Red Cat Holdings - Earnings Call - Q1 2025

Transcript

Operator (participant)

Please note this event is being recorded. During this call, management will be making forward-looking statements, including statements that address Red Cat's expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in Red Cat's most recently filed periodic reports on Form 10-KT, 10-Q, and in Red Cat's press release that accompanies this call, particularly the cautionary statements in it. The content of this call contains time-sensitive information that is accurate only as of today, May 14th, 2025. Except as required by law, Red Cat disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. I would now like to turn the conference over to Chris Ericson, CFO. Please go ahead.

Chris Ericson (CFO)

Thank you very much. Welcome and good afternoon, everyone. Super excited to have everyone join today. This is Chris Ericson, CFO at Red Cat, and with us on the call as well is Jeff Thompson, our CEO. I know most folks on the call want to hear more from Jeff on this morning's announcement, which has been super exciting, but I'm first going to take my two minutes of fame to give you a few key financial highlights for the quarter. First, I'm excited to share that Black Widow Manufacturing started this month to begin deliveries to the Army in June. We currently have a non-SRR backlog of $10 million for Black Widow and H130s to start delivering in June. As far as our guidance goes, we are reiterating our 2025 annual revenue guidance of $80 million-$120 million.

Also, please note, consistent with previous communications, we also reiterate that the bulk of this revenue will be recognized in the latter half of 2025. We ended the quarter with $9 million in cash and receivables, which was immediately bolstered with a $30 million capital raise in April. This liquidity has given us strength and ability to expand our manufacturing to meet the significant ramp in deliveries in the second half of 2025. We are currently expanding our FlightWave manufacturing facility in California to produce beyond 150 drones per month, and we have started discussions to expand our Black Widow production to an additional manufacturing facility outside of Utah to take us beyond our 600+ drones per month. Now, with that being said, I want to turn the time over to Jeff to add his commentary and give us more details on the new USV division. Jeff, please go.

Jeff Thompson (CEO)

Thanks for joining the call, and thanks, Chris. I'm also going to be brief as we have received a ton of questions all day, so I want to get to them in the Q&A. I'm going to start with FlightWave, then Black Widow and SRR, and then finally our exciting USV news from this morning. FlightWave, we have good news and bad news, and Chris touched on this. We continue to have very strong demand for the Edge 130. Shawn Webb, our new President, is doing a great job scaling, but to get to that 150 drones per month by the end of the year, we're not out of space. 150 drones per month is approximately $81 million in annual run rate. Instead of moving in six months, we are ripping off the Band-Aid now and moving into a larger facility.

Same landlords, no penalties, or paying two rents. We have brought a lot of expertise and process improvements along with product improvements and more reliable production. FlightWave is going to be a world-class production facility. I want to thank the team out there doing a great job. Let's move to the Black Widow. We have similar news with the Black Widow production. We are also seeing strong demand that is not SRR-related, and we are going to be starting a second geographical location in California to give us more capacity and redundancy. With the possible large plus-ups in the new budget, we want to be prepared. SRR. We know that everyone is waiting on this contract to be signed, so are we. Internally, the contracts are called TD1, TD2, and TD3. TD1 is the one that we signed in late March.

TD2 is a contract for UVC, which is the Universal Controller, and we've got some great news and results coming in the next few weeks on this incredible project. TD3 is what most people refer to as LRIP. We have not received the final contract yet, but I did actually sign some paperwork that was last night that was connected to TD3 LRIP. We are hoping to see this soon. Also, right before I got on the call, so I'm changing my script that I had 20 minutes ago, started seeing parts of the LRIP contract or TD3 come across the portal. We have not had a chance to review anything. It might just be the services side of the contract, but we expect to have this contract any day now, if not tonight or tomorrow morning. As soon as we know, we will let you hear.

We are probably going to let the Army announce first, and then we will follow up with a more detailed release. We're also hearing, like reported in the Wall Street Journal, that there is a large plus-up coming out of the $150 million. There was a $3.1 billion announcement today from the House Armed Services Committee for unmanned vessel production. Let's talk about unmanned vessels. Our new maritime division. We have been working on this new platform for a long time, and I want to thank Brett Velikovich for his travel and diligence. We are building this in a different way than our competitors. USVs are boats. Boats are hard to build and scale, specifically if you do not have years of experience. We are partnering with some of the best boat builders in the world, and boats need propulsion.

They need jet propulsion to avoid props getting stuck in netting surrounding the ships. We have expertise on our team that started the jet boat craze. We started this from the boat side, not from the tech side. We are also going to have a boatyard now in Florida that will build these boats, and they will be made in the U.S. On the tech stack, we are fortunate to partner with the best solution that is used every day in a war zone and is used very successfully and has destroyed more assets than any other company, or probably any navy, in fact. We are not announcing our partner's name for competitive reasons and for security reasons.

We will have a product later this year that is made in the U.S. with the most proven tech stack in the industry and a boatyard cranking out these USVs every month. With that, I want to open it up to questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause for a moment to assemble our roster. The first question today comes from Ashok Kumar with ThinkEquity. Please go ahead.

Ashok Kumar (Analyst)

The first question on revenue guidance and visibility, what are the key milestones or contracts that you must materialize in the coming quarters to reach this goal? Two is the maritime autonomy and the USV launch with entry into the unmanned surface vessel market. What is the expected revenue contribution from the segment for 2025? How do you assess the competitive landscape and the company's differentiation in the maritime autonomy? Any update on the Russell 2000?

Chris Ericson (CFO)

Jeff, hold on. Writing these down here.

Jeff Thompson (CEO)

Ashok. Thanks for all those questions. I'll start with the last one. We do not get officially notified, but we are for the Russell 2000, but we are significantly above the lower goalposts that were from last year. We are expecting to be part of that reconstitution at the end of this month. We are pretty excited about that. On the competition space in the USVs, there are not many people building USVs of this size that have factories that are ready to start building boats, do not have a boat shipyard. Frankly, the competitors have kind of gone from basically a Silicon Valley model where they get a ton of money. They have never built a boat before. They put a bunch of folks on their board and basically try to start from scratch. We are kind of doing the opposite of that.

We're going with some of the best boat builders in the world. We have a way to get into the boat manufacturing very inexpensively. We expect to have a productive boatyard in Florida by the end of Q3. I don't think there's going to be significant revenue in 2025 from this, although we have had a lot of partners call us today that want to use their products on our boat, whether it's missiles. We're putting our own drones on these. We're fortunate that we also have a drone company that has flying drones. These are just floating drones. We can actually combine our swarms on top of these USVs. It's going to be a very powerful and very useful product set for helping in choke points in the Indo-Pacific region. We think we're in a really good spot for places like Indo-Pacific.

That's where we think we're going to shine, having this type of range and having drones that are now gone through a five-year process and we're actually down-selected for the Army. We have a good combination. I don't remember the other question, but if you want to ask one more, we'll move on.

Ashok Kumar (Analyst)

I'll go ahead and just say margin improvement and Palantir partnership. Jeff, how soon do you expect to realize tangible cost reductions in margin improvement from deployment of Palantir's Warp Speed manufacturing OS? In terms of factory utilization at Long Beach, what is the current and target monthly production capacity, and how does this align with the anticipated auto flow for the rest of the year?

Jeff Thompson (CEO)

Yeah. As we mentioned, our goal was to get to approximately 150 drones per month for FlightWave by the end of this year. I'm hoping we still get there. We'll have plenty of room to do so, which will give us a pretty dramatic run rate going into 2026. Also, as Chris has just mentioned, we are now producing FlightWaves every month. We are now producing Black Widows every month. We've gone a few quarters now with fully loaded cost basis with no revenue, and that changes starting now, which is great. We don't have factory utilization yet to give you. Like I mentioned in my prepared comments, there is about a $1 billion+ up we're hearing all over the Hill in the last week or so that's going to be going towards the UAS group. We're pretty excited about that.

The best way to prepare for that is to have drones that you can ship right away. That is the goal, to ramp up production, have geographical diversity, and to ramp the Black Widows drastically as possible. Because in recent meetings with SRR leadership, they told us very frankly, saying, "As soon as we field LRIP, we are going to go big. That lines up with what they said in the Wall Street Journal recently, that the Army is going to go big for small drones and small weapons." Like, we are constantly hearing where DOGE is heading and where the headset SecDef is heading. I think we are in a great spot.

Ashok Kumar (Analyst)

Got it. One last question, Jeff, is just the key milestones or contracts that must materialize in the coming quarters to reach your annual guidance and just the liquidity or the cash bond, right, with the $30 million raised post-quarter, right, and operating cash outflow of $16 million, right? Question, any color on the liquidity there at the current bond rate?

Jeff Thompson (CEO)

Yeah. I mean, we did just raise $30 million, and as Chris said, we ended the quarter before that with $9 million. So we are very well financed right now. Very excited about that. Now we're just worrying about building drones, and we are. I think we're, again, financially, we're in a great spot right now.

Ashok Kumar (Analyst)

Thank you and all the best.

Jeff Thompson (CEO)

Thanks.

Operator (participant)

The next question comes from Glenn Mattson with Ladenburg. Please go ahead.

Glenn Mattson (Analyst)

Yeah. Thanks for taking the question. Just quickly, first on the color and the language, sounds like the year is going to be even more back-end loaded than we had previously thought. Can you just talk about, there is a good amount of inventory, that inventory has risen a bit, and you had some backlog coming into this year. Can you just talk about why you're adjusting the capacity that you have and making expansions there? Can you talk about what you can do in the meantime in terms of generating revenue and, say, in Q2 and your thoughts around that?

Jeff Thompson (CEO)

Yeah. So I mean, the whole goal was we would have been producing Black Widows sooner and using that inventory if we had a final version from our partners. And we did not get that until the very, I think, the 27th of March. There is no way we were going to be building drones that were not up to the request from our biggest customer or soon-to-be biggest customer. That is why we had to wait until this quarter to start building. You will start seeing that we are still, obviously, we have got plenty of money to get the inventory in. We do not have long lead times for anything anymore. I think our longest lead time now is six to eight weeks, which we plan for. You will start seeing that go down, but we will also just continue.

Now that we're going to start ramping both production lines, we'll have some hiccups with FlightWave switching into a new place, but it's right down the street. It's about a quarter mile away. That's not going to be a big hiccup, but we'll be able to lay out the factory perfectly before we move. It's going to be a beautiful facility. It's going to be able to scale very quickly. On the Black Widow side, we're just adding a location. We're not going to disrupt the Black Widow production going forward as we start making deliveries to the SRR program of record next month. I don't know if I answered the question, but.

Glenn Mattson (Analyst)

Yeah, no, no. It's very helpful. I just wondered if there's some finished goods that are in inventory that you could ship against the backlog that you came into the year with, maybe in FlightWave or something. Just curious if there's any of that going on as well.

Jeff Thompson (CEO)

I'm still not sure I understand your question.

Glenn Mattson (Analyst)

My opinion, I thought there was like a $13 million or $15 million backlog coming into the year for, Black, I'm sorry, for FlightWave stuff mostly. I was just thinking if you could ship against that backlog with some finished goods.

Jeff Thompson (CEO)

Yeah. Yeah. We did actually deliver some of those. Some of that was delivered with the Australian deal that we received and some of it, even a little bit of it last year out of FlightWave and some of it in February. That has brought down some of the backlog, but the FlightWave, I think, will end up going up in backlog with the FlightWave because now that we have drones to fly and demo, we will be able to get out there. We have a tremendous amount of demand to see this bird fly. We are just getting them in the hands of our sales team now, now that we have some production runs under our belt, and the sales team can actually get drones to go demo. We have brought some of that down from 13 to, as Chris mentioned, 10.

Glenn Mattson (Analyst)

Great. Moving on to the surface vessel program. I'm not clear. Are you going to, are you partnering with the shipbuilder, or are you going to own a shipyard? How does that work? I'm just also thinking about the president signing the directive on shipbuilding in the U.S. and if there's maybe some federal support or just some directive by the federal government for this kind of activity.

Jeff Thompson (CEO)

Yep. Even before the announcement today, we have been meeting with the correct people that are behind all of that in the administration. As I mentioned today, there was just a $3.1 billion unmanned vessel that came out of the Armed Services Committee. The executive order for bringing shipbuilding to the United States is something we're directly responding to, and we're getting great support from this administration. I think that to back in the other question, we are going to own a boatyard in Florida. We are getting the partnerships that we're doing are helping us with some of the prototypes that we're building to build the molds, to build the plugs, to build the top. I mean, the top of this vessel is kind of like a stealth bomber, has special curves and, I mean, angles that deflect the radar.

These things are fast so they can get to the enemy. Before they even know it's coming, we have to have specific radar paint on these things. They're very complex vessels, but they're just boats, and you got to build the hull first. We will have a boatyard building these hulls and putting all the propulsion systems in there. We have some of the best folks in the space to do that.

Glenn Mattson (Analyst)

Great. Super helpful. Very exciting. My last one for me is, can you just give a, do you have a, are you comfortable sharing an estimate for what CapEx would be this year with all these plans going on?

Jeff Thompson (CEO)

We don't have it for this call. We're digging in right now and building out this bill of materials that we need for this new USV, all of the cameras, the satellite communications, the magic that we're partnering with that goes into this box, the artificial intelligence, and all of the stuff that makes us such a lethal vessel is not mapped out in a bill of materials to the factory yet, but we'll be able to get that information to you probably for the next call.

Glenn Mattson (Analyst)

Great. Okay. Thanks, Jeff, for answering all the questions and congrats on all the progress.

Jeff Thompson (CEO)

Great. Thank you.

Operator (participant)

The next question comes from Mike Latimore with Northland Capital Markets. Please go ahead.

Mike Latimore (Analyst)

All right. Great. Thanks very much. Yeah. On the USV partnership here, can you talk a little bit about the genesis of this partnership? Were you and this other company pursuing similar programs together? SRR went and created more communications? Or just what was the genesis of this partnership?

Jeff Thompson (CEO)

Yeah. I'll go way back, and we've been looking in certain regions to look at some of this technology that's proven that we know that has actually been in combat. Through Brett's relationships, we found the best in the world at this right now. We've actually already applied for the CAMP project, which is the DIU project for UUVs and USVs. We have already applied for, I don't even know if it's a program of record, but they're pretty large contracts. We are jointly going after these. As everyone knows, if you're going to the DIU, it's got to be made in USA and NDA compliant. That's what we're going to be doing. These boats are going to be made in USA, and they're going to be NDA compliant.

Yeah, we are pretty excited how fast we're running right now and getting into the market. The market's kind of coming to us. The phone calls I was getting today were crazy. We are pretty excited that we're going to have this boat running right out of the box because we already know how it all works because it's working today. It worked yesterday. It's a very complete solution. These are not prototypes. These are going to be out-of-the-box effective weapons.

Mike Latimore (Analyst)

Got it. Got it. Would this be something that, say, Palantir would want to integrate with and use data on this just like they use with your drones too, or?

Jeff Thompson (CEO)

Yeah. No, absolutely. That is something that with our partners, actually, we are not only on the tech side, but we are going to be also utilizing Warp Speed for this new factory in Florida. These things are going to tie in greatly. I think when we bring the software stack from Palantir along with this proven technology partner we have, I think we are going to have an incredible solution that has never been seen before.

Mike Latimore (Analyst)

Got it. Got it. In terms of your non-SRR business for the year, can you highlight who might be some of the more important customers kind of within that non-SRR bucket this year?

Jeff Thompson (CEO)

Yeah. We have existing customers we've had for years that we went up against in some bake-offs with our competitors. If you look at Border Patrol, it's been a customer for years. Now think of this. There are 79,000 mi of United States coastline. We can monitor these coasts with these boats that are autonomous, do not need people, do not need to sleep, could be constantly monitoring the entire coast. We could have Black Widows and/or Edge 130s on there, soon-to-be Trikens. Once they do spot something, they can send the drone towards them. There are also a lot of different customers in the first responder space that would look at this. You've got Puerto Rico that's constantly battling smugglers between the islands and to Puerto Rico. There are a lot of use cases for non-SRR capabilities. Again, NATO is still pushing along for us.

We've actually, there are actually some folks who are in our office in Salt Lake this week. There are lots of other customers besides SRR. Probably the revenue from non-SRR for the second half will be at least equal to SRR, if not bigger.

Mike Latimore (Analyst)

Yep. Got it. Got it. Just last one for me. In terms of the cash operating expense you had in the first quarter here, how should we think about that trending throughout the year?

Jeff Thompson (CEO)

Yeah. I think I kind of mentioned it. We've been here before where we had, when we were launching the Teal 2, we had negative 10% gross margins because we had a fully loaded factory and had zero revenue. As we've basically been in that pattern, that flight pattern for the last two or three quarters. We are now delivering drones from both FlightWave and from the Black Widow. That is going to reduce the cash needs very rapidly and will improve our margins also very rapidly. Like I said, we did not even mention, I think Ashok asked it earlier, none of this guidance has any Palantir revenue in it.

To just give a little bit of details on the guidance, because I had a bunch of questions about this over the last few weeks, actually, people said, "With the continuing resolution and slowing down your contract award," which hopefully it's tonight, but the CR changed our guidance. Myself and Chris have been putting the modeling together. It might look daunting to people on the outside, but the way we're looking at it is to meet the bottom end of the guidance, FlightWave does $25 million, and we're very comfortable with that, specifically with the way it's going to ramp. On the Black Widow side, now with this new geographically diverse location that we're getting up and running as quickly as possible, you look at the last two quarters, you can break up what's left over as $55 million, right?

Some of that will be taken up in Q2. Whatever's left, you can just split that between these two locations, Utah and California, and they can split that delivery. I don't think the problem's going to be demand in our contracts. I think it's going to be delivery. We have been really working on that. If you break up the last two quarters for the Black Widow, half will come from California, half will come from Utah, or 60% Utah, 40% California. We are still comfortable with our guidance.

Glenn Mattson (Analyst)

Got it. Got it. All right. Great. Thanks. Best of luck.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Thompson for any closing remarks.

Jeff Thompson (CEO)

Thanks, everyone. It's been very exciting times. We've spent a lot of time in some boatyards. We are now going to have three product lines. We have two of them shipping now, so we're very excited about this. As we were getting updates during the call, we're very confident of finally getting, as we call it, TD3 contract, or as the rest of the world knows it, as LRIP. As I mentioned earlier in the call, we are going to have the Army announce it first, and then you'll be hearing about it in detail from us. This has been a big week. We were hoping we got that announcement before today, but it looks like it's very close. Everyone just have a great night.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.