Red Cat Holdings Inc. (RCAT) shares took a hit Wednesday morning after the drone company disclosed it had fired its chief revenue officer for cause — and that the executive had already filed a lawsuit over it. The broader market was mixed, with the Nasdaq up 0.03% and the S&P 500 gaining 0.21%, but Red Cat wasn't catching any tailwinds.

Executive Termination For Cause

According to a Form 8-K filed with the SEC on Wednesday, Red Cat's board decided on Friday to terminate Chief Revenue Officer Geoffrey Hitchcock for cause, effective Thursday. The board determined that grounds existed for "Cause" under Section 11(c) of Hitchcock's employment agreement. As a result, the company said Hitchcock is not entitled to severance benefits or accelerated equity vesting beyond salary and benefits earned through his termination date.

Company Denies Allegations

On Tuesday, Hitchcock filed a civil complaint against Red Cat, alleging retaliatory termination under New York and Oregon law, breach of contract, and breach of the implied covenant of good faith and fair dealing. In the SEC filing, Red Cat said it believes the claims are without merit and intends to defend itself vigorously. The company added that it will evaluate potential counterclaims against Hitchcock.

Red Cat Technical Analysis

The technical picture isn't pretty. Red Cat is trading 10.9% below its 20-day simple moving average of $9.06, 22.6% below its 50-day moving average of $10.43, and 28.9% below its 200-day moving average of $11.35. Those levels suggest the longer-term downtrend remains intact.

Momentum indicators are also weak. The MACD is below its signal line with a negative histogram, indicating selling pressure continues to outweigh buying interest. The stock also remains below its June death cross, where the 50-day moving average fell below the 200-day moving average.

Traders may watch resistance near $9.50. Initial support sits around $7.00, followed by the 52-week low of $5.77 if selling accelerates.

Earnings And Analyst Outlook

Red Cat is scheduled to report quarterly results on August 6. Analysts expect the company to report a loss of 18 cents per share, unchanged from a year earlier. Revenue is projected to increase to $22.53 million from $1.53 million a year ago — a massive jump, though partly reflecting the ramp-up of drone deliveries.

Wall Street maintains a Buy consensus rating with an average price forecast of $21.25. Recent analyst actions include:

• Roth Capital initiated coverage with a Buy rating and a $25 price forecast on June 1.
• H.C. Wainwright & Co. initiated coverage with a Buy rating and a $20 price forecast on May 27.
• Needham reiterated its Buy rating and raised its price forecast to $20 on March 19.

Red Cat ETF Exposure

Red Cat is a significant holding in several drone-focused exchange-traded funds, including:

• Defiance Drone and Modern Warfare ETF (JEDI): 5.20%
• REX Drone ETF (DRNZ): 6.36%
• Moonvest ETF (MNVT): 5.00%

Large inflows or outflows in those ETFs could influence trading activity in Red Cat shares.

RCAT Price Action: Red Cat Holdings shares were down 6.29% at $8.045 at the time of publication on Wednesday.

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