The global market for drone technologies is big. It passed $100 billion in 2020 at an annual growth rate of 20.5%, according to IDC. Drone use dramatically increased during the COVID pandemic and is expected to continue its growth trajectory. 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 Comptia.org.
This makes Jeffrey Thompson, CEO of Red Cat Holdings Inc. (RCAT:OTCMKTS), a hardware-enabled software provider to the drone industry, "very excited about this space. We're actually in the airline sector and sharing space with other aircraft. Drone fleets are going to be really large; even though [drone] aircrafts are smaller, the drone aircraft fleet is going to be much larger than the traditional airline space."
"Our goal is to build a very high margin, monthly recurring drone software platform. We're a hardware-enabled software platform that allows us to do stuff nobody else can do through our patents, like GPS denied locations and remote piloting," Thompson said.
Red Cat has been selected to join the Russell Microcap® Index at the conclusion of the 2021 annual reconstitution, taking effect on June 28. The company uplisted to the NASDAQ exchange in May.
Red Cat provides products, services and solutions to the drone industry through its four subsidiaries, all of which worked closely with Red Cat and each other before they were acquired:
Fat Shark offers First Person View (FPV) video goggles to the drone industry. Its 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. Red Cat's Enterprise Segment plans to optimize key products and services from the company's Consumer Segment to grow its business.
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. Its Youtube channel https://www.youtube.com/c/RotorRiot has attracted over 200,000 subscribers and has had more than 25 million views.
Rotor Riot's technology and digital goggles enable drones to be remotely flown from thousands of miles away. Proving its technology, in January 2021, Rotor Riot President Drew Camden controlled a drone flying in Michigan while he was physically located in Orlando.
Through Rotor Riot, Red Cat "has the biggest database of professional drone pilots on the globe. Getting our message out to these pilots is key to obtaining their feedback, which helps us to improve our products," Thompson said.
Its third subsidiary, Skypersonic, provides software and hardware solutions that enable drones to complete inspection services in locations where GPS is not available, yet still record and transmit data even while being operated from thousands of miles away.
Skypersonic's small-size, proprietary caged technology, Skycopter Pro, can inspect places no person or machine can reach. "It also offers the ability to get into dangerous areas in the safest possible way, to determine if there's damage," or if action is required to mitigate onsite issues, Thompson noted. For example, the technology can squeeze into pipes, tanks and boilers and can capture HD videos and analyze structures. A powerful LED system enables the operator to see in the dark. It can inspect structures without excess manpower and with increased safety. Real-time information is streamed "live," which can be documented for regulatory and insurance purposes.
"Skypersonic effectively invented remote piloting, and GPS denied piloting…these (patented) capabilities are opening up revenue streams for us," Thompson said. He explained that instead of a drone operator being able to only do a couple of "missions" at a time, "with remote piloting, you can have a centrally located pilot accessing 30 missions a day from almost anywhere, controlling it over the internet," he explained.
Major industrial customers, like GM and Aramco, are finding the technology to be useful in containing costs, ensuring quality control and improving safety records, according to Thompson. GM uses Skypersonic's technology "to identify" potential production line issues, such as "bolts that need to be tightened…which can be viewed on the screen while pilots fly in real time. The GM workers can go on break, we fly in, do a quick inspection and not have the production line shut down," Thompson said.
In early April, the company reported record third-quarter revenues exceeding $2 million (its year-end is April 30), fueled by all of its subsidiaries' contributions, but notable since Fat Shark was only acquired in November 2020. Similarly, Skypersonic was acquired in May 2021, so revenue-generating expectations are revving up.
Dronebox, Red Cat's "secure black box storage, analytics" offering is the fourth subsidiary, and equally important to the company's revenues. Dronebox describes itself as making "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.
Thompson expects the company to add "a couple more positive acquisitions" before calendar year-end.
At this point, Thompson sees the U.S. market as "big enough" for Red Cat to grow its market share, without having to scramble to pitch its products and services all over the globe. He said a lot of what's happening with the ban on Chinese drones has prohibited many government agencies from buying from China, creating strong interest in U.S.-based drone companies.
In early June, the U.S. Senate voted in favor of approving a sweeping package of legislation intended to boost the country's ability to compete with Chinese technology. This could be favorable to companies like Red Cat as the measure authorizes about $190 billion for provisions to strengthen U.S. technology and research.
ThinkEquity, a division of Fordham Financial Management Inc., on June 7, initiated coverage on Red Cat. Analyst Ashok Kumar wrote, "Red Cat gets competitive advantages by leveraging all three companies together—Fat Shark, Skypersonic, and Rotor Riot. The Skypersonic remote piloting system is combined with the Fat Shark digital video system to provide differentiated solutions. Rotor Riot can scale a U.S. manufactured drone solution for a wide variety of inspection activities. This positions Red Cat to move beyond selling drones into selling drone services and solutions."
ThinkEquity has a Buy rating on Red Cat and a target price of $8 per share. The stock is currently trading at around $2.53.
Red Cat Holdings has 33.87 million shares outstanding,39 million fully diluted and management owns approximately 70%.The company's market cap is approximately $79.56 million.
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Disclosure:
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Disclosures from ThinkEquity, Red Cat Holdings Inc., June 7, 2021
Analyst Certification
The analyst, Ashok Kumar, responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.
Financial Interests
The analyst, Ashok Kumar, has no financial interest in the debt or equity securities of the subject company of this report. Further, no member of his household has any financial interest in the securities of the subject company. Neither the analyst, nor any member of his household, is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is the subject of this research report. The analyst has not received compensation from the subject company. The CEO of ThinkEquity, a division of Fordham FInancial Management, owns shares in the company. At the time of this research report, the analyst does not know, or have reason to know, of any other material conflict of interest.
ThinkEquity is a division of Fordham Financial Management, Inc. (Fordham), a member of FINRA and SIPC. Fordham or an affiliate does not have a client relationship with and has not received compensation from this subject company Red Cat Holdings, Inc. in the last 12 months. Fordham expects to receive or intends to seek investment banking business from the subject company in the next three months. Fordham does not make a market in the securities of the subject company of this report at the time of publication. Fordham does not hold a beneficial ownership of more than 1% or more of any class of common equity securities of the subject company.
