30-Apr-2020: Appendix 4C - EOS March 2020 Quarterly Report
ACTIVITY STATEMENT FOR THE QUARTER ENDING 31 MARCH 2020
The company’s operations in the quarter ending 31 March 2020 closely followed management’s expectations at the commencement of the period, in terms of production output, factory yield, revenue generation, cash flow and profitability. However, events in the last 7 days of this quarter, caused by the COVID-19 pandemic, caused significant changes to the Company’s plans for the rest of 2020 and for 2021.
By Q4 2019 the Company was holding firm orders for over $180 million of defence products deliverable to a foreign buyer in the last 3 quarters of 2020. Combined with another $70 million of firm orders more evenly distributed across 2020, the overall delivery requirement of $250 million was sufficient to support 70% growth in revenue and EBIT for 2020 over 2019.
Management assessed that 70% growth could be managed if the entire 2020 effort was evenly distributed across all four quarters of 2020 to smooth plant demand and reduce production risk. In November 2019 the Company raised around $80 million in new funds, with most allocated to allow production in Q1 2020 of products for inventory, which would be delivered and invoiced from Q2 2020.
Product delivery takes place through a series of steps called the delivery chain. The products must be delivered to the EOS facility in the foreign location, unpacked and checked, installed on customerprovided military vehicles, tested under real combat conditions with live ammunition at a special test range, and then delivered to a designated military base for deployment. These 5 steps typically require 4-6 weeks and involve around 35 staff.
On 24 March 2020, one week before formal deliveries could commence, the delivery chain was broken in multiple places due to a national lockdown and the impact of COVID-19:
- Five EOS technical staff from Australia were required to leave the foreign country on 24 hours of notice, or be stranded due to airport closures and quarantine. These staff are essential for the delivery process.
- All accessible airports were closed to normal commercial passengers and freight.
- The EOS production facility, located in a secure industrial zone, was locked down by military police, along with all other defence plants. Approximately 50% of EOS local staff of 35 persons were also formally quarantined.
- The military test facility required for live firing was closed.
- The designated delivery points within military bases were cut off by military base closures.
At 31 March 2020 these events were very recent, and were represented as precautionary by authorities. At this point, including some activity late in 2019, the Company had already completed around $55 million of production for inventory, as planned.
The company’s Space Systems and Space Communications businesses operated to expectations in this period.
Subsequent Events:
By 10 April 2020 the severity of the pandemic impact across the world and the affected country was more apparent. The Company assessed that the recovery of the entire delivery chain would take 60 days after reasonable access and mobility was restored. Since access was forecast to be opened from July, the earliest date for deliveries to commence would be September, pushing cash payments to Q4 2020.
There are no contractual issues arising from delivery delays due to the pandemic. There is no contractual obligation on EOS to continue production of products which cannot be delivered.
On 14 April 2020 EOS decided to suspend production of products undeliverable in the near term as soon as the production facility could efficiently switch its output to another customer[s]. This switch requires 100 days to allow the supply chain to respond with appropriate parts. The suspended production can resume as soon as the delivery chain is restored and inventory is reduced to normal levels. This is likely to occur in 2021.
On 15 April 2020 EOS raised $134 million in new capital through a fully underwritten institutional placement with $55 million allocated to allow a further expansion of inventory until July 2020 when production capacity can be switched to other contracts with no delivery impediments.
The deferral of a substantial amount of activity and its associated revenue from 2020 to 2021 required EOS to reduce 2020 guidance from 70% growth to 25% growth over 2019 performance.
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[Disclosure: I don't hold EOS. I had them on my Strawman.com scorecard as an "SP-recovery-from-Covid-19" trade, but I'm removing them tonight. I'm not that comfortable with who the end users of their tech are, and what the tech can be used for, including to potentially kill innocent people - whether intentionally or accidentally, and there are better opportunities elsewhere, IMO, so I'm moving that Strawman playmoney out of EOS and into DOW instead, who look to me to have massive upside from here. DOW is also a company I now hold in all of my real-life PFs.]