Unusual Machines (NYSE:UMAC) is a leading first-person-view (“FPV”) drone company competing in an industry dominated by DJI, a privately held Chinese company that now claims 70% market share of the global drone industry. U.S. legislation has prohibited the use of Chinese manufactured drones and drone components by any U.S. government agency. UMAC seeks to become the top tier 1 supplier of FPV drone components manufactured in the U.S.
The Opportunity
UMAC was created from two companies acquired from Red Cat (RCAT); Fat Shark and Rotor Riot, from funds raised in the UMAC IPO on February 16, 2024. Fat Shark is a well-known brand in FPV goggles which are used by drone pilots. Rotor Riot is a business to consumer (“B2C”) e-commerce FPV drone marketplace.
Fat Shark controlled the majority of the FPV drone market when it was acquired by Red Cat (RCAT) in 2020. DJI took advantage of lower labor costs in China and was able to swiftly create a massive distribution system while Fat Shark suffered through Covid related supply chain issues. DJI was able to outmaneuver Fat Shark and became the overwhelming market share leader.
UMAC is a microcap company that is a first mover in seeking to capture a very large market opportunity created by replacing DJI in U.S. sales and the growing demand for drones. The U.S. is the world’s largest drone market. UMAC currently is number two in FPV drones market share trailing only DJI, and now seeks to become the top tier 1 supplier of FPV drone components manufactured in the U.S.
The market has not recognized the potential revenue boost for UMAC as the stock share price has declined from the $4 IPO to its current price of $1.69.
Strategy
Allen Evans, was the CEO of Fat Shark when it was acquired by Red Cat and became C0O of Red Cat in 2021. Mr. Evans is now UMAC’s CEO and envisions UMAC being in a unique position to regain market share in FPV drones due to the Fat Shark brand recognition and the industry connections he and his company have made through the Red Cat Futures Initiative. CEO Evans is strategically avoiding the areas of the drone market getting the most attention such as unmanned drones, A.I. and cameras, choosing to concentrate on FPV flight controllers and motors where there is currently no U.S. based manufactured competition.
Red Cat is focused on US military and defense sales and needed to divest itself of Fat Shark and Race Riot to qualify on government contracts as both Fat Shark and Race Riot have sales that include products manufactured in China. Red Cat will now concentrate on its Teal drones which are autonomous while UMAC is focused on FPV drones, which are immersive and allow for real-time maneuverability.
UMAC intends to be an add-on supplier of the USA manufactured drones and drone components for commercial and U.S. military contracts and is therefore not under the same requirements that direct bidders are subject to. The company continues to sell components that are manufactured in China but it is now offering U.S. manufactured products as well. UMAC recently announced being selected to supply drones and drone parts to RCAT for its new Lethal Strike Systems and the introduction of the first U.S. manufactured FPV flight controller. Management is expecting to continue adding new customers as the U.S. industry shifts away from Chinese products to U.S. manufactured products.
The next few months are particularly of interest for potential share price appreciation as this is the period of the year when U.S. Department of Defense contracts are awarded.
Growth by acquisitions is also in the plan.
Tailwinds
Drones are growing in popularity across multiple purposes such as transportation and traffic management, photography and film, mapping, security, entertainment, architecture, agriculture, and law enforcement.
The war in Ukraine has brought about an increasing deployment of drones as a military weapon. The Pentagon Replicator Initiative is intended to protect Taiwan from a potential Chinese invasion with a massive amount of small drones creating a defensive wall. Six NATO countries have announced intention to create a similar drone wall defense system along the Russian border.
Recent legislation such as the American Security Drone Act of 2003 are prohibiting the use and purchase by US government agencies of Chinese manufactured drones and drone parts. The National Defense Authorization Act of 2023 which prohibits sales by DJI in the U.S. has been passed by the House and is pending a Senate vote.
Financial
There are 9.3 million shares outstanding. Red Cat is the largest shareholder with 45% of the shares and insiders own 19% of the shares after recent purchases. The market cap is about $16 million.
There has only been one 10Q filed since the IPO. It is for the period ending March 31. Prior to the Fat Shark and Race Riot acquisitions, UMAC had no revenues. The report includes only 45 days of revenue from the acquisitions of about $600K, which is a $5 million run rate. Taking out the one-time costs associated with the acquisition and the IPO, the burn rate is about $400 K per quarter. The company reported cash of about $3 M, which is sufficient to fund operations for the next 12 months. There is $2 M in debt owed to Red Cat.
Increasing annual revenue to about $7 M would put the company into profitability. The increase in military budgets and the popularity in drones along with the opportunity to replace Chinese products makes the profitability target a reasonable possibility.
Risks
The company will need to raise funds if it is not able to reach profitability within a year, which would be dilutive to shareholder value. Dilutive financing may also be utilized to fund acquisitions.
The $2 M debt to Red Cat Matures in August 2025. The company will need to reach profitability in order to pay the debt.
UMAC is National Defense Authorization Act (“NDAA”) compliant, but has not yet obtained Blue UAS certification, which is a requirement for sales to the US DOD, and a critical development for UMAC gaining market share.
The company competes with larger American and European drone companies that do not currently manufacture FPV drones or FPV drone components in the U.S. such as Skydio, and Parrot (OTC:PAOTF). Should a large competitor enter the U.S. FPV space, UMAC would face a similar David v Goliath battle as it has endured with DJI.
Conclusion
UMAC was created with the intention of becoming a Tier 1 supplier of American made FPV drone and FPV drone components. The company has an established brand name in its industry after being the number one in market share and it stands in the best position to gain from the removal or reduction of Chinese imports in the U.S. marketplace The management team is experienced and has established connections with Red Cat and its partner network. Gaining Blue certification is a short term potential catalyst. The company could reach profitability with just one or two military contracts, which would result in a rerating of the share price.
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Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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