v3.26.3
Summary of significant accounting policies (Policies)
 9 Months Ended
Sep. 30, 2026
Accounting Policies [Abstract]  
Principles of Consolidation

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, Rotor Riot and Rotor Lab since acquired on September 3, 2025. Intercompany transactions and balances have been eliminated upon consolidation.

 
Basis of Presentation

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 Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2026. The results for any interim period are not necessarily indicative of results for any future period.

 
Use of Estimates

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 condensed financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations, the fair value of shares issued as consideration and the fair value of contingent consideration in business combinations, (iii) reserves and allowances related to accounts receivable, and inventory, (iv) the evaluation of long-lived assets, including intangibles and goodwill, for impairment, (v) the present 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, (vii) the warranty liability and sales returns reserves, and (viii) the deferred tax asset valuation allowance.

 
Cash and Cash Equivalents

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less, when purchased, to be cash equivalents. The Company maintains cash deposits in multiple commercial banks and financial services companies. These financial institutions are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. At September 30, 2026 and December 31, 2025, the Company had approximately $161.7 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

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 September 30, 2026 and December 31, 2025, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for credit losses has been established.

 
Note Receivable

Note Receivable

 

The Company accounts for its note receivable in accordance with ASC 310, Receivables. The note receivable is carried at cost and is evaluated for credit losses in accordance with ASC 326, Financial Instruments – Credit Losses. The Company evaluates embedded features within convertible notes under ASC 815, Derivatives and Hedging, to determine whether any such features require separate accounting as embedded derivatives. The Company reassesses its conclusions regarding embedded features at each reporting date as facts and circumstances change.

 
Short-Term Equity Investments at Fair Value

Short-Term Equity Investments at Fair Value

 

The Company measures its investments in equity securities, consisting of common stock, preferred stock, and non-public warrants at fair value with unrealized changes in value recognized in net income (loss) per ASC 321. The Company has established an Equity Investment Valuation and Quarterly Assessment Policy to ensure consistent application of the applicable accounting guidance, including the evaluation of fair value, observable price changes, and impairment indicators. This policy serves as the basis for management's quarterly investment valuation assessments and related accounting conclusions. The Company holds less than a 5% equity interest in each of the companies it invested in as of September 30, 2026.

 
Short-Term Equity Investments at Cost

Short-Term Equity Investments at Cost

 

The Company accounts for certain equity investments in privately held companies that do not have readily determinable fair values using the measurement alternative under ASC 321, Investments – Equity Securities. Under the measurement alternative, these investments are measured at cost, less impairment, and adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company evaluates these investments at each reporting date to identify observable transactions that may require an adjustment to the carrying amount and indicators of impairment.

 
Inventory

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

 
Leases

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 proposed 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.

 
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures

 

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 September 30, 2026:

                
   Total   Level 1   Level 2   Level 3 
Short term investments – assets:                    
Common stock  $48,965,766   $48,965,766   $–   $– 
Pre-funded warrants   3,686,000    –    3,686,000    – 
Non-public warrants   740,000    –    –    740,000 
Total short-term investments – assets  $53,391,766   $48,965,766   $3,686,000   $740,000 
                     
Contingent consideration from Rotor Lab acquisition  $3,000,000   $3,000,000   $–   $– 

 

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 September 30, 2026.

 

The Company calculated the fair value for pre-funded warrants for short-term investments based on the quoted trading price as of the close of the market multiplied by the total common equivalent shares held by the Company as of September 30, 2026.

 

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

 

The Company used the following inputs related to the non-public warrants fair value as of September 30, 2026:

    
Supplemental Information  Non-public Warrants 
Expected term of the warrants (years)   1.00 
Stock price  $4.56 
Warrant exercise price  $6.00 
Risk free interest rate   4.54% 
Volatility   102.76% 

 

The contingent consideration from the Rotor Lab acquisition was based on management’s estimate at the acquisition date of $2,847,000, which is based on the fair value of contingent consideration determined using the Monte-Carlo variable scenario model which values the liability at the measurement date using certain assumptions including the expected revenue over the calculation period, a discount rate applied to revenue projections, the risk-free interest rate over the earnout period and certain estimates and probabilities of different outcomes. The Company updated the expected contingent consideration from the Rotor Lab acquisition to $3,000,000 as of September 30, 2026 based on actual sales during the period. See Note 3 and Note 14 for additional information.

 

Changes in Level 3 financial instruments are as follows:

                       
    December 31,    

Purchases,

Issuances and

     Change in     September 30,  
    2025     Settlements     Fair Value     2026  
Non-public warrants investment   $ 1,135,000     $ –     $ (395,000 )   $ 740,000  

 

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 September 30, 2026:

            
Short-term investments at fair value  Cost   Cumulative Unrealized Gains (Losses)   Fair Value 
Common stock  $60,649,998   $(11,684,231)  $48,965,766 
Pre-funded warrants   2,850,000    836,000    3,686,000 
Non-public warrants   195,000    545,000    740,000 
Total  $63,694,998   $(10,303,231)  $53,391,766 

  

            
Short-term investments at cost  Cost  

Impairment / Other

Adjustments

   Adjusted Cost 
Common stock  $10,000,000   $–   $10,000,000 
Preferred stock   5,000,000    –    5,000,000 
Pre-funded warrants   30,000,000    –    30,000,000 
Total  $45,000,000   $–   $45,000,000 

 
Accrued Warranty

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 $6,577 and $19,602 as of September 30, 2026 and December 31, 2025, respectively.

 

Rotor Riot does not provide any warranty of any kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor 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 warranty liability is included in accrued expenses on the accompanying consolidated balance sheets and amounted to $317,009 as of September 30, 2026, and $0 as of December 31, 2025.

 
Revenue Recognition

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”). 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 had returns for enterprise orders of $288,000 for the nine-month period ended September 30, 2026. A sales return allowance has not been recorded to date.

 
Disaggregation of Revenue

Disaggregation of Revenue

 

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

          
   For the Three months Ended
September 30		 
   2026   2025 
Retail revenue  $1,346,107   $1,158,449 
Enterprise revenue   12,556,925    976,139 
Total revenue  $13,903,032   $2,134,588 

 

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

 

   For the Nine months Ended 
   September 30 
   2026   2025 
Retail revenue  $4,521,031   $5,012,473 
Enterprise revenue   34,200,305    1,288,384 
Total revenue  $38,721,336   $6,300,857 

 

The Company had revenue outside the United States of approximately $1.5 million and $0.25 million for the nine months ended September 30, 2026 and 2025, respectively.

 
Deferred Revenue

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 $114,491 and $638,125 as of September 30, 2026 and December 31, 2025, respectively.

 
Cost of Goods Sold

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 nine months ended September 30, 2026 and 2025 was $185,431 and $0, respectively.

 
Shipping and Handling Costs

Shipping and Handling Costs

 

Shipping and handling costs incurred for products shipped to customers are included in operations expenses and amounted to $873,225 and $226,530 for the nine months ended September 30, 2026 and 2025, respectively. Shipping and handling costs charged to customers are included in sales.

 
Research and Development

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

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 maintains a valuation allowance against its deferred tax assets when it is more likely than not that such deferred tax assets will not be realized. Certain deferred tax liabilities are not available as a source of future taxable income in assessing the realizability of the Company’s deferred tax assets and, accordingly, remain recognized. For the three months ended September 30, 2026, the net change in deferred taxes and the related valuation allowance was immaterial and, accordingly, no income tax expense was recorded.

 

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-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

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

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:

    
Balance as of December 31, 2025  $3,470 
Foreign currency translation adjustment related to Rotor Lab   20,878 
Balance as of September 30, 2026  $24,348 

 
Net Loss per Share

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.

                       
    For the Three months Ended     For the Nine months Ended  
    September 30     September 30  
    2026     2025     2026     2025  
Weighted average shares used in computing net income per share of common stock, basic     49,968,207       30,002,179       46,094,557       22,610,516  
Add incremental shares:                                
Stock based awards (options and restricted stock units)     –       257,303       –       –  
Warrants     –       321,712       –       –  
Weighted average shares used in computing net income per share of common stock, diluted     49,968,207       30,581,194       46,094,557       22,610,516  

 

The following table presents the potentially dilutive shares that were excluded for the nine months ended September 30, 2026 and the nine months ended September 30, 2025 from the computation of diluted net loss per share of common stock attributable to common stockholders, because their effect was anti-dilutive:

        
   For the Nine months Ended   For the Nine months Ended 
   September 30   September 30 
   2026   2025 
Unvested stock options   3,412,793    682,600 
Unvested restricted stock awards   726,667    550,000 
Warrants   –    1,154,473 
Total   4,139,460    2,387,073 

 
Segment Reporting

Segment Reporting

 

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Unusual Machines, which sells drones and drone-related components, operates as a single reportable segment entity. Our chief operating decision maker, our Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The Chief Executive Officer primarily evaluates consolidated total revenues and gross margin, consistent with amounts presented in the consolidated statements of operations, in assessing the Company’s performance, and evaluates the Company’s cash position, consistent with amounts presented in the consolidated balance sheets, when making decisions regarding investing and financing activities.

 
Recent Accounting Pronouncements

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.