Why Red Cat Stock Crashed Today
Key Points
Red Cat announced plans to raise $225 million in new cash.
The company must issue and sell 23.9 million new shares to make that happen.
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Up 66% over the past year, Red Cat Holdings (NASDAQ: RCAT) stock gave back much of its gains this morning, falling 15.2% through 11:50 a.m. ET after announcing plans to issue and sell 23.9 million new shares of stock in an effort to raise $225 million (before fees).
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Red Cat needs cash
Two months ago, just after Red Cat's most recent "earnings" report (the quote marks are because Red Cat didn't actually "earn" anything, but lost $0.17 per share), I posed the question: "At what point production scale will allow Red Cat to pivot from losing money... to earning profit"?
Red Cat's answer today appears to be: Not soon.
Addressing its decision to sell 23.9 million shares at just $9.40 per share -- a 15% discount to yesterday's closing price -- Red Cat explained it needs the money "for general corporate purposes and continued acceleration of strategic growth initiatives, including, but not limited to, acquisitions or business expansion, research and development, capital expenditures, and working capital."
While it might be nice to see some consolidation in the drones sector, with Red Cat snapping up competitors at attractive prices, I suspect most of the money will go to the "general corporate purposes" part of that explanation -- money Red Cat needs simply to keep the doors open and the lights on.
How long can Red Cat hang in there?
Why do I say this? According to S&P Global Market Intelligence data, Red Cat has never generated positive free cash flow on its own. Instead, it's burned increasingly large piles of cash, and more than $118 million over the past 12 months.
Without this new cash infusion, Red Cat was on course to be out of cash within a year. With the cash, it can probably keep purring through 2027.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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