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Red Cat’s CFO Out After Auditor Fraud Charge, Revenue Misstatement
Drone maker also pays steep price for acquisition after winning government contract.
January 6, 2025
Six months after being appointed Chief Financials Officer at Red Cat Holdings, Inc. (RCAT), a drone maker, Leah Lunger announced December 11, 2024 she is quitting.

Lunger had been interim CFO since March 2024, six weeks before Red Cat’s auditor BF Borgers was charged in a massive fraud scheme impacting more than 1,500 SEC filings.

The year prior, Red Cat misstated its financials by:

—Overstating revenue $5.3 million, or 115.2%
—Understating net loss $1.1 million, or 4.0%

In February 2024, the Securities and Exchange Commission (SEC) subpoenaed Red Cat, demanding records and other information related to the misstatements.

Separately, two months before winning a contract to supply the U.S. Army with short range unmanned aerial systems (UASs), Red Cat paid $14 million to acquire FlightWave Aerospace Systems, a maker of long range UASs with assets of just $650,543.

Ninety-five percent of the purchase price is goodwill.

Red Cat issued stock to fund the deal, increasing the share count by more than 3 million shares, according to our estimate, or approximately 3.9%. Since the acquisition, shares outstanding have increased by nearly 5 million, or 6.2%.

In addition to a class action suit accusing it of securities fraud, Red Cat was accused last month of lying to an investor in the company’s preferred stock.

It’s unclear to us what business Red Cat was in when it was founded as Oravest International, Inc. in Colorado in 1984. In 2016, Oravest changed its name to TimefireVR, and reincorporated in Nevada. In 2019, TimeframeVR became Propware via a share exchange, providing cloud-based analytics and other services to the drone industry.

In 2020-21, Red Cat made four acquisitions, including Teal Drones which was largely responsible for the recent federal contract win.

With an Enterprise Value (EV) of approximately $1.13 billion, Red Cat is priced as if it will grow annual sales to more than $2.2 billion, up from an estimated $24.7 million in 2025. To justify its current share price of $14.19 our Reverse DCF— which quantifies investor expectations embedded in the current share price— indicates Red Cat must:

—Grow sales 45% annually for the next decade— after meeting consensus sales growth estimates of 38.7% and 363% in FY25 & FY26, respectively— twice the industry’s forecasted growth rate through 2032
—Immediately increase NOPAT margin to 12%, significantly higher than our 3-year average estimate of (192.6%)
—Increase Invested Capital (IC) Turns to 2.5 from our 3-year average estimate of 0.14

Notably, the current share price also implies Red Cat increases Return on Invested Capital (ROIC) to 30% from our 3-year average estimate of (23.04%):
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