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Greetings, and welcome to Unusual Machines First Quarter 2026 Financial Results Conference Call and Webcast. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to Christine Petraglia, Investor Relations for Unusual Machines.

Thank you, operator. Good afternoon, everyone. With us today are Unusual Machines' CEO, Allan Evans; and CFO, Brian Hoff. During this call, management will make forward-looking statements, including statements about our expectations concerning the demand for our products, our ability to manage this demand, the growth of our operations, our business and our revenues, the growth of the NDAA compliant drone market, our anticipated gross margins and future costs, our plans to scale manufacturing capacity, including the timing and success of new production lines for motors, batteries, cameras and headsets, our battery manufacturer acquisition, our ability to achieve cash flow positive operations in the future and expected 2027 FAA rulemaking.

The results expected by some or all of these forward-looking statements may not occur. Factors that affect our ability to achieve these results, including the risks that enough of our customers receive orders under the Drone Dominance program or other government programs and in turn, place component orders with us as well as potential funding reductions, program delays or changes in procurement priorities.

Our dependence on a limited number of enterprise customers and the risk of customer concentration, the risks that our inventory buildup will become obsolete or that we cannot sell such inventory at reasonable margins.

Our ability to manage our rapid growth, including integrating new employees and maintaining quality control, risks relating to manufacturing bugs, delays or failure to achieve anticipated production efficiencies, the availability of satisfactory labor pool to meet our planned growth, potential supply chain disruptions or component shortages. The impact also from tariffs, including inflation and increased cost of goods sold, the risk that our automated production equipment may not be operational on the anticipated time line, unanticipated audit issues relating to Upgrade Energy, technical or political risks that may affect FAA rule making and the risk factors contained in our Form 10-K for the year ended December 31, 2025.

Factors or events that could cause our actual results to differ may emerge from time to time, and it's not possible for us to predict all of them. Any forward-looking statement made by us herein speak only as of the date of which it is made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. 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.

Thank you, Christine. Good afternoon, everyone. Thank you so much for joining us today. We really appreciate your time. I apologize if I'm a little bit hoarse. I've been at the trade show at AUVSI all week, and talking to a lot of people. Anyway, during this call, I will discuss our first quarter 2026 performance.

In quarter 1, we generated approximately $8.1 million in operating revenue. This is a 296% year-over-year growth from the first quarter of 2025 and a 65% increase from the revenue generated in the fourth quarter of 2025. In addition, we generated $10.3 million in net profit for the quarter.

What's really key here is even if you move -- remove from that $10.3 million in net profit, the unrealized gains, if we exclude them, we still ended up being profitable. And we've also really dramatically increased revenue for the first quarter. So the quarter 1 results just start to show the dramatic growth that we're at the early stages of. Every single business indicator that we're seeing is pointing to growth. We were able to jump from $4.9 million in revenue just a quarter ago to $8.1 million in revenue this quarter. And that's without the benefit of Christmas driving high consumer demand.

We've increased our headcount from 81 employees to 141 employees across the quarter, and we continue to grow the team as we move forward. We saw the expected drop in margins as we added all these new employees. And we still -- the team did a really good job and we managed to still hit a 32% gross margin, which is a little bit above where we expected to be.

All of these trends that we've seen in the first quarter are continuing through now, and we're still scaling as fast as we can to meet the needs of the marketplace. In the first quarter, we were able to really secure our war chest to be sure that we can manage the working capital and finance this growth, which normally requires some cash in front of seeing the revenue returns.

We raised $150 million of $17 a share in a confidentially marketed public offering. And we now have about $320 million in total working capital, which puts us in a very strong position. We very recently entered into an agreement to purchase Upgrade Energy, and that's a total of just over $50 million in deployment of cash and stock. That's there to accelerate our battery ambitions and bring a new product category to market faster. It's, I think, really important all of this to remember that we're not seeing this growth by burning cash. So this money remains in our war chest, remains in our bank accounts. It can be used to really foster and turn over the growth rather than just to fund operations. The first quarter was our eighth consecutive quarter with record revenues. Since going public, we've never had a quarter where revenue has gone backward, and we don't expect to have one anytime soon.

So this sort of constant success is just not possible without our entire team putting in a lot of really great work. So everyone is working hard, bringing just fantastic energy to all the different challenges we face as we go through this. And I'm confident that we can continue to handle this really fast rate of growth because I'm confident in the team and in each person doing the job that they're doing.

So I very much have the pleasure with and I do want to say thank you to everyone working at Unusual Machines for continuing to make this possible. I'll now hand this off to our CFO, Brian Hoff, to cover our financial results in detail, and once he finishes, I'll go into more detail on our going-forward plans. With that, I'm handing the call off to our CFO, Brian Hoff.

Thank you, Allan. And thank you, everyone, for joining the call this afternoon. I'm excited to share our Q1 results with you all. As we discussed during our year-end results, we had a lot of momentum entering the year. Our Q1 results reflect that momentum, and we continue to expect to continue that for the remainder of 2026.

With that, let's dig in. Revenue was $8.1 million for the first quarter, which Allan noted is approximately 296% growth from Q1 of last year and 65% quarter-over-quarter growth from Q4 2025. As we left 2025, we felt that momentum and demand coming online, and this quarter is just the start of the demand curve. Our Q1 revenue mix was approximately 90% enterprise and 10% retail with a healthy mix of customers and product and little significant concentration.

Gross margin for the quarter ended at 32.8% for the quarter, which is, again, as we said, is a slight decrease from the trend over the last few quarters. However, we anticipated this as we are continuing to scale as fast as possible, which included significantly increasing our manufacturing staff by adding a third shift to our motor line, a second shift to our assembly line. And our total headcount increased from 81 to 141 and we're coming close to crossing over that 200 employee threshold today.

This is another indicator of the continual demand increase we're seeing and trying to capture. So while we anticipate margins, we'll have some fluctuations throughout 2026. We are making decisions to grow operations and be in a position to deliver on the demand throughout the year and headed into 2027. We are continuing to see our yield rates on manufacturing lines improve as we become more efficient and trained in this process.

Jumping to operating expenses. These also increased during the quarter to $9.9 million for Q1 of 2026. These expenses are -- were specific decisions to continue to enable our growth. This includes building out our G&A infrastructure, including headcount, systems and process build-out. We may see some additional growth in the short term in these costs. However, we will gain some efficiencies as we continue to scale revenue and our operating expenses will grow at a slower rate.

In addition, this includes 2 additional facilities that commenced during the quarter, which is our headset facility and kind of in our corporate office. Included in the $9.9 million figure also includes cash -- noncash related expenses of approximately $4 million and other nonrecurring expenses of about $1.7 million. I'd reference the tables in the back of our shareholder letter for the additional detail around that.

In other income and expense, we had very positive results from our investments. These investments, which are designed for a strategic purpose, creating goodwill in the U.S. drone industry and also create supplier partnerships and customer relationships. Our strategy is working, and we have received orders from these -- some of these investments as well. The results include a $7.3 million realized gain from investments, which is a nice add-on to our overall cash balance without any additional dilution.

We also had additional unrealized gains of approximately $9.5 million and interest income of about $0.8 million. Our balance sheet is strong and shows our continual view of being able to grow into the demand. We have a significant cash balance of approximately $223 million after our public offering in March, which netted about $139 million after expenses.

Our short-term investments are continuing to prove strong from a financial perspective and strategic partner in the industry with a balance of over $60 million. Our inventory, including raw materials, finished goods and deposits paid are approximately $27.4 million, and are going to see this to continue to increase in Q2 and Q3 as we make significant purchase to meet the demand and do our part in managing supply chain issues as best as possible. Our total working capital is approximately $320 million, which puts us in a great position to capitalize on the demand moving forward.

I'd also like to reiterate what Allan said. None of this is possible without a fantastic team working extremely hard to make things move, and very quickly. It is an exciting time to be at Unusual Machines and looking forward to the year ahead. Also, thank you to our shareholders and partners and continuing to support our mission throughout the call. I'll send it back to you, Allan.

Thanks, Brian. So what can I say about the year so far. A lot has changed in the 7 weeks since we discussed last year's results on a previous earnings call. We keep scaling both sales and company sizes. We raised $150 million at $17 a share and then subsequently placed $75 million in raw material orders and signed a definitive agreement to buy Upgrade Energy to really jump start our entire battery position.

We continue to be extremely well positioned as a supply chain leader for components for small drones in the U.S. We have the capital to execute and have been growing while maintaining profitability. I'm going to go into more detail now, but I want everyone on the call to note that my following comments are forward-looking and in no way guaranteed.

From our perspective, demand remains on track. The current marketplace remains severely supply constrained, and we still see demand outstripping supply this year and deep into 2027. We're continuing to build the company and procure raw material to grow into this demand as fast as we possibly can, and we don't anticipate slowing down anytime in 2026.

The primary driver of this growth, it continues to be the Department of War. For example, the Drone Dominance Gauntlet program is one purchasing group, and that remained on track. They announced the timing for Phase 2 as well as reiterate the commitment to buying 60,000 more drones in the second half of 2026.

They even were smart enough to put it before the end of the government fiscal year, so that everything will be done and isn't subject to delays that could be caused by continuing resolution. When you look then out a little further in future demand, the proposed budget for the Department of War, it has a 50% increase. They're talking about $1.5 trillion, but I think even more interesting is the dramatic increase in the proposed budget for the Defense Autonomous Warfare Group, DAWG, moving it to a little over $50 billion, which is really the drone-focused government procurement budget.

The Department of War as an end customer has really strong sourcing requirements with the preference for U.S. supply chain and is really the initial force behind driving this relentless demand cycle. In addition to these drone programs, you're seeing counter drone programs that are really starting to materialize and that's becoming an emerging addressable market segment. I think a very good example of what we're seeing there is real orders and partnerships with our first order coming PowerUS, who is one of the companies we invested in, and it's really pushing an even additional category to create this demand.

So given this overwhelming demand environment, we were trying to scale as fast as we possibly can to provide our customers with the parts they need to sell into the Defense Department or the Department of War.

To facilitate this in April, we placed over $75 million worth of raw materials in order to build out motors and other products. We scaled from 81 employees at the end of 2025 to about 200 employees today, we're definitely adding team members, and we're continuing to add shifts and facilities to deliver the -- just the raw material or the subsystems that our customers need.

In addition, and I think very interestingly, we recently announced the merger agreement with Upgrade Energy for the total purchase price of $52 million. The purchase is almost a 50-50 blend of stock and cash with half of the purchase price upfront and the rest being earned out. So Upgrade Energy did just over $6 million worth of revenue. This is unaudited. So as we go through the audit, it may change, in 2025, and that was in their old facility in El Sibringo, California. They very recently moved into a new 18,000 square foot facility, much larger in Torrance, California. And you guys think we're really going to see that ramp quite quickly. I'm personally very excited to work with Matt Barnard, the owner of Upgrade Energy and CEOs, as he joins the team, and really the entire team they built a really strong brand in the battery business.

They have some patented protected technology that works in production at scale. And then our ability to work right away with them and to do it at scale is going to let us drive, I think, very quick growth in the battery category. And own now the entire powertrain from the battery to the motor controllers through to the motors to build that full lift platform.

Now what I think people might not yet realize is that the purchase and the choice to go do batteries, it's not necessarily a right now choice. It is a strategic choice for what we see as the emerging markets that come next even more than it is just another SKU in our offerings. So we expect the FAA to enable the legislative framework that people are calling Part 108, it should really open up new activities like drone delivery in mid- to late 2027. So defense or attributable drones or one-way drones, whatever you want to call them. They typically only have 1 to 2 batteries per drone. On the other hand, delivery drones because they'll go up and down and up and down and up and down and they'll need to change batteries every time as the batteries recharge are expected to have about 10 batteries per drone.

So this purchase and our subsequently planned build-out in Florida for batteries is going to let us get ahead of the supply chain and this problem to really be in a place to do what is a very large battery-to-drone ratio, TAM for what we see as the FAA enabled market segment that we expect to materialize in 12 to 18 months.

So not only is it revenue right now with a team we like and people with the same attitude, but it also positions us, I think, to capture a large chunk of the value in the emerging market that the FAA is going to open up.

Just a quick summary. First quarter of 2026 is everything working well, kind of working the way we planned it. We're rapidly scaling. Our revenues grew above $8 million. We were able to report a profit, so we're not losing money in doing this. And while our operations are not yet independently profitable, we had about $1.5 million to $1.6 million loss just from operations in terms of cash if you subtract out the equity comp.

Our business as a whole is profitable. We're able to raise more money, quickly put that money to work into our supply chain and really drive what we see as a transformative acquisition with the Upgrade Energy merger.

Unusual Machines remains at the forefront of the domestic components market, and the market is continuing to really see this extreme growth. We're well capitalized. We're extremely healthy. We have the infrastructure to continue to scale. And we're just going to continue to grow as fast as we possibly can. And I am just completely overwhelmingly confident that our team can meet the demand that exists right now.

So I want to say thank you again to our entire staff and all of our shareholders and all of our customers.

With that, I'd like to open up the call to questions.

[Operator Instructions] Our first question is coming from Craig Irwin of ROTH Capital.

So Allan, at AUVSI, it was really obvious talking to many of your customers, many of the other drone producers there, there's no shortage on demand. There is an intense demand in the market, and people want credible supply and your customers are lining up to be as credible as possible. to the end agencies, particularly the military, but also you highlighted delivery as a market, and they are also talking about that. So the biggest constraining factor right now is from what many of them represent capacity.

You've gone from 81 employees to over 200 today. You added a third shift to motors. You had a second shift to assembly. Can you maybe unpack for us how much of your time is going into capacity planning, the $75 million prepurchase on raw materials is obviously a big commitment to that capacity or that execution capacity. But actual employees, infrastructure, seats and workstations new products. You've got camera products and battery products and all sorts of new things coming in. How important is managing this to you right now?

I appreciate the question. And I think when you look at a hardware company, and the inventory flow, managing capacity and being sure that you get utilization, but also don't create backlog in this growth period is my most important job. So capacity really breaks down into 3 different things that we need for it. The longest lead time thing is the raw material. It's also the most expensive. So when we place raw material orders like we just did, you're looking at first deliveries are at least 4 months out, you're probably not material complete, which is when you have all the material to make a thing for maybe 6 months and then you can start to convert that raw material into finished subassemblies.

And what we're seeing is because we're becoming a more and more globally significant buyer from these non-Chinese supply chains is that while we do get a little bit of scaling function, we also get, oh, goodness, we have to go help our suppliers scale to meet our demand. So they also have to scale up. So when you see what we're doing for capacity management, step one, get material in the door so we can transform it.

Step 2 is get facilities. So if you look, we're regularly adding a new building here, a new -- adding on to a building there. And we're going through that, and we're very active in that process and what is our Orlando campus. Because once you get the building in place, then you have a place to put the equipment and the people, and so we see that process typically shows up 3 or 4 months in front of being able to start to produce things. So raw material, let's call it 6 months facilities and the capital equipment maybe 3 to 4 months and then the people really come in a month or 2 beforehand and drive it.

And so you're watching us stage this for material facilities people. And every time we've guessed and done something we thought was ambitious from a capacity perspective. We realized we weren't ambitious enough. So I think we continue to see that, and we have a really great person running HR and trace and train a great HR team, helping drive hiring and really great workforce management folks. And Jay, our VP of Supply Chain is doing a really good job with our buyers, managing the incoming material. And so luckily, I don't have to do the job by myself. But I think when you look at strategically in our business that capacity management and more importantly, the inventory flow management and sort of that transformation is singularly the strategic focus of where we as a leadership team, need to pay attention.

That makes complete sense. So my second question is around the gross margins. So when we were talking in the fourth quarter, you were obviously careful and cautious around gross margins. You're bringing your motor manufacturing up and the other significant aggressive hiring to meet demand, you were cautious but optimistic. This quarter, your execution was strong. It was better than what we were looking for. And that's with some substantial headcount additions. Your margins, is it fair for us to see similar margin execution over the next couple of quarters, given that you have a couple of quarters here under your belt, where you're obviously managing the efficiency and the productivity of new employees. I can imagine that people will become more productive, given months and years of experience. But the gross margin trajectory, I think, is somewhat important, less important than revenue. but somewhat important to the future profitability where many of us are looking several years out.

Yes. No, I -- so -- the team did a really good job of training and getting people on board. And I think being more efficient and sort of aspiring to be really good as a production engine. So I think margins for the first quarter exceeded our internal expectations. I think where we're at, given where we performed it's below the margins we'd like to see when it's a little more stable, but I think in this low 30% range, it seems like it's what we're doing. The team has done a really good job on onboarding. So if we can even hold here and we can hold our material margins where we sort of like them, so that we know that we have the room to hit our gross margin targets in the long run, I would feel really good about it.

There may be some movement around it up and down a little bit because it's not as important to us as being sure our customers get really high-quality products that meet their demand. So if we got in a batch of stuff that didn't meet our quality standards, and we had a scrap rate or something that had a little bit of a negative impact on margins, we'd be okay with that to prioritize customer success, but this feels to me, at least right now, sort of a really good spot.

And where I think we will strive to maintain as we continue through this growth cycle. So I think if I was looking at it -- we did it through it, I think, is one of the harder transformations, which is crossing that 100 employee line. And we now have a lot of processes and training and things that are being built out that I think allow us to carry this success forward.

Okay. And last question, if I may. So many people know my approach is kind of to get around a little bit. So when I met with the people from -- with FAA, I was using them. I was getting around saying, "Guys, what's taking you so long? Mana Air in Ireland has already done 1 million deliveries. This is America where the technology leaders you're holding us back. What's going on?" They were obviously pretty defensive and they didn't really, really get the joke. But when we had the conversation, the more extended conversation, they help me understand that there's outside influences that they would like to get their job done. They really want to get part 108 moving from waivers to permits as far as the drone pilots and give people a clear line of sight, but there's issues with the FCC and others trying to put their finger in the pie.

What do you think key issues are that you could outline for us for part 108 over the course of the next year? I know you also had conversations with key people this week. Is there any update that you think or any framing that you think would be useful here for investors to understand?

Sure. First, I think the FAA is doing a great job and has a very hard problem because manned aviation is extremely safe. And so they got the airspace with all of us flying on the carriers, and they have to maintain that and also got to be sure drones don't fall out of the sky. So they have this challenging problem to create a technology infrastructure that sort of still maintains this thing that they've done an amazing job with. So I have a lot of appreciation for the difficulty of that problem.

I think there are a couple of things that need to be really finalized for Part 108. The big one is what is called detect and avoid. So when you allow drones to fly with one pilot controlling 20 drones or whatever and the skies start to have more things in them, what are the rules around how a drone, even without an operator, needs to see another drone, needs to see an airplane. And then what are the rules around how they dodge in the sky, so that the onboard AIs prevent collisions. So I think that's really one of the things where -- is it radio frequency? Is it cameras? Is it -- and there's some -- how good does it have to be? How is it tested? How do you qualify your drone so that it can fly, because I don't think we should just let an unqualified drone fly across Manhattan, right? That's a high risk.

So there's a juggle a framework for innovation with sort of the regulatory and testing requirements necessary to be sure that, that those innovations are deployed in a way that's safe. And I think they're really thinking about it, they're really smart. They have to collaborate with the FCC because of what if it's spectrum, just like self-driving cars, there's discussions around it, too.

So they're on track. And I actually think they're doing a pretty good job, and I think they're dealing with the right problems. So that's my take on it is everything looks like, it's come together in a very effective way. And I think we'll see it in the year because we're down to the -- really that as the problem detect and avoid and a lot of the rest of it has been sort of addressed and agreed upon as a framework.

Great. Congrats on a really strong quarter there.

Our next question is coming from Josh Sullivan of JonesTrading.

Al, did you say revenue should grow sequentially each quarter this year? And any reason that thought process wouldn't carry then into '27 as now that you have the strategic inventory and order flow at hand?

I mean we've never gone backward. I don't see any reason why we would, right? Like the market's growing, I -- the way that I see demand, I think if we don't see consistent growth, I mean, this -- from quarter-to-quarter, this last quarter, I mean, this is full speed growth. It doesn't mean you won't see hiccups or things that might change the growth rate. But really, I think it's a pretty big tumble on our end if we don't manage to achieve that.

And then with the Upgrade Energy acquisition and the positioning you're talking about around a drone powertrain platform, as the commercial drone delivery market materializes next year, or thereabouts. What do you think that battery-to-drone ratio looks like? And then what kind of business models could we see building around.

So this is very much my personal opinion that I'll share with you, but I think the first delivery applications I really think are going to show up are food delivery. I think it's going to be DoorDash, Uber Eats, Grubhub. And if you look, that matches very much the same performance stuff as the Drone Dominance program, right? So 5 pounds, 10 kilometers, it sounds like a hamburger to me. And I see a lot of appeal to that because it's something that people want urgently. You can deliver by drone in a lot of cases, less expensively than by a vehicle. And I think people are picking up because you don't have to tip the robot, and I think we do have some social tipping fatigue.

Assuming that's true, you're probably looking at 10 batteries per drone for active running, give or take, depending on the design. I mean, we could argue over it all day, but that's a good approximation. And if that's true, batteries only have about 500 cycles. So you're probably looking at 10 batteries per drone per year as the attachment rate. And so it actually becomes more of an ARR function on the hardware in that delivery cycle rather than a onetime sale. And so I think that will lead to some interesting business models and some interesting ability to say, okay, here's our recurring power base.

But also importantly, I think that the batteries and the motors and the whole powertrain are going to be part of the certification process, because if you have a power failure, you're going to need to understand how to detect it and have it land safely.

So in order to get certified to fly over people, there's going to be a lot more requirements than there are for combat drones that are designed to go crash and don't have the same sensitivities for mitigating accidents. So I think we're going to see a lot of the energy and the scale being put in the drone, the Gauntlet program, particularly for the larger vehicles are going to lead to some really great airframes and some cost structures, I think $5,000 a drone that are going to be able to deliver hamburgers or pick whatever food is.

But for me, it's always burritos. But anyway, we are going to be able to do those deliveries. And then I think you're going to see a battery ecosystem where the powertrain is going to have to be certified. So we're setting up to position -- if you walk through our factory, for instance, we don't do it right now. We do date codes on tracking our motors, but we have the ability to actually do full electrical characterization and individual serialization of every single motor, if that's what the FAA requires or track the amount of time the motor runs for swap out. Same with batteries, same with energy levels, sort of all these things that you'd see in maybe a type certification process for a different kind of aircraft.

And our next question is coming from Austin Bohlig of Needham & Company.

Congrats on the great results. Allan, I was just curious with this battery acquisition. Could you talk about how this changes whether from like a revenue or kind of margin upside opportunity when it comes to the total content you guys are selling into Drone Dominance per drone?

So for Drone Dominance, we were distributing their batteries. So I don't think it really changes the total, like our partnership there has made us feel really good about this acquisition. But it does mean that we'll get margin expansion. And I think on the batteries now, you'll see us move to that 40% gross margin somewhere in there because, again, we're not -- we try to target that to be a fair and equitable supplier and not break downstream economics for everybody.

So for Drone Dominance, I think we'll see that element of expansion. But I also think they were in a similar place where we are where there's this overwhelming demand. And so now we're able to go work with that. And with some of the battery cell suppliers and start to drive more battery volume, because we have the credit terms and the cash balance to break or do a lot more of the forward-looking inventory purchases there as well to enable really fast battery capacity growth where it would have been more constrained have we not decided to try to put these 2 companies together.

Okay. And then how should we think about as you guys ramp throughout the end of the year? What operating expenditures should look like? And I think you highlighted in the press release that the breakeven point might now be a little bit higher. Just maybe trying to frame up how we should be thinking about that?

Yes. I think it's really going to come down to how much and how much faster we scale. So I think the breakeven point moved higher because we have more space, more people doing more stuff than we originally expected. But I think with where we look at the end of quarter 1, we're starting to get to maybe a more normalized blend across our employee base of employee types. And so I think you can look at operating expenses has probably been a headcount ratio to total expense that we saw in quarter 1, if I'm estimating.

And then what I think you're going to see is the revenue generated per employee start to scale to push us past burning money. So maybe that's not the best answer on the planet for you, Austin. So I'm sorry if it's not. But I think we're moving to where our cost per person is pretty -- is starting to stabilize. I think by the end of quarter 2, quarter 3, it will really stabilize and that we'll then see our ability to generate revenue per employee start to really expand as efficiencies increase.

Well, we appear to have reached the end of our question-and-answer session. And I will now hand back over to Allan for any closing remarks.

No, again, everybody for listening. Really appreciate it. Really appreciate all the support. I think without the investor community, without our customers, without people who are interested in believing us we're not in a position to help onshore production and create these jobs and really be part of the transformation of the American Drone Ecosystem. So I do want to say thank you. If people have questions or are interested, always reach out. We try to be as transparent as possible and appreciate your continued interest and support.

This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful rest of the day. We thank you for your participation.

Greetings, and welcome to Unusual Machines Fourth Quarter and Fiscal Year 2025 Financial Results Conference Call and Webcast. [Operator Instructions] And please note, this conference is being recorded.

I will now turn the conference over to your host, Christine Petraglia, Investor Relations for unusual machines. Ma'am, the floor is yours.

Thank you, operator. Good morning, everyone. With this -- today our Unusual Machines CEO, Allan Evans; and CFO, Brian Hoff. During this call, management will make forward-looking statements, including statements that our expectations containing the growth of our operations our business and our revenues, the growth of the NDAA compliant 1 market, our anticipated gross margins, our plans to scale manufacturing capacity, including the timing and success of new production lines for motors batteries, cameras and headsets, our ability to achieve cash flow positive operations in the future, our workforce expansion plans and future acquisitions we may make. The results expected by some or all of these forward-looking statements may not occur. Factors that affect our ability to achieve these results include the risks that enough of our customers received orders under the grown Domino's program or other government programs and in turn, place component orders with us as well as potential funding reductions, program delays or changes in procurement priorities.

Our dependence on a limited number of enterprise customers and the risk of customer concentration, the risks that our inventory buildup will become obsolete or that we cannot sell such inventory at reasonable margins. Our ability to manage our rapid growth, including integrating new employees and maintaining quality control, risks leading to manufacturing, bugs, delays or failure to achieve anticipated production efficiencies the availability of satisfactory labor pool to meet our planned growth potential, supply chain disruptions or component shortages. The impact from tariffs, including inflation and increased cost of goods sold, the risk that our automated production equipment may not be operational on the anticipated time line, any risk that our auditors may require us to meet changes to our financial statements and the risk factors contained in our Form 10-Q filed with the SEC on November 6, 2025, prospectus supplement filed with the SEC on September 2, 2025, and July 15, 2025, and May 6, 2025 and in our Form 10-K for the year ended December 31, 2025, which we anticipate filing in the coming days.

Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Any forward-looking statements made by us herein speaks only as of the date on which it is made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as -- required by law. And 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 our CEO, Allan Evans. Please go ahead, Allan.

Thank you, Christine. Good morning, everyone, and thank you very much for joining us this Monday. During this call, I will discuss our 2025 annual performance and also emphasize results specific to the fourth quarter. In the year 2025, we generated approximately $11.2 million in revenue, this is 101% year-over-year growth from 2024. Over the course of the year, we raised $157.8 million through equity financing and closed out the year with $103.3 million as part of our $157.4 million in total working capital. This is a massive, massive balance sheet increase from the $3.7 million we had in cash at the start of 2025.

The 2025 results taken in aggregate, don't clearly portray the dramatic changes that occurred throughout the year. The year was a turning point for our business as we underwent a transformation from an online retail store to become a drone components producer and enterprise sales business. This can clearly be seen in the quarterly percentage of our revenue that was attributed to our Enterprise segment. It was 31% in quarter 1, 48% in quarter 2, 57% in quarter 3 and 81% in quarter 4.

Hardware companies like ours, but rapidly scale operations and often see revenues, we often see these revenues follow operation scaling by a quarter or so. Our growth shift started in the third quarter when we went from 19 employees to 38 employees across the quarter. At the same time, we also began to expand our footprint from the 6,900 square feet to the 62,500 square feet that we had at the end of 2025. The fourth quarter results the financial results are representative of the start of this growth process because the growth process started in the third quarter, and I would like to cover them in more detail.

The fourth quarter was our seventh consecutive quarter with record revenues, and it is not even close. We generated approximately $4.9 million in the fourth quarter which represents quarterly sequential growth of 133%. While growing, we were also able to sustain gross margins of approximately 36% and which did exceed our internal expectations for the quarter. We continue to scale operations in the quarter, growing from 38 employees to 81 employees at the end of 2025 and when we started production of our motors in some scale at our motor factory in November.

We expect this operational growth from quarter 4 to be evident in the 10-Q we filed at the end of the first quarter of 2026. Even now, we are continuing to scale as quickly as we can to meet demand and are already over 140 total employees. Our IPO was only 2 years ago and we went public with the plan to transform into a leader for onshoring the production of drone components. In a relatively short period of time, we have managed to undergo that transformation, and we are absolutely in the early phases of rapid growth. This success would not be possible without the work our entire team puts in. As we continue to grow, we now have a few older and many, many newer employees. Everyone is working hard and bringing just incredible energy and ideas to all of the challenges we face.

I am confident that we can handle the growth because I am confident in everyone I work with. So I want to say thank you to everyone working at unusual machines. I will now hand this off to our CFO, Brian Hoff, to cover our financial results in detail and once he finishes, I will go into much more detail on what this looks like going forward. With that, I am handing the call to our CFO, Brian Hoff.

Thank you, Allan. Thank you to everyone for joining our call this morning. I know you've heard it from Allan but it's the absolute truth. 2025 was a transformational year for Unusual Machines. We started the year with the goal of bringing drone component manufacturing to the United States. And by the end of the year, not only have we accomplished this, but we did this with such dramatic pace and scale that's required for the industry. And this is starting to show in our financial results as we will discuss.

But a quick note. As we mentioned in our shareholder letter issued this morning, the numbers in our presentation are unaudited and subject to change. We expect our audits to be completed in the next few days. Revenue was $4.9 million for the fourth quarter, which is approximately 133% growth quarter-over-quarter. And fiscal year-end 2025 revenue was $11.2 million, which was 101% year-over-year increase. This is the start of us realizing that operational scale and transformation that's driven by the shift from the entire enterprise -- from retail to enterprise customers, as Allan highlighted. And again, it's based on our enterprise mix starting around 30% in Q1 to over 80% in Q4 and really driven by our manufacturing coming online. And again, just to start.

Gross margin has increased from 24% in the first quarter to 36% in the fourth quarter and 35% for the full fiscal year 2025. Our margins continually improve as our mix has also shifted from retail to enterprise. That being said, we do expect to see some margin fluctuation and decline in the future quarters based on certain product mixes as we continue to scale up manufacturing, invest in growth, add team members and making our processes more efficient. Once our automated motor line is installed in the second half of this year, we expect to see operating efficiencies and the ability to increase our delivery of drug components to customers.

Our operating expenses increased from $18.5 million for 2024 to $29 million for 2025, all of which are choices to enable us for this growth. And more importantly, put even more growth in the future and this increase is in line with our expectation. Yes. The largest increase in there is noncash stock compensation expense, which was $15.6 million during 2025. We also increased our head count from 15 to -- at the beginning of the year to 81 by the end of the year, expanded our systems, increase our Investor Relations outreach. And again, many other investments for enabling us for the future. We added additional facilities, which includes our motor factory fulfillment center headset factory.

And I'd also just like to reference you guys to our GAAP Q4 net loss to our net non-GAAP operating loss in Table 2 of our shareholder letter to provide more detail. In regards to other income and expense, we had an interest income of $0.8 million in combined realized and unrealized gains from -- sorry, for the year was $1.8 million and combined realized and unrealized gains for short-term investments of approximately $4.1 million during 2025.

Shifting to our balance sheet. Our balance sheet is strong and is a reflection of our continued investment in growth and the momentum that we have heading into 2026, our primary 3 items that we look at is cash, inventory and our investment portfolio. We ended the year with $103 million in cash and that included 3 different capital raises that netted approximately $157 million in cash. Our inventory, including prepaid inventory, is over $15 million at the end of the year, and we are continuing to make purchases to be in a position to help provide needs in the drone supply chain. As part of our strategic plan to develop strong and strategic partnerships within the industry, we made strategic investments in drone companies that expect will drive additional liquidity. These 3 assets, combined with no debt, is setting us up for additional success, growth and scale for 2026.

As Allan said, thank you to the entire UMAC team. Everybody is working very hard, strong growth as we could do without them. We look forward to making this a great place to work. Also thank you to all of our shareholders and partners. Allan?

Thanks, Brian. 2026 is going to be your rapid growth for the U.S. drone ecosystem. We believe we are extremely well positioned as one of the supply chain leaders for components for small drones. As Brian said, we have the capital to execute and the responsibility to demonstrate to our customers and shareholders that we can manage rapid growth. I'm about to go into more detail. But I want everyone to know that my following statements are forward looking and -- extra material now, we see the constant increase in demand over the next 24 months as consuming any excess that we have and making it reasonably safe from a business perspective to be so aggressive that we could even overbuild in the short term.

This supply and demand imbalance and it's dramatic is created by 2 factors. First, legislative and regulatory actions have removed foreign competition from the market and domestic capacity is nascent. Second, the recent success of drones in the international complex like Ukraine has resulted in the driving demand for drones and a domestic supply chain capable of supporting the expected burst drone demand required in a potential war time scenario. The legislation is walled off the garden and the department of ores providing the influx of capital to quickly mature domestic solutions.

There are several legislative actions that all layer in to enable domestic producers to succeed in the U.S. market while making it more difficult for competitors that are overseas to sell into the market. This has been true for the drone companies themselves for a few years with legislation like the American Securities Drone Act, but this has recently extended to components providers with legislation in 2025. There were some smaller examples of government actions that highlight how quickly this market all has directed -- was the SCC ban on new licenses for all foreign-made drones and drone parts that went into effect in late December of 2025.

The impact of this legislation on our business cannot be overstated. The U.S. drone market for small drones is about $10 billion in revenue annually. That represents about somewhere between a $3 billion and $5 billion total addressable market for parts if the drone market stays flat. And it will all have to be made in the United States going forward or get a waiver from the FCC. This FCC action was unexpected, and it creates a huge marketplace vacuum in both the consumer and enterprise segments to go along with the demand we're seeing from the military segment of the industry. To repeat, we believe the FCC actions have created at least a $3 billion nondefense components marketplace that will require domestic solutions within the next 3 to 5 years and massively expand the total addressable market we can go after.

The second government push that is driving demand still on that demand side is the injection from the Department of War. The DOW has recently initiated several programs to buy different types of small drones, including short-range reconnaissance, which is SR purpose-built attritable system, PBAS, and most recently and most publicly the drone dominance program. The drone dominance program is a very public example of how the Department of Bard is trying to drive scaling of the drone companies and the supply chain. They have communicated the entire procurement process publicly on their website. They plan on buying 90,000 low-cost drones in 2026 and 250,000 drones in 2027. This program alone represents about $90 million component opportunity for us this year in 2026 and roughly a $250 million component opportunity in 2027. While the environment is set and demand is there, it really doesn't matter unless we unusual machines are able to see and sell into that demand.

As of right now, we have about $12 million in outstanding purchase orders that we are working to fulfill. About $9 million of those purchase orders are for programs that are not drone dominance. The first set of 11 winners for drone dominance were just announced on Friday, so I expect our sales team is probably reaching out, and we would see additional orders from them, hopefully soon. For the record, more than half of the announced winners of drone dominance are already customers of ours in some form or fashion. This early demand for our parts from the marketplace gives us a high level of confidence that we can capture a significant percentage of the total demand and total demand growth as long as we deliver quality parts on time for our customers.

Given this overwhelming environment of demand, we have started to scale as fast as possible to provide as many products as we can. In very late December, you see some of that on our balance sheet. And in early January, we placed over $15 million worth of raw materials so that we could receive elements from our supply chain to build motors and other products. We have scaled from 81 employees at the end of 2025 to over 140 employees today. We have started a second and third shift at our motor factory, and we're currently producing about 15,000 motors a month, while that number is regularly increasing as we generate efficiencies. We've also started a second shift at our flexible production facility where we kit and do other things to help our customers more effectively manufacture their drones.

In addition to scaling our current products, we are working on introducing new products to capture more of the total component market. Some people might call that wallet share. In January, we produced our first U.S.-made Fat Shark headsets, and we are very quickly scaling to be able to manufacture 100 headsets per shift per day, and we expect to hit that run rate sometime in April. We are working on setting up battery pack production, which we expect to be online in the second half of 2026 as well as install a very high-volume automated motor production line in the second half of 2026 and that should get us to well over 100,000 motors a month.

Finally, we anticipate manufacturing cameras in the United States by the end of 2026. Our explicit goal is to scale production so that we could meet the entire demand for every part that we sell from every company that would get orders in the second phase of drone dominance, and we expect that to occur in September of 2026, and we want to be ready.

That second tranche requires drone companies to use domestic supply chains or at least NDAA compliant supply chains and represents a major opportunity for our parts to get designed into their products. This is not mandatory for delivery of drones in this first phase, but it is for the second. We want to be available to all those great companies to be a supplier and deliver on time even if every single one of them requires parts from us. We have enough money to do all of this. We finished 2025 with about $157 million in net working capital and over $100 million in cash. Our growth is not resource constrained and we are doing a very good job of actively generating revenue as we scale.

Our financial position is strong enough that we can consider potential acquisitions if the right opportunity presents itself without having to compromise our growth plans. We do view acquisitions as a meaningful way to go faster, and we would use the template that we used when we acquired Rotor lab. We see the acquisition plus the build-out in conjunction accelerated our motor production by 6 to 12 months and has allowed us to scale faster.

To summarize, 2025 tells the tale of our transformation. The fourth quarter demonstrates tangible outcomes from scaling we started in the third quarter. We are well capitalized continuing to grow, and we believe that there is overwhelming demand from components that we make for the next 2 years. Unusual Machines is at the forefront of the domestic components market, and the market is undergrowing rapid growth. Our business is capitalized and extremely healthy. We are continuing to grow as fast as we possibly can and I believe we will capture a significant portion of this rapidly expanding market.

I am so confident that our team can meet this demand. I want to say thank you again to our entire staff and all of our shareholders and our great customers. And with that, I would like to open up the call to questions.

[Operator Instructions] Our first question is coming from Austin Bohlig with Needham & Company.

Congrats on the solid quarter. First question was just around kind of like the backlog number. So I think you guys said it's around $12 million. Is that the right way to think about total backlog?

Yes. So -- my whole team is cringing. Thank you for the question because I don't like the word backlog. It implies we're not delivering on time. But that is the outstanding volume that we're working toward delivering to, and we're still hitting delivery schedules. So $12 million is where we have purchase orders for right now. And then we have forecast further out from customers.

Got it. Got you. And then congrats on the high exposure to drone dominant tranche 1. Could you maybe just like walk through with like the 6 to 5 customers like how much content per drone you guys are working with? Like are they buying the whole portfolio of content? Is it primarily motors? Would just love to get a sense of kind of how you're exposed for this first tranche.

Yes. So very few customers across all of the entrants have placed full drone dominance orders yet. So that's being discussed this week now that they found out that they won. So for our blend could be anywhere from 1 part for a customer all the way through a large chunk of them. But even actively over the weekend, we were getting some of these customers asking about other parts of the offer. So I don't know what the mix is. I trust Stacy and our -- the whole revenue side of the house, we'll do whatever we can to serve as much of their needs as possible.

And then just kind of last question, a sense of kind of like how we should be thinking about the ramp throughout the year. So would we be like modeling sequential revenue growth throughout 2026.

I -- we're still scaling as quickly as we can. What I would say is there could be hiccups supply chains could be tough for instance, there's currently a challenge getting barometers. And as demand for drone dominance, I think, sucks up a lot of parts. We have to get further in front of it. But I would expect sequential growth over the course of the year with maybe some supply chain acquisition challenges if demand continues to outstrip supply. So the goal is sequential growth. Our procurement team is in front of it, but you got to be material complete to make a part. And if you're waiting on 1 component, there could be a delay that could cause revenues to slide 1 way or another. Okay.

Our next question is coming from Matthew Galinko with Maxim Group.

Congrats on the strong year. Can you touch on the investment needed for the automated motor production line? And do you expect it to be kind of tuned and yielding at its expectation this year? Or is that kind of a 2027 event?

So the CapEx has already been made that is already accounted for in our books. It's really -- we're targeting having it in-house right now, July, it's a little bit uncertain. But then at the same time, the cost that you'll see is the material component. So if you're going to run 100,000 motors a month, you've got to procure the material for that 6 months ahead of time. So you'll see inventories match the requirement for that probably 2 to 3 months out, and then it will turn on slowly. We really expect to see it running a reasonable scale by quarter 4 with -- for faster if we get it done in quarter 3, that would be great. And you'll see the cost -- the added cost for it will be us scaling inventory. But since we're already moving toward 20,000 to 30,000 meters a month, you'll just see that carried as inventories and prepaid inventories probably at the end of Q2.

Got it. Okay. And then you mentioned outperforming your internal expectations for gross margin in the quarter. Can you maybe give us some thoughts on how that trends as you make these additional investments and expand into -- I think you mentioned battery pack production sometime this year. So where does gross margin trend?

Sure. And I'll explain why just so everybody can be aware on how gross margins work. So you scale operations, all right, you don't really start to see revenue until a quarter delayed. You don't really see the gross margin impact to even a quarter after that. In a lot of ways, gross margin because the people doing the work are in gross margin, but it doesn't show up in the financials until the product is shipped. So for instance, as we had people and we're building motors in November, we shipped many fewer motors that we made in November versus that we would in January. And so when you start new processes and new people, they're not as efficient as they become with training and expertise and new processes. So I would expect whenever we turn something on, like the motor factory, the biggest impact to gross margins would be a quarter delayed, so you'd expect those in quarter 1 and then recovery from that as efficiencies and processes and scale come in?

So we thought we'd see more from really the rapid scaling more of a dip, but the employees that came on we're more productive and crushed and learned and our team did a good job of keeping the dip lower, but I would still expect our worse gross margins as we go through this to be somewhere in the quarter 1, quarter 2 time frame as we've just brought on so many new people and created so many new processes that the natural impact to COGS will be in those quarters.

Very helpful. Final question for me. Maybe if you could touch on what the competitive environment and components looks like today. You've kind of been going at this for a few quarters now, and I'm curious if anybody is kind of following a similar playbook or starting to catch up in components.

There's several other small companies that are private that are out there doing different types of parts. In addition, some of our customers choose to do their own parts. So I would say for electronics, PCVs, there's a really great supply chain in the U.S. I'd say for everything else, there's nobody that is doing higher volumes than us. And again, because we think that this is a supply-constrained market. It's just us growing as fast as we can without worrying about competitors because there's this much larger demand where we just collectively can't fulfill at all. So right now, this is -- everybody can go as fast as they can to secure market share question. And so we think there are a lot of other companies out there trying to do and enter some of these segments in the U.S. I do think that if you looked at who some of our competitors were last year, you'd look and say, like luminaire on the retail side for good FPD. A lot of them set up NDAA compliant but foreign supply chains in terms of -- and the FCC ruling was a really big surprise for that. So we've been very aggressive about onshore in production and still are. And I think a lot of the categories right now we're the largest producer.

Our next question is coming from [ Jonathan Seidman ] with Stifel.

Brian great color on how supply constrained the market is. I appreciate that. Just with your capacity being so valuable in this environment, can you just talk a little bit about how you allocate that your resources to customers? How do you choose winners in this dynamic marketplace.

Jonathan, I appreciate it. The first thing I would say is the other side of this question is a lot of people ask why we don't increase our prices. So I'd like to start to say that we're trying to build relationships and a pricing model that's stain, and we're not in this unique market. We try really hard not to pick winners. We try to work with as many people as possible. And that's where I'll use my statements about drone dominance as an example. We are building capacity to build components for every single winner of Phase 2. Will we be -- be able to supply every single winner? Will they all want to buy our parts? Probably not, but I hope they do. But in that way, we'll talk to and work with the 30 potential companies when drone dominance is only down select to 10, and then we'll have a capacity to stop ply 10, and we won't be forced to make companies that may not have won that program take components.

So we think by building to match the end customer demand, we're in a better position to shift material streams from us to the customers based on how effectively they compete. And that's really what we're trying to do is meet the entire U.S. components demand so that none of our customers so that we don't have a dependency and they don't have a dependency on any specific individual program.

Our next question is coming from Barry Sine with Litchfield Hills Research.

I want to ask about the B2B sales pipeline coming up for 2026 and a couple of parts to the question, with a lot of numbers. So how many B2B customers have you shipped to over the last year? How many are in that $12 million backlog? And then looking ahead, what does the process look like? I know Stacy was promoted to Chief Revenue Officer. What does her team look like? I assume with the drone dominance announcement, it's all hands on deck right now to get those orders. But if you can give us a little visibility that would help us looking out over the next year?

Yes. So I think the number of customers we've sold to depends on how far down the line you want to slice it. we've sold hundreds of enterprise customers at small scale for R&D and some of that even through our retail channel. At large scale, I it's constantly shifting with some of these programs, but we don't have single customer concentration. We still don't. I'm not positive where the exact 1 is exactly today. And really where we see Stacy's team continuing to drive this -- and what we see is really important is not new customer outreach, but more importantly, being sure all the customers we have are satisfied. I believe in the last year, our sales team has done a really good job of driving awareness to everybody and getting small numbers of parts and being designed in for most of the drone companies that people are aware of or that we think have any ability to scale and even some that are smaller? And now it's really relationship management and starting to look more past what they need today to what they need tomorrow.

So we don't care to service 200 customers, we think the market is going to consolidate some and maybe be down to 50 customers. And we want to be sure that those 50 customers have a great experience working with us and what they need.

And maybe a little visibility on what does Stacy's team look like? How many folks are underneath here now? How many in sales, how many customer service, what does that team look like?

There's 5 or 6 people right now doing the combination of sales and customer service, really more relationship management. And then we're actively looking for more account managers. Nice thing is it doesn't need to be a huge team because we don't have to go door to door or anything, and they're doing a great job.

And if I could shift gears. I know it's no longer the focus, but on the retail part of the business, are you still looking to grow that business? How important is it? I know you've added a new person in charge of that, and I'm actually seeing rotary TV commercials now. What's the strategy for the retail business?

The strategy is to use it as a sales funnel and provide parts out there. So the goal is to keep it healthy. We don't expect significant growth there. We expect it to move in the marketplace. But it acts as an amazing sales funnel. So a lot of our customers will go and buy motors off of there for R&D, et cetera, knowing that they can buy them at scale when they go to production. And so from that perspective, we think it's a really important part of our sales process. It minimizes the need for people to go ship stuff all the time. And from that perspective, our hope is to see it continue where at that with some growth and some energy, but right now, it's not the priority of our business.

Our next question is coming from Josh Sullivan with Jones Trading.

With the start of operation epic, Allan, what have been your observations just relating to unusual machines and future warfare and how you're positioned? I get mostly larger systems at this point. But if you look at lessons line so far, curious what your observations are.

Yes. So I'll start and say, hey, war stocks right? And -- what we're seeing is through conflict, people have developed new technologies. And in this case, I think Ukraine is still the largest driver of would has caused people to look at the drone component supplies. I would say when you look at Epicuria, when you look at everything else, when you look at drone dominance, whether it's on the positive or negative side, I think the current Department of or realizes not just that drones are going to matter, but counter drone is going to matter. -- and that we have to understand both sides of it. And so I think they'll procure a whole bunch of drones to test counter grown systems to understand what they may use from our department or may understand what adversaries may use against us. And I think you're just seeing the solidification of this next generation or next paradigm of how complex you're going to be operated with robots and particularly aerial robots.

And then I guess just a question on the funding side or your customer funding side. What are customers seeing on contract adjudications as the environment picked up is funding getting out to them?

I don't track too many of them too hard. I mean most of them or a lot of them are large enough that they make money and they pay their bills on time. So I haven't had people say, hey, look, we can't pay you for components because we're waiting on pet, which we'd be fine with. So in that case, I assume that they're getting paid. But we don't dive too deep into it past that.

Got it. SP1 And then in the letter for 25, painted a picture of 2 halves for '25. How would you might characterize '26, particularly as you scale here to capture this big demand environment?

So I'm going to use an analogy because I like it, and this is a little bit more me, but '25 was fuel in the rocket. And then you saw in early -- like in mid-25, we lit the fuse. And like any rocket taken off, it starts really slow. It just starts to lift off the pad. And I think '26 is going to look like the next part of the launch.

As we have no further questions in the queue at this time. I'd like to hand the call back over to Mr. Evans for any closing remarks.

Thank you, everybody. We really appreciate your time this morning. Please reach out if you have additional questions. And again, I'd like to say thank you to the entire team for making all this possible. I hope you guys have a great morning.

Thank you. Ladies and gentlemen, this does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.

Greetings. Welcome to Unusual Machines Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to Christine Petraglia, Investor Relations for Unusual Machines.

Thank you, operator. Good afternoon, everyone. With us today are Unusual Machines' CEO, Allan Evans, and CFO, Brian Hoff.

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 4 of 2025 and 2026, 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 customers' needs, receipt of orders from the U.S. Department of War, our ability to continue to grow revenue, the timing of our 2026 inventory and other expenses, revenues, expected GAAP profits, and positive cash flow from operations 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 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 our CEO, Allan Evans. Please go ahead, Allan. Allan?

Oh, I'm sorry, I was muted. Thanks, Christine. Sorry, everyone.

Before we get into the meat of the call, I want to address the format change to this audio-only format. We moved to this channel for our earnings calls because of direct integrations with a lot of investor portals like Bloomberg Terminals. This should give all of our investors, especially the ones unable to make the call, faster and easier access to information. As our company keeps evolving, we really do appreciate feedback, and we would love to hear any thoughts that you have, both good or bad, on the new format. So please e-mail us at [email protected] if you have anything to say.

Now, today is a good day. We were profitable in the third quarter. Let me repeat that. We were not just cash flow positive. We actually had our first profitable quarter as a company. The good news doesn't stop there. It was the sixth quarter in a row we achieved record revenues. It was our best gross margin quarter of all time. It is the first quarter where more than 50% of our revenue was from enterprise sales, and we already have enterprise purchase orders totaling more than $16 million from a diverse set of customers going forward.

We closed the Rotor Lab acquisition. Our motor factory in Orlando has turned on, and we're currently producing American-made motors. We executed our staircase financing strategy and currently have more than $130 million in the bank. Our strategic investments have improved partnerships and yielded financial returns. Finally, our team has grown from 19 people at the start of the quarter to over 60 people today, and we're continuing to scale to meet demand.

18 months ago, we set out with an idea to transform this company from a retail channel into a leader in the onshore production of drone components. The results of this quarter finally show initial -- just initial results from the seeds we planted and all the hard work we have done. So, it is not just a good quarter, but rather it's the first signs of a successful transformation and the beginning of rapid growth for Unusual Machines.

This would not be possible without the work our entire team puts in. As we continue to grow, both old and new employees are working hard and bringing incredible energy to the challenges we face. The culture and quality of our workforce make me just very excited for what we can collectively achieve going forward. And the way that we have maintained our culture as we have grown has been very confident our workforce can handle the imminent wave of demand we're starting to face.

We have been aggressively growing as the marketplace changes, and I am sure that is what most of you really want to hear about. I'll hand this call off to our CFO, Brian Hoff, to cover our financial results in detail. And once he's finished, we'll talk about the future.

With that, I'm handing the call over to our CFO, Brian Hoff.

Thank you, Allan. As Allan just noted, we're seeing the initial signs of our transformation from growing from our seasonal retail operation into an organization with significant focus on enterprise sales with expanding margins.

We ended Q3 with over $2.1 million in revenue for the 3 months ended September 30, 2025, which is a 39% growth from the prior year. Year-to-date revenue is at $6.3 million, which is a 55% increase year-over-year. We see the shift from retail to enterprise first through our margin expansion from 28% year-to-date in 2024 to 34% year-to-date in '25. And second, we continue to maintain top line revenue quarter-over-quarter, which typically we saw larger fluctuations from seasonality that typically comes with our retail operations.

Now, looking into Q4, we are bringing those strong enterprise orders that we will start fulfilling in Q4, along with our strongest retail quarter with the holidays coming. We did see an increase in our operating expenses quarter-over-quarter, which is intentional given our investment in our motor and headset production and at scaling our operations. We fully expect to see an increase [ Audio Gap ] fully turn on our motor production facility, hired the additional staff, and continue to build for the future.

Our G&A expenses increased in Q3 as well, which includes noncash stock compensation expense of $2.1 million and nonrecurring expenses of $1.2 million related to Investor Relations and other professional fees. I'd reference Table 2 in our shareholder letter that we issued today for additional breakdown of our non-GAAP operating results.

We had interest income for our cash balance of $0.7 million for the quarter and recorded unrealized gains as GAAP requires us to record at fair value based on current market values from our short-term investments of $5.8 million, which brings us to net income of $1.6 million for the quarter.

Now, shifting to our balance sheet. This is a reflection of our continued investment in growth and the momentum that has been building here. We ended the quarter with $64.3 million in cash, which included a $48.5 million raise in July at $9.70 a share. And subsequently, we raised an additional $72 million in gross proceeds at $15.46 per share off our ATM, giving us over $130 million in cash today.

In addition, as of September 30, we have approximately $16.8 million in short-term investments. We've grown our inventory and prepaid inventory balances to over $10 million in preparation of our enterprise orders, the start of our motor and headset production and the holiday push.

We've grown our PP&E by $1.7 million during the quarter to purchase for our motor equipment and related items. We closed the acquisition of Rotor Lab at the beginning of September and currently working on our GAAP purchase price allocation related to that. Overall, balance sheet is very strong positioned to take full advantage of the growth that Allan is going to talk to you about.

I'd like to thank our entire team, old and new, for their continued -- for their hard work and willingness to get things done. We look forward to a strong finish in 2025 and rolling that into 2026.

I'll send it back to Allan. Thank you all.

Thanks, Brian. It should be obvious by now that, we're excited for Unusual Machines. We are extremely well positioned in the current domestic and global political landscape, and we generally continue to have favorable market conditions for the American drone subsegment outside maybe some of the very short-term hiccups given the government shutdown. We also have the capital to execute. I'm about to go into more detail, but I want everyone to note that my following comments are forward-looking and are in no way guaranteed.

Let's start with an update on internal production. Development of our motor production has matched our expected timeline so far. Phase 1 of motor production is now fully operational. We've just started scaling production and expect to have thousands of motors shipped by the end of the month. As this grows, we're beginning to source material for our highly-automated production equipment that we expect to bring online through the second quarter of next year.

Headset production is just starting to move forward. We're finalizing space and have already ordered the materials to produce 5,000 headsets domestically. Our internal expectation is that we'll start shipping headsets from our U.S. assembly facility in January of 2026.

We have $130 million in cash. We have enough money to build out motor and headset production as well as scale supply chains to meet our customers' needs. As a general rule of thumb, we want to have at least 12 months of forward-looking revenue in cash to meet our working capital needs.

So, our growth is not resource constrained, and we'll be able to right-size our company regardless of how fast or big this marketplace requires us to be. This also provides us with enough extra capital that we can consider potential acquisitions if the right opportunity presents itself without having to under-resource our current plans.

This moment of scaling with uncertainty is one reason why hardware is hard. As a component manufacturing supplier, we ask our customers to give us both forecasts and then purchase orders. It's typical for customers to give us forecasts that extend 12 to 18 months out, but purchase orders are generally only placed for material that they need delivered in the next 6 months.

Our growth ultimately requires purchase orders. We're excited. We have $16 million in purchase orders, and we expect delivery on those purchase orders to occur through the second quarter of 2026. We also have forecasts past that, that have us confident in our continued scaling past that run rate way into the second half of next year. For us to meet these demands, we have to place orders and provide forecasts to our vendors.

Our supply chains outside of China are about 6 to 8 months long, and that's the lead time on several critical components, not just one. So, this is causing us to and will continue to cause us to have to place large orders and put significant amounts of cash in deposits and other payment for material. This material management is critical to our company and is going to likely result in significant cash outlays over the next few quarters, and then we expect revenue and GAAP profits to catch up in the second half of 2026 as we reach a new larger revenue equilibrium.

This uncertainty has been further complicated by the shutdown of the U.S. government. Our primary enterprise business model is B2B2G, and the shutdown has prevented our customers from getting any additional orders. This, in turn, prevents them from placing orders with us. We see this as a competitive advantage, that's right, an advantage for our company relative to our competitors for 2 reasons.

First, we expect the Department of War and other government agencies to still want the drones and drone parts as soon as possible regardless of how long the shutdown lasts. This allows us to continue to build because we have the capital and then we'll be in a position where we are in stock when those customers place orders. Any of our undercapitalized competitors, they have to wait for the actual orders to come to their customers and then to them to even start their supply chains. So, this allows us to get further ahead every day the shutdown continues.

Second, the shutdown in the government has stopped the SEC from processing S-1s for new IPOs. Most companies' numbers go stale in February. So, there's likely to be a massive backlog and a challenge in the IPO market until at least May of 2026. There are very likely several wonderful midsized companies that will have trouble with access to capital due to the combination of the shutdown preventing orders and the IPO market being inaccessible.

This could create an opportunity for us to potentially make a larger acquisition at a reasonable value and further accelerate our business. Regardless of the shutdown, and when it ends, we believe the government demand is going to be very strong through 2026, and we are scaling as quickly as we can to capture as much of the emerging market as we are able to.

To summarize, our third quarter was a standout performance in my book. We are well capitalized, growing the team and the facilities, and have started to see government orders materialize for our customers and ultimately for us. Even though we had a profitable quarter, our goal is to sustain positive cash flow, and we expect to need $30 million in annual revenues to get there. I believe this will happen in the latter half of 2026.

Unusual Machines is at the corner where we think the market is maturing right now. Our business is capitalized and extremely healthy, and now we are aggressively pursuing growth. The U.S. drone market is about to explode, and we expect to fearlessly seize the opportunity.

I want to say thank you again to our entire staff, and all of our shareholders.

And with that, I want to open up the call to questions.

[Operator Instructions] Your first question for today is from Matthew Galinko with Maxim Group.

Not sure, if you're muted, Matt.

Matthew, your line is live.

Can you hear me now?

Yes, sir.

All right. Congrats on the strong quarter. Allan, you touched on expecting to reach a new revenue equilibrium sometime in '26. But to your point, in the growth cycle we're in for drones and domestic components, do you expect that '27 will be -- and I realize you're not guiding at this point to '27, but do you expect we'll still be in a growth cycle in '27? And to the extent that we might be, is the working capital investment cycle going to continue past 2026?

Yes. So, I think everybody is going to try to scale as fast as humanly possible in '26, and we're still -- the drone industry, particularly for defense is going to fall short of the objectives of -- not fall short, but the government programs have increasing numbers of drones they want from now through about 2030.

And so, I do expect working capital to continue to probably be sort of outlaid in front of revenues in that growing pattern. But I think towards the latter half of '26, we'll have a better idea of what that growth looks like, because I think the next year is sort of the 0 to 1 or the 5,000 to 100,000-plus drones. And then after that, it's $100,000 to $200,000. So, it's less of a dramatic step function. But I -- right now, all indicators suggest grow as fast as we all possibly can because of market demand until 2028.

Got it. And maybe just one quick follow-up for me. Just given all the additions and ramp-up in production that we're talking about that's happening in pretty quick succession. I'm wondering if you could give us a kind of reset view on your operating expense run rate, excluding stock comp, starting in the fourth quarter or first quarter of '26 that you have line of sight to?

Yes. So, if you look in quarter 3, we put this in our shareholder letter. Our cash burn, which we try to pay attention to, is still $900,000, and that's without any of the added income from the investments or anything. We still really stare at that pretty hard. And I'm personally proud that we've kept it under $1 million every quarter for operating.

Now, we might grow a little bit past that, and that will just come down to some of the GAAP elements that just when our customers receive material. But our goal is going to be to keep it down. And in quarter 4, quarter 1, it will be a little bit variable just based on when we're -- when our customers are able to accept product from when they can get it to the government. So, a little tough to project it just because the shutdown will affect the day-to-day stuff. But we try to keep it under $1 million every quarter. That's been our goal since we started.

Your next question is from Austin Bohlig with Needham.

Can you hear me?

Yes.

All right. Allan and team, congrats on the nice quarter and especially the margin expansion. Super exciting. I guess my first question, guys, is I just want to dive into kind of what your guys' current capacity is at as maybe we enter 2026. Like, is there a way you guys could frame up like the revenue that you guys could capture, whether it's through like your internal capacity plus the contract manufacturing if we get a perfect strong scenario next year with this demand?

Yes. I mean, this is a little speculative on my end because we keep scaling as we see demand, of course. Right now, we said we have $16 million in purchase orders, and we expect holidays is big for us. So, I would say between here and the end of Q2, everything we said suggests we plan without even being optimistic on delivering $20 million worth of stuff.

I think if we got $100 million, $150 million worth of orders, we'd figure out how to get it done. And more than that, we'll have to start to add space and equipment, and there's longer lead times on that on the CapEx. But I think you could see somewhere in the $100 million to $150 million range as being the capacity that we're scaling to and what we already have machines in for and CapEx in for and partnerships for.

We'd have to get the orders if it was SkyFoundry or PBAS or any of these very large programs. If we had indicators before the end of the year, we could bring in CapEx and exceed that. But we need those indicators here before the end of the year. And of course, if we had them, we'd share them with everybody. So --

Okay. No. Perfect, perfect. And then I just kind of had a question just on the consumer business. It was down kind of a little bit lower than what expected. Anything specific to kind of call out for that near-term weakness?

Yes, a couple of things. The summer tariff weird uncertainty, I think, caused a little consumer hesitation in the marketplace. We weren't focusing on it with the same thing. So, we had some shipments early in this quarter that -- because we had a little bit of out-of-stock stuff. So, we would have been, I think, on par for where we would have expected to be had we not run into a little bit of a stock thing with GAAP rules. And I think you'll see it rebound this holiday. So, you get a little shifting across that time barrier, but my expectation is we'll see us back to normal with consumer in quarter 4 here.

Got you. Got you. And then my last question is just kind of around this $30 million annual run rate for you guys to reach breakeven. On a quarterly basis, is it fair then to assume that it's around like $7 million, $8 million? Or how should I think about like the quarterly revenues you need to be breakeven?

Yes. Yes, I would say, I'd figure $8 million a quarter with the margins that we've been able to move to, and we're there.

Your next question for today is from Josh Sullivan with Jones Trading.

Congratulations on the quarter as well as the strategy coming together here. Just actually a follow-up on that last question, on that $8 million. What do -- can we get there on the enterprise mix where it is? Or is that assuming the enterprise mix is materially higher?

Oh, I think it's going to be on the enterprise mix. So enterprise is going to grow much faster than retail. And as long as it continues to even show up the way we're there, I feel pretty good about it. Hopefully, that answers the question. If it doesn't, ask it again, and I'll try to dig in better about it.

And then just you talked a bit about the competitive advantage you guys have regardless of how long the shutdown lasts, which is great. But curious, is this just something you see from your vantage point? Or do customers see this? Is it helping build your reputation, awards or even M&A opportunities that might be out there? I mean you talked a bit about the S-1 dynamic. Is this competitive advantage? Does it need to play out? Or is it now when people are coming to you?

A combination thereof. So we can finance some inventory. So for our customers that want to be aggressive, we're willing to take a chance with them. And that builds -- that gives them an advantage right now and us as a parts vendor, but it also builds relationships. And when you're a supplier, relationships for 10 years long is you don't lose spots very often.

And so I think it's both a right now advantage in that we can help our customers gain the same advantage on their competitors, even if they aren't as well financed. And in doing that, we're creating very long-term relationships with preferred vendors.

Got it. And then the other dynamic is speed to market, and we talk about this big opportunity coming up here. Can you frame where you guys are relative to the competition and how you've been successful winning these awards?

Yes, we started earlier. I think we messaged really well, but my understanding, we're the only ones doing thousands of motors right now. We -- anything we do, when we go place orders into our component supply chain, it's at least -- it's for at least 10,000 units. So, when customers come to us and they want 15,000 of thing, we can deliver.

So, we really haven't seen any of our competitors do that for value components in the U.S. market. And that puts us way ahead because it gives us the long-term relationships with our suppliers. It means that if somebody needs 500 units for like an LRIP run or something, we have them right away because it doesn't affect our material flow. And then when they scale up, we're a trusted vendor. So, this was -- we're starting to see the results from work we put in more than a year ago when our first flight controller came out because we did 10,000 of those out of the gate. And it's really starting to create sort of an avalanche advantage where even if you go do a design with somebody else, how do you get to 10,000 real fast? Well, you call us.

Your next question for today is from Barry Sine with Litchfield Hills Research.

Lots of questions for you. So, I want to talk about the outlook for orders. You've talked about the confirmed purchase orders, but that's really a subset of what's out there and what you're likely to win. So, we've seen some of the announced customers that presumably there's a lot more wins that you've won on platforms. Can you talk about the part of the iceberg that's under the ocean that we don't see? What is out there that you've won or you've won a placement on a platform that we don't see, at least size-wise? I know you probably can't name the companies.

Yes. So, I think there are several different pieces to this. First, there's -- the government issues are customers often programs and long-term contracts. And there are some things being competed like PBAS, purpose-built attributable systems. And there's -- they haven't awarded the final awards for it yet, but we have parts on, I think, every finalist. So that's an example of where we have forecasting if they win, but haven't seen purchase orders yet necessarily.

So, when you look -- and also the purchase orders we get for anybody are really only for the things they want in the next 3 to 6 months, and we're setting up inventory for the forecast. So, I think there's still some uncertainty because the Department of War hasn't finalized contracts, and they're still trying to figure it out. But my expectation is that what we've put out there is well under 50% of what I expect to see in demand.

Where that falls exactly will depend on which ones of our customers win which contests, whether we're a smaller portion or a larger portion of the bill of materials. But I'm very confident in where we're at going forward, and that's why we continue to scale. We just -- we know that when the government comes back, those will be awarded, and they'll still want the initial drones for those programs at the same time.

And then if we look at your product catalog on the blue list, your hot seller seems to be motors. You seem to be selling a lot of motors. I guess, goggles, maybe second. Where do you see holes in your product line? For example, do you need to have a digital -- more digital solutions? And along those lines, I had a good conversation with a new hire, Al Ducharme at Rampage, and he's got a pretty strong background there. So, what might we see product-wise in components with his fingerprints on this?

Yes. So, product road map, we'll start to really flush that out in quarter 1. What I would say is, right now, we're trying to scale for the FPV segment because there's a ton of demand, and we're really -- we want to focus on that scaling. I would say, initially, where you'd see adjacencies into other drones even before there's a lot more technology necessary is in the powertrain. So, motors plus motor controllers plus batteries is kind of a sweet spot to go look at delivery drones or aerial photography drones or otherwise.

And then I think, once we have moved to scale, we'll know what customers were successful, and we'll work on technologies that they need. I do think there's some really good other companies that do some of the high-value stuff like Digital Lynx, there are several companies that do that, Mobilicom, Doodle Labs, et cetera. And so we're not trying to go compete with other people that are trying to build out the western drone ecosystem. We're trying to be complementary. And I think once we hit scale and we start to build the components for our customers that are doing tens of thousands, they'll tell us where to go, and we'll just listen and we'll get those parts done as quickly as they need them.

So my ears perked up when you said the word batteries because I don't think you have -- you make your own batteries today. So that sounds like it might be a potential area of acquisition.

Yes. I would say, when we look at powertrain, I think batteries is one of the things that we'd have to look at in the next year to see if we can be part of the solution there.

And then on the retail business, as you had a question before, kind of flattish sequential, although 3Q is never historically a big quarter, I don't believe. A couple of questions on that. First of all, some of that is actually enterprise where prospective customers are buying lots of units to try out before they place a large order. So, if you have any sense on that.

And secondly, the other person I had a good conversation with at Rampage was Nate Kennedy, and he seems to have some ideas on growing that business. And I think I'm happy to see that because you guys are so focused on enterprise, it's nice to see somebody focusing back on Rotor Riot, which is where -- what started the company.

Yes. So, we see our retail channel as a massive sales funnel, as you mentioned, and it's great. And we realized that as we're being overwhelmed as a small team with the very rapidly scaling demand for enterprise that we were making some compromises.

So, we definitely -- we brought in some senior personnel to help be sure that our retail channel is better than ever this holiday and past it. And that's where -- that's why I think the hiccup is just added to hiccup. And otherwise, we're really excited about our brands and what we're doing going forward on the retail side and see it as just -- first, our customers there are awesome.

So, I'd like to thank every Rotor Riot customer and Fat Shark customer that -- and everybody that went to Rampage. I mean they're just awesome. And we want to be sure to continue to service that customer base even better than we did before as we grow.

Okay. And Allan, my last question, you made 3 strategic investments during the quarter, Safe Pro, LightPath, Kopin. And we proved that you're a great portfolio manager with the nice gain there. But from a strategic standpoint, could you talk about each of those briefly? Why did you make that investment? What do you see in them? And when might we see the benefits of those new partnerships show up on your income statement?

Yes. So Safe Pro was the first one. It was a smaller one. It was done in collaboration with Ondas, and that was more -- that was done because they're finding land mines and that helps generate value, whether there's conflict or not. I think, it's a really great use case. And we just wanted to be sure that if they were using FPV drones, it worked fine. That was probably the most financial in air quotes of the investments in that it's a little further removed from our platforms. So, I don't know how much that will drive value for our company in deep strategic relationships just because we are not building too many cameras that will be special purpose for that, but we do want to be sure it works.

If you look at LightPath, they're doing non-germanium thermal cameras. Pretty much everybody -- every enterprise customer wants multispectral or thermal cameras. So, Sam's just crossed a way in Orlando, like literally 20 minutes away and has just so much business that, that investment can put us in a position to do thermal cameras. Camera is a little further down on our road map. So, we're not there yet, but I think that will start to materialize in collaborative stuff, assuming we execute and we set up our road map probably mid to late 2026 in product offerings would be the goal.

And then Kopin does panels, display panels, and we're building headsets. So I expect our headset assembly to be online here in January, but we're starting conversations to figure out how to include their panels. And again, that will probably be late 2026. New products take 18 months generally. So, I wouldn't expect anything faster than that.

Your next question for today is from John Roy with Water Tower Research.

Allan, I wanted to discuss a little bit about the domestic motor and headset production. Kind of 2 twin questions here. One is, how do you expect to really turn this, what seems to be a reshoring competitive advantage into a long-term competitive advantage with production of those? And the second thing would be, how do you expect margins might ramp as you really put some more into production costs, et cetera?

We always set out and said that nothing we did could be more than 20% greater in cost than what came out of China. And that's how we try to price. And we think in doing that and building really high-quality products and using things like automation to be able to be competitively priced that once we win slots in this sort of disintermediating moment that we'll keep those slots with those customers through customer service and being local, and also it's just expensive to change suppliers.

So, what I think we're going to see is a dip in margin, a little dip in margin as we really ramp as we figure out how to get these things working again. But what I'm really proud of the whole team, we've demonstrated we can get to 39%, 40% margin. We're on the way we are, and that's at lower revenue. So, I think you might see a dip as we scale, but then at even greater volumes, I'd expect us to be able to probably break through that 40% margin level and be really competitive. And that's where I think this quarter where it's not like blowout revenues, we've done a really good job of taking what we were doing and refining it and polishing it. And so we're not scaling problems. We're scaling solutions. And that has me feeling pretty confident that even though we'll run into the -- probably some yield stuff as we -- some other ripples in margin as we scale that we'll get back to it and probably exceed 40%.

Cool. One last question for me, maybe a little bit broader one. How do you see the competitive landscape evolving maybe a little longer term? We're hearing rumblings from some European companies that they expect to start doing U.S. manufacturing. Just curious as to how you might see the competitive landscape evolving.

Yes. My personal belief is that sort of in the deglobalization we're seeing right now as part of the macro trend, we're going to see regionalization. And so in the same way people ask, hey, are we trying to sell in Europe? Not aggressively, no, because I think Europe is going to buy from Europe.

And I think there's going to be so much demand with all the GDP budgets in Europe increasing that will be there. And then I think U.S. money is going to favor U.S. companies. I mean, it's taxpayer money when you want it to go to people that pay taxes, and are other Americans. So I think that is in a tie, I think the local option wins. So, I think we just need to play for the tie and we'll win in North America, and we're really focused on North America rather than those other geos for that reason. So that's an assumption we're making and how we're going forward.

Sounds good. Congrats on the quarter and talk to you soon.

I really appreciate it. We also have a couple of questions from an analyst that came in via e-mail, which I'll read and then answer.

The first one. Can you please discuss how you expect the timing of major drone awards to interact with U.S. government shutdown dynamics versus looser budget spending requirements for drone purchases? What does reclassifying drones as munitions mean for UMAC's growth versus regular waste spend? How is growth appearing between acquisition officers and base combatant commanders?

So, I think the major drone awards for the U.S. government shutdown, I really don't expect them if the shutdown goes on much longer to probably occur until early 2026. Where I do see a lot of the overly allocated stuff of the looser, the smaller buys occurring when the government gets back online because those are just easier. They require less oversight, less people for approval, someone's on vacation, et cetera.

Reclassifying drones as munitions helps our growth in that it allows much smaller groups to just buy drones and not have to track them. And so, it means our customers can sell $100,000 or $200,000 worth of drones to these sort of base level buyers rather than have to be all centralized and go through a really long process. So, that -- those looser spends, I expect to come online much faster when the government comes back and to drive sort of maybe fewer headlines, but a lot of the revenue in the category.

And then growth between acquisition officers and then base combatant commanders, that to me is pretty opaque. I would say we'd have to go talk to our specific customers. And it also feels like they're still figuring that out, like what is the ratio or who's in-charge of what. And so, I think in another 6 months, we'll have a good idea there.

The second question. Can you discuss the acceleration of customer interest post-AUSA? How does getting the 101st Airborne as a customer raise awareness, not just for UMAC, but also the importance of domestically-sourced drone components?

AUSA was a great event. We were able to go and see a bunch of our parts that were priced out on a wall with members of the armed services flying those drones, and we're really excited about it. One of the things I think it does is there's an initiative called SkyFoundry, where the Department of war, and I think the Army in particular, is considering spending several hundred million dollars -- $200 million or $300 million, starting to build drones inside the military to understand them better. And I think really AUSA drives a lot of awareness as us as a vendor for that.

And I really think it being so inherent even in our customers wanting to use American source components. I think it points out to everybody that this is an important thing from a redundant supply chain perspective. And so, it's been a real positive. And there's -- it's also helped to highlight that we don't have, like, just at-scale suppliers yet. And so there's a real need for that.

The next question. What engineering approaches, materials or form factors are you most excited about with respect to drone components? How do you expect those dynamics to feather into your growth algorithm?

I would say, right now, I am the most excited about doing the powertrain. I think we sit really well there and can be complementary. And so as I alluded to earlier on Barry's question, I think batteries is something we're going to have to look at, and that will come into our growth algorithm. There may be some opportunities to move to like cameras, like gimbaled cameras and the ISR stuff if our customers want it. I think that's a little further out.

But I do think putting this all together is going to put us in a place to continue to add new components and get a more diverse group of customers, but also a more diverse portfolio to, again, really prevent any concentration risk. And I think that's what's awesome about where we're already at, is we're getting this growth, and we don't have customer or product concentration. And so we're able to be really dynamic and not really put ourselves in a situation where it could all come tumbling down. And I think that's what I like the most about it.

And those are the questions from the e-mail. So, I think that's all the questions.

[Operator Instructions] We have reached the end of the question-and-answer session, and I will now turn the call over to Allan for closing remarks.

Again, I would like to thank everybody for being on the call. Really appreciate it. We wouldn't be here without our customers, our shareholders, and people that support us. So, thank you.

I wouldn't be here without the team. We had 30 people start Monday. They're building motors this week. So, thank you for being part of the team to everybody with us since we started. Again, thank you guys all, to Brian for being here. Brian, do the best. And I just -- it's a great quarter. It's profitable. We're growing. Everything is set up for this to scale, and there's -- there are no roadblocks in our way. So, it's time to go. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

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.

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, some of the subsequent events. And then after Brian and I finish, we're going to be really happy to take your questions in an open Q&A session.

I really want to start by acknowledging how much work our small team puts in. This quarter was a lot of extra work because of the day-to-day changes in the tariff situation and the rates and the policies on what we could bring in. So everyone just keeps putting the work, and it's really awesome, and they're bringing energy and enthusiasm to these different challenges we face in a weird environment. And I just -- I'm still so excited because the culture and the quality of our workforce just have me really believing in what we can collectively achieve as we go forward and as we add people to what we're doing. So thank you, everyone.

Speaking of being busy. So even with what I think I personally expected to be a second quarter to wall because of tariffs and consumer demand, it just doesn't seem to slow down for us. And this second quarter was yet again our highest revenue quarter of all time. This is the fifth consecutive quarter that's true. It's 51% growth over quarter 2 last year, which we're excited about. For the quarter, we generated $2.12 million in sales. And really what's neat is we did that at a 37% gross margin. So this growth really coupled with the increase in enterprise sales, which climbed above 30% of our total sales, they overcame this quarter of weak consumer demand that was really caused by tariffs.

And then on top of that, again, pushing margins to 37% without doing anything damaging on the pricing side is really us starting to move in the direction we want to move in. So from my perspective, given that backdrop, I view this quarter as a really great quarter. It was a challenging market environment, and we still hit record revenues. We increased our B2B sales. We improved our margins, and we are now really accelerating our progress. So with all this going on, we'll talk about cash flow, operations and growth.

So we started this quarter with $5 million, and that may seem like a long time ago. As we finished the quarter with $38.9 million, we raised another $44.9 million after fees in quarter 3. So we have a cash position of more than $80 million. We're very comfortable with it. And aside from some CapEx expenses for factory expansion, we plan on still keeping our cash burn low going forward. So now we're actively getting ready to aggressively grow, and we expect the marketplace and are actually starting to see indicators of it changing in quarter 3 and quarter 4. I'm sure most of you are on this call to actually hear about that.

So I'll hand it off to Brian, while you're still a captive audience to cover our financial results in more detail. And I'll leave you waiting just a little bit longer for those forward-looking statements. With that, I'm going to hand it off to Brian.

Thank you, Allan, and I appreciate everyone joining the call today. As Allan mentioned, we continue to have growth in top line revenue and overall gross margin. We hit $2.1 million in revenue for the quarter with $4.2 million year-to-date, which is a 65% increase as compared to the prior year pro forma revenue. This is also done with increasing our margins from 25% last year year-to-date to 31% year-to-date. And as Allan said, we kind of expected to have a drop in our total revenue and margins between Q1 and Q2 of this year from the tariffs and some of the uncertainties, but we didn't see that as we continue to grow our enterprise orders that also have higher margins. We did see an increase in our tariff costs during Q2. However, we were able to pass these costs on to both retail and enterprise deals.

We're going to continue to closely monitor and adjust related to tariff changes moving forward. Our operating expenses increased this quarter as we incurred additional costs as we started setting up our motor factory. We're going to continue to see some operating expenses increase during Q3 and Q4 as we're hiring and have additional costs for both our motor facility and headset operations. However, we are going to continue to be cost conscious, as Allan mentioned.

We also saw an increase in our G&A costs. A lot of that was related to some non-recurring professional fees from some of the acquisition-related activities that we've been through and some of the transactional expenses, non-recurring investor relations and some non-cash and the large non-cash increase in our stock-based compensation, which was $5.5 million during the quarter. As we noted in our shareholder letter that we just published about 30 minutes ago, our net loss was approximately $6.9 million, which -- and including the $6.1 million of non-recurring and non-cash costs. I did reference Table 2 in that shareholder letter to see kind of our normal operations and the breakdown there. It's very interesting to reflect on our balance sheet position over the past year.

Last year, we had about $2.2 million in cash and $4 million in debt as of this time last year. This year, we're at -- we've reported about $39 million in cash and no debt. And as Allan mentioned again, we just raised $48.5 million in addition to put our cash balance over $81 million, transformational for sure. We also with that large cash balance, we saw about $200,000 of interest income during the second quarter and expect that to continue to increase during Q3 with the larger cash balance.

We will -- we started purchasing our motor inventory and equipment, and we're going to continue additional purchase into Q3 and Q4. Our strong balance sheet is going to position us to take advantage of these growth opportunities quickly, which Allan will go into very shortly.

Finally, I'd also like to welcome all our new hires to the team as we continue our growth and say a big thank you to the team for all their hard work and execution over the past quarter and look forward to closing out 2025 strong. I'll send it back over to you, Allan. Thanks.

Thanks, Brian. And Brian, I'm sure, is particularly appreciative of the team as we added a controller. So thank you again for all the hard work, Brian, and now to your -- a couple of the members that help you out after a year of slogging through it yourself. So it should be obvious to everyone at this point that we're extremely excited about what's next for unusual Machines. We're really well positioned in the domestic and global political landscape.

We generally have really favorable market conditions for the American drone subsegment. We also have the capital to execute. So I'm about to go into a lot more detail, but absolutely want everyone to take note that the rest of my comments from this point forward are forward-looking, and they're in no way guaranteed. So let's start with the $80-plus million in cash we have. We have enough money to build out the motor and headset production as well as scale supply chains to meet our customers' needs. We're keeping it in cash equivalents right now that are generating interest, and we plan on doing that for most of it through the end of October when we have a very clear understanding of what 2026 operating needs will be. And we're also starting to explore what a treasury strategy will be, and we'll have more news on that in the coming weeks.

But the real key takeaway is that our growth is not resource constrained. We'll be able to rightsize our company and our speed of growth no matter how fast or how big the marketplace requires us to become. And I spoke at length about other ways we plan on leveraging our cash position last quarter. I won't go into too much more detail now, except to say that we don't plan on sitting on our hands.

So update on motor production. We have received delivery of our low-volume production machinery. When we say low volume, it's not prototyping, it's tens of thousands a month rather than more. And we are installing and testing it even right now in our 17,000 square foot motor facility. We still expect the first motors to come out of that factory in September. So in some miracle of execution, we're still on time. That's a testament to the team. And I think Andrew and Brad and everybody doing the work to get that done. We also expect to close the purchase of Rotor Lab in Australia in quarter 3, maybe even as soon as by the end of this month as we met the final major closing condition, which was approval from the Australian government.

So in regards to motors, everything remains on track, which is exciting and almost unusual in this world. So then many of you may know with [ Avagon ]and Fat Shark, I have a personal long history of developing and producing headsets and headsets for drones. So the opportunity has really come up for us to onshore this now. So we're going to start doing final assembly and production of Fat Shark headsets in a new Orlando facility.

So we're just starting to look at the leasing and everything else, but I am super excited that we recently hired Tom Mercier to be our Vice President of headsets. And he's going to really oversee the initiative. And I just -- there aren't a whole lot of people that are as excellent as he is for this position. He comes from Google, and he was a key person in building out magically production lines also in Florida.

So I'm excited to say as one of our new initiatives that we don't think it will be very long until they're made in USA Fat Shark headsets, and we're really excited that our customers have supported and encouraged us to do that. Speaking of hiring. So we ended the second quarter with 19 employees, which is why the work that they've done has been so impressive, and we started scaling. So we're already at 29 employees. We are going through this growth phase, and we expect to be at about 50 employees by the end of 2025.

And that's just to continue in our scrappy way to meet the demand increase we expect to go through the second half of this quarter and quarter 4. So to everyone who's joined the team, I want to say welcome aboard. We're glad you're here with us. And I think for investors, while the addition of new employees like Tom or our new Controller, Tim, it can be really exciting. I can tell you that I am personally even more excited about the growth of some of our team members that we already have.

For example, Stacy Wright, who is the President of Roto Riot, was promoted to the Executive Vice President of Revenue. She is just crushing it. She's a big part of why we have quarter-over-quarter-over-quarter revenue growth. And to see her and a whole bunch of other team members really bring the energy, the enthusiasm and the excellence to these positions just is really exciting. One thing that I very strongly believe is a company is only as good as the people that actually do the work. And I think if you look at us, that just makes us one heck of a company. So it gives me a chance to really think we've got something special. So I'm sure some of you at this point are thinking, well, that's a lot of growth all at once. And are we sure that now is the right time to turn on?

I'd say those concerns are legitimate because scaling early is absolutely a real risk factor, and it's caused a lot of companies to get themselves into dangerous positions. We are very confident that the time is now. At a macro level, the catalysts are in place. The government finally passed a budget. They added more money for drones in the reconciliation phase. Secretary Hegseth issued a memo making drones easier to purchase by different groups of the DoD.

Secretary Duffy recently opened up the BD loss rulemaking with a drone dominance inside the U.S., and it really enables more use cases for domestic drones. I strongly expect government orders to start any day now and then start to come quickly and in significant volumes. At the same time, at a micro level, our team has been working with a lot of different customers to understand their specific component needs and volume expectations. We're already seeing the B2B volume increase. We saw that in quarter 2 as it moved to over 600,000. And we're really getting guidance and initial orders and feedback that we're about to see much larger volumes, much larger orders being placed with us over the next 3 to 6 months. So given all of this, we absolutely believe the time is now. And we believe that it's going to be driven by U.S. government orders, which are just starting to happen.

So we're just at the front end of this, and it's going. So really, when we look at Q2, I want to go back to say that our team's ability to continue to grow revenue and improve margins in what was a really macro challenging quarter with no government orders or anything else. For me, that makes the second quarter really stand out. And it's really exciting because now that we're well capitalized, we're growing the team and the facilities. These government orders are just starting to materialize for our customers, and we're starting to get guidance there.

It's all coming together, and we haven't left pieces of it undone or behind as we scale. So we stated that our goal is cash flow positive, and we expect to need to be at $20 million to $30 million in revenue annually to get there. I firmly believe that's going to happen in 2026. And we're going to cross that $5 million to $8 million quarter. And that doesn't mean that I think we're going to stop there. But once we get there, we're going to be cash flow positive. And I think the major catalysts for that revenue in 2026 are starting right now.

Unusual Machines is at the corner where the market is about to mature. Our business is capitalized, extremely healthy. We've demonstrated consistent execution, and now we are aggressively pursuing growth. The U.S. drone market is about to just explode, no pun intended. And we absolutely expect to fearlessly seize this opportunity that we have right now. I want to say thank you again to our staff, everybody new. I also want to say thank you to our shareholders.

We're in this together, your owners in the company, and so we're all doing this collectively. So thank you. And then with that, I want to open up the call to questions.

[Operator Instructions] So let me see what we got here. All right. Somebody is going to have to let me know if we have hands up. So I'll start with the first Q&A, and then I'll jump over to the hands that are in the air.

Justin [indiscernible], can you expand upon the announcement new facility for headsets? And will you be working on a new headset that will be introduced to the market in the future? What does it mean new levels of interoperability across systems? Unusual Machine strategy to expand U.S.-based production of critical drone components will initially focus on assembling high-performance FPV goggles with new levels of operability across systems.

Justin, thank you for the question. What we are going to start to do is final assembly of one of our Fat Shark product lines that we already have that is being ordered in large volumes by government users. So that way, we can get our whole team up to speed on how to manufacture. And then once we have that excellence in-house, we do expect to start to do more headset development and production in the U.S., sort of in the same slice stepwise function that we've always taken. So appreciate it. All right. We're going to go over to the call in, and we're going to say, John Roy, you got a question for us.

So can you hear me now?

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

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?

I don't have any real expectations of anything new except for the [BV loss] like the rules for domestic drones to go through the rule-making process. I think we're in a great spot of legislation-wise. I think it's really set to go forward. And now we just -- now it's that market full where the government will start to place orders, and we'll see where that lands.

Yes. And as a quick follow-up on that, you gave us some color on the government drone demand. Can you give us some more color on -- are you guys selling a lot of parts into those? I mean, where is unusual play in that order?

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.

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 collabor 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.

Well, Jeff is a great guy. We obviously came out of Red Cat. They -- publicly, we're doing motors for them. So that's great. And I'd say the same time thing is just because there are rules on when earnings have to go out, and we're close to the deadline. So when you're busy, it's where you push it. But I can't go into more detail because, again, we don't talk about our customers. That's more for them to talk about, and we're happy to approve anything they want to share.

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

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 1 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 knew 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 to grow revenue sequentially in the second half 2025 in quarter 3 and quarter 4? Well, every quarter has been our highest revenue quarter to date, and we expect the market to turn on. So yes, I mean, I think if it would take a real anomaly for that not to be true. So yes, I expect revenues to continue to grow. And I expect to have to repeat that same opening line several more times in a row. I almost -- if you're going to sit at home and play Allen Bingo, you'd probably make it your bingo center square for a while here if you were listening to these.

How big should enterprise sales account for total revenues in 2025? It's a little bit uncertain. It depends on the timing of the orders and what they order and delivery. I think we're seeing 30% of where we're at. I think we'll probably hold there. We might see an uptick depending on if they want delivery in 2025 or early 2026. But I think our move to 30%, our long-term goal is to have enterprise be more than 50%. But you got to remember, Christmas is our biggest consumer season, and we have a lot of stuff there.

So the 2 parts are kind of racing each other to see how it goes. But I'd say the 30% to 40% that we were able to demonstrate in Q2 feels like where I would minimally expect it and it could be a lot bigger than that if some of our customers want earlier delivery.

[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.

What do I see as the best edge and biggest mountain for the future? I'm a backpacker, so I'm not sure about the mountain. I could get literal, and I don't think that's the question you're asking, [Derek] I think our best edge is the aggressiveness that we've taken in terms of getting ahead of making it in the U.S. and then also just working with our customers, like we -- they're very much about solving their problem. And it's not about, hey, here's what it should be. It's like what are you trying to do and how can we be helpful? And then compared to some of the other parts guys, we have scale. So if you look, for instance, for our VTX, there's a chip in there made by a Taiwanese company, Richwave. Where because of the conflict in Ukraine, you can't even order them unless you're going to place an order for $40,000.

They just won't talk to you. You'd have to go to brokers or whatever else. So we're big enough and we move enough that we can go have those direct relationships. And that gives us cost, supply chain surety, reliability. And then having that stuff in stock at a competitive price, not only lets our customers -- our consumer customers get a great deal, but it lets our government customers get a great deal, too. And I see those as the biggest edges.

The biggest mountain is honestly government purchase processing. So okay, the government said they're going to do all this. When do they execute this? And then our customers have to place their orders. And so that creates a lot of timing uncertainty. And that's a big part of why we raised the money is to mitigate that uncertainty, so we didn't have to guess.

Anonymous attendee. Has the coast guard purchased any drone components? Or is it mainly the Army? I'm not -- I don't know the exact answer of all the people that have purchased components because a lot of them come through the store directly, but we've had most of the branches and a lot of different folks in the government buy different parts of components at different scale. So I think the Army and the Marines right now are the ones the most forward in terms of budgets for drones. And so we probably see it weighted to those 2 groups more than others, but everybody has really started to make purchases and explore.

[WHBBBB] what role does Trump Jr. play at UMAC and how are we getting value out of that relationship? 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.

Justin, does the company have ambitions of manufacturing some digital components in the future for the drone industry like you have for analog? Justin, if you look at the history, when I was at Fat Shark, we were the first ones to partner with HDZero to introduce HDZero digital product to the market, and then we were the first ones to partner with [indiscernible] to introduce [indiscernible] products to the market. If you go back in time when I was at Avegant, we integrated the Avegant Glyph with DJI's Lightbridge, and we were the first headset DJI ever used.

So if you look at the history of integrations that we've done and where interest in things I have led has driven us, you would absolutely bet that we are interested in digital components. We're not there yet. We're focused more on the airframe because right now, there's 20 or 100 drones for every ground station and the drones are the really sensitive part. So we're trying to solve the drone segment prior to getting to the ground station, but we absolutely do have ambitions 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 to 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.

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

Anonymous. At what percent does the usual machines cover the TAM for components of FPV drones? No idea. The TAM is wild because there's 4 million or 5 million drones being built in Russia, in Ukraine. So it depends if you're talking globally, if you're talking domestically. I think if we can capture 20% to 30% of the TAM in this government cycle along with consumer TAM that we're doing a great job because you're going to see these -- some of these companies do some of their own components in-house. And so I think really, there's probably only 70% of the TAM that's accessible.

Jason, I may have misheard when you mentioned a treasury strategy, were you referring to a crypto treasure strategy? No. But it's more a strategy with what to do with our capital. And again, we're finalizing it, and we'll get updates for you guys in the next few weeks on where we expect to go with it.

John, how complex are headsets? Will you need to start spending significantly on R&D? So they are complex, which is why we're starting with the manufacturing side because the manufacturing of headsets is complex in terms of how you calibrate them and test them, et cetera. Luckily, we have a long history of making headsets. So we don't need to start spending on R&D right away, and we'll start moving toward development when we see what that needs to be. But once we have manufacturing up and running, then the bridge to introducing it as a product will lower those R&D expenses.

And again, really, really excited to work with Tom. He's done this several times. I've done it a couple of times. It's my career as an engineer. And so this is one of the few places where I think from a leadership perspective, we have a really solid handle on it, and it's -- we're just going to have to block and tackle.

Paolo, without providing details on specific government projects in the pipeline, can you share how many government projects are expected by the end of the year? My guess is that in the categories where we're selling stuff, probably a total of $750 million worth of contracts. That's my guess. So I mean, a real big opportunity.

Chris, also, what other production is housed in the main facility? Do you have an SMD line operational? We don't do SMD in-house. We do final assembly and fulfillment in one center, and then we have a place right next door, which is the motor facility, and then we have a place right next to that, which is going to be the headset production facility, which we haven't leased yet.

So we'll continue to look and manage our space as we need to. And any time we see an opportunity to gain margin expansion and get high utilization for production, we're going to go ahead and do it.

Danny, are Chinese parts for drones officially banned? Not yet. Some of them are for some government stuff, but the American Securities Drone Act doesn't go into effect until January, which is the ban on elements for the U.S. government and the American -- not the Americans.

The Section 1709 of the NDAA, which is the FCC ban on DJI and Autel also doesn't go into effect until January. But because everybody knows that it's going to be in effect, it's -- people are treating it like it's official.

Jason? same question. So we'll just delete that. A different Jason. 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.

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.

John, are you still expecting to park $30 million in the bank to be more -- able to more readily do deals? 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.

Anonymous. If Chinese drone band falls through, are you still optimistic about growth? Yes. I am actually. Most people aren't. Like I would say DGI, the Chinese company does an amazing job. They're an amazing company. Just -- but there's still this real interest globally because of some of the regionalism and some of the tariffs to have diversified supply chains. And I think the U.S. government, particularly as a customer is still going to really prioritize buying domestically. And I think the tariffs are still going to be in place. And with the tariffs, we're actually cheaper than importing, because we've structured to be cost competitive.

So I think our company is in a really good spot to be competitive even in that regard.

Joe, can you get magnets from Australia for your motors? 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. 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?

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'd 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.

Chris, sorry, all my questions are production related. I think production is the most important question. 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?

Yes, we're doing winding in-house. We have a bunch of winding machines. I think we have 4 or 5 cells to start. So we'll be able to add cells. Low-volume production means high thousands, low tens of thousands and high volume is just more automation. So we can always scale production by adding people and some of the same redundant machines that we have faster. But if we have really large orders, we can move to high-volume production machine, which actually lowers our COGS because it requires less touch time from people, which is why we're doing it. So we'll be in a position to meet capacity demands. And the turning on is always a little -- you run into unexpected hiccups -- and so we anticipate that, and we're excited about the Rotor Lab acquisition because they've already gone through running into a lot of hiccups. So they'll be like, oh, let's not do that and I think really speed up our time to running effectively there.

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

All right. What is our process for deciding what new positions will be added at UMAC? It's actually pretty complicated. So we take bringing people on really seriously. And what it is, the whole leadership team meets. We say, okay, where are our pain points? Who -- how do we figure this out? How do we want to hire? What are our initiatives? What are we trying to do? And then we all agree on it.

We talk about it and then we go through a pretty robust vetting process. And then we have a pretty engaged interview in HR process to be sure that the people we bring in that they want to work with us and we want to work with them. But it's definitely not arbitrary. We spend probably more time than anyone else but me likes on the process because I'm particular in being sure that we keep what makes us magical, which is the people.

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

Joe, are we looking at more acquisitions, especially software? Joe, we're always talking to different companies. So I think you're going to see consolidation in the marketplace. Right now is a quiet period as everybody is going through the sales cycle. So I think those discussions will really turn on again late October when we get through what this government interaction moment is where everybody is distracted.

So right now, things are quiet. Everybody is focused on sales, partnerships, driving outcomes. And -- but we're always open to talking to people because we think good teams, good products makes sense. Silvio, what percentage of sales do you expect to be domestic and what percentage is international? 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 encounter? 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.

Anonymous, why do we choose Orlando for the new facility? Are we looking to expand elsewhere? When you build physical things, people got to come to the office, people got to touch stuff. And so we found that Orlando is really great logistics, really great workforce. It's right in that stretch between Tampa and the Space Coast where there's a lot of engineering. There's a lot of drone interest. And so we're going to consolidate to Orlando. It's just -- there's something intangible, hard for Brian to measure.

So people always bring this up and I tell them, we don't have a choice. I'll figure out how to measure it if I have to justify it of having people kind of all be able to interact and share expertise across the board and have those interactions. And so our plan is to really build out in Orlando, and we've been able to find really good talent and especially a little diatribe. One of the things that's really cool is we're entering that phase where people in the industry or people that are really savvy start to look at it, and they can start to tell that it's really turning on and they've seen wins before.

And so the people that are reaching out to us now are amazing talent, and they just want to come join and come build. And we're really starting to get that energy of a place where things are going to happen, and that's a snowball. And that's the snowball where if you track kind of where people start to matriculate or go and where they come from and who they are, you can really get a good read on sort of almost the intuition that people have been really successful have.

And there -- we're really excited that they want to come join the team. And everybody is a great fit. That, coupled with how awesome our current employees are just growing into roles and really taking on new responsibilities is has me even more excited about Orlando actually.

Tim, can I elaborate on any more robotics in the future? 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.

Bill? Okay. So when will we see the stock split? I'm looking forward to this being the next big thing. 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 it 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?

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

Yes, I get it out there.

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?

So we expect to have about $80 million left after all the CapEx for the motor factory. We're still burning under $1 million in cash a month, and that will be mostly offset by interest from the money even at the current rate. And then we plan on moving to set up a headset final assembly line, which will be significantly less expensive and move to revenue sooner.

So we expect to be sitting to actively have for funds under management between $70 million and $80 million through 2026, depending on how fast we grow and return. So we feel really comfortable with that, and we're really excited about having kept our cash burn rate low so that we can be in a position to do this without creating tertiary or cash risks.

Okay. So Chris, I can't comment on direct targets, but can we get a feel for M&A activity ahead?

Chris, right now, I think there are a lot of interesting drone parts companies out there, et cetera. And everybody right now thinks they're going to get the government contract. So if you're talking to anyone right now, they're like, "Oh, I'm going to get this a huge contract. We're going to crush it." And it will really be who are the really solid teams that maybe didn't get selected for a government contract or whatever else that we can add in and really build something robust because we're not here to overpay.

And we're, again, very particular about who we want to integrate because integration is a real headache. And it's personality driven and is it a good fit in the company and everything else. So I think we're -- again, we talk to everybody. We're a supplier to everybody. We do a really good job there, but we're not -- there's nothing like real spicy or anything. And I think we'll -- again, we might see what it really looks like, and there might be a lot of opportunity, but it won't be until late October until people know who won and lost. All right. I know, right? Do we got anything else? I mean I'm pretty excited about it.

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

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.