Earnings Call Transcript - UMAC Q2 2025

Operator, Operator

Hello, everyone. Good afternoon, and welcome to Unusual Machines Second Quarter 2025 Earnings Conference Call and Webcast. With us today are Unusual Machines CEO, Allan 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 ability to add more employees to our ranks, our factory expansions, our ability to increase our margins and revenues, our ability to achieve aggressive growth, our expectation that the marketplace will change in quarter 3 and quarter 4 of 2025, our plan of keeping our cash burn low, our ability to scale our motor and headset manufacturing capabilities, our ability to scale supply chains to meet our customer needs, our expectation that the first motors will be delivered in September of 2025, our expectation that we will close the Rotor Lab acquisition in quarter 3, our increase of our workforce to 50 employees by the end of 2025, receipt of orders from the U.S. Department of Defense, our ability to continue growing revenue and improving margins, our ability to become cash flow positive in 2026 and our expectation that the U.S. drone market will continue to explode. 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 10-Q, Form 10-K and 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, Allan Evans. Please go ahead, Allan.

Allan Thomas Evans, CEO

Goodness. It seems like that statement pretty much covered everything. Anyway, I am really excited about today's call. I'm going to be reading, so forgive me a little bit for that. We have some prepared remarks that we're covering our second quarter results and some of the subsequent events. After Brian and I finish, we'll be happy to take your questions in an open Q&A session. I want to start by acknowledging how much work our small team puts in. This quarter involved a lot of extra work due to the changes in the tariff situation, rates, and policies regarding what we could bring in. Everyone keeps putting in the effort, and it's really impressive. They bring energy and enthusiasm to the different challenges we face in this unusual environment. I am still so excited because the culture and quality of our workforce make me truly believe in what we can achieve together as we move forward and add more people to our efforts. So thank you, everyone. Speaking of being busy, even with what I thought would be a second quarter slowdown due to tariffs and consumer demand, things don't seem to be slowing down for us. In fact, this second quarter was once again our highest revenue quarter ever. This is the fifth consecutive quarter we've achieved that. We saw a 51% growth over the same quarter last year, which we're thrilled about. For the quarter, we generated $2.12 million in sales, and what's impressive is we achieved that at a 37% gross margin. This growth, combined with an increase in enterprise sales that climbed above 30% of our total sales, helped us overcome the weak consumer demand caused by tariffs. Additionally, pushing our margins to 37% without compromising pricing shows we are moving in the right direction. Given that backdrop, I consider this quarter to be a great quarter. It was a challenging market environment, yet we hit record revenues, increased our B2B sales, improved our margins, and are now really accelerating our progress. With all this happening, we'll discuss cash flow, operations, and growth. We started this quarter with $5 million, and although that seems like a while ago, we finished the quarter with $38.9 million. After raising another $44.9 million in quarter 3 following fees, we now have a cash position of over $80 million, which we feel very comfortable with. Aside from some capital expenditures for factory expansion, we plan to keep our cash burn low moving forward. We are gearing up to aggressively grow and expect to see changes in the marketplace in quarter 3 and quarter 4. I’m sure most of you are on this call to hear about that. So I'll hand it off to Brian to cover our financial results in more detail, and I'll keep you waiting just a little longer for those forward-looking statements. With that, I'm going to hand it off to Brian.

Brian Hoff, CFO

Thank you, Allan, and I appreciate everyone joining the call today. As Allan mentioned, we continue to experience growth in our top line revenue and overall gross margin. We achieved $2.1 million in revenue for the quarter, bringing our year-to-date total to $4.2 million, which reflects a 65% increase compared to last year's pro forma revenue. We've also improved our margins from 25% year-to-date last year to 31% year-to-date this year. Despite expecting a decline in total revenue and margins between Q1 and Q2 due to tariffs and uncertainties, we did not see that drop as our enterprise orders, which have higher margins, continued to grow. We did experience an increase in our tariff costs during Q2, but we managed to pass these costs onto both retail and enterprise deals. We will continue to monitor and adjust in response to any tariff changes moving forward. Our operating expenses rose this quarter as we incurred additional costs related to setting up our motor factory, and we anticipate further increases in operating expenses during Q3 and Q4 as we hire additional personnel and incur costs for both our motor facility and headset operations. We remain committed to being cost-conscious. We also observed an uptick in our general and administrative costs, largely due to non-recurring professional fees associated with our acquisition activities, transactional expenses, non-recurring investor relations costs, and a significant non-cash increase in our stock-based compensation, which amounted to $5.5 million this quarter. As noted in our shareholder letter published about 30 minutes ago, our net loss was approximately $6.9 million, which includes $6.1 million in non-recurring and non-cash costs. I referred to Table 2 in that shareholder letter for insights into our normal operations and their breakdown. Reflecting on our balance sheet over the past year, we had about $2.2 million in cash and $4 million in debt at this time last year. Today, we report approximately $39 million in cash and no debt. Additionally, we've recently raised $48.5 million, bringing our cash balance to over $81 million, which is indeed transformational. With this substantial cash balance, we earned about $200,000 in interest income during the second quarter and anticipate this figure will continue to grow in Q3. We have begun purchasing our motor inventory and equipment, and we plan to make additional purchases in Q3 and Q4. Our strong balance sheet will enable us to quickly capitalize on growth opportunities, which Allan will elaborate on shortly. Lastly, I want to welcome all our new hires to the team as we continue to grow and extend my gratitude to the team for their hard work and execution over the past quarter as we look forward to closing out 2025 strongly. I'll turn it back to you, Allan. Thank you.

Allan Thomas Evans, CEO

Thank you, Brian. I'm sure he appreciates the team as we've added a controller. Thank you again for all the hard work, Brian, as well as to a couple of the team members who've supported you after a year of hard work. It's clear that we're extremely excited about what's ahead for Unusual Machines. We're well-positioned both domestically and globally. We have favorable market conditions for the American drone subsegment and the capital to execute our plans. I'll provide more details soon, but I want everyone to note that my upcoming comments are forward-looking and not guaranteed. We currently have over $80 million in cash, which gives us the resources to expand motor and headset production and scale our supply chains for our customers. We're keeping this cash in interest-generating equivalents until we clearly understand our 2026 operating needs by the end of October. We're also exploring a treasury strategy and will share updates soon. The key takeaway is that our growth is not limited by resources. We can adjust our company size and growth speed based on market demands. I discussed our plans to leverage our cash position last quarter, and we have no intention of being idle. Regarding motor production, we've received our low-volume production machinery, capable of producing tens of thousands of units each month, not just prototypes. It is being installed and tested in our 17,000-square-foot motor facility, and we expect our first motors to come out in September, which is a testament to the team's hard work. We're also close to finalizing the purchase of Rotor Lab in Australia this quarter, potentially as soon as the end of this month, now that we have the necessary government approval. Everything is on track for motors, which is encouraging. With Avagon and Fat Shark, I have a long history of developing headsets for drones. We have the opportunity to onshore production now, and we will begin final assembly of Fat Shark headsets in a new facility in Orlando. We are in the early stages of leasing, and I am thrilled that we've hired Tom Mercier as our Vice President of headsets to oversee this initiative. He has experience from Google and was instrumental in building magic production lines in Florida. We aim to have Made in USA Fat Shark headsets soon, encouraged by our customers' support. Speaking of hiring, we ended the second quarter with 19 employees, and we're now at 29. We are in a growth phase and expect to reach about 50 employees by the end of 2025 to meet expected demand. To everyone who has joined us, welcome. I am particularly excited about the growth of existing team members, such as Stacy Wright, who was promoted to Executive Vice President of Revenue. She has played a crucial role in our consistent revenue growth. A company is only as strong as its people, and I believe we have something special here. Some may wonder if it's the right time to scale. Those concerns are valid; scaling too early can be risky. However, we are confident that now is the right time. At the macro level, the government has passed a budget with increased funding for drones, and there are new opportunities from the Department of Defense. I expect government orders to begin shortly and come in significant volumes. At the micro level, our team has engaged with various customers to gauge their component needs and order expectations. B2B volume was over 600,000 in the second quarter, and we anticipate larger orders in the coming months. We are fully convinced that now is the right time, especially with U.S. government orders beginning to materialize. Reflecting on Q2, our team's ability to increase revenue and improve margins during a challenging quarter stands out. With our strong capital position and ongoing growth, we are prepared for the government orders that are on the horizon. Our goal is to be cash flow positive, and we anticipate needing $20 million to $30 million in annual revenue to achieve that, which I believe we can reach by 2026. We are on the verge of crossing the $5 million to $8 million quarterly threshold and becoming cash flow positive. Unusual Machines is at a pivotal moment as the market prepares to mature. Our business is in a very healthy state, and we are committed to aggressive growth. We expect the U.S. drone market to significantly expand, and we are ready to seize this opportunity. Thank you again to our staff and shareholders for your support. We're in this together, and I appreciate your ownership in the company. Now, I would like to open the floor to questions. So let me see what we have here. Someone will need to let me know if there are any questions. I'll start with the first question and then move to the others. Justin, could you elaborate on the announcement regarding the new headset facility? Additionally, are you planning to launch a new headset in the future? What do you mean by new levels of interoperability across systems? The strategy to expand U.S.-based production of critical drone components will initially focus on assembling high-performance FPV goggles with enhanced operability across systems. Justin, thank you for the question. We will begin final assembly of one of our Fat Shark product lines that is currently receiving large orders from government users. This will allow our team to learn the manufacturing process, after which we anticipate starting more headset development and production in the U.S., following our usual stepwise approach. Thank you. Now, let's move to the call-in, and we have John Roy who has a question for us.

Unidentified Participant, Analyst

So can you hear me now?

Allan Thomas Evans, CEO

I can hear you, John. What do you got?

Unidentified Participant, Analyst

All right. So more legislation. Are you expecting to see anything new? I mean, obviously, we've had a lot. Do you, A, expect anything new? And B, do we need anything new?

Allan Thomas Evans, CEO

I don't have any real expectations of anything new except for the BV loss and the rules for domestic drones going through the rule-making process. I believe we're in a strong position legislatively. I think things are set to move forward, and now it's a matter of the market being full so the government can start placing orders, and we'll see where that goes.

Unidentified Participant, Analyst

Yes. As a follow-up, you provided some insights on the demand for government drones. Can you elaborate on whether you are selling a significant amount of parts to them? What is the unique aspect of those orders?

Allan Thomas Evans, CEO

So a question that I have to answer a little bit delicately. All of our customers, like in a lot of cases, compete with each other. So we can't say anything until it's all the way done and all the way announced. So we are selling to a bunch of different folks. And I would say one big driver is a program called PBAS which is an FPV program by the government. There are 12 companies that are currently being looked at to be down selected, 4 of those will be down selected, and that's looking to be about a $500 million total basket. And we have several companies that we are a supplier for that are competing in that as an example of a place where once that's finished, we'll get those revenue projections and really be able to understand what 2026 looks like. I think people are typing in the chat, but if you guys can type in the question space instead of the chat, it would be really appreciated. I'm going to go back to a Q&A question. Rodrigo asked, good afternoon, as a young enthusiastic shareholder, I'd love to go check out the factory in Orlando. Anyway, there can be tours or videos for all those looking to learn what happens behind the door. Rodrigo, I think it's a great suggestion. We do have a video team. Let me work with them and see what we can get out there because we want to share what's enthusiastic with everybody as it comes together. And appreciate you being a shareholder and wanting to be part of the journey. Thank you.

Unidentified Participant, Analyst

All right. So now we're going to go back to somebody who wants to speak here. We're going to go to Danny Ka. All right, Danny, are you with us? I think you got on mute, sir. All right. What do you have? I'm just curious, what kind of collaboration are you guys doing with Red Cat? I know that you and Jeff are pretty close. And what a coincidence that you're both doing a town hall the same day, time and hour. So I'm curious what you and Red Cat have going on together.

Allan Thomas Evans, CEO

Jeff is a great guy. We came out of Red Cat, and we are doing motors for them, which is great. There are rules regarding when earnings need to be reported, and we're approaching the deadline. When things get busy, it becomes a matter of timing. However, I can't provide more details as we don't discuss our customers; it's up to them to share what they want, and we are happy to approve any information they decide to disclose.

Unidentified Participant, Analyst

Got it. Well done, and you're doing a great job. I'm a big shareholder of your company, and I'm super proud.

Allan Thomas Evans, CEO

Thanks. Really appreciate it, and thank you for joining us today. All right. We got a Q&A in the type-in. Jesse says, the goal of Unusual Machines is producing drones in the U.S. Can you please give us an update about that? What are the next steps toward this goal? Jesse, I'd say our goal right now is to produce parts, so other people can produce drones. There are a whole lot of great drone companies out there, and we don't want to directly compete with our customers. So the second we start doing that, I think we start to not service the entire industry. So now if in a few years, there's consolidation and things move around, that may change. But right now, we're just trying to get ahead of the component supply chain. All right. Let's see what we got next. By the way, I appreciate it, guys. Your questions, we're here to be as transparent as possible. So Jason Yun, do you anticipate needing any additional equity raises this year? But considering the timing of expected orders and any supply chain prebuys, do you foresee a need to raise incremental capital? No, I don't think we'll need any more capital for operations. Now if there are strange circumstances or other things occur, there's the opportunity to make all our shareholders a bunch of money, we're going to explore it. We're not ever going to take anything all the way off the table. But our burn rate is really low. We're in a great position to execute on everything we need, and we don't have a requirement in any way around that. Compared to my interview in mid-July, are you seeing stronger demand from customers and a faster pace of orders today? Yes. It is turning on now. This is about to go. Among competitors, who else has comparable balance sheet strength? Do any peers have a cash position as strong as ours right now? I am unaware of any other parts vendor in our same situation. There are a couple of other parts vendors that don't sell into the value segment where we sell sort of competing with the Chinese. And I'd say like there are some great companies out there, examples are like ModalAI, a few others that sell sort of premium Aterian. Other companies that their parts may get mixed and matched with ours depending on our customers' objectives. But I don't think there's a parts company out there in our same position at this point. All right. We're going to go to Joe Schicker. Joe, are you with us? I think you're muted, Joe. All right, Joe. All right. We're going to have to get back to you, sir. All right. Dylan, huge fan of the company. Would love to know some insight into the new means of production, what scalability looks like in the current factory. Right now, we're producing tens of thousands of electronics components. We're producing tens of thousands of cameras. We're lining up to be able to produce tens of thousands of motors. We have enough motor material in to do tens of thousands already in the supply chain. It might be some teething efforts. There might be some supply chain hiccups that's a little early. So tens of thousands is what we're looking at with a supply chain that's ready to go pretty much across everything. If we have to scale to hundreds of thousands, you're really looking at a 6-month window with a ramp into it to build out the supply chain. And that varies depending on the component. But if you use it as a rule of thumb, you'd get a really good idea of where it's at. Larry Walsh, where do you see the company in 10 years? Honestly, Larry, we're either one of the 2 or 3 major drone companies left or we've lost. And I see us being one of the 2 or 3 major drone companies left. And I see us being a monster in what is an emerging logistics category. That's what our entire objective is, and we won't quit until we get there. So the exact steps to get there, exactly what that looks like. I think we're going to have a drone future. And I think once we get and start to win with drones, then you're going to see our parts used with other robotics companies. And I see that as our long-term expansion. Now we got to win these first steps, and we got to focus on them or we'll never get there, but I think we're taking it one step at a time and not losing sight of the long-term goal. Austin. Congrats on the solid results in the tough environment. Thank you. It's all credit to the team. They crushed it. How should we think about gross margin in the second half? We're really constantly striving to always say minimum 30% gross margin with a long-term goal of 50% gross margin, 37% might be a little bit of an overshoot. It might ring back down, but I think you're going to see us keep staircasing this up. And I would expect 35% and if volumes are higher, us to keep figuring out ways to improve margins. Now we're going to see blended margins drop a little as we turn on a motor factory because when you do something new your margins because you're doing returns and replacements for customers and stuff. But I still think as we do this, we're going to manage to start to take those margin gains that are going to be required for us to be a sustained business. Next question. Are we expecting sequential revenue growth in the second half of 2025, specifically in the third and fourth quarters? Each quarter has been our highest revenue quarter so far, and we anticipate the market will improve. Therefore, I believe revenues will continue to grow, and I might have to reiterate this statement several times. If you were listening closely, you could almost consider that a central theme. Regarding enterprise sales and their contribution to total revenues in 2025, it’s somewhat uncertain and will depend on the timing of orders, delivery preferences, and order sizes. Currently, I think enterprise sales account for about 30% of our revenues, which we might maintain. There could be an increase if customers prefer earlier delivery in 2025 or early 2026. Our long-term goal is for enterprise sales to exceed 50%. However, we must consider that the Christmas season is our peak consumer season, and we have significant sales during that time. The enterprise and consumer segments are closely intertwined, but the 30% to 40% we demonstrated in Q2 seems like a reasonable expectation, with potential for it to be even larger if clients seek earlier deliveries. Chris Pok, how much of the production is based on assembly of third-party components and how much is vertically integrated? Chris, truth is, it depends how far down you go down the chain, right? If you think about Apple phones, they don't do any manufacturing. I mean they still maintain the whole supply chain and do it all. And then if you look at like our motors, we make all the motor components, but we don't make the rare earth magnets. But then if you look at the people who assemble the rare earth magnets, they don't mine the magnetic material. So at some level, it's all us. At some level, it's none of us. It just depends on how many slices you want to go. Do we have stamping and powder coating lines for cores and housings going live or soon to be? We have some of that in Australia with our acquisition of Rotor Lab. We do some of the mechanical components over there. Otherwise, we haven't put that in place yet just because there's a lot more of those services domestically than there are some of the other things. And we're still just trying to prioritize the things that nobody else really has good alternatives for. I mean I wish we could do everything all at once, but we can't, and our COO, Andrew Camden, would probably fit out of being overwhelmed. So I really appreciate the questions. Kelly Roman, what's the possible best case revenue for 2026, i.e., if the customers you work would land the vast majority of expected drone-related contracts? Okay, wildly speculative. It depends on the government placing stuff, depends on everything else. Let's take PBAS which is a $500 million contract. You expect the whole collection of customers probably to take 50% margins. So $250 million in drone parts or in drones, let's call it half of that parts, $125 million. I mean, I think if you're looking at like best case scenario in numbers, somewhere in there. That's also probably about as fast as we could scale to fulfill. I mean if somebody came and said we needed to do $1 billion in parts next year, I'd look at them and be like, okay, 18 months because you require a ramp and you require a supply chain and a lot of other stuff. But I think if you look at what's out there publicly and you do some back of the envelope math, you'd be in the low hundreds of millions for absolute best case. I see our strongest advantage and biggest challenge for the future as related to our proactive approach in establishing ourselves in the U.S. market and our commitment to addressing our customers' needs by asking how we can assist them. Unlike some competitors, we have the scale to cultivate direct relationships with suppliers, ensuring better cost efficiency and supply chain reliability. For instance, our VTX product includes a chip from Richwave, a Taiwanese company, which has become hard to order due to the conflict in Ukraine. We have the ability to maintain these direct connections, allowing us to offer competitive prices and great deals to both our consumer and government clients. The main challenge we face is navigating government procurement processes. Even though the government commits to various actions, the execution timeline can vary, leading to uncertainties for our customers when they place orders. This unpredictability is a key reason for our recent fundraising efforts to alleviate such uncertainties.

Unidentified Participant, Analyst

Has the coast guard purchased any drone components? Or is it mainly the Army?

Allan Thomas Evans, CEO

I'm not sure of the exact number of people who have purchased components since many come through the store directly. However, we've seen various branches and several government entities buying different parts at various scales. Currently, the Army and Marines appear to be the most advanced in terms of budgets for drones. Thus, purchases seem to be more concentrated in those two groups, but many are starting to explore and make purchases.

Unidentified Participant, Analyst

What role does Trump Jr. play at UMAC and how are we getting value out of that relationship?

Allan Thomas Evans, CEO

He's an adviser. I talked to him. He is able to do business introductions. But right now, we're not in a position where we need much. So when we get back to those elements, we engage and we ask. But we're just trying to scale. We're trying to drive sales. So that's what we see. So very happy to have them as an adviser. I think the folks that support the company, everybody are really excited and helpful in the ways they see it being helpful.

Unidentified Participant, Analyst

Does the company have ambitions of manufacturing some digital components in the future for the drone industry like you have for analog?

Allan Thomas Evans, CEO

Justin, looking at my history, during my time at Fat Shark, we were the initial partners with HDZero to launch their digital product in the market, and we also collaborated with another company to introduce additional products. Previously, while at Avegant, we integrated the Avegant Glyph with DJI's Lightbridge, making it the first headset used by DJI. Analyzing the historical integrations we've executed and the interests I've championed, it's clear that we are inclined towards digital components. However, we aren't there yet. Our current focus is on the airframe due to the imbalance of drones to ground stations, where there are 20 to 100 drones for each ground station, and the drones themselves are the most critical elements. Therefore, we are addressing the drone segment before moving on to the ground station, but we certainly have aspirations for that. DC, do we see the possibility of buying back shares once enough capital has meant revenues begin to ramp up? Or will funds be generated mainly for R&D? DC, we actually are also looking at a treasury strategy that we'll bring to the market here in a few weeks to see where that lands. And then we're very open-minded to maximize shareholder value. And so I think that's a dynamic question that we can't answer yet because we don't know where the marketplace is going to take us or what opportunities are there, but we're not close-minded to anything either.

Unidentified Participant, Analyst

Do you guys expect an increase in your average total cost of headset production with its move to the U.S.?

Allan Thomas Evans, CEO

We actually expect the cost of production to be slightly higher, but lower than the cost of overseas production with tariffs. So we expect our net cost, if you include tariffs in COGS to be lower with onshore production. And that's even just right out of the gate.

Unidentified Participant, Analyst

At what percent does Unusual Machines cover the TAM for components of FPV drones?

Allan Thomas Evans, CEO

No idea. The total addressable market is significant because there are 4 million to 5 million drones being produced in Russia and Ukraine. It varies if we are discussing globally or domestically. I believe if we can capture 20% to 30% of the total addressable market in this government cycle, combined with the consumer market, we will have done an excellent job. Some companies may choose to produce certain components in-house. Therefore, I think only about 70% of the total addressable market is truly accessible.

Unidentified Participant, Analyst

Hey, thank you for your time. Have you structured your production and supply chain, including any planned expansions to not only rapidly fulfill initial orders once contracts are awarded, but also scale to meet potential demand volumes if they exceed current projections?

Allan Thomas Evans, CEO

Jason, yes. That's what we're in the process of doing right now. So we're not building for orders we've already gotten. We're building for orders that we expect to get. And on top of that, I think a lot of customers are going to get orders from the government. They're going to go to their suppliers and some of their suppliers are going to fall down. And when they fall down, we want to be able to be there and be sure that they are able to still get motors and other components. So we're always happy to be a second source. And then if we have to step in and be a primary source, we will, and we can only do that if we're really in a position to build stuff in a timely fashion.

Unidentified Participant, Analyst

Are you still expecting to have $30 million in the bank to more readily pursue deals?

Allan Thomas Evans, CEO

John, that update is coming in a couple of weeks. Appreciate it, sir. Danny, where can we buy some hats? Danny, love hats, love the energy. I keep asking our team to put them in the store. One of these days, it will bubble up the priority list high enough to go in the store. But I'm a hat guy. So I'll keep working on that. Greg, what are your plans for when the China ban happens? Will it affect revenue? Greg, maybe. we're in a position where we pretty much have one of every component for our customers is NDAA-compliant. So we're in a really good spot. So I think if it happens and other people then can't source, we're going to be a second source. So I do think the impact on revenue would be positive if it occurs and other people haven't addressed the problem and they shift over to us.

Unidentified Participant, Analyst

If Chinese drone ban falls through, are you still optimistic about growth?

Allan Thomas Evans, CEO

Yes, I am actually. Most people aren't. The Chinese company DGI does an amazing job; they're an outstanding company. However, there is still a real interest globally in diversifying supply chains due to regionalism and tariffs. I believe the U.S. government, especially as a customer, will continue to prioritize purchasing domestically. The tariffs are likely to remain in place, and due to these tariffs, our costs are actually lower than those associated with imports because we've structured ourselves to be cost competitive. Therefore, I think our company is in a strong position to remain competitive under these circumstances.

Unidentified Participant, Analyst

Can you get magnets from Australia for your motors?

Allan Thomas Evans, CEO

Joe, we're sourcing magnets from 3 or 4 different places to see which ones work. At least one of them is not Chinese. So we're going to be able to right that.

Unidentified Participant, Analyst

What production run rate do we foresee? Can UMAC produce tens of thousands of units in the short term? And which parts do you see a huge demand for?

Allan Thomas Evans, CEO

We can produce small numbers of tens of thousands. We expect by January to be able to be low tens of thousands. We're doing thousands of parts a month right now. And I think if we saw hundreds of thousands, it would be able to work scaling into it, but mid-tens of thousands, no problem. That's what we're building to expect in the short term. The parts we see the biggest demand for are our first part that we put out there, which was our flight controller, a lot of interest in that because it's been out there the longest. A lot of demand for our cameras. And then otherwise, pretty even across the board. I mean we're in the process of manufacturing in the tens of thousands and shipping it. I mean, not all at once, but it's been good, surprising and more than we expected.

Unidentified Participant, Analyst

Are we winding in-house? What does the transition from low volume to high volume look like to you? Are there constraints to adding additional cells rapidly?

Allan Thomas Evans, CEO

Yes, we are handling winding in-house with several winding machines, starting with four or five cells, and we can expand this as needed. Low-volume production refers to thousands in the lower range and tens of thousands in the upper range, while high-volume production involves more automation. We can scale up production by hiring additional personnel and using some of our redundant machines more quickly. For very large orders, we can switch to high-volume production machines, which reduce our cost of goods sold due to less required labor. This ensures we can meet capacity demands. The initial setup often presents unexpected challenges, but we are optimistic about the Rotor Lab acquisition since they have experience in navigating these issues, which should help us operate more effectively.

Unidentified Participant, Analyst

Do we plan on partnering with domestic material supply companies for lithium batteries, magnets, et cetera?

Allan Thomas Evans, CEO

We do now. So we partner with domestic companies for batteries and for other stuff. We're a very big believer in the domestic ecosystem and prefer to support domestic companies if all things are equal.

Unidentified Participant, Analyst

What is our process for deciding what new positions will be added at UMAC?

Allan Thomas Evans, CEO

It's a complex process for us. We take hiring very seriously, and the entire leadership team comes together to identify our challenges and determine how best to proceed. We discuss what our hiring priorities should be and what initiatives we want to pursue, reaching a consensus on these points. After that, we undergo a thorough vetting process followed by an engaged interview process with HR. This ensures that we are bringing in people who are a good fit for our team and that we are also what they are looking for in a workplace. Our approach is definitely not random; we invest considerable time in this process because I am committed to preserving what makes us special, which is our people.

Unidentified Participant, Analyst

Where do we see the share price and market cap end of year?

Allan Thomas Evans, CEO

I appreciate WHBBBB I can't answer those questions like I'm not allowed to speculate on that. So I'll leave that for everyone on this call to guess and then decide if we're a good buy right now or not based on what you independently determine.

Unidentified Participant, Analyst

Are we looking at more acquisitions, especially software?

Allan Thomas Evans, CEO

Joe, we are consistently engaging with various companies. As a result, I believe we will witness consolidation in the market. Currently, it's a quiet period since everyone is navigating through their sales cycles. I anticipate that discussions will ramp up again towards the end of October once we move past this phase of government interactions that seem to be causing distractions. At the moment, things are calm, and everyone is concentrating on sales, partnerships, and achieving results. However, we remain open to conversations because we believe that strong teams and good products are valuable.

Unidentified Participant, Analyst

What percentage of sales do you expect to be domestic and what percentage is international?

Allan Thomas Evans, CEO

I think 95% domestic. We're not focused on international sales right now. We do have some, but we're not focused on it. And then Danny, do you have any NATO or international government customers? Yes, we have a few. I mean we sell over some stuff over into Europe, but it's not our focus for sales, particularly with the tariffs and I'd say the regionalization in the marketplace, we really see with our limited team, our best sales opportunity domestically right now, and that's where the market is really turning on. All right. Goodness. Are there other questions? Because that was awesome. I really appreciate the questions. All right, Chris, you got another one. I appreciate it. Then we'll wrap up here pretty quick. If you were asked to tax your motor production tomorrow morning, what would be your first constraint you'd be encountered? Supply chain for magnets. So right now, lead time for magnets is 6 months long. Silvio, do you build only to order? Also do you build inventory for your most common components? Silvio, we build ahead of time. Like we have a really pretty good idea of what's popular and what's not. And so we definitely build in front of demand. And that actually is something that captures a lot of customers because a lot of other groups only build to order and then their backlog 6 months where people call us up and we're like we need to do that in a week. And so us looking out for our customers that way because a lot of them don't know what's going to happen has been really effective for us as a business. Greg, I appreciate the transparency and very excited about the shares I hold out for this. Greg, I appreciate you as a shareholder. I appreciate your time. And thank you. It's the questions you guys ask. Again, we're all on this together. So glad we can share the journey with you. We chose Orlando for the new facility because it has excellent logistics and a strong workforce. It's strategically located between Tampa and the Space Coast, which is rich in engineering and drone interest. We're consolidating our operations there because it's important for our team to interact and share expertise in person. Our plan is to expand in Orlando, where we've located exceptional talent. As the industry becomes more engaged, we're seeing incredible individuals reaching out to us, eager to join and contribute. We're excited about the energy in Orlando and the potential for growth. It's encouraging to see that successful professionals are interested in being part of our team.

Unidentified Participant, Analyst

Can you elaborate on any more robotics in the future?

Allan Thomas Evans, CEO

Tim, we get some ancillary orders. Some people doing like robotic cars want to buy motors, some of the other things. So I think as you see industries really expand and saturate with a component, it gets picked up by other stuff, right? So if you go in and use the touchscreen when you order stuff at a place, right, that's all Samsung or iPads because they're already used in sort of the mobile industry and they just got brought over. Or if you look in the DoD, like all the controllers are almost all Samsung phone-based because that quality component is at scale, it's reliable, people know it. And so drones are one aspect of robots, and I think it's really the one in high demand. But as we scale into that, I think we're going to start to see people pick off some of our stuff for other robotics. And I'm always excited to see what our customers do because I'm an engineer, but nobody let me touch any engineering tools because it's not my job. And so when customers have these really need applications, I just get excited.

Unidentified Participant, Analyst

When will we see the stock split?

Allan Thomas Evans, CEO

Bill, this is the next big thing, it doesn't need to split. I mean, that's a choice we have to look at making in the future depending on what we want to do. But one does not require the other, sir, and I appreciate the energy. All right. Anybody else got questions?

Operator, Operator

Something in the chat from Marvel Pegers. Would you like me to read it?

Allan Thomas Evans, CEO

Yes, I get it out there.

Operator, Operator

How much of the $40 million and $48.5 million offerings are going to be spent on the motor factory? And how much is left off after the in-house manufacturing? What are the next major components that UMAC attempts to mass manufacture in-house after the motors?

Allan Thomas Evans, CEO

We anticipate having around $80 million remaining after completing the capital expenditures for the motor factory. Currently, our cash burn is under $1 million per month, which will largely be balanced by interest income even at the present rate. We also plan to establish a headset final assembly line, which will be considerably less costly and allow us to generate revenue sooner. Therefore, we expect to maintain funds under management between $70 million and $80 million through 2026, depending on our growth rate and returns. We are quite confident about this and are pleased to have kept our cash burn low to minimize any financial risks. Regarding M&A activity, while I can't share specific targets, there are many promising drone parts companies available. Many believe they will secure government contracts, but we are looking for solid teams that may not have been selected that can enhance our capabilities. We are cautious about integration since it can be complex and dependent on personalities and company culture. We are communicating with various parties and fulfilling our role as a supplier effectively, but nothing particularly exciting is on the horizon yet. More opportunities may materialize, but clarity will likely come in late October when the outcomes of contract selections are known.

Operator, Operator

We have one last comment from Bill McCammon. I'm enjoying the Q&A and just hearing more.

Allan Thomas Evans, CEO

Thanks, Bill. I really appreciate your time, sir. And I appreciate everyone's time. I mean, still there's like 80 who listened to me for this long. So hopefully, you recorded it and you can play it at night and the Veritone will put you to sleep, so you can get 2 uses out of it. But otherwise, again, I want to say thank you to everyone for your time for being shareholders, being interested in the company and really supporting what we're trying to do in terms of bringing supply chains for critical technologies back to the U.S. So thank you, everyone. I hope you guys have a wonderful day and really appreciate your time.