Red Cat Holdings stock fell 13% Friday morning following a critical short report from Fuzzy Panda Research that questioned the drone maker’s Army contract and production capabilities.

The short seller’s report claimed Red Cat’s recently announced Low-Rate Initial Production contract with the U.S. Army is 46% smaller than what CEO Jeff Thompson had previously promised to investors. According to Fuzzy Panda, the contract is for 690 drone systems, significantly below earlier projections.

The report also challenged Red Cat’s assertion that it has exclusive access to the Army’s Short Range Reconnaissance Tranche 2 program budget. Fuzzy Panda claims competitor Skydio has already delivered "hundreds" of drones for the same program in May, potentially limiting Red Cat’s share of remaining funds.

Former employees cited in the report raised concerns about Red Cat’s manufacturing capabilities, claiming a historical 60% initial failure rate for drones, testing bottlenecks, and manual assembly processes. The short seller stated they toured Red Cat’s Teal factory and "saw the issues first hand."

Fuzzy Panda also highlighted significant turnover in key positions, including the departure of Red Cat’s CTO, Director of Software, and Head of Manufacturing, along with three CFOs in less than two years.

The report further questioned the company’s disclosure practices, suggesting Red Cat prematurely announced winning the Army contract in November before finalizing terms, which Pentagon officials reportedly indicated took eight months to secure due to "concerns about RCAT’s ability to deliver."