Unusual Machines, Inc. (UMAC) Q3 2026 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Unusual Machines Third Quarter 2026 Financial Results Conference Call and webcast. [Operator Instructions] And please note, this conference call is being recorded. I will now turn the conference over to Christine Petraglia, Investor Relations for Unusual Machines. Ma'am, the floor is yours.

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 regarding our expectations for Q4 product demand, revenue growth, manufacturing expansion, our ability to handle this continued growth, gross margins, becoming a supply chain leader for small drones, and anticipated regulatory developments and future commercial drone applications. 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 the non-GAAP measures to the most directly comparable GAAP measures is included in the shareholder letter and earnings press release, which are 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 @unusualmachines.com. Now let me hand the call over to CEO Allan Evans. Please go ahead, Allan.

Thank you, Christine. Good afternoon, everyone, and thank you for joining us today. During this call, I will discuss our third quarter 2026 performance. In the third quarter, we generated $13.9 million in revenue. This is a 551% year-over-year growth from the third quarter last year. We generated a net loss of approximately $25 million for the quarter, which represents a loss of $0.50 per share. The majority of that loss was driven by noncash line items, which we will discuss later. The key takeaway from the rest of this call is that we are continuing to grow the company, and we are now well positioned for the fourth quarter of 2026 all the way through 2027. The third-quarter financial results require some interpretation to clearly see what Unusual Machines is working to achieve. We are generating rapid growth, with revenue growing more than 550% compared to the third quarter last year. At the same time, we are effectively managing costs and maintaining margins. We held non-GAAP adjusted EBITDA loss at approximately $700,000 for the quarter, and our margins have remained consistent even with the growth. We finished the quarter with a 35.4% gross margin. This is all against a backdrop of investing for future growth and scale during the quarter. For example, our headcount increased from 240 employees to 276 employees as of October 1 and then to 325 employees after we formally closed the acquisition of Upgrade Energy. This continued success and rapid execution is impossible without collaboration across our entire team. I am confident in our ability to handle continued growth because I am extremely confident in the people we have in place and the people I get to work with. I want to say thank you to everyone at Unusual Machines, including those who have just recently joined us from Upgrade Energy. 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 the quarter and on 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 us today. As Allan discussed, we're continuing to invest in growth through manufacturing capacity and the supply chain needed to support our growth. From a financial perspective, our focus remains on maintaining a strong balance sheet, deploying capital strategically, and building a business that can scale efficiently and eventually toward profitability. With that, let me walk through our third quarter results. We generated approximately $13.9 million in revenue during the third quarter. And as we mentioned, that's an increase of 551% compared to the third quarter of 2025, and year-to-date revenue reaches $38.7 million, representing a growth of 515% over the comparable period last year. Enterprise customers accounted for approximately 90% of third-quarter revenue and 88% year-to-date. Revenue was lower sequentially than the $16.7 million reported in Q2 as we focused on certain operational investments that will help continue scaling into the future. It's important to distinguish delivery timing and operational investments that we made from any other issues related to underlying demand. Gross margin was approximately 35.4%. And as we've discussed previously, margins fluctuate as we continue to scale manufacturing and shift toward a predominantly enterprise customer base. Despite these ongoing investments, we maintained margins in the mid-30% range, consistent with our expectations. We had a net loss of approximately $25 million. However, our adjusted EBITDA loss was around $700,000. We are continuing to maintain our adjusted EBITDA in line with expectations as we continue to grow and invest in the business. Even as we more than doubled our workforce this year, we remain focused on managing expenses and building out the operational efficiency needed to scale profitably. Included in the net loss is approximately $5.5 million in noncash stock compensation expense and approximately $18.4 million in noncash unrealized losses on short-term investments. Our strategic investments strengthen relationships with manufacturers, suppliers, and potential customers, creating opportunities to expand component sales and supporting domestic supply chains. During the quarter, we deployed an additional $35 million of capital across multiple investments, which includes a loan receivable within the industry. A full reconciliation of GAAP results to adjusted EBITDA is included in Table 2 of our shareholder letter. We ended September with approximately $162 million in cash, $98.4 million in short-term investments, and $342 million in working capital as presented in Table 3 of the shareholder letter. During Q3, we used approximately $24.8 million of cash for inventory purchases, $3 million for equipment, including our automated motor manufacturing line, and, as mentioned previously, $35 million for the short-term investments. Table 1 of the shareholder letter provides a full breakdown of cash uses during the quarter. As anticipated last quarter, inventory and related deposits increased from approximately $42.4 million at the end of Q2 to approximately $65.9 million at September 30, including $23.3 million in prepaid inventory. This investment in inventory helps us manage supply chain constraints and support larger customer orders as we continue to prepare for significant growth in 2027. Other things we're working on during Q4 include looking at approximately 100,000 square feet of additional space to expand manufacturing operations, scaling additive manufacturing, and bringing the automated production line online in Q4. As we look ahead, our focus is on translating the investments we've made in inventory and manufacturing capacity into stronger operating performance. While quarterly results may fluctuate as we scale, we believe these investments position us to support higher production volumes, improve efficiency, and capitalize on anticipated demand in 2027, while maintaining the financial discipline needed to move toward profitability. As Allan said, thank you to our entire team, welcome to the Upgrade Energy team, and thank you to our shareholders and partners for their continued support. With that, I'll turn it back to Allan.

Thanks, Brian. At a high level, I'm very proud of what our team achieved this quarter, and I want to take some time to provide more detail. First and foremost, we chose this quarter to invest in initiatives that will allow us to sustain long-term growth. There were several initiatives we focused effort on simultaneously. This includes changing our electronics vendor, installing the highly automated motor production line, improving quality and tracking systems, scaling up energy as we worked on closing the acquisition, and beginning to add additive manufacturing capabilities. We made great progress toward all these initiatives in the quarter, and our team still hit the top end of the $12 million to $14 million revenue target range that we had set out. This work really positions Unusual Machines to become a supply chain leader for components for small drones, as our customers are still rapidly growing in what is an expanding market, and it's very quickly everywhere. I'm going to go into more detail on the third quarter and also discuss our outlook going forward. I'd like to remind you that the following comments contain forward-looking statements, and actual results may differ materially from those we anticipate. By most metrics, the third quarter should be considered very successful. Revenue was up over 550% from a year ago, while margins remained steady at 35.4%. We had a narrow EBITDA-adjusted loss of only $700,000 while having over $342 million in working capital. All demand signals remain strong, and there has been nothing preventing us from continuing to grow. All of that being said, this quarter reminds me a lot of the third quarter last year. The third quarter last year was when we built an operational base from which we started scaling. The second and third quarters last year were really close in revenue, and it seemed to have flattened out at a little over $2 million a quarter. But in the third quarter, we started driving inventory capacity and space to grow with the industry that was just starting to get orders from programs like Drone Dominance and PBAS. We were intentional about positioning the company for a year of growth. This quarter feels the same way, except for the new revenue base we are positioning around is substantially higher than it was a year ago. The financial indicators match these operational indicators I'm talking about, and they suggest that we are positioned to scale from here again. For instance, we grew from 240 to 276 employees in the quarter and are now actually over 340 employees after the Upgrade Energy acquisition closed through today. We've made an additional $3 million investment in equipment purchases, which includes things like additive manufacturing and, more importantly, automated motor production. Our inventory and prepaid inventory increased from $42.4 million at the end of the second quarter to $65.9 million at the end of the third quarter, and this wasn't driven by finished goods, which only increased from $4.4 million to $9.3 million. So that's raw material we can now process. Our accounts receivable increased from $9.3 million to $18.7 million. These are all financial indicators that reinforce these operational frameworks we've set and that we see every day doing the work. Anyway, I guess that's enough on our positioning in the third quarter and what happened. Let's talk about the future. First and foremost, last quarter, we set our revenue target for the fourth quarter at $25 million. That remains our target. In addition, the demand that we've always seen remains strong and really hasn't changed. The current U.S. marketplace continues to be supply constrained, and we see demand outstripping supply the rest of the year and all the way through 2027. We are continuing to scale into this demand as fast as we can, and we don't see any signs of softness, even though there may be some short-term concerns from the change in the political environment. The primary driver of the demand remains the Department of War. The drone dominance Gotland program issued orders on time for Phase 2 in September and placed those orders in October. And it also appropriated 2026 dollars for Phase II, which begins in early 2027. So that's already funded. Counter-drone demand growth has been a really strong segment for us. This was evidenced by the $16.9 million order from Power U.S. for components for the Guardian Interceptor drone, amongst a few other things. I think that order also shows some of the importance of the work we do with our strategic investments, which we think will help drive our relationships there long term. And so really, there's already enough appropriated funding through 2026 and enough demand that we are already pretty much fully allocated through the first quarter of 2027. And we don't need to see any more environmental orders or large programmatic orders for us to be in a good position. The commercial domestic market is also probably going to start to scale late in 20. We expect the FAA proposed Part 108 rule for drone operations to be finalized in the next 6 months. And we also see several companies like Google Wing, Amazon Prime, DoorDash, and Zipline working with Walmart. They're all already expanding their delivery footprints. So we expect that their accumulated history of performance, along with these new rules, will create a very strong demand cycle on the commercial side that will match and complement the current demand cycle we're seeing from the Department of War. All that being said, I do want to spend a few minutes to proactively address a few broader topics that aren't related exactly to the operations of the company. First, we are still in discussions with the Office of Strategic Capital. Media leaks are the reason why there's awareness about it and why we are in conversations. Another company that was in the same media leak, Miros, just announced a loan. So I would say that the timing is not unusual or dragged out. I don't know if we will get a loan or when our discussions will resolve one way or another. That is all I can say about the topic, and I look forward to sharing whatever resolution comes from it with all of our investors and shareholders as soon as we know. The election. In my personal opinion, this election outcome is the second-best possible outcome for unusual machines. That may seem counterintuitive, but I'd like to take a moment to explain. For unusual machines, we just need the government to stay open and govern. As long as budgets get passed and things run on time, that ends up being good for us. We see steady demand regardless of the total appropriations of the defense bill, et cetera, because there is a strong shift toward dual-use drones and toward autonomous systems. The outcome from this election was very certain, and so this allows our elected officials to get back to work very quickly, and there's not this long period of determining who won the election. This makes it much more likely that a budget gets passed sooner rather than later. And the overwhelming public response increases the likelihood that there's going to be compromise as people work together to move things forward rather than the gridlock we see with really slim majorities. Additionally, and I think most positively, many of the newly elected and reelected officials from both parties are large proponents and advocates of both reindustrialization and of drones. So what we do and where we do it, which is drone parts made in America has wide bipartisan support. So the working government and where we sit, we think, is going to be positive for us. Zooming out, it seems investor sentiment in the drone market is changing. Across the segment, share price multiples have come down substantially, new financings are less common, et cetera. This could be for a variety of reasons: higher Treasuries, the recent election, inflation, et cetera; I don't know. But this sentiment change has reduced the unrealized value of our investments, and it's the primary driver of our GAAP loss of $25 million in the quarter. Interestingly, the investor sentiment is not representative of the marketplace. Demand is scaling rapidly, and there's an overwhelming interest in drones and drone parts. What it does is create an environment that strongly favors well-capitalized companies like ours, and it actually positions us to take a more dominant market position than we might otherwise have been able to. To summarize, the third quarter of 2026 positions Unusual Machines for sustained growth through 2027. Revenue was $13.9 million with 35.4% margins and an adjusted EBITDA loss of only $700,000. We have advanced several growth initiatives, including closing the acquisition of Healthgrave Energy, and are ready to continue growing with the industry through the end of 2026 and into 2027. Our business is well capitalized and healthy, which gives us a strong advantage in the current market environment. We are continuing to grow as fast as we can, and I'm confident our team is up for the challenge. I want to say thank you to our entire staff, all of our shareholders, and everyone interested in the company. With that, I'd like to open up the call to questions.

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

Congrats on the solid results here. First, just wanted to talk about the Q4 $25 million revenue guide. What's the visibility there? Just curious about how much we should be assuming you're going to recognize from this second big order from Power Us and then also the incremental contribution from Upgrade?

We don't break that out specifically, but I appreciate the question, Austin. I mean, at this point, for us to maintain that target, you'd assume we have pretty good visibility. So pretty high confidence in that as a target, and we've seen the Power U.S. order is one example of orders that we've seen that we don't need anything else to get there except for us to execute on an operational side. So I'd say the risk is us continuing to scale effectively internally, not demand; we definitely have the demand already in place.

And then I guess if I could ask about 2027, and if there's any way to give us some context on growth as we head into next year, ending the year at about a $100 million run rate, like do you guys feel that you guys can continue to grow sequentially off of the larger Q4 number as we enter next year?

Right now, I would say, yes, there are a couple of limits. First, we're starting to reach the productivity limit of our total space. So as Brian mentioned, we're looking at about 100,000 square feet of space to add. So we're going to need to get more real estate, and that will be a dependency. And then I'm making the assumption, and I think this election helps with that assumption, that we don't see major hiccups in the domestic demand from a very extended lack of the government budget or something. But otherwise, that is my expectation, absolutely.

Our next question is coming from Mike Latimore with Northland Capital Markets.

Congrats on the growth and strong gross margins there. Allan, when you say you're fully allocated through 1Q '27, I guess, does that include Drone Dominance 2 and then this Power US order? I guess, what does it not include?

We have several different customers. So it includes PowerUS and some of the stuff from Drone Dominance 2. It doesn't include Drone Dominance 3. And what we do is we don't require a payment upfront. Slot customers in as they work with us based on what their expected delivery needs are. And that becomes more important now as a lot of the customers are private companies. And with the downturn in the markets, there's just less access to cash. But there's enough demand for us to go pretty much all the way through quarter 1 without seeing any new U.S. budgetary initiatives or anything. So we're in a good spot.

And then in the shareholder letter, you highlighted that funds have been allocated for Drone Diamonds 2 and the counter-drone initiatives. I guess, what's your level of confidence that those don't change and that, in fact, hold throughout whatever cycle we go through here?

90% to 95%, given on how budgets work. The reason why Gaulet II was announced on September 30 is that it was out of last year's defense budget. So it is allocated. It's just not contracted and committed. Same with the $4.5 billion worth of IDIQs that were awarded for counter-drone stuff across 10 companies. So because that's out of last year's budget and the money has already been pulled out and set aside for the contract, that's very likely not going to move around. I would say, in the continuing resolution, we're seeing matching elements go. And so I think we'll see that through the end of the year. I assume they're going to move to continuing resolution into January and then come around with budgets, which will probably still shift more money toward autonomy regardless of what the top line is. So those programs are already funded. So very rarely does that change.

And then just last, obviously, Power US, a nice order in the counter drone space. Can you provide any more color on how many other customers you might have in the counter drone space?

They're the first big one, really going forward. So we're in discovery with others, but we don't have anybody else in the same magnitude.

Our next question is coming from Amit Dayal with H.C. Wainwright.

Allan, just congrats on the quarter, by the way. The $25 million target for 4Q, is that all defense? Or is there any enterprise and other segments in that?

It's probably going to be dominated by defense. It tends to be our best retail quarter. So we'll see a little bit of uptick in retail, and we have seen some initial work with commercial consumer. But right now, the super majority of the work we're doing ends up in defense-end markets, and I expect that to be Q4, too. I don't expect us to see substantial shifts toward the commercial market. Starting in 2027, as people develop their platforms and then probably late 2027, we'll see more significant revenue volumes move to that segment as they start to scale up their fleets after what I think the FAA Part 108 rulemaking is finished.

And I apologize if you've already discussed this. But what's the size of the pipeline for you specifically for unusual machines from the drone dominance program?

Uncertain. If you look, we're constantly working with all the different vendors to try to capture more market share. So I hope it's 100% of all the parts that we do, and we keep adding parts, which would be a couple of hundred million dollars through '27. But again, as they change the requirements and they change the award, that's constantly shifting, both in our favor and away from us depending on how it goes. So I would say if we're able to service most of that program, that alone would keep us busy through scaling. We don't anticipate that, so we're working on other things. But yes, that alone is a substantial source of parts and everything else.

And just one last thing, I guess. The funds from the Office of Strategic Capital, is there a specific use of those funds? Or is that just going to be general working capital growth needs, et cetera?

Well, we can't talk about our specific interactions with the Strategic Capital; you'll see that some of the other loans that have been given to companies like PDW or Nis do have specific use cases. Those use cases are for drone parts in a lot of ways or other manufacturing things. And so I would make the assumption that we're probably going to have the same nature of loan that the other 2 companies that received loans had disclosed. That is, if we are selected for it.

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

Just want to get your thoughts on the Part 108 ruling. It sounds like it maybe isn't a pistol start. It sounds like there's going to be a ramp there. But I mean, how do you think the commercial world is going to find its footing? I mean, is there a desire to be everywhere at once? Or is it going to be a growth market?

Well, first, I think you're already seeing elements of the growth. You saw Zipline just closed a financing that values it at $20 billion. You're seeing DoorDash announce that they're expanding under a Part 135 waiver. And so you're seeing all these zone tests of drone delivery. I think you're seeing that implementation right now. And what that will do is it will create a framework for them to expand globally or at least across the country without having to get specific waivers. I do think it will not be all at once; it will be a ramp, but I think that ramp will look very, very substantial compared to the size of the industry now. And the drivers of that ramp are very large companies with really deep pockets and a lot of interest in scaling it. I think if you look at comparable autonomy rollouts like Tesla and the Waymo cyber taxis, you see a lot of units being deployed very quickly even in the limited geographies. And I think this is going to be supply chain limited. But Amazon, Google, Walmart, DoorDash - these are the entities that are going to be scaling. So I think, from a social perspective, we may say, hey, it's going to look slow. From a domestic drone industry perspective, it's going to look like a tidal wave.

And I guess relatedly, just on the scaling up of upgrade Energy. How has customer response been to that related to the commercial market as well, and the battery swapping model that you might be contemplating there? Just curious how that's all coming together.

Still very early. So just starting those discussions. But I think the first responsibility we have is to continue to work with the upgrade energy team to scale production. We've got to be a lot bigger really fast to be big enough to support the scale that these customers are going to want. So I think there's excitement because I think everybody has seen that we're in the starting process of being able to scale to be a large enough provider to meet their needs. But I think we have another 6 to 9 months of execution that we're really going to require to get into a range of quality and scale and traceability and everything where they go, all right, yes, let's do it. So it's been really positive initial feedback. And I think our team is doing a great job going so fast. But these really big players, they're very open-minded, but we've still got to cross some of these thresholds. And so we're working really hard to do that as quickly as we can.

Our next question is coming from Craig Irwin with ROTH Capital. Congratulations on a strong quarter.

Allan, most of my questions have been answered, but the one that's outstanding that we've been getting from investors is your supply position at Nuros. So they obviously performed incredibly well at Gauntick 2 and booked themselves a $100 million order. The Office of Strategic Capital is obviously rewarding them for their execution. And you've been rumored to be in the same small group. So I wouldn't be surprised if there was substantial content. Can you clarify for us some of the things that are out there and accurate, that you are an important supplier to Nuros on their Archer?

Nuros is a great company, doing great work. We have a policy not to talk about our customers or potential customers. So I can't confirm or deny or comment on it outside of, I think they're a great company, and they're doing a really great job. So that's about all I can say about that.

Then the leaks regarding the officer Strategic Capital have gotten a lot more specific. We're now not talking about a couple of hundred million. We're talking about $220 million. Can you maybe just give us a little bit of an update as far as how you might invest that amount of capital? What would be your near-term priorities as far as product line, manufacturing capabilities, product focus, and potential expansion of the ecosystem you currently supply as a priority on that list?

Yes, and I'll provide this theoretically. We're trying to scale as fast as possible. I think for a long time, the Department of War stated a desire to have the capacity to build across the U.S. 1 million drones a year or more. It would be irresponsible of us to blindly rush toward that level of capacity without checking demand. And so it would make sense if we were working with somebody who had stated that level of demand to determine what it would take to finance that capacity. And if that capacity was financed, then it would be a very strong indicator that demand is actually there. So you look at the numbers as being what it would take to build the capacity to build 4 million motors a year, give or take, for drones, and then we want that financed. So I think if you look at it that way, from us making responsible decisions as management and not pausing to look around to determine where and what demand was at a much earlier level, so we didn't overshoot on inventory or do some of the other things that are very risky for a hardware company, then you can probably back out how that number might have resulted in a leak.

[Operator Instructions] Our next question is coming from Matt Galinko with Maxim Group.

I guess maybe following up on some of the prior questions, and assuming no additional influx of capital comes in and assuming capital gets a little bit tighter, we've seen a pullback in the market in the last day or 2. Can you talk about how you approach expansion opportunities in that environment and how your disposition on capital deployment changes?

Yes. So right now, we feel like we're fully allocated in our investment portfolio until it comes back because of the way the market is. If you look, we have $65 million-ish in inventory or prepaid inventory plus another $160 million in cash, really $220 million of stuff or money. And that puts us in a really strong position to do at least that much in annual revenue without needing to drive any other financing. I think right now, until we scale revenue a little bit and hit some of the numbers that we're targeting, we're probably not going to be very interested in acquisition or investment or anything but scaling and de-risking the business. I would say let's assume we're able to hit our target of 25% and move forward from there. As we start to hit those business milestones, I think other sources of financing become a reasonable cost of capital for us besides equity raising. If the markets don't come back, we could do inventory financing or factoring on our accounts receivable, et cetera, to stretch our cash balance to enable us to scale even more. And I think it's once we see those business performance objectives, and we look at what the cost of alternative capital is and where the market is, I think until we feel really comfortable that it's a really good deal that we wouldn't be looking to be really acquisitive or anything else because we wouldn't want to ever compromise that inventory cash flywheel that is fundamental to our rapid growth. So I think you're probably assuming market conditions don't change much; you're probably looking at us being relatively boring on the external front for the next 6 months as we really hammer down and drive operations. And then I think sometime in early quarter 2 of next year, we'll have unlocked more of the tools that larger operating companies have, and we'll be able to make decisions at that point based on where those tools set. Appreciate the question, Matt. Anything else?

We have no further questions in the queue at this time. So I'm going to hand the call back over to Mr. Evans for any closing remarks.

I want to thank everybody again. This quarter was a building quarter. We laid the foundation for the next year. It reminds me of us doing it this time last year. I think the execution of the team over the last year has been beyond expectations, and I have no reason to believe that we're not going to be able to do it again. So I'm really excited. I know the macro environment is a little bit rough. And I think, honestly, it favors our company because of our current positioning and allows us to operate this way, where some people that might be competitors or otherwise aren't going to have the same flexibility. So I really look forward to it. I look forward to getting back to work, and I do appreciate everybody's time. So thank you. And lastly, thank you to everyone who works at Unusual Machines. You guys are awesome. I really appreciate you and the hard work you guys do. I hope everybody has a good night.

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