If you’re a pilot, the message you want to hear from Air Traffic Control before take-off is “CAVU”, or “ceiling and visibility unlimited” — which means, ideal flying conditions.
It appears that for Red Cat Holdings Inc. (RCAT:NASDAQ), a hardware enabled software provider to the drone industry, ideal flying conditions are on the horizon as the company seems poised to climb to higher sales levels and increase high-margin, monthly recurring revenue.
Navigating the route ahead is Jeffrey Thompson, Founder and CEO of Red Cat, who has piloted a number of strategic acquisitions over the past few years, and it looks like business will continue to be brisk for Thompson and his team for the balance of 2021 and beyond.
In mid-August the Company announced that it had received a “significant purchase order from Drone Nerds, the largest distributor of drones in the U.S.” The transaction, in addition to a recent “down selection” by the U.S. Army (down selection narrows the field of potential suppliers under consideration throughout the bidding process) and an additional federal contract, represents combined revenue of nearly US$4 million.
The purchase order is for the Golden Eagle, manufactured by Teal Drones. Red Cat recently announced that it was acquiring Teal Drones. Red Cat and the Golden Eagle were featured in the Drone Nerds’ booth at the Association of Unmanned Vehicles Systems International (AUVSI) convention in Atlanta in mid-August. Thompson said the event “was well attended” by AUVSI members, undeterred by the pandemic, who work in the defense, civil, and commercial markets and represent more than 60 countries.
Garnering that kind of global market exposure is noteworthy as Red Cat is only one of four, hand-picked, companies that have been given the green light to bid on US Department of Defense (“DOD”) drone-related contracts following a rigorous vetting process. Meanwhile, legislation moving through Congress is expected to impose a five-year ban on U.S. government purchases of drones manufactured or assembled in China, which could result in significant upside for Red Cat.
As a NASDAQ-listed Company, Red Cat follows top-level business practices and transparency standards, and in June was selected to join the Russell Microcap® Index. Red Cat’s Market Cap is about US$126 million with 48.24 million shares outstanding. Management owns about 70% of the company.
“There’s a bid going on right now for the U.S. Army for all soldiers to have a drone in their rucksack (for safety and security reasons),” said Thompson. “There are three tranches in the process. Phase one was a proof of concept. Teal moved through that phase, and tranche two will take place in late September. We’ve been down selected to perform in that demonstration. Tranche three is next year for the potential big contracts,” which Thompson estimated could be “tens or hundreds of millions [of dollars] in contracts” to the successful bidder(s).
Thompson is not overstating the numbers. The U.S. military has used small aerial drones for decades and has tried to expand its fleet. In its 2019 budget, Defense Department officials requested nearly US$280 million for small-drone purchases — enough to buy more than 3,000 of them — up over 3 times from US$89 million the year before, according to the Center for the Study of the Drone at Bard College in New York.
In a Wall Street Journal article published in August 2020, Michael Kratsios, a top technology adviser to former President Donald Trump, who was also named the Pentagon’s acting undersecretary of defense for research and engineering, emphatically stated: “We are putting these tools [drones] in the hands of our war fighters in very critical times, and we need to ensure that the technology in their hands is not only cutting edge but is also secure.”
In addition to the opportunities with the DOD, Thompson noted that there are many other sectors they are targeting, such as public safety (e.g., police, first responders) and infrastructure (e.g., roads, bridges, tunnels). This is good timing as the Biden administration earmarked US$1.2 trillion for infrastructure spending, which the Senate recently passed.
In addition to Teal Drones, Red Cat has four other subsidiaries:
Fat Shark offers first person view (FPV) video goggles to the drone industry. Their systems use radio technology to transmit a real-time video feed — downlink technology — from an airborne drone to the pilot’s headset, providing a "true" flight experience.
Rotor Riot is a leader in the sale of FPV drones and equipment, primarily to the consumer marketplace through its digital storefront. Rotor Riot has attracted a large, dedicated following in social media through its Facebook page and sponsorship of its professional drone racing team.
Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS is not available, while still recording and transmitting data even while being operated from thousands of miles away.
Dronebox, Red Cat’s “secure black-box storage and analytics” offering makes “drones more accountable and the skies a safer place.” Red Cat Propware is developing a SaaS platform to provide drone flight data analytics and storage, as well as diagnostic products and services.
“Our goal is to do what Cisco [the multinational technology conglomerate that develops, manufactures, and sells networking hardware and software] did as the then new space of the Internet evolved. They sold routers — we used to call it selling iron. Then you get infrastructure in place, then you sell software as a service. We want to own the drone software business, but we need to own the hardware platform first,” Thompson said.
The global market for drone technologies is significant. It passed US$100 billion in 2020 at an annual growth rate of 20.5%, according to the International Data Corporation (IDC). Drone use dramatically increased during the COVID pandemic, which is logical since "unmanned" drones can accomplish significantly more than "human, in-person" site inspections. Drone use in business and civil service organizations is gaining traction, too, and creating opportunities for a rapidly expanding ecosystem of developers, pilots, manufacturers, and service providers, according to the Computing Technology Industry Association (CompTIA).
Looks like the sky’s the limit for Red Cat.
1) Deborah Thompson (not related to Red Cat’s CEO, Jeffrey Thompson) compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She and/or members of her household own securities of the following companies mentioned in the article: None. She and/or members of her household are paid by the following companies mentioned in this article: None. Her company has a financial relationship with the following companies referred to in this article: None.
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