Drone maker Red Cat’s stock dives as fraud allegations take flight

Red Cat Holdings, a prominent player in the drone manufacturing industry, is navigating turbulent skies following serious allegations concerning its US Army contract and production capabilities. The company’s stock took a nosedive, dropping over 8% on January 16, 2025, after Kerrisdale Capital, a well-known short-selling firm, released a report casting doubt on Red Cat’s claims.

Kerrisdale Capital’s report challenges Red Cat‘s portrayal of a lucrative $400 million, five-year sole-source contract with the US Army for Short Range Reconnaissance (SRR) drones. Contrary to Red Cat’s optimistic projections, Army budget documents reveal a more modest SRR budget of just under $25 million for 2025, with similar expectations in the medium term. Additionally, the Army plans to refresh the SRR model every 2-3 years and remains open to switching contractors, which undermines the notion of a long-term, exclusive partnership.

The report also questions Red Cat’s ambitious plans to expand its market to other US military branches and allied nations. For instance, the Air Force has limited use for infantry drones, and the Marines and Coast Guard already have existing drone programs. Moreover, despite Red Cat’s assertions of imminent drone sales to NATO allies over the past three years, there has been no evidence of such sales materializing.

Production capacity is another area where Kerrisdale Capital expresses skepticism. Despite announcing the need for a “mass production” facility since 2022, Red Cat has not made significant capital expenditures to establish one. The company’s 2025 guidance assumes the production of three new drone models at a rate three times faster than its historical best-seller, a target that seems increasingly unrealistic given the current circumstances.

In the wake of these revelations, Block & Leviton, a securities litigation firm, has initiated an investigation into Red Cat Holdings for potential securities law violations. The firm encourages investors who have suffered losses to reach out and learn more about possible avenues for recovering their investments.

Adding to the company’s woes, two key executives, including George Matus, the brains behind the SRR-winning drone, resigned and sold most of their stock shortly after the SRR contract win. These insider transactions have raised further concerns about the company’s stability and future prospects.

As the investigation unfolds, investors and industry watchers alike are keeping a close eye on Red Cat Holdings. The company’s ambitious projections now face intense scrutiny, and its ability to navigate these challenges will be critical in determining its future trajectory.

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