Drone Co. Taking on China Sets IPO Price

Unusual Machines Inc. (UMAC:NYSE), a Puerto Rico-based company looking to take on China's leading drone maker, has announced the pricing of its initial public offering as it began trading Wednesday on the NYSE under the symbol "UMAC."

The company said it is offering 1.25 million shares of common stock at a public offering price of US$4 per share for aggregate gross proceeds of US$5 million.

Chinese company DJI has cornered more than 90% of the global consumer market and makes more  than 50% of the drones sold in the United States.

Demand is skyrocketing for unmanned aerial vehicles (UAVs) for everything from the military, with thousands being flown in conflicts worldwide, to your neighbor taking aerial pictures or racing the vehicles. In the Ukraine, defenders plan to deploy 1 million of them on the battlefield this year.

But even drones made in the U.S. heavily outsource components from China. Unusual Machines wants to change that.

"Motors, props, airframes, the FPV (first-person-view) flight controllers, the goggles, we know how to manufacture all that, and we can onshore it, and no one's doing it yet," said Chief Executive Officer Allan Evans.

In the IPO, Unusual Machines granted underwriters a 45-day option to purchase up to an additional 187,500 common shares at the public offering price, less underwriting discounts. The offering is expected to close on or about Feb. 16, subject to the satisfaction of customary closing conditions.

Globally, the market for drone motors was valued at US$2.6 billion in 2021 and is projected to reach US$9.9 billion by 2031, a compound annual growth rate (CAGR) of 15.1% from 2022 to 2031, according to Allied Market Research.

"Drones have become an essential part of several industries, ranging from military and security to commercial and recreational," the report said. "The increasing investment in drone technology by governments, private companies, and venture capitalists is expected to drive the growth of the drone motor market."

But "that's just one component," Evans told Streetwise Reports.

Fat Shark, Rotor Riot Acquisitions

In 2022, the company entered into a share purchase agreement with Red Cat Holdings Inc. (RCAT:NASDAQ) and Red Cat CEO Jeff Thompson to acquire its consumer businesses, Fat Shark Holdings Ltd. and Rotor Riot LLC.

Fat Shark and Rotor Riot design and market consumer drones and FPV goggles, while Rotor Riot is also a licensed reseller of several third-party consumer drones.

Fat Shark started in 2007, the vision of Greg French, "originally a radio-controlled car nerd." The company's Dominator FPV drone goggles feature HD OLED displays, HD DVR recording, and a full-color graphic interface.

Some of the proceeds of the IPO will be used to pay for the cash portion of the US$20 million transaction.

Unusual Machines said it plans to focus on FPV goggles, but its primary objective is to "acquire companies engaged in (the) drone industry."

"We are seeking to acquire established drone companies with high-quality technology from across the drone industry," the company said.

The Catalyst: Countries Are Security Threats

Passed and signed into law last year as part of the National Defense Authorization Act (NDAA), the American Security Drone Act (ASDA) prohibits the federal government from using drone systems manufactured or assembled in countries viewed as security threats, namely, China and Russia.

"This bill would prohibit the federal government from using American taxpayer dollars to purchase this equipment from countries like China," said Republican Rep. Mike Gallagher, a sponsor of the ASDA in the U.S. House of Representatives.

The U.S. Senate also separately approved an amendment by Sen. Marsha Blackburn and Democrat Mark Warner that would stop the Federal Aviation Administration from operating or providing federal funds for drones from China, Russia, Iran, North Korea, Venezuela, or Cuba.

"Taxpayer dollars should never fund drones manufactured in regions that are hostile toward our nation," Blackburn said.

Congress banned the Pentagon from buying or using drones and components made in China in 2019, Reuters reported. The Commerce Department also put in place export restrictions on DJI in 2020, saying the company was complicit in the oppression of China's Uyghur minority.

Making a Mark on Battlefields

The total UAV market is set to grow from US$26.2 billion in 2022 to US$38.3 billion by 2027, a compound annual growth rate (CAGR) of 7.9%, according to a report by Markets and Markets.

"The civil and commercial application segment of the UAV industry is projected to grow significantly in the next ten years," the report said.

The technology is also making a big mark on the world's battlefields during a time of geopolitical stability, especially in the Ukraine conflict.

Ukraine announced its plans to produce 1 million FPV drones this year, The Wall Street Journal reported.

"The country lacks a modern arms industry that can sustain the war effort, and it would take years — and billions of dollars — before Kyiv could produce the kind of artillery and missile systems it needs on a large scale," the Journal reported.

Hamas' attack on Israel last year also deployed weaponized off-the-shelf drones to incapacitate some of Israel's static defenses, which cost millions.

Weaponized commercial drones available in electronics stores ("the types used by YouTube and Instagram bloggers to make reels," according to a report on New Delhi TV) have also been seeing use in the war in Ukraine.

The unmanned vehicles are being "used on a scale that has never been seen before," Stacie Pettyjohn, a senior fellow and director with the Center for New American Security, told NPR.

Russia also has used thousands of the devices in the conflict. Its defense exports agency has said it wants to create drone production facilities in the Middle East.

Becoming a Tier 1 Supplier in North America

Unusual Machines' CEO Evans said as the company moves forward, it plans to position itself with both retail and component channels.

"Instead of making the Hypetrain motors (made by Rotor Riot) all in China, if we made Hypetrain motors in the U.S. . . . we can now sell through a highly curated channel and be our own first customer," said Evans. "That overcomes the whole cashflow problem of having to build a new factory and going to find customers."

Past that, there are still "a whole bunch of North American drone companies," he said.

"There's no good North American Tier One commodity supplier to this brand-new industry that's really taking off," Evans noted. "If China shuts off exports, then you need to go get your motors from somewhere."

Unusual Machines estimated its market cap at US$35 million with 8.7 million shares outstanding.

Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Red Cat Holdings Inc. and Unusual Machines.
2. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. 
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