Unusual Machines, Inc. (UMAC) Earnings Call Transcript & Summary

Greetings, and welcome to Unusual Machines Second 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. Christine, over to you.

Thank you, operator. Good morning, everyone. With us today are Unusual Machines CEO, Allan Evans; and CFO, Brian Hoff. During this call, management will make forward-looking statements regarding our expectations for product demand, revenue growth, manufacturing expansion, gross margins and anticipated regulatory developments. Actual results may differ materially due to factors, including government program funding and timing, customer concentration, inventory risks, manufacturing challenges, supply chain disruptions, tariff impacts and other risks described in our Form 10-K for the year ended December 31, 2025. We undertake no obligation to update forward-looking statements, except as required by law. For a complete discussion of risk factors, please refer to our SEC filings and the shareholder letter accompanying this call. In addition to reporting financial results in accordance with GAAP, we will discuss certain non-GAAP financial measures, including adjusted EBITDA. We believe these measures provide useful supplemental information to investors regarding our operating performance. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures is included in the shareholder letter earnings press release, which are also available on our website and filed with the SEC. 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 over the call to our CEO, Allan Evans. Please go ahead, Allan.

Thank you, Christine. Good morning, everyone, and thank you for joining us today. During this call, I will discuss our second quarter 2026 performance. In the second quarter, we generated more than $16.7 million in operating revenue. This is a 687% year-over-year growth from the second quarter in 2025, and it's more than double the revenue we generated last quarter, the first quarter of 2026. We generated a GAAP loss of approximately $7.8 million for the quarter, which represents a net loss of $0.16 per share and that's a reduction in loss when compared to the $0.32 per share from the second quarter of 2025. The key takeaway from this quarter for me is that we are continuing to dramatically increase revenue while getting closer to consistent profitability. The Q2 results begin to reflect the underlying financial structure Unusual Machines is working to achieve. There is rapid continued growth, doubling to almost $17 million in revenue with the growth driven entirely from our Enterprise segment. At the same time, we've managed to reduce our non-GAAP adjusted EBITDA from a loss of $1.6 million last quarter to a loss of only $400,000 this quarter. Our margins have remained consistent and healthy with the slightly lower than target depression that we see from rapid growth, and we finished the quarter with a 34.7% gross margin. This is in that backdrop of scaling as our head count went from 141 employees to 240 employees as of July 1. A healthy balance sheet remains a priority for us, and we took the opportunity to raise another $60 million at $30 a share, and we did this with block ATM transactions. Right now, we have about $367.5 million in total working capital and no debt. It's very important to remember that we don't burn cash. So this money remains in the war chest and enables us to both manage inventory and make investments that accelerate our customers and the entire drone marketplace. The success of this quarter and of the company just would not be possible without the hard work everyone on the entire Unusual Machines team puts in. Everybody works hard and brings incredible energy to all of the challenges we face. I am confident we can handle continued growth because I am confident in everyone I have the pleasure of working with. So I want to say thank you to everyone working at Unusual Machines. I'll hand this call off to our CFO, Brian Hoff, to cover our financial results in detail. And then once he finishes, I'm going to go into more detail on both this quarter and our plans going forward. With that, I'm handing the call off to our CFO, Brian Hoff.

Thank you, Allan, and thank you, everyone, for joining the call. As Allan just mentioned, we've had another strong quarter with $16.7 million recognized in revenue for the quarter, which, as we said, is 687% increase from the prior year and 107% increase from the prior quarter. That puts us at revenue year-to-date at $24.8 million. And we continue to see this significant shift toward Enterprise revenue, about approximately 95% of our second quarter revenue was generated from Enterprise customers, which is across a diverse base of customers and products. Gross margin was 34.7% for the quarter, which is an increase from last quarter and slightly below our 2025 margins. We expect to continue to see these margin fluctuations as we can scale our manufacturing and work to capture the market demand. We anticipate additional margin fluctuation for the remainder of 2026, primarily related to our growth initiatives. However, we expect them to kind of continue to recover. Our operating expenses also increased during the quarter to $13.6 million for Q2 of '26. This increase reflects deliberate investments and strategic decisions to support our continued growth and scale of our business, things that are including of building out our G&A infrastructure, head count, systems, process. Including is also $5.7 million in noncash stock compensation expense and about $1.8 million in nonrecurring expenses. We continue to expect additional operating expenses as we continue to hire additional staff, add additional manufacturing space and have additional public company-related expenses. Please reference the tables at the end of the shareholder letter for the additional detail, which reflects our adjusted EBITDA. As Allan said, we've brought this down from about $1.6 million in Q1 to about $400,000 in Q2, so showing very positive trends. In other income and expense, we had additional positive results from our investments. These investments are designed for strategic purposes, and they create goodwill in the U.S. drone industry and develop supplier partnerships and customer relationships. Our strategy is continuing to work. The results show a $2.3 million realized gain from investments during the quarter, which is a nice add-on to our overall cash without adding additional dilution. We also had interest income of about $1.8 million during the quarter. Our balance sheet also remains very strong and reflects our focus on positioning for anticipated growth. Our cash balance ended the quarter at $229 million, which included the $60 million from our ATM block funding in May at $30 a share. The balance sheet is also further supported by our short-term investments of over $86 million and inventory, which includes raw materials and finished goods and deposits paid of about $42.4 million. And we're going to see this continue to increase in Q3 and Q4 as we make significant purchases to meet demand and do our part in managing supply chain issues as much as possible. Our total working capital was over $367 million, which puts us in a great position to capitalize on demand moving forward. I'd also like to reiterate what Allan just said. None of this is possible without the fantastic team working extremely hard to make things move. It's an exciting time to be at Unusual Machines and looking forward to the rest of the year. Thank you to our shareholders and partners for continuing to support our mission throughout it all. Back to Allan.

Thanks, Brian. At a high level, it's been an impressive quarter. We keep scaling both sales and company size. We maintain a strong cash position. We've added product categories through activities like the Upgrade Energy acquisition, and we've been able to achieve these results while reducing our operating losses. We believe we remain well positioned to be a supply chain leader for components for small drones as the domestic industry expands. I'm about to go into a lot more detail on the second quarter and also discuss our outlook going forward. I'd like to remind everyone that my comments coming forward from here definitely contain forward-looking statements, and actual results may differ from those anticipated. Quarter 2, the second quarter is worth talking about in more detail. The second quarter is the moment where I've gone from hoping we could be a major supplier in the emerging drone industry to believing that we will be. Two major threads emerged in the second quarter that are not going to show up in the financial statements, but are really core to Unusual Machines' ability to effectively grow forward and be a larger company. The first was the supply chain issue. During the quarter, we outgrew one of our electronics vendors, and we had to work through challenging supply chain challenges as we replaced different components and where we got parts is we still fulfill products for our customers. Our sales and operations team did an incredible job of navigating this and putting in the extra hours and working with customers. And I cannot be more proud of those teams and how they handled what was this really challenging situation to deliver for our customers and keep our business on track. The second challenge was that we had a quality issue with one of our motor SKUs. There was this intermittent issue that required deep coordination with our product team, our motor production team and our customers to go in and find the root cause of the intermittent challenge. They then had to go through and create remedies to our production processes as well as new ways to do quality testing to eliminate the issue from everything we're doing going forward. These 2 challenges are both pretty normal types of issues for a company like ours at scale. They should be expected. But this is really the first time that we faced either one of these types of challenges at this scale. At the same time, they both showed up simultaneously, either one of these operating issues could have easily been used to justify a flat quarter, could have easily derailed what we were doing or slowed it down. Our team members could have treated this as routine. They could have not put in the 10- to 12-hour days and worked the long hours required to be sure our customers were in the best place they could be. I've been watching everyone, and I mean everyone involved work through these challenges and still deliver the kind of growth we've seen and the margins that we've seen has me fully believing that we have the team and the mindset to be successful as we continue to grow. I absolutely believe in the team we have and what we are continuing to build. That's probably enough on the second quarter, but I think it's important for everyone to understand that as it doesn't show up. So now let's talk about the future. First and foremost, demand remains strong. The current U.S. marketplace remains very supply constrained, and we still see demand outstripping supply both this year and deep into 2027. We are continuing to build the company and procure raw material to grow into this demand as fast as we possibly can, and we don't see any signs of softness now or in the near future. The primary driver of this demand growth continues to be the Department of War. The Drone Dominance Gauntlet Program remains on track as Phase 2 is currently in the final selection process and more than 60,000 drones are expected to be ordered in the second half of 2026, mostly in the fourth quarter. The NDAA continues to move forward through legislation with big increases in spending for autonomous systems. And in addition to that, there are drone programs and counter drone orders for the same parts. Counter drone is really becoming another emergent addressable market segment that's creating immediate and near-term demand. There have also been orders that have been propagated through the sort of Department of War procurement process. And I just want to give some examples. There was a $90 million counter UAS order for Powerus. There was $500 million in counter UAS from AeroVironment, $500 million in counter UAS orders from Perennial Autonomy, a $500 million IDIQ for FPV drones from Neros, which is an extension of the PBAS program and very recently, an $820 million loan from the OSC to PDW. These and other orders are really just starting to propagate through the supply chain, and we expect that they're going to create additional demand here in late Q3 and Q4 and then into 2027. So one thing we did learn in the second quarter is that we do not yet have the infrastructure to support hundreds of millions or billions of dollars in annual revenue. The massive amount of money flowing into the drone marketplace is coming faster and is larger than we anticipated. And so we are in the middle of transforming Unusual Machines. And we now very strongly believe that we only have until the end of the third quarter to complete this transformation because of this demand wave. Our high-speed motor production line is just in the process of being installed, the components from Florida, and it's going to take some time to bring that online. Our HR team is very busy in California, even this week, actively working on helping upgrade energy hire people, scale their team and process and prepare for integration into the Unusual Machines greater umbrella, even though we're not going to see any revenue from that acquisition in this quarter until we close. Our supply chain team is working closely with them to drive battery vendors and work on bringing in the cells and the material, and that is a long-term endeavor in terms of transitioning and qualifying new electronics providers. And these are all to address some of the challenges we had in the second quarter and are a ton of work that we're setting up for the long-term future. These activities, all of this work will not show up in the top line for the third quarter, but this is the work that positions us to continue our dramatic growth during the fourth quarter and into 2027 as this massive demand wave starts to fully manifest. To summarize, the second quarter of 2026 showed strong results despite operating challenges. We doubled revenue to almost $17 million and reduced our adjusted EBITDA loss to $400,000. We continued our staircase financing strategy, and we're now focused on building a strong foundation with the industry through the end of '26 and into 2027. Unusual Machines remains at the forefront of the domestic components market, and the market is growing in a way never anticipated with additional demand from counter drone pushing things even faster. Our business is well capitalized and healthy, and we're continuing to grow as fast as we possibly can, and I am now confident and believe that our team is positioned to meet this demand. I want to say thank you again to our entire staff and to all of our shareholders who are part of this with us. And with that, I would like to open up the call to questions.

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

Congrats on the great results. First, Allan, I just wanted to kind of dive a little bit more into kind of the revenue outlook for the rest of the year. I think prior, you guys were talking about trying to grow internally 50% quarter-over-quarter, understanding this is at a much larger base. Is the plan to still try and grow sequentially throughout the year?

Austin, I appreciate your question. We don't historically give guidance. I think I'm going to give you what our internal targets are and why here. And this is a unique situation. In the second quarter, we ran in front of our inventory a little bit. So we have some shortages as we go through the changeover to different electronics vendors. And we also, honestly, our motor factory right now is a construction zone, and we're prioritized plugging in our high-speed line. So our internal targets, which are not the same as guidance, these are sort of where we really work toward, and we've done a good job of this historically. Internally, because of all the efforts we're putting in, we're targeting $12 million to $14 million in the third quarter, and then that positions us to go after our internal target of $25 million for the fourth quarter. So those are our internal targets, and we're really spending this quarter rushing to build out everything to start to meet what will be drone dominance and the counter drone demand coming in the fourth quarter. And so we're applying a lot of work not toward building and selling, but to positioning to start to explode into quarter 4 and the time after that.

Okay. Perfect. And then I guess, on kind of the counter UAS market because I think that's just as hot as the FPV drone dominance market. How many customers are you guys working with in that space?

I am not sure of the number right now. It is definitely more than one already. And some of the same customers that are FPV customers buy the same parts for counter drone. So I would have to dive into that specifically. But it is definitely a major driver for us. And the first customer that we announced that we were doing it with where we're the furthest along was Powerus. And they were the first ones to start to see large contracts. So now that we're seeing other companies get counter drone contracts, we'll have better granularity on that probably in another month or 2 as they finalize their supply chains.

Okay. And then just was curious on the pricing environment. I think historically, you guys have just tried to, for your customers, maintain pricing, but I've just heard just due to the really imbalance of supply and demand, definitely is an environment that favors you. Just curious of how you guys have been thinking about pricing of components this year and next.

Yes. I think we could absolutely increase our pricing to drive margin, but we view our company and always will is competing in the global marketplace. And so our customers very often have had overseas suppliers, and they're being forced to switch. And we really think it's important for us to be -- understand their cost sensitivities as well and be a place where they can switch and not break their downstream costs or make products that are too expensive for the American people. So we try to combine the -- looking at it to have a 40% gross margin, so we have a healthy business, but also being price competitive to imported motors from Taiwan or Japan or China, so that we don't break their downstream model. So we're not looking to use this moment to create margin expansion at the expense of our customer. We think if we serve them really well, then we'll have a multiyear relationship with all of them and be able to provide them with the parts they need at a competitive price so they can compete in the marketplace.

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

Congrats on the big ramp here in the quarter. Just wanted to get some additional thoughts on working capital position now and where it might need to be next year as this ramp really comes through. And then where are the supply chain stress points currently for yourselves?

Yes. So if you look, this is a great example. As Brian had mentioned, we have about $42.7 million in inventory, raw material, finished goods, prepaid inventory, and that's on a $16 million quarter. Multiply that by 4, you at $60 million. We, I think, have historically said we always expect about 1x working capital to forward-looking revenue. So I think that is in that ballpark. It matches sort of our baseline models. As we go into next year, I think we're going to be seeing still a year of forward-looking revenue in there, and we've always said that we aspire to do about $250 million of revenue, if possible, in 2027 if we're successful in don't run any hiccups. So we think we're going to need to land around there across the next year. I do think as we scale into that, there are options that are not equity financing, right? There's loans, et cetera, that could be possible. And then hopefully, that answers the first question. And do you mind repeating the second question, so we have an on record.

Yes. The second one is just curious where your stress points are in the supply chain at this point.

So the stress points are everywhere. If you look electronics vendors across the board, and this is especially true because you just saw yesterday, China make drone export restrictions harder. It's a very dynamic environment where the sort of isolation is creating regulatory changes. So if there's even -- you could say like on an F7 flight controller, the only place where they make the OSE chip is out of China. So working around that, and that is more expensive if you use a microcontroller and program it and then you have to go find it. We've had to place orders for Sony sensors already for cameras that won't even be delivered until December because there's a shortage of camera sensors that are outside of China. If you look for magnets, we have to order 9 months out for magnets from Japan as we scale our production line and do design where magnets from other areas can be shorter. There's probably 20 different very challenging items to source where our supply chain team is on top of it and does an incredible job. And those are just some I know off the top of my head. And it gets harder as the rules are changing on short notice.

Maybe just one last one, just a follow-up on the counter drone market. What do you think the magnitude of the counter drone market is going to be versus the legacy FEV market?

So I think the counter drone market is probably going to be larger. And I think it's going to be larger because I think counter drones will be used more. I think there's a lot more global defense activity and I think a lot easier U.S. export for defense activity. I'll give you an example right now. In Iran and the Middle East, the Gulf states all would want counter drones in addition to things like Patriot missiles. And I think it's a lot easier to say, hey, here are counter drones where then we're not facilitating or engaging in a conflict. I think if you look, there was a great effort done by the government during FIFA to a full drone task force. And I think you're going to see the same thing with the Olympics, et cetera. So I think if you think the counter drone and the small incredible drone markets of the same size. I think you're going to see more routine rollover and deployment in the counter drone market. And so I think that's going to be a more consistent demand driver long term.

Our next question is coming from Craig Irwin of ROTH Capital.

So Allan, it's rare for a growth company to have a double in revenue and for margins to hang in there. Usually, there's fairly substantial margin compression when companies are scaling. And you've delivered the opposite despite some of the challenges that you had in the quarter. Can you maybe give us a little bit more detail on your planning for scaling as far as how you allocate resources for employees, hiring, infrastructure necessary? How are you actually delivering on margins that are healthy and expanding modestly while scaling at such a rapid rate?

I think that's a great question, and thank you for the observation. Everybody in the company cares about building a sustainable business. I think where you see a lot of companies reduce margin for growth, they have to create demand. And as we've always talked about, there's a market vacuum here. And so our cost to create demand aren't the same as other emerging environments. And so we have the benefit then of being able to understand and build with discipline to maintain and grow those margins. Our goal and our belief is that we're going to be able to be operating cash flow positive in the new year. Now again, as I mentioned, for the third quarter, we're putting in a ton of work. So right now, we were at about 70,000 square feet of total space. And we've added 15,000 square feet in Orlando for batteries, another 4,000 square feet in Orlando for operating staff like overhead staff, G&A. The 18,000 square feet for upgrade energy will close, and we're actually looking for another 100,000 to 200,000 square feet over the next 9 months because at our current rate, we've sort of filled up the space that we had faster than we expected. It's all being operational and it's all generating margin. The other thing that is true is everybody on our team puts in the work. And so I think when you look at gross margin expansion, a lot of our gross margin costs come from labor and people are really efficient and work really hard. And I think we have an incredible workforce that has helped us achieve that. So those are the 2 pieces that I think have led us do that is not having to spend wildly on demand generation and then a really effective workforce with a senior leadership that has an attitude toward constantly building a business with profitability. I think one other thing to note, and this will create a changeover in 2027. Most of our loss is driven by equity comp. Myself and the senior executives are no longer taking restricted stock. We move to options. And so I think where you may see some more gap stuff in the third and fourth quarters by 2027, a lot of that gap loss will be ameliorated as we all believe in the future and are structured for growth.

So another major item that wasn't specific to UMAC this last quarter, but specific to the industry was Performance Drone Works getting their conditional loan commitment. That's $820 million, that's a big amount of money for the Department of War to commit to the build-out of this infrastructure, this industry that you are clearly a leader in. You were obviously mentioned -- your company was mentioned in several of those press reports that talked about potential government investments. So I don't want to ask specifically about your status there, but I'd love to ask about how you could potentially use money if you did have a couple of hundred million dollars come in. What would this mean now that you've proven that you can use your capital wisely?

Great question. I'd like to say congratulations to the PDW team. I've known Ryan and James and Matt over there since the early DRL days, and they're great stewards of what they're doing. I think they're a great company in the industry. What we would do, what we could contribute, is very shortly, we're going to have a complete, let's call it, motor production unit, a full supply chain, a mid-tier introductory line with the ability to do things all the way through a high-volume line where we could do, let's call it, 100,000 motors a month. With hundreds of millions of dollars, we could take that production unit and parallelize it. We could rubber stamp it out and adjust it to match. So if there was a desire to do 1 million motors a month to support the drone and counter drone industry, we could take that base unit, which was confirmed and validated along with the full supply chain and the variants that we have there. And at this point, we could stamp out 10 of them. And I think in that way, with our leadership position in motor production and our quality improving through strong partnership and feedback with our customers and the hard work of our team, I think that's where you would see us go and what you could see us do with sort of a mandate that it would be desirable.

Well, congrats on the progress.