Red Cat Q2 2026 Earnings Report

Red Cat EPS Results

• Actual EPS: -$0.26
• Consensus EPS: -$0.21
• Beat/Miss: Missed by -$0.05
• One Year Ago EPS: N/A

Red Cat Revenue Results

• Actual Revenue: $20.20 million
• Expected Revenue: $22.65 million
• Beat/Miss: Missed by -$2.45 million
• YoY Revenue Growth: N/A

Red Cat Announcement Details

• Quarter: Q2 2026
• Date: 8/6/2026
• Time: After Market Closes
• Conference Call Date: Thursday, August 6, 2026
• Conference Call Time: 4:30PM ET

Red Cat (NASDAQ:RCAT) is a drone technology company that develops and supplies small unmanned aircraft systems for military, government, public safety and commercial applications. Its solutions are designed to support intelligence, surveillance and reconnaissance, situational awareness, and other missions requiring portable and rapidly deployable aerial systems.

Through its Teal Drones business, Red Cat offers the Teal 2 and related Black Widow systems, compact drones designed for defense and public-safety users. The company also owns FlightWave, which develops the Edge 130 Blue, a fixed-wing vertical takeoff and landing aircraft intended to provide longer-range and extended-duration aerial operations. Red Cat’s product portfolio also includes software and systems intended to support drone control, secure communications and coordinated operations.

Red Cat has expanded from its earlier focus on the consumer and commercial drone markets toward defense and government applications. The company serves customers in the United States and international markets through government procurement, defense relationships and authorized distribution channels. Jeff Thompson is the company’s chief executive officer.

Red Cat Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Record revenue and improving margins: Q2 revenue rose 520% year over year to $20.2 million, while gross margin improved to 16.1% from 11.6% a year ago and 12.7% in Q1. Management attributed the gains to higher production volumes, overhead absorption, and manufacturing efficiencies.
• Positive Sentiment: Management maintained its $150 million–$180 million 2026 revenue target and expressed confidence in a substantial second-half ramp, citing approximately $50 million–$80 million of potentially shippable drone inventory, expanding defense demand, and expected contract activity in August and September.
• Positive Sentiment: Red Cat reported increasing customer diversification: Army revenue represented roughly 50% of first-half sales versus 73% in 2025, while Japan and NSPA Europe became important customers. The company also cited international activity across Japan, Korea, Taiwan, the Middle East, and Ukraine.
• Positive Sentiment: Product and manufacturing expansion continued: production capacity reached approximately 270,000 square feet, Blue Ops moved its Variant 7 maritime platform into mass production, and the company advanced Black Widow, Hellcat, APM swarm autonomy, and Quaze wireless charging technologies.
• Negative Sentiment: Operating expenses increased to approximately $41.9 million, including $14.2 million of R&D spending, and the company continued to operate at a loss despite positive gross profit. Management is targeting approximately 30% gross margin and division-level profitability by late 2026, but acknowledged that contract awards and delivery timing remain uncertain.

Presentation

[Operator]

Greetings, welcome to the Red Cat 2Q 2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. 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.

[Ankit Hira, Investor Relations Representative at Solebury Strategic Communications]

Good afternoon, 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 our 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 in its most recent annual report on Form 10-K and other SEC filings.

[Ankit Hira, Investor Relations Representative at Solebury Strategic Communications]

These forward-looking statements reflect management's beliefs, estimates, and predictions as of the date of this live broadcast, August 6th, 2026. 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.

[Ankit Hira, Investor Relations Representative at Solebury Strategic Communications]

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.

[Chris Ericson, COO at Red Cat]

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 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 sq ft.

[Chris Ericson, COO at Red Cat]

During this past quarter, we added an additional 12,000 sq ft of manufacturing and engineering space in San Diego for APM operations. To be clear, square footage is critical, but not the sole focus and end 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 processes 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 helped 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.

[Chris Ericson, COO at Red Cat]

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 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.

[Chris Ericson, COO at Red Cat]

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 Widow 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 hulls and moved into mass production of the Variant 7 uncrewed surface vessel, a U.S.-built, mission-adaptable maritime autonomy platform designed for U.S. and allied defense missions.

[Chris Ericson, COO at Red Cat]

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 MACE 3 and MACE 4 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 in future naval operating concepts. We also continued validating the broader Blue Ops ecosystem in real-world maritime environments.

[Chris Ericson, COO at Red Cat]

The recent Navy Services engagement further validates the demand we are seeing for 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 dynamic or contested environments.

[Chris Ericson, COO at Red Cat]

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.

[Chris Ericson, COO at Red Cat]

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 that 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 roadmap with the goal of supporting more coordinated, resilient, and operationally effective mission profiles.

[Chris Ericson, COO at Red Cat]

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 find, fix, and finish workflow operating under a unified command and control architecture. The demonstration combined ISR provided by Black Widow 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 architectures 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 where Quaze becomes highly complementary.

[Chris Ericson, COO at Red Cat]

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, APM and Quaze strengthen two foundational 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.

[Chris Ericson, COO at Red Cat]

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 standalone 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.

[Chris Ericson, COO at Red Cat]

I'll now turn the call over to Christian to discuss our financial results.

[Christian Morrison, CFO at Red Cat]

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 six 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.

[Christian Morrison, CFO at Red Cat]

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 six 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.

[Christian Morrison, CFO at Red Cat]

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 autonomous technologies, while helping maintain our competitive edge in rapidly evolving defense markets. 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.

[Christian Morrison, CFO at Red Cat]

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.

[Christian Morrison, CFO at Red Cat]

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.

[Christian Morrison, CFO at Red Cat]

Second, our manufacturing footprint, inventory position, and production readiness provide us with the ability and speed to scale deliveries as opportunities materialize. 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.

[Jeff Thompson, CEO at Red Cat]

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 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. Let's look at the bigger picture.

[Jeff Thompson, CEO at Red Cat]

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 six months of 2025, we generated just $4.8 million in total revenue and recorded a gross loss of about a half a million dollars. Fast-forward to the first half of 2026, and the contrast is dramatic. Combined first half 2026 revenue is $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. 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 one year ago.

[Jeff Thompson, CEO at Red Cat]

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 four deployed soldgineers who operate ankle to ankle with warfighters 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. warfighters.

[Jeff Thompson, CEO at Red Cat]

As excited as 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 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 sq ft of manufacturing space. Fast-forward to today, our scale, capacity, market positions are completely transformed. We enter the second half of 2026 backed by nine active products, approximately 270,000 sq ft of expanded production capacity, and unit economics featuring average selling prices in the hundreds of thousands of dollars rather than tens of thousands.

[Jeff Thompson, CEO at Red Cat]

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, 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 two strategic acquisitions, and massively scaled production. The factory is the weapon. I'll now turn it over to questions.

[Operator]

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please click the raise hand icon on the bottom of your screen. Once your name and company are announced, please accept the promotion to panelist. Please make sure to have your microphone unmuted. One moment please, while we poll for questions. Thank you. Our first question comes from the line of Austin Bohlig with Needham & Company. Please proceed. Austin, you're still on mute.

[Austin Bohlig, Senior Analyst at Needham & Company]

All righty. Can you hear me now?

[Jeff Thompson, CEO at Red Cat]

Yes.

[Christian Morrison, CFO at Red Cat]

Yeah, we can hear you.

[Austin Bohlig, Senior Analyst at Needham & Company]

Congrats on the good first half results. Just maybe first wanted to dig into the Q2. 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.

[Jeff Thompson, CEO at Red Cat]

Yeah. There's very little anything other than currently for Q2, other than Black Widows and Hellcats. That's still Q2 is mostly driven out of Teal. That's already, as we already mentioned today, APM 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. We didn't break it out for which stuff is FANG, which stuff is Black Widows or anything like that.

[Austin Bohlig, Senior Analyst at Needham & Company]

Okay, fair. 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?

[Jeff Thompson, CEO at Red Cat]

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. General Phillips just got a two-star upgrade. He used to run it, and now they have new people in there. We'll be able to continue with that, but only half of that revenue came from the Army.

[Austin Bohlig, Senior Analyst at Needham & Company]

Okay.

[Christian Morrison, CFO at Red Cat]

Yeah. Austin, if I can jump in. Jeff's spot on. 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 and our relationship with the Army is very strong. For the first six months, Jeff is right. It's right about 50%. What I'm so excited about as the CFO is the diversification. Our number two customer is an ally in Japan. Our number three customer is NSPA in Europe. Great story. Love how the business is growing and the customer base is expanding.

[Austin Bohlig, Senior Analyst at Needham & Company]

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

[Jeff Thompson, CEO at Red Cat]

Great. Yeah, some great questions, Austin. The confidence is coming from, we've been in Japan twice, working with folks on the Variant 7. Now actually not Variant 5. We've got a new name for it. You'll hear about it soon. There's a lot of interest, thousands of boat interests 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 mi away on a phone, using TAC. There's a lot of interest in that region. We're spending a lot of time there. Like I said, we've been to Japan twice this month. We were in Taiwan. We were in Korea. I'm heading back there in mid-September. There's a ton of interest there. The Middle East has actually ramped up. Everyone's talking about USVs now.

[Jeff Thompson, CEO at Red Cat]

There's so much interest coming from that, back into just budgets, right? The administration has told the Department of War that they want 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. The budget from last year is still not fully spent. The international operations are just insane. Like for instance, again, we're in four 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.

[Jeff Thompson, CEO at Red Cat]

People are also now starting to understand that for the Drone Dominance Program, the fact that you need an ISR drone. We're so happy that the DDP has, really looking at how that you have to have an ISR drone to complete that. You should be hearing something from the Ukraine opportunity probably in the beginning of September from us.

[Austin Bohlig, Senior Analyst at Needham & Company]

All righty. Awesome. Well, best of luck in the second half. That's all for me.

[Chris Ericson, COO at Red Cat]

Thank you, Austin.

[Operator]

Thank you. Our next question comes from the line of Ashok Kumar with ThinkEquity. Please proceed.

[Christian Morrison, CFO at Red Cat]

You there, Ashok?

[Jeff Thompson, CEO at Red Cat]

He's muted still. No.

[Ashok Kumar, Head of Equity Research at ThinkEquity]

Can you hear me now?

[Operator]

It looks like you'll have to unmute.

[Chris Ericson, COO at Red Cat]

Yes.

[Operator]

There you go.

[Ashok Kumar, Head of Equity Research at ThinkEquity]

Okay, great. Thank you, Christian, Jeff, and Chris. Back to the second half coverage question, the roughly $114 million of second half revenue, the low end of your annual target. How much is covered today by executed purchase orders of funded contract line items, and how much remains in the pipeline? Going back to the cost structure, as you highlighted, the OpEx stepped up to 43% sequentially to $42 million. The R&D was doubling. What drove the step up? Which programs absorbed the R&D increase? It's Q2, the new base, what quarterly revenue reaches operating breakeven and which quarter do you expect to cross it? The last question is the margin bridge, right? Gross margin improved from 13%-16%. Can you bridge us to the 30% you targeted for late this year, right?

[Ashok Kumar, Head of Equity Research at ThinkEquity]

What margins do Army Japan and vessel revenues each carry, and does 30% survive a vessel volume flip into 2027? Thank you.

[Christian Morrison, CFO at Red Cat]

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

[Jeff Thompson, CEO at Red Cat]

Yeah, sure

[Christian Morrison, CFO at Red Cat]

divide and conquer? Just on the R&D, it's everything that we talked about. Drone Dominance Program 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. It's easy to see the dollars. It's hard to see the weekend hours and all the time that the team's putting in that you have to have those products be successful. The investments are being made right now, real time in R&D.

[Ashok Kumar, Head of Equity Research at ThinkEquity]

Thank you, Christian.

[Christian Morrison, CFO at Red Cat]

Yeah. The next question, I'm drawing a blank. You were saying, margin profiles?

[Jeff Thompson, CEO at Red Cat]

Well, I can take some-

[Christian Morrison, CFO at Red Cat]

Okay. Back end? Okay

[Jeff Thompson, CEO at Red Cat]

some of the questions. 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. 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. There's lots of things that we can elaborate over the next few weeks for everybody to people understand why we're so confident.

[Ashok Kumar, Head of Equity Research at ThinkEquity]

Thank you, Jeff. The last question on the inventory conversion and gross margin, primarily the gross margin bridge, right? The transition from 16%-30%.

[Chris Ericson, COO at Red Cat]

Yeah, a lot of that gross margin will increase as we approach the end of the year. As our revenue ramps, our production ramps, there's going to be a lot of economies of scale that's going to drop that down, as well as the improvement from a mix of our USVs. We do expect to hit 30% towards the end of the year. It might not be cumulative for the year, but towards the end of the year, our margins will hit 30%.

[Jeff Thompson, CEO at Red Cat]

Yeah. Christian, you might want to comment on what Teal and Blue Ops look like if they hit their forecast that is part of our target revenue.

[Christian Morrison, CFO at Red Cat]

No, absolutely. We spent a lot of CapEx, a lot of investment in Blue Ops. The great thing about the USV business is that our ROI is pretty fast on that. Jeff's right, if we hit our Q4 internal targets, we will absolutely have a profitable division within Blue Ops. The hurdles are not that high. You're talking boats here. It's less than 10 boats, and we're adding free cash flow to the business.

[Ashok Kumar, Head of Equity Research at ThinkEquity]

Right.

[Christian Morrison, CFO at Red Cat]

On the Teal side, if we have incremental upside on Hellcat, we are there. On a standalone basis, those businesses are performing like we believe they can and will be on track to be profitable by the end of the year.

[Ashok Kumar, Head of Equity Research at ThinkEquity]

Got it. Just as a last question on Army transition, right? Replacement revenues from new programs arriving on time as your revenue base transitions, right? Are there any developments related to SRR to LRIP to OTA sequence, right, where there might be more of a timing issue there?

[Jeff Thompson, CEO at Red Cat]

Well, they just went through a huge change. Once we have more information on that, we will get that to you once I meet the new team, which I'm hoping to later tomorrow or early next week. As soon as we have something to report. They just put in a whole new team, which is pretty exciting because we didn't know if they were going to keep going with that, and obviously they are with a whole brand-new team in the SRR and PM UAS, and they actually just funded some stuff in the LRR portion to AVAV. We have a very unique customer base now for 2027. We really have to focus a lot.

[Jeff Thompson, CEO at Red Cat]

If you look at the Department of War, the new Drones Czar, the DIU, and DAWG, all of those things are set up to go really fast without long programs of record. We're about to apply for SWAP. That was on the DIU website last week, and you got till Monday to submit for that $100 million. It's for a boat that has drones on it. We feel pretty good about that. We'll see. The down select is only like a week after the submissions. That's a pretty unique item for us. You can see that these things aren't just coming from old school procurement programs of record. These things are fast hitting. You got to reply for them, like DDP Crucible. There's also some stuff going on in Swarm Forge. These crucibles are quick, and the allocations to the people that win is quick.

[Jeff Thompson, CEO at Red Cat]

The Drone Dominance could be $14 million-$28 million just in Q3 for us. You got to adapt to learn how these new organizations like the Drones Czar, the DAWG and DIU work together, and how they filter up to the Department of War, as we continue to try to be a resource for all of them, in giving our lessons learned in Ukraine and other places and other theaters that we've been in recently.

[Ashok Kumar, Head of Equity Research at ThinkEquity]

Got it. One last question and congratulations again. This is just the finish of the raw materials of $60 million, right? Which suggests shipping is auto limited rather than production limited, and your reserve ratio is down to 2% from 9% in December. Is that just a qualitative comment on that? Once again, congratulations.

[Christian Morrison, CFO at Red Cat]

I'll say. Chris had my back on this, we're upgrading cameras right now. We're in the process. It's part of the reason why our margin has improved. Before, that's why our margin was negative. If the Army wanted to make an adjustment, tweak engineering, we just ate those costs because we're a great partner. Now we're at the part of where we are maturing, doing cost downs in the product, improving it. We have scale. It also means that we have more raw materials than we have before.

[Chris Ericson, COO at Red Cat]

In our raw materials, as we start to build up the Hellcats as well, they're the same hardware, the same product. There's no reason and no need to write off any inventory. The reserve as a percentage of the total inventory has gone down.

[Ashok Kumar, Head of Equity Research at ThinkEquity]

Okay. Thank you, Jeff, Christian, and Chris.

[Chris Ericson, COO at Red Cat]

Thank you.

[Christian Morrison, CFO at Red Cat]

Yeah.

[Operator]

Thank you. Our next question comes from the line of Alex Latimore with Northland Capital Markets. Please proceed.

[Alex Latimore, Research Associate at Northland Capital Markets]

Hello, can you hear me?

[Christian Morrison, CFO at Red Cat]

Yes.

[Chris Ericson, COO at Red Cat]

Yep.

[Jeff Thompson, CEO at Red Cat]

We got you, Alex.

[Alex Latimore, Research Associate at Northland Capital Markets]

Hey, guys. Great quarter here. A question for me. I think I might have had it answered, but I just want to get some clarity. It sounds like the timing of revenues should step up sequentially 3Q into 4Q. I'm assuming that would be on contracts coming online in 3Q, fully materializing in 4Q. Some confirmation there. What is the rough split of UAV and USV revenue in the second half that you expect?

[Jeff Thompson, CEO at Red Cat]

Yeah. We haven't given specific guidance on splits yet. We just got our first revenue for Blue Ops. They're on the board, the division's been around less than a year. They've won every exercise they've gone to, which is pretty exciting. The boat is getting a great reputation. We just put a Volvo engine in for the USV, which was requested by a certain country in the Middle East. They wanted the Volvo engine. It's something that they're looking for. We won't be breaking it out, but you're correct. There's a lot of stuff happening right now, contracting. Not just us, everyone in the defense industry. You're going to see a lot of contracts coming on board in the next few weeks, going into September. People delivering.

[Jeff Thompson, CEO at Red Cat]

I think we've got between $50 million and $80 million of sellable drones that could ship tomorrow if we got the order. That's basically the Black Widows, basically, and Hellcats. That's sitting there based on our demand that we're seeing and possible contracts that we're hopefully going to sign.

[Alex Latimore, Research Associate at Northland Capital Markets]

Awesome.

[Jeff Thompson, CEO at Red Cat]

Q3 and Q4 are going to obviously ramp dramatically, just like last year.

[Alex Latimore, Research Associate at Northland Capital Markets]

Okay. Understood. Then to dig into APM a bit there, can you talk about the opportunity both qualitatively, maybe from partnerships with Anduril, how that positions you to win different market share outside of Swarm Forge? Then, if you can comment on the financial prize pool opportunity of Swarm Forge as well.

[Jeff Thompson, CEO at Red Cat]

Well, again, we haven't announced anything on projections or forecasts specifically for APM. We just recently closed on the deal. They have hit the ground running. They needed to build their team up. They did. Their technology is one of the best swarming technologies I've ever seen. It's super reliable. If you've ever been to a swarm event, they're not usually super reliable. We'll be getting you more details on these new acquisitions, including Quaze, which we did a demo in Fort Eustis, and I couldn't believe the amount of interest that we got on the Quaze mat. Mostly for the mounted soldiers for the Army. They're requesting them already, to do a trial actually in California like two weeks ago, a week after that Fort Eustis demonstration. The way Quaze can expand things, is you can get further into country.

[Jeff Thompson, CEO at Red Cat]

You don't have to touch anything. If you're in Ukraine, you can leave those mats out there, stay in the trench and not run out to change batteries. There's so much stuff that Quaze and APM together can do and can drive for revenue, it's too early for us to start making projections on these acquisitions we just closed.

[Alex Latimore, Research Associate at Northland Capital Markets]

Understood. That is it for me. Thank you, guys.

[Christian Morrison, CFO at Red Cat]

Thanks, Alex.

[Chris Ericson, COO at Red Cat]

Thanks, Alex.

[Jeff Thompson, CEO at Red Cat]

Thanks, Alex.

[Operator]

Thank you. Our next question comes from the line of Brian Dobson with Clear Street. Please proceed.

[Chris Ericson, COO at Red Cat]

You're on mute right now, Brian.

[Greg Pendy, Equity Research Director at Clear Street]

Hi.

[Chris Ericson, COO at Red Cat]

Hello.

[Greg Pendy, Equity Research Director at Clear Street]

Hi, it's Greg Pendy in for Brian Dobson.

[Chris Ericson, COO at Red Cat]

Okay.

[Greg Pendy, Equity Research Director at Clear Street]

Just was wondering if you could touch on the gross margin expansion and how that might look out in the second half. You showed good gross margin expansion year-over-year and sequentially in 2Q, but now we're going to see a big pop in revenue. Just how should we be thinking about that?

[Jeff Thompson, CEO at Red Cat]

Yeah, I'll touch upon it then let the expert finish, Christian.

[Christian Morrison, CFO at Red Cat]

Sure.

[Jeff Thompson, CEO at Red Cat]

Just like when we had the Teal 2, a product we launched, you can see this thing already happening the same way as the Teal 2 happened. When we started the Teal 2, we went from a negative, like we did last year with a negative margin, into a positive margin. We went from 10%, then I think to 20%, then we get to a 30% gross margin before we kind of turned down the Teal 2. That's right about where we've been talking about. Christian just mentioned that Teal, if they hit the numbers that they're forecasted to hit, will be at cash flow breakeven, and same thing for Blue Ops. Those margins obviously got to increase to get to those points. Christian, if you want to be the detail guy in the margins.

[Christian Morrison, CFO at Red Cat]

Yeah, sure. We're just at that stage right now, Greg. That's the name of the game where we're a good partner with the Army. They have changes, we made the changes, but we can't operate at such a low gross margin forever. We've been very strategic and deliberate how we do that. We don't want to suffer any quality. We want better quality, better price, better scaling. That's where we're at right now, but we are really excited about Blue Ops. The higher the Blue Ops concentration, the higher the margins. The margins are that accretive to the overall business.

[Greg Pendy, Equity Research Director at Clear Street]

Great.

[Greg Pendy, Equity Research Director at Clear Street]

Very helpful. Thanks a lot.

[Christian Morrison, CFO at Red Cat]

Yeah.

[Operator]

Thank you. There are no further questions at this time. I'd like to pass it over to Jeff Thompson for any closing remarks.

[Jeff Thompson, CEO at Red Cat]

Yeah, I just want to say, again, thanks for everybody for joining us on this call. We're hitting our stride. All the hard work we did over the last year is paying off. We're really focused on building our revenue. As I said at the Innovation Day, 2026 is huge revenue ramp, and then we want to be going into 2027 focusing on profitability. We're very well-financed. We have a lot of money in the bank. We're going to continue to expand our products like we've done with the Hellcat, getting actual support from the front lines, from the zero line, that's going to make sure that our war fighters have the best product in their rucksack or on top of our boats. Again, thanks everybody, and we'll see you in three months.

[Christian Morrison, CFO at Red Cat]

Thank you.

[Operator]

This concludes today's webinar. You may disconnect your lines at this time. Thank you everyone for your participation.

Participants

Executives

• Chris Ericson, COO
• Christian Morrison, CFO
• Jeff Thompson, CEO

Analysts

• Ankit Hira, Investor Relations Representative at Solebury Strategic Communications
• Austin Bohlig, Senior Analyst at Needham & Company
• Ashok Kumar, Head of Equity Research at ThinkEquity
• Alex Latimore, Research Associate at Northland Capital Markets
• Greg Pendy, Equity Research Director at Clear Street