Unusual Machines, Inc.

Note 1 –Organization and nature of business

Unusual Machines, Inc. (“the Company”) is a Nevada corporation engaged in the commercial drone industry.

On September 3, 2025, the Company acquired Rotor Lab Pty. Ltd., an Australian company (“Rotor Lab). See Note 3 for additional information.

Note 2 –Summary of significant accounting policies

Basis of Presentation

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 12, 2026. The results for any interim period are not necessarily indicative of results for any future period.

Principles of Consolidation

The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries including UMAC IP Holdings Corp., Unusual Machines of Florida, Inc, Fat Shark and Rotor Riot since acquired on February 16, 2024 and Rotor Lab since acquired on September 3, 2025. Intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash deposits at a financial institution that is insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. At March 31, 2026 and December 31, 2025, the Company had approximately $222.6 million and $102.6 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests.

Accounts Receivable, net

The Company carries its accounts receivable at invoiced amounts. The Company follows ASC 326, Financial Instruments – Credit Losses and has early adopted in fiscal year 2025, ASU 2025-05, under which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for credit losses based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At March 31, 2026 and December 31, 2025, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for credit losses has been established.

Short-Term Equity Investments at Fair Value

The Company measures its investments in equity securities, consisting of common stock, preferred stock, and non-public warrants at fair value with unrealized changes in value recognized in net income (loss) per ASC 321. For the quarter ended March 31, 2026 the realized gain from short-term equity investments was approximately $7.2 million and unrealized gain from short-term equity investments was approximately $9.5 million. The Company holds less than a 5% equity interest in each of the companies it invested in as of March 31, 2026.

Short-Term Equity Investments at Cost

The Company measures its investment is privately held companies without readily determinable fair values using the Measurement Alternative per ASC 321. Investments are recorded at cost and subsequently adjusted only when there is an observable transaction or impairment under the Measurement Alternative.

Inventory

Inventories, which consist of finished goods and raw materials, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials, direct labor, an allocation of rent expense and depreciation for manufactured products, 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.

Property and equipment, net

Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives which includes computer equipment ofthree to five years, motor production equipment of ten to fifteen years and tenant improvements of five to fifteen years.

Leases

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 leases in Orlando, FL and for the Canberra Australia lease related to the Rotor Lab acquisition as discussed in Note 3.

The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company used an effective discount rate of 8.24% based on its last debt financings. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets. Lease terms do not include an option to renew.

Business Combinations

The Company accounts for business combinations under ASC 805 using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities and certain purchase price components is subjective in nature and often involves the use of significant estimates and assumptions used in valuations and estimates determined by management. Business acquisitions are included in the Company’s consolidated financial statements as of the date of the acquisition.

Goodwill and Long-lived Assets

Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. No impairment loss on goodwill was recognized during the three months ended March 31, 2026 and 2025, respectively.

The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. 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 during the three months ended March 31, 2026 and 2025, respectively.

The Company has certain indefinite-lived trademark assets that are reviewed for impairment by first performing a qualitative analysis in accordance with ASC 350-30 to determine whether it is more likely than not that the fair value of the indefinite-lived asset is less than its carrying value. If based on this assessment, management determines that impairment is not more than likely, then no further quantitative testing is required. However, if performing a qualitative analysis determines that is more likely than not that the fair value is less than its carrying value, then a quantitative analysis is performed in accordance with ASC 350-30-35, which occurs annually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. The Company performed only a qualitative analysis for 2025. The Company did not record an impairment during the three months ended March 31, 2026 and 2025, respectively related to the indefinite-lived assets.

Fair Value Measurements and Fair Value of Financial Instruments

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.

The following table details the fair value measurements of the Company’s financial assets and liabilities as of March 31, 2026:

The Company calculated the fair value for common stock for short-term investments based on the quoted trading price as of the close of the market multiplied by the total shares held by the Company as of March 31, 2026.

The Company calculated the fair value for pre-funded warrants for short-term investments based on the quoted trading price as of the close of the market multiplied by the total common equivalent shares held by the Company as of March 31, 2026.

The fair value of the non-public warrants investment in 2026 was determined using a Black-Scholes pricing model which values the warrants based on the stock price at the valuation date, the expected life of the warrant, the estimated volatility of the stock of the investee, and the risk-free interest rate over the expected life of the warrant.

The Company used the following inputs related to the non-public warrants fair value as of March 31, 2026:

The contingent consideration from the Rotor Lab acquisition is based on managements estimate of $2,847,000, which is based on the fair value of contingent consideration determined using the Monte-Carlo variable scenario model which values the liability at the measurement date using certain assumptions including the expected revenue over the calculation period, a discount rate applied to revenue projections, the risk-free interest rate over the earnout period and certain estimates and probabilities of different outcomes. See Note 3 for additional information.

Changes in Level 3 financial instruments are as follows:

The Company's financial instruments mainly consist of cash, receivables, short-term investments, 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.

Short Term Investments

Our short-term investments consisting of investments accounted for at fair value and investments accounted for at cost were as follows as of March 31, 2026:

Accrued Warranty

Fat Shark generally provides a one-year warranty on all of its products, except in certain European countries where it can be two years for some consumer-focused products from the date of 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 $16,514 and $19,602 as of March 31, 2026 and December 31, 2025, respectively.

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

Rotor Lab does not provide any warranty, but does provide for a seven day defect period. Rotor Lab has not had any material defects for products sold.

Effective September 2025, Unusual Machines, the parent company which manufactures motors, has a limited warranty in which it warrants to customers that their products will be free from defects in material and workmanship under normal use and service for up to 90 days. The limited warranty covers manufacturing defects and premature failures and extends only to the original customer and is non-transferrable. The Company did not have any warranty claims as of March 31, 2026.

Revenue Recognition

The Company will recognize revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). 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 drone and drone parts to enterprise customers and distributors (“Enterprise Revenue”) and individual consumers (“Retail Revenue”). Sales revenue is recognized at a point in time when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met. The Company’s retail return policy allows for certain non-custom or built-to-order products to be returned up to 15 days after the original order is placed so long as it meets specific requirements as outlined in its return policy. The Company’s enterprise return policy allows for returns related to defective product so long as it meets the requirements in its policy. The historical sales returns for retail customers is de minimis and the Company does not have a specific sales return allowance for retail orders. The Company does not have any historical returns for enterprise orders and as such has not recorded a sales returns allowance.

Disaggregation of Revenue

The following table presents the Company’s revenue disaggregated by revenue type for the period ended:

The Company had sales outside the United States of approximately $0.6 million and $0.1 million for the three months ended March 31, 2026 and 2025, respectively.

Deferred Revenue

Deferred revenue relates to orders placed and payment received, but not yet fulfilled. All deferred revenue is expected to be recognized within one year. Deferred revenue related to orders placed, but not yet fulfilled totaled $672,568 and $638,125 as of March 31, 2026 and December 31, 2025, respectively.

Cost of Goods Sold

Cost of goods sold includes inventory costs which includes an allocation for labor and rent for our manufactured products, direct packaging costs and production related depreciation, if any. Depreciation included in cost of goods sold for the three months ended March 31, 2026 and 2025 was $39,330 and $0, respectively.

Shipping and Handling Costs

Shipping and handling costs incurred for products shipped to customers are included in general and administrative expenses and amounted to $198,642 and $70,161 for the three months ended March 31, 2026 and March 31, 2025, respectively. Shipping and handling costs charged to customers are included in sales.

Research and Development

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 are expensed as incurred.

Income Taxes

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.

Stock-Based Compensation

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 based on comparative companies through December 31, 2025, and historical volatility beginning of January 1, 2026, expected term using the simplified method and future dividends. The Company recognizes forfeitures as they occur. The fair value of stock grants is based on our stock price on the date of grant. Compensation costs are recognized on a straight-line basis over the requisite service period which is the vesting term.

Warrants

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.

Foreign Currency

The Company’s wholly owned subsidiary’s functional currency is the Australia dollar (AUD). For financial reporting purposes, the Australia dollar has been translated into the Company’s reporting currency, which is the United States dollar (USD). Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at the average rate of exchange prevailing during the reporting period. Equity transactions are translated at each historical transaction date spot rate. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity (deficit) as “Accumulated other comprehensive income (loss).” Gains and losses resulting from foreign currency translations are included in the statement of operations and comprehensive income (loss) as a component of other comprehensive income (loss). There have been no significant fluctuations in the exchange rate for the conversion of Australian dollars to USD after the balance sheet date. Transaction gains and losses from transactions denominated in a foreign currency are recognized in other income (expense) in the statement of operations.

Changes in the cumulative translation adjustments were as follows:

Net Loss per Share

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.

The following table presents the reconciliation of basic to diluted weighted average shares used in computing net income per share of common stock attributable to common stockholders.

The following table presents the potentially dilutive shares that were excluded for the three months ended March 31, 2025, from the computation of diluted net loss per share of common stock attributable to common stockholders, because their effect was anti-dilutive:

Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Unusual Machines, which sells drones and drone-related components, operates as asingle 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 is provided with consolidated assets and liabilities consistent with those presented in the consolidated balance sheets.

Recent Accounting Pronouncements

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. 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.

Note 3 –Acquisitions

Rotor Lab

On September 3, 2025, the Company closed on the acquisition of Rotor Lab. Rotor Lab is an Australian developer and manufacturer of electric motors and propulsion systems for unmanned aerial systems (“UAS”). Its product line includes precision-wound electric motors across multiple classes, from sub-400W units for small UAS to high-power motors supporting large rotary and fixed wing platforms.

In addition to the motor production facility in Australia, the Company built out a motor production facility in Orlando, FL and started producing motors for drones in the fourth quarter of 2025. The Company and Rotor Lab have been working together prior to the acquisition on co-developing several motor designs and sizes. The acquisition helps the Company accelerate their goals of building a resilient drone supply chain through their team and technology. In addition, Rotor Lab will continue to serve as the engineering center for the Company’s motor design, prototyping, and low to medium volume production of orders.

The Business Combination was based on a share purchase agreement (the “Rotor Lab Purchase Agreement”) that was executed on June 12, 2025, subject to customary closing conditions and was completed on September 3, 2025. Under the terms of the Rotor Lab Purchase Agreement, the consideration paid for the acquired assets consisted of (i) the issuance of common stock for a value of $4.0 million based on the preceding 20 day average Volume Weighted Average Price (“VWAP”) of the Company’s stock from the date of the signing the Rotor Lab Purchase Agreement in June 2025, and (ii) the issuance of common stock (“Contingent Shares”) for up to a total value of an additional $3.0 million based on the Company producing and recognizing revenue, dollar for dollar related to internally manufactured motors during the first two years after the acquisition closing date. The Contingent Shares will be calculated and issued based on the Company’s VWAP for the preceding 20 days on each anniversary date of the closing of the transaction.

The acquisition met the definition of a business combination under ASC 805, Business Combinations, and therefore the assets acquired, and liabilities assumed are accounted for at fair value. The Company issued 656,642 shares of its common stock based on the formula as noted above, which resulted in an initial purchase price of $5,922,911 based on the Company’s stock price of $9.02 on September 3, 2025, which was the closing date of the acquisition. The contingent purchase price has been initially recorded at $2,847,000. The fair value of contingent consideration was determined using the Monte-Carlo variable scenario model which values the liability at the measurement date using certain assumptions including the expected revenue over the calculation period, a discount rate applied to revenue projections, the risk-free interest rate over the earnout period and certain estimates and probabilities of different outcomes.

Such fair value amounts are subject to adjustment during the one-year measurement period.

The following represents the fair value allocation of Rotor Lab Purchase Price:

On September 3, 2025, the Company acquired 100% of the issued shares of Rotor Lab. For U.S. federal income tax purposes, the acquisition is treated as a stock purchase. The Company did not make an election under Section 338 of the Internal Revenue Code. As a result, the tax bases of Rotor Lab’s assets and liabilities carry over from their historical amounts, and no step-up in tax basis was recorded for U.S. tax purposes. Goodwill for tax purposes will be amortized over 15 years.

The results of Rotor Lab have been included in the Consolidated Financial Statements from the date of acquisition. Revenue was $183,481 and net loss was $80,581 from the date of acquisition through December 31, 2025 in the consolidated statement of operations. The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Rotor Lab occurred at the beginning of each period. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented (in thousands, except per share data):

The unaudited consolidated pro forma financial information is presented for informational purposes only. The unaudited consolidated pro forma adjustments are based on preliminary estimates, information available and certain assumptions, and may be revised as additional information becomes available. In addition, the unaudited pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.

Note 4 –Inventories

Inventories, which consist solely of raw materials and finished goods was as follows as of March 31, 2026 and December 31, 2025, respectively.

In addition, the Company had prepaid deposits for inventory totaling $13,566,078 and $9,748,483 as of March 31, 2026 and December 31, 2025, respectively.

Note 5 –Other Assets

Other current assets included as of:

Non-current other assets primarily include rent security deposits of $184,091 related to the operating leases for the Orlando, FL facilities and the Rotor Lab facility in Australia as of March 31, 2026.

Note 6 –Property and Equipment, net

Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically assessed for impairment. Property and equipment as of:

Depreciation expense totaled $45,511 and $27,548 for the three months ended March 31, 2026 and 2025, respectively. A total of $39,330 and $0 of depreciation expense was recorded to cost of goods sold in related to the production of motors for the three months ended March 31, 2026 and 2025, respectively. The Company has open commitments of approximately $1.33 million related to the purchase of motor production equipment and $93 k related to tenant improvements. These assets are expected to be placed into service during the second quarter of 2026.

Note 7 – Operating Leases

The Company has assumed in the February 2024 business combination of Rotor Riot, 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. Operating lease expense totaled $26,286 and $26,286, respectively for the three months ended March 31, 2026 and 2025. A total of $26,119 was recorded to costs of goods sold for the three months ended March 31, 2026.

In June 2025, Unusual Machines signed a lease agreement for an additional 17,000 square feet of warehouse/office space in Orlando, FL. This space will be used primarily for motor production. The lease commencement date is August 1, 2025 and currently runs through August 21, 2030. The Company has valued the ROUA and the associated liability, as of August 1, 2025, at $973,443. Operating lease expense totaled $67,273 and $0, respectively for the three months ended March 31, 2026 and 2025. A total of $67,273 was recorded to cost of goods sold for the three months ended March 31, 2026.

In October 2025, Unusual Machines signed a lease agreement for an additional 25,000 square feet of warehouse/office space in Orlando, FL. This space will be used primarily for order fulfillment and inventory storage. The lease commencement date is December 1, 2025 and currently runs through December 31, 2030. The Company has valued the ROUA and the associated liability, as of December 1, 2025, at $1,430,522. Operating lease expense totaled $123,359 and $0, respectively for the three months ended March 31, 2026 and 2025. A total of $10,198 was recorded to cost of goods sold for the three months ended March 31, 2026.

On December 15, 2025, the Company parent entity entered into a three-year operating lease agreement for an additional 4,500 square feet of space in Orlando, FL. This space will be used for headset production. The lease commenced on January 1, 2026 and expires in December 2028. The Company has valued the ROUA and the associated liability, as of January 1, 2026, at $204,749. Operating lease expense totaled $19,316 and $0, respectively for the three months ended March 31, 2026 and 2025. A total of $18,562 was recorded to cost of goods sold for the three months ended March 31, 2026.

On December 10, 2025, the Company parent entity entered into a three-year operating lease agreement for an additional 9,125 square feet of space in Orlando, FL. This space will be used as the Company’s corporate headquarters. The lease commenced on February 1, 2026 and expires in February 2029. The Company has valued the ROUA and the associated liability, as of February 1, 2026, at $613,657. Operating lease expense totaled $33,309 and $0, respectively for the three months ended March 31, 2026 and 2025.

The Company has assumed in the acquisition of Rotor Lab on September 3, 2025, a three-year operating lease of warehouse and office space in Canberra, Australia. The leased commenced in May 2024 and expires in April 2027. The Company has valued the ROUA and the associated liability, as of September 3, 2025, at $58,524. Operating lease expense totaled $10,364 and $0, respectively for the three months ended March 31, 2026 and 2025.

The Company has no finance leases.

The following is a summary of the operating lease right-of-use assets and liabilities at March 31, 2026 and 2025:

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

Note 8 –Goodwill and Intangible Assets

Goodwill

There were no changes in the carrying amount of goodwill during the three months ending March 31, 2026. The carrying value of goodwill was $15,596,105 and $15,596,105 as of March 31, 2026 and December 31, 2025 respectively.

Intangible Assets

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

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.

Trade name for Rotor Lab is amortized over 5 years, customer relationships are amortized over 7 years and non-compete agreements are amortized over 2 years.

Amortization expense for the three months ended March 31, 2026 and 2025 was $58,633 and $20,422, respectively.

Note 9 –Stockholders’ Equity

Common Stock

2026 Transactions

Common shares for services issued to employees and directors

On January 2, 2026, the Company issued 70,000 restricted shares of common stock to certain employees of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to employees are subject to pro-rata forfeiture over a four-year period. The shares were valued at $13.57 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively, for a total of $949,900 to be recognized as stock compensation expense pro-rata over the vesting period.

On January 23, 2026, the Company issued 550,000 restricted shares of common stock to executive officers of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through December 31, 2026. The shares were valued at $16.70 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively, for a total of $9,185,000 to be recognized as stock compensation expense pro-rata over the vesting period.

On January 23, 2026, the Company issued 120,000 restricted shares of common stock to certain employees of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to employees are subject to pro-rata forfeiture over a four-year period. The shares were valued at $16.70 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively, for a total of $2,004,000 to be recognized as stock compensation expense pro-rata over the vesting period.

On March 13, 2026, the Company issued 5,883 shares of common stock related to vested restricted stock units for our certain board members. The restricted stock units are valued at $20.40 per share, the closing price of our common stock as of the date of the grant, for a total value of $120,013 and expensed on the grant date.

Common shares issued for services

On January 2, 2026, the Company issued 40,000 restricted shares of common stock to a consultant for service performed. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to the consultant are subject to pro-rata forfeiture over a two-year period. The shares were valued at $13.57 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively, for a total of $542,800 to be recognized as stock compensation expense pro-rata over the vesting period.

Common shares issued related to option exercises

During the three months ended March 31, 2026, several employees of the Company exercised 74,600 of their vested stock options in which the Company issued 74,600 shares of common stock related to these exercises. The Company received total cash proceeds of $260,334 related to the exercise of the stock options.

Common shares issued related to warrant exercises

On January 9, 2026 the Company issued 350,000 shares of common stock related to warrant holders exercising their warrants. The Company received gross proceeds of $3,395,000 related to the warrant exercises. The Company cancelled the 350,000 warrants upon issuance of the common shares.

Common shares issued related to public offering

On March 19, 2026, in a confidentially marketed public offering the Company sold 8,823,529 shares of common stock at $17.00 per share resulting in gross proceeds of $149,999,993, prior to the payment of placement fees of $10,500,000 and $700,000 of other offering expenses resulting in net proceeds of $138,799,993.

2025 Transactions

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

On February 3, 2025, the Company issued 480,000 restricted shares of common stock to executive officers and certain employees of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through December 31, 2025. The restricted shares issued to certain employees are subject to pro-rata forfeiture over a four-year period. The shares were valued at $12.00 per share, which was the value of the Company’s common stock on the date of grant, respectively for a total of $5,760,000 to be recognized as stock compensation expense pro-rata over the vesting period. Stock compensation expense of $5,007,742 was recognized during the year ended December 31, 2025.

In February 2025, the Company issued 1,224,606 shares of common stock related to warrant holders exercising their warrants at an exercise price of $1.99. The Company received gross proceeds of $2,436,966 related to the warrant exercises. The Company cancelled the 1,224,606 warrants upon issuance of the common shares.

Note 10 –Share Based Awards

The Company’s Board of Directors has delegated authority to the Chief Executive Officer to grant stock options. Any issuance of restricted stock awards or restricted stock units must be approved by the Company’s compensation committee. Stock options are granted for employees on a monthly to quarterly basis. Restricted stock awards and restricted stock units are granted on a quarterly basis. All stock awards which have been granted to individuals who donot have possession of material non-public information at the time of grant.

Stock Options

The 2022 Equity Incentive Plan (the “Plan”) allows the Company to incentivize key employees and directors with long term compensation awards such as stock options, restricted stock, and other similar types of awards. The Plan is authorized to issue up to 15% of the outstanding shares on a fully diluted basis giving effect to the exercise and conversion of all outstanding common stock equivalents issued outside of the Plan. In addition, the Plan has an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of directors. The Plan allows for awards to be issued up to a contractual maximum term of 10 years from the grant date. As of March 31, 2026, the Plan is authorized to issue up to 8,983,338 of awards, with 3,654,703 shares available for issuance.

During the three months ended March 31, 2026 and 2025, the Company’s board of directors approved the grant of 90,000 and 0, respectively of stock options under the Plan to certain employees. The stock options are subject to certain vesting provisions. Standard vesting on stock options have a six-month cliff vesting in which the first two quarters vest at the six-month mark and quarterly thereafter over a total of four years, however, certain stock options may have immediate vesting or shorter periods as approved. Stock options contractual term range from 5 to 10 years.

The following table presents the activity for stock options outstanding:

The range of assumptions used to calculate the fair value of options granted during the period ended March 31, 2026 was:

The total grant date fair value of stock options granted was $1,287,801 and $0 during the three months ended March 31, 2026 and 2025, respectively. The Company recognized $291,412 and $22,940 in stock-based compensation expense related to stock options during the three months ended March 31, 2026 and 2025, respectively. As of March 31, 2026, there was $4,023,011 of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term through 2030.

Restricted Stock

Restricted stock awards are equity grants in which the Company issues restricted common stock awards as of the grant date which are subject to certain vesting and clawback provisions. Restricted stock units are equity grants in which the Company issues a restricted stock unit subject to vesting requirements and common stock is not issued until the vesting requirements have been met. The following table presents the activity for restricted stock awards and restricted stock units outstanding:

The total value of restricted stock and restricted stock units was $12,801,713 and $6,402,517 granted during the three months ended March 31, 2026 and 2025, respectively. The Company recognized $3,648,567 and $1,883,432 in stock-based compensation expense related to restricted stock and restricted stock units during the three months ended March 31, 2026 and 2025, respectively. As of March 31, 2026, there was $13,866,825 of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized over the remaining vesting term through 2030.

Warrants

The following table presents the activity for warrants outstanding as of March 31, 2026:

On January 9, 2026,350,000 warrants were exercised related to the July 2025 Registered Direct Offering and the Company received proceeds of $3,395,000.

Note 11 –Related Party Transactions

On April 30, 2024 (“Grant Date”), the Company has been a party to a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr. Allan Evans. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who performs such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans performs the duties and responsibilities that are customary for a chief executive officer of a public company similar to the Company.

The Consultant received a $250,000 fee per year, until October 2025 at which time it was increased to $300,000 per year, payable in monthly installments. On April 1, 2026, the Compensation Committee renewed the Consultants contract for an additional two years and increased the annual fee to $350,000.

On March 13, 2026, the Company issued 1,961 vested shares of common stock to each of three of its independent directors as compensation for the three months ended March 31, 2026; the fourth independent director elected to receive cash compensation. The shares were valued at an aggregate of $120,013 and were immediately recognized as stock compensation expense.

On April 1, 2026, the Company paid $217,943 to its investment committee, which includes the CEO and two independent Directors of the Company. The payment is based on a 1% per committee member based on the realized gains during the previous quarter.

In January 2026, the Company received a $2.1 million order from Teal Drones, which is a subsidiary of Red Cat. Red Cat is a related party as Jeff Thompson is the Chief Executive Officer of Red Cat and is also on the Board of Directors of Unusual Machines. The order is expected to be delivered in the first half of 2026 and includes several different drone components manufactured and sourced from the Company. The Company recognized approximately $0.7 million in revenue from this related party for the three months ended March 31, 2026. The Company had related party receivables of $0.4 million as of March 31, 2026

Note 12 –Commitments and Contingencies

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 five -year operating lease agreement for approximately 17,000 square feet of space for the Company’s drone motor manufacturing facility in Orlando, Florida. The lease commenced on August 1, 2025 and expires in August 2030. See Note 7 – Operating Leases for additional information.

As a part of the business combination that occurred on September 3, 2025 with Rotor Lab, the Company acquired a three-year operating lease of warehouse and office space in Canberra Australia. The lease commenced in May 2024 and expires in April 2027. See Note 7 – Operating Leases for additional information.

On October 30, 2025, the Company entered into a five-year operating lease agreement for an additional 25,000 square feet of warehouse/office space in Orlando, FL. The lease commencement date is December 1, 2025 and expires in December 2030.

On December 10, 2025, the Company entered into a three-year operating lease agreement for an additional 9,125 square feet of space in Orlando, FL. This space will be used as the Company’s corporate headquarters. The lease commenced on February 1, 2026 and expires in February 2029.

On December 15, 2025, the Company entered into a three-year operating lease agreement for an additional 4,500 square feet of space in Orlando, FL. This space will be used for headset production. The lease commenced on January 1, 2026 and expires in December 2028.

Note 13 –Subsequent Events

Equity Grants to Employees & Consultants

In April 2026, the Company granted certain employees common stock options. The Company issued a total of 190,000 stock options to employees. The shares were valued at $12.34, which was the quoted trading price of the Company’s common stock on the date of the grant. All shares and options vest in quarterly installments over a four-year period starting from the grant date.

Definitive Agreement to acquire Upgrade Energy

On May 7, 2026, the Company signed a definitive agreement to acquire DroneNX, LLC which operates as Upgrade Energy (“Upgrade Energy”), a manufacturer of battery and power systems solutions for unmanned aerial systems. The transaction purchase price is estimated at $52.0 million, which includes (i) a fixed quantity of 1,792,012 shares of the Company’s common stock at $13.9508 per share which was based on the preceding 5 day volume weighted average share price of the Company’s common stock prior to signing the definitive agreement, which is estimated to be approximately $25.0 million, which could be subject to change based on the Company’s common stock price at the time of closing, (ii) $1.0 million in cash upon closing of the transaction, and (iii) up to an additional $26.0 million in cash contingent on the Company recognizing $10.0 million in revenue related to internally manufactured batteries during the first two years after the acquisition closing date. The acquisition is subject to customary closing conditions, including Upgrade Energy completing their financial audit.