Short-selling investment firm Kerrisdale Capital believes the recent run in shares of Red Cat Holdings Inc (NASDAQ:RCAT) is built on hype rather than reality.

What To Know: Kerrisdale Capital announced a short position against Red Cat on Thursday morning in a report titled, “Flying Blind.” With Red Cat shares having gained more than 1,200% over the past year, the short seller believes Red Cat has reached its peak, at least in the near term.

Kerrisdale attributed most of the run in Red Cat shares to the anticipation of a production award for the U.S. Army’s short-range reconnaissance (SRR) drone.

“But expectations for both the SRR contract size and the potential for follow-on sales bear almost no relationship to reality,” the short seller said.

“Having set almost impossible expectations, Red Cat is set to be blown out of the sky.”

Red Cat is preparing a statement on the Kerrisdale Capital short report, a spokesperson told Benzinga in an email.

Red Cat announced in November that it was selected as the winner of the U.S. Army’s SSR program of record. The company said in the press release that it was “also preparing to meet increased demand across the rest of the U.S. DoD, federal government and allied countries, to support operators and warfighters globally.”

Kerrisdale claimed the contract was preemptively announced without the Army's permission and is “much smaller and less favorable” than Red Cat’s management team has implied.

The short seller said management has talked about the potential for $80 million in revenue in 2025 as a result of the contract, but pointed out the Army’s detailed funding request for 2025 shows that it only expects to spend between $20 and $25 million on drone systems this year.

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Kerrisdale also claimed Red Cat management has been misleading investors about its manufacturing capacity for years and has pushed the idea that the SSR contract will open up other opportunities within the U.S. defense sector and across NATO militaries, but Kerrisdale believes it’s “nonsense.”

“Red Cat's 2025 guidance excluding the SRR is laughable, and we don't think the company will come close to meeting it,” the short seller said.

Finally, Kerrisdale flagged recent executive departures including the resignation of former CTO George Matus, which occurred about a week after the SSR announcement, as well as the resignation of former CFO Leah Lunger in mid-December.

Both executives sold large blocks of shares upon departure. The short seller also highlighted continued insider selling over the past month from executives including CEO John Thompson.

“Given the slim chances for Red Cat's 2025 plans to come to fruition, shareholders may follow suit,” Kerrisdale said.

Check out Benzinga’s Insider Trades page for Red Cat Holdings and more information. For detailed information on Red Cat Holdings, sign up for Benzinga Pro.

RCAT Price Action: Red Cat shares were down 1.88% at $10.71 at the time of publication Thursday, according to Benzinga Pro.

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Photo: Courtesy of Red Cat Holdings.