentage of sales, totaled 34.7% during the three months ended June 30, 2026, compared to gross margin

of approximately 37.4% during the three months ended June 30, 2025.

Our gross profit is entirely driven based on our growth in top line

revenue, while the decrease in margins is driven primarily by our continued and rapid expansion of manufacturing, however, we believe

our margins are still within normal operating limits and will continue to increase as our manufacturing process continues to mature.

Operating Expenses

During the three months ended March 31, 2026,

operations expenses totaled $1,948,899 compared to $302,602 during the three months ended March 31, 2025, resulting in an increase of

$1,646,297 or 544%.

Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses.

In addition, we have started incurring additional operations related expenses as we start incurring non-product costs related to our

motor production and headset facilities.

We expect our operations expense to increase as we continue to hire additional staff to support

our operations including engineering staff to help improve process and gain efficiencies.

We are also setting up our headset factory

and anticipate building out a battery facility and camera facility in the second half of 2026.

During the three months ended March 31, 2026,

research and development expenses totaled $91,143 compared to $7,903 for the three months ended March 31, 2025, resulting in an increase

During the three months ended June 30, 2026, operations

expenses totaled $1,540,919 compared to $404,277 during the three months ended June 30, 2025, resulting in an increase of $1,136,642 or

Operations expense relate to expenses incurred for fulfilling orders and warehouse related expenditures including our warehouse

personnel, supplies, and shipping expenses.

The increase primarily relates to additional costs incurred related to our motor factory operations

that we are putting in place along with additional shipping costs from the increase in revenue.

During the three months ended June 30, 2026, research

and development expenses totaled $430,759 compared to $62,731 for the three months ended June 30, 2025, resulting in an increase of $368,028

Research and development expense primarily relates to new product development and is subject to fluctuations based on specific

research and development projects ongoing during the period and include both internal and external resources and costs associated with

new product development.

During the three months ended June 30, 2026, sales

and marketing expenses totaled $790,012 compared to $302,358 for the three months ended June 30, 2025, resulting in an increase of $487,654

The increase primarily relates to the buildout of our sales and marketing teams as our business shifts from retail to enterprise.

In addition, we incurred additional expenses during the second quarter related to marketing events and increase in ad spend during the

During the three months ended June 30, 2026, general

and administrative expenses totaling $10,799,261 compared to $7,195,193 for the three months ended June 30, 2025, resulting in an increase

of $3,604,068 or 50%.

Research and development expense primarily relates to new product development as we continue to partner with manufacturers

to bring drone component manufacturing to the United States.

We expect our research and development expenses to increase some as we continue

to build out our products, however, we do not anticipate a significant growth as compared to revenue and other costs.

During the three months ended March 31, 2026, selling

and marketing expenses totaled $580,039 compared to $207,616 for the three months ended March 31, 2025, resulting in an increase of $372,423

General and administrative expenses incurred include expenses related to operations for a public company including

legal and other professional fees, public company insurance expense, investor relations and other costs associated with being public.

We’ve also increased our headcount to support our growth which includes building out our accounting, HR, and facilities staff.

expect our general and administrative expenses to increase during 2026 as we continue to build out our infrastructure with additional

hires and systems.

We also anticipate items like professional fees and other expenses related to being a public company to increase.

addition, we anticipate our non-cash stock compensation expense to be higher in 2026.

We do not anticipate the increase in our general

and administrative expenses to increase at the same rate as our revenue as we start to gain operational efficiencies at scale.

Other Income (Expense)

During the three months ended June 30, 2026, other

income and expense totaled $50,590 compared to $225,734 during the three months ended June 30, 2025, resulting in a decrease of $175,144.

This decrease relates primarily to our unrealized loss from short-term investments of $3,883,535 offset by realized gain from short-term

investments of $2,267,931 and an interest income increase of $1,594,428.

Net Income (Loss)

Our net loss for the three months ended June 30,

2026, totaled $7,783,553 compared to $6,964,739 for the three months ended June 30, 2025, resulting in an increase in net loss of $818,814

This increase in net loss relates to the increase in realized gain of trading securities of $2.2 million plus an increase in interest

income of $1.6 million, which was offset by a decrease in operating profit of $643,669 and unrealized loss in trading securities of $3.9

Results of Operations – Six Months

Ended June 30, 2026 compared to the Six Months Ended June 30, 2025

During the six months ended June 30, 2026 we generated

revenues totaling $24,818,304 compared to $4,166,270 during the six months ended June 30, 2025, representing an increase of $20,652,034

The growth in revenue is driven from growth in our existing retail channel and expanding our enterprise channel as we are manufacturing

additional NDAA and Blue UAS products.

Our enterprise revenue was $21,510,234 for the six months ended June 30, 2026 compared to $312,246

for the six months ended June 30, 2025.

We started manufacturing production on certain products including drone motors, headsets, cameras

and other drone related products during the first half of 2026.

As we continue to expand our manufacturing capabilities and the larger

drone market develops, we continue to see significant increased interest and demand in our manufactured products as we head into the second

half of 2026.

We expect our revenue to continue to grow in 2026 as we continue to build out our capacity including our manufacturing facilities

and products and significantly increasing our manufacturing staff to handle additional demand from the market.

Cost of Goods Sold & Gross Profit

During the six months ended June 30, 2026, we

incurred cost of goods sold of $16,362,063 compared to $2,874,784 during the six months ended June 30, 2025, resulting in an increase

of $13,487,279 or 469%.

Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other

direct and indirect product costs.

The increase in cost of goods sold is driven entirely by the increase in our revenue.

During the six months ended June 30, 2026, our

gross profit was $8,456,241 compared to $1,291,486 during the six months ended June 30, 2025, resulting in an increase of $7,164,755 or

Our gross margin, as a percentage of sales, totaled 34.1% during the six months ended June 30, 2026, compared to 31% during the

six months ended June 30, 2025.

We anticipate our gross margin to fluctuate period to period depending on certain promotions and products

that are sold during the period and the mix of retail and enterprise sales during the period.

The margins we generated during the first

half of the year are in line with our expectations and our normal operating margins.

Operating Expenses

During the six months ended June 30, 2026, operations

expenses totaled $3,367,620 compared to $706,879 during the six months ended June 30, 2025, resulting in an increase of $2,660,741 or

Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses.

we have started incurring additional operations related expenses as we start incurring non-product costs related to our motor production

and headset facilities.

We expect our operations expense to increase as we continue to hire additional staff to support our operations

including engineering staff to help improve process and gain efficiencies.

We anticipate additional operating expenses in the second half

of 2026 as we set up additional battery facilities with the completion of the Upgrade Energy acquisition and look to continue to expand

additional operations.

During the six months ended June 30, 2026, research

and development expenses totaled $644,101 compared to $70,633 for the six months ended June 30, 2025, resulting in an increase of $573,468

Research and development expense primarily relates to new product development and include both internal and external resources

and costs associated with new products.

During the six months ended June 30, 2026, sales

and marketing expenses totaled $1,370,051 compared to $509,975 for the six months ended June 30, 2025, resulting in an increase of $806,076

Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot, marketing events and payroll expenses

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is driven off of advertising sales.

During the three months ended March 31, 2026, general

and administrative expenses totaling $7,228,201 compared to $3,225,904 for the three months ended March 31, 2025, resulting in an increase

During the six months ended June 30, 2026, general

and administrative expenses totaling $18,027,462 compared to $10,421,097 for the six months ended June 30, 2025, resulting in an increase

of $7,606,365 or 73%.

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our headcount to support our growth which includes building out our accounting, HR, and facilities staff.

The above amount includes $3,939,979

in non-cash stock compensation expense during the first three months of 2026 as compared to $1,906,373 during 2025.

We expect our general

and administrative expenses to increase during 2026 as we continue to build out our infrastructure with additional hires and systems.

We also anticipate things like professional fees and other expenses related to being a public company to increase.

In addition, we anticipate

our non-cash stock compensation expense to be higher in 2026.

We do not anticipate the increase in our general and administrative expenses

to increase at the same rate as our revenue as we start to gain operational efficiencies at scale.

Other Income (Loss)

During the three months ended March 31, 2026,

other income totaled $17,541,980 compared to $1,532 during the three months ended March 31, 2025, resulting in an increase of $17,540,448.

We expect our general and administrative

expenses to increase during 2026 as we continue to build out our infrastructure with additional hires and systems.

We also anticipate

things like professional fees and other expenses related to being a public company to increase.

In addition, we anticipate our non-cash

stock compensation expense to be higher in 2026.

We do not anticipate the increase in our general and administrative expenses to increase

at the same rate as our revenue as we start to gain operational efficiencies at scale.

Other Income (Expense)

During the six months ended June 30, 2026, other

income and expense totaled $17,592,571 compared to $227,266 during the six months ended June 30, 2025, resulting in an increase of $17,365,304.

This increase relates primarily to our unrealized gain from short-term investments of $5,608,541, realized gain from short-term investments

of $7,264,743, and increase in interest income of $790,546.

Operating Income (Loss)

Our operating loss for the three months ended

March 31, 2026 was $7,258,987, compared to an operating loss for the three months ended March 31, 2025 of $3,267,811.

This increase followed

our rapid expansion as we began to apply the cash we had raise to the expansion of our drone components business.

of $9,532,673, and an interest income increase of $2,384,974.

Net Income (Loss)

Our net income for the six months ended June 30,

2026, totaled $2,499,441 compared to a net loss of $10,231,018 for the six months ended June 30, 2025, resulting in an increase in net

income of $12,730,459 or 124%.

The increase primarily relates to unrealized gains from investments of $5.6 million, realized gains from

investments of $9.5 million, and an increase in interest income of $2.3 million.

Operating Activities

Net cash used in operating activities was $38,891,945

during the three months ended March 31, 2026, compared to net cash used in operating activities of $1,193,628 during the three months

ended March 31, 2025, representing an increase of $16,219,359.

during the six months ended June 30, 2026, compared to net cash used in operating activities of $3,862,349 during the six months ended

June 30, 2025, representing an increase of $35,029,596 or 907%.

The increase was primarily attributable to changes in working capital,

including increase in inventory of $8,510,541, prepaid and deposits for inventory of $3,817,595, accounts receivable of $1,817,598, and

a decrease in accounts payable and accrued expenses of $435,307 .

including increase in inventory of $16,324,070, prepaid and deposits for inventory of $10,385,385, accounts receivable of $8,713,013,

and offset by an increase in accounts payable and accrued expenses of $1,416,814, an increase in operating lease liabilities of $558,619

and an increase in contingent consideration of $153,000.

The Company recorded unrealized gains on short term investments of $5,608,541

and realized gains of $7,264,743, which were partially offset by share-based compensation expense of $3,939,979.

and realized gains of $9,532,673.

Investing Activities

Net cash used in investing activities was $5,383,494 during the three

months ended March 31, 2026 compared to net cash used in operating activities of $0 during the three months ended March 31, 2025.

increase consisted of $17,500,000 used in our strategic short term investments, $698,237 in purchases of property and equipment, partially

offset by proceeds from sales of short term investments of $12,814,743

Net cash used in investing activities was $35,786,762

during the six months ended June 30, 2026 compared to net cash used in investing activities of $262,751 during the six months ended June

30, 2025, representing an increase of $35,524,012.

This increase consisted of $52,500,000 used in our strategic short-term investments,

$508,336 in purchases of property and equipment and $2,861,101 in deposits for future purchases of property and equipment in 2026 as compared

to $262,751, partially offset by proceeds from sales of short term investments of $20,082,674.

Financing Activities

Net cash provided by financing activities totaled

$142,455,327 during the three months ended March 31, 2026, compared to $2,436,966 during the three months ended March 31, 2025, resulting

in an increase in net cash provided by financing activities of $140,018,362 or 5,745%.

Our first quarter 2026 proceeds are from a public

offering of common shares of $149,999,993 offset by offering costs of $11,200,000 and proceeds from warrant exercises of $3,395,000

$200,981,341 during the six months ended June 30, 2026, compared to net cash provided by financing activities of $39,300,836 during the

six months ended June 30, 2025, resulting in an increase in net cash provided by financing activities of $161,680,505.

Our first half

2026 proceeds are from a public offering of common shares of $149,999,993 and at the market shares of $60,000,000 offset by offering costs

of $13,001,236.

Our first half 2025 proceeds included a public offering of common shares of $40,000,000 offset by offering costs of $3,504,000.

In addition we had proceeds from warrant exercises of $3,395,000, and option exercises of $587,584 during 2026 as compared to $2,436,966

and $367,870, respectively during 2025.

Liquidity and capital

As of March 31, 2026, we had current assets totaling

As of June 30, 2026, we had current assets totaling

$370,575,945 primarily consisting of cash balances of $229,598,776, investments of $86,773,449, inventory of $21,914,332 and deposits

for inventory of $20,543,732.

Our current liabilities as of March 31, 2026 totaled $2,458,193, primarily consisting of accounts payable

and accrued expenses of $1,071,486 and deferred revenue and current operating lease liability of $1,386,707.

Our net working capital as

of March 31, 2026 was $312,747,378.

Subsequent to March 31, 2026, we placed inventory orders of approximately $75 million.

On January 9, 2026, we

received $3,395,000 in proceeds related to the 350,000 warrants that were exercised from the July 2025 Registered Direct Offering.

On March 23, 2026, we completed a public offering

for the sale of 8,823,529 shares of Common Stock at a price of $17.00 per share for aggregate gross proceeds of approximately $150.0

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

We retained approximately

$138.8 million in net proceeds after offering expenses.

Our current liabilities as of June 30, 2026 totaled $6,885,146, primarily consisting of accounts payable

and accrued expenses of $2,863,569, contingent consideration of $3,000,000, deferred revenue of $286,056, and current operating lease

liability of $735,521.

Our net working capital as of June 30, 2026 was $363,690,799.

We believe that our existing cash balances will be sufficient to fund

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Recently Issued Accounting Pronouncements

The Company has implemented all new accounting pronouncements

that are in effect.

These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and

the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact

on its financial position or results of operations.

For a description of our critical accounting policies

and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year

ended December 31, 2025.

There have been no material changes to our critical accounting policies and estimates since our Annual Report

on Form 10-K for the year ended December 31, 2025.

Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule

12b-2 of the Exchange Act and are not required to provide the information required under this item.

We are a smaller reporting company as defined

by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

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 2. Management’s Discussion and Analysis