Unusual Machines, Inc.

Hi, everyone. We'll be starting the webinar momentarily. Give us about one more minute. Thank you. Just waiting for more attendees to enter the room, everybody. So we'll be starting momentarily. okay good afternoon everyone and welcome to unusual machines first quarter 2025 earnings conference call and webcast with us today our unusual machines ceo alan evans and cfo brian hoff following today's remarks we will have a q a session during this call Management will make forward-looking statements, including statements that address unusual machines' expectations regarding the impact from tariffs, our future growth, our future performance, or operational results, including cash flows, future makeup of our enterprise and consumer sales, the expected performance of our new United States-based drone manufacturing facility, our ability to get more products listed on the Blue UAS Framework of the United States Department of Defense, and expectations on future acquisitions. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in Unusual Machines' most recently filed Form 10Q and Form 10K and the Prospectus Supplement. Except as required by law, Unusual Machines disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. As a reminder, this call is being recorded and a replay will be available on Unusual Machines' website at www.unusualmachines.com. Now let me hand the call over to CEO Alan and Evan. Please go ahead.

Thanks, everybody. I'm actually really excited about today's call. We have some prepared remarks covering our quarter, the results and some subsequent events. After Brian and I wrap up with our comments, we're going to be happy to take any questions in an open Q&A. I want to start by just acknowledging how awesome our whole team is. Like everybody keeps working hard and they're bringing some pretty creative solutions to a lot of challenges, like a really dynamic pricing environment with tariffs changing all the time. And just the culture and the quality of the workforce really, they blow me away. Really great people to work with. And I'm really confident with this group of being able to do some very interesting things going forward. the whole process really just doesn't seem to slow down for us. The first quarter was our highest revenue quarter of all time. And that's for the fourth consecutive quarter. So we keep hitting the marks. It's 59% growth over quarter one, 2024 on a pro forma basis. So we feel pretty good about that growth. And this was all done in like this really chaotic tariff backdrop with a T motor being sanctioned, which eliminated a very large Chinese motor company. And then, um, also with the Doge and some of the government stuff slowing down spending there. So the other really big news from all of this is we closed a substantial financing yesterday, about $40 million. Progress is fast. And for us, it's going even faster. And with everything going on, though, we still really want to focus on cash flow operations and growth. So to dive into it quickly, we started the quarter with $3.7 million in the bank. We finished the quarter with $5 million in the bank. And we subsequently raised $36.6 million after fees. Our cash position right now is more than $40 million. We're very comfortable with this. And aside for some of the capexes for the motor factory that we plan on going, we really are focused on continuing to keep our burn rate low. So for the quarter, we generated 2 million just over in sales at a 24% gross margin. Again, this is about a 59% increase over the pro forma from last year, which is pretty encouraging. The margin drop that we see here down to 24% is primarily due to tariff charges. And then the blend of enterprise has held steady at 13% of revenue. This surprised me and is to the upside because Doge and the government budget expenditures and the continuing resolution we thought would totally lock out the government market and really hinder our B2G growth. Growth in the quarter. So in general, our financials for this quarter signal positive growth pretty uniformly across the board. And this is a quarter that is very, very often a significantly down quarter for us coming out of quarter four in the holidays. So really overcoming cyclical nature. It's pretty great. I mentioned this last call. I'll mention it again. We're planning for aggressive growth this year. We really plan on going after it. And I'm sure that's why most of you are probably on this call and what you want to hear about. So I was going to hand this off to our CFO, Brian Hoff, who's done a great job to cover our financial results in more detail and leave you waiting until he finishes up for me to get you some of those forward-looking statements. With that, I'm going to hand the call over to Brian Hoff. Brian.

Thank you, Alan. Thank you to everyone joining in today for the call. As Alan mentioned, we started the year off great with $2 million in revenue for the first quarter, which was the 59% increase from the pro forma revenue from the first quarter of last year. We are very excited about this. The momentum did not slow down after the Q4 holiday push that we typically see. The team has done fantastic work in the first quarter here. The Q1 margins were at 24%, which, as we said, was a little lower, primarily from some of the tariff policy changes this quarter. And we're likely going to see some continued uncertainty in the Chinese tariffs in Q2 and moving forward. But on the same note, our team has been very active in finding alternative suppliers outside of China to try and offset some of these larger cost increases. Operating expenses have remained consistent over the past quarter. We did see an increase in non-cash stock-based compensation expense for this quarter of approximately 1.9 million. There was also some non-recurring expenses in Q1 for some professionals fees and public company expenses of about 0.3 million. We'll continue to put focus on growing our business. maintaining and increasing our margins and getting the cashflow positive as quickly as we possibly can. We've made tremendous shifts in our balance sheet position, as Alan has kind of mentioned as well, and expanding our cash. We ended this quarter with 5 million, which was led by the 2.4 million of cash exercises from warrants from our previous private placement. We're closely maintaining and watching our inventory levels while we're trying to minimize the tariff impact. And over in Q4, we have no debt and we're in a very strong position to push on our strategy of growth. We do expect to see our CapEx to grow this quarter as we started purchases toward motor factory equipment. And finally, as Alan discussed, and as we put out news recently, we completed our public offering in which we received net proceeds of $36.6 million of cash for 8 million shares of common stock. As our balance sheet says today, we have 24.8 million shares of common stock outstanding as of today. Again, from end of Q1, very excited about what is coming for Q2 and beyond for Unusual Machines. And I want to say thank you to our staff for having a tremendous quarter, our entire working team with the financing, and to our partners at Dominaria for helping complete it. I'll send it back over to Alan. Thank you all.

Thanks, Brian. It should be obvious by now that I'm actually pretty darn excited for what's next for Unusual Machines. I think we're really well positioned in the current domestic and global landscape, and we have weirdly favorable market conditions for our American drone subsegment. We also have the capital to execute, and I plan on going into a lot more detail, but definitely want everyone to know that my comments here are forward-looking and are no way guaranteed. So let's start with the financing, $40 million financing. I'm sure many of you are wondering, why the heck did we raise $40 million when we had $5 million in cash and generally keep our burn under $1.25 million? The raise was really done from a position of desire, not from a position of need. It's a clean transaction at a reasonable price, and it leaves our cap table in a good position going forward. Just as a review, the raise was done at $5 a share as an all-common stock deal, and the pricing was about 23% below the volume-weighted average price for the week before the weekend we did it. There is so much excitement and was so much excitement around the future and what we're doing that myself, three of our board members, our entire board of advisors, and several, to my understanding, of our current investors added to their positions. So just a lot of energy behind it. And that's really exciting. So again, why so much money relative to our spend and what are we going to do with it? First, we're going to take about another $2 to $3 million in CapEx, immediately place additional orders to build out a premier drone motor factory in Orlando. Second, I think we're probably going to spend another $4 to $6 million in operations total over the year as we really work to get to cashflow positive. But third, and most importantly, We plan on putting $30 million in the bank, and we don't ever expect to touch it. It'll generate a fair interest rate, but that's not the point. The $30 million in today's market is critical to our sales and supply chain. On the sales side, it allows us to be a supplier to these large government primes like Lockheed Martin or Northrop Grumman because the buyers there can look at us and say, Yes. If I integrate components from unusual machines in my program, my five or seven year program, they as a supplier are healthy and will be positioned in five years to keep selling me the part that I need for that program record. It's really the ability to be there and for them to feel secure and that we're steady. And it lets our biggest customers know that we also have the resources to scale with them. So if you go from 1,000 drones to 10,000 drones, we're ready to go. That's on the customer side, and that really helps us drive sales. The other side of that where we sit in the supply chain is the supplier side. And supply chains, when we break down China, they're really tenuous. So this amount of money, this creditworthiness kind of lets us move to the front of the line and commit to the purchase sizes and the relationships that are required. One really good example of this is China has recently banned the export of the rare earth magnets that are used in drone motors. Now, there are a few other global suppliers and they have a ton of demand and long lead times. And they're only really interested in working with companies that can place an order for hundreds of thousands at a time and are in a financial position that if we place that order, they can be sure to get paid. So this this money in the bank. makes us a safe harbor and a wonderful partner for both our customers that we're selling to and the suppliers that we need to build components. It really moves us into a very strong competitive position in global supply chains, particularly for drone parts and components, in a way that most people might overlook. And so we're actually really excited to be able to leverage this money just sitting there in an account. So that being said, we've very much said that our current major growth effort is building out motor production. So we've already ordered production equipment. We didn't wait on this financing. That was done as part of what we had done before. And we're now going to plan on ordering more equipment. We're in the final negotiations for a 17,000 square foot facility that will be part of sort of our growing Orlando campus. And it's going to be dedicated exclusively to motor production. We expect some hiccups, but ultimately, with some slip in there, we do expect First Motors to come out of that factory in September. Obviously, something of this size just isn't off one day and turn on the next day. It scales in. But between here and September, we're already solving the problem because we have a vendor network, and we're sending our designs out to produce products. you know, NDA compliant motors of those designs from different vectors to fulfill orders that we have right now. So the Orlando factory becoming operational and turning on is not a barrier to us solving the motor problem for customers right now or for the industry. Instead, what it does is it represents both margin improvement and then production capacity expansion. And we expect that to arrive just about the time our customers need all these additional components based on what we see is the potential for government orders coming through. Speaking of government orders, government orders have been very slow for the drone industry in quarter one. And to start quarter two, there's the continuing resolution, there's Doge, there's the impacts of new contract starts, and spending in general has been delayed. So we've recently, in about the last month, we finalized sourcing to provide a fully NDAA compliant FPV drone kit. And this is sort of a baseline system that a lot of B2B2G customers are starting to look at. And this week, literally this week, we're just starting to hear from those customers that orders are starting to trickle through. the government flow, like the smaller orders. This honestly is a little sooner than I expected. So right now we're thinking this might result in an uptick in enterprise sales, either like toward the end of this quarter and really into the start of the third quarter is what the timing looks like right now, even though that could change quickly. So last earnings call, I told everyone I'd expect to be able to give guidance this quarter. I mean, there's uncertainty around tariffs, government spending turning on, how quickly we can ramp and what we're going to do with a recently acquired amount of money. So honestly, giving guidance would be pretty irresponsible of me. So I'm going to say the same thing all the other public companies are doing and just saying the environment's too chaotic for me to know. But what I can say, a couple of things that I'm pretty sure about. Quarter two is going to be a weird anomaly of a quarter for everyone. There's a lot of consumer uncertainty around tariffs. We're making additional inventory purchases to get ahead of our supply chain. It's also the quarter where the stuff that was ordered is finally hitting. You hear about the store shelves and stuff. It's hitting us too. So we see some of those tariff charges in this quarter as that temporary change because of how quickly it was introduced. We have some capex to get the motor factory going. We're going to have fees associated with the financing. And then we're going to have some of this government stuff turning on. So it's going to be a really interesting transition quarter. But even with all that, we plan on continuing to grow revenue. We see the government orders starting to trickle in. And we're really going to move toward this motor production facility, which just gives me the confidence that we're going to be able to grow quickly throughout the end of the year. So now that we're in a great position, we are publicly stating and we privately state that absolutely now our corporate goal is to get to cash flow positive. To do that, we're going to have to grow. And we right now are expecting to need to be between 15 and 20 million in revenue. I believe we're four to six quarters away from that. And there's a possibility that it could happen faster if the government market materializes quickly this fall. Unusual machines, we're right at the corner where the market's about to mature. Legislation starts to come into play really in December of this coming year with the American Securities Drone Act. Our business is capitalized. Everything's extremely healthy. And we are absolutely going to aggressively pursue growth without worrying about some of the short-term uncertainty caused by a dynamic political landscape or a trade landscape. The U.S. drone market, because of some of the legislation, some of the other things, is rapidly changing, and we are going to fearlessly seize these opportunities because they are here right now. So I want to say thank you again to the whole team. Everybody's awesome. I want to say thank you to all our shareholders. Without you guys, this wouldn't be possible. You're part of it with us, and we really appreciate that. And with that, I want to open up the call to questions. If you want to ask a question by phone, you have to press star 9 to raise your hand and then star 6 to unmute. So hopefully we can start to go through that process and answer some of these. You can also type them in, I believe, and I can read them that way, too, in the Q&A in the bottom if you prefer to type.

Waiting for questions now.

We have three people with hands up. All right. John Roy, you've got a question. Fire it away.

Great. I got a couple, actually. One, you had mentioned September manufacturing. Can you kind of walk us through the things that need to happen to kind of hit a September, October timeframe in terms of first unit out?

Yeah, I mean, we're looking more August, September. So we've already ordered the equipment. The equipment has to land. We have to set it up. We're finalizing the lease on the space. We'll have to go and do the electric, put it all together. We're in negotiations with different suppliers for all the different parts. All that stuff sort of has to show up at the same time. And then we... You know, we're going to have a lot of motors and they're not all going to be great out of the gate, or there may be some adjustments we have to make. And so they'll have to go through our quality process. And we're giving it a month for that, for our staff to really, you know, figure out what the workflow is. So we put some slip in there and we feel pretty good about September for stuff coming out of Orlando with, if there's not, you know, unusual delays or anything in the supply chain.

And the demand for those new motors looks good?

Demand looks good. I mean, again, we're going to really know what demand looks like when we see the government contracts show up. So we have a lot of customers that have sampled motors from us that have done, I'd say, initial designs. But until they start to get large orders, we won't know exactly what it looks like. We just know there's a huge market hole and we want to be ready to fill it.

Great. I had one question for Brian. You had mentioned that you were looking for increasing margins. I know this is a tough one, but where can margins go medium, long-term? Can you give us some sort of range? I mean, obviously you're not a software company.

Yeah, of course. But I think a portion of it's going to be driven by these motors being manufactured by us, right? So you're going to not have these tariffs. So we will be able to expand and be able to sell directly with with our internally made products is really where the margin expansion is going to come from.

Right. And do you, is it going to be a significant, I mean, it's not going to be 10 bits, you know what I mean?

Yeah. I don't, I don't think in that regard, but I think we'll also drive uncertainty out of that, that terrace.

Great. Thanks so much guys. I really appreciate it.

No problem. Thank you. All right. We got a couple of Q&As on the type in. So from Austin, congrats on the capital raise. Makes a lot of strategic sense. Curious if we can expand on these enterprise customers and what the pipeline looks like. Second, are the motors the only component you're manufacturing internally? Do we plan to add more? The enterprise customers look like pretty much anybody doing group one, group two for the DOD. So a lot of folks have sampled them. We publicly said Red Cat. You know, if you go to Softweek and other stuff and walk around, you'll see our parts on some stuff. But we don't we don't disclose who our customers are unless they ask us to. But we have parts now being sampled or being used in a fair number of products from a fair number of companies. So pipeline there looks pretty good. But again, they just because they haven't designed it and they need to get the orders for them to flow through to us. And then second, are the motors the only component we manufacture internally? Do we plan to add more? The motors are the first ones that we're going down one more layer on. In our mind, we do some assembly or we put together things like stacks, which are an ESC and a motor. We'll do final assembly of drones in-house. But this is the first subsystem we're really internalizing because there's not a good vendor network for it. And we see it as a way to margin expand. I think we're looking at other pieces, and it really just comes down to cost-benefit analysis on a trade-off and what we see as volume growth. And lastly, we try to focus. We want to get one thing done at a time. And this is the one thing we're trying to do first. And I think when that goes well, we'll be able to say, oh, man, all right, we know how to do this. What's the next specific set of things we're interested in doing? So hopefully that answers the question. Jesse Stapleman asked a question. He says, if I got it right, the new 8 million shares aren't already sold. The 8 million shares are already sold and they're in the market. They've left. It was a straight common offering. It was done at $5 a share. So that's all done and the money's in the bank. So I think we have a question out here. We'll go with Barry Sine here. Barry.

Hey, I think I'm unmuted now. Congratulations. Great quarter. Two related questions on the upcoming defense budget authorization issue. I think the headline number is a top line of about a trillion dollars, which is a new record. I assume you guys are looking at that pretty closely. If so, what are you seeing inside the proposals, specifically, obviously, in terms of drone orders? They're not going to order drone parts at the government level, but they will place orders from your customers. And then secondly, once we see the president sign the defense budget, What kind of a timeline should we expect from unusual machines before we start to see orders and then revenue flow?

So first, you know, in terms of the defense budget and the government calls, we really don't do too much there. We're in touch with our customers and we try to get what they need. So most of our customers that sell to the government have people that are really good at the other side of procurement, understand what the language needs. You know, our team is a lot more efficient. we're better working with them because they, we can get them exactly what they need to fill out their part and we can get the parts that they're looking for to get it done. So that's sort of how we engage at that level, along with their expectations and the slices they think we can get. And we do a pretty good job of that to be sure they have what they need to write their proposals. Um, The other side is the flow through on the orders that you're talking about. So the government budget gets passed and then it trickles down. And some people, some different groups, depending on who's spending the money, they may already have estimates and stuff lined up that they want to place orders for. But generally, you're like six to eight weeks till it's through to the procurement segment. And then when our customers win awards, we'll typically get notified that And we might even see the orders or the POs come in, but that doesn't mean we're going to see it in GAAP right away, you know, because then we'll start to scale up and we'll deliver. So where we may see the opportunity and lock in the opportunity, july or something this is where we probably won't start shipping to like september and that would be a flow in terms of the delay so you wouldn't you'll see a one delay from us getting a po one quarter delay is what i expect from us seeing the orders to us starting to fulfill those orders and driving that outcome and that's where we feel really good about where the motor factory's at like we're able to get samples for everybody right now they're able to put them in their stuff it's the exact design But realistically, they all know that the big volumes won't really even start till the fall. And so they will be in place in time to fulfill, and we may all see those orders sooner. So our whole process there is built around this entire government flow process. So hopefully that covers what you're looking for. If not, feel free to clarify the question a little bit. Otherwise, we can take some other ones.

Thank you.

No problem. We have a Q&A. This is written. Jesse says, how many drone motors can be produced per month in this 17,000 square foot hall? Out of the gate, we're a little bit uncertain, but we're targeting being able to do hundreds of thousands to millions a year. And we would expand if we need that. That's really the capacity that we'll move toward. If we see the order sort of level out somewhere, we'll level out capacity there, but we should be able to scale up to whatever we expect as demand. In particular, just as a reference for how we think about it, And this is the long term. This is three to five years. So I'm sure most investors, this is too far of a time horizon. When you think about it, DJI sells maybe a million drones in this category in the US a year, roughly. That's about four or five million motors. And if we were going to be a supplier for a company that was going to replace them, that would ultimately be the volume we need to realize. And so, you know, that's what we see is the... the realistic likely segment size three to four years out. And so we have to start to scale that in over time. It's not all at once. Like we're not going to pre-scale and get too big, but we'll need to start to get there. All right. I think we have Joe Shicker. You have a question, sir? Oh, you're muted. Let's ask you to unmute.

Joe, you need to unmute yourself, please.

All right, Joe. You got to unmute. All right. Joe, if you're still there and you have a question, type it, please. Love to answer it. All right. What else do we have? Any other questions here? I don't see anybody else with their hands up. I don't see any other questions. I really appreciate everyone being here. You know, we try to be as transparent as possible. We're really excited about where we're going, and I think we're now equipped to go after it. Oh, we got some more questions. Give me a second. All right, Jesse, you have a question? What do you got? You'll need to unmute.

Hello. My question is, now we are producing drones in the US and some parts are still from China. And you talked about the mineral earth, yes. And my question is, what we can expect, is there a possibility that the drones are China-free and fully produced in the US? And... Yeah, how many drone parts are at the moment Chinese free?

It's a great question. And I think when you start to slice down it, I look at it in slices, how we do manufacturing, you have the drone. And those are manufactured teal, skydio, aerovironment. Then you have the subsystems like motors, circuit boards, cameras. Then you have the components of those subsystems like the rare earth metals, the copper wiring, the whatever. Then you have the raw ingredients that go into those, like the mined copper ore that gets processed and through. So I'd say at slice one, final drones, assembly is now all in the U.S. Slice two is what we're looking at right now, which is where people are trying to move away from China. And I'd say there, for instance, we offer one of every component NDAA compliant, not maybe fully made in the U.S., but not made in China. If you look like it's really hard not to get the high end electronics from TSMC or Samsung as some mix of what you're doing for production. And then I think like what we're looking at with a motor factory is if we're going to do motors that are produced in the U.S., we want all the parts of our motors produced. to be then part of a supply chain that maybe is diversified away from china and so where i think tier one we're all the way there tier two is where a lot of people are trying to go now and that's what we sell into and then as we start to manufacture those components we're looking to do that third tier i expect to be a very long time until that fourth tier like copper is origin control because at that point you're getting into commodities that are being processed and i think that's um That's just going to be a very different situation. But that's how we view it. And that's how we're trying to step down the process in our role in the supply chain. All right. Barry has another question here. All right, Barry.

All right. I think I'm unmuted. A little more visibility on the topic of drone motors. So earlier this year, if I'm not mistaken, there's a Chinese competitor, T-Motor, that was immediately banned. So what's going on with the demand? Who's filling that demand? And are you shipping drone motors ahead of your production facility through contract manufacturers? Are you meeting some of that demand or is it just going unmet at this point?

So a really great, great question. I think it's really talking about the sanction on T-Motor, which says no more money can be sent over to T-Motor. So people have a backlog of stuff. And at the same time, at least in the US, with the government being locked up, there haven't been a lot of orders yet. So there hasn't been a real push to swallow all that excess inventory. We are shipping using contract manufacturers and other places right now. The small volumes necessary for these things also to get people the designs that will eventually produce in the US so they can start to design it in. But the cyclical nature of the government and the military spend and some of the delays in the contracts and stuff have actually created a window in time where there hasn't been massive motor demand. There's anticipated motor demand and there's people trying to set up the supply chain to solve the problem. And that's really where we're very fortunate in certain ways that that's true because we're able to sample and develop those relationships. And we expect that our facility will be operational just in time to really start to meet the scale and demand we expect from government orders. All right. Do we have other questions? All right, we'll give everybody about another 10 seconds to see if they have anything out there. But again, we really appreciate everyone's time. We really appreciate the support. I mean, what we're trying to do is hard. We're a small company. So, you know, without the interest and the support and the understanding of everybody involved like this, it just wouldn't go as smoothly. And really what I think we're all collectively doing is pretty cool. We're diversifying supply chains that are critical infrastructure infrastructure. And so we're really trying to hold to that mission and then also have a lot of respect to be sure we try to return, you know, on the investment for shareholders. Oh, we have another. We have RYH. You should be available if you unmute to ask questions, sir or ma'am.

Let's see.

All right. You need to unmute if you're asking a question. Again, recommend typing a question. We're having some challenges here. So, you know, just try to be open to everyone. All right. I'd say it looks like we probably have no more questions. So, again, appreciate it. You know, look forward to additional feedback. I'm always happy to hear from everybody. So reach out anytime, you know, try to be available. And otherwise, I hope everybody has a wonderful evening.