Unusual Machines, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited financial statements and related notes thereto included in our 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. Recent Developments Definitive Agreement to acquire Upgrade Energy On May 7, 2026, we signed a definitive agreement to acquire DroneNX, LLC which operates as Upgrade Energy (“Upgrade Energy”), a manufacturer of battery and power systems solutions for unmanned aerial systems. The transaction purchase price is estimated at $52.0 million, which includes (i) a fixed quantity of 1,792,012 shares of the Company’s common stock at $13.9508 per share which was based on the preceding 5 day volume weighted average share price of the Company’s common stock prior to signing the definitive agreement, which is estimated to be approximately $25.0 million 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 domestic manufacturing and engineering capabilities, adds additional drone components to our product mix, and strengthens our overall 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. 29 Leases 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 June 30, 2026 and 2025 Revenue 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%. 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 or 722%. 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 630%. 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. 30 Operating Expenses 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 281%. 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 or 587%. 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 or 161%. 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 period. 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%. 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. 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 items 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 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 or 12%. 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 million. Results of Operations – Six Months Ended June 30, 2026 compared to the Six Months Ended June 30, 2025 Revenue 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 or 496%. 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. 31 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 555%. 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 376%. 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 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 or 812%. 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 or 169%. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot, marketing events and payroll expenses for our sales and marketing team. The increase relates mainly to adding additional staffing to our sales and marketing team. We anticipate our sales and marketing costs to increase in 2026 related to building out our enterprise sales team, however, we expect these increases to be at a lower rate than our revenue and other expenses as our enterprise sales are more dedicated efforts, while our retail revenue is driven off of advertising sales. During the 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%. General and administrative expenses incurred include expenses related to operations for a public company including legal and other professional fees, public company insurance expense, and other costs associated with being public. We’ve also increased our headcount to support our growth which includes building out our accounting, HR, and facilities staff. 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 $9,532,673, and an interest income increase of $2,384,974. 32 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. Cash Flows Operating Activities Net cash used in operating activities was $38,891,945 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 $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 $9,532,673. Investing Activities 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 $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 resources 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 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 our current operating plans through more than the next 12 months. Critical Accounting Policies and Estimates For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2025. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2025. Recently Issued Accounting Pronouncements 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. 33 Item 3. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.