Red Cat Holdings Inc. (RCAT:NASDAQ) is no stranger to the military drone market. Although the Puerto Rico-based Company also provides its services to the enterprise and consumer markets, its focus has been on major defense and defense-adjacent contracts (e.g., its ongoing US$90 million one with U.S. Customs and Border Patrol (CBP).)
Red Cat's Golden Eagle drones are U.S. Department of Defense (DoD) approved for surveillance, public safety, and inspection applications, and company subsidiary Skypersonic Inc. produces special tech which enables drones to complete inspection services thousands of miles from their operators — in locations where Global Positioning System (GPS) coverage is lacking or intentionally degraded.
Other products produced by the concern include First Person View (FPV) video goggles that give pilots a better perspective to control their drones while in flight, and specialized software designed to allow one person to manage the operations of four or more drones at once.
The company operates through several subsidiaries. In addition to Skypersonic, it is the powerhouse behind Teal Acquisition I Corp and drone racing brands Rotor Riot, LLC and Fat Shark.
The Catalyst: Bureau of Land Management Limited Source Determination
On January 25, Xanthe Otterstedt, a United States Department of Interior contracting officer, signed off on an authorization for the Bureau of Land Management to acquire two of Red Cat’s Teal Golden Eagle drones for use in resource management and fire control coordination roles.
The authorization includes another prospective fourteen purchases in the future for a total fleet size of 16.
This authorization solidifies the foothold in U.S. civilian government roles that the company first established when it expanded from the DoD to serve CBP.
Why this Sector? Ongoing War Demand, Expanding Civil Uses
Drone technology is changing military dynamics. The Ukraine conflict has raised awareness of drones and their capabilities on the battlefield and has occasioned increased defense spending on semi-autonomous systems across the west for the foreseeable future.
According to a recent market report from The Business Research Company, “The global military drones market size will grow from US$14.54 billion in 2022 to US$15.88 billion in 2023 at a compound annual growth rate (CAGR) of 9.2%. The Russia-Ukraine war disrupted the chances of global economic recovery from the COVID-19 pandemic, at least in the short term.”
The report goes on to say that “The war between these two countries has led to economic sanctions on multiple countries, a surge in commodity prices, and supply chain disruptions, causing inflation across goods and services and affecting many markets across the globe. The global military drones market size is expected to grow to US$20.64 billion in 2027 at a CAGR of 6.8%.”
According to a recent market report from The Business Research Company, “The global military drones market size will grow from US$14.54 billion in 2022 to US$15.88 billion in 2023 at a compound annual growth rate (CAGR) of 9.2%.
A report from Allied Market Research concurs, explaining that “the growth in threat from terrorism and increase in security concerns across the globe has led to increased government expenditure for UAVs such as drones. Unmanned aerial vehicle solutions have a wide range of applications in the military and defense sector for the effective observations of the assets and surveillance of the areas for gaining the optimum operational effectiveness.”
“The security of key institutions has been greatly enhanced with advanced video surveillance and access control systems. Unmanned Aerial Vehicles are used for tactical planning and surveillance of major events or gatherings in large cities. Such factors are expected to fuel the growth of the global military drone market during the forecast period.”
Why this Company? Growing Scope Backed by Current Contracts
On January 30, analyst Ashok Kumar of ThinkEquity reported that “Red Cat has a US$90 million contract with the Border Patrol. The current purchase order is approximately US$1 million, and the company expects to ship this order beginning January 2023.”
His report states, "Red Cat is in a bake-off with two other companies to replace the existing Chinese fleet." The company also "expects to expand the Border Patrol contract throughout 2023."
Company CEO Jeff Thompson explains that the "Teal Drones manufacturing capacity expansion is complete, and ramping up of drone production has begun to fulfill existing contracts and be prepared for a much higher volume of purchase orders in the coming quarters."
Ashok Kumar of ThinkEquity reported that “Red Cat has a US$90 million contract with the Border Patrol. The current purchase order is approximately US$1 million, and the company expects to ship this order beginning January 2023.”
"Increased entrenchment within the US military complex bodes well for additional contract awards going forward, especially the SSR Tranche 2 program that is expected to be worth US$300M+ and is expected to be awarded within 12 months," he continues.
"Key partnerships with Reveal Technology, Tomahawk Robotics, Athena AI, and Immervision keep the Company at the leading edge of drone technology advancements. Additionally, the Skypersonic division should benefit from the US$1 trillion Federal Infrastructure Bill passed in 2021 that will create demand for drone inspection services across many civil improvement projects."
Why Now? Well Positioned for Growth with a Unique Solution
Thompson paints the company as extremely well-positioned for sustained revenue growth. "We had nearly US$33 million in net cash as of Q4 2022," he explains, "with additional non-dilutive proceeds coming from the anticipated sale of the Company's consumer division,” which encompasses Rotor Riot and Fat Shark.
Kumar’s report was particularly optimistic about new developments in one small element of Red Cat's panoply of offerings: "The 4-Ship is a software platform that controls four Teal Golden Eagle drones simultaneously and can be operated by one pilot. This enables four 360-degrees of situational awareness," his report explains.
“The 4-Ship+ will include two extra Golden Eagle units and an additional linked controller to facilitate control handoff from one pilot to another. The other two drones also allow pilots to bring in units with fresh batteries, while units with drained batteries drop off to be charged — all without breaking up the four-drone flight pattern.”
This setup “allows for continuous 360-degree surveillance of any target and overcomes the biggest
weakness of any drone: limited battery life. We believe that 4-Ship is a disruptive technology that alters the approach to intelligence, surveillance, and reconnaissance approaches.”
Ownership and Share Structure
Streetwise Ownership Overview*According to Reuters, 37.27% of the company's stock is held by management and insiders. CEO Thompson owns some 22.59% of the company's common shares, with other officers and directors controlling the rest. 9.01% is held by institutions and strategic investors, including Vanguard Group at 2.32% with 1,267,536 shares, Uniplan Investment Counsel at 2.02% with 1,113,688 shares, Pellon Venture Partners at 1.63% with 898,278 shares, and BlackRock Fund Advisors at 0.61%, with 334,866 shares.
The rest is in retail.
Red Cat Holdings Inc has a market cap of US$71.67 million, with 55.13 million shares outstanding. Cash on hand was US$32.9 million as of 10/30/22.
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Disclosures:
1) Owen Ferguson wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. They or members of their household own securities of the following companies mentioned in the article: None. They or members of their household are paid by the following companies mentioned in this article: None.
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