Red Cat Holdings, Inc. (RCAT) Earnings Call Transcript & Summary

Greetings, and welcome to the Red Cat 2Q 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'll now turn the conference over to Ankit Hira, Investor Relations. Thank you, Ankit. You may begin.

Good afternoon, and welcome to Red Cat's Second Quarter 2026 Earnings Conference Call. Joining us today are Red Cat's CEO, Jeff Thompson; COO, Chris Ericson; and CFO, Christian Morrison. Please note that certain information discussed on the call today will include forward-looking statements for future events and Red Cat's business strategy and future financial and operating performance. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause actual results to differ materially from those stated or implied by those statements. Certain of these risks, uncertainties and assumptions are discussed in Red Cat's SEC filings, including its most recent annual report on Form 10-K and other SEC filings. These forward-looking statements reflect management's beliefs, estimates and predictions as of the date of this live broadcast, August 6, 2026, and Red Cat undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. In addition, our comments on the call today contain references to non-GAAP financial measures such as adjusted EBITDA and key business metrics such as annual recurring revenue. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures as well as definitions of the key business metrics referenced and management's reasons for including the non-GAAP measures and key business metrics referenced may be found in the press release. Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at ir.redcatholdings.com. With that, I'll now turn the call over to Chris.

Thank you, Ankit. Good afternoon, everyone, and thank you for joining Red Cat's Q2 2026 Earnings Call. Operationally, the second quarter was an important quarter as we continued scaling production, expanding our family of systems and building the infrastructure necessary to support Red Cat's next phase of growth. As Jeff will discuss in a bit, demand across our markets remains strong. My team's job is to ensure that we can deliver at scale while maintaining the speed, quality and flexibility of our -- that our customers expect. We continue to improve operational metrics by supporting $20 million in quarterly revenue and improving gross margin to 16% -- the most important operational achievement of the quarter was our continued progress scaling manufacturing capacity across the organization. We previously noted that our manufacturing footprint increased fivefold since 2024 to 260,000 square feet. During this past quarter, we added an additional 12,000 square feet of manufacturing and engineering space in San Diego for APM operations. To be clear, square footage is critical, but not the sole focus and all for capacity. We continue to focus on increasing throughput, improving efficiency and strengthening supply chain resiliency. Throughout the quarter, we continued expanding production capabilities, increasing inventory availability and investing in manufacturing process that support better quality and higher delivery volumes across our product portfolio. We are seeing significant synergy gains through centrally driven collaboration across our multiple product platforms in areas of engineering, system integration, quality programs and supply chain optimization. These efforts help support continued deliveries across our autonomous platforms while positioning us for anticipated future demand. Importantly, this shows that we're not simply scaling capacity, we're building repeatable processes that enable us to consistently deliver as volumes grow. That includes investments in manufacturing systems, quality control, supplier management and operational analytics that improve visibility across the organization. As we continue to scale, maintaining quality and execution discipline remains a top priority. Operationally, we continue to make progress across several important programs. At Teal Drones, advancement to Gauntlet II of the drone dominance program was an important milestone. While the program is still ongoing, moving forward in the process reinforces our confidence in the competitiveness of the platform and the capabilities of our engineering and production teams. We remain focused on execution and supporting the program requirements moving forward. We also support -- we also continue to support growing international demand for secure American-made unmanned systems. Deliveries to international customers, including the Japan Ground Self Defense Force, further demonstrate our ability to deploy and support our platforms globally while expanding Red Cat's international footprint. One of the most exciting developments at Red Cat is the continued expansion of our family of systems. Our Black Widow platform continues gaining traction with customers that require secure, mission-ready small unmanned aerial systems. At the same time, we introduced the Hellcat, which extends our ability to support international defense customers with a globally configurable platform derived from the proven Black Window architecture. This creates additional opportunities to expand our addressable market while leveraging technologies and capabilities already proven in the field. Beyond aerial systems, we're also making meaningful progress in the maritime domain through Blue Ops. During the quarter, Blue Ops completed production validation testing of its V7 holes and moved into mass production of the Variant 7 uncrewed surface vessel, a U.S.-built mission-adaptable maritime autonomy platform designed for the U.S. and allied defense missions. The Variant 7 brings together domestic autonomy, command and control, communications and mission systems while supporting intelligence, surveillance and reconnaissance force protection, harbor and coastal security, contested logistics and other payload adaptable missions. This is an important part of how we are expanding Red Cat from an aerial systems provider into a broader all-domain autonomy platform. Recently, we have been selected to participate in the U.S. Office of Naval Research Global mACE3 and mACE4 operational experimentation events. These programs provide an opportunity to demonstrate advanced autonomous maritime capabilities alongside government and defense stakeholders and further validate the relevance of our Blue Ops and APM technologies and future naval operating concepts. We also continued validating the broader Blue Ops ecosystem in real-world maritime environments. The recent Navy services engagement further validates the demand we are seeing for a scalable U.S.-built maritime autonomy and reinforces our confidence that Blue Ops is addressing a clear and urgent capability gap for naval customers. In May, we demonstrated the Blue Ops Variant 7 with Kymeta during an exercise in Key West, Florida, highlighting resilient communications on the move for autonomous maritime operations. for uncrewed surface vessels. Reliable connectivity is a critical enabler for operations at a distance, real-time data sharing, swarming and coordinated missions in the dynamic or contested environments. That event was another proof of point that the platform is not just a vessel, but a part of the integrated maritime autonomy stack that can support the types of operational requirements naval customers are increasingly prioritizing. Another major operational focus has been integrating the technologies and capabilities we've acquired over the past several quarters, and I would start with swarm autonomy. The Department of Defense's Swarm Forge initiative reflects clear direction of travel across the market. Customers want autonomous systems that can operate collaboratively, adapt in complex environments and generate meaningful effects with fewer operators. The program is designed to accelerate AI-enabled robotic warfare through recurring crucible events and move validated swarm packages, including mission software, coordination logic and interfaces and tactics toward operational transition in 90 days or less. This is why our integration of APM is so strategically important. APM brings multi-agent autonomy and distributed control capabilities that can help enable coordinated operations across air, land and sea. As customers increasingly focus on collaborative autonomous systems, we believe the swarming will be an important differentiator across the Red Cat family of systems. Our engineering teams are working to incorporate these capabilities into our future road map with the goal of supporting more coordinated, resilient and operationally effective mission profiles. Another important step forward during the quarter was our continued work demonstrating interoperability across leading autonomy platforms. During a recent joint demonstration with Anduril, our team showcased a multi-vendor fine, fix and finish workflow operating under a unified command and control architecture. The demonstration combined ISR provided by Black Window autonomous mission orchestration through APM's Paradigm software and kinetic effects capabilities integrated through Anduril's ecosystem. We believe these demonstrations validate our family of system strategy and show how Red Cat technologies can integrate into a broader defense architecture while supporting increasingly sophisticated multi-domain missions. Equally important, these effects demonstrate that Red Cat can serve as a critical contributor within larger defense ecosystems, reinforcing the value of open interoperable architectures that combine the best-of-breed technologies from multiple providers. From there, the next operational constraint is Endurance, and that is what Quaze becomes highly complementary. Quaze adds wireless power transfer capabilities that address one of the most significant remaining barriers to persistent autonomy, keeping systems powered in the field without manual battery swaps, precise alignment or connector-based charging. Its platform is designed to support autonomous recharging across air, ground and maritime environments, including vehicle-mounted systems, drone-in-a-box solutions, uncrewed surface vessels, fixed infrastructure and underwater charging stations. While integration remains ongoing, we're encouraged by the opportunities this technology creates across multiple platforms. Together, APIM and Quaze strengthen 2 foundation pillars of autonomy stack, coordination and endurance. Swarming helps autonomous systems work together more intelligently, while wireless power helps keep those systems operating longer with less operator burden. When combined with our aerial and maritime platforms, these technologies enhance our ability to deliver more complete mission-ready solutions for customers operating across increasingly complex environments. Our customers increasingly want interoperable systems that work together seamlessly. They want common control interfaces. They want integrated data flows. They want a single partner that can support multiple mission requirements. That trend continues to accelerate as military organizations adopt multi-domain operating concepts and seek greater operational flexibility. Our approach is designed around those requirements. As we integrate new technologies, expand our portfolio and continue building common architectures across the organization, we believe Red Cat becomes increasingly valuable to customers looking for comprehensive solutions rather than stand-alone products. Looking ahead, our operational priorities remain straightforward. First, continue scaling production and deliveries; second, continue integrating newly acquired technologies into fielded capabilities; third, maintain the agility and responsiveness that have become hallmarks of the company. We believe the operational foundation we have built over the past several years positions us to support future growth across air, land and maritime autonomy, and we're excited about the opportunities ahead. I'll now turn the call over to Christian to discuss our financial results.

Thank you, Chris. I'm pleased to present Red Cat's financial performance for the second quarter of 2026, which demonstrates continued revenue growth, improving operating scale and the investments we are making to support our long-term growth strategy. For the second quarter of 2026, revenue was $20.2 million, representing an increase of 520% from $3.2 million in the prior year period. For the first 6 months of 2026, revenue totaled $35.7 million compared to $4.8 million in the prior year period. This performance was driven by continued deliveries across our drone portfolio, including Black Widow, FlightWave and APM platforms as well as ongoing execution against key defense programs and international opportunities. These results reflect growing customer demand, increased manufacturing output and the expanding scale of our operations. Our gross margin performance also continued to improve. Gross profit for the second quarter was $3.3 million, representing a 16.1% gross margin, a significant improvement from 11.6% in the quarter of 2025 and a sequential improvement from 12.7% in the first quarter of 2026. The improvement reflects better absorption of manufacturing overhead, increased production volumes and operational efficiencies as we continue to scale the business. We believe this demonstrates the underlying leverage in our operating model as revenue continues to grow. Capital expenditures totaled approximately $12.6 million during the first 6 months of 2026, primarily supporting manufacturing expansion at our Blue Ops division, facility improvements, production equipment and other infrastructure investments. These investments are intended to support anticipated future demand and expand our production capabilities. Our strategic investments in future growth remained significant during the quarter. Total operating expenses were approximately $41.9 million, reflecting continued investment in personnel, manufacturing capacity, product development, acquisitions and infrastructure required to support our long-term growth objectives. These investments are designed to position Red Cat to capitalize on the significant opportunities we see emerging across defense, autonomy and multi-domain robotic systems. Research and development expense increased to approximately $14.2 million during the quarter, reflecting our commitment to innovation, autonomy, next-gen platforms and the continued expansion of our family of systems. These investments support future product development across aerial, maritime and technology and autonomous technologies while helping maintain our competitive edge in rapidly evolving defense markets. Our balance sheet and liquidity position provides a significant competitive advantage, and we believe that Red Cat now has one of the strongest balance sheets in the sector and a strong foundation for executing our growth strategy. As of June 30, 2026, we held $325.6 million in cash compared to $167.9 million at year-end 2025. Working capital increased to approximately $396.5 million, providing substantial financial flexibility to invest in growth initiatives, pursue strategic opportunities and support increasing production requirements. Our inventory strategy continues to be an important component of our growth plan and use of cash. Inventory, including prepaid inventory, totaled approximately $84.8 million at quarter end, up from $30.4 million at year-end. This increase reflects a deliberate effort to secure critical components, strengthen supply chain resilience and position the company to support anticipated deliveries across existing programs and to deliver faster than our competition. We view this investment as a strategic enabler that allows us to respond quickly to customer demand while mitigating potential supply chain constraints. We view our balance sheet and inventory position as strategic assets with more than $325 million of cash and significant investments in inventory, manufacturing capacity and technology expansion, we believe we are in a prime position to support future growth opportunities in real time as they emerge. These investments provide flexibility to respond to customer demand, pursue strategic initiatives and continue expanding our capabilities across air, land and maritime autonomy. Looking ahead, we remain confident in our long-term growth trajectory. Our target revenue remains between $150 million and $180 million. While the timing of individual contract awards and delivery schedules can create quarter-to-quarter variability, we continue to see substantial opportunities across domestic and international markets and believe the investments we are making today position us well to capitalize on those opportunities. Several key factors support our confidence in that outlook. First, we continue to see strong demand signals across defense and national security markets. Second, our manufacturing footprint, inventory position and production readiness provide us with the ability and speed to scale deliveries as opportunities materialize. Third, our recent acquisitions, including Quaze Technologies and APM Swarm Robotics expand our technology capabilities and addressable market while strengthening our position as an integrated all-domain autonomy platform. We also continue to see multiple growth vectors emerging across air, land and maritime autonomy, supported by increasing production readiness, expanding customer demand and continued progress across our strategic programs. Market conditions remain highly favorable as defense customers increasingly prioritize autonomous and unmanned systems. Combined with our strong balance sheet, expanding product portfolio and growing operational scale, we believe Red Cat is uniquely positioned to participate in what we view as one of the most significant defense technology modernization cycles in decades. With that, I'll now turn the call over to our CEO, Jeff Thompson.

Thanks, Christian. Good afternoon, everyone, and thank you for joining us on this call. I am thrilled to start with our Q2 2026 results. We delivered a Q2 record of $20 million in revenue this quarter, a strong sequential increase of approximately 30% from the $15 million we reported in Q1 2026. Even more impressive is the gross profit of $3.3 million, which represents a sequential jump of about 66% from what we achieved in the first quarter. This translates to a gross margin of roughly 16% in Q2, up nicely from the 12% we posted in Q1. That is approximately a 20% -- 27% sequential margin increase. These sequential improvements show that our scaling efforts are working, higher volumes are flowing through, manufacturing efficiencies are kicking in, and we're seeing clear operating leverage quarter after quarter. Now let's look at the bigger picture. The first half of 2026 compared to the first half of 2025. This is where the transformation of Red Cat really stands out. In the first 6 months of 2025, we generated just $4.8 million in total revenue and recorded a gross loss of about $0.5 million. Fast forward to the first half of 2026 and the contrast is dramatic. Combined first half 2026 revenue, $36 million, combined first half 2026 gross profit, $5.2 million. First half gross margins, approximately 15%. That's more than a 7x increase equating to approximately 636% growth in revenue year-over-year. And we swung from a gross loss into a solid positive territory. The sequential strength we just delivered in Q2 is accelerating the momentum we built in Q1 and the first half of 2026 already looks completely different from where we stood just 1 year ago. While these financial milestones mark a significant turning point, the underlying engine driving the performance is a fundamental transformation in how we now operate. Beyond the numbers, we have reshaped how Red Cat operates in defense technology. We are actively moving away from traditional requirements documents, many of which predate the lessons learned in Ukraine and shifting business development to sales and toward direct real-time theater feedback. We have rejected the legacy prime contractor model of middlemen resellers and trade show marketing. Instead, we have 4 deployed soldgineers who operate ankle-to-ankle with war fighters in active operational environments. By capturing direct feedback on active battlefields, we've compressed our product development cycles from years down to weeks. We continue to see competitive systems in the field that simply do not work, and we refuse to place substandard crap in the hands of U.S. war fighters. As excited we are about our strong first half performance, the more important question is how we hit our revenue target, an objective we're highly confident in reaching. As we highlighted back in the Innovation Day in February, 2026 is fundamentally a second half story. Last year, we delivered a vast majority of our revenue in just 1.5 quarters across Q3 and Q4. That performance was generated off a single product line with a single primary customer operating out of just 22,000 square feet of manufacturing space. Fast forward to today, our scale, capacity, market positions are completely transformed. We entered the second half of 2026 backed by 9 active products, approximately 270,000 square feet of expanded production capacity and unit economics featuring average selling prices in the hundreds of thousands of dollars rather than tens of thousands. The operational footprint we have built over the last year is designed to drive unprecedented growth, hit our targets and crush our second half execution. In summary, Red Cat has transformed our sales methodology, pioneered a new model of productive product development and compresses cycles from years to weeks, delivered record first half revenue, continued expanding gross margins on a clear path to profitability, launched new products, received our first orders for Blue Ops, closed 2 strategic acquisitions and massively scaled production. The factory is the weapon. And I'll now turn it over to questions.

[Operator Instructions] Our first question comes from the line of Austin Bohlig with Needham & Company.

Just maybe first want to dig into kind of like the Q2, like could you highlight maybe specifically what were the main revenue drivers, if you can break out between Teal and Black Widow and Blue Ops would be helpful.

Yes. Well, there's very little anything other than currently for Q2 other than Black Widows and Hellcats. So that's still Q2 is mostly driven out of Teal -- but that's already -- as we already mentioned today, Apium and Blue Ops are getting paid to go to these exercises. They're on the board. We're very happy that we're finally diversifying our revenue. But we didn't break it out for which stuff is FANG, which stuff is Black Widows or anything like that.

Okay. Fair. And can you assume -- was the bulk of this revenue still related to the extended LRIP contract? Or are these new programs and new opportunities that you're selling into?

No, it was a little less than half was coming out of the Army. There's been a lot of changes. The PM UAS office in Huntsville just got a whole new team put in last week. We're actually going to be meeting with them later, hopefully by tomorrow. They've got General Phillips just got a 2-star upgrade. He used to run it, and now they have new people in there. So we'll be able to continue with that, but only half of that revenue came from.

Yes. And Austin, if I can jump in. I mean, Jeff is spot on. I mean you look at our 10-K from 2025, Army was 73% of our revenue. That's how concentrated we were with the Army. Love the Army. Everything we've done in our relationship with the Army is very strong. And for the first 6 months, Jeff is right. It's right about 50%. What I'm so excited about as a CFO is the diversification. Our #2 customer is an ally in Japan. Our #3 customer is NSPA in Europe. So Great. Great story. I love how the business is growing and the customer base is expanding.

Okay. Perfect. And I guess to kind of lastly, looking at kind of the outlook, I guess, what gives you guys confidence in this big second half ramp? Are there any key programs we should be tracking? And then kind of piggybacking off of that, would love an update on the Ukraine opportunity and where that kind of stands?

Great. Yes, some great questions, Austin. Yes, so the confidence is coming from -- we've been in Japan twice working with folks on the Variant 7 and now actually the variant -- not Variant 5. We've got a new name for it. You'll hear about it soon. So there's a lot of interest, thousands of boat interest across that whole region. We were just recently in Korea, where we had someone from the Army driving a boat in Palm Beach, 8,000 miles away on a phone using TAC. So there's a lot of interest in that region. We're spending a lot of time there. Like I said, we've been in Japan twice this month. We're in Taiwan. We were in Korea. I'm heading back there in mid-September. So there's a ton of interest there. The Middle East has actually ramped up. Everyone is talking about USVs now. So there's so much interest coming from that. But then back into just budgets, right? So the administration has told the Department of war that they want that the big beautiful bill, I think it's $152 billion. They want most of it at least contracted by the end of 2026, which is the end of next month. That's a massive amount of new money that people weren't really paying attention to. Plus the budget from last year is still not fully spent. And then the international operations are just insane. Like, for instance, again, we're in 4 live theaters currently. We're not going to say which ones, but the Ukraine opportunity is going very well. We've done some very interesting partnerships, again, which you'll hear about soon to position us as that frontline ISR drone, which is also now people are starting to understand that for the Drone Dominance Program, the fact that you need an ISR drone. We're so happy that the GDP has really looking at how that you have to have an ISR drone to complete that. But you should be hearing something from the Ukraine opportunity probably in the beginning of September from us.

Our next question comes from the line of Ashok Kumar with ThinkEquity.

Back to the second half coverage question, the roughly $114 million of second half revenue, the low end of your annual target. So how much is covered today by executed purchase orders or funded contract line items and how much remains in the pipeline? And then going back to the cost structure, as you highlighted, the OpEx stepped up 43% sequentially to $42 million. So the R&D is doubling. So what drove the step up, which programs absorbed the R&D increase and is skewed to the new base? And so what quarterly revenue reaches operating breakeven and which quarter do you expect to cross it? And the last question is the margin bridge, right? So gross margin improved from 13% to 16% -- so can you bridge us to the 30% you targeted for late this year, right? What margins do Army Japan and vessel revenues each carry -- and does 30% survive the vessel volumes slip to '27?

All right. Lots of questions, Ashok. Do you want me to take the R&D first, guys, and then.

Yes, sure.

Divide and conquer. Just on the R&D, it's everything that we talked about. Drone dominance is part of why R&D increased. Hellcat, which is our Ukraine variant there. That was a big part of the spending. In addition, we have Blue Ops prototypes that we're working on. TRICHON, we're working on. The team is working really hard. I mean it's easy to see the dollars. It's hard to see the weekend hours and all the time that the team is putting in that you have to, to have those products be successful. So the investments are being made right now real time in R&D. The next question. I'm drawing a blank. You were saying, margin profiles?

Well, I can take some.

Okay, Back end? Okay.

So the contracts that give us confidence, you'll be hearing about again throughout the rest of August and September. As you know, this is sweeps. There's never been this much money in the history of sweeps available that's got to get spent by the end of September. And as those discussions become live contracts, we will let you know. There's also contracts that we have that we're not allowed to talk about. So we won't talk about them. We'll keep our guidelines. We're told not to talk about it whatsoever or just to point to LinkedIn. So there's lots of things that we can elaborate over the next few weeks for everybody to people understand why we're so confident.

And the last question on the inventory conversion and gross margin, primarily the gross margin bridge, right, the transition from 16% to 30%?