$307M Bet Against China: Inside Unusual Machines’ Race to Dominate US Drone Manufacturing

Oh man, so I think you got to go back to the idea of two years ago, Valentine's Day, you know, lovely. When we IPO'd, we set out with the idea, this notion that if the US is going to require US-made drones, they're going to require US-made drone parts. So, we really started right out of the gate sort of saying, 'Hey, parts are going to ultimately be our business.' And then if you look, we have this really great retail channel, you know, Rotor Riot. We sell these parts, we do this stuff. And we said, 'Okay, if we start to build our own parts, we at least know where we can sell them.' So, we could make a thousand or five thousand and we didn't have to speculate on where the first volumes would go. And then about a year ago, you know, we started getting parts on the blue framework a little more than a year ago, which is the Department of Defense approved parts list. And people started buying them in large numbers. Like our first flight controller that we did, right when it was done, we sold almost 10,000 of them. And we were, you know, new coming out. We're like, 10,000? I don't know. We were panicking and then they were gone in under a month and we're like, 'Okay, the concept works.' And so, really what happens then is we kept doing product development and building and last summer the government shutdown ended. Really the government budgetary shutdown and the delay on the budget and continuing resolution delayed the military part of the drone market till late last summer. And then once the market turned on that and the drone dominance program and some of the other stuff that have really come online have now just created huge amounts of demand that we just keep building into. And so, that trigger, you know, about nine months ago started our scaling corner because our customers were all getting tons of orders and really trying to build drones. And now, I mean, we're just trying to keep up and we're doing a very bad job going as fast as we can of keeping up with demand.

Oh, you're muted.

We went down to a buck fifty a share for a while there. I invested in the round we did it at a buck fifty a share and Redcat had owned like forty-nine percent of it when we IPO'd because we were kind of like a spin-out and we had them bought out. And so that first year there was a lot of, I would say, uncertainty and risk around the company. Like we were not well capitalized. We had to clean up some of the derivative stuff. We were able to go in and do all that without destroying shareholder value.

Solid CFO. So shout out to Brian Hoff. He's, you know, he had to do a lot of the work and then contribute a lot of the ideas. But really how it all got done is we have relationships and trust with key investors. Right, all the way up and down. We try to be transparent. We try to say what we're going to do. And so we were able to get investors including Redcat which owned a lot of the stock to sort of buy into what we were doing. We hit our execution milestones and everybody sort of went along with it seeing the long-term opportunity over like a quick flip or a microcap structured deal. So, you know, I really think it's that approach that we take where we're like, 'Hey, we're trying to do it this way. If everybody participates, here's how you get the win in the longer term and like a real meaningful financial win for everybody.' And we were able to deliver on that for those investors who sort of trusted us and bought into what I think is a much cleaner approach to, you know, building the company from a cap table perspective to where we're at today. And if you look today, we're all common stock, right? No derivatives, no controlling interest, no debt, none of the things you'd say, 'Oh, something cute's going on there.' So, I think everybody was like, 'Okay, you know, with those relationships, if we support what they're doing, we can really build something meaningful.' And in doing that, we, you know, have driven value for those early shareholders.

Yeah, so it wasn't a pivot. It was the plan all the way along.

So, we said, 'Okay, we have this retail channel and we can sell parts into it.' And then, we kept making more and more parts, but we expected that our enterprise and manufacturing business would be much larger than our retail business. And that was our story from the very beginning. That's what we IPO'd around. And so, you know, our retail channel's still super important. It's actually a really great sales funnel. So, like, let's say you're running Kenny's drone companies, right? You're building a drone. You know that you can come to our retail channel and buy US-made motors and build your prototypes. And then, you know you can come buy 10,000 of them. And so, we get a lot of inbound, a lot of initial purchases, where people don't want to call a salesperson and deal with the whole rigmarole, and like, they just want to go buy them and know that they can buy a whole bunch of them if it works. So, we see a lot of value in still doing the retail channel, and a lot of value in servicing the American customers as well.

Yeah, so I think two questions here. The first one is like why do investors like us? And my guess why I like us, let's just say, and why I have a bunch of equity and keep doing it, besides the team's great and the work's fun. In a market like this where there's a lot of uncertainty, who's going to win? Like DJI, the big companies kicked out, but you know, like we don't know who's going to win. And we as a parts vendor sell to everybody. So, you know, what I've said in the old days and it's still true, we kind of look like an ETF for drones. Right? If you're like, 'Ah, I don't want to pick the winner. I kind of want to pick the industry. I'll just invest in the parts guys.' Why? Because they kind of sell to everybody, and we do. So, I think for a lot of people who look at it, if you don't know which one of the 25 drone dominant companies is going to win, or you don't know, there's a lot of really great drone companies all doing new stuff, and if you don't have a real strong instinct on one of them being the winner, then the parts guy sells to, we sell to most of them, right? So, then you're like, 'Okay, doesn't matter who wins, these guys are going to be just fine.'

Yeah, there are parts vendors for that. Yeah, exactly. And so we see it the same way. There aren't a lot of other parts vendors in our categories. So the other thing is there's just not the same level of domestic competition. And that just happened to be because what we do is the boring part. Right? Like drones are awesome. The parts... like who's all like, 'Goodyear's great.' They're like, 'No, look at that Tesla.'

Oh, you know, I can't talk about that. I mean... And I also don't... I don't backlog. Like backlog implies we're not delivering on time. We definitely deliver on time, so it's more like revenue under contract. But remember we're a parts vendor, so actually that's not a big part of our blend. What we get is these forecasts that are non-binding from customers. And I'll give you a great example. Drone dominance phase two is expected to be announced in September.

They're going to pick 10 companies to build 60,000 drones. It's about, if we do all the parts that we do, it would be about a thousand dollars in revenue. It'd be about a 60 million dollar opportunity. And let's just take that for example. How are any of those companies going to place orders right now when they don't even know when they would go compete to see if they won? So they don't know and they can't really place orders till like September when they find out if they won or not. But we're already starting to build inventory and be ready to supply all those customers. So we know that just from drone dominance phase two there is a 60 million dollar revenue potential opportunity. But we won't get orders till September for it. But we have to build now and be ready to meet the demand or we won't be able to let our customers meet the end timing demand. Because you're the parts guy, so the demand is going to come your way. Correct. Especially for the only ones in stock at scale when they have to use US parts. It's great, but they don't know if they won, so how can they sign a binding PO for 20 million dollars? For a lot of these companies they're small and that would be, you know, if they've won they can do it. If they haven't then they got to be much more careful about what they do. And we understand and appreciate that. So you would say, 'Okay, what is the programmatic revenue opportunity?' Just drone dominance just this year for us is a 90 million dollar opportunity. Are we going to realize the whole thing? No. Right? You don't ever get a hundred percent of the pie, but I think we'll do pretty good.

Yeah, let's just use another example. Drone dominance, the program requires about $250 million worth of parts in 2027. The only way for us to have the raw material to make that is to order and we have to order at least six months in advance because supply chains are long and as you order more and more stuff, they get even more long. So just to have the material, just material, not the warehousing, not the staff, not the CapEx, not the anything to just meet the demand for drone dominance in just 2027, I have to place about $125 million worth of parts orders by about August.

So if you look at our finances, we register a GAAP loss but only because of equity comp.

We have never had a quarter where we've spent more than a million dollars.

So, $150 million would get us till I'm dead from old age. I mean, it's a little bit tongue-in-cheek, right? We have to spend some money to accelerate and stuff, but I think another reason why people really like us is we're not a venture company. We don't look like VC money to scale at all speeds. We're a growth company where if you look, Amazon lost money, but was cash flow positive for 20 years till they turned a profit because they kept reinvesting in growth. Uber the same way for like 10 years where they kept reinvesting in growth. You know, they were cash flow positive, but equity comp is why they registered a loss. Our goal is to sit in that same sweet spot, and if we're growing 50% year over year, do you really want us to turn a profit and kick it off, or do you want us to keep growing?

So, we see a real big market opportunity here, but we wanted to have enough working capital in the bank to place the orders later this year to just meet the minimum demand next year. And not run out of capital because if you can't pay your vendors or whatever, the whole hardware system jams up.

So, we took the opportunity to raise money to just be ready for what we have to do over the next six months to be in a position to be the big winners next year and as a parts vendor. And that's actually one of the reasons why the bigger you get the better your raw material pricing, the better your systems, the cheaper your parts, the better your parts because of quality, the more people that want to buy your parts. So, the bigger you get, right? It's a virtuous cycle hardware is. And so, the further out in front we get and the more we can use capital to really drive scale, the more of the market we win. Like most of these companies only end up ever being at best duopolies, right? There's only two winners. There's only Uber and Lyft, even though there were

30 ride-share companies. And so, we're capitalized to be one of the winners in that duopoly. And like you just don't get displaced once you're at scale because the economics of being at scale make it really hard for anyone else to enter. And this market wouldn't even be available unless the US government banned Chinese parts, and actually all foreign parts. So, we have this like moment in time where this billions of dollars market was opened up where now if we can be the first ones on the virtuous cycle, that positive feedback loop just lets us fill the vacuum. And why wouldn't you resource that to fill the vacuum? And that's where the people putting in the money see what we're doing. They see us starting to fill this vacuum. They toured the motor factory. They see us making 20,000 motors a month and adding staff and adding shifts because they can feel the energy of the pull. And they're like, 'Yeah, okay. We get you need to buy more raw material. We would like some stock because this is going to work.' And you know, you don't raise that much money at an 8% discount with no warrants, no overhead, nothing from large small-cap institutional investors. That's a really good financing. It's not a 25% discount or anything else, which would signal more corporate weakness and more like arbitrage from the large funds. They're like, 'We don't even need the arbitrage. You're going to take the money and blow this thing out.'

A little bit. The margins are going to dip in the first couple quarters because as you bring in a whole bunch of new hourly workers that build stuff, they all hit margin.