Drone Co. Finalizes Transactions, Looks to Next Growth Phase

Drone and drone component maker Unusual Machines Inc. (UMAC:NYSEAMERICAN) has finalized several transactions with partner Red Cat Holdings Inc. (RCAT:NASDAQ), including one related to the closing conditions of the acquisitions of Rotor Riot and Fat Shark.

The share purchase Agreement under which Unusual Machines acquired Rotor Riot and Fat Shark from Red Cat contained a provision for a subsequent determination of the working capital of Rotor Riot and Fat Shark, UMAC said.

Following negotiations, UMAC and Red Cat agreed upon a US$2 million final working capital adjustment. So instead of UMAC paying Red Cat US$2 million, the parties have agreed to amend the existing note to US$4 million and extend its maturity date to Nov. 30, 2025.

"Following the recent launch of the Brave 7 flight controller (last week), Unusual Machines will continue to focus on expanding our portfolio of U.S.A.-made drone components, and the changes in ownership support our long-term growth strategy," said Chief Executive Officer Allan Evans. "We look forward to continuing our work with the entire Red Cat team as we launch several new products and initiatives."

Separately, Red Cat entered into an agreement with two third-party shareholders to divest itself of its investment in UMAC. To accommodate Red Cat and the two shareholders, Red Cat exchanged their 4.25 million common shares for Series A preferred stock, which does not have voting rights and includes beneficial ownership limitations preventing the shareholders from owning in excess of 4.99% (increasable to 9.9% on at least 61 days' notice) of all outstanding common stock.

"We are excited to have the acquisition of Rotor Riot and Fat Shark completed with the working capital adjustment finalized," said Brian Hoff, chief financial officer of Unusual Machines. "The conversion of the Red Cat shares to preferred shares and subsequent sale of these shares helps reduce our shareholder concentration of Unusual Machines as we look forward to our next phase of growth."

Rotor Riot is a source of recreational and hobbyist drones, and Fat Shark is a brand of first-person view (FPV) goggles. Red Cat also has tapped Universal Machines to provide the first drone and components for its new FANG line of FPV systems.

"[Unusual Machines] generates US$5M revenue a year with 20–30% year-on-year growth that is expected to continue," Technical Analyst Clive Maund wrote on June 20.* It has since then gone up more than 26% following its latest product release.

'Plenty of Potential Catalysts'

The Rotor Riot Brave F7 flight controller, announced last week, is manufactured in the U.S. and is fully compliant with the National Defense Authorization Act (NDAA), UMAC said. Flight controllers use sensor data to coordinate the speeds of rotor motors.

"We are currently in the Blue UAS approval process for the Brave F7 Flight Controller. This underscores our commitment to supply chain transparency and regulatory compliance," Evans said. "This U.S.-based production is our first step in providing a more secure and reliable supply chain to our consumer, commercial, and government customers."

"[Unusual Machines] generates US$5M revenue a year with 20–30% year-on-year growth that is expected to continue," Technical Analyst Clive Maund wrote on June 20. It has since then gone up more than 26% following its latest product release.

Unusual Machines said some key features of the controller include its pricing, a STMF722RET6 processor, a Bosch accelerometer and barometer, and 16 megabytes of built-in black box memory.

Chief Operating Officer Drew Camden called the controller "a significant milestone for our company" and "the first step on our ambitious roadmap of having a suite of American-made components."

"The Brave F7 Flight Controller is designed by our Rotor Riot team with the FPV pilot in mind," said Stacy Wright, president of Rotor Riot. "We are committed to serving our FPV hobby and are proud to offer high-quality, reliable American-made drone components at a very competitive price."

Maund concluded the company was an Immediate Strong Buy. "There are plenty of potential catalysts over the next several months with the seasonal round of government contracts being announced," he wrote.

In a June 17 research note, Dr.  Ashok Kumar also shared optimism for Unusual Machines, giving the company a Buy rating and a target price of US$4.

'An Established Brand Name'

Unusual Machines has a foothold in the commercial drone business; however, it is pivoting some of its focus toward B2B initiatives with customers in the defense industry. Demand for drones and drone parts in the defense sector is large. 

Writing for Seeking Alpha on July 21, Sergio Heiber noted that UMAC "has an established brand name in its industry" and "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," Heiber wrote. "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."

The drone market is anticipated to grow in both sectors. According to a report by Drone Industry Insights, the global drone market size is forecasted to reach US$54.6 billion by 2030, with the commercial market growing at a 7.7% compound annual growth rate (CAGR).

Fortune Business Insights noted that "The global military drone market is projected to grow from US$14.14 billion in 2023 to US$35.60 billion by 2030, at a CAGR of 14.10% during the forecast period."

As noted by Bloomberg, "Chinese drones command about 90% of the US consumer market and 70% of the industrial one."

The U.S. is attempting to pivot away from China as a supplier. However, legislation to ban such drones that passed in the House of Representatives has so far been left out of a Senate version of the National Defense Authorization Act.

Ownership and Share Structure

About 21.6% of the company is owned by management and insiders, UMAC said. The rest, 78.4%, is retail.

The company's market cap is US$16.24 million, according to Market Watch, with 9.33 million shares outstanding with 2.25 million free float shares. It trades in a 52-week range of US$5.54 and US$0.98.

Important Disclosures:

1. Unusual Machines Inc. is a billboard sponsor of Streetwise Reports and pays SWR a monthly sponsorship fee between US$4,000 and US$5,000.
2. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Unusual Machines Inc.
3. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
4. This article does not constitute investment advice and is not a solicitation for any investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Each reader is encouraged to consult with his or her personal financial adviser and perform their own comprehensive investment research. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company. 

For additional disclosures, please click here.

* Disclosure for the quote from the Clive Maund source June 20, 2024

1. For the quote (sourced on June 20, 2024), the Company has paid Street Smart, an affiliate of Streetwise Reports, US$1,500. 
2. Author Certification and Compensation: [Clive Maund of clivemaund.com] is being compensated as an independent contractor by Street Smart, an affiliate of Streetwise Reports, for writing the article quoted. Maund received his UK Technical Analysts’ Diploma in 1989.  The recommendations and opinions expressed in the article accurately reflect the personal, independent, and objective views of the author regarding any and all of the designated securities discussed. No part of the compensation received by the author was, is, or will be directly or indirectly related to the specific recommendations or views expressed.

Clivemaund.com Disclosures

The quoted article represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maund's opinions are his own, and are not a recommendation or an offer to buy or sell securities. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications. Although a qualified and experienced stock market analyst, Clive Maund is not a Registered Securities Advisor. Therefore Mr. Maund's opinions on the market and stocks cannot be  only be construed as a recommendation or solicitation to buy and sell securities.