Unusual Machines (AMEX:UMAC) released first-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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Summary
UMAC reported $8.1 million in operating revenue for Q1 2026, marking a 296% year-over-year increase and a 65% growth from Q4 2025, with a net profit of $10.3 million.
The company raised $150 million in a public offering, enhancing its working capital to $320 million, and it acquired Upgrade Energy for $52 million to advance its battery capabilities.
UMAC anticipates continued revenue growth throughout 2026 and 2027, driven by strong demand from the Department of War's drone programs and future opportunities in drone delivery markets.
Full Transcript
OPERATOR
Greetings and welcome to Unusual Machines First Quarter 2026 Financial Results Conference Call and Webcast. At this time all participants are in a listen only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press 0 on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to Christine Petralia, Investor Relations for Unusual Machines.
Christine Petralia (Investor Relations)
Thank you Operator. Good afternoon everyone. With us today are Unusual Machines CEO Alan Evans and CFO Brian Hoff. During this call, management will make forward-looking statements including statements that are expectations concerning the demand for our products Our ability to manage this demand the growth of our operations, our business and our revenues the growth of the NDAA compliant drone market Our anticipated gross margins and future costs Our plans to scale manufacturing capacity including the timing and success of new production lines for motors, batteries, cameras and headsets Our battery manufacturer acquisition Our ability to achieve cash flow positive operations in the future and and expected 2027 FAA rulemaking the results expected by some or all of these forward-looking statements may not occur. Factors that affect our ability to achieve these results including the risks that enough of our customers receive orders under the Drone Dominance Program or other government programs and in turn place component orders with us, as well as potential funding reductions, program delays or changes in procurement Our dependence on a limited number of enterprise customers and the risk of customer concentration the risks that our inventory buildup will become obsolete or that we cannot sell such inventory at reasonable margins Our ability to manage our rapid growth including integrating new employees and maintaining quality control Risks relating to manufacturing bugs, delays or failure to achieve anticipated production efficiencies the availability of satisfactory labor pool to meet our plan growth potential supply chain disruptions or component shortages the impact also from tariffs including inflation and increased costs of goods sold the risk that our automated production equipment may not be operational on the anticipated timeline unanticipated audit issues relating to upgrade energy technical or political risk that may affect FAA rulemaking and the risk factors contained in our Form 10-K for the year ended December 31, 2025. Factors or events that could cause our actual results to differ may emerge from time to time and it's not possible for us to predict all of them. Any forward-looking statement made by us herein speaks only as of the date of which it is made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or or otherwise, except as may be required by law. As a reminder, this call is being recorded and a replay will be available on Unusual Machines website at www.unusualmachines.com. now let me hand the call over to CEO Alan Evans, please. Go ahead, Alan.
Alan Evans (Chief Executive Officer)
Thank you, Christine. Good afternoon, everyone. Thank you so much for joining us today. We really appreciate your time. I apologize if I'm a little bit hoarse. I've been at the trade show AUVSI all week and been talking to a lot of people. Anyway, during this call, I will discuss our first quarter 2026 performance. In quarter one, we generated approximately $$8.1 million in operating revenue. This was a 296% year over year growth from the first quarter of 2025 and a 65% increase from the revenue generated in the fourth quarter of 2025. In addition, we generated $$10.3 million in net profit for the quarter. What's really key here is even if you remove from that $10.3 million in net profit the unrealized gains, if we exclude them, we still ended up being profitable. And we've also really dramatically increased revenue for the first quarter. So the quarter one results just start to show the dramatic growth that we're at the early stages of. Every single business indicator that we're seeing is pointing to growth. We were able to jump from $4.9 million in revenue just a quarter ago to $8.1 million in revenue this quarter. And that's without the benefit of Christmas driving high consumer demand. We've increased our headcount from 81 employees to 141 employees across the quarter and we continue to grow the team as we move forward. We saw the expected drop in margins as we added all these new employees and we still, the team did a really good job and we managed to still hit a 32% gross margin, which is a little bit above where we expected to be. All of these trends that we've seen in the first quarter are continuing through now and we're still scaling as fast as we can to meet the needs of the marketplace. In the first quarter, we were able to really secure our war chest to be sure that we can manage the working capital and finance this growth, which normally requires some cash in front of seeing the revenue returns. We raised $1$50 million at $$17 a share in a confidentially marketed public offering. And we now have about $$320 million in total working capital, which puts us in a very strong position. We very recently entered into an agreement to purchase upgrade energy and that's a total of just over $$50 million in a blend of cash and stock. That's there to accelerate our battery ambitions and bring a new product category to market faster. It's, I think, really important, all of this to remember that we're not seeing this growth by burning cash. So this money remains in our war chest, remains in our bank accounts, and can be used to really foster and turn over the growth, rather than just to fund operations. The first quarter was our eighth consecutive quarter with record revenues. Since going public, we've never had a quarter where revenue has gone backward and we don't expect to have one anytime soon. So this sort of constant success is just not possible without our entire team putting in a lot of really great work. So everyone is working hard, bringing just fantastic energy to all the different challenges we face as we go through this. And I'm confident that we can continue to handle this really fast rate of growth because I'm confident in the team and in each person doing the job that they're doing. So I very much have the pleasure with and do want to say thank you to everyone working at Unusual Machines for continuing to make this possible. 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 our going forward plans. With that, I'm handing the call off to our cfo Brian Hoff.
Brian Hoff (Chief Financial Officer)
Thank you, Alan and thank you everyone for joining the call this afternoon. I'm excited to share Q1 results with you all. As we discussed during our year end results, we had a lot of momentum entering the year. Our Q1 results reflect that momentum and we continue to expect to continue that for the remainder of 2026. With that, let's dig in. Revenue was $8.1 million for the first quarter, which Alan noted is approximately 296% growth from Q1 of last year and 65% quarter over quarter growth from Q4. 2025. As we left 2025, we felt that momentum and demand coming online and this quarter is just the start of the demand curve. Our Q1 revenue mix was approximately 90% enterprise and 10% retail, with a healthy mix of customers and product and little significant concentration. Gross margin for the quarter ended at 32.8% for the quarter, which is again, as we said, is a slight decrease from the trend over the last few quarters. However, we anticipated this as we were continuing to scale as fast as possible, which included significantly increasing our manufacturing staff by adding a third shift to our motor line, second shift to our assembly line, and our total headcount increase from 81 to 141 and we're coming close to crossing over that 200 employee threshold today. This is another indicator of the continual demand increase we're seeing and trying to capture. So while we anticipate margins will have some fluctuation throughout 2026, we are making decisions to grow operations and be in a position to deliver on the demand throughout the year and headed into 2027, we are continuing to see our yield rates on manufacturing lines improve as we become more efficient and trained in this process. Jumping to operating expenses these also increased during the quarter to $9.9 million for Q1 of 2026. These expenses were specific decisions to continue to enable our growth. This includes building out our GNA infrastructure, including headcount systems and process build out. We may see some additional growth in the short term in these costs. However, we will gain some efficiencies as we continue to scale revenue and our operating expenses will grow at a slower rate. In addition, this includes two additional facilities that commenced during the quarter, which is our headset facility and kind of in our corporate office. Included in the 9.9 million figure also includes non cash related expenses of approximately $4 million and other non recurring expenses of about 1.7 million. I'd reference the tables in the back of our shareholder letter for the additional detail around that. In other income and expense we had very positive results from our investments. These investments which are designed for a strategic purpose, creating goodwill in the US Drone industry and also creates supplier partnerships and customer relationships. Our strategy is working and we've received orders from some of these investments as well. The results include a $7.3 million realized gain from investments which is a nice add on to our overall cash balance without any additional dilution. We also had additional unrealized gains of approximately $9.5 million and interest income of about $0.8 million. Our balance sheet is strong and shows our continual view of being able to grow into the demand. We have a significant cash balance of approximately $223 million after our public offering in March which netted about $$139 million after expenses. Our short term investments are continuing to prove strong from a financial perspective and strategic strategic partner in the industry with a balance of over $60 million. Our inventory including raw materials, finished goods and deposits paid are approximately 27.4 million and are going to see this to continue to increase in Q2 and Q3 as we make significant purchases to meet the demand and do our part in managing supply chain issues as best as possible. Our total working Capital is approximately 320 million, which puts us in a great position to capitalize on the demand moving forward. I'd also like to reiterate what Alan said. None of this is possible without a fantastic team working extremely hard to make things move and very quickly. It is an exciting time to be at Unusual Machines and looking forward to the year ahead. Also, thank you to our shareholders and partners in continuing to support our mission throughout this all. Send it back to you Alan.
Alan Evans (Chief Executive Officer)
Thanks Brian. So what can I say about the year so far? A lot has changed in the seven weeks since we discussed last year's results on a previous earnings call. We keep scaling both sales and company size. We raised $$150 million at $17 a share and then subsequently placed $$75 million in raw material orders and signed a definitive agreement to buy upgrade energy to really jumpstart our entire battery position. We continue to be extremely well positioned as a supply chain leader for components for small drones in the U.S. we have the capital to execute and have been growing while maintaining profitability. I'm going to go into more detail now, but want everyone on the call to note that my following comments are forward looking and in no way guaranteed from our perspective. Demand remains on track. The current marketplace remains severely supply constrained and we still see demand outstripping supply this year and deep into 2027. We're continuing to build the company and procure raw material to grow into this demand as fast as we possibly can and we don't anticipate slowing down anytime in 2026. The primary driver of this growth, it continues to be the Department of War. For example, the Drone Dominance Gauntlet program is one purchasing group and that remains on track. They announced the timing for phase two as well as reiterate the commitment to buying 60,000 more drones in the second half of 2026. They even were smart enough to put it before the end of the government fiscal year so that everything will be done and isn't subject to delays that could be caused by continuing resolution. When you look then out a little further at future demand, the proposed budget for the Department of War it has a 50% increase. They're talking about $$1.5 trillion. But I think even more interesting is the dramatic increase in the proposed budget for the Defense Autonomous Warfare Group dog moving it to a little over $$50 billion, which is really the drone focused government procurement budget. The Department of War as an end customer has really strong sourcing requirements with a preference for US Supply chains and is really the initial force behind driving this relentless demand cycle. In addition to these drone programs, you're seeing counter drone programs that are really starting to materialize, and that's becoming an emergent, addressable market segment. I think a very good example of what we're seeing there is real orders and partnerships with our first order coming power us, who's one of the companies we invested in. And it's really pushing an even additional category to create this demand. So given this overwhelming demand environment, we were trying to scale as fast as we possibly can to provide our customers with the parts they need to sell into the Defense Department or the Department of War. To facilitate this, in April, we placed over $$75 million worth of raw materials in order to build out motors and other products. We scaled from 81 employees at the end of 2025 to about 200 employees today. We're definitely adding team members and we're continuing to add shifts and facilities to deliver just the raw material or the subsystems that our customers need. In addition, and I think very interestingly, we recently announced the merger agreement with Upgrade Energy for the total purchase price of $$52 million. The purchase is almost a 50/50 blend of stock and cash, with half of the purchase price up front and the rest being earned out. So Upgrade Energy did just over $$6 million worth of revenue. This is unaudited. So, you know, as we go through the audit, it may change in 2025. And that was in their old facility in El Segundo, California. They very recently moved into a new 18,000-square-foot facility, much larger in Torrance, California. And I think we're really going to see that ramp quite quickly. I'm personally very excited to work with Matt Barnard, the owner of Upgrade Energy and CEO as he joins the team. And really their entire team, they built a really strong brand in the battery business. They have some patented protected technology that works in production at scale. And then our ability to work right away with them and to do it at scale is going to let us drive, I think very quick growth in the battery category. And I know now the entire power train from the battery to the motor controller through to the motors to build that whole lift platform. Now what I think people might not yet realize is that the purchase and the choice to go do batteries, it's not necessarily a right now choice. It's a strategic choice for what we see as the emerging markets that come next even more than it is just another skew in our offerings. So we expect the FAA to enable the legislative framework that people are calling part 108. That should really open up new Activities like drone delivery in mid to late 2027. So defense or attritable drones or one way drones, whatever you want to call them, they typically only have one to two batteries per drone. On the other hand, delivery drones, because they'll go up and down and up and down and up and down and they'll need to change batteries every time as the batteries recharge, are expected to have about 10 batteries per drone. So this purchase and our subsequently planned build out in Florida for batteries is going to let us get ahead of the supply chain and this problem to really be in a place to do what is a very large battery to drone ratio. Pam, for what we see as the FAA enabled market segment that we expect materialize in 12 to 18 months. So not only is it revenue right now with a team we like and people with the same attitude, but it also positions us, I think, to capture a large chunk of the value in the emerging market that the FAA is going to open up. Just a quick summary. First quarter of 2026, is everything working well? Kind of working the way we planned it. We're rapidly scaling. Our revenues grew above 8 million. We were able to report a profit. So we're not losing money in doing this. And while our operations are not yet independently profitable, you know, we had about a 1.5 and 1.$6 million loss just from operations. In terms of cash, if you subtract out equity comp, our business as a whole is profitable. We were able to raise more money quickly, put that money to work into our supply chain and really drive what we see as a transformative acquisition. With the upgrade energy merger, Unusual machines remains at the forefront of the domestic components market and the market is continuing to really see this extreme growth. We're well capitalized, we're extremely healthy, we have the infrastructure to continue to scale and we're just going to continue to grow as fast as we possibly can. And you know, I am just completely overwhelmingly confident that our team can meet the demand that exists right now. So I want to say thank you again to our entire staff and all of our shareholders and all of our customers. With that, I'd like to open up the call to questions.
OPERATOR
Thank you very much. We'll now be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. And for any participants using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions. Thank you. Our first question is coming from Craig Irwin of Roth Capital. Craig, your line is live.
Craig Irwin (Analyst)
Good evening and thank you for taking my question. So Alan, at AUVSI, it was really obvious talking to many of your customers, many of the other drone producers there, there's no shortage on demand. There is an intense demand in the market and people want credible supply and your customers are lining up to be as credible as possible to the end agencies, particularly the military. But also you highlighted delivery as a market and they are also talking about that. So the biggest constraining factor right now is from what many of them represent capacity. You know, you've gone from 81 employees to over 200 employees today. You added a third shift to motors, you had a second shift to assembly. Can you maybe unpack for us? How much of your time is going into capacity planning? The, you know, the $75 million pre purchase on raw materials is obviously, you know, a big commitment to that capacity or that execution capacity. But actual employees, infrastructure, seats and workstations, new products, you've got camera products and battery products and all sorts of new things coming in. How important is managing this to you right now?
Alan Evans (Chief Executive Officer)
Craig, I appreciate the question and I think when you look at a hardware company and inventory flow, managing the capacity and being sure that you get utilization but also don't create backlog in this growth period is my most important job. So capacity really breaks down into three different things that we need for it. The longest lead time thing is the raw material. It's also the most expensive. So when we place raw material orders like we just did, you know, you're looking at first deliveries are at least four months. You're probably not material complete, which is when you have all the material to make a thing for maybe six months and then you can start to convert that raw material into finished sub assemblies. And what we're seeing is because we're becoming a more and more globally significant buyer from these non Chinese supply chains is that while we do get a little bit of scaling function, we also get, oh goodness, we have to go help our suppliers scale to meet our demand, you know, so they also have to scale up. So when you see what we're doing for capacity management, step one, get material in the door so we can transform it. Step two is, you know, get facilities. So if you look, we're regularly adding a new building here or a new adding onto a building there and we're going through that and we're very active in that process. And what is our Orlando campus? Because once you get the building in place, then you have a place to put the equipment and the people. And so we see that process typically shows up three or four months in front of being able to start to produce things. So raw material, let's call it six months, facilities and the capital equipment, maybe three to four months. And then the people really come in a month or two beforehand and drive it. And so you're watching us stage this for material, facilities, people. And, you know, every time we've guessed and done something we thought was ambitious from a capacity perspective, we realized we weren't ambitious enough. So I think we continue to see that. And we have, you know, really great person running HR and Trish and a great HR team helping drive hiring and really great workforce management folks. And Jay, our VP of supply chain, is doing a really good job with our buyers managing the incoming material. And so luckily, I don't have to do the job by myself. But I think when you look at strategically in our business, that capacity management and more importantly the inventory flow management and sort of that transformation is singularly the strategic focus where we as a leadership team need to pay attention.
Craig Irwin (Analyst)
That makes complete sense. So my second question is around the gross margins. So when we were talking in the fourth quarter, you know, you are obviously careful and cautious around gross margins, you know, bringing your motor manufacturing up and the other, you know, significant aggressive hiring to meet demand. You were cautious but optimistic. You know, this quarter your execution was strong, was better than what we were looking for. And, you know, that's with, you know, some substantial headcount additions, you know, your margins, you know, is it fair for us to see similar margin execution over the next couple quarters, given that you have a couple quarters here under your belt where, you know, you're obviously managing the effects, efficiency and the productivity of new employees. I can imagine that people will become more productive given months and years of experience. But the gross margin trajectory, I think is somewhat important. Less important than revenue, but somewhat important to the future profitability where many of us are looking several years out.
Alan Evans (Chief Executive Officer)
Yeah, no, I. So, you know, the team did a really good job of training and getting people on board and I think being more efficient and sort of aspiring to be really good as a production engine. So I think margins for the first quarter exceeded our internal expectations. I think where we're at, given where we performed, is it's below the margins we'd like we'd like to see when it's a little more stable. But you know, I think in this low 30 percent range, it seems like it's what we're doing. You know, the team's done a really good job on onboarding. So if we can even hold here and we can hold our material margins where we sort of like them, so that we know that we have the room to hit our gross margin targets in the long run, I would feel really good about it. You know, there may be some movement around it up and down a little bit, because it's not as important to us as being sure our customers get really high quality products that meet their demand. So if we got in a batch of stuff that didn't meet our quality standards and we had a scrap rate or something that had a little bit of a negative impact on margins, we'd be okay with that to prioritize customer success. But this feels, to me, at least right now, sort of a really good spot and where I think we will strive to maintain as we continue through this growth cycle. So I think if I was looking at it, you know, we did it through what I think is one of the harder transformations, which is crossing that 100 employee line. And we now have a lot of processes and training and things that are being built out that I think allow us to carry this success forward. Okay, and the last question, if I may.
Craig Irwin (Analyst)
So many, many people know my approach is kind of to get around a little bit. So when I met with the people from. With FAA, I was teasing them. I was getting around saying, guys, what's taking you so long? Manna Air in Ireland has already done a million deliveries. This is America, where the technology leaders. You're holding us back. Back. What's going on? They were obviously pretty defensive and they didn't really get the joke. But when we had the conversation, the more extended conversation, they helped me understand that there's outside influences that they would like to get their job done. They really want to get part 108 moving from waivers to permits as far as the drone pilots and give people a clear, clear line of sight. But there's issues with the FCC and others trying to put their finger in the pie. What do you think key issues are that you could outline for us for Art108 over the course of the next year? I know you also had conversations with key people this week. Is there any update that you think or any framing that you think would be useful here for investors to understand?
Alan Evans (Chief Executive Officer)
Sure. First, I think the FAA is doing a great job and has a very hard problem because manned aviation is extremely safe. And so you know, they got the airspace with all of us flying on the carriers and they have to maintain that. And also got to be sure drones don't fall out of the sky. So they have this challenging problem to create a technology infrastructure that sort of still maintains this thing that they've done an amazing job with. So I have a lot of appreciation for the difficulty of that problem. I think there are a couple of things that need to be really finalized for part 108. The big one is what is called Detect and Avoid. So when you allow drones to fly with one pilot controlling 20 drones or whatever, and the skies start to have more things in them, what are the rules around how a drone, even without an operator needs to see another drone, you see an airplane, and then what are the rules around how they dodge in the sky so that the onboard AIs prevent collisions? So I think that's really one of the things. Where is it radio frequency? Is it cameras? Is it, you know, and there's some how good does it have to be? How is it tested? How do you qualify your drone so that it can fly? Because I don't think we should just let an unqualified drone, you know, fly across Manhattan. Right. That's a high risk. So they have to juggle a framework for innovation with sort of the regulatory and testing requirements necessary to be sure that those innovations you deploy in a way that's safe. And I think they're really thinking about it. They're really smart. They have to collaborate with the FCC because of what if it's spectrum just like self driving cars. There's discussions around it too. So they're on track. And I actually think they're doing a pretty good job and I think they're dealing with the right problems. So you know, that's, that's my take on it is everything looks like it's coming together in a very effective way and I think, I think we'll see it in a year because we're down to the really that as the problem Detect and Avoid and a lot of the rest of it's been sort of addressed and agreed upon as a framework.
Craig Irwin (Analyst)
Well, I like that. Congrats on a really strong quarter in there.
Alan Evans (Chief Executive Officer)
Thanks, Craig.
OPERATOR
Thank you very much. Our next question is coming from Josh Sullivan of Jones Trading. Josh, your line is live.
Josh Sullivan (Analyst)
Hey, good evening, Ellen. Did you say revenue should grow sequentially each quarter this year? And any reason that thought process this
Alan Evans (Chief Executive Officer)
wouldn't carry then into 27 as now that you have the strategic inventory and order flow at Hand, I mean, we've never gone backward. I don't see any reason why we would. Right. Like we, the market's growing with the way that I see demand. I think if we don't see consistent growth, I mean, hey, this from quarter to quarter, this last quarter, I mean we've done this is, you know, full speed growth. It doesn't mean we won't see hiccups or things that might change the growth rate. But really I think it's a pretty big fumble on our end if we don't manage to achieve that. And then with the upgrade energy acquisition and you know, the positioning you're talking about around a drone powertrain platform, you
Josh Sullivan (Analyst)
know, as, as the commercial drone delivery market materializes, you know, next year or thereabouts, what do you think that battery to drone ratio looks like?
Alan Evans (Chief Executive Officer)
And then what kind of business models could we see UMAC building around? So this is very much my personal opinion that I'll share with you. But I think the first delivery applications I really think are going to show up our food delivery. I think it's going to be DoorDash, Uber Eats, Grubhub. And if you look, that matches very much the same performance stuff as the drone dominance program. Right. So five pounds, 10 kilometers, that sounds like a hamburger to me. And I see a lot of appeal to that because it's something that people want urgently. You can deliver by drone, in a lot of cases less expensively than by a vehicle. And I think people pick it up because you don't have to tip the robot. And I think we do have some social tipping fatigue. Assuming that's true, you're probably looking at 10 batteries per drone for active running, give or take, depending on the design. I mean, you know, we could argue over it all day, but that's a good approximation. And if that's true, batteries only have about 500 cycles. So you're probably looking at 10 batteries per drone per year as the attachment rate. And so it actually becomes more of an ARR function on the hardware in that delivery cycle rather than the one time sale. And so I think that'll lead to some interesting business models and some interesting ability to say, okay, here's our recurring power base. But also importantly, I think that the batteries and the motors and the whole powertrain are going to be part of the certification process because if you have a power failure, you're going to need to understand how to detect it and have it land safely. So in order to get certified to fly over people, there's going to be A lot more requirements than there are for combat drones that are designed to go crash and don't have the same sensitivities for mitigating accidents. So I think we're going to see a lot of the energy in the scale being put in the drone. The gauntlet program, particularly for the larger vehicles, are going to lead to some really great airframes and some cost structures. You know, think $5,000 a drone that are going to be able to deliver hamburgers or, you know, pick whatever your favorite food is, but for me, it's always burritos. But anyway, are going to be able to do those deliveries. And then I think you're going to see a battery ecosystem where the powertrain is going to have to be certified. So we're setting up to position. You know, if you walk through our factory, for instance, we don't do it right now. We do date codes on tracking our motors, but we have the ability to actually do full electrical characterization and individual serialization of every single motor, if that's what the FAA requires, or track the amount of time the motor runs for swap out. Same with batteries, same with energy levels, sort of all these things that you'd see in maybe a pipe certification process for a different kind of aircraft.
Josh Sullivan (Analyst)
Got it. Thank you. I'll leave it close.
Alan Evans (Chief Executive Officer)
No problem. Thanks, Josh.
OPERATOR
And our next question is coming from Austin Bolig of Needham and Company. Austin, your line is live.
Austin Bolig (Analyst)
Thanks, guys, for taking my question, and congrats on the great results. Alan was just curious with his battery acquisition, could you talk about how this changes, whether from, like, revenue or kind of margin upside, opportunity when it comes to. To the total content you guys are selling into drone dominance per drone.
Alan Evans (Chief Executive Officer)
So for drone dominance, we were distributing their batteries. So I don't think it really changes the total. Like our partnership there has made us feel really good about this acquisition, but it does mean that we'll get margin expansion and, you know, I think on the batteries now, you'll see us move to that 40% gross margin somewhere in there, because again, we're not. We try to target that to be a fair and equitable supplier and not break downstream economics for everybody. So for drone dominance, I think we'll see that element of expansion, but I also think they were in a similar place where we are, where there's this overwhelming demand. And so now we're able to go work with Matt and with some of the battery cell suppliers and start to drive more battery volume because we have the credit terms and the cash balance to. To Break or do a lot more of the forward looking inventory purchases there as well to enable really fast battery capacity growth where it would have been more constrained had we not decided to try to put these two companies together.
Austin Bolig (Analyst)
And then how do we think about as you guys ramp throughout the end of the year, what operating expenditures should look like? And I think you highlighted in the press release that the break even point might now be a little bit higher. Just maybe trying to frame up how we should be thinking about that.
Alan Evans (Chief Executive Officer)
Yeah, I think it's really going to come down to how much and how much faster we scale. So I think the break even point moved higher because we have more space, more people doing more stuff than we originally expected. But I think with where we look, you know, at the end of quarter one, we're starting to get to maybe a more normalized blend across our employee base of employee types. And so I think you can look at operating expenses as probably being a headcount ratio to total expense that we saw in quarter one. You know, if I'm estimating. And then what I think you're going to see is the revenue generated per employee start to scale to push us past burning money. So maybe that's not the best answer on the planet for you, Austin. So I'm sorry if it's not, but I think we're moving to where our cost per person is starting to stabilize. I think by the end of quarter two, quarter three, it'll really stabilize and that will then see our ability to generate revenue per employee start to really expand as we efficiencies increase.
Austin Bolig (Analyst)
Okay. All right, well, thank you guys for taking the questions. Best of luck. The rest of the year. Thank you. Really appreciate it, Austin.
OPERATOR
Thank you very much. Well, we appear to have reached the end of our question and answer session and I will now hand back over to Alan for any closing remarks.
Alan Evans (Chief Executive Officer)
No, again, everybody for listening, really appreciate it. Really appreciate all the support. I think without the investor community, without our customers, without people who are interested in believing us, we're not in a position to help onshore production and create these jobs and really be part of the transformation of the American drone ecosystem. So I do want to say thank you. If people have questions or are interested, always reach out. We try to be as transparent as possible and appreciate your continued interest and support.
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