Last night I was jamming with a mate and some kids I'm going on a surf trip with later this year. One of them, Ando - a sparkie who has just finished his apprenticeship, tried to pitch me Droneshield. He was a little light on detail, in fact he misquoted the name of the company, but he'd been tipped into the stock by a mate of a mate and he assured me it was "a sure thing".

Now Ando is a lovely kid. I've got a lot of time for him. But he's a country bogun. When the Ando's of this world are pitching me a stock, I'm going to assume the top is in.

It's a bit of a mea culpa for me after reading of Droneshield's intention to cap raise at 30 cents (yesterday's close was 37 cents). It's also a bitter reminder of how this industry operates.

According to the AFR Droneshield is proposing to raise $9-11 million for inventory ($7 million) and engineering/sales expansion ($2 million) via an institutional credit raise and retail share purchase plan. A link to the article can be found here.

I had hoped the investment by Epirus late last year, resulting in a cash balance of $10.3 million at 31 December, plus favourable payment terms on the most recent large deal they signed, plus Oleg's statement to Strawman members they intended to be cashflow positive each quarter going forwards, would be enough to get them through. On that I was clearly wrong and have to own that. However, I think there's been plenty about how it's played out that just stinks and puts a big question mark on management and the Board.

In their defense if they need to raise you would probably argue that if they view the price as currently elevated, this is arguably the time to do it. I also haven't completely forgotten the fact that small companies will still need to access funds and CRs are a legitimate way to do that. On the other hand I wish there had been a little less cloak and daggers. Oleg was too smart to ever get caught saying outright they wouldn't need to raise, but there was no shortage of suggestions that was the case. I guess that's somewhat par for the course in the industry, but it doesn't mean I have to like it.

A bigger red flag for me is the significant sale of shares by Oleg and another board member last month. I wrote about it at the time here as not looking great in the context of other announcements they had made. It looks a lot worse now. In my view there should be a compulsory blackout period between a reporting period end and issuance of the report. Plenty of companies do that voluntarily. It should be mandated across the board.

The share price has run since they sold and the raise is at a higher price than they exited. However, in my view that's not relevant. It didn't run on news and they weren't to know that it would.

Finally you've Bell Potter, who I don't think have ever looked at a stock they didn't want to buy, initiate coverage last year with a buy recommendation. Now they're the folks going around trying to hock the stock to instos. Nothing to see here.

To be clear, I still like the company and the tailwinds it has going. But it has left me questioning whether the Board is working on behalf of shareholders and if they're not, I'm not sure a polar jetstream would help them reach their destination any faster.

[Holding - maybe not for much longer]

It was a decent update and 4C by Droneshield today. Revenue for FY22 came in at $16.9m, which is impressive growth, but with $19m in order backlog (cash receipts) and $200m in the pipeline FY23 looks like being a very good year for them.

Still cash flow negative but with the bank balance to hopefully support them to inflection.

One thing I will query them on is how the two deals in Dec and Jan of $22m reconciles to the $19m cash backlog. It seems they've already been part paid for one (presumably the Dec deal), which suggests accelerated payment terms. It's probably nothing but worth keeping them honest. I hold a small amount of this.

Announcement covered by @slymeat and @Lambo but the line that I found interesting was "Importantly, this order does not require working capital, due to the payment structure from the customer". I reckon that line is a bit clumsy because I don't see how a customer's payment terms changes the fact Droneshield will need to pay for the inputs, but I interpret it as meaning they're getting all - or at least a chunk - of the order paid up front. Replace the term does not require for does not adversely impact and the line makes more sense to me. They would be getting the payment up front if, for instance, the customer was Ukraine.

Putting aside speculation about the customer, if they are being paid up-front that's great news for Droneshield. Their cashflow in 1H FY23 (calendar year aligns with financial year) should look really good. The positive working capital nature of the business has been one thing that's just kept them on the watchlist. Up until now they've struggled to make the inflection to positive free cash flow and although they managed to do so last quarter that was on the back of substantial government grants. Could a deal like this be the catalyst to delivering sustainable free cash flow, without needing to tap shareholders again? I dunno but they've been stringing together a series of pretty constructive announcements lately.

[Not held - but definitely interested]