Red Cat Holdings, Inc.

Good afternoon and welcome to Redcats third quarter 2025 earnings conference call. My name is Steve and I'll be your operator for today's call. Joining us are the Redcats CEO Jeff Thompson and CFO Chris Erickson. Please note that certain information discussed on today's call will include forward-looking statements of our future events and Redcats business strategy and future financial and operating performance. These forward-looking statements are only prediction and are subject to risk, uncertainties, and absorption that are difficult to predict and may cause actual results to differ materially from those started or implied by those statements. Certain of this risk, uncertainties, and absorption are discussed in REDCAT's SEC filings, including its most recent annual report on Form 10-K and other SEC filings. These forward-looking statements reflect management's belief, estimate, and prediction as on date of this live broadcast, November 13, 2025, and that card 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 contains reference 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 alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly compared GAAP measures as well as definition of the key business matrix referenced and management reasons for including the non-GAAP measures and key business matrix 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 investor relations sections of the company's website at ir.redcatholdings.com. With that, I'll turn the call over to Jeff.

The 2025 earnings call. I will start by providing some high-level commentary on our financial results and then share exciting updates about our unique market position and revenue growth initiatives. REDCAT delivered a record-breaking third quarter with revenues of $9.6 million, up 200% from second quarter of 2025. Q4 will be more revenue in one quarter than we have ever done in a 12-month period. A majority of that almost 40 million of revenue in 2025 will have been shipped in the second half of Q3 and Q4. That's just 1.5 quarters. This performance reflects the accelerating adoption of our drone and robotic solutions across defense and national security sectors. Our product portfolio has reached new levels of validation and market acceptance. We are uniquely positioned and have built capacity to meet the U.S. Army's need for 1 million drones. We are ready with speed and volume. Here are additional milestones we achieved this quarter. The limited-rate initial production Tranche 2 contract we signed in July 2025 has expanded. It is now 35.1 million. We launched BlueOps, our new maritime division focused on uncrewed surface vessels, with facilities now established in Georgia, Maine, and Southeast Florida. Our FANG FPV drone was officially added to the Blue UAS cleared list, a critical validation for US government use, and now being used by other PM UAS categories. We successfully completed flight testing with Palantir's visual navigation software on our Black Widow platform, enabling operations in GPS-denied environments, and now a Black Widow product option that will improve Black Widow margins through software sales. We announced a strategic partnership with AeroEnvironment, enabling deployment of FANG from the P550 UAS, part of the LR program of record, and Edge Autonomy is deploying the Black Widow on their long-range platform. Our Black Widow system was approved for NATO NSPA catalog, opening doors to NATO members and partner nations and possible foreign military sales. To impact that a bit more with added color, our limited-rate production contract for the Black Widow system valued at $35 million demonstrates the military's confidence in our technology and manufacturing capabilities. The total contract in 2025 is now approaching 40 million for the US Army alone. While we experienced a six to seven week delay due to change orders that pushed the first shipments to mid-August, this reflects dynamic nature of defense requirements and our ability to adapt to solutions to meet evolving specifications. We received the new changes at the end of July. We iterated and delivered the first LRIP drones three weeks later. We proved that we can do quick changes and continue to ship at volume. Perhaps the most exciting strategic expansion is the launch of Blue Ops, our new maritime division. This represents a natural extension of our autonomous systems expertise into a high growth, into a high growth adjacent market. Our partnership in Europe with a battle proven boat technology gives Blue Ops a three-year advantage in the USB space. And we expect our first boat hulls to be completed in December with potential pricing from about 750,000 to 1.5 million per unit. This division opens up substantial new revenue opportunities. We now opened 155,000 square foot manufacturing facility in Georgia. capable of building more than 500 to 1,000 vessels per year, and established a sales showroom and lab in Southeast Florida, and a prototype partner in Maine that has built some of the most complex boat technology in the industry. We believe this is the most undervalued REDCAT asset. If we only ship 200 boats at the low end of pricing, that is $150 million in revenue. Redcap believes factories are the moat. Additional expansion strategies are propelled by the need for manufacturing speed and volume, and we believe factories are becoming the new moat for defense. We have doubled our manufacturing space in Salt Lake City and doubled our manufacturing space in Los Angeles, and we have US capabilities for 1,000 USVs a year and can build a new hull design in months to production. Now to provide the Army SRR program update. We continue to execute on the U.S. Army short-range reconnaissance program. The LRIP contract signed in July has been expanded and is now valued at 35 million. So let me share some context on changes in our revenue outlook and where our projections are shifting slightly to the future. The highly anticipated SRR contract took an extended amount of time to finalize. The government budget was not signed until July 4th, and we're still receiving changes to the Black Widow as late as the last week in July. The unanticipated delay shifted our expected revenue recognition by about six to seven weeks to the right. But our long-term trajectory remains unchanged. In fact, the recent expansion of the ELRP contract at $35 million gives us further excitement of the future trajectory of U.S. public announcements and specifically the 1 million drones last week. We expect to announce additional contracts and partnerships in the coming months, including developments in our USV segment, Edge 130 move to Triton, new power capabilities combined with swarming. Given some of the delays mentioned, we are needing to lower our full-year revenue guidance range for 2025 to between 34.5 to 37.5. Q4 guidance is just below a $100 million annual run rate. We remain very optimistic about our ability to recover revenue from the delayed continuing resolution known as the one big beautiful bill and the government shutdown of 2025. Demand has grown significantly in the last three months with the Army alone looking for millions of drones. We are currently implementing warp speed in Salt Lake City. and expect to send Palantirian forward-deployed engineers to Flightwave Long Beach facility, then soon to Georgia for the Blue Ops facility. We believe running our factories utilizing Palantir's warp speed will give us lower cost, higher margin, better operating metrics, better visibility, and help us dominate against old, crusty prime vendors. As you know, we also previously announced our new product with partnership with Palantir for visual navigation. We also expect to launch other important products from Palantir on the Black Widow and the USV products earlier next year as partnerships continue to grow with Palantir utilizing their AI products. I will now turn the call over to Chris to discuss our financial results.

All right, thank you, Jeff, and good afternoon, everyone. I appreciate everyone jumping on today. As Jeff mentioned, we're pleased with our record third quarter 2025 results. Absolutely ecstatic. Our financial performance reflects the success of our ongoing strategic initiatives and our commitment to delivering value to our shareholders. On the income statement side, revenues were $9.6 million for the third quarter of 2025. Now, this is training up from $3.2 million in the second quarter and up further from the $1.6 million in Q1 of 2025. This improving trend is due to increasing product revenue as we have started delivering drones to the U.S. Army under the SRR program. Gross profit was $638,000 in the third quarter of 2025, up from $375,000 in the second quarter of 2025. Margins have been primarily driven by higher revenues in the two consecutive quarters. Q3 gross profit was a large increase compared to the gross loss of $392,000 in the third quarter of 2024, an improvement of over $1 million. On a percentage basis, gross profit for this quarter was 7% compared to a gross loss of 30% during the third quarter of 2024. Year over year, same quarter change is due to higher utilization of plant capacity and decreased inventory obsolescence in 2025 compared to 2024. On our operating expense side, we've strategically increased the areas of R&D and G&A to support our rapid growth trajectory and market expansion initiatives. During Q3 of 2025, we invested approximately $6 million into R&D, a quarterly increase of 66% over Q2 of 2025. We've accelerated R&D to focus on growing our technological leadership in all areas, including but not limited to unmanned maritime service vessels, advanced communication systems, electrical, optical, and thermal sensor technology, universal flight controls, AI-based navigation systems, and swarming capabilities, to say the least. Plenty of other areas that we're spending R&D as well to improve our technologies. General and administrative expenses have grown to $9.2 million for Q3 of 2025, a quarterly increase of 48% over Q2 of 2025. This is to support our larger organization, including the establishment of our Blue Ops division and the operational infrastructure required to manage our expanding operations. Now on to the balance sheet and cash flow side. The most significant trend across our balance sheet and cash flow metrics is the strengthening foundation we're building for sustained growth and profitability. We've ended the quarter with $212.5 million in cash and receivables. This liquidity positions us well to execute on our SLR obligations, scale our USV division, and pursue other strategic growth opportunities. The investments we're making in working capital, manufacturing capabilities, and organizational infrastructure are already generating returns through accelerated revenue growth and enhanced market position, positioning us for continued success as we scale our operations and capture the tremendous opportunities in the defense drone market. Despite the timing shift of revenue that Jeff talked about, we remain confident in our ability to meet long-term goals. Our production capacity continues to improve with minimal constraints. We are on track to scale up drone output to 1,000 units a month by early 2026, and our USD manufacturing is building up with first deliveries expected in Q2 of 2026. On the capital allocation side, we are focused on deploying capital across three key areas. Our USV division build-out at Blue Ops, estimated to be a $20 million to $25 million investment to fully operationalize the division. Strategic investments targeting technologies, informing battery tech, AI, and communications, among others. And the third, our facility expansion, with completion of our facility expansions in Salt Lake City and Los Angeles here in the next three to four months, and then also in Georgia with our Blue Ops facilities. General outlook. Turning our guidance to the full year 2025, as Jeff mentioned, we expect revenues to be between $34.5 to $37.5 million. This represents T4 revenues between $20 and $22 million, or a sequentially quarterly increase of 170%, more than doubling the Q3 revenues. This continued strong sequential growth driven by our accelerated Black Widow production ramp and FANG system deliveries following blue UAS certifications. This guidance reflects our confidence in our production capabilities with our anticipated manufacturing scaling from 500 to 1,000 drones per month in Q1 of 2026 and our strong order visibility from both existing defense customers and new opportunities generated through our NATO catalog approval. Several key factors are driving our optimistic outlook for the remainder of 2025 and into 2026. A limited rate production contract for Black Widow Systems provides a solid foundation of committed revenue. while our expanded production capacity position allows us to capture additional opportunities as they emerge. With the launch of Blue Ops opens an entirely new revenue stream and significant potential, giving our pricing expectations between $750,000 to $1.5 million per vessel and a growing demand for autonomous maritime solutions. Our strategic partnerships with Palantir and Arrow Environment are beginning to generate collaborative opportunities that should contribute meaningfully to our revenue growth trajectories. Market conditions continue to be exceptionally favorable in our solutions. Defense spending on autonomous systems is accelerating globally, driven by evolving geopolitical dynamics and the proven effectiveness of drone technology in modern conflicts. The emphasis on domestic manufacturing and supply chain security creates substantial competitive advantages for REDCAT. while our international expansion through NATO approval opens up significant new market opportunities. We're also seeing increased interest in our maritime capabilities as defense organizations recognize the strategic importance of unmanned surface vessels. Our internal initiatives are positioned to drive sustained growth beyond the current quarter. In closing, we remain focused on disciplined execution, strategy expansion, and delivering shareholder value. We are pleased with the progress we have made on each of our strategic initiatives and operational performances of the business. And with that, happy to answer your questions. So operator Steven, if you would please open up the line for Q&A.