# EDGAR Filing Document

**Accession Number:** 0001956955
**File Stem:** 0001683168-25-006163
**Filing Date:** 2025-8
**Character Count:** 140293
**Document Hash:** 43ea200fa22b96633c614a7e770666fe
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001683168-25-006163.hdr.sgml**: 20250814

**ACCESSION NUMBER**: 0001683168-25-006163

**CONFORMED SUBMISSION TYPE**: 10-Q

**PUBLIC DOCUMENT COUNT**: 69

**CONFORMED PERIOD OF REPORT**: 20250630

**FILED AS OF DATE**: 20250814

**DATE AS OF CHANGE**: 20250814

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** Unusual Machines, Inc.
- **CENTRAL INDEX KEY:** 0001956955
- **STANDARD INDUSTRIAL CLASSIFICATION:** RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663]
- **ORGANIZATION NAME:** 04 Manufacturing
- **EIN:** 660927642
- **STATE OF INCORPORATION:** NV
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** 10-Q
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-41961
- **FILM NUMBER:** 251218627

**BUSINESS ADDRESS:**
- **STREET 1:** 4677 L B MCLEOD RD
- **STREET 2:** SUITE J
- **CITY:** ORLANDO
- **STATE:** FL
- **ZIP:** 32811
- **BUSINESS PHONE:** 720-383-8983

**MAIL ADDRESS:**
- **STREET 1:** 4677 L B MCLEOD RD
- **STREET 2:** SUITE J
- **CITY:** ORLANDO
- **STATE:** FL
- **ZIP:** 32811

?xml version='1.0' encoding='ASCII'? Unusual Machines, Inc. Form 10-Q

[**Table of Contents**](#q2_001)

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

---

| | |
|:---|:---|
| ☒ | **Quarterly REPORT pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
| **For the quarterly period ended June 30, 2025** | **For the quarterly period ended June 30, 2025** |
| **Or** | **Or** |
| ☐ | **Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
| **For the transition period from _____________ to _____________** | **For the transition period from _____________ to _____________** |

---

**Commission File No. 001-41961**

**<u>Unusual Machines, Inc.</u>**

(Exact Name of Registrant as Specified in Its Charter)

---

| | |
|:---|:---|
| **Nevada** | **66-0927642** |
| *(State or other jurisdiction of<br> incorporation or organization)* | *(I.R.S. Employer <br> Identification No.)* |

---

---

| | |
|:---|:---|
| **4677 L B McLeod Rd**<br> **Suite J**<br> **Orlando, FL** | **32811** |
| Address of Principal Executive Offices | Zip Code |

---

**(720) 383-8983**

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

---

| | | |
|:---|:---|:---|
| **Title of each class** | **Trading Symbol(s)** | **Name of each exchange on which registered** |
| Common Stock, par value $0.01 per share | UMAC | NYSE American |

---

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐ Accelerated Filer ☐ <br> Non-accelerated Filer ☒ Smaller Reporting Company ☒ <br> Emerging Growth Company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ☐ No ☒

As of August 14, 2025, 30,437,786 shares of the registrant's common stock, $0.01 par value per share, were outstanding.

**UNUSUAL MACHINES, INC.**

**2025 QUARTERLY REPORT ON FORM 10-Q**

**TABLE OF CONTENTS**

---

| | | |
|:---|:---|:---|
|  |  | **Page No.** |
| **[PART I – FINANCIAL INFORMATION](#q2_002)** | **[PART I – FINANCIAL INFORMATION](#q2_002)** | **[PART I – FINANCIAL INFORMATION](#q2_002)** |
| Item 1. | [Financial Statements (Unaudited)](#q2_003) | 4 |
|  | [Consolidated Condensed Balance Sheets](#q2_031) | 4 |
|  | [Unaudited Consolidated Condensed Statements of Operations](#q2_032) | 5 |
|  | [Unaudited Consolidated Condensed Statements of Changes in Shareholders' Equity](#q2_033) | 6 |
|  | [Unaudited Consolidated Condensed Statements of Cash Flows](#q2_034) | 8 |
|  | [Notes to Unaudited Consolidated Condensed Financial Statements](#q2_004) | 9 |
| Item 2. | [Management's Discussion and Analysis of Financial Condition and Results of Operations](#q2_019) | 25 |
| Item 3. | [Quantitative and Qualitative Disclosures About Market Risk](#q2_020) | 29 |
| Item 4. | [Controls and Procedures](#q2_021) | 29 |
| **[PART II – OTHER INFORMATION](#q2_022)** | **[PART II – OTHER INFORMATION](#q2_022)** | **[PART II – OTHER INFORMATION](#q2_022)** |
| Item 1. | [Legal Proceedings](#q2_023) | 30 |
| Item 1A. | [Risk Factors](#q2_024) | 30 |
| Item 2. | [Unregistered Sales of Equity Securities and Use of Proceeds](#q2_025) | 33 |
| Item 3. | [Defaults Upon Senior Securities](#q2_026) | 33 |
| Item 4. | [Mine Safety Disclosures](#q2_027) | 33 |
| Item 5. | [Other Information](#q2_028) | 33 |
| Item 6. | [Exhibits](#q2_029) | 33 |
|  | [Signatures](#q2_030) | 35 |

---

 

*Unless we state otherwise or the context otherwise requires, the terms "Unusual Machines," "we," "us," "our" and the "Company" refer to Unusual Machines, Inc., a Nevada corporation.*

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "intends", "plans", "anticipates", "believes", "estimates", "predicts", "potential", "continue" or the negative of these terms or other comparable terminology.

Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include the factors set forth in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2024 and Part II, Other Information, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2025.

These forward-looking statements speak only as of the date of this Form 10-Q and are subject to business and economic risks. We do not undertake any obligation to update or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made, except to the extent required by law.

**PART I – FINANCIAL INFORMATION**

**Item 1.** **Financial Statements** 

**Unusual Machines, Inc.**

**Consolidated Condensed Balance Sheets**

---

| | | |
|:---|:---|:---|
|  | **June 30,<br> 2025** | **December 31, <br> 2024** |
|  | **(Unaudited)** |  |
| **<u>ASSETS</u>** |  |  |
| Current assets: |  |  |
| &nbsp;&nbsp;&nbsp;Cash and cash equivalents | $38933059 | $3757323 |
| &nbsp;&nbsp;&nbsp;Accounts receivable | 173388 | 66575 |
| &nbsp;&nbsp;&nbsp;Inventories | 1609117 | 1335503 |
| &nbsp;&nbsp;&nbsp;Prepaid inventory | 1314592 | 904728 |
| &nbsp;&nbsp;&nbsp;Other current assets | 192778 | 31500 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total current assets | 42222934 | 6095629 |
| Non-current assets: |  |  |
| Property and equipment, net | 262979 | 570 |
| Operating lease right-of-use asset, net | 288516 | 323514 |
| Other assets | 84693 | 59426 |
| Goodwill | 7402906 | 7402906 |
| Intangible assets, net | 2184686 | 2225530 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total non-current assets | 10223780 | 10011946 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total assets | $52446714 | $16107575 |
| **<u>LIABILITIES AND STOCKHOLDERS' EQUITY</u>** |  |  |
| Current liabilities |  |  |
| &nbsp;&nbsp;&nbsp;Accounts payable and accrued expenses | $608694 | $668732 |
| &nbsp;&nbsp;&nbsp;Operating lease liability | 73569 | 67820 |
| &nbsp;&nbsp;&nbsp;Deferred revenue | 139435 | 197117 |
| &nbsp;&nbsp;&nbsp;Total current liabilities | 821698 | 933669 |
| Non-current liabilities |  |  |
| &nbsp;&nbsp;&nbsp;Deferred tax liability | 93793 | 93793 |
| &nbsp;&nbsp;&nbsp;Operating lease liability – non-current | 223762 | 262171 |
| Total non-current liabilities | 317555 | 355964 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total liabilities | 1139253 | 1289633 |
| Commitments and contingencies (See note 13) | **–** | **–** |
| Stockholders' equity: |  |  |
| &nbsp;&nbsp;&nbsp;Preferred stock - $0.01 par value, 10,000,000 authorized | **–** |  |
| &nbsp;&nbsp;&nbsp;Series A preferred stock - $0.01 par value, 4,250 designated and 0 and 0 shares issued and outstanding at June 30, 2025 and December 31, 2024, respectively |  |  |
| &nbsp;&nbsp;&nbsp;Series B preferred stock - $0.01 par value, 1,000 designated and 0 and 0 shares issued and outstanding at June 30, 2025 and December 31, 2024, respectively |  |  |
| &nbsp;&nbsp;&nbsp;Series C preferred stock - $0.01 par value, 3,000 designated and 0 and 0 shares issued and outstanding at June 30, 2025 and December 31, 2024, respectively |  |  |
| &nbsp;&nbsp;&nbsp;Common stock - $0.01 par value, 500,000,000 authorized and 25,287,786 and 15,122,018 shares issued and outstanding at June 30, 2025 and December 31, 2024, respectively | 252877 | 151221 |
| &nbsp;&nbsp;&nbsp;Additional paid in capital | 97199116 | 50580235 |
| &nbsp;&nbsp;&nbsp;Accumulated deficit | (46144532) | (35913514) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total stockholders' equity | 51307461 | 14817942 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total liabilities and stockholders' equity | $52446714 | $16107575 |

---

See accompanying unaudited notes to the consolidated condensed financial statements.

**Unusual Machines, Inc.**

**Consolidated Condensed Statement of Operations**

**For the Three and Six Months Ended June 30, 2025 and 2024**

**(Unaudited)**

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Three months ended June 30,** | **Three months ended June 30,** | **Six months ended June 30,** | **Six months ended June 30,** |
|  | **2025** | **2024** | **2025** | **2024** |
| Revenues | $2123970 | $1411124 | $4166270 | $2030039 |
| Cost of goods sold | 1329291 | 1022684 | 2874784 | 1437432 |
| Gross Margin | 794679 | 388440 | 1291486 | 592607 |
| Operating Expenses |  |  |  |  |
| &nbsp;&nbsp;&nbsp;Operations | 404277 | 213772 | 706879 | 326094 |
| &nbsp;&nbsp;&nbsp;Research and development | 62731 | 10282 | 70633 | 27078 |
| &nbsp;&nbsp;&nbsp;Sales and marketing | 302358 | 386332 | 509975 | 543390 |
| &nbsp;&nbsp;&nbsp;General and administrative | 7195193 | 1349587 | 10421097 | 2353761 |
| &nbsp;&nbsp;&nbsp;Depreciation and amortization | 20593 | 171 | 41186 | 342 |
| &nbsp;&nbsp;&nbsp;Total operating expenses | 7985152 | 1960144 | 11749770 | 3250664 |
| Loss from operations | (7190473) | (1571704) | (10458284) | (2658057) |
| Other income and (expense) |  |  |  |  |
| &nbsp;&nbsp;&nbsp;Interest income | 225734 |  | 227266 |  |
| &nbsp;&nbsp;&nbsp;Interest expense | – | (40534) | – | (60183) |
| Other income and (expense) | 225734 | (40534) | 227266 | (60183) |
| **Net loss** | $**(6964739)** | $**(1612238)** | $**(10231018)** | $**(2718240)** |
| Net loss per share attributable to common stockholders |  |  |  |  |
| Basic and diluted | $**(0.32)** | $**(0.16)** | $**(0.54)** | $**(0.34)** |
| Weighted average common shares outstanding |  |  |  |  |
| Basic and diluted | **21771954** | **10040741** | **18853428** | **8053299** |

---

See accompanying unaudited notes to the consolidated condensed financial statements.

**Unusual Machines, Inc.**

**Consolidated Condensed Statement of Changes in Stockholders' Equity**

**For the Three and Six Months Ended June 30, 2025 and 2024**

**(Unaudited)**

**<u>Three and Six Months Ended June 30, 2024</u>**

---

| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | Series B, Preferred Stock | Series B, Preferred Stock | Common Stock | Common Stock | | | |
|  | Shares | Value | Shares | Value | Additional Paid-In<br>Capital | Accumulated<br>Deficit | Total Stockholders'<br>Equity |
| Balance, December 31, 2023 | 190 | $2 | 3217255 | $32173 | $5315790 | $(3933046) | $1414919 |
| Issuance of common shares as settlement |  |  | 16086 | 161 | 64183 |  | 64344 |
| Issuance of common shares, initial public offering, net of offering costs |  |  | 1250000 | 12500 | 3837055 |  | 3849555 |
| Issuance of common shares, business combination |  |  | 4250000 | 42500 | 16957500 |  | 17000000 |
| Conversion of preferred shares | (120) | (1) | 600000 | 6000 | (5999) |  |  |
| Net loss | – | – | – | – | – | (1106002) | (1106002) |
| Balance, March 31, 2024 | 70 | $1 | 9333341 | $93334 | $26168529 | $(5039048) | $21222816 |
| Conversion of preferred shares | (20) |  | 100000 | 1000 | (1000) |  |  |
| Issuance of common shares, equity incentive plan |  |  | 977899 | 9779 | (9779) |  |  |
| Stock compensation expense - vested stock |  |  |  |  | 346854 |  | 346854 |
| Stock option compensation expense |  |  |  |  | 14389 |  | 14389 |
| Net loss | – | – | – | – | – | (1612238) | (1612238) |
| Balance, June 30, 2024 | 50 | $1 | 10411240 | $104113 | $26518993 | $(6651286) | $19971821 |

---

See accompanying unaudited notes to the consolidated condensed financial statements.

**<u>Three and Six Months Ended June 30, 2025</u>**

---

| | | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | Series A, <br> Preferred Stock | Series A, <br> Preferred Stock | Series B, <br> Preferred Stock | Series B, <br> Preferred Stock | Series C, <br> Preferred Stock | Series C, <br> Preferred Stock | Common <br> Stock | Common <br> Stock | | | |
|  | Shares | Value | Shares | Value | Shares | Value | Shares | Value | Additional Paid-In<br>Capital | Accumulated<br>Deficit | Total Stockholders'<br>Equity |
| Balance, December 31, 2024 |  | $– |  | $– |  | $– | 15122018 | $151221 | $50580235 | $(35913514) | $14817942 |
| Issuance of restricted common stock, equity incentive plan |  |  |  |  |  |  | 483546 | 4835 | (4835) |  |  |
| Issuance of common stock for exercise of warrants |  |  |  |  |  |  | 1224606 | 12246 | 2424720 |  | 2436966 |
| Stock compensation expense - vested stock |  |  |  |  |  |  |  |  | 1883433 |  | 1883433 |
| Stock option compensation expense |  |  |  |  |  |  |  |  | 22940 |  | 22940 |
| Net loss |  |  |  |  |  |  |  |  |  | (3266279) | (3266279) |
| Balance, March 31, 2025 |  | $– |  | $– |  | $– | 16830170 | $168302 | $54906493 | $(39179793) | $15895002 |

---

---

| | | | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
|  | Series A, <br> Preferred Stock | Series A, <br> Preferred Stock | Series B, <br> Preferred Stock | Series B, <br> Preferred Stock | Series C, <br> Preferred Stock | Series C, <br> Preferred Stock | Common <br> Stock | Common <br> Stock | | | |
|  | Shares | Value | Shares | Value | Shares | Value | Shares | Value | Additional Paid-In<br>Capital | Accumulated<br>Deficit | Total Stockholders'<br>Equity |
| Issuance of common shares, Management/Board of Directors |  |  |  |  |  |  | 208336 | 2082 | (2082) |  |  |
| Issuance of common shares, Option exercises |  |  |  |  |  |  | 94650 | 947 | 366923 |  | 367870 |
| Issuance of common shares, consulting services |  |  |  |  |  |  | 4630 | 46 | (46) |  |  |
| Issuance of common shares, advisory board |  |  |  |  |  |  | 150000 | 1500 | (1500) |  |  |
| Issuance of common shares, public offering |  |  |  |  |  |  | 8000000 | 80000 | 36416000 |  | 36496000 |
| Stock option compensation expense |  |  |  |  |  |  |  |  | 576831 |  | 576831 |
| Stock option compensation expense – vested stock |  |  |  |  |  |  |  |  | 4936497 |  | 4936497 |
| Net loss |  | – |  | – |  | – | – | – | – | (6964739) | (6964739) |
| Balance, June 30, 2025 |  | $– |  | $– |  | $– | 25287786 | $252877 | $97199116 | $(46144532) | $51307461 |

---

See accompanying unaudited notes to the consolidated condensed financial statements.

**Unusual Machines, Inc.**

**Consolidated Condensed Statement of Cash Flows**

**For the Six Months Ended June 30, 2025 and 2024**

**(Unaudited)**

---

| | | |
|:---|:---|:---|
|  | **Six Months Ended June 30,** | **Six Months Ended June 30,** |
|  | **2025** | **2024** |
| Cash flows from operating activities: |  |  |
| &nbsp;&nbsp;&nbsp;Net loss | $(10231018) | $(2718240) |
| &nbsp;&nbsp;&nbsp;Depreciation and amortization | 41186 | 342 |
| &nbsp;&nbsp;&nbsp;Stock compensation expense as settlement |  | 64344 |
| &nbsp;&nbsp;&nbsp;Stock compensation expense | 7419701 | 361243 |
| &nbsp;&nbsp;&nbsp;Bad debt | 12146 |  |
| Change in assets: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts receivable | (118959) | 6798 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventory | (273614) | 152566 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prepaid inventory | (409864) | (253424) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other assets | (151547) | (129089) |
| Change in liabilities: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts payable and accrued expenses | (60038) | 384556 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating lease liabilities | (32660) | (18615) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Customer deposits and other current liabilities | (57682) | (32321) |
| Net cash used in operating activities | (3862349) | (2181840) |
| Cash flows from investing activities |  |  |
| &nbsp;&nbsp;&nbsp;Cash portion of consideration paid for acquisition of businesses, net of cash received |  | (852801) |
| &nbsp;&nbsp;&nbsp;Purchase of property & equipment | (262751) | – |
| Net cash used in investing activities | (262751) | (852801) |
| Cash flows from financing activities: |  |  |
| &nbsp;&nbsp;&nbsp;Proceeds from issuance of common shares, IPO |  | 5000000 |
| &nbsp;&nbsp;&nbsp;Proceeds from issuance of common shares, public offering | 40000000 |  |
| &nbsp;&nbsp;&nbsp;Proceeds from option exercises | 367870 |  |
| &nbsp;&nbsp;&nbsp;Proceeds from issuance of common shares, warrant exercises | 2436966 |  |
| &nbsp;&nbsp;&nbsp;Common share issuance offering costs | (3504000) | (637687) |
| Net cash provided by financing activities | 39300836 | 4362313 |
| Net increase in cash | 35175736 | 1327672 |
| Cash, beginning of period | 3757323 | 894773 |
| Cash, end of period | $38933059 | $2222445 |
| Supplemental disclosures of cash flow information: |  |  |
| &nbsp;&nbsp;&nbsp;Non-cash consideration paid for assets acquired and liabilities assumed | $– | $19000000 |
| &nbsp;&nbsp;&nbsp;Deferred acquisition costs | $– | $100000 |
| &nbsp;&nbsp;&nbsp;Deferred offering costs recorded as reduction of proceeds | $– | $512758 |

---

See accompanying unaudited notes to the consolidated condensed financial statements.

**Unusual Machines, Inc.**

**Notes to Consolidated Condensed Financial Statements**

**June 30, 2025**

**<u>Note 1 – Organization and nature of business</u>**

Unusual Machines, Inc. ("the Company") is a Nevada corporation engaged in the commercial drone industry. The Company reincorporated from Puerto Rico to Nevada on April 22, 2024.

On February 16, 2024, the Company closed its Initial Public Offering (the "IPO") of 1,250,000 shares of common stock at a public offering price of $4.00 per share ("IPO Price"). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings Ltd. ("Fat Shark") and Rotor Riot, LLC ("Rotor Riot") from Red Cat Holdings, Inc. ("Red Cat") (See Note 3).

**<u>Note 2 – Summary of significant accounting policies</u>**

*<u>Principles of Consolidation</u>*

 

The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024. Intercompany transactions and balances have been eliminated upon consolidation.

*<u>Basis of Presentation</u>*

The consolidated condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). 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. 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 27, 2025. The results for any interim period are not necessarily indicative of results for any future period.

*<u>Use of Estimates</u>*

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.

The condensed consolidated financial statements include some amounts that are based on management's best estimates and judgments. Significant estimates reflected in these consolidated financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, and inventory, (iv) the evaluation of long-lived assets, including intangibles and goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, and (vi) the deferred tax asset valuation allowance.

*<u>Reclassification</u>*

 

In the condensed consolidated financial statements, the Company has reclassified $5,470 for the six months ended June 30, 2024 from depreciation and amortization to general and administrative expense to conform to the current period presentation. This reclassification did not affect previously reported total operating expenses, loss before income taxes, or net loss in the condensed consolidated statements of operations.

 

 

 

 

*<u>Cash and Cash Equivalents</u>*

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, 2025 and December 31, 2024, the Company had approximately $38.5 million and $3.0 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.

*<u>Accounts Receivable, net</u>*

 

The Company carries its accounts receivable at invoiced amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC 326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for credit losses based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At June 30, 2025 and December 31, 2024, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for credit losses has been established.

*<u>Inventory</u>*

Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence.

*<u>Property and equipment, net</u>*

 

Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets of three years. As we expand into the Orlando production facility, our current plan is to set the capitalization threshold at $10,000.

 

*<u>Leases</u>*

 

The Company applies Accounting Standards Codification (ASC) 842, "Leases" which requires the recognition of assets and liabilities associated with lease agreements. The Company recognized a lease liability obligation and a right-of-use asset for the facilities leased in Orlando, FL.

The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company used an effective discount rate of 11.49% based on its last debt financings. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets. Lease terms do not include an option to renew.

*<u>Business Combinations</u>*

 

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 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.

 

*<u>Goodwill and Long-lived Assets</u>*

Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, ("ASC 350"). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company recorded an impairment loss on goodwill of $10,073,326 in 2024 based on the Company's estimated future net cash flows from the acquisitions.

The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management's assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management's plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is 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. Amortizable intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be recovered. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets. No impairment charges were recorded by the Company as of June 30, 2025.

The Company has indefinite-lived trademark assets that are reviewed for impairment by first performing a qualitative analysis in accordance with ASC 350-30 to determine whether it is more likely than not that the fair value of the indefinite-lived asset is less than its carrying value. If based on this assessment, management determines that impairment is not more than likely, then no further quantitative testing is required. However, if performing a qualitative analysis determines that is more likely than not that the fair value is less than its carrying value, then a quantitative analysis is performed in accordance with ASC 350-30-35, which occurs annually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. If a quantitative analysis is required, the Company utilizes the relief-from-royalty method, which is a form of the income approach and requires us to make significant estimates and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal year revenue growth rate. The Company did not record an impairment as of June 30, 2025, related to the indefinite-lived assets.

*<u>Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures</u>*

The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The guidance establishes three levels of the fair value hierarchy as follows:

*Level 1*: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

*Level 2*: 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; and

*Level 3*: 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.

*Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis*

The Company's financial instruments mainly consist of cash, receivables, other current assets, accounts payable, and accrued expenses. The carrying amounts of cash, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these instruments.

 

*<u>Accrued Warranty</u>*

 

Fat Shark products are warranted against defects in materials and workmanship for a period of two years from the date of shipment. If a defect arises during the warranty period, Fat Shark will either (i) repair the affected product at no charge using new parts or parts that are equivalent to new in performance and reliability; (ii) exchange the affected product with a functionally equivalent product; or (iii) refund the original purchase price for the affected product. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product warranty claim rates and expected costs to repair or to replace the products under warranty. The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior 24 months' sales activities. If actual return rates and/or repair and replacement costs differ significantly from the Company's estimates, adjustments to recognize the additional cost of sales may be required in future periods. Historically, the warranty accrual and the expense amounts have been immaterial. The warranty liability is included in accrued expenses on the accompanying consolidated balance sheets and amounted to $17,789 and $28,944 as of June 30, 2025 and December 31, 2024, respectively.

Rotor Riot does not provide any warranty of any kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor Riot.

*<u>Revenue Recognition</u>*

 

The Company recognizes 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:

Step 1: Identify the contract with a customer;

Step 2: Identify the performance obligations in the contract;

Step 3: Determine the transaction price;

Step 4: Allocate the transaction price to the performance obligations in the contract; and

Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.

The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. 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.

*<u>Deferred Revenue</u>*

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 $139,435 and $197,117 as of June 30, 2025 and December 31, 2024, respectively.

*<u>Cost of Goods Sold</u>*

Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any.

*<u>Shipping and Handling Costs</u>*

Shipping and handling costs incurred for products shipped to customers are included in operations expenses and amounted to $147,572 and $74,634 for the six months ended June 30, 2025 and 2024, respectively. Shipping and handling costs charged to customers are included in sales.

*<u>Research and Development</u>*

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs, materials, and a proportionate share of overhead costs.

*<u>Income Taxes</u>*

 

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 events. 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.

*<u>Stock-Based Compensation</u>*

Stock options are valued using the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. The Company recognizes forfeitures as they occur. The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the date of grant. Compensation cost is recognized on a straight-line basis over the service period which is typically the vesting term.

*<u>Warrants</u>*

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. 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.

*<u>Net Loss per Share</u>*

 

Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, *Earnings per Share*. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.

*<u>Segment Reporting</u>*

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.

*<u>Recent Accounting Pronouncements</u>*

In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity's effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.

In November 2024, the FASB issued ASU No. 2024-03, "Disaggregation of Income Statement Expenses" which requires disaggregated disclosure of income statement expenses into specified categories in disclosures within the footnotes to the financial statements. The standard is effective for annual reporting periods beginning after December 15, 2026. The Company is currently evaluating the effect of this ASU on the consolidated financial statements and disclosures.

In May 2025, the FASB issued ASU No. 2025-4, "Compensation – Stock Compensation and Revenue From Contracts With Customers" which provides clarifications to share-based consideration payable to a customer. This new guidance will likely have an impact on the Company.

**<u>Note 3 – Acquisitions</u>**

*Fat Shark and Rotor Riot*

 

On February 16, 2024, the Company closed on the acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the "Business Combination") (See Note 12 – Related Party Transactions for additional information). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view ("FPV") goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third parties.

The Company specializes in the production and sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a strong curated retail channel in the FPV drone market segment. This Business Combination is a realization of the Company's strategy to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for customers that require a domestic supply chain.

The Business Combination was based on a share purchase agreement (the "Purchase Agreement") that was executed on November 21, 2022. From November 21, 2022 to February 16, 2024, the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments. Under the terms of the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $1.0 million in cash and a cash deposit of $0.1 million made in 2022, (ii) issuance of a $4.0 million 18 month promissory note to Red Cat (see Note 9 "Promissory and Convertible Notes" for further details), and (iii) the issuance of 4,250,000 shares of the Company's common stock, which represented approximately 48.66% of the outstanding common stock of the Company on February 16, 2024, after the effect of the issued shares (collectively the "Consideration Paid"). The Company valued the Red Cat common stock at $4.00 per share for $17,000,000 which represents the IPO price of the Company's common stock on February 15, 2024. Accordingly, the value of the Consideration Paid is equal to $22,100,000.

The acquisitions met the definition of a business combination under ASC 805, Business Combinations, and therefore the assets acquired, and liabilities assumed are accounted for at fair value.

The following represents the fair value allocation of Fat Shark and Rotor Riot Purchase Price:

---

| | |
|:---|:---|
| Cash | $147200 |
| Accounts receivable (approximates contractual value) | 6798 |
| Inventories (on hand and prepaid) | 2611583 |
| Other current assets | 10892 |
| Right of use asset – operating | 378430 |
| Other long-term assets | 59426 |
| Goodwill | 17476232 |
| Intangible assets | 2297007 |
| Total assets | 22987568 |
| Accounts payable and accrued liabilities | 287544 |
| Deferred revenue | 114441 |
| Deferred tax liability | 107153 |
| Operating lease liability – current and long-term | 378430 |
| Total liabilities | 887568 |
| Total purchase price | $22100000 |

---

On December 31, 2024, the Company recorded a measurement period adjustment to the above fair value allocation to report a deferred tax liability of $107,153 and increase goodwill by the same amount.

Goodwill and intangible assets relate to Fat Shark and Rotor Riot being FPV market leaders and their well-known and established brands within the industry and related patents. Combining these entities and their existing customer base along with Unusual Machines' strategy of extending to B2B sales of drone components will provide a strategic advantage.

The results of Fat Shark and Rotor Riot have been included in the Consolidated Financial Statements from the date of acquisition of February 16, 2024. The financial activity for the 2024 period prior to the acquisition is not considered material and pro forma information has not been included in the unaudited consolidated condensed financial statements.

**<u>Note 4 – Inventories</u>**

Inventories, consisting solely of finished goods, totaled $1,609,117 and $1,335,503 as of June 30, 2025 and December 31, 2024, respectively. In addition, the Company had prepaid deposits for inventory totaling $1,314,592 and $904,728 as of June 30, 2025 and December 31, 2024, respectively.

**<u>Note 5 – Other Current Assets</u>**

Other current assets included as of:

---

| | | |
|:---|:---|:---|
|  | **June 30,<br> 2025** | **December 31,<br> 2024** |
| Prepaid insurance | $149512 | $31500 |
| Prepaid expenses | 41266 |  |
| Other current assets | 2000 | – |
| Total other current assets | $192778 | $31500 |

---

Non-current other assets include rent deposits of $84,693 and $59,426 related to the operating leases for our Orlando, FL facilities as of June 30, 2025 and December 31, 2024, respectively.

**<u>Note 6 – Property and Equipment, net</u>**

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:

---

| | | |
|:---|:---|:---|
|  | **June 30,<br> 2025** | **December 31,<br> 2024** |
| Computer equipment | $7738 | $7738 |
| Motor equipment | 247434 |  |
| Tenant improvements | 15317 | – |
| Total Property and Equipment | 270489 | 7738 |
| Accumulated depreciation | (7510) | (7168) |
| Total property and equipment, net | $262979 | $570 |

---

Depreciation expense totaled $342 and $171 for the six months ended June 30, 2025 and 2024, respectively. The Company has open commitments of approximately $3.0 million related to the purchase of motor equipment and $0.5 million related to tenant improvements. These assets are expected to be placed into service during Q3 2025.

**<u>Note 7 – Operating Leases</u>**

The Company has assumed in the business combination a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. The Company has valued the ROUA and the associated liability, as of February 16, 2024, at $378,430. The Company has no finance leases. Operating lease expense totaled $52,572 and $51,435, respectively for the six months ended June 30, 2025 and 2024.

The following is a summary of the operating lease right-of-use asset and liability:

---

| | |
|:---|:---|
|  | **Orlando, FL Operating Lease** |
| Operating lease right-of-use assets | $378430 |
| Less: accumulated amortization | (89914) |
| Operating lease right-of-use assets, as of June 30, 2025 | $288516 |
| Operating lease liability | $378430 |
| Less: accumulated reduction | (81099) |
| Operating lease liability, as of June 30, 2025 | $297331 |
| Current operating lease liability | $73569 |
| Non-current operating lease liability | 223762 |
| Total operating lease liability | $297331 |

---

The following is a summary of future lease payments required under the five-year lease agreement:

---

| | | | |
|:---|:---|:---|:---|
| **Year** | **Future Lease <br> Payments** | **Operating Lease <br> Discount** | **Operating Lease <br> Liability** |
| 2025 | $50901 | $(15741) | $35160 |
| 2026 | 105178 | (25468) | 79710 |
| 2027 | 109037 | (15985) | 93052 |
| 2028 | 94185 | (4776) | 89409 |
| Total | $359301 | $(61970) | $297331 |

---

---

| | |
|:---|:---|
| **Supplemental Information** | |
| Weighted average remaining lease term (in years) | 3.33 |
| Weighted average discount rate | 11.49% |

---

In June 2025, we 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. The lease commencement date is August 1, 2025 and currently runs through August 21, 2030.

**<u>Note 8 – Goodwill and Intangible Assets</u>**

*<u>Goodwill</u>*

There were no changes in the carrying amount of goodwill during the six months ended June 30, 2025. The carrying value of goodwill was $7,402,906 as of June 30, 2025.

*<u>Intangible Assets</u>*

As of June 30, 2025, the balances of intangible assets were as follows:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Type** | **Gross Value** | **Accumulated Amortization** | **Net Value** |
| Patents/IP | Finite-lived | $816877 | $(112321) | $704556 |
| Trademark | Indefinite-lived | 1480130 |  | 1480130 |
| Total intangible assets, net |  | $2297007 | $(112231) | $2184686 |

---

Patents and intellectual property relate to the patents and technology know-how from the acquisition of Fat Shark in February 2024. Patents are amortized over 10 years. Trademarks relate to the brand name and recognition of Rotor Riot from the acquisition in February 2024. Amortization was $40,844 and $0 for the six months ended June 30, 2025 and 2024, and $20,422 and $0 for the three months ended June 30, 2025 and 2024, related to the Patents.

**<u>Note 9 – Promissory and Convertible Notes</u>**

In February 2024 and in conjunction with the acquisition of Fat Shark and Rotor Riot, as discussed in Note 3, the Company issued a promissory note ("Note") with Red Cat Holdings, Inc. ("Red Cat") for $2.0 million. In July 2024, the Company finalized its working capital adjustment with Red Cat which increased the overall purchase price by an additional $2.0 million. In accordance with ASC 470, Debt, the additional $2.0 million was treated as a modification that was not treated as a debt extinguishment and expenses related to the debt were expensed as incurred. The additional $2.0 million was added to the existing Note and was reflected as an adjustment to the opening purchase price and was included in the opening balance sheet as of February 16, 2024 as an increase to goodwill and intangible assets. Accordingly, the Note was amended to increase the principal amount of the Note to $4.0 million.

Subsequently and in July 2024, in conjunction with a private sale of Red Cat's common stock and its promissory note to two accredited investors ("Investors"), the Company issued new notes to the new Investors (the "July Notes") and cancelled the original Note. The July Notes contained 8% per annum interest. In addition, the maturity date of the July Notes was extended to November 30, 2025, subject to certain conditions.

On August 21, 2024, the Company entered into two exchange agreements with the Investors, under which the Investors exchanged their respective 8% July Notes for new 4% Convertible Notes (the "August Notes"). Pursuant to the exchange agreements, the Investors exchanged the $4,000,000 of July Notes for an aggregate of (i) $3,000,000 for the August Notes, (ii) 210 shares of Series C preferred stock, which converts into 630,000 shares of the Company's common stock, and (iii) 630,000 warrants with a five-year term and an exercise price of $1.99 per share, subject to certain adjustments. The July Notes were cancelled as a part of the exchange agreement. In accordance with ASC 470, since the August Notes were considered a greater than 10% change from the July Notes and a substantive conversion option was added to the August Notes, this exchange was treated as a debt extinguishment. The August Notes bear interest at 4% annually with interest payable monthly and the principal due on November 30, 2025. The August Notes are convertible into common stock at a fixed $1.99 per share, except in the Event of Default as defined in the August Notes, which the conversion price for an Event of Default Conversion is calculated at a 10% discount of the average three-day volume-weighted average price prior to the conversion date.

During the third quarter 2024, the Company recognized a loss on debt extinguishment of $685,151 related to the exchange agreement discussed above. The loss on extinguishment related to the August Notes included $315,303 fair value related to the warrant liability issued, $347,947 fair value related to the optional conversion feature derivative liability of the remaining principal balance, and $21,901 cash fees paid for legal costs related to the August Notes. The Company used the binomial option pricing method for calculating the derivative fair value related to the warrants and optional conversion feature.

In December 2024, the Investors exercised their conversion option to convert the remaining $3,000,000 in August Notes to Common Stock at a fixed $1.99 conversion price. As a result, the Company issued 1,507,538 shares of common stock, cancelled the $3,000,000 in August Notes, and recorded $17,864,325 to common stock and additional paid in capital related to the conversion of the August Notes to Common Stock. This value is based on the closing price of the Company's common stock on December 3, 2024 of $11.85 per share. This resulted in a loss on debt extinguishment of $14,864,325. The settlement of the related conversion option derivative resulted in a gain on extinguishment of $16,503,923. The net gain was $1,639,598.

Total interest expense for the six months ended June 30, 2025 and 2024 was $0 and $60,183, respectively. Total interest expense for the three months ended June 30, 2025 and 2024 was $0 and $40,534, respectively

**<u>Note 10 – Earnings Per Share and Stockholders' Equity</u>**

*<u>Earnings per Share</u>*

Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include 382,850 of stock options issued to employees as of June 30, 2025, 330,000 unvested restricted stock awards and units, 8,500 of common stock representative warrants issued to the underwriter associated with the February 2024 IPO, 164,473 warrants issued related to the October 2024 private placement, and 640,000 warrants issued to the placement agent related to the May 2025 confidentially marketed public offering.

*<u>Preferred Stock</u>*

As of 6/30/25 and 12/31/24, there are no issued and outstanding Series A, B, and C Preferred Stock.

The Series A was convertible into common stock at a ratio of 1,000 shares of common stock for each share of Series A stock held, subject to certain limitations. The Series A shares were not entitled to vote on any matters submitted to shareholders of the Company.

The Series B was convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. The Series B shares were not entitled to vote on any matters submitted to shareholders of the Company.

The Series C was convertible into common stock at a ratio of 3,000 shares of common stock for each share of Series C stock held, subject to certain limitations. The Series C shares were not entitled to vote on any matters submitted to shareholders of the Company.

On April 10, 2025, the Company filed a Withdrawal of Designation with the Secretary of State of the State of Nevada withdrawing the certificates of designation for each of the Series A, Series B and Series C.

<u>2024 Preferred Stock Transactions</u>

During the six months ended June 30, 2024, shareholders converted 140 shares of Series B into 700,000 shares of common stock. The Company cancelled the 140 shares of Series B upon the conversion.

*<u>Common Stock</u>*

<u>2025 Transactions</u>

On January 14, 2025, the Company issued 3,546 immediately vested restricted shares of common stock to non-employee directors of the Company. The shares of restricted stock were granted under the 2022 Equity Incentive Plan. The shares were valued at $11.99 per share, which was the value the Company's common stock on the date of grant, respectively for a total of $42,517 to be recognized as stock compensation expense during the six months ended June 30, 2025.

On February 3, 2025, the Company issued 480,000 restricted shares of common stock to executive officers and certain employees of the Company. The shares of restricted stock were granted under the Company's 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through December 31, 2025. The restricted shares issued to certain employees are subject to pro-rata forfeiture over a four-year period. The shares were valued at $12.00 per share, which was the value of the Company's common stock on the date of grant, respectively for a total of $5,760,000 to be recognized as stock compensation expense pro-rata over the vesting period. Stock compensation expense of $3,044,536 was recognized during the six months ended June 30, 2025.

In February 2025, the Company issued 1,224,606 shares of common stock related to warrant holders exercising their warrants. 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.

On May 19, 2025, the Company issued 33,336 immediately vested restricted shares of common stock to non-employee directors of the Company. The shares of restricted stock were granted under the 2022 Equity Incentive Plan. The shares were valued at $5.40 per share, which was the value the Company's common stock on the date of grant, respectively for a total of approximately $180,000 to be recognized as stock compensation expense during the 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.

<u>2024 Transactions</u>

On January 2, 2024, the Company issued 16,086 shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of $64,344 or $4 per share, the value of the IPO in February 2024.

On February 16, 2024 the Company completed its IPO and issued 1,250,000 shares of common stock at the IPO Price for total net proceeds of $3,849,555. The Company incurred $510,000 direct deduction from proceeds, $127,687 in cash disbursements related to offering costs and $512,758 in prior year paid and deferred offering costs as of December 31, 2023 for a total of $1,150,445 offering costs, associated with the IPO which consisted of underwriter, legal, accounting, and other associated filing fees. These costs have been recorded as a reduction of the gross proceeds from the IPO in stockholder's equity. The 62,500 of representative warrants are exercisable for common stock at a price of $5.00 per share (125% of the IPO Price) at any time beginning on August 15, 2024 through and including February 16, 2029, the expiration date.

Simultaneously with its IPO and as a part of the Purchase Agreement as discussed in Note 3, the Company issued Red Cat 4,250,000 shares of common stock as consideration of the business combination. These were subsequently exchanged into 4,250 Series A preferred shares as discussed above. As agreed in the Purchase Agreement, $17.0 million of the purchase price would be issued in common stock based on the IPO price of $4.00 per share.

During the six months ended June 30, 2024, the Company issued 700,000 shares of common stock related to certain shareholders converting 140 Series B shares into common stock.

On April 30, 2024, the Company issued 937,249 restricted shares of common stock to executive officers and board members of the Company. The shares of restricted stock were granted under the Company's 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through February 14, 2025.

On May 2, 2024, the Company issued an additional 40,650 of restricted shares of common stock to a company controlled by Allan Evans, the Company's CEO, related to an agreed upon reduction of the consulting fee paid to the company. The shares of restricted stock were granted under the Company's 2022 Equity Incentive Plan.

The April 30, 2024 and May 2, 2024 shares were valued at $1.20 and $1.23 per share, respectively for a total of $1,174,698 to be recognized pro-rata over the vesting period which is the forfeiture period. Stock compensation expense of $346,854 was recognized during the six months ended June 30, 2024.

**<u>Note 11 – Share Based Awards</u>**

*<u>Stock Options</u>*

 

The 2022 Equity Incentive Plan (the "Plan") allows the Company to incentivize key employees and directors with long term compensation awards such as stock options, restricted stock, and other similar types of awards. The Plan is authorized to issue up to 15% of the outstanding shares on a fully diluted basis giving effect to the exercise and conversion of all outstanding common stock equivalents issued outside of the Plan. In addition, the Plan has an "evergreen" provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of directors. As of June 30, 2025, the Plan is authorized to issue up to 4,333,728 of awards after the 5% increase on January 1, 2025.

The following table presents the activity for stock options outstanding as of June 30, 2025:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Non-Qualified**<br> **Options** | **Weighted**<br> **Average**<br> **Exercise Price** | **Weighted**<br> **Average**<br> **Remaining**<br> **Contractual Term** | **Aggregate**<br> **Intrinsic Value** |
| Outstanding - December 31, 2024 | 330000 | $1.24 | 9.34 | $— |
| Granted | 177500 | 5.36 |  |  |
| Forfeited/canceled | (30000) | 1.20 |  |  |
| Exercised | (94650) | 3.89 |  |  |
| Outstanding – June 30, 2025 | 382850 | $2.50 | 9.16 | $2324870 |
| Exercisable – June 30, 2025 | 100350 | 3.71 | 9.44 | 487445 |

---

The Company recognized $599,771 in stock-based compensation expense related to stock options during the six months ended June 30, 2025. As of June 30, 2025, there was $494,070 of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term through 2028.

*<u>Restricted Stock</u>*

 

The following table presents the activity for restricted stock outstanding:

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **Restricted Stock<br> Awards** | **Weighted<br> Average<br> Grant Date <br> Fair Value - RSA** | **Restricted <br> Stock Units** | **Weighted<br> Average<br> Grant Date<br> Fair Value - RSU** |
| Unvested - December 31, 2024 | 227723 | $1.20 | 150000 | $4.40 |
| Granted | 696512 | 10.78 | 200000 | 9.43 |
| Forfeited/canceled |  |  |  |  |
| Vested | (644235) | 6.86 | (300000) | 6.49 |
| Unvested – June 30, 2025 | 280000 | $12.00 | 50000 | $12.00 |

---

Restricted stock awards are equity grants to officers, directors and employees of the Company in which restricted common stock is issued on the grant date subject to vesting and claw-back provisions. Restricted stock units are equity grants to employees and advisors of the Company in which common stock is issued upon meeting certain vesting requirements.

The total value of restricted stock awards and restricted stock units granted during the six months ended June 30, 2025 is $9,392,783. The Company recognized $6,819,930 in stock-based compensation expense related to restricted stock and restricted stock units during the six months ended June 30, 2025. As of June 30, 2025, there was $3,253,279 of unrecognized stock-based compensation expense related to unvested restricted stock awards and units to be recognized over the remaining vesting term through March 2029.

 

*<u>Warrants</u>*

The following table presents the activity for warrants outstanding as of June 30, 2025:

---

| | | |
|:---|:---|:---|
|  |<br>**Warrants**<br>**Outstanding** | **Weighted**<br>**Average**<br>**Exercise Price** |
| Outstanding - December 31, 2024 | 1397579 | $2.01 |
| Granted | 640000 | 5.00 |
| Forfeited/cancelled/restored |  |  |
| Exercised | (1224606) | 1.99 |
| Outstanding – June 30, 2025 | 812973 | $4.39 |

---

As Discussed in Note 10, "Earnings Per Share and Stockholders' Equity", in connection with the Private Placement, the Company issued 1,286,184 warrants and an additional 102,895 warrants to the underwriter related to the Private Placement for a total of 1,389,079 warrants. The warrants have an exercise price of $1.99. The warrant holders exercised 1,224,606 warrants during the six months ended June 30, 2025.

All warrants outstanding have a weighted average remaining contractual life of approximately 2.47 years as of June 30, 2025. The aggregate intrinsic value of the warrants at June 30, 2025 is $3,397,377.

**<u>Note 12 – Related Party Transactions</u>**

In November 2022, the Company entered into the Purchase Agreement, as amended with Red Cat and Jeffrey Thompson, the Company's former Chief Executive Officer and President and a current director. Mr. Thompson is also the current Chief Executive Officer of Red Cat, pursuant to which, among other things, Mr. Thompson and the Company have agreed to indemnification obligations, which shall survive for a period of nine months from February 16, 2024, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of 100,000 shares of our common stock owned by him to secure any indemnification obligations, which stock is our sole remedy, except for fraud. Our prior Chief Executive Officer, Mr. Brandon Torres Declet, negotiated the terms of the Purchase Agreement on an arms' length basis with Joe Freedman who was the head of Red Cat's Special Committee. The transaction was ultimately approved by the Company's and Red Cat's board of directors. On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated in the Purchase Agreement in a special meeting. Mr. Thompson recused himself from such vote.

In February 2024, the Company completed the acquisitions to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO.

On April 30, 2024 ("Grant Date"), the Company's board of directors approved the Company entering into a two-year Management Services Agreement (the "Agreement") with 8 Consulting LLC (the "Consultant") for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services as the Company's Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant agreed to cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company's fundraising and investor relations activities; (iii) to report to the Company's board of directors; (iv) to perform services for such subsidiaries of the Company as may be necessary.

The Consultant receives a $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restricted common stock. The fair value of the shares was $585,600 based on the $1.20 quoted trading price on the Grant Date and will be recognized over the service period (see below). The grant of restricted common stock was made under the Company's 2022 Equity Incentive Plan. The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that Dr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code. The Company and Dr. Evans previously entered into an Offer Letter dated November 27, 2023, under which he would serve as the Company's Chief Executive Officer effective as of December 4, 2023. The Agreement terminates and replaces the Offer Letter dated November 27, 2023.

In October 2024, in relation to the Private Placement as described in more detail in Note 10, "Earnings Per Share and Stockholders' Equity", the Company's CEO and two directors (collectively, the "Insiders") invested $250,000 in the Private Placement on identical terms to the other Investors. In addition, the Insiders were required to pay an additional $92,105 to the Company related to the greater of book or market value for the warrants.

In May 2025, in relation to the confidentially marketed public offering as described in more detail in Note 10, "Earnings Per Share and Stockholders' Equity", the Company's CEO and three directors invested $420,000 in the offering on identical terms to the other Investors and received a total of 84,000 shares of common stock.

**<u>Note 13 – Commitments and Contingencies</u>**

*<u>Orlando Leases</u>*

As part of the business combination that occurred on February 14, 2024, the Company acquired a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. See Note 7 – Operating Leases for additional information.

On June 4, 2025, the Company entered into a Lease Agreement to lease approximately 17,000 square feet of space for the Company's drone motor manufacturing facility in Orlando, Florida, at an average monthly rental of $21.1k over a five year period. The lease commences on August 1, 2025 and expires in August 2030. As of June 30, 2025, the Company has open commitments of approximately $3.0 million related to the purchase of motor equipment and $0.5 million related to tenant improvements. These assets are expected to be placed into service during Q3 2025.

*<u>Aloft Material Definitive Agreement</u>*

On February 1, 2025, the Company entered into an Agreement and Plan of Merger and Reorganization (the "Agreement") with Aloft Technologies, Inc., a Delaware corporation ("Aloft"), and UMAC Merger Sub, Inc. a Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub"). Aloft is a leader in the drone fleet and airspace management sector, powering a majority of all FAA-approved Low Altitude Authorization and Notification Capability airspace authorizations in the United States and the related software is complimentary to the Company's overall position to provide drone related components and drone services made in the United States.

Under the terms of the Agreement and subject to customary closing conditions and a working capital adjustment, on the closing date of the Agreement Aloft will merge into Merger Sub, and Merger Sub will continue as a wholly owned subsidiary of the Company. In addition, each issued and outstanding share of Aloft capital stock that is not a dissenting share will be cancelled and each Aloft Stockholder (as defined in the Agreement) will receive their pro rata share of the merger consideration payable by the Company as provided for in the Agreement. The merger consideration of $14.5 million consists of 1,204,319 shares of common stock of the Company and expected not to exceed $100,000 in cash payable to unaccredited investors.

Customary closing conditions by the parties including Aloft shareholder approval must be met before being able to close the merger.

On May 6, 2025, the Company and Aloft executed an Amendment and Waiver to the Merger Agreement (the "Aloft Amendment") which (i) waives the exclusivity provision in the Agreement, (ii) extends the end date in the Agreement from April 30, 2025 to August 31, 2025, (iii) adds a $100,000 breakup fee in the event Aloft consummates an alternative transaction while the Agreement remains in effect, and (iv) permits the Company to terminate the Agreement at any time upon written notice, however, the Company will forfeit the breakup fee.

On June 9, 2025, the Company terminated the Agreement with Aloft and forfeited its right to receive the $100,000 breakup fee.

*<u>Rotor Lab Material Definitive Agreement</u>*

On June 12, 2025, the Company entered into a Share Purchase Agreement ("SPA") to acquire 100% of the capital stock of Rotor Lab Pty Ltd., an Australian company ("Rotor Lab") from its existing shareholders. The Company agreed to issue the sellers a total of $4,000,000 of common shares of the Company's common stock, plus additional earnout consideration over two years from the closing of the agreement for up to $3,000,000 worth of shares of the Company's common stock. $800,000 of the initial consideration will be restricted and subject to forfeiture in the event of a breach of representations and warranties and indemnification. The terms of the SPA are subject to standard closing conditions, in addition to receiving required regulatory approvals from the Australian Foreign Investment Review Board.

**<u>Note 14 – Subsequent Events</u>**

*<u>Registered Direct Offering</u>*

On July 14, 2025, the Company entered into a securities purchase agreement with certain investors for the purchase and sale of 5,000,000 shares of common stock in a registered direct offering at a public offering price of $9.70 per share. On July 15, 2025 the offering closed and we received aggregate gross proceeds of $48.5 million before deducting placement agent fees and other related expenses. The Company intends to use the proceeds of the offering for the purchase of our drone motor manufacturing equipment which we estimate to be approximately $4.0 million, general corporate purposes and working capital.

 ****

**Item 2.** **Management's Discussion and Analysis of Financial Condition and Results of Operations**

*The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2024, which was filed with the SEC on March 27, 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, 2024, 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.*

 

**Company Overview**

We are a Nevada corporation with our principal place of business in Orlando, Florida. We sell and manufacture drones and drone components across a diversified brand portfolio, which includes Fat Shark, the leader in FPV (first-person view) ultra-low latency video goggles for drone pilots. We also retail small, acrobatic FPV drones and equipment directly to consumers through the curated Rotor Riot e-commerce store. Beginning in the second half of 2024, we launched our business-to-business channel selling drone parts to commercial customers. With a changing regulatory environment, we seek to be a dominant Tier-1 parts supplier to the fast-growing multi-billion-dollar U.S. drone industry.

**Recent Developments, Challenges and Uncertainties**

On July 14, 2025, we entered into a securities purchase agreement with certain investors for the purchase and sale of 5,000,000 shares of common stock in a registered direct offering at a public offering price of $9.70 per share. On July 15, 2025, the offering closed and we received aggregate gross proceeds of $48.5 million before deducting placement agent fees and other related expenses. The Company intends to use the proceeds of this offering for the purchase of our drone motor manufacturing equipment which we estimate to be approximately $4.0 million, general corporate purposes and working capital

With the funds received from our recent offerings, we are focusing on growing both our retail and enterprise revenue channels and investing in drone component manufacturing in the United States. During the first quarter of 2025, we added both the Rotor Riot Brave 55A ESC (electronic speed controller), and the Fat Shark Aura FPV (first-person view) Camera to the U.S. Department of Defense Innovation Units Blue UAS Framework ("DIU Blue Framework"). In addition, in July 2025, we added the Fat Shark Aura Video Transmitter (VTX) to the DIU Blue Framework. In furtherance of our B2B business, we have entered into a new lease of a 17,000 square foot facility in Orlando, Florida effectively August 1, 2025, where we plan to open a drone motor manufacturing plant. See Note 8 to Consolidated Financial Statements. While we continued to see top line revenue growth during the first half of 2025, our continued future plans for retail revenue growth and margins are subject to uncertainties outside of our control, including changes to trade policy with respect to tariffs and other impacts to our global supply chain cost structure. We are continually evaluating the tariff landscape and working to find reliable and high quality suppliers in multiple countries including the United States and Taiwan that we anticipate will have the least amount of impact to our retail costs and overall margin. Because of the tariff uncertainties, we cannot predict the impact tariff policies in the United Staes and other countries will have on our business. But our B2C business relies heavily on China so retaliatory tariffs can adversely affect us especially our B2C business. See "Item 1A – Risk Factors" for more information on the risks associated with the uncertainty of the imposition of tariffs on our business.

On June 12, 2025, we entered into a Share Purchase Agreement ("SPA") to acquire 100% of the capital stock of Rotor Lab Pty Ltd., an Australian company ("Rotor Lab") from its existing shareholders. We agreed to issue the sellers a total of $4,000,000 of shares of our common stock, plus additional earnout consideration of up to $3,000,000 worth of shares of our common stock. $800,000 of the initial consideration will be restricted and subject to forfeiture in the event of a breach of representations and warranties and indemnification. The terms of the SPA are subject to standard closing conditions, in addition to receiving required regulatory approvals from the Australian Foreign Investment Review Board.

**Results of operations**

***Three Months Ended June 30, 2025 and 2024***

**<u>Revenue</u>**

During the three months ended June 30, 2025 we generated revenues totaling $2,123,970 compared to $1,411,124 during the three months ended June 30, 2024, representing an increase of $712,846 or 51%. The growth in revenue is driven from growth in our existing retail channel and expanding our enterprise channel as we are manufacturing additional Blue UAS products.

**<u>Cost of Goods Sold & Gross Profit</u>**

During the three months ended June 30, 2025, our cost of goods sold was 1,329,291 compared to $1,022,684 during the three months ended June 30, 2024, resulting in an increase of $306,607 or 30%. Our gross margin, as a percentage of sales, totaled 37.4% during the three months ended June 30, 2025, compared to gross margin of 27.5% during the three months ended June 30, 2024. We try and maintain margins in the 20% - 30% range on majority of our products and anticipate our gross profit 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 that are sold during the period. Our gross margin is also subject to additional fluctuations based on the increased tariffs being imposed on certain products. We have started passing these additional costs to customers and will have an impact on our overall gross profit percentage. We expect that in the three months ended September 30, 2025, our cost of goods sold will experience an increase from the tariffs and increase in inventory costs as we source inventory from countries outside of China including the United States and Taiwan. See "Item 1A – Risk Factors" for more information on the risks associated with the uncertainty of the imposition of tariffs on our business.

During the three months ended June 30, 2025, our gross profit was $794,679 compared to $388,440 during the three months ended June 30, 2024, resulting in an increase of $406,239 or 105%. Our gross margin, as a percentage of sales, totaled 37.4% during the three months ended June 30, 2025, compared to gross margin of approximately 27.5% during the three months ended June 30, 2024.

**<u>Operating Expenses</u>**

During the three months ended June 30, 2025, operations expenses totaled $404,277 compared to $213,772 during the three months ended June 30, 2024, resulting in an increase of $190,505 or 89%. 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, 2025, research and development expenses totaled $62,731 compared to $10,282 for the three months ended June 30, 2024, resulting in a increase of $52,449 or 510%. 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.

During the three months ended June 30, 2025, sales and marketing expenses totaled $302,358 compared to $386,332 for the three months ended June 30, 2024, resulting in a decrease of $83,974 or 22%. The decrease primarily relates to additional costs incurred during the second quarter of 2024 related to our Rampage marketing event that is expected to occur during the fourth quarter of this year. Other sales and marketing expenses increased slightly based on the increase in revenue and ad spend during the period.

During the three months ended June 30, 2025, general and administrative expenses totaling $7,195,193 compared to $1,349,587 for the three months ended June 30, 2024, resulting in an increase of $5,845,606 or 433%. The increase primarily relates to the increase in non-cash stock compensation expense of approximately $5.5 million and increase in professional fees and operating as a public company.

**<u>Net Loss</u>**

Our net loss for the three months ended June 30, 2025, totaled $6,964,739 compared to $1,612,238 for the three months ended June 30, 2024, resulting in an increase in net loss of $5,352,501 or 332%. This increase in net loss relates to the increase in general and administrative expenses which was primarily driven by the increase in non-cash stock compensation expense, which was $5,513,328 for the second quarter of 2025.

**Results of Operations – Six Months Ended June 30, 2025 compared to the Six Months Ended June 30, 2024**

**<u>Revenue</u>**

During the six months ended June 30, 2025 we generated revenues totaling $4,166,270 compared to $2,030,039 during the six months ended June 30, 2024, representing an increase of $2,136,231 or 105%. The growth in revenue is driven from growth in our existing retail channel and expanding our enterprise channel as we are manufacturing additional Blue UAS products.

**<u>Cost of Goods Sold</u>**

During the six months ended June 30, 2025, we incurred cost of goods sold of $2,874,784 compared to $1,437,432 during the six months ended June 30, 2024, resulting in an increase of $1,437,352 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs. The increase in cost of goods sold is driven entirely by the increase in our revenue.

**<u>Gross Margin</u>**

During the six months ended June 30, 2025, our gross margin was $1,291,486 compared to $592,607 during the six months ended June 30, 2024, resulting in an increase of $698,879 or 118%. Our gross margin, as a percentage of sales, totaled 31% during the six months ended June 30, 2025, compared to 29% during the six months ended June 30, 2024. 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 quarter are in line with our expectations and normal operating margins.

**<u>Operating Expenses</u>**

During the six months ended June 30, 2025, operations expenses totaled $706,879 compared to $326,094 during the six months ended June 30, 2024, resulting in an increase of $380,785 or 117%. Prior to the closing of the acquisitions in February 2024, we did not have any operations. 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 costs related to our motor production facility during the second quarter of 2025.

During the six months ended June 30, 2025, research and development expenses totaled $70,633 compared to $27,078 for the six months ended June 30, 2024, resulting in an increase of $43,555 or 161%. 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.

During the six months ended June 30, 2025, sales and marketing expenses totaled $509,975 compared to $543,390 for the six months ended June 30, 2024, resulting in a decrease of $33,415 or 6%. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses. The decrease relates to additional costs incurred during the second quarter of 2024 related to our Rampage marketing event, which was then offset by additional ad spend and other sales related expenses from our increase in revenue and sales.

During the six months ended June 30, 2025, general and administrative expenses totaling $10,421,097 compared to $2,353,761 for the six months ended June 30, 2024, resulting in an increase of $8,067,336 or 343%. The increase relates primarily to increased non-cash expenses totaling $7,419,701 related to stock based compensation expense and the additional increase is from increase in professional fees and other public company related expenses.

**<u>Net Loss</u>**

Our net loss for the six months ended June 30, 2025, totaled $10,231,018 compared to $2,718,240 for the six months ended June 30, 2024, resulting in an increase in net loss of $7,419,701 or 276%. The increase primarily relates to increased non-cash expenses related to stock based compensation expense discussed in the above paragraph.

**<u>Cash Flow Analysis</u>**

Prior to the closing of our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cash inflows from operations and all cash outflows related to our activities related to our IPO. Our future cash flows from operating activities will be significantly impacted by revenues received, our investment in sales and marketing to drive growth, and general and administrative expenses related to operating a public company. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.

**<u>Operating Activities</u>**

Net cash used in operating activities was $3,862,349 during the six months ended June 30, 2025, compared to net cash used in operating activities of $2,181,840 during the six months ended June 30, 2024, representing an increase of $1,680,509 or 77%. This increase in net cash used primarily resulted from our increase in accounts receivable of $125,757, inventory of $426,180, prepaid expenses of $156,440, accounts payable and accrued expenses of $444,594 and changes in other operating assets and liabilities of $61,864. This was offset by the change in non-cash stock based compensation of $6,994,114 and changes in other non-cash related expenses of $52,990.

**<u>Investing Activities</u>**

Net cash used in investing activities was $262,751 during the six months ended June 30, 2025 compared to net cash used in investing activities of $852,201 during the six months ended June 30, 2024, representing a decrease of $590,050 or 69%. The cash used in investing activities during the six months ended June 30, 2025 related to the purchasing of equipment related to our motor factory while the cash used in investing activities during the six months ended June 30, 2024 related to our acquisitions of Rotor Riot and Fat Shark.

**<u>Financing Activities</u>**

Net cash provided by financing activities totaled $39,300,836 during the six months ended June 30, 2025, compared to net cash provided by financing activities of $4,362,313 during the six months ended June 30, 2024, resulting in an increase in net cash provided by financing activities of $34,938,523. The increase primarily relates to proceeds received from our public offering of $36,496,000 in May 2025, proceeds from warrant exercises of $2,436,966, and employee stock option exercises of $367,780 during the period.

**Liquidity and capital resources**

As of June 30, 2025, we had current assets totaling $42,222,934 primarily consisting of cash balances of $38,933,059, inventory of $1,609,117 and other current assets of $192,778 and deposits for inventory of $1,314,592. Our current liabilities as of June 30, 2025 totaled $821,698, primarily consisting of accounts payable and accrued expenses of $608,694 and deferred revenue of $139,435 and current operating lease liability of $73,569. Our net working capital as of June 30, 2025 was $41,399,236.

On July 15, 2025, we completed a registered direct offering in which we sold 5,000,000 shares of our common stock at $9.70 per share and after deducting underwriting discounts and expenses, we received approximately $44.9 million in net cash proceeds.

On May 7, 2025, we completed a confidentially marketed public offering in which we sold 8,000,000 shares of our common stock at $5.00 per share and after deducting underwriting discounts and expenses, we received approximately $36.5 million in cash proceeds.

On February 26, 2025, multiple investors exercised 1,224,606 warrants at $1.99 per warrant from the October 2024 Private Placement and we issued 1,224,606 shares of our Common Stock and received cash proceeds of $2,436,966.

In December 2024, two investors and note holders exercised their option to convert $3,000,000 of the then outstanding Convertible Note into 1,507,538 shares of Common Stock at a price of $1.99 per share. After the conversion and as of December 31, 2024, we no longer have any debt outstanding.

In December 2024, we also had several investors exercise 684,000 warrants with cash and we issued 684,000 shares of our Common Stock for total cash proceeds of $1,523,700.

On October 29, 2024, we completed a private placement offering for the sale of 1,286,184 shares of Common Stock at a price of $1.52 per share for aggregate gross proceeds of $1.95 million before deducting fees to the placement agent and other expenses payable by us in connection with the private placement. We retained approximately $1.8 million in net proceeds.

As of August 14, 2025, we have approximately $81 million in cash. We believe that the net proceeds from our financings, warrant exercises, revenues, and existing cash balances will be sufficient to fund our current operating plans through more than the next 12 months. With the approximately $45 million of net proceeds we received on July 15, 2025 and our existing cash balances, we have substantial liquidity to support our business.

**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, 2024. 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, 2024.

**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.

**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.

**Item 4.** **Controls and Procedures** 

**Evaluation of Disclosure Controls and Procedures**

We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act") as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures as of March 31, 2025, were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms because of a material weakness in the Company's internal control over financial reporting. Specifically, the Company did not maintain effective controls, segregation of duties, and procedures to support the identification of, accounting for, and the evaluation and disclosure of certain transactions, as limited individuals, either the Principal Executive Officer or Principal Financial Officer, initiates all transactions and they also review, evaluate, and approve these same transactions.

**Changes in Internal Control Over Financial Reporting** 

During the six months ended June 30, 2025, we have continued to strengthen our internal controls including hiring of a Controller that will help provide additional segregation of duties, additional process related to our financial reporting, and start the documentation of our internal control process. This includes certain segregation of duties including the recording of financial records in NetSuite, the creation of purchase orders by our purchasing team that is approved in accordance with our authorization matrix, the receipt of inventory in NetSuite by our operations team in Orlando, FL, and dual approvals of all outgoing cash payments. As the implementation of NetSuite occurred, we experienced changes to our processes and procedures which in turn, resulted in changes to our internal control over financial reporting. We expect NetSuite to strengthen our internal financial controls. Management will continue to evaluate and monitor our internal controls as processes and procedures in each of the affected areas evolve and plan to document our internal control framework and related activities.

Other than as discussed above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the six months ended June 30, 2025 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. In addition, we have an ongoing search for a controller to support our finance and accounting team.

**PART II – OTHER INFORMATION**

**Item 1.** **Legal Proceedings**

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

---

| | |
|:---|:---|
| **Item 1A.** | **Risk Factors** |

---

In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors disclosed under the heading "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024 and the following additional Risk Factors.

**Rising threats of international tariffs, including tariffs applied to goods between the United States and China, may materially and adversely affect our business.**

Our B2C business has historically been dependent on Chinese imports for our products and operations. For example, a majority of our products were manufactured, directly and indirectly, using Chinese vendors. In contrast, our B2B business we instituted in the second half of 2024 employs a made in the United States model. Recently, the current administration has imposed steep and additional tariffs on the importation from China and other countries (paused for 90 days) of goods including the drone components we use in our B2C business. As a result, we have begun sourcing components from other countries including the United States and Taiwan. This creates several issues including increased costs and potential inventory shipment delays. This increase in tariffs imposed could materially and adversely affect our business and results of operations. These tariffs apply to the vast majority of our consumer inventory for our B2C segment, and except for our Unusual Machines branded products we have increased prices and may in the future be forced to implement additional price increases to adjust to the higher costs of inventory. This in turn imposes the risk of reduced demand for such products and lower sales and resulting revenue. While to date, we appear to have not seen resistance based on increases in sales, that may not continue and future increases which we attempt to pass on to our customers may not work. Future inventory increases may require us to increase the prices of our branded products, which may result in decreased sales, particularly since we rely on consumer spending and our B2C products are typically considered non-essential, and purchases are therefore highly price sensitive.

Changes in the state of China-United States relations, including any tensions relating to potential military conflict between China and Taiwan, are difficult to predict and could adversely affect the operations or financial condition of the Company given that we are shifting inventory for our B2C business to Taiwan. In addition to Chinese tariffs, one of our first B2B customers was a European company. After the 90-day United States tariff pause, if the European Union and other European countries react to the United States tariffs by imposing tariffs on United States made product including our drones, the trade war may make our B2B drone parts too expensive.

**If the tariffs or other factors result in increased inflation and a recession, our business may be materially harmed**.

A direct impact from rising tariffs on our business has been increases in the prices of inventory we acquire and an increase in our selling prices (with one exception described in the prior Risk Factor). Further, due to the tariffs and possibly large cuts in the size of the government, there may be increased unemployment and other economic factors which result in a recession.. In such event, our B2C business may be materially and adversely affected. Further, our B2B business including our proposed manufacturing of drones in the United States may also be adversely affected by a recessionary economy and inflation in addition to experiencing some increased tariff-related costs including from products that use rare earths.

**If critical components or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business.**

Our ability to meet customers' demands depends, in part, on our ability to obtain timely and adequate delivery of high-quality materials, components and subsystems, many of which are obtained from a select group of specialized suppliers, including some sole-source providers. In order to mitigate potential disruptions, we maintain long-term, non-binding agreements with several key suppliers that help stabilize pricing, reduce lead times and enhance planning accuracy. We do not have long-term agreements with all suppliers that obligate them to continue to sell components, products required to build our systems or products to us. Our reliance on suppliers without long-term binding contracts involves significant risks and uncertainties, including whether our suppliers will provide an adequate supply of required components or products of sufficient quality, will increase prices for the components or products and will perform their obligations on a timely basis.

If any of our supplier's face capacity constraints, financial instability, or an unwillingness to provide raw materials or components to us, we may need to seek alternative suppliers or revise our designs, particularly because some of our components are sourced from foreign countries. Locating alternative sources may take significant time, and even then, we may encounter significant delays in manufacturing and shipping. Additionally, credit constraints among key suppliers could impact our cash flow. We have also experienced rising costs for components, shipping, tariffs, warehousing, and inventory. Our domestic suppliers have experienced increased demand for their products due to tariffs, which could impact the availability or price of our components. The permanence of these cost increases remains uncertain, and obtaining replacement components within our required time frames may prove challenging. Shortages could lead to excess inventory and potential obsolescence risks.

In addition, certain raw materials and components used in the manufacture of our products and in our development programs, are periodically subject to supply shortages, and our business is subject to the risks of price increases and periodic delays in delivery.

**Because our new manufacturing business has inherent risks, such risks may adversely impact us.**

We recently hired a vice president of manufacturing whose role is to head up our proposed drone motor manufacturing business. The Company has leased an additional 17,000 square foot facility near our headquarters office in Orlando, Florida, at which we will manufacture NDAA compliant drone motors. The lease begins August 1, 2025. There are inherent risks in connection with launching our component manufacturing business, which include:

· the need to expend working capital to purchase manufacturing equipment, rent a facility and to hire personnel with the requisite skills to fabricate our drones which could initially have an adverse effect on our working capital;

· the manufacturing equipment that we acquire may have bugs or may not be in sound working order and the products we manufacture may not be manufactured in accordance with our or our customers specifications, which result in conflicts with customers, the loss of revenues or damage to our reputation; and

· We may encounter cost overruns for a variety of reasons which due to fixed priced customer orders leads to operating losses.

Our products, including motors, batteries, and other advanced components, rely on rare earth metals for their manufacturing, of which a significant majority are sourced from China. Any disruption in the supply of these metals could adversely affect our ability to produce and deliver our products. Factors that might lead to such disruptions include geopolitical tensions, trade restrictions, supply chain bottlenecks, and environmental regulations affecting mining operations. A limited supply or increased cost of rare earth metals could lead to higher production costs, delays in manufacturing schedules, and potential inability to meet customer demand, thereby impacting our revenue and growth plans. Managing these risks necessitates close monitoring of supply chains, diversification of suppliers, and the pursuit of alternative materials or technologies where possible.

Escalating restrictions between the U.S. and China contribute to supply chain complexities. Some of our components sourced from foreign countries, including China, are at risk of further sanctions and other trade restrictive actions, and any escalation in global trade tensions or trade restrictions may hinder our ability to obtain these components from new suppliers. Restrictions on semiconductor manufacturing equipment and raw materials could lead to higher material costs, material unavailability, and transportation uncertainty.

**If our facilities and information systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events which could have an adverse effect on our business operations.**

Our new drone motor manufacturing facility is located in Orlando, Florida. We also rely on third-party manufacturing plants in the U.S., Asia and other parts of the world to provide key components for our products and services. If major disasters such as hurricanes, tropical storms pandemics, earthquakes, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur in any of these locations, or the effect of climate change on any of these factors or our locations, or our information systems or communications network or those of any of our key component suppliers breaks down or operates improperly as a result of such events, our facilities or those of our key suppliers may be seriously damaged, and we may have to stop or delay production and shipment of our products. We may also incur expenses relating to such damages. If production or shipment of our products or components is stopped or delayed or if we incur any increased expenses as a result of damage to our facilities, our business, operating results and financial condition could be materially adversely affected.

**If we fail to respond to commercial industry cycles in terms of our cost structure, manufacturing capacity, and/or personnel needs, our business could be seriously harmed.**

The timing, length, and severity of the up-and-down cycles in the commercial and defense industries are difficult to predict. This cyclical nature of the industries in which we operate affects our ability to accurately predict future revenue, and in some cases, future expense levels. During down cycles in our industry, the financial results of our customers may be negatively impacted, which could result not only in a decrease in orders but also a weakening of their financial condition that could impair our ability to recognize revenue or to collect on outstanding receivables. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. We must be in a position to adjust our cost and expense structure to reflect prevailing market conditions and to continue to motivate and retain our key employees. If we fail to respond to fluctuating market conditions our business could be seriously harmed. In addition, during periods of rapid growth, we must be able to increase engineering and manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. Each of these factors could adversely impact our operating results and financial condition.

**Our ability to stay competitive within our markets may be dependent upon increasing manufacturing capacity to support anticipated growth and achieving cost reductions and projected economies of scale from increasing manufacturing quantities of our products. Failing to adequately increase production capacity and achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our business.**

Our future growth depends on increasing manufacturing capacity of our drone motors, and our failure to adequately increase such capacity could have a material adverse impact on our business and financial results. We do not know whether or when we will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture (or contract for the manufacture of) our drone motors in commercial quantities while meeting the volume, speed, quality, price, engineering, design and production standards required to successfully market our products. Our failure to develop such manufacturing processes and capabilities in locations that can efficiently service our clients and markets could have a material adverse effect on our business, financial condition, results of operations and prospects. Our ability to remain competitive is, in part, dependent upon achieving increased savings from volume purchases of raw materials and component parts, achieving acceptable manufacturing yield and capitalizing on machinery efficiencies. We expect our suppliers to experience a sharp increase in demand for their products.

**We face significant risks in the management of our inventory, and failure to effectively manage our inventory levels may result in supply imbalances that could harm our business.**

We maintain a variety of parts and components in inventory which are subject to obsolescence and expiration. Due to the long-lead time for obtaining certain product components, including in response to procurement issues caused by shortages in the supply chain for such components, and the manufacturing cycles, we need to make forecasts of demand and commit significant resources towards manufacturing our products. As such, we are subject to significant risks in managing the inventory needs of our business during the year, including estimating the appropriate demand for our products. Should orders and market conditions differ significantly from our estimates, our future results of operations could be materially adversely affected. In the future, we may be required to record write-downs of finished products and materials on-hand and/or additional charges for excess purchase commitments as a result of future changes in our sales forecasts or customer orders. We may hold material amounts of inventory at third parties which are subject to separate management processes. Additionally, our failure to manage inventory effectively, including in response to the effects of shortages of our components, could expose us to losses.

Additionally, shortages of components may result in increased inventory of unfinished products and significant quantities of other unused components remaining in inventory, which could expose us to increased risks of obsolescence and losses which may not be covered by insurance.

**Item 2.** **Unregistered Sales of Equity Securities and Use of Proceeds**

On May 22, 2025, the Company issued a total of 150,000 shares of the Company's Common Stock to three advisors in connection with vested restricted stock units granted pursuant to their corresponding Restricted Stock Unit Agreements dated November 22, 2024. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.

**Issuer Purchases of Equity Securities**

We did not repurchase any of our equity securities during the six months ended June 30, 2025.

**Item 3.** **Defaults Upon Senior Securities**

None.

**Item 4.** **Mine Safety Disclosures**

None.

**Item 5.** **Other Information**

On May 13, 2025, 8 Consulting LLC ("8CL"), a company whose sole member is Dr. Evans, our Chief Executive Officer and the Chairman of our Board of Directors, modified his Rule 10b5-1 plan (the "Plan") so that, notwithstanding any contrary provision under the Plan and any related agreement, no sales of the Company's common stock on behalf of 8CL shall be pursuant to the Plan and any related agreement prior to November 20, 2025 During the quarter ended June 30, 2025, no other director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.

**Item 6.** **Exhibits**

The exhibits required by Item 601 of Regulation S-K and Item 15(b) of this Report are listed in the Exhibit Index below. The exhibits listed in the Exhibit Index are incorporated by reference herein.

**EXHIBIT INDEX**

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
| | | | **Incorporated by Reference** | **Incorporated by Reference** | **Incorporated by Reference** |
| <br>**Exhibit**<br> **No.** | <br>**Description** | <br>**Filed/Furnished**<br> **Herewith** | **Form** | **Exhibit**<br> **No.** | **Filing**<br> **Date** |
| 1.1 | [Form of Underwriting Agreement, dated February 14, 2024, by and between Unusual Machines, Inc. and Dominari Securities, LLC](https://www.sec.gov/Archives/edgar/data/1956955/000168316824001045/umac_ex0101.htm) + |  | 8-K | 1.1 | 2/16/24 |
| 2.1 | [Agreement and Plan of Merger by and between Unusual machines, Inc., a Puerto Rico corporation and Unusual machines, Inc., a Nevada corporation](https://www.sec.gov/Archives/edgar/data/1956955/000168316824002614/umac_ex0201.htm) |  | 8-K | 2.1 | 4/23/24 |
| 3.1 | [Articles of Incorporation](https://www.sec.gov/Archives/edgar/data/1956955/000168316823004117/unusual_ex0301.htm) |  | 8-K | 3.1 | 4/23/24 |
| 3.2 | [Amended and Restated Bylaws](http://www.sec.gov/Archives/edgar/data/1956955/000168316823004117/unusual_ex0302.htm) |  | 8-K | 3.1 | 10/8/24 |
| 3.2(a) | [Amendment No. 1 to Amended and Restated Bylaws](https://www.sec.gov/Archives/edgar/data/1956955/000168316825000740/umac_ex0301.htm) |  | 8-K | 3.1 | 2/5/25 |
| 3.3 | [Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock](https://www.sec.gov/Archives/edgar/data/1956955/000168316823001467/unusual_ex0402.htm) |  | 8-K | 3.1 | 7/22/24 |
| 3.4 | [Certificate of Designation of Series B Convertible Preferred Stock](https://www.sec.gov/Archives/edgar/data/1956955/000168316823001467/unusual_ex0403.htm) |  | 8-K | 3.3 | 4/23/24 |
| 3.5 | [Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock](https://www.sec.gov/Archives/edgar/data/1956955/000168316823001467/unusual_ex0402.htm) |  | 8-K | 3.1 | 8/22/24 |
| 4.1 | [Revised Form of Representatives Warrant](https://www.sec.gov/Archives/edgar/data/1956955/000168316824000608/unusual_ex1007.htm) |  | S-1/A | 10.7 | 2/1/24 |
| 4.2 | [Form of Representatives Warrant](https://www.sec.gov/Archives/edgar/data/1956955/000168316824001045/umac_ex0401.htm) |  | 8-K | 4.1 | 2/16/24 |
| 4.3 | [Placement Agent Warrant, issued to Dominari Securities LLC](https://www.sec.gov/Archives/edgar/data/1956955/000168316825003236/umac_ex0401.htm) |  | 8-K | 4.1 | 5/7/25 |

---

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| | | | | | |
|:---|:---|:---|:---|:---|:---|
| 10.1 | [Form of Lock-up Agreement](https://www.sec.gov/Archives/edgar/data/1956955/000168316824000608/unusual_ex1014.htm) |  | S-1/A | 10.14 | 2/1/24 |
| 10.2 | [Form of Lock-up Agreement – Jeffrey Thompson](https://www.sec.gov/Archives/edgar/data/1956955/000168316824000608/unusual_ex1015.htm) |  | S-1/A | 10.15 | 2/1/24 |
| 10.3 | [Allan Evans Non-Compete Agreement](https://www.sec.gov/Archives/edgar/data/1956955/000168316824001122/umac_ex1009.htm) |  | 8-K | 10.9 | 2/22/24 |
| 10.4 | [Management Services Agreement #](https://www.sec.gov/Archives/edgar/data/1956955/000168316824003013/umac_ex1001.htm) |  | 8-K | 10.1 | 5/6/24 |
| 10.5 | [Form of Restricted Stock Agreement](https://www.sec.gov/Archives/edgar/data/1956955/000168316824003013/umac_ex1002.htm) |  | 8-K | 10.2 | 5/6/24 |
| 10.6 | [Form of Restricted Stock Agreement](https://www.sec.gov/Archives/edgar/data/1956955/000168316825000405/umac_ex1001.htm) |  | 8-K | 10.1 | 1/16/25 |
| 10.7 | [Agreement and Plan of Merger and Reorganization dated February 1, 2025](https://www.sec.gov/Archives/edgar/data/1956955/000168316825000690/umac_ex1001.htm) |  | 8-K | 10.1 | 2/4/25 |
| 10.8 | [Placement Agency Agreement, dated as of May 5, 2025, by and between Unusual Machines, Inc. and Dominari Securities, LLC](https://www.sec.gov/Archives/edgar/data/1956955/000168316825003236/umac_ex1001.htm) |  | 8-K | 10.1 | 5/7/25 |
| 10.9 | [Amendment and Waiver to Merger Agreement, dated as of May 6, 2025, by and between Unusual Machines, Inc., Aloft Technologies, Inc., UMAC Merger Sub, Inc., Jon Hegranes and Josh Ziering](http://www.sec.gov/Archives/edgar/data/1956955/000168316825003285/umac_ex1009.htm) |  | 10-Q | 10.9 | 5/8/25 |
| 10.10 | [Form of Restricted Stock Agreement](http://www.sec.gov/Archives/edgar/data/1956955/000168316825003913/umac_ex1001.htm) |  | 8-K | 10.1 | 5/21/25 |
| 10.11 | [Lease Agreement, dated June 4, 2025, between Unusual Machines, Inc. and Icon FL Orlando Industrial Owner Pool 5 GA/FL, LLC](http://www.sec.gov/Archives/edgar/data/1956955/000168316825004377/umac_ex1001.htm) |  | 8-K | 10.1 | 6/10/25 |
| 10.12 | [Rotor Lab Pty Ltd Share Purchase Agreement, dated June 12, 2025](http://www.sec.gov/Archives/edgar/data/1956955/000168316825004460/umac_ex1001.htm) |  | 8-K | 10.1 | 6/13/25 |
| 10.13 | [Form of Securities Purchase Agreement](http://www.sec.gov/Archives/edgar/data/1956955/000168316825005120/umac_ex1001.htm) |  | 8-K | 10.1 | 7/15/25 |
| 10.14 | [Placement Agency Agreement](http://www.sec.gov/Archives/edgar/data/1956955/000168316825005120/umac_ex1002.htm) |  | 8-K | 10.2 | 7/15/25 |
| 10.15 | [Placement Agent Warrant, issued to Dominari Securities LLC](http://www.sec.gov/Archives/edgar/data/1956955/000168316825005120/umac_ex1003.htm) |  | 8-K | 10.3 | 7/15/25 |
| 31.1 | [Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.](umac_ex3102.htm) | (1) |  |  |  |
| 31.2 | [Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.](umac_ex3102.htm) | (1) |  |  |  |
| 32.1 | [Certification of the Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.](umac_ex3201.htm) | (3) |  |  |  |
| 32.2 | [Certification of the Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.](umac_ex3202.htm) | (3) |  |  |  |
| 101.INS | Inline XBRL Instance Document | (1) |  |  |  |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | (1) |  |  |  |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | (1) |  |  |  |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | (1) |  |  |  |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | (1) |  |  |  |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | (1) |  |  |  |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | (1) |  |  |  |

---

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| | |
|:---|:---|
| + | Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC Staff upon request. |
| # | Indicates management contract or compensatory plan, contract or agreement. |
| (1) | Filed herein |
| (3) | Furnished herein. |

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**<u>SIGNATURES</u>**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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| | |
|:---|:---|
| **Unusual Machines, Inc.** | **Unusual Machines, Inc.** |
| By: | /s/ Allan Evans |
|  | Allan Evans<br> Chief Executive Officer<br> (Principal Executive Officer) |
| By: | /s/ Brian Hoff |
|  | Brian Hoff<br> Chief Financial Officer |

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Date: August 14, 2025

## Exhibit 31.1

**Exhibit 31.1**

**CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER** 

**PURSUANT TO RULES 13a-14(a) OR 15D-14(a)**

**UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF**

**THE SARBANES-OXLEY ACT OF 2002**

I, Allan Evans, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2025 of Unusual Machines, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 14, 2025

<u>/s/ *Allan Evans*</u>

Allan Evans

Chief Executive Officer

(Principal Executive Officer)

## Exhibit 31.2

**Exhibit 31.2**

**CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER** 

**PURSUANT TO RULES 13a-14(a) OR 15D-14(a)**

**UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF**

**THE SARBANES-OXLEY ACT OF 2002**

I, Brian Hoff, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2025 of Unusual Machines, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 14, 2025

*<u>/s/ Brian Hoff</u>*

Brian Hoff

Chief Financial Officer

(Principal Financial Officer)

## Exhibit 32.1

**Exhibit 32.1**

**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906**

**OF THE SARBANES-OXLEY ACT OF 2002**

In connection with the Quarterly Report of Unusual Machines, Inc. (the "Company") on Form 10-Q, for the period ended June 30, 2025, as filed with the Securities and Exchange Commission, I, Allan Evans, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

August 14, 2025

*<u>/s/ Allan Evans</u>*

Allan Evans

Chief Executive Officer

(Principal Executive Officer)

## Exhibit 32.2

**Exhibit 32.2**

**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906**

**OF THE SARBANES-OXLEY ACT OF 2002**

In connection with the Quarterly Report of Unusual Machines, Inc. (the "Company") on Form 10-Q, for the period ended June 30, 2025, as filed with the Securities and Exchange Commission, I, Brian Hoff, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

August 14, 2025

*<u>/s/ Brian Hoff</u>*

Brian Hoff

Chief Financial Officer

(Principal Financial Officer)