What might be a bull case for Droneshield's business prospects is also likely a bear case for broader humanity. Depressing, huh? For those that haven't seen, tension in the middle east continues to escalate, with the latest conflict between Iran and Israel raising eyebrows globally.

Why is this relevant? Drone warfare once again appears to be at the forefront of the conflict. While I haven't been able to locate confirmation, reading between the lines, the Israeli's employ Droneshield's counter drone defence solutions. Supporting this is this article, with the Israeli's being a close ally of the five-eye alliance / coalition and highly likely the referred to party.

While the conflict in Gaza is controversial and blurred for many, any conflict with Iran (or Iraq) is likely more straightforward. The broader coalition are almost certain to a) support their close ally in Israel and b) look to curtail any Iranian aggression. This might lead to further interest in Dronshield's defence solutions by not just Israel but others in the coalition. Whatever the case, as one of few market leaders -- arguably the market leader -- Droneshield stands to benefit from continued use of drones in conflict.

Recent reporting by Droneshield themselves indicated "By simply being on the NSPA (NATO) framework, additional end-users are likely to place orders with Droneshield". Major non-NATO allies include Japan, South Korea and - you guessed it - Israel.

I admit there was some scepticism at previous results, perceivably waiting for some evidence of scaling, but they have turned the screw in this quarter. We are finally seeing some evidence of operating leverage and we get a glimpse of how profitable this business could be with the margins, razor blade model and high-quality, sticky customer base it maintains.

Cash receipts totalled 48m, and costs are frankly nowhere near it – with R&D the largest contributor. Further evidence that payments will be lumpy, and this will often appear scary when we see high R&D, marketing, and staff costs without much intake. But this is a reminder of the nature of the business and the industry they operate.

Cash holdings increase from an already impressive 37m to 57.8m. With 58m in the bank and almost 50m received this quarter, all of a sudden the market cap of 220m seems incredibly attractive.

With an order backlog of 30m and ongoing collaboration with Lockheed Martin, the short-term outlook appears sound. With the company moving to a new Sydney-based facility (3x the space of the existing facility) you get the impression that management are confident of continued growth. We also get some hints from Oleg and co, with them “targeting annual production capacity of 300-400m” and outsourcing “lower-margin manufacturing to trusted third parties” to enable further scaling as needed. In truth, I remain concerned that one of the US giants will come knocking to obtain their IP, which would be a real shame for shareholders (in my view, anyway). Until that day comes, provided they continue to kick goals like they have done the last 12-24 months, I will remain a happy holder.

Droneshield have been awarded a 33m contract from a US government agency. This consists of Droneshield equipment and multi-year services, with full payment expected this financial year. Provided this occurs, FY23 will be a record year by some distance and more.

Why would the CEO and director sell knowing this order is coming?! Easily the largest and most impressive order ever received/announced by the company. Bizarre.

From an investment point of view, this is impressive -- it also somewhat justifies the recent capital raise to presumably be able to deliver the order.

I am curiously keeping tabs on Droneshield. I have a small holding, on here and IRL. I got a little lucky with my entry, it was actually the meeting on Strawman many months ago that resulted in me taking the plunge. Since then, the company has had a few record-breaking deals and fortified their balance sheet while the going was hot. There are a lot of tailwinds, the industry-specific ones have been regularly discussed on here so I won't repeat them. But they might not last forever, and there is also the question mark around competition – the more of a problem drones are seen to become, mainly around warfare, the risk increases that a powerhouse company or two decides to invest significantly in this niche market. That might be a massive problem for Droneshield. Alternatively, there might be an assessment that they aren’t worth competing with and someone tries to buy them out.

Droneshield need to capitalise on this momentum, while continuing R&D efforts to ensure they remain one of the world leaders. Should they not, deals will dry up pretty quickly and governments will look elsewhere. That said, and perhaps the main point of this straw, they need to do so profitably, or demonstrate that they are scaling nicely to reasonably quickly achieve this profitability. The Strawman meeting with Oleg was around 8 months ago now – Oleg clearly mentioned that they expect to be cash flow positive going forward. So how have they done?

March 4c: -1.8m

Dec 4c: +333k

Sep 4c: +1.2m (Strawman interview just after this from memory).

All in all, not bad. The last quarter was obviously not a strong one, and contradicts Oleg’s comments in the meeting. Another cash flow negative quarter around similar levels and an orange flag is presented (in my opinion). Momentum has never been higher in this industry – if they aren’t making cash now there is a question mark over their ability to do so sustainably into the future, even as world leaders. One thing I will compliment them on is strengthening their balance sheet after shares increased significantly, limiting dilution somewhat. Their balance sheet is a very healthy 37.8m as of their last update; this will hopefully be the last capital raise they ever have to do. Famous last words, perhaps?

Droneshield have received a binding commitment from Epirus to raise A$3.7m via a placement of 18.5m shares, at 20cps. Epirus will acquire a 4.1% shareholding interest in Droneshield.

They are entering at what is essentially market price. Given the liquidity (or lack of), it looks like Epirus wanted to get involved -- a win win for the company and shareholders if you ask me. Droneshield's already healthy balance sheet gets a boost, with minimal dilution to shareholders.

I don't hold, but I'm increasingly becoming interested. The recent chat with CEO Oleg sparked my interest, and he gave some hints there was good news on the pipeline. I was surprised to hear that he expected Droneshield to be self sufficient from that point onwards. Since then, there have been multiple orders (as hinted) and a strategic buy in from Epirus.

I plan to do a DCF in the coming weeks; this will be difficult given the nature of the business and difficulty predicting cash intake, but I like the industry they operate and the associated tailwinds. Drones aren't going anywhere -- this is evident by their use in warfare and the problems to airports and the like when drones disturb airspace. Similar to the shutdown of a port, the closure of an airport -- particularly the larger ones -- has huge financial consequence. I was initially very sceptical, because while tailwinds are evident it's another thing entirely to operate a cash flow positive business; one that isn't reliant on investors capital. Droneshield mentioned their competitive advantage in their chat with us. While this can be difficult to gauge from the outside, orders from reputable government entities including the US DOD speak to this. I plan to slowly build a position and increase there as the company starts to kick more goals. I expect over the next 12-24 months we will continue to see Droneshield mature as a company.