Red Cat Holdings Inc Stock

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%?

Yes. A lot of that gross margin will increase as we approach the end of the year. So 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, but we do expect to hit 30% towards the end of the year. So it might not be cumulative for the year, but towards the end of the year, our margins will hit 30%.

Yes. And 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.

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. And Jeff's right, we hit -- 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. On the Teal side, if we have incremental upside on Hellat, we are there. So on a stand-alone basis, those businesses are performing like we believe they can and will be on track to be profitable by the end of the year.

Good. And just the last question on Army transition, right, replacement revenues from new programs arriving on time as the revenue base transitions, right? So are there any developments related to SRR to LRIP to OTA sequence, right, where there might be more of a timing issue there?

Yes. 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. So as soon as we have something to report, but 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 PMUAS, and they actually just funded some stuff in the LRR portion to AAV. But we have a very unique customer base now for 2027.

We really have to focus a lot. If you look at the Department of War, the new drones are, the DIU and DAWG, all of those things are set up to go really fast without long programs of record. And we're about to apply for SWAP that was on the DIU website last week, and you got until Monday to submit for that $100 million, and it's for a boat that has drones on it. So we feel pretty good about that. We'll see. The down select is only like a week after the submissions. So that's a pretty unique item for us. But 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. So I mean, the drone dominance could be $14 million to $28 million just in Q3 for us. So you've got to adapt to learn how these new organizations like the drones are, 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.

Got it. One last question, and congratulations again. Just the finish -- the raw materials, the $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. So is that just a qualitative comment on that?

Yes. I'll say -- I mean, Chris, I'm back on this, but on -- we're upgrading cameras right now. We're in the process. It's part of the reason why our margin has improved. I mean before, that's why our margin was negative. I mean if the Army wanted to make an adjustment, tweak engineering, we just take 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.

Yes. In our raw materials, there's no indications. Let me see how best say this. As we start to build up the Hellcats as well, they're the same hardware, the same product. And so there's no reason and no need to write off any inventory. So the reserve as a percentage of the total inventory has gone down.

Our next question comes from the line of Alex Latimore with Northland Capital Markets.

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. So some confirmation there. And then what is the rough split of UAV and USV revenue in the second half that you expect?

Yes. So we haven't given specific guidance on splits yet. We just got our first revenue from Blue Ops. They're on the board and the division has been around less than a year. and 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 is something that they're looking for. So 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 and people delivering. We've got -- I think we've got between 50 million and 80 million of sellable drones that could ship tomorrow if we got the order. And 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. Q3 and Q4 are going to obviously ramp dramatically, just like last year.

Okay. Understood. And 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? And then if you can comment on the financial pride pool opportunity of Swarm Forge as well.

Yes. Well, again, we haven't announced anything on projections or forecast specifically for APM. We just recently closed on the deal, and they have hit the ground running. They built -- they needed to build their team up. They did. Their technology is one of the best swarming technologies ever seen. It's super reliable. And if you've ever been to a swarm event, they're not usually super reliable.

So we will -- 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 were -- they are requesting them already to do a trial actually in California like 2 weeks ago, a week after that Fort Eustis demonstration. The way Quaze can expand things is you can get further into country. 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. But it's too early for us to start making projections on these acquisitions we just closed.

Our next question comes from the line of Brian Dobson with Clear Street.

It's Greg Pendy in for Brian Dobson. Yes, just was wondering if you could kind of 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. So just how should we be thinking about that?

Yes, I'll touch upon it and then let the export finish, Christian. So just like we had -- when we had the Teal 2 product we launched, you can see this thing already happening the same way as the TL 2 happened. So when we started the Teal 2, we went from a negative like we did last year with negative margin and to a positive margin. We went from 10%, and I think to 20%, then we get to a 30% gross margin before we kind of turn down the Teal 2. And 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, we'll be at cash flow breakeven. And the same thing for Blue Ops. So those margins obviously got to increase to get to those points. And Christian, if you want to be the detailed guy on the margins.

Yes, sure. I mean we're just at that stage right now, Greg. I mean that's the name of the game where we are 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. And 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.

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

Yes. 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 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 whatever the -- or on top of our boats. So again, thanks, everybody, and we'll see you in 3 months.

Thank you.

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

Gentlemen, thank you so much. Greetings, and welcome to the Red Cat Quarterly Earnings.

[Operator Instructions]

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ankit Hira, Investor Relations. Thank you, Ankit. You may begin.

Good afternoon, and welcome to Red Cat's First Quarter 2026 Earnings Conference Call. Joining us are Red Cat's CEO, Jeff Thompson; COO, Chris Erickson; and CFO, Christian Morrison. Please note that certain information discussed on the call today will include forward-looking statements for future events at Red Cat's business strategy and future financial and operating performance, including Red Cat's target revenue. 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, May 7, 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.

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 Jeff.

Thank you, Ankit. Good afternoon, and thank you for joining Red Cat's Q1 2026 Earnings Call. Secretary Hegseth last week at a hearing on the Hill announced that Defense Autonomous Warfare Group, DAWG, will have a $54 billion budget for drones, drone dominance, and counter. But also said it would be closer to $74 billion and added that announcing a new unified command that would add to this $74 billion and is made-in-U.S.A. only. This is 2027 funding, which is only 4.5 months away.

On top of this good news, the DOW has stated they intend to spend the 2025 $156 billion reconciliation bill related to defense in fiscal 2026. It's not going to go over 3 years now. Only $30 billion has been obligated through April. Fiscal 2026 also ends in 4.5 months. The funding has finally been turned on in a big way for 2026 and is magnitudes higher for 2027, specifically for UAVs and USVs. These are great tailwinds, so let's get started.

I'm pleased to report we delivered record quarterly revenue of $15.5 million, representing an 849% increase compared to the same period last year. This is remarkable growth considering the government shutdown at the end of last year. I'm going to review our opportunity pipeline to tie into our target revenue with our multi-domain family of systems. We'll start with FAN and drone dominance, then FlightWave TRICHON , of course, the Teal Black Widow and then finally, the BlueOps fleet. Then Chris Erickson will review operations. Then Chris Morrison will review financials, and then we will take your questions.

So let's start with FANG and drone dominance. We are gearing up for Gauntlet II in August. We have been working with the DDP and believe this will be a much smoother and realistic competition. FPV drones, which are called shooters, need a sensor to complete the sensor, shooter kill chain. We believe we are the only made in USA company with a blue-list approvals sensor, Black Widow successfully deployed in Ukraine and other theaters. We believe that 350,000 FPV drones would need between 10,000 and 17,000 Black Widows depending on ratios of sensors to shooters. Red Cat is integrating our targeting from the Black Widow into FANG and other FPV partners. This gives us tighter integration into the kill chain and a competitive advantage.

FlightWave. Our first demo TRICHONs are being delivered in a few weeks. The features on this new version are stunning. The demand for the Edge 130 has always been significant. But as you know, it is too fragile for war fighters. We'll be updating the Street in the upcoming months, but believe this can be a winning drone in suites this year.

On to the Black Widow. We could spend an hour on what we've been doing with the Black Widow. The Black Widow is currently in three theaters. Word spreads fast when you have a combat proven capability and the scale to produce them. This led to an invite to the Pentagon to share lessons learned as a successful platform in the most contested battlefield in the world. Most importantly, we want to bring these capabilities back to the U.S. war fighter. The Black Widow is EW-proven and capable, proven in GPS-denied battlefields, flight time of 52-plus minutes and over 10-kilometer range. These features have positioned the black widow with a large opportunity pipeline for 2026. This pipeline consists of the U.S. Army with our final LRIP contract soon and the OTA, Marines, Air Force, drone dominance, Ukraine, Japan, Philippines and Taiwan.

We currently have the supply chain and inventory to build $220 million worth of Black Widows and can step on the gas if needed. As we reported last quarter, the Ukraine opportunity could be for over 100,000 Black Widows. We are completing the final integrations actually this week and hope to have them tested next month in theater.

Let's talk about the Blue Ops fleet. The Valdosa factory is operational. We have started 3D printing, the 5-meter boat. We have approximately 145 fiberglass hulls built -- to be built this year, and we will have approximately 100 3D printed boats. That's a potential of approximately USD 150 million in sales this year. The Variant 7 has received a lot of attention recently with President Trump talking about the machine gun that is mounted on the Variant 7. The machine gun is made in U.S.A. by our partners, ACS. This combination is very powerful.

The Strait of Hormuz has been a great example of the need for this type of weapon system. Our team is in the region now by invitation, and we believe we will be a very valuable partner in the Arabian Peninsula. We have also been invited to INDOPACOM next month, and we'll be participating in the RFP for the 1,300 USVs in Taiwan, which will be awarded first quarter next year. Look forward to your questions, and we'll hand it over to Chris.

Thank you, Jeff. Good afternoon, everyone. Our operational performance in Q1 2026 reflects the strength of our execution capabilities and our ability to scale efficiently in response to unprecedented demand. We achieved a remarkable operational metrics by supporting the $15.5 million in quarterly revenue while simultaneously improving our gross margin to 13%. The increase in margin is a testament to our operational discipline and process optimization while significantly scaling our manufacturing footprint more than 500% year-over-year. We expect our margins to continue to improve through 2026, moving us closer to our ultimate target gross margin of 30%.

Now as a point of emphasis, please note, our current manufacturing footprint is specifically designed for growth and efficiency and can support well over $1 billion of annual revenue between our UAVs and USVs. The operational landscape has evolved dramatically with customers demanding faster delivery cycles and enhanced performance specifications. We've responded by investing strategically in our supply chain resilience and manufacturing capacity, enabling us to meet accelerated delivery timelines while maintaining the rigorous quality standards essential for military applications. Our inventory and prepaid inventory position of $62.7 million demonstrates our proactive approach to securing critical components and positioning ourselves for continued growth and acceleration.

During the quarter, we successfully navigated several operational challenges, including supply chain complexities associated with specialized drone components and temporary disruption caused by the federal government shutdown. We address these challenges through diversified supplier relationships, strategic inventory positioning and enhanced production planning. Our team's agility in adapting to these conditions while maintaining delivery commitments underscores the robustness of our operational framework. We are committed to continuous innovation and next-generation platform development.

These investments have yielded significant product enhancements across our drone portfolio with particular focus on extending flight endurance, improving payload capacity and enhancing autonomous navigation capabilities. Our engineering teams have successfully integrated advanced sensor technologies and improved communication systems that provide superior situational awareness for operators in the field.

The Black Widow platform continues to set industry benchmarks with its exceptional reliability and versatility in diverse operational environments. Recent enhancements include upgraded imaging systems with enhanced low-light performance, extended battery life, providing up to 52 minutes of flight time and improved weather resistance capabilities that enable operations in challenging conditions. Also, just this past month, the Black Widow became the first Group 1 UAS device to successfully integrate with Anduril's Lattice platform. And we have integrated the Black Widow with SignLink, Ukraine's battle-proven satellite-free GPS-denied positioning network system. The SignLink integration completes the development phase and birds will be delivered to Ukraine at the beginning of June for validation testing and the final step to start replacing hundreds of thousands of Chinese-made drones in Ukraine.

These improvements directly address customer feedback, operational requirements and strengthening our competitive advantage and customer satisfaction levels. Our newly acquired Apium swarm robotics capabilities represent a quantum leap in coordinated unmanned operations, enabling multiple drones to operate autonomously as a unified system. This technology provides unprecedented tactical advantages, allowing for complex mission profiles, including coordinated surveillance, area coverage and synchronized data collection that would be impossible with individual isolated devices.

Red Cat's unique value proposition lies in our integrated ecosystem approach, combining best-in-class hardware with sophisticated software solutions and comprehensive support services. Our platform delivers a unified client experience from initial deployment through ongoing operations with intuitive control interfaces, real-time data analytics and seamless integration with existing military command and control systems. This holistic approach reduces training requirements, accelerates deployment time lines and maximizes operational effectiveness, creating substantial value for our customers while building long-term partnership relationships that drive recurring revenue opportunities.

Now, with that being said, 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 first quarter of 2026, which demonstrates steady improvements, strong operational leverage and the scalability of our business model. For the first quarter of 2026, revenue was $15.5 million, representing an increase of 849% from $1.6 million in the prior year period. This performance was primarily driven by continued drone deliveries under our U.S. Army short-range reconnaissance program, deliveries of our Black Widow drones to a European NATO ally and deliveries of FlightWave Edge 130 drones. These deliveries reflect increased order volumes, enhanced manufacturing capacity and an expanding geographic footprint, coupled with diversified product offerings.

We believe these results validate the strength of our core business as we move into a significantly larger phase of growth. Our gross margin performance was also impressive, improving from negative in Q1 2025 to positive 12.7% in Q1 2026. This improvement in positive territory reflects the operating -- the operational leverage inherent in our business model, improved manufacturing efficiencies and better cost management as we scale our production volumes.

The positive gross margin improvement marks a significant inflection point, demonstrating our ability to generate profitable revenue growth. Our strategic investments in future growth were substantial during the quarter. Operating expenses increased to $29.3 million, driven by investments in personnel and infrastructure to support the scaling and volumes required to achieve the significant revenue growth we expect in 2026 and beyond.

We continue to focus on research and development expenses, which increased to $8.0 million during the quarter, reflecting our commitment to innovation and next-generation platform development. These investments are critical to maintaining our technological leadership and expanding our addressable market opportunities across military, government and commercial applications. Capital expenditures totaled $6.8 million during the quarter, which primarily included manufacturing equipment and facility improvements at our Blue Ops USV division in Georgia and other company-wide infrastructure to support our production scaling requirements.

Our balance sheet strength and liquidity position provides a solid foundation for executing our growth strategy and capitalizing on the significant opportunities ahead. As of March 31, 2026, we maintained exceptional liquidity with net working capital of $190.6 million. This representing a robust current ratio that ensures our ability to meet operational obligations and invest in growth initiatives without financial constraints. Our cash position of $131.9 million reflects our strategic deployment of capital to support rapid business expansion and inventory positioning for anticipated contract fulfillment. The substantial inventory and prepaid inventory balance of $62.7 million represents a strategic investment in securing critical components and positioning ourselves for accelerated delivery capabilities.

This inventory build reflects our proactive supply chain management and confidence in our contract pipeline, ensuring that we can meet customer delivery requirements in an environment of strong demand while mitigating potential supply chain constraints. Looking ahead, we are confident in our ability to deliver strong financial performance for the remainder of 2026. Our target annual revenue for the short to medium term is expected to be between $150 million and $180 million, representing significant growth compared to 2025. As revenues materialize over time, we expect gross margins to approach 30%.

Several key factors are driving our target revenue. First, the resolution of the federal government shutdown has cleared the path for accelerated contract execution and payment processing, eliminating some temporary headwinds. Second, our strategic inventory positioning ensures we can meet aggressive delivery time lines without supply chain delays. Third, our Blue Ops division is trending ahead of schedule in its production capabilities of USVs with increasing demand signals. In addition, our recent acquisition of Apium Swarm Robotics and our pending Quaze Technologies acquisition expand our addressable market and enhance our competitive differentiation in high-value segments.

It is important to note that we expect increased revenues as we anticipate our Blue Ops and FlightWave divisions will begin to provide meaningful revenue contributions. The timing of our short-range reconnaissance program deliveries, combined with the letter of request from the Armed Forces of Ukraine and our ever-growing international contracts that include NATO and INDOPACOM allies and other opportunities in the Middle East represents significant growth opportunities. Market conditions remain exceptionally favorable with global defense spending continuing to prioritize unmanned systems and our ability to continue to unlock substantial international opportunities.

The increasing urgency around drone technology adoption demonstrated by accelerated procurement cycles supports our expectation of continued strong demand through 2026 and beyond. And with that, we're now happy to answer your questions. Operator, will you please open the line for Q&A?

[Operator Instructions]

Our first questions come from the line of Mike Latimore with Northland Securities.

Can you hear me?

We can hear you now. You went blank for a little while.

All right. Great. Yes. So maybe just a little clarification on the guidance. You guided to a certain range, very strong growth relative to '25. You said short- to medium-term range. Can you just sort of clarify what that means a little bit?

Yes. So our target revenue of $150 million to $180 million is -- it says it right there annual, so short to medium term. So we are -- we've spent the last almost 8 months in Ukraine working on the Black Widow to get it to where it is. It's very interesting because we're one of the only people that are doing this. Everyone says they're not going to use stuff in the Army or any other these contracts in the U.S. unless it works in Ukraine. If you looked at our competitors, specifically in this range of drone, they're making craft that hasn't changed in 2 years. Our drone changes every 3 weeks.

So with that, we have been able to build an amazing opportunity pipeline for just a [Teal] is close to like $700 million. So now that the funding has been unleashed, we are ready to perform. We have everything we need to start shipping. We are proven. Everyone likes the equipment. Everyone likes what we're doing. We're also -- we just got -- I don't know if you saw the announcement by the Air Force about the F-35s working with the Black Widow displaying our screens there. So that target revenue of $150 million to $180 million, we are very comfortable with, considering the -- again, the opportunity pipeline just for the Teal Black Widows is almost $700 million.

And then, Jeff, you gave some numbers on the production volumes for the USV this year. Can you just mention those again? I didn't quite get them. What's the -- is that going to go into inventory? Is that to support programs? Or is that like maybe a little more clarity on that?

Yes. So the -- as you know, Blue Ops did not exist and -- 7 months ago, 8 months ago now. And a lot of you on this call have been to our location during Innovation Day. And that location is filled with potential customers every week now. From every branch, from every agency, we got invited to an exercise recently. I can't talk about it, but we are crushing it. And the demand and the opportunity for Blue Ops is massive. As I mentioned, we were invited to the region of the Strait. That wasn't us that we were invited by some very important people. But we do have some hard constraints when you're building boats. They're much bigger and larger than what Mitch is building for the Teal Black Widow.

Mitch could turn it up from $220 million to $500 million very rapidly and very easily. He's got -- he's going to be building $221 million, no matter what, this year. So -- but with the boats, we -- because we only had 1 mold, now we have 2 molds. It's -- we're limited by molds and tooling to make boats. So we can't make the tooling go any quicker. They're hard to make and they take time. So we -- our first year, we're making more than we said earlier, we're going to make 145 fiberglass hulls. So that -- and we believe they're all going out the door. And then on top of that, we just started printing this week the 5-meter, more Kamikaze style, 5-meter 3D printed boats.

Now you noticed that I said that's about 245 boats altogether, but I only said -- it's only $40 million probably if we sell all those plastic boats and about $90 million if we sell all of the fiberglass boats this year. So we can sell plastic 3D printed -- 5-meter Kamikaze boats very inexpensively and with still great margins.

Now as Christian talked about earlier, as we -- the [ Teal too ] went from negative 10% to 10% to 20% then to 30% gross margins. We believe we can replicate that with the Black Widow. But that gross margin that we're trying to get to in Q4, trying to close in on that 30% would change dramatically if we sell more boats. If we sell all these boats, that margin would go up. And we haven't put anything in from any of the software from Palantir, which is still moving along. We actually have another meeting with them tomorrow.

People are now starting to want to look at visual navigation. As we're in multiple theaters, we're getting a lot of interesting demands for that software.

Got it. Great. And then just last on the -- you talked about the FANG opportunity, drone dominance and the need for the black widow and better sensors in that program. What -- if they bought these Black Widows for the drone dominance program, would that come through the funding for drone dominance or would that be a separate allocation?

Well, this has been a discussion with all the people that are involved there, and we've been trying to help them. So I think what drone dominance is about $1 billion, if I'm correct. So if you're going to buy 350,000 FPV drones, they're useless without a sensor, which -- I mean the way they're used, and we're in theater every single day is a drone like the Mavic 3 typically from DJI finds the targets and then tells the FPV drones where to go. They don't just go out and search for them because they have horrible cameras in their analog. It's like driving through snow.

The way they're used in the Ukraine has a sensor, which is an ISR drone similar to the Black Widow, and we're hoping to replace all them. So if you buy 350,000 drones and don't have a sensor, those 350,000 FPV drones are actually useless. So people are starting to get that. So they're going to start having ways to have a sensor shooter in the Gauntlet. So if you look at different ratios, we did a low ratio, we did a medium ratio. We did never -- we didn't even do a high ratio. And that's 10,000 to 17,000 Black Widow-style drones.

You can't get around that. If it's not us, it's going to be someone else. And by the way, our competitors, their drones, they don't work. They're crap. They haven't changed them since 2024. We change ours every 3 weeks. There are requirements document. That's what they do. They go to requirements and they build crappy drones. And sorry, I digress.

Our next questions come from the line of Austin Bohlig with...

Can you guys hear me?

Yes. I can hear you now, Austin.

Just first one, I just want to go back to kind of like the new updated guidance. I think historically, you guys have provided some granularity on like what's Black Widow, FlightWave, USV. Would love any additional color of how we should be thinking about the different buckets driving this outlook.

Well, that's a great question. So as I was mentioning in our opportunity pipeline, we've got -- I'll give you some -- I'm not going to give exact numbers for each customer. But with the Army, you got LRIP, which we're working on our final contract for that. So that will finally be over with. And then we go into OTA, which we've been simultaneously negotiating with. It's very linear with them. We also have other branches in the Arm services that are -- to be frank, some of them are bigger than SRR. The SRR is such an antiquated program. It really hasn't kept up with the numbers compared to other branches that are now getting their funding and looking for ways for their soldiers to get products that actually work in battlefields.

Drone dominance is another bucket. Just -- I'm just talking Black Widow right now, Austin, for your models. Drone dominance is also, we believe, is going to be a pretty good bucket for us for the end of this year and into 2027. We've got Israel is going to be a part of this. The Air Force, which they put out their own announcement about the Black Widow, working with the F-35s. We don't know how big that's going to be. I think there's about 500 of those. And then Ukraine, we didn't even put Ukraine fully into our opportunities pipeline because the opportunities pipeline will go from like $700 million to $2 billion immediately.

So we're giving some caution around Ukraine until we get through next month, but that has actually been our focus. Ukraine -- if you own a business and everyone is asking, hey, what OTA, OTA, OTA, I'm like, did you guys not listen to the last call, we could replace hundreds of thousands of drones in the Ukraine and they want them and they need them and they're going -- we talk to them every week. That should be the focus. And to be frank, the Army might barely -- probably won't make it into the top 3 of customers on revenue this year, even though they're going to be a great staple and a great platform.

So Ukraine is another bucket. Japan, we announced recently, they're continuing to buy. And then we have an incredible trip to Taiwan, Korea and Japan next month, and we'll hopefully be able to update the Street on some of those adventures. So that's just the bucket for Black Widow for your modeling, okay?

When you go into Blue Ops, we are physically limited by the amount of boats we're going to make of about 245 boats made this year, which is phenomenal. And going into '27, we hope to get to that 650 to 1,000 at least production numbers that we can get to. So Blue ops, if you capped it and it's mostly V7s, but there are going to be some V5s. We're making V5s and V7s with the 3D printing. So we can use that to listen to customer feedback as we're doing that. So -- but that one kind of has a cap unlike Mitch McDonald, the President of Teal, can step on the gas from that 221 that he's building this year in a month, so -- and change dramatically how many drones we can deliver.

And then FlightWave, we still have that pinned around $40 million in production this year -- in the second half of the year. So if you put all those -- you put all that just the production that we can do that we're going to do no matter what, it's $388 million in 2026.

Okay. That's super helpful. And I guess kind of like going down the P&L, how should -- it might be a better question for Christian. How should we be thinking about kind of OpEx throughout the year on a quarterly basis? Is what you guys did on an absolute a pretty good run rate? How should we be thinking about that?

Yes, that's going to go up a little bit in the back half of the year. It just naturally has to. But yes, it's within the realm. I'd probably flex it up maybe 15%, 20% for the back half of the year.

Our next questions are going to come from the line of Brian Dobson. Brian with Clear Street.

So how important is the integration of Anduril's Lattice into your weapon systems? You mentioned that Black Widow is now in the system. Do you believe that's going to be a gold standard for Pentagon procurement?

I can take that because I've been involved pretty deeply with that. Thanks for the question, Brian. Nice to finally meet you. So there was a notice yesterday throughout the Army that we got that if you're not integrated into Lattice, you're not working with the Army is kind of the message. I just paraphrase that. It's not the exact wording. And we were -- the event that we were at last few weeks ago we were the only people there from the SRR program and that had integrated and has actually integrated into Lattice, as Chris Erickson mentioned earlier. So yes, I believe that if you're not integrated into Lattice, you're going to have some problems going forward. You're going to get forced to do it no matter what.

Yes, very good. And then I guess just shifting gears a little bit. So on Blue Ops, unmanned surface vessels, relatively new domain for the company. Maybe you could just give a little bit of color on what you see as the opportunity there over the next 2 or 3 years? And how you view demand evolving, not only from the United States, but from our allies when compared with, call it, air system demand?

Yes. So the bottom line is Blue Ops could probably surpass all of the UAVs next year. The demand -- let's face it, 70% of the world is water, and we can launch our other products from this. But the market is massive, and there's not a lot of quality players. What we started as boat builders. And what we're seeing a lot, and I can't give any details, but we've been in a lot of situations where our competitor's boats are failing and ours are actually prevailing because we started as boat builders and we build sturdy boats that can get smashed around and are very high quality. And then you put your tech stack on it.

But if they can't handle the ocean, the ocean eats everything. So you -- there's nothing it doesn't want to eat. So you have to make your boat super, super reliable, specifically when they're going as fast as ours go and when they have the capabilities that ours have, a human couldn't stand on that boat, they would get sick or get hurt doing the turns and the speeds that we're doing it. Now add the payloads, which makes us super unique is we're talking about -- the President talking about these machine guns from ACS. They are great anti-FPV and anti-Shahid killers. So this is a very sought-after combat weapon system right now all over the globe. And we're over there now, and it's very important for us. We think that our allies will be buying a lot of USVs. And we came out of this -- the interesting part is drones had never been mass manufactured in the United States.

The boat industry has been going on for hundreds of years, and we got the best boat builders, we believe, in the world. So we started with high, high, high quality and based on a third-generation product that's already been in theaters. So we had a kind of a head start, which put us at the front of the line. And now we're competing and we're proving everyone that we do have what we believe is the best USV out there. Now we can do different sizes. We went from whiteboard to floating in the water by December with our first boat. Now we can compress that down with 3D printing to weeks.

We can try new models. And now our mold capability, we can actually start making our own molds in the next few months. So we won't have to rely on people that make our tooling. We'll make our own tooling. So the opportunity for the USVs is massive, but it also helps create a combined -- we can put our Black Widows on there. We can put the TRICHON on there. We've partnered with ACS. There's so many payloads that want to be on our boat right now. We are getting massive traction with the Variant 7 right now.

Yes, that's great. And correct me if I'm wrong, I think some of your boat builders came from Hinckley Yachts. So slightly different application, but impressive maritime heritage. So just one final one for me. You made some exciting tuck-ins during the quarter. How do you see these benefiting the broader platform? And how are you thinking about M&A going forward, right, in terms of your desire to either develop tech in-house or go out and buy it?

We've kind of been doing both because we -- I mean we built Blue Ops, as you know, and thank you for noticing that we've got one of the best premier families, and we're working with Hodgdon Yachts as our prototype shop, another premier boat builder. But we developed that entire tech-stack in-house. There's other things that we will acquire. We want to have a lot of vertical integration so that we own the entire boat. We own the entire drone, all of these things. We do a little bit of both.

So now that we have Apium to be able to do our swarming. We -- everyone keeps talking about swarming, but no one can do it reliably. So we're pretty excited about Apium. None of the Apium's revenue is in our target revenue. Nothing from Quaze is in there. So we're excited to show our swarming capabilities because now it's starting to show up in all the requirements across the DOW. So we are very happy that we're bolting that on. We can also swarm our boats with their technology.

Our next questions come from the line of Jon Hickman with Ladenburg Thalmann.

Can you hear me?

Yes. We got you, John.

I'm kind of brand new to the story, but a lot of the other questions have been very helpful. Could you elaborate a little bit on what the shutdown cost you?

We don't have any details on that. But just the delays alone, people are -- even though during a continuing resolution year, you're usually allowed to use the amount up to your previous budget. But for the entire SRR program, it was only $70 million. So that's not much for them to be able to say, "Hey, we got money to push around. And we ended up getting $40 million out of that once the shutdown was complete. So it's just delays. I don't think that it's going to cost us total. I think it's just got pushed out a month or 2. Just like everyone else that's in the defense industry, we are all feeling the spigot turn on in the last couple of weeks.

The money has loosened up. There's a ton of it coming. All of that $130 billion from the -- that they released for defense is going to be spent -- it has to be spent now if they're going to do it for fiscal '26 by the end of September. And then the budget, which was hundreds of millions of dollars, is now $74 billion with whatever they're going to add on with a unified command for drones, counter-drones, USVs, and drone dominance. So the drone -- which starts October 1, just a few -- 4 months away.

So the -- now that we have budgeting on time, like the year before, we didn't have a budget, at least this year, we have a budget. And next year, we have a massive budget. So I don't think there'll be delays, but you can never tell with government. So we're hoping it stays smooth and the numbers are so large, you have to be able to produce and we can produce. So we're pretty excited about that. But we don't see it as a loss. We just see it got moved to the right and timeline.

Okay. So I know you were ranting earlier about competition. Is there a competitor you're worried about or we expect?

Yes. And the -- I would say more so in the boat space because I mean, we went in a down selection process, and there was a clear winner. Those are the Army's words, not ours. And if you don't change your bird at all, if it's a 2-year-old bird, -- that's not going to make it. So that doesn't really scare me. We're in the front. We're ankle to ankle with the Ukrainian war fighters at the zero line, and we're changing our birds all the time. We have some great, great team that's doing that for Red Cat. And we're continuing it. We're already in 3 theaters now because of this method of showing our products to people is let's go to the front line and do that. So our product changes every 3 weeks right now. It's probably going to go down a week or days.

We have an office in Ukraine now, and we're going to be hiring some local coders. So we're going to be going really fast with the Black Widow and our competitors are going really slow. In the boats, there are some -- there's some people that have been around for a long time like Kraken. So I'm not going to say the same types of things about them. Then there's -- well, obviously, Saronic, I think they moved up to like the bigger boats, but they're probably -- we haven't really seen them in theater yet with us. So they're probably a good company. Then you've got Black Sea, which makes the dark, which -- when we were at Portugal, I don't think they won anything there, but I'm not sure about them.

But what you will see, I think, in the boat industry, you're going to see us do really well by our performance as a boat builder. And then what's very, very unique, which I've said it a million times about the Edge 130 and now the TRICHON, it does stuff that no other drone does, and it had a huge amount of demand, but we do not want to put a bad taste in people's mouths and ship them these drones and they break in a couple of weeks.

Actually, we brought them to the Ukraine with our new radio systems in them just to test them. They loved our fixed wing solution, but the bird barely lasted a full day. So that bird is probably the most unique with competitive advantage than our other products.

And one question about the sensor being for your drones. Do you make that sensor yourself? Or is that outsourced?

Well, sensor is just kind of a term for sensor-shooter. The sensor is the black widow drone or like -- let me back up because a lot of people do not understand how this works with FPV drones. They've never been in Ukraine. They never work with these people. Why have these teams that have a bunch of FPV drones with them, and they don't go out and just search for targets. They have an ISR drone. Typically, right now, it's DJI Mavics, which we're hoping to replace. They go through 350,000 of those DJI Mavics in Ukraine right now. So the Mavics go out and find the tanks or the motors or the human beings, and they tell the FPV guys where to go.

Sometimes it's literally verbally. It's that primitive, but it's very effective. 80% of the deaths are from FPV. So in drone dominance, if they just buy 350,000 FPV drones, they're kind of useless. Actually, they're absolutely useless. They're analog cameras and they're very hard to see. So you need a sensor. It's just a term. It's not like an actual sensor that senses stuff. The Black Widow has a bunch of sensors that gets it out there in contested environments and finds the bad guys and tell the FPV guys, the shooter, what to go kill.

So it's basically a sniper rifle, you would never use a sniper rifle without a scope. We're the scope, they're the sniper rifle.

And that's all done electronically. It doesn't -- no human intervention there.

For -- well, lots of times in Ukraine because these are DJI drones are not going to interface with anything else. You can't call DJI and say, "Hey, can you make our FPV drones integrate for targeting. With us, we will, we will do that. We're doing it right now for drone dominance. So we believe that the drone dominance program is going to need significant amounts of sensors, which are ISR drones, if not the Black Widow, it's going to have to be some ISR drone.

Thank you so much. This does conclude today's question-and-answer session. I would now like to hand the call back over to Jeff Thompson for any closing remarks.

Great. Thanks for coming. We are super excited about this year. It's going to be -- as you've seen with our target revenue, it's going to be a great year. And I want to thank a lot of people. We've got a team of people going around the globe working with these war fighters. We're in 3 theaters right now because of that. And that feedback gets back to our factories. And I want to thank all the factory workers in Teal at Salt Lake City. You guys are doing amazing jobs. We're getting orders and we ship them the next day because we have so much production. And the same with Valdosta, which I can't wait to get back up there, hopefully next week. That factory is going to be exciting when people get to see it. We're having a big ribbon cutting there. Everyone is really crushing it in our factories across the globe. The factory is the weapon and look forward to seeing you folks next quarter.

Thank you. Thank you so much. That does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.

Greetings, and welcome to the Red Cat quarterly earnings. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ankit Hira, Investor Relations. Thank you, Ankit. You may begin.

Good afternoon, and welcome to Red Cat's Fourth Quarter and Full Year 2025 Earnings Call. Joining us 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 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, March 18, 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 will contain references to non-GAAP financial measures such as adjusted EBITDA and key business metrics. 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 link available on the Investor Relations section of the company's website at ir.redcatholdings.com.

With that, I'll now turn the call over to Jeff.

Thanks, Ankit. Good afternoon, and thank you for joining Red Cat's Q4 2025 Earnings Call. I'm going to let Chris Ericson, our COO; and Chris Morrison, our CFO, discuss last year's extraordinary Q4 results, which annualized would be over $100 million. I am going to cover Blue Ops, Black Widow work in Ukraine, drone dominance and guidance.

A year ago on the same call, we announced our new mission, Maritime USVs. We found a management dream team in the early summer to build this division. The new team spent many weeks in Europe to learn how these boats were so successful against the Russian Navy. By August, we had preliminary designs. And by December, we had a boat in the water driving autonomously and out-of-the-box ATAC capable.

We found a boat factory in Georgia, signed a lease for 155,000 square feet. That factory just went operational approximately 1 month ago, and we'll have full rate production tooling later this month. We believe and are confident that they can build over 100-plus USVs in 2026 as we ramp up production capability to thousands.

Blue Ops is a strategic and important part of Red Cat's family of systems. It opens the rest of the globe for Red Cat. Our family of systems was limited to 30% of earth. With our new Variant 7 and other hulls, we can now launch from 100% of the globe. We believe that our Blue Ops USVs can keep our war fighters out of harm's way and make them more lethal. We believe Blue Ops could be very helpful in Venezuela, in the USVIs, the Gulf of America, Cuba and urgently in the Strait of Hormuz.

Blue Ops demonstrated partners on Innovation Day that was timely. We demonstrated short-range and long-range counter drone capability. For short range, we have the ACS Bullfrog on the front of the Variant 7 that can shoot down FPV drones up to 1,500 yards and can do the same to a Shahed-136. For long range, we have the Aeon's Zeus that can travel 20 kilometers and take out Shahed-136 at a very low cost. The 2 weapon systems combined on the Variant 7 controlled miles away can deliver a potent deadly deterrent for short-range and long-range counter drone operations.

Let's move on to recent work in Ukraine with the Black Widow. Last fall, we deployed a team to Ukraine in hopes to get them a drone to replace the Chinese ISR drones and to verify the drones we are delivering to soldiers would work in an actual battlefield. The team received an MOU and an LOC and recently LOR, a letter of request. I'm going to have Chris Ericson, who just got back from Ukraine last night, give more details on this mission. I also want to thank the Red Cat ICC team for this hard and dangerous work.

Drone dominance. As you know, we do not make the cut at drone dominance Gauntlet I. I have a ton of excuses, but I'm not going to go there. We are preparing for Gauntlet II and hope to have better results. But we believe even if we lose every stage of the Gauntlet, we will still be one of the larger beneficiaries of the program. There's going to be a total award of 350,000 FPV drones. Going by the Ukrainian ratio of 20:1, that requires 17,500 ISR drones or 8,750 SRR systems. Sensor shooter requires a sensor, and that's what the Black Widow is. We will support the Drone Dominance program in any way we can.

Guidance. We are not currently ready to offer official guidance. We want to have our government contracts in hand before we give guidance. We do not want a replay of last year during the continuing resolution. Fortunately, we have a budget for 2026, which also just received an additional $150 billion, and it looks like we'll be getting another $50 billion for Iran. We don't have to wait until the next quarterly to give an update on guidance. And as soon as we have the contracts in hand, we will update the market.

And with that, I will hand this to Chris Ericson.

Thank you, Jeff, and good afternoon, everyone. With that intro, I'll skip ahead a little bit and talk about the most interesting part of my script. Yes, I just returned from Ukraine yesterday. My first overarching impression is that I was in awe of the spirit of resiliency of the Ukrainian people. They continue to show how David could stand up to Goliath, and my favorite retort to that comment was only comparable if David wasn't given a sling and rocks.

We have now established an office in Kyiv and have a fabulous team. We are building the business and relationships to most effectively, one, test our equipment at the front and obtain true feedback; two, identify new product and integration partners with battle-proven technology; and three, use this knowledge to increase the efficacy of our unmanned systems. I'm happy to report that we have tested multiple systems at the front and proven that our tech works and works really well. This has now resulted with Red Cat receiving a letter of request from Ukrainian forces to provide our systems to begin replacing the use of Chinese-made ISR drones.

Black Widow's compact rugged design and secure communications architecture has proven invaluable in real-world deployments, which will contribute directly to mission success for our defense customers. And finally, this past week, we entered into a joint development agreement with a Ukrainian state-owned partner to bring new battle-proven technology to our USVs. This agreement is a huge step forward as we are the first nongovernmental entity to successfully enter into this type of deal, which will enable the future transfer of battle-proven technology to us and our allies.

So let's change directions a little bit and talk about how the factory is the weapon. We have quickly learned through current global conflicts how important -- how important factories and capacity are critical infrastructures in supporting a country's defense. Over the past year, we focused on acquiring talent, improving processes and tools, transforming from a fast-moving start-up to a repeatable, high-reliability production enterprise that can deliver quantity and quality and stability to our customers.

Our operational performance in Q4 2025 reflects the successful execution of our multi-domain strategy and our ability to adapt rapidly to the evolving defense technology landscape. We achieved remarkable production scalability while maintaining the quality and security standards our defense customers demand. This represents our ability to search production capacity, demonstrating the operational agility that sets Red Cat apart in the defense contractor community. We remain on track to scale Black Widow Drones output to 1,000 units a month in the first half of 2026, and our USV boat manufacturing will have first deliveries expected in Q2 of 2026.

The regulatory landscape shift following NDAA Section 1709 implementation has fundamentally changed how we operate, creating unprecedented opportunities while requiring enhanced focus on supply chain security and domestic sourcing. We responded by strengthening our American manufacturing capabilities and expanding our network of trusted domestic suppliers. Our NDAA-comliant supply chain has become a significant competitive differentiator, allowing us to capture market share from foreign competitors who can no longer serve defense and government customers.

Our manufacturing expansion has been transformational with overall facility square footage increasing from 36,000 square feet last year or 2 years ago to 254,000 square feet in Utah and across new locations in Florida, Georgia and California. Our Salt Lake facility now operates at an impressive capacity, having produced 50 Black Widow drones per day, proving the ability of producing 1,000 drones per month on a single shift. The facility has room to triple the manufacturing lines and add additional shifts.

Our FlightWave facility in Torrance can produce 125 Edge 130 drones per month using only 1/3 of its available space. Additionally, our Valdosta, Georgia facility provides 155,000 square feet dedicated to our expanding Blue Ops maritime production capabilities and room to produce more than 100 boats per month. This strategic expansion positions us to meet accelerating customer demand while maintaining our commitment to quality and security standards.

During the quarter, we triumphed when faced with the challenge of rapidly scaling production to meet accelerating customer demand and still maintained our rigorous quality standards. This record quarter. We also expanded our manufacturing partnerships, most notably with Hodgdon Shipbuilding to ensure ability to quickly pivot for growing demands across all operational domains.

Our expansion into maritime operations through Blue Ops represents perhaps our most significant operational advancement, extending our family of systems approach beyond the air and land domains to uncrewed surface vessels. These USVs leverage the same autonomous technologies and secure communications that have made our aerial platform successful while addressing the growing demand for maritime domain awareness and operations.

The partnership with Hodgdon Shipbuilding brings proven shipbuilding expertise to our advanced autonomous capabilities, creating a unique value proposition in the maritime defense market. This operational growth has truly placed us in prime position for the future where the factory is the weapon.

I'm sure you may have some follow-on questions, but first, I'll turn the call over to Christian to discuss our financial results, after which we'll take questions. Christian?

Thank you, Chris. I'm pleased to present Red Cat's financial performance for the fourth quarter and full year 2025, which represents a transformational period in our company's growth trajectory. For the fourth quarter of 2025, revenue was $26.2 million, up $25.0 million year-over-year and up $16.6 million (sic) [ $15.6 million ] sequentially as deliveries accelerated. This growth was driven by robust defense and government customer demand, our expanded program wins and our ability to rapidly scale production for mission-critical requirements.

Gross margin was 4.2%, up 85% year-over-year and down 2.4% sequentially, reflecting mix and ramp dynamics typical of our growth phase. For the full year 2025, revenue was $40.7 million, up $25.1 million year-over-year. Gross margin was 3.1%, up 332 basis points year-over-year, partially driven by scale benefits and manufacturing improvements. Gross margin can be volatile on a quarter-to-quarter basis due to revenue levels that include fixed costs reflected in our cost of goods sold and investments in productions that are not yet at scale.

We are continuously implementing more efficient processes and procedures that will enable us to capitalize on the expected increased demand and growth. Our ability to deliver and perform has remained strong alongside our focus on rapidly scaling operations, reflecting our disciplined approach to cost management and the premium value of our American-made secure drone platforms.

Operating expenses in 2025 were $67.8 million compared to $32.9 million in the prior year. This increase in operation -- in operating expenses were focused, planned and deliberate to enable us for the accelerated growth we experienced in 2025 and more importantly, for further growth expansion going forward. We increased our headcount by 85%, which primarily included increased engineers and corporate headquarter functional positions.

Research and development expenses were $17.9 million compared to $8.1 million in the prior year. This increase in R&D investments is focused on advancing our core platforms, developing new capabilities in artificial intelligence and machine learning and enhancing the interoperability of our family systems across air, land and maritime domains. Our investments in the business demonstrate the inherent value of positioning and the pricing power that comes with being a trusted domestic supplier in the defense market.

Regarding our investment priorities, we've made strategic investments across multiple areas to support our growth trajectory and maintain our competitive advantages. We remain focused on deploying capital across 3 key areas. The first area of focus is our USV division build-out, which is estimated to be a $30 million to $40 million investment to fully operationalize the division. Second, we remain focused on strategic acquisitions; and thirdly, increasing inventory and managing our supply chain to meet customer demand.

One of the most notable improvements in our financial profile has been our improved cash position and working capital management. Our cash increased from $9.2 million at the end of 2024 to $167.9 million at the end of 2025, providing us with substantial financial flexibility to pursue strategic initiatives and capitalize on market opportunities. These results demonstrate Red Cat's evolution into a premier defense technology company with the financial strength and operational capabilities to capitalize on the tremendous market opportunities ahead of us.

Our working capital position has strengthened considerably, driven by our enhanced cash position, healthy AR and strategic inventory investments. We increased our inventory from $13.6 million to $30.4 million during 2025, reflecting our proactive approach to supply chain management and our commitment to meeting accelerating customer demand. The strategic nature of this inventory build becomes especially important when considering the supply chain requirements and the extended lead times for specialized components in the current regulatory environment.

Looking ahead to 2026, we're positioned for continued strong performance driven by several key factors that reinforce our confidence in Red Cat's growth trajectory. While we are not providing annual guidance at this time, we expect to maintain revenue momentum throughout the year. Our revenues are supported by our expanding and increasingly diversified customer base and growing international presence. When we gain additional visibility as we progress throughout the year, we look forward to updating the market. We are also being mindful of the ongoing geopolitical developments that are currently in the headlines. We are also influencing our international expansion plans, particularly in the Middle East and Asia Pacific region.

While current allied relationships remain strong, changes in defense priorities or procurement policies could affect the timing or scale of international opportunities. We're also monitoring potential changes in defense spending priorities as new administrations and congressional leadership evaluate budget allocations across different military capabilities.

And with that, we're now happy to answer your questions. Operator, will you please open up the line for Q&A?

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

Congrats on the solid Q4 execution, guys, and it seems like the pipeline is really strong. Understanding you guys aren't giving kind of formal guidance, which I think is prudent, there seems to be a ton of tailwinds, everything from SRR to this bold opportunity, drone dominance now with this really unique opportunity in Ukraine. Any way you can give us some kind of different scenarios on what 2026 could look like?

Yes. And we don't want to get ahead of our skis again. But I mean, there's a range from all of you out there between $100 million and $170 million, very wild -- crazy goalposts right now. We're fine. We're very comfortable in the top half of that, but we're not ready to commit to it until we get contracts in hand to give our official guidance.

Okay. No, that's fair. And then just wanted to dive into this new Ukraine opportunity. This seems pretty incremental. Do you guys have any idea of like how many you could be potentially replacing?

Yes. Well, let me -- I'm going to have Chris Ericson answer that because he just got back last night, and he was in the room when they notified us.

Yes. So we were there with the war fighters and the guys who are collecting all the data there, and they came back and I asked them the question, they said 350,000 ISR drones a year, Chinese ISR drones is what they're going through a year on the Ukraine front, a massive number.

Wow, wow. So a big opportunity there. I guess kind of lastly for me and more just kind of want to touch on all businesses, the boat segment. Obviously, what's going on in Hormuz. Have you guys noticed any sort of increase in maybe RFP or interest just given the heightened conflict in the waterways or anything you could talk about there?

Yes. So Austin, you were at Innovation Day and 2 days later, the war started. And our biz dev team, all of our different teams have been getting stuff coming at us in every which way and direction some people calling, asking panic questions, what can we get here and now? As things calm down a little bit, it looks like there's going to be some pretty massive RFPs coming out of the Gulf states. They won't take as long as traditional RFPs. We're seeing an uptick in some Navy inquiries that were at Innovation Day. We are hearing a lot about counter. People want counter.

As I explained in my prepared comments, the Variant 7 has a great counter configuration with the ACS Bullfrog, which can take down FPVs and also can take down Shahed's at close range. And that combined with the Aeon's Zeus is something we're going very quickly at, and they're ramping very rapidly to be able to be a great solution, a counter solution for the Shahed's. And they also don't require a pilot like a lot of the Ukrainian solutions to take down a Shahed. So a lot of great tech coming out of Ukraine for counter Shahed's, but we think that we can also help dramatically in the Strait of Hormuz.

And you got to remember, this is -- everyone is talking about how this is so urgent right now in the Strait, but we believe that the Strait is going to need to be protected for not years, forever from now on. No longer is it going to be acceptable for the world to be held hostage by that one gap in small area there between the Persian Gulf and the Gulf of Oman. So we think this is a very long-term solution is to not have billion ships escorting tankers. We prefer to do it -- we prefer to do it with 30 or 40 USVs, 10, 20 on each side and/or doing port protection being close to the shore of Iran to make sure that nothing is coming out with our counter capabilities.

Well guys, keep up the great work.

Our next question comes from the line of Mike Latimore with Northland.

Sorry, I'm in an airport, so it might be a little bit noisy. I apologize. So I guess -- yes, congrats on the strong year. That was great. As you think about the full rate production contract, is that something that you would anticipate getting sort of one main order? Or would there be separate tranches over there?

Are you talking for the Black Widow with the SRR program?

Yes, sorry. Yes, exactly.

Yes. Okay. Because there's a -- we're going into full rate production, hopefully very soon with the boats also. So yes, great question. So as Austin alluded to earlier, there's an influx of orders related to Epic Fury. We're expecting, and again, not going to give dates to have our new OTA full rate production contract any day. We -- there is some possibilities of getting some immediate orders for Epic Fury, which might delay a week or 2 the other contract. But we're progressing the ship every month still for SRR and things are looking fantastic with the SRR program with their funding and now with Epic Fury and a lot of other needs that we're hearing out of the Department of War for Black Widows.

Excellent. And I think you -- in your prepared remarks, you talked about anticipating an order for the USV in the second quarter, I believe. I guess can you give a little more color there in terms of type of customer region, that sort of thing?

I'm sorry, I don't know which order in the second quarter you heard.

I thought you said something about a USV -- or anticipating a USV order in the second quarter. No?

No, we did not say that, but we are hoping -- people are very interested in our USVs. There's a lot of urgency around our USVs right now. We were previously going to use our first 15 for demos only. And now we're going to -- hull # 6, which is just coming out now today. Hull #6 from 15 are now going to be hopefully shipped to customers as quickly as we can make them.

Excellent. And last thing on -- you talked about getting to 1,000 drones a month. Would you sort of start building to that rate even before having the contracts?

We're there. We're doing that now.

Our next question comes from Ashok Kumar with ThinkEquity. Looks like we lost Ashok there. I don't see any more questions. And with that, I'll pass it back to management.

Great. Well, thanks, everybody, for coming on. We had about 400 people on this call today. A lot of exciting stuff happening across the globe. Chris Ericson's great news that we'll be working very hard on quickly and scaling to help fulfill all the things that are going on.

Again, we will not be waiting for an official quarterly call to update people on guidance. As soon as we have our contracts in hand, we will get that information out to the market. We're very excited. We still believe that every quarter is going to be a record going forward, and we're excited to get back to work. Thanks again.

Thank you, everyone.

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

Good morning, everyone. How are you? Welcome to West Palm Beach. My name is Stan Nowak. I am the Vice President of Marketing for Red Cat Holdings. Some of you, I know, some of you I am seeing for the first time. But again, welcome to Palm Beach. I do want to give a shout out to Barry Hinckley and the Blue Ops team. We're here in their new facility, for our Maritime division. Let's give it up for Barry Hinckley and the team, who not only our hosting, but put together the really this amazing experience you guys are going to witness today.

This is also our very first Red Cat Innovation Day. So I just want to give it up for that. Thank you. You guys are going to get a really truly an exclusive peak not only into our growth strategy and our business, but Phase 2 of today, you guys will see an amazing demonstration both drone and unmanned surface vessel. I want to thank all of you, our in-person attendees. Thank you, investors, analysts, partners for traveling [indiscernible] to get here. We really appreciate being here. Thank you to those who are tuning in online as well. We do have a live stream webcast of this. So thank you all of you to tuning in. Really, we truly appreciate your continued interest in Red Cat and our growth.

Today it's all about innovation, integration execution and where we're headed. So really, throughout the day, we are very open. We're going to have interactions between yourselves and our senior leadership throughout the day. There's going to be many moments to ask questions. First off, we're going to start with Jeff Thompson, who is going to go over our company overview. Let's get the disclosure statement out of the way for a couple of seconds. All right. We're done with that.

Okay. Today's agenda. Again, we're going to have each of our senior leadership come up and do a presentation on each of their respective areas. We will then have a Q&A session. So a lot of you in person will be able to ask questions. But then, if you can't get to your question then, we will have many interactions throughout the day. There is going to be a shell bus ride then all of us will then go to an off-site location to view the live demonstration. And so there will be also interactions on the bus as well. We'll provide refreshments throughout the day and make you guys as most comfortable as possible. Again, any questions you guys have throughout the day will make ourselves available. If you need anything, for those in-house restrooms, they are outside, just some housekeeping items there.

So here's the team is going to be presenting today. Again, starting with Jeff Thompson, who is going to do just a brief company overview. We'll then move to our Chief Operating Officer, Chris Ericson, who will discuss operational scale, manufacturing expansion and positioning our company to be accelerating demand, followed by our Chief Revenue Officer, Geoff Hitchcock, who will provide some insights into our pipeline and cover engagement. Will be followed by Barry Hinckley, President of Blue Ops, who will talk about our unmanned surface vessels and maritime strategy. And we will end the presentation with our Chief Financial Officer, Christian Morrison, who will talk about our financial strategy and capital allocation priorities.

Once that's done, we'll go into the Q&A. You guys can ask questions. We'll have about 30 minutes for that. And then after that, we'll all get on a shuttle bus offsite and go view the demo this afternoon. We'll give you guys a briefing on the mission that we're going to be doing. We are going to be immersing all of you into a true mission today. And so you guys get to [indiscernible] really how these missions are [indiscernible] and the why behind them.

So without further ado, I'd like to bring up the stage CEO, Jeff Thompson.

It's always tough to go after him. Very elegant polished and I'm a little rough around the edges. So I'm going to try to go through this presentation. I'm going to be very brief and then these guys are going to explain the key points that I do. I'm going to try to get through my presentation without pissing our lawyers off too much.

So 2026, is basically a massive revenue growth year for us. So just to put it in context, in 2025, we had 1 customer, 1 line item in the appropriations, and that was $78 million from the Army. For the PM UAS office, which has 3 groups in it. LRR, MRR and SRR. We are the SRR company. There's another one that's involved in that also. And then there's MRR, which is in production, yes, we're in a production contract. And there's [ LRR ], the large birds that is also not a production contract. So out of that $78 million Red Cat actually secured $40 million. It would have been $45 million if we had some birds on the shelf, but we didn't. So that's a pretty high percentage.

So if you fast forward to 2026, and we actually don't have a long continuing resolution this year, we actually have a budget and it's $426 million [indiscernible] plus an additional $56 million. So almost $500 million. And that same considering that we're in the only company that's in a production contract, I saw something in the print or in the J book that they're going to buy 107 vehicles and I haven't been able to find any information about LRR. So -- but my focus is on SRR. So we think we're going to have a really good year in 2026.

In 2027, the budget is going to go from $1 trillion to $1.5 trillion. So these budgets are not going to go down. They're going to continue to go up. So when we talk about revenue this year is going to be the focus of really ramping a massive revenue growth year for us, and it's not only going to be one customer, one product this year. The Air Force used to be our largest customer until probably 6 months ago. We've got a lot of other places. Now the Black Widow is getting them great accolades out there. We believe that we're going to have a great year with the Black Widow, but not just one customer. So that's pretty exciting.

We already actually have new customers already. We just announced our first into [ Paycom ] contract, which is just a start there for us is supposed to grow pretty rapidly there. But 2027, I'm not going to go in order here on these. 2027 is our focus will be path to profitability. But yes, it will still be massive growth each year as the budgets, not only at the U.S. is growing dramatically, but so are all the MODs across. Even Japan has a budget now. So we're basically building the Empire State Building this year, and then we're going to start charging rent next year for profitability.

So how do we get there? Well, everyone always asked us, are you going to be able to make them? Can -- you don't have enough production? Do you not have space this and that. We have spent the whole year building factories to be able to handle this [indiscernible] growth. We've been able to do 1,000 drones a month at Teal for a long time, but we haven't had the demand. And we expect to get that demand this year. So we've built out a brand-new factory in [ Terrence ] for the Edge 130. So the Edge 130 can start contributing. No more one drone, one customer, one product, one customer.

We expanded Salt Lake City, which Chris is going to go into some great detail on how many drones that thing can pump out now. And then we also have here, which is kind of more of a showroom laboratory. And we have [ Valdosta ], which is 155,000 square feet to be able to build a lot of boats. So we have the capacity to hit these large revenue numbers that we're going to be talking about.

So just more housekeeping is -- we're not going to be giving our own guidance today. This is not a numbers day, this is [indiscernible] day, but we report in about 19 days. We'll be giving you a lot more detail on where we expect the year to go at the end of next month. Well, March 18, I think we're right around there is when we're reporting. So 2026 revenue growth, 2027 revenue growth. 2027 focused on profitability. We have the capacity. Now we believe we don't have to build any new for at least a year, unless some new features or something else comes on. So now let's focus on new capabilities.

So when we -- new capabilities, I think of that, I think of Blue Ops. A year ago, when we started looking at doing Blue ops or doing a Maritime division, the Black Widow and the Edge 130 can only launch from about 30% of the globe, less than 1/3. When we bring Blue ops online, which didn't exist really until we just started in August. We already got boats floating in December. That's a new capability. It gives us an entire 100% of the globe to launch from. So that's a new capability that's a must-have. And then you look at the most important thing that we kept hearing from the administration telling us hey, you need counter. You have to have counter.

I give a shout out to [ ACS ] and Mike right [indiscernible] They are a counter. You're going to see that live. They do some crazy stuff. Actually, I just saw a video the -- it's out there on [indiscernible] not giving anything away. FPV drone on about 100 miles an hour, and they shot it down like 3 or 4 shots. It was incredible. So their counter is working, and it's here now, and you'll see 1 of them mounted on the front when you get out to the lake.

So we're looking for capabilities all the time. Swarming. We've got Josh from [indiscernible] and right over there, another shout out. You're going to see their swarming technology. And by the way, almost all swarming technologies I've ever seen, we kind of [indiscernible] just driving them in the background, or they didn't work, or they're trying to make them work. Their stuff works, and I'm not going to say how it works, but it's a unique way they do it, and you're going to see reliable swarming today, which really doesn't exist across a lot of places.

So we're going to keep looking at these new capabilities. But basically capabilities that the war fighter tells us to do. Not some engineers, I'm not going to [indiscernible] engineers here. I'm an engineer, but we need to use them as our capability. We need to use the warfighters as our capability. And I can tell you something that kind of pisses me off about capabilities is there's a lot of products that are being sold in the United States that don't work in a battlefield.

I can tell you right now. The [ Variant 7 ], we know it works in the battlefield. The Black Widow. We know it works in a battlefield. And more recently, with our incredible team, I'm not going to let you know about them yet. Even the Edge 130 we know works in a battlefield. So our family [indiscernible] obviously worked to Battlefield. So we -- that's the most important thing for us. We don't want to just sell us off because it meets the requirements. I know that would make a lot of people in Wall Street happy, but that's not what we're going to do.

So as we continue to give new capabilities, those capabilities are always going to line up with the warfighter and stuff that actually works. And then we're acquisitive, but we're not crazy acquisitive, like every other week. We are very targeted at our acquisitions that continue to fill in our capabilities. You'll see one maybe acquisition a quarter, maybe sometimes 2, then maybe sometimes none. If we think that we've got a family of systems and weapon systems are actually going to work for the warfighter. So I was going to be really brief because these guys are going to actually tell you how it works and the guys that are really doing it. I want to give the shout out to them. Shout out to all the teams that have made this happen.

Oh, wait, we can't forget. What about our hockey teams? USA. Two gold medals from our hockey teams. I'm [indiscernible] about that. So I'm going to get off the stage now and let Chris take over.

All right. Thanks, everyone. I got this nice picture of me from 20 years ago. So the face [indiscernible] a surprise. Sorry about that. Focus this past year, this company has -- I mean, we have grown awesomely over this past year. From a start-up company, I've only been here now 11 months, I think right about 11 months now. And from when I started to where we're at now, the team has really matured and grown. And this is part of what I wanted to talk about today is just talk about what we've been doing this past year.

The biggest focuses that we have is starting -- going from a scrappy little start-up. We've got the great mines. We've got the engineers. We've got the grit determination as we've seen, and you guys will see these -- this demonstration today, how much has been accomplished in such a short period of time. But at the same time, what do our customers want?

Our customers want quantity. They want quality and they want a stable partner, right? They want a company that's going to be around in 2 years from now, to be able to support the drones that are out there, or the systems that we have. They want to make sure that they're still getting the software upgrades that they need because we want to make sure that at the pace that technology advances and moves that we are relevant months, years from now.

And part of that manufacturing. The number one question I got when I was in Christian's role last year was, well, how much can you produce? What can you really punch through that factory? I'm actually going to walk you through all 3 factories in just a minute, and talk about what the capacity of each of those factory is. Quality. As a start-up company, kind of the last things you're thinking about sometimes are the higher level operating functions. So the quality side of things, the compliance, security of your systems, financial reporting. Some of those things, because you're just focused on getting that drone done, getting it right and getting it out there. Those are some of the things that you put to the side.

But now as we mature as a company, that's what we're working on. This line here, maturity of people, processes and tools. We have to make sure that we've got the structure in place to support this growth to support the maturity that we need. Some of the things that we've talked about in the past on the corporate side of things. We've moved up with our auditors. We now have a big 4 auditor. We've got [ SOX ] compliance coming up in the future that's important to a lot of our investor base to understand what's happening in there. We're now working with the military, making sure that we're compliant with all the regulations, with our imports, exports as well as our own security systems becoming [ CMMC ] compliant. There's a lot of this infrastructure that we're building up on the corporate side.

Let's go. Okay. Talk about these facilities a little bit, and I'll give you a little bit more insight on what's happening. And what you'll see in the picture on here, up on the left side, let me step out of the way here, on the left side over here, this is Suite 2 and 3 in Salt Lake City. What we've been operating at last year. This right side is Suite 2. You've got the inventory racking and you've got the production side of things here. And Suite 3, we've got all manufacturing -- or sorry, engineering on Suite 3.

What we've done now is we've expanded this. We've leased up the suite -- 2 suites next to it. So [indiscernible]. What's going to happen is all of this engineering is now moving over to Suite 4. We've changed the configuration. You can see a little bit inefficiencies with the configuration here. We're actually expanding that up so we can house another 30 to 40 engineers over in Suite 4 on top of what we already have.

Now you're looking at the production over here. With this production, this is 3,500 square feet. And this 3,500 square feet, which we've been [indiscernible] in, we can produce 50 drones a day. 50 drones a day, that's 1,000 drones a month and 3,500 square feet in with only one shift, a single shift. Right now, that shift starts up at 6 in the morning. They get done about 2:30, 3:00 in the afternoon and they're out. We have now hired up shift leads to open up a second shift when we deem that necessary.

Now what happens with this expansion? All of the engineers are now moving over to Suite 4. Suite 5 is more on the corporate side. So the corporate where we used to have 2 guys in IT. Now we've got 7, 8 guys. We used to have 2 people in HR. We've been expanding that. Now we have an internal audit team. Finance is expanding. That corporate suite is now in Suite 4 and 5. We will actually have a ribbon-cutting ceremony in the next couple of months as we open up these new facilities.

Now that pushes over. Now this is empty space. Inventory racking. We're improving that to make sure that we can go more vertical with the racking to take on the throughput that we have, manufacturing is going to move over here. We can actually triple the size of our manufacturing floor with this move. And so you start thinking through those numbers, right. 1,000 drones a month with what we currently have. Now if you double up a second shift, 2,000 a month. Now you triple that space 6,000 a month. We have been poising ourselves and making sure that we can hit the quantities that are needed when these floodgates open up. And that's where right now what we're prepared to do.

We've been tightening up all of our supply chain, making sure that we can shorten up the supply chain as much as possible. A lot of times we hear what's that supply chain look like? Are you depending on one vendor or not. Everything is NDA compliant. We moved everything out of China. Now that we've broken through the threshold of production. Now everything is an expansion [indiscernible] 2 to 3 vendors for every component that we've got making sure that as that ramps up, we can be there for it.

Let's see okay. Oh and by the way, going back one more thing. The very bottom thing. I get asked this question a lot, well, what about FPV drones? One thing I want to make sure everyone understands that the Black widow drone, our [ ISR or SRR ] drone is a very technical, very technologically advanced drone. It is a little bit harder to produce. These numbers I'm telling you right now are for that Black Widow done. When we talk about FPVs, FPVs are a lot easier to build. We can build -- and this is actually a very conservative note. 4 FPV drones and the time that it takes for us to make 1 Black Widow drone. So now I start to think about the FPV side, these drones, we can produce a lot more than just 1,000 on that single shift, in that small little square foot print area. At least 4,000 a month, we could really push those through in that area.

FlightWave capacity. FlightWave has outgrown their facility. They outgrew their -- we moved into a new place, I think January, February last year. And within 6 months, we'd already outgrown that place that we had. We've moved to a new facility in [indiscernible], California, 51,000 square feet. That for their 130 production. Right now, it's a nice open space. You can see in the picture here. Let's make sure I don't stand in front of everyone's view. The picture here, you can see a lot of space in there. We can produce 125 drones per month on a single shift using just 1/3 of that facility.

That other 2/3, expansion. Just like we can do with Salt Lake City, expand to more Edge 130 where the [ Tricon -- ] when the Tricon is completed later this year, expansion there. But also FlightWave a great location in Los Angeles. As we work closer with our partners, we talk about vertical integration, some of our partnerships later. We can also do expansions here. If we need to bring some more work over from Teal. We can do Teal work down here. If we want to work more vertically with the components, we can also start doing some plastic-injected moldings. There's a lot more manufacturing on the going vertical that we can also do in California close to many of our partners out there.

And Blue ops, making sure that everyone understands everyone knows, this is not the manufacturing plan for Blue Ops, right? This is our special R&D facility. We do have this place in Valdosta, Georgia, 155,000 square feet. When you walk into this place -- when I walk into this place, it blows my mind how big it is. Every corner I turn, there's a massive new [ base ] ready to facilitate more operations. Previous owners, previous users of this facility, we're kicking out about, let's say 60 boats a month. You can think about that, 60 ski boats a month. These ski boats have also a lot of human accommodations. I'm looking at the wording here because it was just changed to make sure I use proper boat terminology.

But lack of human accommodations, right? So [indiscernible] heads, entertainment system [indiscernible], we don't need any of that. There's none of this stuff going into these boats. Therefore, a lot of what took a lot of time to make those boats, we're going to crunch that time down we can produce a lot more than 60 boats a month once we hit full production next year -- this next year, I shouldn't say next -- this next year. We're hitting full production here very shortly as tools get delivered. I don't want to take all the thunder, but tools get delivered this -- here in the middle of March. Production is ramping up, which is just a huge amazing story you guys.

Jeff mentioned it here, but to have something starting from ideation in the middle of last year to actually having hired on folks within the group and to start to expand and already have something that's running that you're going to see out there on the lake is just a huge accomplishment from the team here at Blue Ops and shows a lot of the [indiscernible] and determination that they have. I love these guys.

Lets see. The strategic partnerships. Now also make sure there's so much more I want to talk about, guys, the corporate infrastructure, everything that we've been doing, the value chain, the R&D processes that we've built out, delivering products, but need to cut this short. Strategic partners, you're going to see a couple of things going on today. Great job with ACS also with APM. APM is running the swarms today with the drones that you'll see swarming together in coordination with each other. APM with our system that's on the front of the boat that we've talked about that you get to see out there, just amazing technology, amazing partners that we have.

But this is also something you'll hear a lot about modular open systems architecture -- thank you. That we want to build -- we are not going to be the greatest and the smartest in every single thing possible, right? There are a lot of people out there that can do things better. We want to make sure that we grow, and we can all grow together as multiple companies as partners. And that's where we want to make sure that we find the experts out there and integrate with those technologies and bring those into our system to make sure that we've got the best possible system and solution for those warfighters out there today.

Because we do not want to limit the warfighters capabilities because of just what's in Chris's head, or just what's in this corporate team's head. We want to make sure that we utilize all the resources that we have across all the partnerships. And so just listing off a whole bunch of here about different technologies and capabilities that we're looking at to integrate, and have integrated and we'll continue to integrate over this next year.

All right. Enough of hearing from me. I want to turn the time over to Geoff, our Head of Sales.

Okay. Thanks for coming. A little bit about me. I'm the guide that you rarely see. I don't particularly like doing things like this. But they tell me that I'm good at it once [indiscernible] on my role, so I'll try to make it enlightening for you guys.

Something about me. Retired Air Force. Special operator, run around on ground, drop [indiscernible] shooting guns. Had a lot of fun doing that, got into UAVs. I was actually a UAV instructor in 1999. Yes, I've been doing a little bit, right? It's about 16.5 years at [indiscernible]. They were the market leader. Jumped out of that, hopped into this about 4 years ago. And I could tell you right now from my 20-odd years in this space, I've never seen anything as dynamic as it is right now across all platforms, right?

Boats, drones, UUVs, doesn't matter. We're moving at the speed of heat and a lot of that is coming from very, very small scrappy companies like us. We're getting out of scrapping now and get a little more mainstream, but we're working with all those partners that Chris was talking about because they are the experts in their field. And the Montage video, you saw, half of that stuff were companies that were on that list that you just showed you, right? So the entry to get in and is if you're talking to the same people we're talking to, and they're liking your stuff, and we're liking your stuff, then we'll play with you. We'll play with anybody, right? Because one company cannot do it all, okay? So that's just kind of teeing it up.

Who do we sell to? Everybody. Who do we serve? Everybody. The mission sets, regardless of platform, my opinion. They're the same, whether it's a floating platform or a flying platform, or underwater platform. You want to send a thing out to do a thing and make a decision on what you wanted to do after that, right? So if we're getting into the boat world now, the [indiscernible] we're still in the drone world heavy with hybrid [indiscernible], FPVs, and Black Widows, right, serving our ISR customers. Stand over here where you guys can read that, right?

[indiscernible] [ Paycom ], all the theaters we're serving and some are going to be faster than others. South America is always going to be a little bit of slow, not that they're not good people, but they don't have a whole lot of money. We're focusing on that, keeping that on [indiscernible] but we're looking at the hitters, Middle East and [indiscernible], okay?

A little bit on that. We have all the [indiscernible] we're playing [indiscernible] agencies, those who shall remain nameless, and we're making strides to backfill into DFR, drones as first responders because the ban of DJI has left everybody kind of hanging, right? So we have road maps to provide a low-cost platform at some point in a box more than likely that we'll be offering for DFR applications. Focus is still on defense, but everything we're doing in defense can be pivot to dual use, okay?

Okay. What is feeding the pipe right now? At short-range reconnaissance program. I call that -- we see Black Widow up here. But there's -- the difference is a configuration for the Army for SRR is 2 air vehicles and one ground control station, right? So it is technically the [ RQ-28B ] system for the short range [indiscernible] program, which includes Black Widows and a web controller, okay? So we've got that going on right now. We started with 37 companies, got cut down to 10, got cut down to 5, got cut down to us, okay? So that was a 3-year process, doing different generations and phases of R&D on those.

Right now, as of last week, drone dominance there's two programs out there, and they're kind of mashed together. Now they talked about purpose-built attritable drones PBAS, okay? And then they talked about -- when we get over this side now so you can see. And then they're talking about this drone dominance program. They've mashed them together, okay? The first tranche, everybody proposed they've down selected to 25 companies. We are one of those 25. We flew last week. The other 12 companies flew last week, 12 companies are flying or finished up flying this week. We're waiting for a down select. They're going to pick 12. 12 of those are going to get an order for 2,500 systems. And then there's a pot of 6,000 systems for those that deliver early.

So the system that we have there is our 10-inch FPV, and we are already building those 2,500 in anticipation of so we can get a bite at that 6,000 apple that's for those who deliver early, okay? So back to Chris' point on scalability [indiscernible] FPV to drone or 2 FPVs -- Black Widows to [indiscernible] 4:1.

And then Asia Pacific, we -- let me say this. We were not particularly pleased with the press release that we had to put out, but you have to understand that there are going to be press releases that you can't really get any information out of. And it's not because of us. It's because Chinese banning things in Pacific -- Asia Pacific is a real thing. So they want to remain [ cagey ] and not give much information out other than their [ indopaycom ] Ally period, right? So don't get upset when you don't have a whole lot of information to go off of. That's not us, that's them. And that's just kind of a recurring thing in the business. Sometimes we'll be able to tell you everything. Sometimes we're not going to be able to tell you much, okay.

[indiscernible] [ Paycom ], is taking off, both on the boat side. Partners that want to work with us across several different nations. Production capacity is the thing we discuss with some of them, but that stuff we're working through. But this is what is feeding all the stuff that they're doing with the expansion, okay? And setting us up for the next stage.

Okay. Upcoming opportunities. There's a lot on this slide. So I'll start over here. Maritime operations. My opinion, the [indiscernible] are kind of where drones were at 20 years ago. It's still open. Wide open. There's been a couple of attempts and a couple of failures, and then we're coming on to the block. The difference between us and everybody else, anybody else on the planet. And if you guys can come up with a company that has this, all we can't. But right now, our portfolio with boats and flying ISR and flying [ Kinetic ], we are the only enterprise that offers that. And we are the only other enterprise that has that list of 20 other companies that we're playing with. for their unique specialties, swarming, guns, that big missile theirs from [indiscernible] that's a $1 billion program for the Army program of record, and we're going to be putting that on this to do some testing, right?

So we're picking winners, avoiding losers, and we're getting ready to meet the need, right? So a lot of work going into the maritime stuff operations and organic, having that organic to your enterprise is key right now. A lot of companies are never going to think about this, but we're ahead of the game on that. Sensor shooter, same thing. You got your sensor, the boat could be a sensor, Black Widow could be [indiscernible] sensor, and then you have the activity you want to take on that which is your FPV, kinetic, or boat kinetic, or missiles off about boat kinetic, right? Having all that or operating in the same egospace, gives us a competitive advantage over their folks.

Adoption and attributable [indiscernible] low cost, right? Everybody is looking for low cost. Sometimes it's not going to be so low cost because your average guy, it's like FPV, I was just talking about it this morning. Right now, they have a very low price point. They want it for like $1,000 or less. 2 years from now, they think is probably going to be a [indiscernible] because they're going to have a good idea, and that good idea is going to cost more money, right? But it's just kind of the evolution of things. They're starting out of the [indiscernible], but they're going to want IR cameras, add another $3,000. They're going to want some software, compute and [indiscernible]. And that thing will continue to scale up and grow as they start to prove that out across the Army brigades and the Marine Corps.

Modular system open architecture, right, the modularity of Black Widow. That's the only platform in this space, that if you break an arm, guy in the field replaces it. If you break the gimbal assembly, the guy in the field replaces it. The only time it comes back to us is for open heart surgery, right? Nobody else is doing that. And for them to be able to do that, that's a total redesign and call that 3 years from now, right? So we're like 3 years ahead on the most of stuff.

Same thing on the boats, your base platform so much more room for activities on boats, by the way, super stoke. What do you want to put on it? How much of it do you want to put on it, more gas, more stuff, more guns, more missiles, more drones. We'll configure it any way you want. Just tell us what you want, right? So we're having a lot of those discussions happened yesterday. We got some stuff we're going to be following up on, which is pretty exciting and we'll talk about when that comes to fruition. And then allied modernization programs. Back to that [indiscernible] Paycom sale, right? China said 2027 for Taiwan. A lot of people in [indiscernible], a lot of countries that [indiscernible] we've only got a year left. So their budgets are opening up significantly.

And it's a little bit of chasing and a whole lot of people calling us, which is a really interesting position, right? Everybody on the drone side, everybody right now is making drone large programmatic decisions. They've been flying drones for a couple of years. Now they're down selecting for their 3-year programs, right? And they're probably going to iterate and get a new platform over 3 years because technology is moving so fast. What you have now is going to be archaic 3 years from now based on the tech, right?

So that's talking a little bit about that. And then lastly. They wanted me to talk to you about the government contracting. Some of you may understand it. Some of them you may think you understand it. And then there's those that truly do understand it, right? So I'm not doing any [indiscernible] it up here, but know that we don't control much of that, okay? Government fiscal year runs from 1 October to 30 September. Program of record is dollars that are for acquisition of major programs. Short-range reconnaissance program. That is a program of record. That is an acquisition pot of money. And then you have O&M money, which is what the brigades have their operating budget is O&M dollars, okay?

So when we talk about program of record Black Widow, that's just one pot of money, what's coming out of Huntsville. We also have bites at now at O&M money where Brigade Commander DOW [indiscernible] can now sign in by whatever he wants with his money if he wants to, that's O&M dollars. So we're chasing O&M money, and we're chasing program money, and we're chasing RDT&E money, which is also a different color of money. So there's 3 avenues for money across all the services. For the boats. We're chasing RDT&E and we're chasing programmatic dollars, okay? So that's the attack. We want them to pay us for what we're already doing, and we want to buy a lot of their program dollars.

Continued resolutions. If the budget is -- okay, for 20 years or more, we've never had a budget on 1 October for the Department of War. Ever. There's always some level of continuing resolution. And then occasionally, there's a government shutdown. Well, we've had both. We had a government shutdown, nobody came to work, and we had a continued [indiscernible] and now they finally got their budgets about 1.5 weeks ago, and they're sorting all that stuff out. So when we say money is coming, it's coming, but we have very little control of the when. We can target it down to about a month, which right now looks like sometime in March, we'll get the program dollars from the Army, whatever they're looking to buy for this following year.

So units and program offices get their money February, March, April, depending on how long CRs run. And then they got to spend all of that before 30 September, and that's where we go with sweeps. Sweeps happening -- sweeps are basically spare dollars. If you are a unit or an organization and you have not spent your money, then they're going to take that money and they're going to give it to somebody who could spend it. And you're not going to get that much -- you're not going to get the same month of next year. So we call that [indiscernible].

Everybody's taking care of business up to a certain point, probably by the end of May, early June, and then they start looking at their spare dollars. Because they know they've got to get all of that on contract before 30 September. So that's what we call the sweep cycle. And that's when we're out showing all of our stuff. People are making decisions. I've got a couple of extra million dollars [indiscernible] We have no idea what those dollars look like until [indiscernible] But [ sweeps ] are a thing that we chase.

So you'll see stuff in our Q3 where we're booking stuff that will be delivered in Q4 kind of thing end of year, right? So that's kind of the cycle of how things work. Plus [indiscernible] programs versus O&M dollars talked about that. The $500 million, that's what's in the line item for [ sUAS ] in Huntsville, the $1.5 billion, though that's what's in the procurement line item for [indiscernible] So those are the 2 pots that we're going to be chasing this year. And again, they just got their money.

So good things are going to happen this year. You just got to be a little patient never happens on our time line, unfortunately. And everything changes with the phone call will [indiscernible] down. Questions or actually no questions until the end.

Okay. Barry?

Wow, thank you all for being here. This is our big debut for Blue Ops. As Jeff said, and -- and Chris and Geoff Hitchcock, we didn't exist a year ago today. We did not exist as a company. We started talking about doing this in May, and then we formed the company in August. And here, we have a boat.

And I'll tell you a little bit about this journey. But I'm going to -- I'll remind you of a quote here or introduce you to a quote that I heard about 3 weeks ago in Washington, D.C., when we were lucky enough to meet with [indiscernible] [ Trent Kelly ]. And he said two things to me. I'll tell you the second thing in a second, which is equally as awesome, but he said, "Barry, we need affordable open architecture and the ability to produce at scale". And I said, you have found your company, because that's what we do. And that's what I tell our end users all the time.

We are focused on building boats. I am a boat builder, my team, our boat builders and technologists. We built affordable, reliable, in durable boats over and over again. And you're looking at the end product here, which is only an idea in August, and we began production in October, and we launched the vote in December, we began autonomizing it in January, and you will see that [indiscernible] and those boats perform up in the lake today.

I'll tell you the other thing you said, which is kind of interesting in part of it's stuck with me every single day. He said, "Barry, be kind. It doesn't cost you anything". I think about that every day.

Next slide. So let's talk about some capabilities. The boat you're looking at here, the [ Variance 7 ] is -- we can go through it, but it's 7.8 meters long. It will do 800 nautical miles at 40 knots. We can extend the tanks. That boat has a payload capacity of 1,800 pounds forward of the mid-section. We don't really envision any payloads weighing more than 1,000. So that means we can have extended fuel. And I was talking to a retired admiral the other day, and I said, admiral, how much is enough endurance? He said, all of it. And I said, what do you mean by all of it? He said, my job is to make sure I put my men and women out of harm's way. So the farther away these things can go more out of harm's way we are.

So we can add extended range capability with hundreds of pounds of more fuel, extending this to over 1,000 miles at 40 knots. And of course, if you slow the boats down, they sip fuel at 5 or 6 knots, it burns a gallon an hour. That boat carries 317 gallons of fuel as it is with extended rain to edge more, you can do the math.

When I talk about the boat, we talk about -- I use the iPhone metaphor a little bit. Our job is to build a really stable product that has the basics. And I had the first iPhone that came out in 2010, at least I thought it was if it wasn't the first but [indiscernible] was certainly my first. And it did the basics. And if I wanted some special stuff, I went to the very limited app store and the App Store grew over the years. That's the way we treat our boat. It is a really stable, reliable platform, and then we allow our end users and we collaborate with them. Sometimes we find customers. I mean, collaborators like ACS over here or sometimes they bring them to us. But we deliver a reliable platform.

Because it doesn't matter how good your technology is, if you can't get it to a [indiscernible] to do its job. Whether that's launching a UAV, whether that's launching a precision munition. Just as you know, these are fake [indiscernible] Hollywood style, but they're an imitation of what a precision munition made by our partner would be. So we are the platform and we deliver the ability to deliver capabilities. And that's the power of USV because Jeff Thompson said in his introduction, the world is 3/4 of water. And we will get important things to where they need to be over the water with long range [indiscernible].

You'll all get a copy of this, I think. So you can follow up on these. And in the Q&A, you can drill down on any of these features and functionalities. Next slide.

Obviously, I talked about integration, flexible deployment. The end user drives a lot of what we need -- what they need and we can easily adapt because once again, we are an open platform, right? So the ability to play well with others is a great way to say it. And at the end of the day, we are boat builders. Our goal is to build boats -- high-quality boats at scale. And let's talk about experience matters. I know that's a broad statement, but I'm going to kind of bring some context into it here a little bit.

I'm a third generation build builder. So we're in our [indiscernible] year as a family building boats. And we are a young family of boat builders compared to our partners, [indiscernible] [ Hudson ] shipbuilders, Tim [ Hodgins ] back here. They have been doing it for 210 years. They are the longest continuously family-operated boat builders in the United States of America. So they've got 5 generations. We've got 3. That's the experience we bring to that boat. That's why we're able to turn that boat around a beautiful boat that performs well in 5.5 months.

The other thing about the experience matters is there was so much happening in Eastern Europe that was redefining not only the battlefield but boat building. When a country with no Navy pushed back a country with one of the largest as in the world using what they call costs, consumer off-the-shelf boats. I said I need to learn. I'd already been working with the Red Cat team for a while at this point in time. I went to Ukraine in July. And I began learning and watching and learning. I went back. I went into Portugal, where a lot of USP experimentation happens from Eastern European nations and in NATO allies. I spent 5 weeks there. And then I went back in late September to Ukraine and then I went back to November, and I'm going in 2 weeks.

And what do I do when I go there, I learn? And one thing about the boats that are built over there is they're built to the last 6 months because they're mostly one-way trips. That boat is built to last at least 5 years and get beat on by men and women's sailors over and over again until it takes its final trip. That's a -- so we learn and then we bring to America and we build to American multigenerational shipbuilding standards. That's the game we're playing, and that's why experience matters.

We can go into the autonomy and all that stuff in more detail. You'll see it function this afternoon. And I'm going to pass it off to Christian Morrison, our CFO. Hopefully, that was a good overview of what we're doing here at Blue Ops. And when we go to Q&A, be glad to answer any questions.

All right. All right. Well, hopefully, we didn't have to twist your arm to [indiscernible] you down to sunny Florida. I'm glad some of you that made it from the Northeast, okay. But truly, we're honored to have you here today. It really means a lot to us as a company and to have you here and get up close and personal with our products and our product portfolio. We really appreciate it means a lot.

Jeff had mentioned it earlier, our call is scheduled for March 18, aftermarket and where we'll be covering 2025, and we'll give some glimpses into 2026. So please forgive me for some generalities today instead of specifics. Its by design.

Okay, there's 3 areas in which the company is focusing its capital resources, of course, human capital, PP&E, operations facilities, and then we are always looking for strategic partnerships. I want to spend some time talking a little bit more about the human capital side of things. We nearly doubled our head count in 2025. For everything you would imagine that it would take to mature company sales ops, engineers, Galore, finance, HR, IT. We spent a lot of the company's money just building up and maturing the company.

As far as 2026 goes, our focus will be building out the Blue Ops division. We have further heads to hire for the Blue Ops division. We have some incremental engineers that we're going to hire and then we will start to level off as we look towards the future. For facilities, and I know Chris mentioned it, but I want to level set for everybody. This building that we're in is 11,000 square feet, including the front office lobby. So just to visually picture what Chris had mentioned earlier, in Salt Lake City, our headquarters, it's about 4x the size with much higher ceilings. In L.A., where FlightWave is, it's about 5x the size. Again, but configure different. In Valdosta, Georgia, it's 155,000 square feet. And that sounds like a big number, it's huge. If you took this building and you put it side by side, and you stretch it all the way out to the road that you came in on, there's still extra space. That's how large that facility is.

It's a lot of money, but then we are also investing in capacity that will exceed what we're capable. So we can meet any demand, and we are anticipating some big demand in 2026. Strategic investment opportunities, like everybody mentioned, we're always looking for partners to complement our technology [indiscernible] technology. Our focus will be vertical integration. If something makes sense, that take us horizontally, we'll take a look at it. And I do want to give a shout out to some of you in this room. You've been very helpful with some of the leads for companies that we should check out, and so please keep them coming. I really appreciate it. I know Jeff Thompson does as well.

For 2026, revenue is going to be a great year for us. Like just to echo what Jeff Thompson talked about in the PM UAS number, it's $426 million. That's one customer, one product. In addition, the Pentagon talked to Congress and told them they're going to spend $1.5 billion in USVs. That's not including drone dominance, the opportunities are out there. We just need to see the opportunity. We absolutely have the production capability to meet any demand that comes our way.

As we look forward to 2026, what our primary use of cash is going to be is we need to build inventory. We didn't make sure that our working capital -- that we invest in our working capital and make sure that we have plenty of inventory to meet demand. That will be our primary use of cash in 2026. We need to further build out the facilities. We still have a lot more money to spend to make sure that Blue ops can produce the way that we know it can. Same in FlightWave. And let's not take for granted the complex environment that we're in, part of doing businesses. We have to invest in our IT and infrastructure to make sure that we are CMMC compliant. There's a lot of cyber risk that we did make sure that we mitigate so we don't harm ourselves in the future. It's a tremendous amount of spending on the company that we just have to do.

I'm excited about where we're going. From a finance guy's perspective, I do have to reiterate that what you will see today is really cool. Today is not about the numbers. Today, it's all about the technology. You will see 8 drone swarming controlled by 1 person. You will see -- I can't even do it justice, but the machine gun on the front, we'll be shooting some blanks autonomously at the red team, the bad drone in the sky. It's really cool. And I hope all of you take the opportunity to talk to our presidents, get to know the tech, see it, ask questions. Please. This is a really unique opportunity. And I'm aware of -- I'm not aware of any other company doing what we're doing. So we're really excited. We're excited about 2026 and where it's going.

And with that, I will end it and we'll turn it back to Stan for some Q&A. Thanks.

Thank you so much, everyone. Let's keep it up for our senior leadership team. I'm going to ask actually all of our team members to bring your chairs up on stage. We'll go into the Q&A portion of our day.

We will have two folks from our [indiscernible] Investor Relations firm, [indiscernible] here to hand out mics. So I would ask if you do have a question, raise your hand and we will get a microphone over to you just so we can capture it.

This is an impressive setup here for sure. Congrats on all that. Michael Latimore the Northland Capital. On the USV, there's a lot of missiles and drones and all sorts of things you can put on it. Can you just talk about the pricing? What's the base price? How much margin do you get on every upsell, or margin upsell? Just like how does the pricing work on? And this is sort of a fully loaded boat?

Alright, Michael, going there right away. All right. We're not here to give up margins on Blue Ops, our newest division. It is a very high-margin product I will say. The price point is out there already. It's about $700,000 per basis config. That's not with those missiles, that's not with [indiscernible] controls counter. This massive explosion unit over here from [ Univision ]. So that's the base without any volume.

And I don't know, Barry, if you want to hang in? You've been building boats forever?

Yes. It's -- everything you said is correct. To me, it's an efficient boat to build once you figure out how to build it. As Chris said earlier, without all the human accommodation, you can get efficient.

In terms of the opportunity for your USV, you've talked about [indiscernible] but I guess, maybe what is the most low-hanging fruit here? Is it the Navy? Is it some [indiscernible] in the Asia Pacific region? What would be the sort of the lower-hanging fruit for the USV business?

Yes. Well, I'll just say, obviously, with the $5 billion in one budget, there's $1.5 billion in other budgets for USVs now, right here and now. I'll just say yesterday's Customer Day. We did not want you [indiscernible] from Wall Street mixing with our customers. But it was a very successful day and all the people that you think would be a customer has been doing a great job meeting with everyone going on the [indiscernible] the time. But [ indoPaycom ], I mean, that is just a massive opportunity for this team and do [indiscernible] of the feedback you're getting. Maybe from an [indiscernible] sitting in [indiscernible] we won't say his name.

People are incredibly excited because of the affordable way that we can address 3/4 of the world's surface. The U.S. has tens of thousands of miles of coastline. South America has hundreds and hundreds of thousands [indiscernible] is Island after Island. Logistically not putting humans in harm's way, but moving things around, whether they're kinetic or resupply. People are incredibly excited around the world about the capability of small [ USDs ].

Austin Bohlig with Needham. Maybe a question for second, Jeff. Going back to your comment about kind of walking through like the procurement process and like the $1.5 billion available for USV. There was news earlier this week about how it sounds like the Pentagon wants to like just go on a spending surge of that [ $150 million ] that was in the [indiscernible]. Could you maybe walk through like where is that $1.5 billion coming from? Is it that? And like, how does that accelerate a time line maybe benefit you guys?

Yes. And thanks for the question, Austin. That is part of the $1.5 billion, right? So just kind of tag on to the last question a little bit, right? Getting into the U.S. Navy market is going to be the biggest heaviest lift from a technological perspective. Everybody else on the globe is going to benefit from what we learned from the Navy, right? So we can meet the Navy specs as we start [ gleaning ] with those specs are, that's going to help everybody else in the globe when it starts acquisition for [indiscernible] specifically.

To your point, there's going to be a lot of RDT&E money, right? There's platforms out there that are different than maybe underperforming. There's -- yes, we're in a really good place. From my knowledge of the USV market, we're in a really good place in a really good position with the Navy right now. We're talking to all the right people. They're going through a reorg as we speak to program executive offices write our PAEs that they're setting up. So they're collapsing all of these individual acquisition entities under a larger umbrella kind of reconfiguring. So they're starting to figure it out, right? But we are participating in a lot of R&D experimentation exercises.

We have one coming up at [indiscernible] that's happening in July. We're going to be out there doing that. We're bringing a whole bunch of tech out there, drones and boats and missiles for that event. And we're going to learn a lot, right? The guys we had here yesterday, we're just pull in what the requirements are. What is giving us a specific advantage is kind of our newness, right?

We're a clean slate. If customers are asking for something that is different for people that are already in production. It's kind of like the modularity on Black Widow, right? Nobody else has detachable arms. If they want detachable arm, they got to do a clean sheet redesign for detachable arms. That's kind of where we're at in the boat space right now, right? So I think that is a distinct advantage that we have so much more room for activities. To find out what people want to put on these things, maybe specifically first. Others will benefit from it, NATO and [ IndoPeycom ]. But I think that's actually giving us an edge.

Because we are open common because we'll play with anybody because we'll do anything you ask us to do, because we can do that. We can iterate and spin very quickly across the entire enterprise. Does that kind of answer your question?

Mike Legg from Ladenburg. As you build out your manufacturing, can you talk about supply chain and any constraints you may see the bottlenecks?

Well, I'm going to hand that one over to him, but he's been working really hard to make sure there is no [indiscernible] combination. [indiscernible] here. But also, I want to congratulate also, you just had a [indiscernible] baby. Chris, do you want to take that?

I can take this. Supply chain, right? Supply chain is a huge focus right now on Sky Foundry. The Sky Foundry an initiative that kicked off a few months ago and really trying to understand, hey, where is the supply chain out? What are things coming from? Because if you take it all the way down to the very basic on the mineral side of things, they're coming from all over the world, specifically a lot from Asia, right?

And so there's this there's this small buildup that comes up. What we've been doing is we've been focusing very closely, first of all, initially, it's just to pass the [ SNF ] test to make sure we're NDA compliant. Nothing can be coming out of enemy territory. So making sure that we're cutting off of the China supplies and the sanctions. Unfortunately, we got all that taken care of before sanctions hit us moving in that direction.

Now we're also looking at what's being -- in this same thing with Sky Foundry. What's being produced here in the United States or what's not being produced here in the United States? Where are we lacking it? Batteries is something that we look very closely at because a lot of the batteries right? A lot of battery production. You go on to Amazon, you type in there, the batteries that you're looking for, everything is coming from Asia. And how do we find those right partners that are here in the United States?

Fortunately, we found some great partners here in the U.S. that have been able to quickly ramp up. We've gone through many different vendors to really identify the correct ones that can give us the right pricing, the right quality, the right speed of iteration. Right at the -- very initially last year, at the beginning of last year as we were looking at these batteries, it was very hard to find a company that could take a new battery for us, iterate that and pump that out in full production within a few months. We now found those partners that can do that for us.

We then look into Motors. Motors is another one. Once again, online, you look up, all the motors are coming out of Asia. We found some great partners here in the United States that have been able to produce mortgage for us. And we now have people -- a lot of people that have noticed this in other, I should say, partner countries around the world that have noticed this lack of motor production and have also started to come to us to help supply these to us. Fortunately, now we fixed these other areas.

So I guess, supply chain is a loaded question because you go all the way to the components that are getting built in and also supply chain time lines for us. How are we dealing with the time lines. There are some components as we've looked at it. It took 9 months of lead time to get to us because initially as our engineers were thinking about just getting it done and not necessarily thinking about the cost of the components or the time line to get those components in, we've now been able to take a step back, analyze these components and make some slight adjustments saying, hey, these chips are a rare [indiscernible] it takes 6 months to get these chips into our drones Hey, here's a more common chip that can do the exact same thing. There's better capabilities on these chips. Let's move that up. Hey, we've just cut out 3 months of that 9-month lead time. We've now started to prepurchase at a smaller percentage of the dollar amounts, prepurchase those longer lead time items to make sure that we can insert those into the supply chain.

Now we're operating at, at least 6 of -- the longest lead time items are now at 6 months. Technically 9 months, but because we prepurchased, we brought that down to 6 months, and we're now adjusting to say, hey, what's this ramp going to look like in the near future? How can we cut that down further? Right now, we can have a significant increase in our production and the supply chain beyond what I've talked about today within 3 months to make sure that as that ramps up, we're able to fulfill because we believe that we do have the -- we're on the forefront of this, right?

We have the leadership. We have the lead on this, and we do not want to lose that lead. And so we're making sure that we are adequately structuring ourselves to keep that lead even if there's a massive spike, we can take on that massive spike.

And then Jeff, you mentioned that you're only battle field testing one out there, the market is growing substantially in '26 over '25, you're the only supplier. Can you talk about what you think might be a competitor in response as the market gets larger?

Well, there's a lot of things that the big primes don't do they're not going to do the things that we will do to make sure that our product actually is just not fitting requirements, it actually works in a battlefield. And we're not the only ones to do it. There's other people that do in other cross products, but our team has been very forward deployed, making sure that our stuff works.

This thing was designed from the beginning, and I think Ralph is already out there. So you'll get to meet Ralph later on today. He's a superstar. But he's a pioneer pre-Ukraine which is almost everything is based on his tech. So we're pretty fortunate to have that. So we know what's going on in Blue Ops. The Black Widow. We know that works in [indiscernible], and we're going to be giving you some details in a month or 2 about that.

And the same thing with just recently the Edge 130. We kind of had a [indiscernible], and we know that works now, too. So we're very satisfied that our stuff works in battlefields. Because if it doesn't, it's useless, it's basically a brick in your rucksack. We won't do that. We won't give that to the war fighter where we know that our competitors, I'm not going to say names, but we know their stuff doesn't work there at all.

And just one last question. Barry, the fuel economy seems great on that boat. I mean, you're getting close to 4-plus miles a gallon. Can you talk about how you get that?

Well that all depends on [indiscernible] C state payload. So it varies from one to probably 12, 15. Depends. It's a diesel engine. So it's math. As a matter of fact, I'll have our partners Labor and Steyr, they're built in Austria. We chose that engine because the Navy has been using that engine for over a decade. It's proven. They're set up to repair it. And it's a great piece of technology. But what I'll -- instead of answering that randomly, I'll actually have you send the whole years and years of real-world engine efficiency and testing.

But once again, it varies on how fast you're going, what the sea state is and how much weight you're carrying. But it's an incredibly efficient whole shape. You'll see it move today. It hardly makes any wake, and that's the design of 5 plus 3 generations of boat building. That got us there, and that's a big part of the efficiency, too.

Amit [indiscernible] from H.C. Wainwright. My question is around the stability of the specs from the customer side. Do you have some good visibility around that? Or do you need to be in a position to sort of manage quickly evolving specs? And how do you sort of deal with that?

We're kind of going in reverse a little bit on that because if you let the program offices do the requirements, they're going to add requirements constantly. Just because, oh, we want this. We want this we were getting add-ons in July for a drone that we had to deliver 2 weeks later [indiscernible]. They just added a different thing that we had to do differently.

So that is [indiscernible] speed in volume, speed in volume. And that's basically get at 85% done, then we'll figure it out together to make it work properly on a battlefield. Well, that's not getting down to the people doing the requirements yet. They'll add as many requirements because you have to do it no matter what if you want their business.

So on a different note, we're actually saying, when you actually go to these battlefields, they're like, we don't need any of that. We're that offer that -- all this stuff is never going to be used. It's kind of like Mike Tyson, I think everyone's got a plan until you have punched in the face. So there's -- we want to make sure our stuff works. And then we'll always go and make sure we have the requirements. It's usually software that's add-ons and it does all this stuff. But we also want to say the go, hey, by the way, if you want to use something that works without all that [ garbage ] put on top of it, we have that too.

I don't know if I can add on for a second. Yes, it's a little bit of a carrot and stick thing, right? I mean that's [indiscernible]. We designed the Army requirements. Those requirements were 5 years old, 5 years old, right? So we continue to the [indiscernible] it as we talk to the [indiscernible] and say, hey, we got this new thing. We're adding to Black Widow. The stick is, are you telling me you're not going to give that to every army brigade and we're going to be selling it to Germany, the latest and greatest tech, and we're not going to have it here? So we continue to iterate at the speed of heat, right?

So in the next 4 year-old requirement comes out, we'll be light years ahead of that, right? So we're going to continue to iterate all the time. And if the Army accepts it, great, but if not, we're still going with it, because everybody else wants it, right? We're not going to stop because the Army says they may or may not be interested in a specific tech, 1 of those 15 companies we talked about, right? We're going to offer all the cart menus, all sum are none, let us know what you want, we'll bolt it on and get it out to you. And we're going to just continue to iterate because it's [indiscernible] take a week off you've done in this space. So we're going to try to stay what, 18, 24 months ahead of any of that.

That's right. And I'll jump in. That's a crucial reason for our office in Eastern Europe right now, right? The testing that we're doing out there because we want to stop being reactive, having someone tell us hey, here are the specs, here's what you need to build into it, then us build that up. We need to take that leadership position. We need to understand what those specs are before everyone else understands it and build those into it. We want to lead that definition, because if we don't, then we're always going to be chasing something, we're always going to be delayed a little bit.

But if we can take those learnings from the front, immediately integrate those in, then we're dictating, hey, here's the specs you want. [indiscernible] telling us these things that the guys in college and university thought up in their heads. This is actually what's needed out there, and we want to take that leadership.

Josh Sullivan, Jones Trading. What do you think about the longer-term product portfolio map? We look at the size of this boat, what are you thinking longer term? It's an innovation day. So if you're going to drill the dream, and we're talking about that old conversations about 24 months technology, but 5 decades, or 5 generations of boat building capacity. We think, [ Bluewater ] or something along those lines? Just curious what you guys are thinking longer term?

I want to give a quote before he starts because he's changed my entire mind just a few months ago. People that can build -- if I'm saying wrong, can build [indiscernible] below is a completely different technology than 16 above. So the expertise is completely different. And some people can do one and they can do it almost anybody can do both. So ever since then, I'm like, we got to stay below 60.

Yes. There's a reason [indiscernible] doesn't make cars. They're different animals. In the sub-60 foot boat market, even sub-40 is different 60, there's some connection there. But below 60 feet and then above 60 feet, certainly above 100. They're completely different animals. And my father always told me, pick one thing and do it really, really well. Our goal is to be the dominant small U.S. builder in the world, full stop. So product pipeline, we already have 2 more boats in design that we'll be rolling out as soon that design complete and we can move into production. And that won't be -- that's just the beginning. I would imagine we'll have a pretty complete portfolio of hall shapes to match the C state admission requirements of NATO navies around the world.

And then maybe if I think about [ Arca ], broadly speaking, what are those core technologies on the technology road map that you guys want to dominate today as we get through these bigger orders that are coming in the next 2 years? But longer term, what do you see as those core technologies that you're really focusing on right now?

Well, you're -- you've seen a lot about it today, and this is not a factory, but the factory is the weapon. So mass in the old days in the art used to be considered people. And now mass is robots. So we got to be able to produce millions of robots to go against millions of robots because our adversaries are going to be doing the same thing.

So as we -- to be able to have more control over that, we want to do it. You'll see us looking at a lot of more vertical integration so that we control almost the entire almost [indiscernible] close as [indiscernible] the entire supply chain and doing a lot more of the stuff ourselves through vertical integration. Not just in the Black Widow or the Tricon or -- and Blue Ops. So we want to make sure that we can control all those things so that if something new is -- or I mean, the speed of war is crazy right now. 3 weeks is a long time. I mean, it used to be 30 years before they would change how they do stuff.

There's still stuff that's a 30-year-old technology in the U.S. So we want to be able to be super quick, iterate quickly or even if there's a whole new category, which -- bomb boats didn't exist until a couple of years ago. It wasn't even a thing. And now with 30 of these coming after a multibillion-dollar ship, they don't know what to do. So we just want to remain flexible, have the capability and just learn how to take something from scratch, build it, sell a lot of them, make it profitable. New thing comes up that's in the robotic world. I mean that's a floating robot. We have flying robots. That's a gun robot [indiscernible] controls.

We've got -- I think the crucial thing is once you have all these robots, is how to control them with just a few people? Because it's useless. Like FPV is a great market, right? But every FPV drone needs a person that does not scale well right now. And another thing that people don't understand about FPV and robots is that FPV is useless without a Black Widow. You need all these FPVs, everyone really excited about right now, 340,000 and drone dominance. They're useless because they have old analog [indiscernible] because they're quick enough. They can only see [indiscernible] feet.

And if you've been -- I've been to a training facility in Ukraine and you got ISR drones, which we would love to replace. And then we got a FPV drones, the ISR drones like a Black Widow, tell them we're [indiscernible]. So all of these things, we got to get -- we got to get rid of more humans. FPV, if it's one-to-one the most expensive part. Those drones cost [indiscernible] No, they don't, because you got a human on every single one, the human for any aircraft ever, even small airplane, the human is the most expensive part. So per hour. So we got to look forward there to get more humans out of the loop.

Yes. You're going to see a fundamental shift, right, with the maturity of swarming and you're going to see that today, right? So you're going to see one person flying 8 drones today and you're going to have 3 guys driving 3 boats. 2, 3 weeks from now, you're going to have 1 guy driving those 3 boats and flying those 8 drones. And then -- then you start having the conversation about sea and air launch [ effects ], right?

There's different missions out there, which is different than the Ukraine mission. Lots of C4, send 30 and hit a ship. No, we're going to want a jam. We're going to want to [indiscernible], we're going to want to look at stuff, we're going to want other effects, both air and sea, right? So going back to the most conversation, right?

Swarming is a catalyst from where everything else is going to come from. If you have a specific classified payload you want to put on it to do a thing, okay? We could have 10 boats doing that. We can have 40 boats doing this. We're going to have 5 boats doing that. We do [indiscernible] this, you're going to have 100 FPVs doing this. And all [indiscernible] doing it. And then you got to reduce a cognitive workload, right?

I started this stuff, and it was 2 operators for 1 bird at our environment. 1 guy on a tough book computer 20 years ago, 1 guy in a tough book computer and another guy in that sticks. Now we've got 1 guy flying 8 and making them do a dance for you today, right? And they can do way more than that, but it gets really expensive to do that test for us to fly 100. But we could fly a 100. But I don't know that I want to pull out that out of inventory to do that, right?

So we're giving you a [ SNF ] and it becomes overwhelming. What if you saw a 100 [indiscernible] offline around 1 guy doing it all, you'd lose your mind. It's hard to get your head wrapped around seeing something that large, right? So you're just like you kind of go starry eyed and you can't really think about how to employ all of them. So it's gradual steps. The demonstrations will get bigger. The capability is going to continue to escalate and we're going to start bolting other stuff on, hey, can you do this and this? Yes, we can do that. Give us your payloads. Give us your cameras, give us whatever it is you want. And we'll bolt it into one of these things, and we'll link it all together in a common operating picture. I think that's the string you were kind of trying to pull, right?

Yes, everything comes off swarming. You get that perfected, then you get out everything else to it.

Is it already ready? Or are you still working on building that software or [indiscernible]?

Swarming. You're going to see it today. Its ready.

There's a question right here.

Josh [indiscernible] with [indiscernible] Capital. So [indiscernible] is really impressive what you've done in a year. And so it's kind of...

5.5 months. Who's counting?

So you did it in 5.5 months. My question is like, again, Hinckley, I know the name, obviously, so a history of boat building, so that helps a ton. But what keeps competition from doing the same? And -- or anyone else wants to just say, you know what, we've got a lot of money. We've got a the other [indiscernible] you mentioned, that's also the book building family.

We want to replicate what you did. What is it that keeps them from doing the same thing in 4 months now and having a competing boat? Maybe that's okay. Maybe it's someone you partner with, but just curious to know you've done an incredible thing in a short amount of time as a team, how do you now keep the competition from doing the same thing?

Humility. I can't wait to hear this. So you're asking me to predict the future, which, of course, is unpredictable. So that's -- well, I'm on boat builder. I can tell you that they're going to be hard-pressed to find the experience that we've assembled, but they certainly could. And I guess that's -- you have to say it's a possibility. But as long as we keep humble and keep reminding ourselves every day that we are boat builders.

And I'll tell you one of our -- I spoke to a former employee of a large competitor, and he was -- I think he said he was the 18th employee of a very early adopter competitor. And he said, when they pulled them all into a room and they said, we're going to build boats. They're just not going to be boats. We never think we're not building boats. And we know how to build those. And we do that were run over again. So of course, a competitor could shift to mind that, but most of our competitors have said, okay, we have a great piece of technology. Oh, by the way, we need to build a boat to put it on.

We started with the concept of we need the best, most reliable, durable boat and then we're going to put the technology on. It's just a completely inverted mindset that I have witnessed.

Who are the others that you see that are trying to do it? And who are you watching that could be partners? Or are you watching the good competitors? Just we don't have the space well.

I recommend Google. I mean I -- we're friendly with the usual suspects. You can do a quick Google search or go to some of the [ USP ] pages, you'll see them all. They're friendly. I was at [ Retmis ] for 5 weeks, which is the big showdown stands for robotic, experimentation, prototyping for maritime unmanned systems at [indiscernible], Portugal every year. Portuguese sponsored NATO event and all the usual suspects are there, and we're all get to know each other, and I have respect for all of them, and I wish them all the best.

Great again, really impressive what you've done. To the CFO so that you're not left alone, and I won't ask specifics. But I heard SOX compliance in the working and then also, obviously, compliance with the various military specs. Can you just give us any sense of timing in terms of when you think you'll be SOX-compliant? And when do you think you'll meet the [indiscernible] what is the right certifications?

Yes, I'll start on the [indiscernible] side. So we have to be compliant January 1, 2027. We have a team. We're already going through the whole process right now. We'll be telling our audit committee meeting on -- or we'll be holding our Audit Committee meeting on March 12, where we're going to lay out to the Audit Committee, our entire plan. So we're on how we're going to be [ SOX ] compliant and integrate that and make sure that we can meet all of the requirements starting January 1, 2027. I didn't think I'd give that question right on. And I'll kick it to Chris on CMMC.

Yes, CMMC compliance. So full compliance, there's a range of compliance has happened, right? We've already done our pre-assessments. We've already started building out our tech stacks. Actually, all the tech stacks are now built out rolling in. We are doing our first initial audits, or kind of our fake draft audit in April. And then we'll be fully compliant by the middle of the summer.

I think our goal target is September, but we're well on track to hit it beginning to middle to the beginning of the summer time.

[ Ned Morgan ] with BTIG. I was just wondering if you guys could talk some more about your strategy of strategic partnerships as opposed to [indiscernible]

Yes. I'll be very frank. We look at a lot of our strategic partnerships as an M&A road map. You'll see us partner with companies for years on end. And then lots of times, we'll -- as we gel, we like to fold them in. A perfect example is I tried to buy [indiscernible] for 5 years in a row, and we finally got them in there. And that was before everyone knew anything about for the FPV, before FPV was the most successful weapon in the Ukraine.

So it's getting to know lots of times, start-ups. Its their baby. They don't want to become corporate. I don't think we're very corporate at least I know I'm not. So they don't want to have that culture change in that. But if you partner with someone for 2 or 3 years, like all the guys that were in these rooms, making these boats work in the last few weeks, killing themselves together, other companies, not just ours, our employees. When you work side-by-side like that, you really get a feel of the type of people you want to work with.

I mean, it's always people you're going to have to work with, but I think our road map for M&A comes from our strategic partnerships. And a lot of the strategic partnerships are really actually kind of not forced on us, but the army will say, hey, this piece of technology works really good. We're looking at these guys. You should get them on the black window. And we call them and say, hey, let's talk about that. So that's kind of an organic way to have the Army and the Navy be our own sales force for what we should have on these for features.

And then when you look at the -- I look at what's going on in these out of the battlefields and we got -- we have to pull from that. When we were at AUSA, every person we talked to from the army is like, if your stuff doesn't work in Ukraine, we don't want it. And I'm like, well, I know you buy a lot of stuff that doesn't work. But we are -- that's the way we're trying to look at the strategies. We're not going to see everything, but we have the platforms now to do that.

Just one more. How do you guys think moving forward, long-term strategy of Red Cat ? How are you prioritizing the program like SRR versus more attributable deeper drones in the [indiscernible]

Drone dominance is just -- we look, right now, they're going to be great margin. We just went last week, and I think we did pretty well, but you never know. But at first, those are going to be great margin at the beginning. And then the price comes down, the price comes down.

Let's say, it becomes a loss leader, ammunition. You have to have it. You can't not offer FPV. But more importantly, FPV's useless without the Black Widow. So we -- we're actually one of the only companies that showed up and said, hey, you want us to do sensor shooter? No one else has a Black Widow that the armies rare accepted in the program of record. So that's a key thing. FPV's been on. I've been in FPVs since 2015.

So I know the industry very well, but it's a very difficult business model because of the volumes. And once it gets down to low margins because of the prices people are going to want, it becomes a tougher business model. So we'll always probably always have it. things will evolve with FPV, but it's also going to be relying on -- we can put FPV on that. We can put FPV on all the other new holes that we're coming up with. We actually are working on a very complex launching system off of these units that you'll be hearing about soon for Black Windows and other drones coming out of these things.

So the FPV business model is difficult, but it's basically a bullet. You don't have a bullet, you can't kill anybody.

It's Craig [indiscernible] from Ross. Wanted to ask about capacity, right, both for FPV and Black Widow. So you showed us a schematic on your facility, tripling the floor space in production. But you also mentioned that you're only working on one shift there. Is there a reason you're only at one shift? Can you go to 24-hour production after you triple the floor space? I mean is this really a 1 to 10x facility if we see that kind of surge out of the buying entities right now?

It seems like you could be facing down a situation where that asset could be needed. And then if you could also talk a little bit about the labor requirements. How technical are the labor requirements that you need to put in place this greater manufacturing with best league. Is there an extended learning period for these employees to come online efficiently? And what are you doing to prepare?

So sorry, can you repeat the first half of that question one more time?

So your Utah facility, right? How [indiscernible] is the production between the different [indiscernible]. And you're tripling your floor space, right? You've got on [indiscernible], but one series of base, one pod that runs 1 shift. And you have plans you shared to triple that. Is there a reason you only run 8 hours? And then, is that really a 10x facility if you 24 hours?

The -- okay, so I'll kind of reverse answer the questions a little bit. So 10x the facility. Not necessarily because after you start hitting like -- if you start hitting a third shift, you're going to start losing a lot of efficiencies in there, right? And also the inventory coming in and inventory flowing through, you're going to start losing quite a bit.

Now if you ask me right now, from 1 shift to 2 shift, there's not -- there's no inefficiencies. We would definitely double the capacity right there. Doubling up the floor space, we're still going to be pretty good on that area. Now I also want to correct that right now, the plan is not to expand the facility immediately. We do not need that expansion and to triple the size.

Now we already have leased the space. We're already moving the manufacturing from the yellow area into the new empty space. And we're going to expand a few areas also for FPD. So that's the current plan, but we have the capacity or capabilities to expand further.

Now if you ask me what it takes and this gets into the second question as well. The manufacturing process, unfortunately, we've got some great manufacturing engineers at our facility. The -- there's not so much a technical capability, but it's a mind tech capability that we're looking for our guys on the manufacturing floor. Guys who are open to communicate, hey, I think it would be faster to do something this way. Hey, I'm having trouble putting these together. The manufacturing engineers we have are designing new tools and tool sets to be able to replicate quality checks faster. To replicate the production to make it easier, so you don't have to determine how much do you have to torque each of the crews.

These guys have made the manufacturing process very simple. Our partners with partnership with Palantir, our MES systems that we're using have really been able to enable us to not necessarily need a very, very technical person on the manufacturing floor. In fact, as we release these requisitions for hiring. We're getting hundreds and hundreds of applications where we're able to really define the mindset and the type of people and the energy that they have to bring into the factory forward. We've got great workers on our factory for that are enabling us to do this. So if we then said, take what I just said, hey, we need to hire a second shift or third shift. We've got those folks that were able to easily bring on to quickly onboard them through the manufacturing process to scale up quickly.

One thing I want to add to that before we go on because everyone keeps asking the same question on the production in this net. A 1,000 drones a month what we have right now is $30 million a month with 1 shift, okay? So we did $40 million last year, right? So if you double that shift, you're doing $60 million a month with just one product.

So people lose that everyone just talks about, they want to hear about tens of thousands a month. But we can -- like you said, if we do 2 shifts on 3 different lines, I mean we're doing hundreds of millions a month.

So in the context of one of our global [indiscernible] trying to find a politically correct word, but another global player making 10,000 drones [indiscernible], right? There clearly is interest in having that kind of capacity. Is that something you aspire to serve?

Well, we -- I mean looks to be like China, our enemy, I'll say it. Russia, our enemy, we're banned from China. So -- they are -- they're making in [indiscernible] million a year. Russia is making [ 3 million to 4 million ] a year. Ukraine is making [ 3 million to 4 million ] a year. We have to get there. And if I really don't care about people's political views, but this administration has actually kicked it into gear to do so.

We're still we're still going to go faster, I think, and that's not just being selfish as a business owner that makes them. But if our adversaries are making [ 4 million ] a year, we've got a kicking in the gear. And we're ready to do that. We have the -- I mean we just need to the many startups that are getting to this industry now, but they do go through the valley of death. So we have to overcome that value depth with orders. And we can't just say, hey, they're making [ 4 million ]. We want to make [ 4 million ] to someone's got to pay for them. And that's -- we're getting there with that type of a mindset from this administration and [indiscernible] at the Department of War.

Last question, if I may. That's actually a fantastic segue. So M&A, right, most of the private companies out there will be capacity starved, capital starved. And have a limited expertise set. It seems that even though valuations are improving for successful companies like yours, a lot of the private companies out there it could have a very strong desire to be acquired, right? They could even really release their potential to the market.

How broad is this ecosystem that you're seriously considering right now? There is a little bit of a land grab going on and tremendous visibility on spending out of buying customers. How active do you -- you said 1 quarter or maybe 2 a quarter. Is there a potential for that to accelerate? And will these be bigger acquisitions, smaller acquisitions. If you could just...

One of the things that someone asked me the other day, I forgot what interview was, but they were talking about innovation. Is it all coming from China? Is it all coming these [indiscernible] No, it's all coming from Ukraine. The innovation is pouring out of their. And as -- when they're enabled, or someone's enable to export their technology, there's going to be massive opportunities there for some great technology.

It still has to be made in U.S.A. There's a lot of great companies in other countries, still have to come here to be made in the U.S.A. Otherwise, people aren't going to -- the U.S. is not going to buy it. There'll be a few strays that would take too long, and they'll but they typically want it made in U.S.A. You got at least have an arm or a partner that's a majority owner. So there's a lot of innovation coming out in the Ukraine.

To the early part of your question, there's a lot of great companies that -- I mean, they just run out of money. Teal was out of money. It was about to go out of the business. Unfortunately, they had gotten through the first phases of [indiscernible] down select. We came in and we actually built a factory, show some expertise, got rid of the people that didn't know how to do it and built a great factory, and now we're one of the best drone-makers in the U.S. And we think we're as good as the Chinese strong manufacturers, which had a 16-year lead and to be more on that in just a couple of months.

And FlightWave, which [ Sean Webb ], who's back there, I don't -- he's sitting now. We still him from AV. He used to make the switch blades. He came in and FlightWave, they run out of money and they had some great tech. They are the longest flying fixed wing or any drone on the Blue UAS list. So you get these guys with these head starts and then they run out of money because it's a little easier right now, and it's always waves when you're public, you have access to the capital. So we'll be opportunistic with those situations. But I think there's going to be a lot of innovation come out of Ukraine once they have an export path.

We have time for one last question.

Alex Latimore with Northland Capital. I just have one question here. Can you frame the new Department of War marketplace opportunity? Is this a new revenue stream? [indiscernible] the procurement cycles? Anything to do with sweeps maybe there?

Yes, absolutely, right. So the marketplace, remember, I talked about procurement dollars versus O&M dollars. That's where O&M dollars go. So Brigade Commander can go there. It's like GSA catalog. Everything that is blue listed, they could be Army PM UAS office, the program office controls who gets in. We've already sent our stuff in. We're kind of the first -- we're going to be the beta testers of that. And basically, that's where Brigade Commander or company commanders or any it's got a government credit card and wants to buy a thing, go buy a drone off that site.

So infancy stages right now. We're in the middle of the beta testing of that. I think they're going to have the ability to start using it in the next month or 2, but it's going to continue to get refined through the rest of the summer. But that's basically where any DOW unit with money can go there to buy [indiscernible] Because if you think about the SRR program, the what, 55 brigades active in guard, and then you have a program of record SRR, well, they're not fielding golf, somebody is at the bottom of that list that needs drones now and are willing to spend their O&M dollars for it. That's where they go to the marketplace to buy those.

What does it look like to market on that marketplace? Is it kind of a word-of-mouth game? Like how do you get to your...

No, it's like a GSA catalog, right? You've got pictures of your stuff, you got to [indiscernible] stuff and you have a price of your stuff and then you have quantity discounts on your stock. So it's just like the GSA catalog specific to drones and to DOW.

And Alex, yes, think of it as like a poor man's Amazon. I mean [indiscernible], we were flattered when they wanted to participate, hey, you're the first customer that can see and look what do you think, and they're asking for our feedback. We're on the side chatting like this is a [indiscernible]. Like it's pretty interesting I think it's a new way of thinking about it.

They're great [indiscernible] you should buy drones on it. I think we'll have a huge head start over our competition. I do think it will be increase. But knowing the government is going to take a while before it's up. We love the government also. They're great. the best. Thank you, everybody.

All right. That concludes our Q&A portion. Let's give it up for our leadership team. I would ask the leadership actually to step out and you can take your chairs. We do actually just have some closing remarks from Jeff Thompson, our CEO.

I have closing remarks. You didn't tell me about that. What you're seeing is basically Redcat Holdings as a holding company, right? And we -- our whole idea is to give entrepreneurs like Barry Hinckley and Sandy spalling, great entrepreneurs. And we were all saying, hey, I need some help. Can you find some friends to build the boat? And they said, we'd love to build these boats for you. And that was, I think, in July at lunch right down the street.

FlightWave, same thing. Teal same thing. We give them the resources. We don't want to break up their culture. We don't want to make people move. So it's a very interesting model compared to other folks. We have a holding company. If we find a company in XYZ city, we're not going to uproot all their families. So we keep the culture, we keep the speed, and we take all the minutia off the top at all startups, including myself, hate doing [indiscernible] 401(k) plans, payroll, all the taxes, auditors, all that stuff is a pain in the neck.

But what we see is we keep the cultures of those local start-ups as they mature and have access to capital. And it's -- I mean I can't even believe this building was empty and the same thing at Teal. Every time I go to Teal its like, right now, they're kind of rack-and-stack they're going to be using bunk beds pretty soon. But the growth has been fantastic. The biz dev teams all over the globe all the time. We're getting great feedback from all of our stuff. But this is going to be an epic year for us because of the growth. I mean [ $40 million ] from like, I don't know what it was the year before. I don't want to think about those days, to where we're going this year is going to be so compelling. And then obviously, 2027 is going to be massive also. But then we start to work our way into profitability. It's just a normal path. But we're glad that you came here for the ride. We know why you're here. And if we perform all the stuff that you do, you'll do well. So thanks for coming. That's it.

Thank you so much, Jeff Thompson. We are about to year make our way to the shows. We're going to close just with a little glimpse.

Good afternoon, and welcome to Red Cat's Third Quarter 2025 Earnings Conference Call. My name is Steve, and I'll be your operator for today's call. Joining us are the Red Cat's CEO, Jeff Thompson; and CFO, Chris Ericson. Please note that certain information discussed on today's call will include forward-looking statements of 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 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 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 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 comparable GAAP measures as well as definition of the key business metrics referenced and management 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 Investor Relations section of the company's website at ir.redcatholdings.com. With that, I'll turn the call over to Jeff.

[Audio Gap] 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. Red Cat 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 1 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 Blue Ops, 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 U.S. 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 AeroVironment, 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 unpack 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 U.S. Army alone.

While we experienced a 6- to 7-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 3 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 adjacent market. Our partnership in Europe with a battle-proven boat technology gives Blue Ops a 3-year advantage in the USV 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 Red Cat asset. If we only ship 200 boats at the low end of pricing, that is $150 million in revenue. Red Cat believes factories are the moat. Additional expansion strategies are propelled by the need for manufacturing, speed and volume, and we believe factories are becoming a 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 U.S. 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's 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 4, and we're still receiving changes to the black window as late as the last week in July. The unanticipated delays shifted our expected revenue recognition by about 6 to 7 weeks to the right, but our long-term trajectory remains unchanged. In fact, the recent expansion of the LRIP contract to $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 Trichon, new power capabilities combined with swarming. Given some of the delays mentioned, we are needing to lower our full year revenue guidance range from -- for 2025 to between $34.5 million to $37.5 million. 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 3 months with the Army alone looking for millions of drones. We are currently implementing Warp Speed in Salt Lake City and expect to send Palantir and 4 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 trusty prime vendors. As you know, we also previously announced our new product with partnership with Palantir for digital 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 trending 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 2 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. The 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 have accelerated R&D to focus on growing our technological leadership in all areas, including, but not limited to, unmanned maritime surface 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 SRR 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 USV manufacturing is building up with first deliveries expected in Q2 of 2026.

On the capital allocation side, we are focused on deploying capital across 3 key areas: our USV division build-out of Blue Ops, estimated to be a $20 million to $25 million investment to fully operationalize the division. Strategic investments targeting technologies in farming 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 3 to 4 months and then also in Georgia with our Blue Ops facility.

General outlook. Turning our guidance to the full year 2025, as Jeff mentioned, we expect revenues to be between $34.5 million to $37.5 million. This represents Q4 revenues between $20 million 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 thank system deliveries following Blue UAS certification. 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. Our 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 the growing demand for autonomous maritime solutions. Our strategic partnerships with Palantir and AeroVironment are beginning to generate collaborative opportunities that should contribute meaningfully to our revenue growth trajectory. Market conditions continue to be exceptionally favorable in our solutions.

Defense spending on autonomous systems is accelerating globally, driving by evolving geopolitical 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 Red Cat, 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 performance of the business. And with that, happy to answer your questions. So operator, Stephen, if you would please open up the line for Q&A.

[Operator Instructions] First question comes from Austin Bohlig with Needham.

First one, we're just curious on an update regarding the full rate production order. It sounded like previously, you guys were hoping to secure that by the end of the year. Is that still kind of the expectation? And any idea on like sizing of that opportunity?

Austin, thanks for the question. Well, we hope that, that was going to be by the end of the year, but that was before the shutdown. We're still communicating with -- they're using OTAs from now on, as you probably heard Secretary Hegseth last Friday. We do not know the size yet, but considering that LRIP is closing in on a $40 million size. If you look at the President's budget, it's for 2250 systems for SRR, which they have at about $148 million now. Until budgets are approved, no one knows what that's going to be. But I think the size is going to be dramatically larger from the $40 million basically we got in 2025.

Okay. Great. And then just on the boat opportunity, shipping, it sounds like in Q2 of next year. What is the type of cadence for revenue opportunity do you think that could be next year for you guys?

Well, as I said in my comments, if we only sold 200 boats, that's $150 million, and that would be the least expensive 5-meter boat. We're starting with the 7-meter variant, which has lots of opportunities for missiles, torpedoes, black widows. It comes in many, many different configurations because it's the bigger size. And those will be probably in the midrange of that $750 million to $1.5 million. But we think there's a robust need for shipbuilding as there was also an executive order just like the Drone Dominance Executive Order. The U.S. is way further behind in shipbuilding and way further behind than Ukrainians are with their naval capabilities. So we believe it could be a pretty robust revenue stream for us in 2026. A little too early to start giving guidance on that.

We did have a very successful outing in Portugal in September. And once the first hulls are ready to demo, we're probably booked the first 3 months of the year giving demos to almost everybody who wants to take our meeting because of our partner that we have in Europe has 3 years of proven -- battle-proven, not battle-tested, battle proven, which is a key differentiator in the Black Sea. So we expect to get all the meetings. It's going to be up to us to show them how good our brand-new hull is and our capabilities are. And we're actually probably going to add a lot more robust capabilities with additional cameras than they are in other countries right now.

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

All right. I guess on the -- you mentioned the 6- to 7-week delay. Just maybe can you provide a little framework on how much revenue recognition was influenced by that, which products, which programs were affected?

Well, there's a lot of moving pieces to that, Mike. A, because they keep changing the contract from the Army. The good news is we're already delivering on it. We did a delivery today. As we mentioned, we're going to be doing more than 100% growth in Q4. Basically, the way I would look at it, Mike, is if you took -- instead of our production shipping starting in the beginning of July, if you just shifted everything 6 to 7 weeks to the right, nothing has changed with our demand from our customers to -- from the previous guidance. I would say the only thing that was significantly different from -- that held us up in demand was that we had to do some reconfiguring, which I mentioned this publicly about 2 months ago. The FlightWave Edge 130 is a great flying machine, but it's not a very robust tool to hand a soldier that's going to be pretty rough with it.

So the $25 million that we were expecting to have from FlightWave this year, we decided to rip the Band-Aid off early and start that reconfigure a couple of months ago, as I mentioned on a previous call, to make that Edge 130 a more robust aircraft so that a soldier could handle it and would not be breaking it and so the decision was to just move straight to the Trichon instead of messing with the interim version. And that's where we are. That's the only -- and we expect the $25 million in 2025 from FlightWave, which we're not going to get because of that.

Okay. Got it. And then it looks like inventory almost doubled sequentially. Is that largely finished goods, Black Widow? Like what's in there?

Yes. So I'll let Chris take that.

Not finished goods, but raw materials inventory ramp-up, a lot of deposits in there as well. As we've started production now, of course, at the very beginning of any type of process like this, you do have a lot of long lead time lead items that have to build up. And so as we built that out to prepare for, especially the big ramp starting up in Q1 for these deliveries, we've built up that inventory. But that's all in raw materials and parts for those inventories as well as deposits.

Did you say that was for Blue Ops or Black Widow or both?

Black Widow. So a majority of that is Black Widow, smaller portion FlightWave. Blue Ops, we're going to start having that to ramp up this next quarter, but you won't see that yet.

Got it. Okay. And then just thinking about Blue Ops in '26, what -- I think you're launching, again, the demos. Like what's the next -- maybe walk through a couple of steps here. The -- which programs are most visible? What do you think sort of sales cycles are, funding cycles are? When do you think you might get some commercial wins there?

Yes. Well, there's a lot of stuff that's going to be coming up in the 2026 budget for shipbuilding, USVs. It's all out there for the taking. We believe because of our platform is mature compared to competitors, it's 3 years old. It's been the most successful against the Russian Navy and that we have actually improved the hulls dramatically, have some of the best boat building capabilities, and we have the capability to scale rapidly with lots of volume coming out of Georgia. That factory used to do 850 Lake boats per year before we took it over in September.

The USVs that we're making don't require bathrooms. They don't require upholstery. They don't require sound systems. They're much simpler boats to build. There is some great technology in them. There's a lot of sensors. There's a lot of comms. We actually just tested our tech stack this week on a traditional commercial boat. That's not one of our USVs coming out of the factory, and we're able to drive that boat from pretty much anywhere in the world through Starlink, and we've been demoing that in Florida.

So our tech stack is getting mature. We're pretty stoked about that. But -- we'll be able to give you much stronger updates early in Q1. The demo in Portugal was very successful for us. The people know that there's a U.S. option of the most successful USV in the industry. So we'll be able to update you on where we'll be next year -- early next year.

[Operator Instructions] The next question comes from Glenn Mattson with Ladenburg Thalmann.

Nice to see the revenue ramp. I imagine there's a lot of moving parts still, but the gross margin was up, obviously year-over-year, still sub-10%. Like what's your expectation, Chris, in Q4, given this higher revenue level? And can you just remind us where you think you'll be when you're at a higher scale, say, later next year or whatever that may be?

Yes, absolutely. Yes, we do expect this margin of 7% to increase up continuing on to next quarter as well as building up into next year. So we're going to expect to see it probably right around 10% for Q4 and then breaking into Q1 through the end of next year, that will continuously increase, projecting towards 20% by the end of next year. This is part of full utilization of the overhead implementing into it and then starting to bring down the cost on the supply chain. It's for the first time of ramping up, things are a little bit more expensive. But as we accelerate that, we will be able to bring down the cost of that as well. And so that will extend on the low end, 20% by the end of next year, shooting for around 30% to 35% in the long run.

And Glenn, just to add to that, we have to look at each system as a separate entity when we're looking at how to get these gross margins up. So if you look at the Teal products we had in the past, the Teal 2 went from negative 10% to right around 8% to 10% in its first quarter to 20% then to plus 30% each quarter. So previous ramping experience was that it will go up nice and steadily quarter after quarter, specifically as the revenue grows, like we're seeing triple-digit growth next quarter, and we expect similar growth going forward. But each one -- each device is going to have a different margin. FlightWave's margins are actually slightly higher than the Black Widow.

So once we get that switched to the Trichon, that will probably help our margins on an overall basis. But we look at them per unit. We have the Black Widow, we have the Trichon, we have the FANG and we have the USVs. They all have different margin capabilities in their maturity.

Great. When it comes to the Trichon, what programs are you targeting in terms of like the uptake for that UAV?

Yes. What's interesting is the demand is very strong for the -- even the Edge 130, but it's currently not to where we want it to be. We've done some incredible improvements to it in the last couple of months to make it more reliable and adding features, all the things that we're getting feedback on. If there's lots of different programs. Your MRR is still wide open. We could look at MRR with the Trichon. There's a lot of different things. Border patrols really like the Trichon, long-range capabilities with it.

We could also turn it into a loitering munition. It's a very unique aircraft. Our sales team love it. We just need to make it more robust. And once it's more robust, there's a lot of things we can do with that platform. It flies the longest on the Blue UAS list. It's one of the fastest drones on the Blue UAS list. So if we can make it a more robust aircraft, it's going to sell very well.

Great. And then I'm just trying to think about like the first part of '26. I know you're not giving guidance, but like if your prior guidance at the low end was, say, $80 million and you're coming in now just ballpark, say, $40 million, although it's lower than that be $40, say, that's a $40 million delta, and you're saying basically $25 million of that is FlightWave. So the remaining $15 million or so is kick out into Q1. Is that fair? And then what else backfills into Q1 to rise sequentially, say, from Q4 in your mind, Jeff?

Well, obviously, just to bash the haters, the haters out there said that our LRIP contract was $12 million. It's $35 million. The plan for what you see in the President's budget is for $2250 next year, which is probably a small number after the Army announcing they need to deliver 1 million drones over the next year or 2. So all the numbers seem to be going up. LRIP went up. We believe all of 2026 is going to go up. So we're not going to get into guidance yet in 2026. We got burned severely by the government, massive postponements through half the year and then a government shutdown. So we're going to wait until we have our OTA contract, which is going to give us a very great barometer for 2026.

And if you look at how SRR LRIP worked out, Skydio got 7, we got 35. The Black Widow is doing some incredible things in Europe right now. We expect the Black Widow to end up dominating this category of drone, the way it's performing in very contested environments, and we're just going to continue to improve the Black Widow and give the Army a product that we're proud of so that they can be safe and more lethal. So long answer to we're not going to give 2026 guidance with the way this government has been operated. As soon as we sign the OTA contract, which who knows when it's going to be signed, I'm not going to give dates on that. I'm starting to learn at least.

But yes, we're not concerned with 2026 being significantly larger than 2025. Now just to back up here a little bit, all this revenue that we're talking about, almost all of it is from the Black Widow. So we're not getting contributions from the Blue Ops yet and from FlightWave. We expect them to significantly contribute next year, but we're not ready to give guidance yet. So we're hoping to be able to do that at the beginning of next year.

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

Well, thanks, everybody, for joining. We're pretty excited about what's going on. We're excited about where we're going with the Army. We're excited where we'll go with all the other groups. We're going to continue to just keep building and delivering drones. Thanks again for everybody joining.

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