Patterns - The cap raise many saw coming

Long post, but trying to organize my thoughts and opinions. please add what you can!

Based on patterns I said there would probably be another announcement last week. It was start of this week instead. When a company says they are not going to announce small sales and then they announce 2 small sales on back to back days. AND THEN announce a successful deployment with no sale attached. And they make a big deal our a revenue number that was ~60% government grants and not sales. You think they are probably up to something bigger. The other indicator was 75m shares traded on 300k in sales announced. That is more shares than trade than in an average month. It appeared like something was coordinated or leaked as 300k in tester units does not mean much. Just appearance. Who knows but patterns often work. This pattern each of the last two years meant a capital raise and this year it does too. I know a lot of you saw this coming too.

Now we are here with a capital raise. Nothing you can do. Further dilution. You can be sure that some sort of sale will be attached to it.

If it is a weak sale relative to MC (only a few million) they really do not need the money to produce and are probably doing it just because they are worried about market conditions. That would be worrying and you will want no part of the capital raise and you will hope they pawn it off on a new class of institutional investors.

If it is a stronger sale (the Saudi Sale) it will be interesting to see how DRO handles it. It would be peculiar to announce a strong sale then raise at low prices. You usually want to let price run first then raise. Whoever they sell these shares to will probably be able to sell them for more and turn a quick relatively risk free profit. Remember DRO is a company that IPO’ed at 20c 4 years ago and has lost money for most investors. It should want to give those same loyal investors a chance to profit. IMO the fair way would be a pro-rata rights issue based on shares owned by all current holders. But … patterns. Last year DRO did not give retail a chance, instead it sold shares for 20c to Regal while retail holders were paying 30c. You don’t want them doing what theydid with Regal last year. If the sale looks big and the shares are at a discount or slight increment we should pay close attention to whom DRO sells to. If they sell to a small group of institutions, especially ones that are close to DRO or close to the directors it could at least look like self dealing. I doubt they do that but if they you should be worried and probably upset.

My view on the Saudi potential sale. And I welcome your view.

The sale is around US40-50m. Only guns. Lets pick 50m. That is 70m AUD. I believe DRO had said that the 70m Saudi deal would require a substantial deposit and this capital raise may not be necessary. Based on patterns I do not think that is a likely and DRO will want to raise anyway. Here is how I do the math. I am assuming some reasonable case numbers as a starting point

70m (revenue)

-10m (discount for interest on loan or equivalent dilution. this is the most variable number. Assume it take DRO 1.5 years to get paid and they are paying around 10%+ on their current loans like R&D one. this 10% is actually probably a bit cheap)

-35m (cost of guns. normally assume higher margins but this should include some volume discount. so maybe 50%)

-1m (cost of shipping. using similar ratios to last shipping organized by a company associated with Director Jethro Marks)

-17.5m (commission do distributor. This is what worries me the most. If we guess that Rafael, Ascent, and IAI are leaders in the space. Then maybe DRO, who hasn’t won other big deals, is winning in part because they are paying a VERY HIGH commission to the broker who has connections. I do not know but I am curious. This seems to be how it works in the middle east. if someone can find the real number that would be great)

-1m+ (I would assume that directors are going to want something for this sale, either more options or cash or both, maybe they will not want any more and be happy with 30m ZEPOs and other options and shares)

=5.5m profit earned over the 3 years it takes to deliver (not counting for operational costs)

Currently there are 253m shares, 50m options(30m are ZEPOs), and we can expect another 25m+ from this round (it could be alot more)

So the 5.5m profit over 325m shares is around 1.5c a share earned over 3 years. I need to check the math.This number would be lower if the Saudis do not pay of course. And we should consider that risk. Better economic assumptions (especially the Saudis prepaying, which doesn’t seem likely, can get this to 4-5c per share, but anything else involves some stretch).

Another way to look at this is that it is likely a one-off sale. The $3m sale took 2 years to deliver and is still not paid for 2.25 years later. This one will likely take 3+ years. So we are looking at 70m in sales (under 10m in profit) over 3 years. It’s just not that life changing through that lens. The current market cap of 40-50m (adjusted for options and current issue) isn’t based on the 3-4m in current sales but partially accounts for larger sales like the Saudi one.

We should find out

+what quality of sale it is.

+ assuming it is a high quality sale. then

+if this order is only DroneGuns (i could write on this a lot. but very bad sign, MUCH better if it is substantially Sentinel or Sentry),

+if the commission is really 20%+ (very bad sign).

+who the offer is available to (very bad sign if it is a high quality sale and mostly or only to institutions, worse if it is to organizations close to DRO and its directors)

I will follow and I may participate in the issue if the sale is strong and the price is right. All my opinion and based on furthering our knowledge. Please add what you can. For now I just do my DD.