Unusual Machines Issues Letter to Shareholders

Rhea-AI Summary

Unusual Machines (NYSE American: UMAC), a drone and drone components manufacturer, reported its Q2 2024 results and provided a shareholder letter. Key points include:

1. Retail revenue of $1.4 million with a 28% gross margin.

2. Total revenue of $2.0 million since February 2024 acquisitions.

3. Approval from the U.S. Department of Defense for the Brave 7 flight controller on the Blue UAS Framework.

4. Cash position of $2.2 million as of June 30, 2024.

5. Net loss of $1.6 million or $0.16 per share for Q2 2024.

6. Focus on expanding retail operations, NDAA-compliant production, and defense component sales.

Positive

• Retail revenue of $1.4 million with 28% gross margin in Q2 2024
• Total revenue of $2.0 million since acquisitions in February 2024
• 10% improvement in retail sales compared to same period in 2023
• Approval from U.S. Department of Defense for Brave 7 flight controller
• Cash position of $2.2 million as of June 30, 2024
• Potential for enterprise component sales in Q3 or Q4 2024

Negative

• Net loss of $1.6 million for Q2 2024
• Operating loss of $1.5 million for Q2 2024
• Non-recurring expenses of $0.2 million related to acquisitions and transition costs
• Stock compensation expense of $0.4 million
• Increase in inventory and prepaid inventory to $2.7 million

Insights

Financial Analyst

Unusual Machines' Q2 2024 results reveal a mixed financial picture. While the company generated $1.4 million in retail sales with a 28% gross margin, it reported a net loss of $1.6 million. The cash position improved to $2.2 million, primarily due to the IPO proceeds. However, the company's operating expenses exceeded initial estimates, now projected at $450,000 per quarter.

The acquisition of Fat Shark and Rotor Riot has boosted revenue, but also increased expenses. The company's focus on NDAA-compliant drone components for the defense sector could be a significant growth driver, especially with the recent approval of their Brave 7 flight controller. However, investors should monitor the company's cash burn rate and its ability to reduce inventory levels as planned.

Market Research Analyst

Unusual Machines is positioning itself in a rapidly evolving drone market, particularly in the defense sector. The company's strategy to focus on NDAA-compliant components aligns with the increasing demand for non-Chinese supply chains in defense. The approval from the Defense Innovation Unit for the Brave 7 flight controller is a significant milestone.

However, the company faces challenges in its retail operations. While there's a 10% improvement over 2023 for Rotor Riot, the overall retail market for drones remains competitive. The company's ability to differentiate its products and expand its enterprise sales will be important for long-term success. The next 2-3 months will be critical in gauging market acceptance of their new products and potential government contracts.

Legal Expert

The completion of Unusual Machines' IPO and acquisitions has brought several legal and regulatory considerations to the forefront. The company's re-audit of financial results for 2022 and 2023, necessitated by an SEC order against their prior auditor, demonstrates compliance with regulatory requirements. This proactive approach to financial reporting transparency is positive for investor confidence.

The restructuring of Red Cat Holdings' stake through a private transaction has reduced shareholder concentration, potentially improving corporate governance. However, investors should note the presence of convertible notes that could dilute equity in case of default. The company's commitment to timely SEC filings and its efforts to navigate complex acquisition-related financial reporting are commendable from a legal standpoint.

CEO Allan Evans shares Q2 2024 achievements and provides insight into the Company's strategic expansion

ORLANDO, FL / ACCESSWIRE / August 14, 2024 / Unusual Machines, Inc. (NYSE American:UMAC) ("Unusual Machines" or the "Company"), a drone and drone components manufacturer, today announced it filed its 10-Q with the U.S. Securities and Exchange Commission for the second quarter of 2024 and provided the following letter to its shareholders from CEO Allan Evans.

Dear Shareholders,

This shareholder letter followings the completion of our second quarter of 2024. This represents our first complete quarter as a public company. We are grateful for your continued support and confidence in Unusual Machines. The completion of the acquisitions of Fat Shark Holdings LTD ("Fat Shark") and Rotor Riot, LLC ("Rotor Riot"), financial results, and recent press releases have led to a significant number of questions from shareholders. We would like to take this opportunity to provide context and deeper insights into our operations and what these represent for Unusual Machines' future.

Retail Operations Update

Unusual Machines revenue for the second quarter was generated from the B2C sales channel. For the second quarter, we generated approximately $1.4 million in retail sales at a 28% gross margin and a total of $2.0 million in revenue at a 29% gross margin since the acquisitions in February 2024. We see an improvement of 10% over the same time frame in 2023 for Rotor Riot. Based upon our performance to date since we completed the acquisitions, we are currently ahead of our pace to hit the target for 2024 of $5M or better in retail revenue.

Enterprise Operations Update

The critical role drones have played in recent conflicts, such as in Ukraine and Israel, has heightened the U.S. Department of Defense's demand for cost-effective drones and a reliable non-Chinese supply chain. We have started to sell NDAA-compliant drone components for the defense sector. Just last week, we received approval from the Defense Innovation Unit of the U.S. Department of Defense for inclusion of our U.S made Brave 7 flight controller on the Blue UAS Framework. We are currently seeing strong demand signals, and the next two months which we believe will allow us to properly evaluate product market fit and position ourselves to serve the market as we expect potential contracts prior to the government fiscal year end on September 30^th. We expect these enterprise component sales to contribute to revenue in the third or fourth quarter of 2024.

Finalization of the Acquisitions of Rotor Riot and Fat Shark

We finalized the acquisitions of Rotor Riot and Fat Shark from Red Cat Holdings. As one of the final outstanding closing items, we reached an on the value of the working capital adjustment of $2M. Rather than paying it immediately, both parties agreed to amend the outstanding note to include this additional amount. Additionally, we incurred the remainder of the one-time expenses required in closing the IPO and finalizing this transaction. These expenses will continue to make it challenging to discern the basic operations of the company from the financial statements alone.

Cash Position

We view managing our cash position and cash flow as the most important aspect of our business. During the second quarter, we incurred the rest of the one-time expenses associated with our IPO and closing of the acquisition of Fat Shark and Rotor Riot. We also had marketing and inventory expenses that exceeded our baseline for the quarter. The breakdown of the cash position change over the quarter (Table 1) demonstrates the extraordinary expenses as opposed to our operating expenses. Our rough estimate of operating expenses of $400k per quarter was low and we have amended it to $450k per quarter. We also anticipate continued interest expense on our outstanding debt of approximately $80k per quarter. We also incurred cash outflows of approximately $75k as an increase in inventory. This was primary done in anticipation of an order from a customer that has since been realized in Q3. As part of our management strategy, we plan on limiting our cash burn by reducing our current inventory and prepaid inventory of $2.7M to $2.0M or less over the next nine months.

Update on Audited Financials and Restated Earnings

On August 9, 2024, the Company filed a 10-K/A related to our re-audits of our financial results as of and for the years ended December 31, 2023 and 2022. These re-audits were required because of the SEC order against our prior auditor. The Company intends to continue to make timely filings with the SEC.

Red Cat Holdings Private Transaction

On July 22, 2024, the Company executed an agreement with Red Cat to provide Series B preferred stock in exchange for their common stock. Red Cat then divested this equity and the note to two accredited investors.The total number of shares on a fully diluted basis remains the same; however, the number of voting shares has been reduced from 10.4 million to 6.2 million. This has reduced shareholder concentration as it relates to control of the company. We also note that the notes payable are not convertible unless we incur an event of default.

Looking Ahead

Our priorities moving forward are clear:

• Retail Sales: As our primary revenue source, we will continue to invest in and expand Rotor Riot's operations, driving both top-line growth and improved margins while introducing U.S. made components at competitive prices.

• NDAA-Compliant Production: We have started domestic production of drone components, with our first product, the Brave 7 flight controller, currently for sale. This is our first product to get Blue UAS Framework certification from the U.S. government. Sales over the next 2-3 months will be a strong indicator for market acceptance as well as help us prioritize the next products we focus on producing domestically.

• Defense Components: The current demand for drone technology in the defense sector provides opportunities for sales and non-dilutive research and development financing. This segment is cyclical due to the government fiscal year ending in September, so our current primary business development focus is on sales into this segment.

We are enthusiastic about the future of Unusual Machines. The launch of the Brave 7 and the expansion of enterprise sales could provide an immediate driver for substantial growth. We thank you for your trust and confidence in our vision. We are a small company and appreciate your feedback. Please reach out with any questions or comments.

Sincerely,
Allan Evans
CEO of Unusual Machines

Second Quarter Financial Results

• Sales totaled approximately $1.4 million for the three months ended June 30 and approximately $2.0 million for the period since acquisitions of Fat Shark and Rotor Riot of February 16, 2024 through June 30, 2024. We did not have any sales in the prior year or prior to the completion of the acquisitions.

• Gross margin for the second quarter was approximately 28%, which brings us to a gross margin YTD of 29%. We did not have any sales or gross profit in the prior year.

• Our loss from operations was approximately $1.5 million for the three months ended June 30, 2024 as compared to an operating loss of $0.4 million for the three months ended June 30, 2023. Included in this is non-recurring expenses of $0.2 million related to the acquisitions and transition costs from Fat Shark and Rotor Riot and stock compensation expense of $0.4 million.

• Net loss attributable to common shareholders for the second quarter 2024 was approximately $1.6 million or $0.16 per share as compared to a net loss of approximately $0.4 million for the second quarter 2023 or $0.13 per share. The decrease primarily relates to additional expenses as it relates to the completion of our IPO and acquisitions and additional costs incurred related to the transition and integration of Fat Shark and Rotor Riot.

• We had approximately $2.2 million of cash as of June 30, 2024 as compared to $0.9 million as of December 31, 2023. The increase in cash primarily relates to the closing of our IPO for gross proceeds of $5.0 million in February 2024 offset by our increase in net loss and cash used as consideration related to the acquisitions of Fat Shark and Rotor Riot.

For further information concerning our financial results, see the tables attached to this shareholders' letter.

About Unusual Machines

Unusual Machines manufactures and sells drone components and drones across a diversified brand portfolio, which includes Fat Shark, the leader in FPV (first-person view) ultra-low latency video goggles for drone pilots. The Company also retails small, acrobatic FPV drones and equipment directly to consumers through the curated Rotor Riot e-commerce store. With a changing regulatory environment, Unusual Machines seeks to be a dominant component supplier to the fast-growing multi-billion-dollar US drone industry and the global defense business. According to Fact.MR, the global drone accessories market is currently valued at $17.5 billion and is set to top $115 billion by 2032.

For more information visit Unusual Machines at https://www.unusualmachines.com/.

Safe Harbor Statement

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements include: our expected revenue from the retail market for 2024, our expectation of entering into contracts for the Brave 7 flight controller from the U.S. government prior to its fiscal year-end on September 30, 2024, our expectation that we will sell our drone components to the Department of Defense, our ability to manage our cash burn, and improved margins. 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 our ability to select, negotiate and close any acquisition targets, the sufficiency of our cash resources and future stock price, our ability to enhance our existing products, develop new products and create new services for our customers and future customers, and the Risk Factors" contained in our Prospectus filed with the Securities and Exchange Commission on April 19, 2024. 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 statement 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 may be required by law.

Contact:
CS Investor Relations
917-633-8980
investors@unusualmachines.com

Table 1

Cash balance at March 31, 2024		$	3.2M
Q2 cash spend:
Non-recurring expenses (IPO, acquisition, transition)			(0.3M	)
Marketing and IR additional spend			(0.1M	)
Interest expense			(0.05M	)
Inventory increase			(0.075M	)
Normal operations			(0.450M	)
Cash Balance at June 30, 2024		$	2.2M

Unusual Machines, Inc.
Consolidated Condensed Balance Sheets

		June 30, 2024				December 31, 2023
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	2,222,445			$	894,773
Inventory			1,638,038				-
Prepaid inventory			1,074,403				-
Other current assets			182,077				120,631
Total current assets			5,116,963				1,015,404
Non-current assets:
Property and equipment, net			912				1,254
Deferred offering costs			-				512,758
Operating lease right-of-use assets			356,965				-
Goodwill and intangible assets			19,666,087				-
Other non-current assets			59,426				-
Total non-current assets			20,083,390				514,012
Total assets		$	25,200,353			$	1,529,416
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	786,598			$	114,497
Operating lease liabilities			62,482				-
Deferred revenue			82,120				-
Total current liabilities			931,200				114,497
Long-term liabilities
Promissory note			4,000,000				-
Operating lease liabilities - long term			297,332				-
Total liabilities			5,228,532				114,497
Commitments and contingencies (See note 12)
Stockholders' equity:
Series B preferred stock - $0.01 par value, 10,000,000 authorized and 50 and 190 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively			1				2
Common stock - $0.01 par value, 500,000,000 authorized and 10,411,240 and 3,217,255 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively			104,113				32,173
Additional paid in capital			26,518,993				5,315,790
Accumulated deficit			(6,651,286	)			(3,933,046	)
Total stockholders' equity			19,971,821				1,414,919
Total liabilities and stockholders' equity		$	25,200,353			$	1,529,416

See accompanying condensed unaudited notes to the consolidated condensed financial statements.

Unusual Machines, Inc.
Consolidated Condensed Statement of Operations
For the Three and Six Months Ended June 30, 2024 and 2023
(Unaudited)

		Three months ended June 30,								Six months ended June 30,
		2024				2023				2024				2023
														(Restated - Note 13)
Revenues		$	1,411,124			$	-			$	2,030,039			$	-
Cost of goods sold			1,022,684				-				1,437,432				-
Gross Margin			388,440				-				592,607				-
Operating Expenses
Operations			213,772				-				326,094				-
Research and development			10,282				-				27,078				-
Sales and marketing			386,332				-				543,390				-
General and administrative			1,349,587				434,917				2,353,761				1,612,439
Depreciation and amortization			171				381				342				763
Total operating expenses			1,960,144				435,298				3,250,664				1,613,202
Operating loss			(1,571,704	)			(435,298	)			(2,658,057	)			(1,613,202	)
Other Expense
Interest expense			40,534				-				60,183				-
Other Expense			40,534				-				60,183				-
Net loss		$	(1,612,238	)		$	(435,298	)		$	(2,718,240	)		$	(1,613,202	)
Net loss per share attributable to common stockholders
Basic and diluted		$	(0.16	)		$	(0.13	)		$	(0.34	)		$	(0.47	)
Weighted average common shares outstanding
Basic and diluted			10,040,741				3,384,837				8,053,299				3,398,470

See accompanying condensed unaudited notes to the consolidated condensed financial statements.

SOURCE: Unusual Machines, Inc.

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FAQ

What was Unusual Machines' (UMAC) retail revenue for Q2 2024?

Unusual Machines (UMAC) reported retail revenue of $1.4 million for Q2 2024 with a 28% gross margin.

Has Unusual Machines (UMAC) received any approvals from the U.S. Department of Defense?

Yes, Unusual Machines (UMAC) received approval from the Defense Innovation Unit of the U.S. Department of Defense for inclusion of their U.S. made Brave 7 flight controller on the Blue UAS Framework.

What was Unusual Machines' (UMAC) net loss for Q2 2024?

Unusual Machines (UMAC) reported a net loss of $1.6 million or $0.16 per share for Q2 2024.

What is Unusual Machines' (UMAC) cash position as of June 30, 2024?

Unusual Machines (UMAC) reported a cash position of $2.2 million as of June 30, 2024.

What are Unusual Machines' (UMAC) main business priorities moving forward?

Unusual Machines (UMAC) is focusing on expanding retail sales, NDAA-compliant production, and defense component sales as its main business priorities.