$RCAT CEO Interview: U.S. Army Deal, NATO Opportunities, and AI Revolution

Yeah, you know, everyone loves you when your stock's going up, everyone hates you when it's going down. Well, it's been great. Look, our community, we've been all over the story since July, since the stock was about $2, and we've been riding everything with you. This is the first time I have a chance to talk with you, but there have been people in our community who have interviewed you and talked to you in the past. Alpha Wolf Trading, we've seen some of his interviews as well, so we're caught up on the story and, you know, we're here to tell the story to everyone else who hasn't heard about it yet. There's over 3,000 people listening live right now.

Yeah, sure. So the way we have to put it with the US Army is there's 5,880 systems. I want to be very accurate with this. Each system contains two Black Widows and one controller, which is about $45,000 for that system. If they field all 5,880 systems, that would be at least $260 million. And as we said on the town hall the other day, usually there's about anywhere from 30 to 50% to 70% of extras for repairs, spares, and training, which would probably bring the contract, if they field all 5,880, up to, yeah, $400 million.

So if you look at manufacturing, manufacturing is really hard and, you know, that's one thing that I truly believe. But to take a prototype and then get it into mass production, having high yields, a very reliable drone is hard. But we are really getting good at it. So I'll give you an example from the past that we did with the TL-2, and then I'll apply it to where we're heading with the Black Widow. It's all about your gross margins. So when we built the factory almost two years ago, we had in our queue, we used to have a weird year-end, it's now switching to calendar January 1, but we had a quarter that ended in May, you know, a year and a half ago or so, that we had negative 10% gross margins. And why would I even talk about that on this show is because we had built the factory, we had fully loaded cost basis, and we weren't building the drones yet. So the next quarter we did, we swung 20%. We went to plus 10% gross margins. And then the next quarter we went to 30% gross margins. So we had a 40% margin swing just by finally getting to build the same drone over and over. And as the cost of your factory is here and your amount of drones is here and then here and then up and up, your margins go up with that.

So all that said, we are going to be now, and we built the TL-2 for a while. We shut the factory down to build the prototypes for this Army contract, and so then we had to turn it back on. So your margin is going to be lumpy when you're not just making the same thing or same widget on any factory production line. So now we know we're going to be making this drone for at least three to five years, the same airframe, the same aircraft. So we'll be punching these out at high volumes, and our cost structure hasn't changed much, even though we spent the last two quarters of this year preparing for 2025 because we had a good idea that we were probably going to win this contract. So we're ready in January to really start ramping. We believe in our forecasting now. This is just in the Black Widow. We have three products now, we used to only have one. The Black Widow, we think once we get through three-quarters of production, we can get close to 50% gross margins, which would put us at the end of next year, and at that point we're basically break-even or cash-flow break-even.

And sorry, end of next year, yeah, like once we get to the third quarter of producing the same drone, that's when you'll see the margins increase every quarter. But right, we expect them to get into that high 40s, low 50s at the end of next year.

Let me give you some detail on this. Because when I see, you know, on some of these platforms all the haters, and I got quite a few of them, they don't look at the cap table. I'm the largest shareholder, so I'm not going to do some crazy raise just to dilute. That's insanity. It means you have done no due diligence. But, you know, whenever we do something, we're trying to raise the right amount of money at the right time for the right things, not to just raise money. And a lot of people will come back at me and say when you can raise money, you take as much as you can. But our customers, the Department of Defense, it's one of the only budgets that has to be there by law every year. We're not going to have a recession. We're pretty much recession-proof as a company. So let's back into a raise.

So as we mentioned on the town hall, we have a facility for 15, and I've never done warrants, but we did do warrants on the debt, but they're not cashless. And warrants are hell and toxic, and they'll just short your stock if they have them for free. But if they have to write a check, then they're now an investor. We put it way above market, and we still have $6 million left in that facility. We might even close on that right now just to not worry about money right now until we get a bunch of data from these contracts. So we could close on that before Thanksgiving. And it also raises us a bunch of money, about $5 million at $6.50, but we did the debt when we were like at two bucks, as you were just mentioning. So it raises about $5 million there. We can take in $6 million if we close this week, and then we get into, we can go well into first quarter without having to worry. And by then we hope to have the, and I know we're going to dig in deep on the SRR contract for the Army, but we'll have a lot of data on how much money we're getting up front from the Army.

And also, I don't know if you've been following, but defense tech for startups is getting hot again. And the Pentagon just announced a billion-dollar loan program. You can borrow from $10 to $150 million. It's coming from the, oh, the Office of Strategic Capital. And it's basically for companies that, lots of times when you're waiting on contracts and waiting to produce something, you go through the valley of death, and that's killed a lot of companies dealing with the government. So they're trying to really solve that. Not only that, they're also trying to solve that with Replicator. So very long answer to, we're not against raising money. If the stock's at $30 after some announcements or something like that and we want to raise $20 million bucks, it's zero dilution basically, right? So we're not against it, but we got a lot of good stuff going on, so there'll be a better time for our shareholders, which I'm always going to protect. As your largest shareholder, I'm going to protect you investors in this company.

I don't make stock predictions on price. But I will say our direct peers, you know, like Anduril trades at 28 times revenue, Shield AI I think 24, Skydio, who we went head-to-head, you can't say they're not a comp, we went head to head in this contest to win this contract, trades at 22 times revenue. With what we are possibly going to do for next year, let's just say it's $100 million, and that's not our official guidance yet, we haven't put it out yet. We did put $55 million out as official guidance about a month ago, but that was before SRR. But even if say it's $100 million for 2025, we're cheap, is what I'll say.

Yeah, so NATO, we had literally some very specific contracts that they told us point-blank at, actually, I don't know if you follow the company really close, but we were at AUSA, which is the Army's big conference every year in DC, and that's when we launched the Black Widow. Actually, a couple of the countries that we've been talking about with these NATO contracts were at our booth for quite some time, spent some time with them, and they were very point-blank. We're just waiting to find out if you're winning SRR. We don't know what that means. But the other thing that it means is these European countries, they actually go on vacation, and now we're closing in on, I mean, they're gone the whole month of August, even though they're in a war, you know, close to the war zone. I don't know when we're going to hear. I don't think it's going to be that long, but, you know, we're hoping it's soon. But I was so wrong with the announcement of SRR being in September, even though they internally did their selection in September, they didn't notify us until later. So I'm not going to make dates on the NATO contract. We got plenty of drones to build before that, and plenty of other stuff on the US side that is starting to come in now.

Yeah, so let me give you guys some of how it will happen, because this is how it happens with every single large entity that we deal with in defense and kind of on the DHS side. I'll just keep using examples because I'm not making predictions. We did a bake-off with two other companies for Customs and Border Patrol. They bought 50 drones from each one of us. We won the bake-off and then they bought hundreds of drones, you know, six months later. You'll see that same pattern with almost every large industry or any branch of the government. If you see a foreign country order 100 or 200 drones, they're typically buying them. We go over, we start doing the training for those people, get them up to speed on that drone, and then you get the real program of record after you've gone through that process, and they give you the much larger order. So you always get a small buy, couple hundred or 100 or 300, and then you got to go do some work, you get over there, you do some training. You know, we just had one of our partners doing this in Israel, and then they get the large order. So specifically, if they're sole-source, then at that point it's, yes, you got to do the process and hopefully you get the big one.

They're a great company. And I would just point to you, they just recently did a partnership with Fly by Robotics, a small company out of Santa Monica. That means nothing. I think that they have some of the best products out there. But let me just say what the Black Widow's going to do regardless of Palantir. We are building the most useful aircraft I think the Army's ever had. That's going to be fitting in your rucksack, it'll sit in your rucksack and you'll be able to pull it out. It'll have better cameras than stuff that costs 10x. It'll have artificial intelligence, some of the best artificial intelligence on the planet. It'll have the best visual navigation. It's EW-resistant, and we've passed EW resistance in Ukraine. You won't need GPS. It can go into dark mode, which means no matter what anti-drone technology you throw at it, if it can see you, it can kill you.

Oh yeah, my lawyers hate when I do these things. I'll just say, yeah, Black Widow is going to be an unbelievable platform. It's blowing my mind already. But there's a lot of stuff we can do to that drone before we deliver it to the US Army, and everybody's going to want it.

Yeah, so I got to be careful with UMAC, I'm actually on the board. But again, let's talk about the market in general. When we spun off UMAC, they make the FPV goggles, I think mine are right here. Going to the in-laws for Thanksgiving, I want to get some stick time so I don't have to hang out the whole time with them. But they make Fat Shark goggles, they make FPV drones, and the initial idea to spin off UMAC was because we go through audits with the US government, we don't just get audited by our audit firm, the PCOB audits, the US Army comes in and audits our facilities, and we didn't want to have any connection with anything made in China. And a lot of UMX stuff is still made in China, but they've actually, myself and Drew and Allen the COO, really smart team over there, 14 months ago we started building a Blue UAS flight control, and they got through the Blue UAS certification really quick with their Brave 7 flight controller.

So FPV has become so critical because of the Ukraine war. I think the reason UMAC's doing really well and it's going to continue to do well is they're the experts in the world on FPV. They've been doing it, I connected with Rotora and Fat Shark in 2015. I was at a crazy race in Dubai and I tried to buy the Shark back then, and tried to buy it for years, and they kept saying no. But they are the experts in FPV in the globe. Fat Shark basically invented first-person view. And I don't know if your whole audience knows what FPV is, but it's basically small drones in Ukraine that they are putting kinetics on, explosives. They use the goggles, they find targets, and they use a $1,000 drone and they can take out a $4 million tank. FPV drones are the most used munition in Ukraine right now. They bring up the lethality of a soldier by multiples, never seen this before in infantry. So that's going to continue, and now that the US is looking at FPV, the US is a much larger army than Ukraine, and I just think UMAC is very well positioned to be the leader in FPV because they've been the leader in FPV since 2015.

Yeah. So we have a product called Fang, and they're going to be one of the parts suppliers for Fang. And as we, now that we're getting contracts from the Army and other entities, I think we'll do well.

In the FPV space ourselves with our FANG product, because we have three drones that fly off the same controller now. We have the Edge 130, which is switching to—it'll be called the IN once we put the new radio in it, and that'll have EW capability. The Black Widow works on our new controller called the WEB—the Warfighter Electronic Bridge—and our FPV drones are also going to use that same bridge. So not only will we be able to use the same controller for these drones, we'll also be able to fly multiple vehicles with one pilot.

No, we don't need help for the US Army contract. But if you look at the numbers—even with our contract, the requirements were written around 2015 after ISIS used some FPV drones and was using them against our soldiers. So they built the SRR requirements based back then. So the 58,880 systems—that's an antiquated number. They're going through 10,000 drones if not more. One of our board members just got back from Ukraine—it's much higher than 10,000, but until someone puts that in an article, we'll just say it's 10,000, which he's been out there a million times. 10,000 drones a month, and a lot of those drones are like ours. They usually use the Mavic 3—that's what we're going to replace over there if we get a contract there. So the amount of drones that the US would need to manufacture is probably in the millions. Russia is making 300,000 a month FPV drones. So we've got our team at UMAC that's been doing this since 2015 and knows the space inside and out. Drew is one of the best pilots in the world—that's the COO—and they're going to eventually—I mean, they're going to get a pretty—I think they're going to get a significant contract sooner or later, if not through us selling the FANG, through other mechanisms. But there's going to be a few of these companies that make FPV—there's already a few right now. I think there'll be a couple of leaders, there'll be number one and a number two, maybe a number three, with millions needed, and then there'll be 10 or 15 other guys that fill in what those guys can't make. But I expect that UMAC will be a leader in the FPV space by far.