We are short shares of Red Cat Holdings, a $1 billion drone manufacturer that’s added more than $900 million in market capitalization over the last 9 months mostly in anticipation of an award for the production of the US Army’s short range reconnaissance (SRR) drone and the supposedly massive market opportunity unlocked by such a high-profile endorsement.
But expectations for both the SRR contract size and the potential for follow-on sales bear almost no
relationship to reality.
Army budget documents clearly delineate an SRR budget for 2025 of just under $25 million, and an expectation of about the same in the medium term. The Army also intends to refresh the SRR model every 2-3 years while remaining open to switching contractors. That contrasts sharply with Red Cat management’s crafty portrayal of a sole-source contract worth close to $400 million over 5 years, and $80 million in 2025. Investors should also consider that Red Cat preemptively announced the program win without the Army’s permission, weakening its position in contract negotiations and even, in a worst-case scenario, endangering the award.
Red Cat’s depiction of a huge follow-on market consisting of the other US military services, US government agencies, and US-allied militaries is also a fantasy. The Air Force has little infantry and thus little use for an infantry drone, and the Marines and Coast Guard have preexisting drone programs. The only other relevant government agency is Customs and Border Patrol, and its budget documents indicate near term drone procurement of just $1 million. Meanwhile, management has been talking about massive imminent drone sales to NATO allies for the last 3 years with nothing to show for it, which could be because European militaries are more inclined to modify cheaper and better Chinese drones or because there’s an array of smaller homegrown European drone suppliers already supplying these customers.
Just like those elusive NATO contracts, Red Cat has been setting near-term deadlines for a “mass production” facility since 2022, but having devoted almost no capex to one, still can’t manufacture large quantities of drones. 2025 guidance, though, assumes that Red Cat will produce 3 new drone models, each at triple the speed of the company’s historical best seller.
One of those new drones, the Edge 130, comes to Red Cat through a 2024 acquisition and has never been produced as more than a prototype.
Red Cat’s declarations and projections rarely materialize, and we believe the same will be true of both the company’s 2025 guidance and the parameters of the SRR contract. Almost immediately following the SRR win, two key executives – including George Matus, the brains behind the SRR-winning drone – resigned and sold most of their stock. Share sales have also been made by other insiders. Having set almost impossible expectations, Red Cat is set to be blown out of the sky.
Read the full Kerrisdale Capital report.
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Red Cat Holdings, Inc. (Nasdaq: RCAT) (“Red Cat”), a leading American drone technology company, has been selected as the winner of the U.S. Army’s Short Range Reconnaissance (SRR) Program of Record. The production selection was made after a test and evaluation process of Teal’s next generation sUAS, completed by the Army Project Management Office for Uncrewed Aircraft Systems, Army Maneuver Battle Lab, Army Test and Evaluation Command, and Army Operational Test Center.
“This is a powerful moment in time, coming after five years of blood, sweat, and tears put into SRR by our incredible team. The long-awaited production selection marks a new era for our company and the future of American drones,” said George Matus, founder of Teal and CTO of Red Cat. “We were selected based on soldier feedback, technical performance, volume manufacturability, and system cost. Our top priority now is to start ramping production of the next generation system, recently announced as the Black Widow and WEB, and give warfighters the tools they need to be successful on the modern battlefield.”
“Warfare has undergone a dramatic transformation over the past two years, with a significant shift towards drone technology, exemplified by the SRR Black Widow. It is an honor to support the U.S. Army by delivering the Black Widow to our warfighters. We believe this advanced technology will enable the Army to shape the battlefield, save soldiers’ lives, and serve as a powerful tool in their arsenal,” said Jeff Thompson, CEO of Red Cat. “This long-term contract will give us the capability to continue to improve the Black Widow, scale production and improve margins.”
“Both the operational and tactical levels of war and maneuver of combat elements have evolved significantly over the past couple of years,” said Paul Edward Funk II, retired Four-Star Army General and Red Cat board member. “Operational success today depends on the ability to seamlessly move data across the battlefield. From a tactical perspective, small unmanned aerial systems that are rucksack portable are playing a vital role in Intelligence Surveillance & Reconnaissance, as well as surgical strike capabilities based on the real-time needs of the warfighter.”
The SRR contract selection builds on significant momentum for Red Cat, with the acquisition of FlightWave Aerospace, the announcement of the ARACHNID
family of systems, and the creation of the Red Cat Futures Initiative. The company is focused on ramping production of Teal’s next generation system to meet the Army’s currently stated acquisition objective for 5,880 systems, which is subject to change over the 5 year period of performance. Red Cat is also preparing to meet increased demand across the rest of the U.S. DoD, federal government, and allied countries, to support operators and warfighters globally.
For more information about Red Cat and the U.S. Army’s Short-Range Reconnaissance Program of Record, please visit www.redcat.red.
About Red Cat, Inc.
Red Cat (Nasdaq: RCAT) is a drone technology company integrating robotic hardware and software for military, government, and commercial operations. Through two wholly owned subsidiaries, Teal Drones and FlightWave Aerospace, Red Cat has developed a leading-edge Family of Systems including the flagship Black Widow, a small unmanned system offering the most advanced capabilities in its class, TRICHON fixed wing VTOL for extended endurance and range, and FANG, the industry’s first line of NDAA compliant FPV drones optimized for military operations with precision strike capabilities. Learn more at www.redcat.red.
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Red Cat Holdings, Inc. (Nasdaq: RCAT) (“Red Cat”), a drone technology company integrating robotic hardware and software for military, government, and commercial operations, today announced it is fulfilling an order by the Florida Army National Guard for its Teal 2 drones. The drones will be used to support the ongoing disaster response to Hurricane Milton, which has left more than 3 million people without power.
“Our drones are specifically designed for the defense industry, but we understand that our warfighters’ roles extend beyond combat, especially during natural disasters,” said Jeff Thompson, CEO of Red Cat. “Small, portable drones like our Teal 2, built for the toughest environments, can be invaluable for first responders in damage assessment and search and rescue missions. We are proud to support the Florida Army National Guard soldiers in their efforts to assist with the aftermath in Milton.”
Red Cat subsidiary Teal Drones builds its Teal 2 system, designed to support U.S. and allied military operations, public safety organizations, and government agencies, at its Utah facility. Teal 2 is a cost-effective, man-portable sUAS designed to “Dominate the Night” that has best-in-class night vision, multi-vehicle control support, and a fully modular design. It is both Blue UAS Certified and FAA Remote ID approved.
About Red Cat, Inc.
Red Cat (Nasdaq: RCAT) is a drone technology company integrating robotic hardware and software for military, government, and commercial operations. Through two wholly owned subsidiaries, Teal Drones and FlightWave Aerospace, Red Cat has developed a bleeding-edge Family of ISR and Precision Strike Systems including the Teal 2, a small unmanned system offering the highest-resolution thermal imaging in its class, the Edge 130 Blue Tricopter for extended endurance and range, and FANG, the industry’s first line of NDAA compliant FPV drones optimized for military operations with precision strike capabilities. Learn more at www.redcat.red.
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Red Cat Holdings, Inc. (Nasdaq: RCAT) (“Red Cat” or the “Company”), a drone technology company integrating robotic hardware and software for military, government and commercial operations, endorses the passing of the American Security Drone Act (ASDA) as an important legislation package that benefits the federal government, domestic drone businesses, and national security. Introduced in November 2023, the bipartisan act prevents the federal government from procuring drones from countries that are deemed security threats, such as China. It was officially passed into law as part of the National Defense Authorization Act.
“The passing of the American Security Drone Act is a major milestone for domestic drone companies and also for protecting the U.S. and our allies,” stated Jeff Thompson, Founder and CEO of Red Cat. “Red Cat has invested significantly in our subsidiary Teal Drones’ factory, which recently went into mass production and can produce thousands of drones for defense forces and federal agencies. We are ready to support these organizations as they transition to safe and secure American-made drones.”
Teal Drones operates a 25,000 square foot manufacturing facility in Salt Lake City, Utah. The company’s flagship Teal 2 is an affordable, man-portable solution that is designed to “Dominate the Night” with its best-in-class night vision camera, fully modular design, multi-vehicle control, and artificial intelligence capabilities. In celebration of its efforts in domestic manufacturing, Teal Drones was recently selected for a $750,000 Manufacturing Modernization Grant from the State of Utah. The goal of the grant is to support and modernize domestic manufacturing in Utah.
Teal 2 is designed to support U.S. military operations, public safety organizations, and U.S. government agencies in a variety of environments. It is both Blue UAS Certified, which means it is approved by the Department of Defense, and FAA Remote ID approved.
“The government’s support of American manufacturing is monumental and will ensure that better products are built and used domestically. This act will level the playing field for American manufacturing against our greatest geopolitical rival,” stated Brendan Stewart, VP, Regulatory Affairs at Red Cat. “We are also committed to supporting legislation to subsidize the cost of switching drones and will work closely with the government and our peers to ensure that agencies have access to the best technology available.”
About Red Cat Holdings, Inc.
Red Cat (Nasdaq: RCAT) is a drone technology company integrating robotic hardware and software for military, government and commercial operations. Red Cat’s solutions are designed to “Dominate the Night” and include the Teal 2, a small unmanned system offering the highest-resolution thermal imaging in its class. Learn more at www.redcatholdings.com
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