Drone Tech Co. Lands $1.6M Contract

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Red Cat Holdings Inc. (RCAT:NASDAQ) secured a US$1.6 million (US$1.6M) contract for subsidiary FlightWave's Edge 130 Blue drones, UAS-approved military-grade tricopters, from repeat customer, U.S. Customs and Border Protection (CBP), noted a news release.

Already the CBP employs Red Cat's Teal 2 drones, the largest federal law enforcement agency that does, noted the release, for enhanced situational awareness. The Teal 2, also Blue UAS certified, is a small unmanned system providing the highest-resolution thermal imaging in its class, the company said.

"Following our playbook from the acquisition and growth of our flagship Teal drones, we are well positioned to scale up production and get the Edge 130 Blue into the hands of our current customers like the CBP, as well as other security and defense forces around the world," Red Cat Chief Executive Officer Jeff Thompson said in the release.

FlightWave developed the Edge 130 Blue for government and military applications, specifically long-range mapping, inspection, surveillance, reconnaissance and tracking, but it is ideal for commercial uses, too. It is small (77 cm long by 25 cm high), lightweight (1,200 grams), easily deployed and able to take off and land vertically, making it especially suitable for maritime operations and shoreside locations.

A user can assemble and hand-launch the Edge in a single minute and capture high-accuracy aerial imagery with medium-range autonomy, noted the release. With its hybrid fixed-wing and rotary design, this drone delivers endurance, range and flexibility that are superior to traditional drone platforms. For instance, the Edge can fly in forward mode for an hour to 1.5 hours, longer than any other available Blue UAS-approved drones.

The Edge 130 Blue became part of the Red Cat Family of Systems' low-cost, portable, unmanned, reconnaissance and precision lethal strike drones when Red Cat acquired the company that developed it, FlightWave, last month. FlightWave is a California-based provider of vertical takeoff and landing (VTOL) drone, sensor and software solutions.

Currently, FlightWave is making several enhancements to the Edge using the recently granted US$1.9M, of TACFI, or Tactical Funding Increase, funds from the U.S. Air Force.

Delivering on Demand

Red Cat Holdings, headquartered in Puerto Rico, is a drone technology company integrating robotic hardware and software for military, government and commercial operations. Along with the Edge and Teal 2, Red Cat also owns FANG, through its subsidiary, Teal Drones. FANG is the industry's maiden line of first-person-view drones, optimized for military operations with precision strike capabilities, the company said.

Red Cat has a US$13M order backlog for its family of systems, Ladenburg Thalmann Glenn Mattson reported in a Sept. 24 research report. A significant portion is from FlightWave because preacquisition, it had difficulty building and delivering its drones. Red Cat, however, at its facility in Utah, can produce on a large scale; it is the only public U.S. small defense drone manufacturer with such capability, Technical Analyst Clive Maund highlighted in a report. Thus,  Red Cat management believes that now, pent-up demand for the Edge will be unleashed further.

"Red Cat has seen strong uptake from its Teal drones and appears to be seeing solid traction from its new offerings as well," Mattson commented. "Buyers appear to be growing more confident in [the company's] ability to meet demand."

The company being equipped with all of the requisite certifications for supplying its products to armed forces and other governmental agencies should lead to additional contract opportunities, purported the analyst.

For calendar year 2025, Red Cat guided to revenue of US$55M, Mattson noted, excluding any potential revenue from major U.S. programs or NATO awards.

Jan. 1 through Dec. 31, 2025 also will be the next fiscal year for the defense company because it recently changed its fiscal year-end from April 30, Investing.com reported.

"This move could potentially simplify the comparison of financial results with industry peers and provide a more intuitive time frame for financial analysis," Editor Lina Guerrero wrote.

Sector Growth Forecasted

Around the world, drone use is on the rise, whether for military/defense, commercial or personal purposes, and more growth in each market segment is expected.

"Looking ahead, the drone industry is poised for continued innovation and widespread growth," a Drone Expo article noted. "Key trends include the expansion of precision agriculture applications, the rise of delivery and logistics services driven by e-commerce demands and general advancements in drone endurance, payload capacity and operational autonomy."

The article attributes present and future growth to technological advancements, aviation integration, changing regulations, venture capital funding and public awareness and acceptance.

Looking at the specific global drone markets, the military segment is projected to reach US$22.03 billion (US$22.03B) in value by 2028 from US$15.8B in 2023, according to The Business Research Co. Government funding, a surge in terrorism, the rising popularity of drone swarm technology and innovation are said to be the primary growth drivers.

As for the global fixed-wing VTOL unmanned aerial vehicle (UAV) market, it is estimated to reach US$4.6B in size by 2030 from US$842M in 2022, reflecting a 23.7% compound annual growth rate, a Market and Markets report indicated.   

These drones are ideal for operations requiring longer, high-speed and more stable flights and for carrying heavy payloads, according to The Brainy Insights. As such, they are used mostly in long-distance missions like monitoring, mapping and surveying. Though employed mostly in defense, demand from the commercial space is increasing.

With respect to the global commercial drone market, it is forecasted to explode over the next 10 years, hitting US$1.4 trillion in value by 2034 from $60.37B in 2024, according to Precedence Research. This projected expansion reflects a 37% compound annual growth rate.

The Catalysts: More Contract Wins

Red Cat is still waiting to learn whether or not the U.S. Department of Defense (DOD) chose it to receive its Short-Range Reconnaissance Tranche 2 (SRR T2) contract, CEO Thompson told Tim Weintraut of Alpha Wolf Trading in a Sept. 26 interview. Only Red Cat and one other company remain in the running for it.

"Revenues for Red Cat could jump an additional 7x or 8x next year if it wins," wrote Sean Daly in an Aug. 26 Seeking Alpha article. "A win will also likely generate order flow from NATO and allies."

Daly explained that the SRR T2 contract is for about 12,000 small unmanned aerial systems for the U.S. Army and estimated its worth at about US$600−700M.

Thompson said 2024 will be an exciting year for the company either way.

"Without SRR, we're going to triple revenue," he told Weintraut. "We'll be closing in on profitability when we get to that run rate. We don't need a raise, and we're going to grow like crazy without SRR. Throw on SRR, and you're just putting gasoline on the fire."

Other contracts could come from the DOD's Replicator initiative, aimed at getting thousands of all-domain, autonomous systems in the field by August 2025, or from NATO, Mattson pointed out.

"Beyond these major programs, standard and frequent order flow from allied nations should be expected as defense agencies look to stockpile, train and develop better small UAV capabilities," added the analyst.

'Compelling Investment Opportunity'

Mattson has a Buy rating on Red Cat and a target price implying a 16% return where the stock now is trading.

"The company has significant potential upside optionality should they win major programs like the SSR or Replicator," he wrote.

Finance website, Insider Monkey, on Sept. 13, highlighted Red Cat as one of  "8 Unstoppable Tech Stocks to Buy Now."

"Its drone technology portfolio topped with its service industry, which is directly linked to the global rise in defense budget, makes Red Cat Holdings Inc. a compelling investment opportunity," wrote Talha Qureshi.

The article pointed out that the company increased its revenue 286% between FY23 and F24 through strong organic growth and expanding its drone product portfolio. Rising defense spending in the U.S. likely played a role, too.

Ownership and Share Structure

As of Oct. 10, according to Reuters, management and insiders own 21.24% of Red Cat. CEO Thompson holds 15.85%, and Director Nicholas Liuzza has 1.31%.

Institutional investors own 19.02%. The Vanguard Group Inc. has 1.83%, and Pelion Venture Partners has 1.16%.

The rest is in retail.

Red Cat has a market cap of US$268.4M. Its 52-week range is US$0.525−3.48.