Red Cat has eyes on growth in 2024, and its Teal 2 government deal is a key indicator

The stock market hasn’t been kind over the past year to Red Cat, a Puerto Rico-based drone giant that has a portfolio of drone makers including military drone maker Teal. But that could perhaps change in 2024, particularly given some deal news including a fairly-significant Teal 2 government contract.

Red Cat in early August announced that its subsidiary, Teal Drones, had received a $2.6 million purchase order to supply its Teal 2 drone to the U.S. Defense Logistics Agency (DLA). The Teal 2 is a military-grade sUAS for military, government and commercial purposes that is optimized for nighttime operations. The compact, 2.75-lb drone can fly for at least 30 minutes and stands out as the first drone to be equipped with Teledyne FLIR’s Hadron 640R sensor. In short, it’s a drone providing high-resolution thermal imaging in a small form factor designed for intelligence, surveillance and reconnaissance.

Under the Teal 2 government deal, which was requested by U.S. Air Force Security Forces, Teal will deliver 172 units of the Teal 2 drone. The Teal 2 itself costs about $15,000 per unit, so the $2.6 million order covers the cost of 172 units plus other expenses like training and spare parts.

Red Cat’s Teal 2 drone, designed for military nighttime operations. Photo courtesy of Red Cat.

How Red Cat landed that Teal 2 government deal with the Air Force

The U.S. Air Force Security Forces is an arm of the Air Force designed to defend Air Force bases and installations.

The Air Force procurement of Teal’s drones was sourced by global operations support company Noble Supply & Logistics (NOBLE), managed under the DLA’s Special Operational Equipment Tailored Logistics Support (SOE TLS) Program. The SOE TLS program is a 10-year program with a maximum budget of $33 billion designed to fund purchases of what the DLA calls ‘Special Operational Equipment.’

Red Cat CEO Jeff Thompson said in a presentation at the Canaccord Genuity 43rd Annual Growth Conference last week that the Air Force would be using drones to help protect their bases.

Blue UAS approval

A huge factor in the U.S. Air Force Security Forces’ ability to procure the Teal 2 drone is that the Teal 2 is approved by the U.S. Department of Defense (DoD) as Blue UAS. Blue UAS is the label for a select group of DoD-approved drones for government users, which have been officially vetted as being NDAA compliant, validated as cyber-secure and safe to fly, and available for government purchase and operation.

There are only about a half dozen companies right now that can sell to the DoD, and Red Cat is one of them. In short, those companies have been named special supplier certified for federal government use.

“Drones go through a lengthy process to get approved by the Blue UAS group,” Thompson said. “Red Cat is the first company to have two drones approved.”

That’s the aforementioned Teal 2 drone, as well as another older model, the Teal Golden Eagle. The Teal 2 only received that coveted Blue UAS Cleared List approval in June 2023.

“A couple things have happened in the drone industry that have been pretty large tailwinds for Red Cat,” Thompson said. “Years ago, the federal government actually banned the DoD from using Chinese drones.

That’s a reference to a few efforts, including one instance in 2017 when members of the DoD were banned from using DJI products. In 2018, the DoD issued a ban on the purchase and use of all commercial off-the-shelf drones, regardless of manufacturer, due to cybersecurity concerns. The following year, Congress passed legislation specifically banning the DoD from purchasing and using drones and components manufactured in China.

“We shouldn’t be using Chinese drones,” Thompson said. “They’re basically mapping the U.S. They’re a huge security risk. If we’re using Chinese drones to map out every blemish on a bridge while it’s getting filmed by a Chinese drone, you can see the problems that can happen there. Hopefully we can prevent it by not using those drones anymore.”

That ban — and the subsequent ability for Red Cat to be one of only a few companies certified to provide drones to the DoD — has provided a huge leg up for Red Cat, especially given recent market conditions.

“It’s similar to what China did to Amazon, where they kicked Amazon out of China and then Alibaba was formed,” Thompson said.

More Teal 2 government deals for Red Cat could be on the horizon

While the Air Force contract is huge, Red Cat has landed some recent deals, including the delivery of 54 Teal 2 drones to U.S. Customs and Border Protection, and 10 systems to the North Carolina Division of Emergency Management for Civil Air Patrol’s North Carolina Wing. 

Another recent development for the company is that — in late July — its Teal 2 became available to purchase through the federal government’s GSA Advantage website. GSA Advantage is an online shopping and ordering service created within the General Services Administration for use by government agencies to buy commercial products and services.

A few of the GSA website where government customers can purchase the Teal 2 drone.

It’s like any other online shopping website (kind of) albeit that it’s for people who work in government seeking products for their work. There shoppers can buy one of two Teal 2 systems for just over $15,000 (there’s the Teal 2 with 2.4 GHz, or the more expensive Teal 2 with 1.8 GHz).

Note that the DLA order was not made via the GSA Advantage site, but was instead sourced by NOBLE. Red Cat has not yet publicly announced any orders that were placed via the GSA Advantage site.

Beyond the U.S., Red Cat is shipping its drones to other countries, too. Among them: Ukraine.

“You can’t go to YouTube without seeing a small racing drone in Ukraine blowing up a tank,” Thompson said. “These small drones have changed warfare completely.”

Earlier this summer, Red Cat fulfilled a purchase order consisting of 200 long-range, high-speed FPV (first-person view) drones forUkrainian drone pilots engaged in conflict with Russia. Previously, Red Cat-owned Teal supplied 15 Golden Eagle drone units, plus spares and training to an unspecified NATO (North Atlantic Treaty Organization) member country in 2022, which said it would use them for deployment in Ukraine.

Thompson said more is to come.

“We shipped a few Teal 2 drones there, but we expect to ship a lot more later this year,” he said.

Military service members and civilians have been using drones of all sorts in Ukraine, including units from Skydio, Teal and DJI (as pictured here). (Photo by Sean Gallup/Getty Images)

How Red Cat fits into the current (chaotic) state of the drone industry

The current state of the worldwide drone industry is in a bit of chaos right now, between the end of Skydio’s consumer drone division, China-imposed restrictions on exports of long-range civilian drones and a growing list of proposed U.S. legislation that could ban Chinese-made drones from certain use cases.

For better or for worse, Red Cat has survived for a few reasons. For starters, there’s the fact that its focus is military and industrial versus consumer — and the money is with the former.

Then there’s its ability to capitalize on strong anti-Chinese drone sentiment, and strong ‘buy American’ sentiment.

Teal is made in America

The Teal 2 is manufactured at Red Cat’s purpose-built factory in Salt Lake City, Utah. The company said it currently manufactures 100 units per month but is scaling higher.

“I think our special sauce is having a factory that’s working and producing drones right now,” Thompson said. “Additionally, it’s having the supply chain solved, and building drones that your customers (the military) wants, not just what you think they want.”

But even Red Cat hasn’t fully been all-American. At the end of 2022, Red Cat announced that it would sell off its consumer division of FPV and hobby drones — which consisted of Rotor Riot and Fat Shark Holdings — to a company called Unusual Machines for $18 million (consisting of 5 million in cash, $2.5 million in a convertible senior note of Unusual Machines, and $10.5 million in Series A convertible preferred stock).Thompson said Red Cat elected to spin off Fat Shark “because it has parts made in China, and we can’t have any connection with China.”

The money is with enterprise operations

Perhaps a secondary reason to separate from Fat Shark has to do with the fact that the consumer drone market in the U.S. is fraught. In fact, Teal itself initially launched as a consumer-oriented drone company before it was acquired by Red Cat in 2021.

“The company we bought was limping along,’ Thompson said. “Fortunately before they got completely crushed — they switched into defense.”

That was likely a smart move for Red Cat. Red Cat reported that its enterprise revenues increased by more than 100% in fiscal 2023 — and was entirely attributable to its Teal Drones subsidiary.

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