Unusual Machines Q2 2024 Earnings Call Transcript

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August 14, 2024

There are 3 speakers on the call.

Operator

Hello. Good afternoon, everyone, and welcome to Unusual Machine's Second Quarter 2024 Earnings Conference Call and Webcast. With us today are Unusual Machine's CEO, Alan Evans and CFO, Brian Hoth. Following today's remarks, a Q and A session will be conducted. As a reminder, this call is being recorded and a replay will be available on Unusual Machine's website.

Operator

Now, let me hand the call over to CEO, Alan Evans. Please go ahead, Alan.

Speaker 1

Hey, everybody. I'm Alan. I just want to say good afternoon. Thank you very much for joining this unusual machine's 2nd quarter earnings call. I'm the CEO, Alan Evans.

Speaker 1

I'll be joined by our CFO, Brian Hoth. Before we begin, our lawyers have asked me to read a safe harbor statement. Please note that the company's remarks made during this call, including answers to questions, have forward looking statements, which are subject to various risks and uncertainties. These statements include our expected revenue and gross margin for the retail market for the year 2024 our expectation of entering into contracts with the Brave 7 flight controller from the U. S.

Speaker 1

Government prior to its fiscal year end on September 30th and selling drone components to the U. S. Government our ability to manage our cash burn and improve margins our liquidity our near term growth to come from our Made in the USA component business and our ability to secure research and development contracts that will help us offset our costs in making NDAA compliant FPV components. Actual results may differ materially from the results predicted and the reporting results should not be considered as an indication of future performance. A discussion of risks and uncertainties related to Unusual Machine's business is contained in its filings with the SEC, including the prospectus filed with the Securities and Exchange Commission on April 19, 2024.

Speaker 1

Additionally, we are dependent on 3rd parties and in getting on the Blue UAS framework for sorry, the Blue UAS framework list for our drones and drone components in a timely manner and also receiving subsequent orders for our Made in the United States drones and drone parts. Unusual Machines disclaims any obligation to update any forward looking statements as a result of future developments. All right. So, we have some prepared remarks that we want to share to provide clarity on our Q2. As usual, I apologize, I'm going to come off a little bit robotic because I'm trying to read this so I don't miss anything.

Speaker 1

After our comments, both Brian and I will be very happy to answer any and all questions you have in an open Q and A session. Also, this is our first time doing this via Zoom, so we'll provide some instructions and look for feedback on the experience when all is said and done. To begin, I really want to just recognize all of the hard work that the entire Unusual Machines team has put in. It's a small team and they're really everybody's just pulling in the same direction. It's great to be here and I really appreciate everything you're all doing.

Speaker 1

So as a reminder, it feels like a long time, but this is only our 2nd earnings report as a public company. It's also only the 1st full quarter of operations for us since being public. So, for me, and where I want people to take context of this, is that in a transition like this, we don't want to overlook the consumer business. It's very easy to make that mistake and sort of lose focus on the operations. So, in doing that, we still maintain our 3 primary priorities cash flow, operations and then growth.

Speaker 1

Priority 1 for us is cash flow and probably for most of you listening on this call. We started the quarter with $3,200,000 in the bank. We finished the quarter with $2,200,000 in the bank, which honestly can seem scary if it's not more accurately understood. So, I want to break down some of the additional costs that we had associated with the IPO. We had an IPO and acquisition and transition costs as we closed it all out of about another $300,000 We did slightly underestimate the cost of our normal operations last quarter when we estimated it at 400,000.

Speaker 1

After being able to pay a lot more attention and really break it down, we realized it's about 450,000 a quarter. So, we're not that far off but a little bit. We had interest expenses on the debt, which was approximately 50 or 60,000 in the second quarter and then that leaves us with this unexpected overage of about $200,000 which was split between marketing, IR and then an inventory increase. So, the inventory increase would be something I'd ask questions about. We chose to increase inventory to accommodate the timelines of some of our government customers.

Speaker 1

So a government customer came to us and said, Hey look, we're going to give you this award, pretty certain. It takes 2 to 3 months to get through the procurement cycle, but we really need delivery this date. So, we placed a risk buy. It's not buying in from their end, but that inventory is actually being utilized right now and through the course of business will be fully sold in the Q3. It's one of the things that we decided to do to have a very satisfied customer as we try to expand in the new business.

Speaker 1

So going forward, we do expect an increase in the marketing spend in this Q3 because this is the key procurement window for our government customers. So we think we're going to have an approximate $200,000 excess spend for this marketing in this quarter, we'll have $80,000 in loan interest and then we'll have the $450,000 to normal operations. That gets us to approximately $700,000 for the quarter. As part of offsetting that cash spend, we do plan on more aggressively managing our inventory down over the next 12 months. We're currently at about $2,700,000 in total inventory value and we think it needs to be moved down to about $2,000,000 So the inventory management along with our base costs and our cash spend plan absolutely leave us with the expectation that through some management, even without any real positive catalyst, which we do expect, that we will be able to remain solvent for more than a year just as is and that we'll be able to get through a second government procurement cycle next summer without needing to raise more money.

Speaker 1

Our second priority is operations. For the quarter, we generated approximately $1,400,000 in retail sales at the 28% gross margin. This is about a 14% increase over the first quarter of this year if you look at it in its entirety rather than just in our operating period and it puts us ahead of our $5,000,000 target for retail sales for the year 2024. It's pretty nice that this was done without the launch of a new flagship product or anything else to really drive sales and it also was the most successful order for our flagship event, Rotor Riot Rampage, which has 300 attendees and is just a really great annual event we hold. And then our 3rd priority is growth, but I want to delay discussions around that until Brian has a chance to really dive into the financial results.

Speaker 1

And before I hand it off to Brian, I really want to say thanks, Brian, for the very long hours you put in to get this filing done, along with closing the acquisitions and redoing both the 'twenty two and 'twenty three audits. So if he seems a little tired, folks, it's, he earned it. But with that, I want to hand it off to Brian Hoff.

Speaker 2

Thank you, Alan, and appreciate everybody joining here. I would go on camera, but Zoom, this is our test subject here for this one, is not allowing me to go on. So I will try one more time, but it doesn't appear that the camera is letting me turn on. So anyways, let me continue on with our financial results. So as Alan mentioned, this was our 1st full quarter of operations with Fatchark and Rotor Riot and we're continuing to see both top line growth and those steady margins.

Speaker 2

We ended the 3 months ended June 30th at 1,400,000 in revenue and then 28% gross margin, which puts us just over 2,000,000 in revenue and 29% gross margin since the completion of the acquisitions of Fat Shark and Road Riot in mid February. And as we look deeper into the P and L, SG and A costs or net loss over the 1st 6 months of the year, it's really helpful to understand what's part of our normal operations and then we have all that kind of noise that seems to be happening with the non recurring one time expenses related to our IPO, the transition, acquisitions and then obviously there's the cost of just being a public company. I want to at least point out kind of 2 buckets of kind of items in those operational costs, we've got about $900,000 sitting in non recurring expenses that again relate to those acquisitions and transition expenses. And then second, like most public companies, and you'll see about a $426,000 in stock compensation expense. That's non cash, just a part of, having some equity related items.

Speaker 2

But again, it is for GAAP purposes. We are continuing to be selective about where we incur expenses and how we spend cash. As Alan mentioned, we're lean, we're going to continue to be lean, but we're also going to invest in areas that are going to drive growth, which Alan will go into shortly. And then as we kind of shift over to our balance sheet, we ended the quarter with $2,200,000 of cash, which Alan kind of gave the breakout of the additional context of where that money was spent and we do want to highlight that we do have very healthy inventory levels at approximately 2,700,000 which does include prepaid inventory and that's going to help us put us in a position to continue the growth in both our retail operations but also help facilitate any new initial enterprise orders. As we announced recently as well in an 8 ks, we finalized the working capital adjustment with Redcat and agreed on the additional $2,000,000 as a part of the purchase agreement for working capital.

Speaker 2

This $2,000,000 was added to our existing, promissory note, which is also added to goodwill for a total of 4,000,000. Understood, we also have our goodwill and unallocated purchase price related to the purchase accounting of those acquisitions. Currently, it sits around $19,600,000 We are going to be continuing to finalize our purchase accounting and the allocation of that purchase price during this next quarter now that that working capital adjustment is done. Last week, we did issue a 10 ksA filing, which related to reissuing our 10 ks from earlier in the year, primarily from our prior auditors, SEC sanctions, which unrelated to unusual machines, required us to reaudit the 2023 2022 financial results and those have been filed. Obviously, today we just filed our 10 Q and we are looking to continue to maintain compliance with SEC regulations.

Speaker 2

From my perspective, from the financial perspective, the team since we've completed the acquisitions, I mean things have been continuing to progress really nicely. We haven't had any kind of fall off from any of the noise that can come with acquisitions, the IPO, and we're excited with the progress we've made over the 1st 2 quarters of this year, and also to having our first product being received the Blue UAS Framework Certification and what lies ahead in Q3. As I said and Alan has said, cash management is going to be one of our top priorities over the next few quarters along with the growth factors, which Alan is going to be going into here very shortly. So I appreciate everybody joining and I'll kick it back over to you, Alan.

Speaker 1

Alan Well, thanks, Brian. I think as discussed and you can see here, there have also been several events since the end of the quarter that are probably worth mentioning. So as Brian noted, we finalized the transaction with Redcat and we agreed upon $2,000,000 for the working capital adjustment. That is a reasonable agreement as it was originally probably at about 2.4 and then rather than having to immediately pay the balance, we were able to work with them to amend our debt note from the $2,000,000 that it was to 4,000,000 and also move the maturity date out till November 30, 2025. So that helps with sort of the immediate cash need.

Speaker 1

We then facilitated an exchange of their common stock for preferred stock, which reduced the total voting shares from approximately 10,400,000 to 6,200,000. After that, Redcat divested their entire position. This series of transactions is a win for Redcat, a win for UMAQ and I think most importantly a win for our shareholders. The only potential loser is me. The reduction in shareholder concentration makes it impossible for me to just go get 3 signatures to get shareholder events done.

Speaker 1

So significant transactions will now require a lot more notice and approval from all of you who we really appreciate as owners of the company. Anyway, that's kind of that's a lot of what has happened, but not what is happening. And so I think I want to talk a little bit about our priority 3, which is growth. We very much believe that the value of the company is in what we will do, not necessarily in what we already have done and I think many of you feel the same way. So, I want to preface these statements by saying that my comments around growth are generally forward looking and are in no way assured.

Speaker 1

And I also want to say that we are absolutely trying to manage for reward rather than manage against risk. And in that way, we're fairly aggressive in how we're trying to go after it. We anticipate the near term growth. And when I say near term, I mean it could be next week, sort of quarter 3, quarter 4, to come from our Made in the USA component business that we are absolutely in the process of moving forward with right now. We are focusing to start on FPV, so first person view components, where we are extremely well positioned because of our long standing brands, our internal expertise and our price competitiveness.

Speaker 1

We finalized the development of our USA made flight controller, the BRAVE-seven. It was just added to the Defense Innovation Unit's Blue UAS framework, which is an external certification by the US government just last week. It's actually in production right now. We have great videos of it. And the blue framework is a list of not just NDAA compliant parts, but ones that are approved by the US military without additional paperwork.

Speaker 1

And so it does really open up the procurement process. In a very short period of time, we're already starting to see market validation from the flight controller alone. So remember, again, Blue UAS a week ago, but in addition to retail sales, we've had 20 customers already order multiple units of it for evaluation in their programs in anticipation of placing larger orders. This is a more positive market reaction than we initially expected. And then separately, as we suggested during the inventory discussion earlier, we did have a single enterprise partner order about $100,000 in drones and drone components that we're in the process of preparing and will be delivered this quarter.

Speaker 1

So in addition to just the drone components, which we're out there working on with the Brave 7 and then we have a roadmap for other components, we also see a lot of opportunity in doing complete FPV drone products. As part of that, we've formalized the partnership with Redcat Holdings and with the Redcat Futures Consortium, where we are the primary supplier for the FAANG drone that is part of their family of systems. There's, you know, with Replicator and a lot of the other programs, there are a lot of potential contracts and customers that are interested and we are definitely under consideration in these where we could be a very meaningful subcontractor. I think the third thing that is often overlooked is there's what's called RDT and E money or research and development contracts and these can help offset our costs in additional development and also just some of our operating costs as we try to build this out faster. There is a bolus of funding for drones and we're hoping to be able to capture some of it to accelerate developing a U.

Speaker 1

S.-based supply chain for critical components for our size category of drones. So our corporate drive to build these parts is actually converging with DoD initiatives to quickly have this supply chain come into existence really to help alleviate some national security concerns. So I would say for us, the next 2 months are very critical for contract awards because the US government fiscal year ends September 30th and with the continuing resolution last year, a whole lot of the allocation is going to occur between here and the end of September with publication probably into early August. We're in consideration for different size, different type contracts, mostly as a sub and we'll have a much better understanding of how we were and what our B2B sales expectations are at the end of Q3. Right now, it would be a guess.

Speaker 1

And so, we don't feel comfortable providing guidance. So, I think there's some other things here and these are no longer really prepared marks, but this is my perspective. A lot of what we talk about or a lot of how we approach things doesn't seem enthusiastic. We try to be as candid as possible with our shareholders because we view you guys as all part of what we're trying to do together. I've been part of a lot of different companies, a lot of different product launches.

Speaker 1

The early feedback we're getting here is as positive as anything I've seen previously in my career. I had a lot of failures, so it doesn't have those echoes yet. And I really think the opportunity is right now and we have a chance to drive dramatic change. I also think we're pretty much past the IPO and the acquisition sort of, you know, if you throw a rock in the pond, the waves that come from it as Monday of this week, the lockups expired. So there really isn't much more there and I really appreciate the team and all the hard work sort of putting us on a path where we can go forward.

Speaker 1

And so in those ways, I am actually very, very excited about the opportunity that we're looking at and I think we have a shot at what is a $20,000,000,000 industry. That's the like the size of the market for drone parts right now and 90% of it comes out of China. So, you know, I think we're small and we have just this really nice opportunity to go fast and hard and go after it. And so we are and the whole team is excited and you can feel an energy that I find is uncommon and it's awesome. Anyway, before I conclude my remarks, I do want to say thank you again to the entire team.

Speaker 1

It's a small team, people are killing it, they're doing amazing work and what we're doing would be impossible without their buy in and hard work. So, with that, we're going to open it up to questions. I'm going to let you know that we're doing a Zoom, so we got a couple of different ways. I see we got a hand raised So we can put you on audio. There's also a Q and A box at the bottom of the Zoom where if you type them in, we'll read them out and we'll go through and answer them.

Speaker 1

And I think, Christine, do you mind going through and reading the questions for people? And we'll try to answer everything you guys put out there. So, we'll take the ones in the Q and A box first and then anybody who still has their hand raised after that, we'll go ahead and let you ask your question live.

Operator

Hey, great. Sharion, the first question is from Michael and he's asking love RotoRiot. It is perfect for enthusiasts. Andrew, Stacy and Tyler have done an amazing job. However, with defense, other government agencies and commercial interests increasing, is another site with an alternative layout planned?

Speaker 1

Great question. Right now, we don't know what we're going to do for alternative procurement. Everything we do is dual use. So we think it's extremely important that what we make, we make for people who go fly for fun for our retail customers and in doing that, we're honest about the price. And so it's great our government customers can go to the same site and that we're not creating, try to create artificial pricing in a marketplace.

Speaker 1

We really think dual use and reasonable pricing is very much our ethos.

Operator

Okay. Our next question is congratulations on getting your controller on the blue UAS framework. Is a motor next? What would your timeline be?

Speaker 1

We're looking at the reason great because this is a wonderful question. I feel like I'm teed up. When you look at the blue framework, there's a lot of really great drones in the ISR category, teal, Skydio, and the larger thermal camera everything. There's not much in the FPV category. And then the US government has requirement for critical components to be on the blue list for drones or not from a country of origin.

Speaker 1

Those critical components are a flight controller, a camera, the control link or the C2 link, the video link. And so in FPV where we have this advantage where other people aren't already on the list, we're focusing on developing those critical components because they're mandatory. And I think once we get through those critical components for FPV, we'll look at critical components for the broader market in addition to components that aren't critical like motors.

Operator

Okay.

Speaker 1

Alright.

Operator

Our next question is, what is the next big milestone we should be watching for?

Speaker 1

A PO. I mean, we're staring at it. I think over the next 2 months, we either start to get enterprise business and we validate the model or this will be a very hard call in a quarter, but we've positioned ourselves to have parts, to have people explore it. We're going to start shipping components and I think love to see materiality in the next 8 weeks is where we're going after customers.

Operator

And another question is what does the competition look like?

Speaker 1

It really depends. We are the first ones to put an FBV component at our price on the Blue UAS list in the U. S. So, there's a pain point there. Competition globally, you have a lot of it out of China, 90% still China.

Speaker 1

People are extremely price sensitive. And then there are a couple of European companies that have been selling into Ukraine. I'd say Orca is probably the best well known in the industry. So it kind of depends on the bubble for competition, but that's what it looks like. We feel pretty good.

Speaker 1

Like we're trying to go first mover and price advantage. And I think next summer, if it works and it's bigger, we'll see some of the more entrenched players try to come in. So we got to get big fast to get there. And I think we have a good shot to do it.

Operator

Okay, great. And the last question I see here is, will you get an inexpensive drone on the blue UAS list, something basic that can be leveled up after purchase with AI weaponry, ETC?

Speaker 1

We're not the ones that plan on doing that. We may be a provider to companies like the FAANG drone, which Redcat may get through on the Blue UAS list, but we don't plan ourselves on putting anything on the Blue UAS list. We want to work with industry partners and in that way we can stay dual use.

Operator

Okay. That looks like all of those questions, Alan. Thank you.

Speaker 1

No problem. Does anybody else have questions? All right, good. We have other questions. I can read these if you want, Christine.

Speaker 1

We have a great question saying, access is key in the defense industry. What is your current level of access and are you working to bring on a former DO official on your board? Access is key. I would say if you look at our filing in regards to getting on the Blue UAS list, you could see that we worked with the Marine Corps Warfighter Lab and they were directly quoted in that. We also are partnering with a lot of the primes that do defense work.

Speaker 1

We ourselves don't ultimately want to be a defense prime. We want to be dual use and we want to be a component supplier to the primes. So, in some ways, we're a little bit beholden as a sub to those companies. But given that I came out of Redcat and Teal, we have some access and know a fair number of the individuals in the U. S.

Speaker 1

DoD that work in the small drone groups. And so we've been able to meet with them and understand their needs pretty effectively. And we do plan on continuing to get more different components on the Blue Framework and that really allows them to shortcut through a lot of the procurement and it makes it a lot easier just to get POs rather than go through the programmatic process or some of the other contract processes. Other questions? Happy to answer them, guys.

Speaker 1

I really appreciate everyone being here and, you know, we're trying to be as great question. How reliant are we on Redcat? Well, right now, not at all. We hope to partner with them. They represent a really good enterprise partner, but our core business is retail and that has nothing to do with them.

Speaker 1

And then we'll have a very good idea of what the breakdown is between Redcat component sales, other partner sales in a quarter and we'll know and be happy to share what amount of what percentage of our enterprise business goes through a single partner because that'd be a concentration risk. But I think for this sales cycle, we're working very closely with them and we're excited too. Those guys are great and I've worked with them for a lot of years and I think we're a really effective team. So, happy to take any other questions. Otherwise, we'll post this live.

Speaker 1

And again, really appreciate everyone's time today and I look forward to the next few months. Thank you again, everybody. I hope you have a wonderful afternoon. And if you don't mind, if you feel like sending an email to investors at unusualmachines.com with any feedback or any way you'd like to see these types of calls go differently or be amended in the future, we're really interested in being sure we communicate in the most effective way that we can for you. So, thank you very much.

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Key Takeaways

  • Unusual Machine’s cash balance fell from $3.2 M to $2.2 M in Q2 after a ~$700 K burn driven by IPO/acquisition costs, operations, marketing and a $200 K risk inventory build; management plans to cut inventory from $2.7 M to $2.0 M to extend runway beyond one year without additional financing.
  • Retail sales reached $1.4 M in Q2 at a 28% gross margin (14% sequential growth), positioning the company on track for its $5 M full-year retail revenue target without launching a new flagship product.
  • The US-made BRAVE-7 FPV flight controller was added to the Blue UAS framework and has already attracted 20 evaluation customers alongside a $100 K government order for drones and components to be delivered in Q3.
  • Growth strategy centers on developing Made in USA NDAA-compliant components—flight controllers, cameras and C2/video links—to win defense and enterprise contracts ahead of the U.S. fiscal year-end (Sept 30).
  • Integration of Fat Shark and Rotor Riot acquisitions is on track, with $19.6 M in goodwill, a $2 M working-capital adjustment added to the promissory note (maturing Nov 2025), and $2.7 M of inventory supporting both retail and enterprise growth.
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Earnings Conference Call
Unusual Machines Q2 2024
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