EPS of $-0.18 decreased by 82.6% from previous year
Gross margin of -1.5%
Net income of -13.33M
""What we are doing now is we're taking the Black Widow, which is the winner of SRR Soul Source, which is going to be 12,000 drones out there. We're partnering with Palantir's visual navigation and their artificial intelligence Maven... this drone is going to be very difficult to defeat in a battlefield. And when you add our strike capabilities, you're really giving a war fighter something that's going to make them safer and more lethal."" - Jeff Thompson
Red Cat Holdings Inc (RCAT) QQ2 2025 Earnings Analysis: DoD SRR Momentum, Palantir Collaboration, and Path to Profitability in a Transformational Drone Platform
Executive Summary
Red Cat Holdings (RCAT) reported a net operating loss and ongoing cash burn in Q2 2025 as it transitions from a near-term product mix dominated by TL2 to a broader Black Widow/Mass Production strategy anchored by the US Army SRR program and a newly announced Palantir software integration. Revenue for the quarter stood at $1.5347 million, down 73.8% year over year and 44.7% quarter over quarter, with a gross margin of -1.53% and an EBITDA of -$8.74 million. Management emphasized a deliberate pivot toward high‑margin, software-enabled hardware and a multi‑year runway for scale, forecasting a substantial improvement in gross margins through mass production (target up to 50% gross margins on a consolidated basis) and software upsell on each drone. The company also raised guidance to a baseline of $55 million (from $50 million) with a wide long‑term target range of $80–$120 million, reflecting SRR‑related revenue and anticipated DoD contracting momentum. Near-term liquidity remains tight but manageable given a recent $6 million financing, potential ~$3 million in January from new features, and the prospect of strategic capital facilities. The CFO transition announced during the call adds execution risk but is being mitigated by a pipeline of internal and external candidates. Looking ahead, RCAT is positioned to monetize the SRR program through both hardware production and high‑margin Palantir-enabled software, with LRIP kicking off in January 2025 and full-rate production anticipated in the second half of 2025. The investment thesis hinges on (i) timely SRR program execution and DoD budget release, (ii) successful integration and pricing of Palantir visual navigation software, (iii) the lawful expansion into non‑DoD markets once DJI/Autel constraints materialize, and (iv) disciplined capital deployment to minimize dilution while optimizing working capital needs.
Key Performance Indicators
Revenue
1.53M
QoQ: -44.73% | YoY:-73.76%
Gross Profit
-23.48K
-1.53% margin
QoQ: 95.14% | YoY:-102.13%
Operating Income
-9.12M
QoQ: -17.97% | YoY:-104.99%
Net Income
-13.33M
QoQ: -7.40% | YoY:-142.95%
EPS
-0.18
QoQ: -5.88% | YoY:-82.56%
Revenue Trend
Margin Analysis
Key Insights
Revenue: $1.5347 million in Q2 2025 (four-quarter window shows Q2 2025 revenue of 1,534,727 USD); YoY change: -73.76%; QoQ change: -44.73%.
- Revenue: $1.5347 million in Q2 2025 (four-quarter window shows Q2 2025 revenue of 1,534,727 USD); YoY change: -73.76%; QoQ change: -44.73%.
- Gross Profit: -$23,475; Gross Margin: -1.53% (YoY gross margin deteriorated materially vs prior periods).
- Operating Income: -$9.116 million; Operating Margin: -5.94%.
- Net Income: -$13.334 million; Net Margin: -8.69%.
- EBITDA: -$8.744 million; EBITDA Margin: -5.70%.
- EPS: -$0.18; Weighted average shares outstanding: ~76.19 million.
- Cash flow (operating): -$10.139 million; Free cash flow: -$10.163 million; Net change in cash: -$3.1217 million; Cash at end of period: $4.6111 million.
- Balance sheet (selected): Total assets $51.092 million; Cash and cash equivalents $4.611 million; Total debt $13.820 million; Net debt $9.209 million; Total stockholders’ equity $27.028 million; Retained earnings negative at approximately -$106.882 million.
- Liquidity/ratios: Current ratio 1.43; Quick ratio 0.60; Cash ratio 0.31; Price-to-book 8.63; Price-to-sales 151.90; EV/Revenue and EV/EBITDA not favorable due to negative earnings; DSO ~65.8 days; Inventory turnover ~0.13; Long-term growth drivers remain tied to SRR delivery timings and software monetization.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
1.53M
-73.76%
-44.73%
Gross Profit
-23.48K
-102.13%
95.14%
Operating Income
-9.12M
-104.99%
-17.97%
Net Income
-13.33M
-142.95%
-7.40%
EPS
-0.18
-82.56%
-5.88%
Key Financial Ratios
currentRatio
1.43
grossProfitMargin
-1.53%
operatingProfitMargin
-594%
netProfitMargin
-869%
returnOnAssets
-26.1%
returnOnEquity
-49.3%
debtEquityRatio
0.51
operatingCashFlowPerShare
$-0.13
freeCashFlowPerShare
$-0.13
priceToBookRatio
8.63
priceEarningsRatio
-4.37
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key management themes from the earnings call include the strategic pivot toward hardware tailored for the SRR program with Palantir software integration to drive margins, a near-term guidance uplift tied to SRR-related revenue, and ongoing liquidity management while the company executes its growth plan. Highlights by theme:
- Strategic partnership and product differentiation: Jeff Thompson and Geoffrey Hitchcock discussed the Palantir visual navigation platform and Maven AI integration as a high-margin software add-on to every Black Widow drone, addressing battlefield navigation, GPS-denied operations, and EW resilience. Quote excerpt: We are taking the Black Widow... partnering with Palantir's visual navigation and their artificial intelligence Maven... this Black Widow is going to be one of the most capable birds ever fielded by the DoD, and this software will add to our margins and hopefully accelerate our path to profitability.
- Guidance and market opportunity: Management raised the baseline revenue target to $55 million and signaled an expansive range of $80–$120 million, inclusive of SRR‑related revenue, with LRIP and full-rate production milestones anticipated in 2025. Quote excerpt: We upped our guidance from $50 million to $55 million goal posts and we put some kind of wide goal posts out there, $80 million to $120 million.
- Operational development and timing: LRIP kick‑off planned for January 2025; ongoing Army discussions for R&D contracts and potential LRIP/full-rate production contracts; Edge 130 integration and future expansion to Triton platform noted. Quote excerpt: LRIP starts again, continues to still start in the first half of 2025. Full rate production still starts in the second half of 2025.
- Caution on execution risk and CFO transition: Leah Lunger disclosed her resignation for family reasons, with interim CFO candidates identified; management indicated multiple financing avenues (debt warrants, strategic capital facilities) to mitigate dilution; Stan’s Q&A cadence indicated potential NATO/EU contract activity contingent on SRR outcomes.
- Competitive and policy context: Palantir collaboration and DoD budget cycles are highly sensitive to continuing resolutions and budget allocations; the team highlighted a favorable shift away from DJI/Autel within a forthcoming NDAA framework, potentially expanding the TAM in law enforcement and civil uses.
"What we are doing now is we're taking the Black Widow, which is the winner of SRR Soul Source, which is going to be 12,000 drones out there. We're partnering with Palantir's visual navigation and their artificial intelligence Maven... this drone is going to be very difficult to defeat in a battlefield. And when you add our strike capabilities, you're really giving a war fighter something that's going to make them safer and more lethal."
— Jeff Thompson
"We upped our guidance from $50 million to $55 million goal posts and we put some kind of wide goal posts out there, $80 million to $120 million."
— Jeff Thompson
Forward Guidance
RCAT’s forward-looking view rests on three pillars: (1) SRR program execution and scale, (2) monetization of Palantir-enabled software across Black Widow and future platforms (Edge 130, Triton), and (3) strategic capital options to preserve equity. Key observations and assessment:
- Baseline and upside: The baseline guidance of $55 million (up from $50 million) plus a stated long-run target of $80–$120 million implies material SRR contributions and software-driven upside. The absence of fixed pricing for Palantir software creates execution risk until pricing and contracts are finalized.
- Revenue mix and margins: Hardware alone targets roughly 50% gross margins at scale; Palantir software margins are historically high (80–90% in quoted commentary), suggesting potential substantial margin uplift if software attachments scale with unit volumes. However, the current quarter shows negative gross margins, underscoring the transition risk from TL2/smaller early run-rate to mass production.
- Timing risk: LRIP in January 2025 and full-rate production in H2 2025 depend on Army contracting cadence, funding approvals, and the speed of SRR-related procurement. The continuing resolution andNAVAL/NATO demand cycles add variability to the pace of backlog growth.
- Financing and liquidity: The company outlined multiple non-dilutive or low-dilution funding options (Office of Strategic Capital loan program, warrant exercises, additional financing) to maintain liquidity while expanding capacity. Investors should monitor actual drawdowns and terms, as well as the timing of new orders from SRR and related DoD programs.
- Key monitorables for investors: (a) execution of LRIP and transition to full-rate production, (b) priced Palantir software attachments per drone, (c) cadence of government contract awards and budget approvals, (d) cadence and profitability of Edge 130 and FlightWave manufacturing ramp, and (e) CFO/management stability and capital deployment strategy. Overall, the investment thesis hinges on successful deployment of a software-enabled airframe at scale with a favorable DoD budget cycle and a credible path to profitability within 12–24 months absent further equity dilution.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
RCAT Focus
-1.53%
-5.94%
-49.30%
-4.37%
QUBT
31.70%
-28.78%
-7.18%
-1.89%
RGTI
64.50%
-5.21%
-10.20%
-3.46%
QBTS
63.60%
-8.63%
82.60%
-2.61%
STRC
79.00%
-2.13%
-17.90%
-1.65%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
RCAT presents a bifurcated risk/return profile. On the one hand, the company has a compelling strategic position driven by SRR program adoption, a robust hardware roadmap, and a potential material margin uplift from Palantir-enabled software. On the other hand, near-term profitability remains elusive as the company expends cash to scale production and integrate software across a growing product family. The investment case improves if (a) LRIP and production milestones occur on plan, (b) Palantir software attach pricing is finalized and monetized at scale, and (c) non-DoD revenue streams materialize (e.g., first responders, NATO, civil markets) with acceptable margins. Monitoring milestones include DoD budget clearance, LRIP/full-rate production start dates, Palantir pricing and integration progress, and the evolution of liquidity facilities (Strategic Capital loan program and warrant exercises). In valuation terms, RCAT trades at elevated price-to-sales and price-to-book ratios driven by speculative growth expectations; a disciplined path to profitability and improved operating cash flow would be essential to justify valuation multiples absent further equity issuance.
Key Investment Factors
Growth Potential
- Large TAM tied to SRR program execution and broader DoD aviation modernization.
- Palantir software attachment could materially raise gross margins well above hardware-only levels, potentially enabling a path to profitability as production scales.
- Edge 130 and FlightWave integrations expand the product family, enabling cross-sell to DoD and civil markets once restrictions ease on foreign vendors.
Profitability Risk
- Short-term negative profitability and ongoing cash burn; sensitivity to DoD funding cycles and continuing resolutions.
- Execution risk around LRIP and transitioning to full-rate production.
- Pricing uncertainty for Palantir software attach rates; dependence on pricing clarity and contract terms.
- Leadership transition (CFO) could introduce governance and execution risk during a critical growth phase.
Financial Position
- Balance sheet shows substantial goodwill and intangible assets with negative retained earnings, signaling a history of investment and required operating losses to build capability.
- Short-term liquidity supported by a recent $6 million financing and potential additional inflows (doD features, warrant exercises, strategic capital loan program).
- Cash burn metrics indicate a need for steady back‑end financing to fund working capital during production ramp; debt levels are manageable but the company remains levered given negative earnings.
SWOT Analysis
Strengths
Strategic SRR program win positioning Red Cat as a defense-focused, high‑barrier-to-entry supplier.
Palantir visual navigation and Maven AI integration, enabling GPS-denied, real-time battlefield operations and higher-margin software attachments.
Expanded product family (Black Widow, Webb, Edge 130, FlightWave) with a plan for mass production and scalable margins.
Potential to monetize a large TAM as DJI/Autel constraints increase domestic demand for non-Chinese drones.
Weaknesses
Significant near-term losses and negative gross margins as the company transitions to mass production.
High cash burn and dependence on DoD funding cycles and LRIP/production awards.
Leadership transition risk with CFO resignation introducing governance and execution uncertainties.
Uncertain timing of LRIP/full-rate production and pricing for Palantir software attachments.
Opportunities
Large addressable market from SRR and related NATO/European opportunities.
Regulatory tailwinds from potential DJI/Autel bans creating a taam for domestic drone manufacturers.