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Hey everybody, Tim from Alpha Wolf Capital coming at you with an update with my good buddy and friend Alan Evans from Unusual Machines. And as always with Alan, there's something going on. And there is something recently that happened that thought would be a good idea to come on and share with everybody the thinking and process behind the move, right? And then Alan and I were just talking before we hopped on and I think this is really cool. Alan would like to talk about some of the operational challenges that the company has faced and how his team has managed those. So, UMAC, Unusual Machines. Alan, thanks for coming in, man.
Hi Tim. Always fun to talk to you. I'm never sure where it goes, but I like the preface. We'll see where we end up.
So, let's talk about the investment that you just did and why you did the investment that you just did.
Sure. So, I think we're talking about the $30 million in Power US. We tend to invest in our customers. It's kind of the Nvidia or Palantir model, but if you look, last time we invested in them, they placed a purchase order of a similar size not that long after for counter drone parts. And they're really starting to see success in counter drone, they're part of drone dominance, et cetera. So, you can figure we have a really good relationship with them, think they're a great company. We've invested in other customers too like Extend, et cetera. And they're just starting to take along and we really see that as a whole other demand driver for counter drone. That's just more parts, Tim. More parts go out the door, man.
All these things, people constantly look for programs or whatever else, but we're just a parts vendor and the interceptor drones need the exact same parts that the FPV drones need, that the ISR drones need. So, you know, batteries, motors, the boring things that we make at scale.
You know, that's the funny thing because the counter drone, when I hear counter drone or when I have heard counter drone, I'm thinking counter drone technologies, whether that's like microwave, but what counter drone, when you're talking about counter drone, you're talking about an object that is flying at a much faster speed that's going to actually hit those drones and take them out, right?
Yeah, I think the best analogy for any of this is if we go back to like World War II or whatever. You got bombers and fighters. And the fighters are designed to intercept the bombers. And we started with just bombers in the drone system and then it keeps stacking up to do these different things. And so, the interceptor drones look like the fighter variant where a lot of what people think about is like the anti-aircraft gun from World War II, right? The ground-based flak gun. So, I think you see staggered defenses, but there's been a lot of success with interceptors. So, that's a whole other demand driver that comes out of the military and then a ton of demand actually out of the Middle East because of the Iranian conflict and Shaheds being everywhere. So, it's real easy to go put some low-cost interceptor drone somewhere. You know, it's not fixed infrastructure. You don't need like a nuclear power plant to run the laser. And so, yeah, Power US is doing a great job really pushing forward there. So, I'm a big fan.
It's like you got both sides, right? You got both sides of it. You got the drones, which is awesome, and then you got the guys that are taking out the drones. And those are one-way missions, right? So, you're talking about some repeat orders there.
Yeah. You know, you look and it's even more, like I feel better about the counter stuff because if you think about it, Department of Homeland Security or some of the other defending against non-state actors, like cartels or whatever, there's a really good way to deploy that to be sure that we don't lose substations or anything else. So, counter drone feels like a little more noble of an industry to support. Yeah, you know, just in terms of defending our soldiers at forward operating bases or whatever else and not having infrastructure go away, so I can feel a little better about it. But yeah, in all these cases, there's just again, demand looks like infinity for us as we keep scaling. It's just a huge huge appetite to divest away from or to have redundant supply chains globally.
All right, so let's talk about some of the challenges you're facing. I mean, you know, I think it was either the last interview or the one prior where you were like, it's just so much. We're growing so fast. We've got three shifts and we still can't keep up. We've got this amount of space. It's like too much, right?
Yeah, yeah, so I'm happy to talk about some growing pains, some very interesting and real growing pains. And we keep growing. I think we're like 250 employees now or something, not counting Upgrade Energy. Our team went out to Upgrade Energy because we're working on integration. We're helping them hire people to move to multiple shifts. We just signed a lease on another 14,000 square feet in Orlando to add a second battery factory to double the capacity of what they're doing there. You know, so the growth engine is running. The HR team has scaled and is scaling to help bring that in. They're doing a great job. The interview process is working.
All right, keep going, but couple of interesting challenges in this last quarter because we keep growing. We outgrew sort of the capacity of one of our suppliers, an electronics supplier. So, you know, late deliveries and stuff that would have caused us to be late. So, our supply chain team, you know, with this external fire drill was able to migrate and find larger, more sophisticated sourcing groups for us to migrate what we were doing over to. That's always really challenging. And at the same time, because of the transition from the DIU to the blue list transition over, the DCMA went through and reviewed the blue list and took some of our products off the blue list without even notifying us.
That we had placed substantial material orders for. For reasons of concern over STM has five factories and they're one of the chips on there and one of those five factories are in China. So, it just makes sense why they wanted to be sure it was all done there, but very recently, you know, we had some discussions with them and I think other people did too. They went back and they've created an end-of-life process and everything. So, those parts are back on the blue list provisionally. So, our team had to work through that and then with our customers because we don't want to ever put them in a situation to not have the right product.
And then, you know, we shipped a whole bunch of motors. And one of our motor SKUs was causing some vibration issues with one of our customers building a new platform. So, our whole motor engineering team and product engineering team had to go through and do a root cause analysis on the exact function of the motor and the failure rates, and we had a, I think, a 1% failure rate on one pole where sometimes in the assembly process we had shredding of a little bit of insulator that would cause a ground plate to become slightly conductive that might then be conductive through the carbon fiber for screwing in there. So, we were able to, you know, update the engineering design, roll that over, change the process, communicate with our customers, be sure they didn't have additional failures as they're building it out.
And I'm just giving you examples of like very substantial scaled-up operational challenges. And what's amazing is a lot of these times these would bring line down or cause growth hiccups or whatever else. But in each of these different segments, like our supply chain team, our engineering team, our production team, man, they all just crushed it like it was normal. These are normal things that occur in manufacturing. You know, there's a lot of urgency with it, but we don't create too many internal fire drills. And so, you know, the weekend work, people just put it in super willingly. And we didn't miss a beat as a company.
And so, from my perspective, this quarter has been awesome because all of this stuff came up. And this stuff is all pretty normal, like as you scale in manufacturing. But it's the first time this stuff has come up kind of really at scale and with the functions of scale. And we're big enough now that, you know, down to the individual tiers of responsibility, everybody just executed. That, you know, process, documentation, communication. And over the last week I was sitting around and wondering what my job even is anymore. I'm like, who's everybody?
Yeah, you know, like, well, they don't need me.
Let me just tell you that. I just watch it all happen and you're like, you just kind of want to be like, wow. I guess I'll just clap.
Yeah, yeah, you know, so I think those are the sorts of things that people don't see from the outside. It's like, oh, it's all great. It's awesome. Stuff sucks, man. Building this stuff is hard. Growing this fast has all these like massive growing pains. But this has been really the first quarter where I've gotten to watch everything that we put together and everybody that's sort of taken ownership of their individual things just do really excellent work and it just gives me a ton of confidence as we go forward.
Yeah, that's got to be a great feeling, man, right?
It's really cool. To just watch everybody just like very real things that can be very disruptive to business, could have hurt our revenue growth, like had me out there being like, well, this quarter was tough. Instead, you're just like, how did you guys... awesome.
So, and we've, you know, I'd say we've had a lot of good fortune to date to not run into too many of these issues. Like we hadn't seen that much. There's always adversity, but this is the real time where we're really starting to see it in meaningful ways and handled it.
Even having the products removed from the list without them notifying you, which is like scary, right? I mean, scary for you, scary for your customers, right? Is that something that you feel is rectified now? That that won't probably happen again?
There's now a process in place. So everybody's learning. So this is not a criticism of anyone, but when you start to do tens or hundreds of thousands of a thing, you got to start to follow standard like end-of-life processes, last time buy processes as you roll stuff over. And so I think you're seeing new procurement methodologies from the government like the challenge-based stuff for drone dominance, etc. And what's really great is everybody's trying to do the right thing and re-industrialize as fast as possible.
And so through some of the communication and the changes, I think on the buy side too, they're getting a lot more sophisticated really fast. So a compliment to them for going in, understanding, taking the feedback, doing full evaluation, and not just from us, but then setting processes that match dual use like consumer electronics rather than the old sort of bespoke DOD purchasing stuff. So, you know, it's really cool to watch it all evolve and the whole industry sort of grow up really quickly as we do a lot of these things for the first time in 30 or 40 years back in the US. But you know, then part of our challenge is we're one of the larger producers at scale just in terms of volume. And so we get the privilege of being the first ones to experience some of these headaches.
Yeah. So a lot of times we're at the forefront of the discovery phase and our whole team, we're doing things the right way, you know, we're bringing production here. We're really transparent about what we do. So we get some credit when we run into these problems. In terms of going to a meeting like, so guys, here's the headaches for dual use folks that that creates. Let's talk about it. And the different government agencies are really receptive, but yeah, we're at the pioneering edge of scale and discovery, because we're doing hundreds of thousands of almost everything we do. Right? We're doing hundreds of thousands of motors. We're doing hundreds of thousands of cameras. So we have this big material flow transformation challenge where you can't just be like, stop doing that. We're like, no, we had to remember we placed $75 million worth of raw material orders? Like, the ship's getting bigger, Tim, and so it's not a speedboat anymore. We're not a cruise ship. We're not a monster boat. We're getting pretty big.
You were just at the Planet Micro conference and I went by the table. I didn't want to take up your guys' time right after the conference. I mean, in my head I know you guys pretty well. If there's somebody that's new at the conference that can take some time with you guys, I want them to take time, right? I mean, I don't want to be taking up your time. But I did want to go by and just kind of check out what you had. And I happened to walk by at a time when there was nobody at the booth. It was early in the morning. And you guys, I saw all the different size motors. I mean, you got quite an array of motors there.
Yeah, we build stuff. And you know, if you look at like the drone dominance program or some of the others, the indoor drones are a much smaller framework than the long-range outdoor drones. And we're regularly trying to offer a more expanded size category to let our customers sort of realize different systems based on their creativity and their design profiles and everything. Yeah. So, slowly doing some of that stuff, but the material coming in for that, our vendors are in the process of making this stuff and shipping it slowly. So, if somebody was like, this motor, stop making it... no. What do I do with all the parts? So, you know, and really communicating that to the defense buyers who want dual use and really want this ecosystem to emerge. They've been really receptive and I think very good about changing some of the ways they look at things to match what they're ultimately trying to achieve.
So, from our end, a lot of credit to the people in the government where I think a lot of people can get frustrated with where they're at. I'd say, you know, a lot of the folks in the Department of War right now driving these procurement programs are absolutely doing it the right way. So, a lot of credit to them. Just, I understand some of the frustration, but if you're out there, just understand it's a real good group.
Let me ask you a question. I interviewed Sam yesterday from White Hat. And I asked him this question too. I don't think this is highly likely. However, if tomorrow the whole world singing Kumbaya and there is no war, right? I know this is a fantasy, but let me live it for a minute. What happens for you, UMAC? Is there a dramatic slowdown? Or is there... I mean, is there enough commercial applications? And even if there isn't war, it doesn't mean you don't still continue to prepare for a potential war, right?
We're not a defense company at all. If the war ended tomorrow, first, great, because war sucks. Second, we still have infinite demand. If you look, you know, the FCC ruling saying, hey, no foreign drones and drone parts, means there's a $10 billion domestic market that exists today. That's $3 billion in parts annually for no growth. That's not food delivery. That's not additional inspection. That's not any of that stuff. So, last I checked, we weren't doing 3 billion a year in revenue.
I don't know. I got to find a pencil. You can see how far away we are from that.
Yeah. So, no, there's a huge amount of demand. It'd be like saying, if there was no war, are we still going to build jets? The domestic use for jets is much, much bigger than the conflict use. And I think in the same way, conflict creates a risk-taking environment where some of the technologies get deployed at scale and demonstrated. But it's really in the domestic and consumer markets where these technologies realize a very large-scale advantage.
A very unfortunate example is exactly two nuclear bombs have been dropped in the history of the world. But man, there's a whole lot of nuclear energy and we're seeing a major resurgence in nuclear energy. So the same technologies, the risk framework in conflict generally encourages or allows for a faster adaptation of emergent technologies and frameworks. But the much larger markets are almost always commercial and consumer in terms of realizing productivity gains for people.
And so in that way, where because it's considered that the domestic production base for like the Chips Act for drone parts is really important that we have that. But the real market drivers, just like for the Chips Act or for drone parts, are this advancement of a domestic framework that the FAA and the FCC are working on. So, you know, I hope we all sing Kumbaya tomorrow or whatever language is your preference. But it doesn't actually affect where we see our company going as a parts vendor. Like I think in 2030, we're going to be less than 20% defense end market and probably 80% commercial consumer.
Yeah. Absolutely. Is it? Like think about how awesome it is to, you know, when the FAA comes around and if we look at the drone dominance program, the long-range drone is 20 km, 5 lb, for four grand for a drone that can do it. That's food delivery. Man, that's a hamburger. And the cost of food delivery at that price point is a dollar. And you don't have to tip the drone. And it gets there faster and hotter. So, no more like soggy, did the driver eat my fries? Those fries are less than 10 minutes out of the fryer. I don't have to tip the thing.
And the drone Dominos program's trying to build 100,000 of these drones next year. So, the supply chain's there for it. So, you're telling me when the FAA opens this up, DoorDash, Uber Eats, and Grubhub aren't going to be like, we got your burger? Done.
Yeah. That means... and you're telling me the first time you show up to a friend and it lands and you're like, look, I don't even have to tip it. Somebody burns their mouth on a hot fry because it's still so fresh. Like, the quality of the product and the cost of the product dramatically change for the consumer. You don't think that's going to drive the market?
Right? Imagine sitting in your autonomous Tesla with a moon roof and something comes by and delivers you a coffee on your way to work in the morning. Like, that's where... That's not science fiction. Like, we can technically do that today and it's 2 years away from being regulated. You're telling me you're not going to sit in a Waymo or a Tesla and think to yourself, boy, a coffee would be great?
That's... I love it. I mean, yeah, I do see that. Talking to drone nerds, there are so many things that I haven't even been thinking about, right? That the commercial applications. I mean, just cleaning windows. He's talking about a whole business.
And I was thinking to myself, I guarantee you when those things are cleaning windows, it's going to stop people on the side. They're going to watch the show. You know what I mean?
You watch the guys on the thing now. It's not any different. Like you're like, man, those guys are brass tacks. I'm afraid of heights, Tim. So, I'm particularly mesmerized when they're up like 20 stories on a dangly swingy thing in the breeze just being like... right? So, yeah. It's not going to be... and people are like, what about noise? You're like, they're running a power washer anyway. Like, it's the same noise. So, that's one that's really interesting. That's a high-risk job. Drones do it faster, cheaper.
Absolutely. Yeah. Same with crop spraying, like crop dusting, super dangerous and way more expensive. Drones do a great job of that. There's a ton of these applications, climbing cell phone towers. Whenever they install a new antenna, they now do all the inspections with drones. So, yeah, I would say that, I think food delivery is an interesting emergent market, but if you look at the $10 billion a year market that exists now, you see a whole lot of these commercial applications where people might not realize drones are already used.
And now they can't use foreign drone parts.
Yeah, that's a horrible thing for you, huh?
It just means you're going to continue to grow, right?
So, that was one of the things I asked you before we hopped out, was is the acceleration slowing down? Or is it becoming... like do you see the light at the end of the tunnel or are you still thinking, where does this end?
Right now is where you know, where does this end? And it's where we sit as a business, if we look at competitive positioning, you know, we had first mover, we're well capitalized, we're growing pretty quickly. There's a $4 billion a year domestic market for parts, give or take. A hardware like this is a virtuous cycle, you're one, two or you're not participating. So, the biggest risk, if we know that there's a made market for $4 billion a year, that we could take as a company is to slow down. If other people can go faster than us, then they could pass us.
I believe with our team and our attitude, people can't grow faster than we can grow. I think we're running at about max growth rate. So, I think other people can do what we're doing, but not do a lot better. Maybe that's, you know, I think we're making all the choices to go as fast as possible. And at some point, we'll have to make very different choices when we start to get a larger portion of the TAM just to be sure we don't overshoot. But no, right now, we're grow as fast as we can. I think at a hundred million a year run rate, maybe a little bigger, we're going to have to stop and say, okay, how big is the market that we're addressing? Do we still feel this overwhelming demand? But until we're there, I think we don't even need to think about it. And once we're there, I think we'll need to think about it for like 30 seconds, and then we'll pick the next checkpoint. And say, okay, maybe it's 200 million a year run rate. We need to look around and say, hey, are we going to overshoot? So, that's where we're sitting right now, just still going as fast as we can.
The bulk of your operations is just mainly in Florida, right?
Yeah, supermajority of what we're doing is in Orlando. We just acquired Upgrade Energy, so there's 18,000 square feet in California.
Okay. Okay. So, that is... do you see a point down the road where maybe you've got, you know, regional, you got west, you got central and...
Maybe. You know, I think what you're looking at is what is the workforce feedstock to enable the growth in what we're doing? And where we sit in Orlando and our relationship with Valencia and our proximity to parks and the large population in Orlando, we feel pretty confident getting to 5 to 10,000 people here with the expertise in the stuff we need. I think once we start to get to that many people, we might have to look at another region just for workforce balancing and redundancy, but I think there's more benefit to being in one place still right now till we're several thousand people than we would see benefits of trying to have two different shops.
I can't believe you're over 200 people already.
Yeah, if you count Upgrade Energy, we'll end the quarter around 300 people, probably just shy of that.
I think... a holiday party, man. Like there were 350 people at our summer picnic, like with families and stuff.
Yeah. And I remember looking around thinking, first our events person did a great job putting it on, but second, yeah, we're getting big.
I remember it was probably 9, 10 months ago, maybe a little bit longer. We were talking about what we were thinking was going to be full staff. And I remember it was 48 or so.
I was wrong. We're now structuring the company assuming a thousand people.
You know, when we were talking a year ago, I had theorized a market vacuum.
Right, I was talking about how legislation would happen and it all happened in January. Theory versus the reality of living in a market vacuum. Two very different things.
Living in it is a sort of demand growth intensity I've never witnessed in my career. But it's really cool, but you know, we postulated that it would occur. And you think you know the theory and you're like, all right, we got this. And then you get into it and you're like, nope, so much faster. It'd be like going class four rapids for the first time. You've canoed on a lake once and you're like, yeah, I could imagine the pull from rapids. Different when you're in the rapids.
You remember the movie Point Break, right?
Of course. Are we talking about the remake or the original with Keanu? Because I'm here for the original with Keanu.
Right? I mean, Point Break... sometimes that wave that you think you're going to be riding is a little bit bigger than you anticipated, right?
Yeah, so we're like, oh, it's going to be a wavy day.
That was me a year ago. Now you're like, we're surfing the wave and it is... it is different, man.
It's different, it's fun, right? You're having fun.
I spent my entire career in technology and going to China and building stuff. This is the coolest moment of my entire career. It's so awesome to see re-industrialization. This last quarter especially, like I said, we had all these operational challenges and people worked through them and did it in the right way, in a way that matches us actually bringing back some of these things that have been overseas for a really long time. And to see that almost rebirth of a skill set in the US and to be able to watch it happen live with people that are putting it in. It is extremely fulfilling.
To be able to do it as a public company where people can take the ride with us, see some of the benefit, believe in what we're doing. We're the benefactor of a bipartisan government and citizen attitude to try to onshore and rebuild a lot of these critical industries. Instead of just being dollars captured by VCs or whatever, I think it's really cool to watch it happen externally in terms of driving value, internally in time in terms of seeing expertise growth and people earlier in their careers doing amazing things. It's great to see our customers see success. To do all of it in the right way. I'm in the middle of an extraordinary moment and I have the privilege of a front row seat, like at a movie premiere.
Do you attribute the skill set of your teams to the hiring practice that you have of the team meeting with, you know, potential new employees, the people that you work with the most. Do you attribute the success to, do you think that's part of it?
100%. So, whenever you have these sorts of issues, like root cause analysis, everybody cares so much that nobody wants to be the one who's responsible. So, it's human nature to be like, 'Oh, that's not my fault.' or whatever. And our whole team just didn't even bother to do that. They just went in and solved it. Right? There was no blame game, there's no whatever. So, yeah, I think a lot of how we align the structure of the team, and then incentives of the team, so we don't do any of the individual assessment stuff that other companies do. I don't measure individuals. We refuse to.
I freaking love that. I hated, when I was an executive, I hated having to do performance reviews. It sucked.
Yeah. We just don't do them because it's not the individual.
Letting you know that someone is trying, I'm very popular this morning.
No kidding. Well, I'm just secretly calling you to get the robot to talk at the same time.
Do you actually mind if we take a quick break?
No, not at all. You want to do that?
Yeah. Because that was my dad. I'm going to call him back.
Yeah. Let's just call your dad back. We'll reboot afterwards. New topic.
All right. I just knocked my camera.
