Details released this morning:

• $35m fully underwritten Institutional Placement of 20.6m at $1.70, 12% of existing issued share capital
• Share Purchase Plan to raise a further $5m, not underwritten, also at $1.70
• 18.3% discount to the last closing price of $2.08

In the last 18 or so months, since Andreas came onboard, it feels that EOS has quite decisively morphed from doghouse -> Turnaround -> steady contract growth and resolution of cash flow issues -> accelerating growth.

This raise thus makes sense to me and I'm in.

Discl: Held IRL and in SM

EOS went in a Trading Halt this morning.

AFR reports EOS ".... is seeking up to $40 million from investors, wall crossing fund managers on Tuesday night. Proceeds would fund working capital needed to fulfil customer orders."

It does make sense to me to do this and reduce reliance on very expensive debt. EOS is in a good position with its Turnaround and has had a very strong 100% run up in share price in the last 6 or so months. The need for funding for working capital lines up with the consistent management commentary of demand going gang-busters.

No mention of whether there is a Retail offer but I would have no hesitation signing up to it, if there was one as I have been looking to top up again.

Discl: Held IRL and in SM.

Wonderful to see EOS having to respond to a ASX speeding ticket today for the price movement from $1.235 on 8 Feb to $1.645 today 12 Feb.

Despite what many swear against, I do believe turnarounds ARE possible, but only IF the right ingredients are in place - CAT, EOS, EML, C79 are standouts for my portfolio .... I need NAN, ALC and maybe JAN to make the not so possible, possible ... !

Notes from the EOS Investor Update call earlier today, following the release of its Appendix 4C yesterday. In summary:

• Cashflow and operational challenges of 2019-2020 seem to now be well under control
• Good bullish sales momentum - the timing of how the Turnaround has been initiated and rapid progress on that journey has positioned EOS very nicely for 2023 and 2024. Steady flow of sales contracts have been announced
• Debt is now under control - good contract, collection and overall cashflow discipline against a backdrop of a bullish market provides strong confidence that debt repayments will be comfortably met
• Low capex requirements ahead, focus is on monetising R&D in recent years

My 3 concerns in July 2023 were: (1) sustainability of the turnaround (2) translation of the turnaround to improved sales, revenue, delivery and cashflow and (3) “top up when the Working Capital debt is mostly repaid”. 

Decided to accelerate the top up today as the track record in FY2023 suggests that EOS is on a good, disciplined trajectory with a bullish market ahead, meaning (1) and (2) are mostly met which significantly improves the risk profile.

Discl: Topped up Today IRL and placed Buy order in SM.

• Very bullish market currently, and is expected to remain bullish all of FY2024/CY2024
• At the start of a 2-3 year trend in these areas:
• EOS products are the “weapon of choice” to address the threat of drones in current war conflicts - traditional missile defences are (1) unaffordable (2) suffer from congested airspace issues - key differentiators for EOS is precise positioning, high reliability, high fire power/hit probability
• Robotic unmanned battlefield vehicles is a key demand as operations increasingly move from manned to unmanned operations
• Laser systems - 2024 is the launch year of commercialisation, expecting 1-2 contracts to kickstart sales after completing development investment in 2023
• A unique offering is to have these laser systems used in classic/conventional weapon systems
• 29 Jan 24 deal to sell Slinger Counter-Drone Systems to Diehl Defence was a major breakthrough into the German market - small contract size but a highly strategic win
• Recent deals have significantly broaden EOS’ customer base - addresses the previous issue of high business concentration on a few customers
• Talking to ~20 countries in Europe at the moment - likely to need to open a European office and logistics centre to increase supply reliability to customers
• US manufacturing facility in Huntsville will be increasingly key in the future as US sales will likely need to be manufactured onshore in the US - having to find ways of expediting sales and delivery to customers which minimise red tape
• Sales is focused in the following areas:
• Conflict Driven Ukraine, Middle East - key focus in 2024 is how to support the “immediate demand”-type sales. EOS has good pricing power in these sort of sales.
• Non-Conflict, long-term growth - Large quantity orders over a longer term supply period, strategic in nature, bullish will continue to grow order book in 2024

FINANCIAL UPDATES

• Strong focus on cashflow clearly seen in cashflow results
• Strong continued discipline in ensuring new contracts have a good cash flow positive profile - actions to remediate key Middle East contract completed in Feb 2023
• FY2023 cashflow was the highest ever achieved with $325.4m received
• $71.0m cash balance after paying of $26.2m debt in Sep 2023
• Other than the potential European office, minimal requirements for capex going forward - EOS does not need Capex to scale up and is now mostly focused on monetising prior year investments in development

Debt is in a good place following the resolution of the lender fee dispute with WHSP

No breach of borrowing covenants relating to cash inflows and cash outflows calculated on a rolling 3M basis in the last Quarter

TRANSFORMATION/TURNAROUND

Progress in the last 12-18M against the Turnaround plan has gone exceptionally well, beyond initial expectations

EOS Defence Systems has secured a new contract to supply approximately A$28m of R600 Remote Weapon System (“RWS”) unit spares to a customer in South East Asia.

• Deliveries under the contract are scheduled to commence in late 2024 and continue into 2025 and 2026.
• This sale was secured pursuant to EOS strategic initiatives to widen the product base, customer base and manufacturing base of the Group.  
• The products to be supplied under this contract will mainly be manufactured at EOS facilities in the United States.

Really liking the sales momentum and breadth in recent months at EOS. Once they can solve that irritating dispute with WHSP, life will be much better holding on to EOS ....

Discl: Held IRL

The EOS Marketing guys are justifying their high salaries by keeping EOS in the news ...

https://www.abc.net.au/news/2023-10-02/australian-drone-killer-system-ukraine-730/102876242

The publicity can't hurt ...!

https://www.abc.net.au/news/2023-09-02/drone-killing-laser-gives-glimpse-into-aukus-future/102806468

Notes on the EOS Activity Statement Qtr Ended 30 Jun 23. I liked and followed the headers that @Bradbury uses - it really does help clear my head and crystallise the key points.

Discl: Held IRL

WHAT WAS GOOD

• Cash balance as at 28 July was $84m, double the 30 Jun 23 cash balance of $42.0m - this has really improved
• Cash flow has benefited from contractual changes with significant Middle East customer in Feb 23 allowing earlier invoicing - Q2FY23 receipts from customers $61.1m, total 1HFY23 receipts $123.2m vs pcp $74.5m
• Continued good flow of cash positive new contracts this quarter - approx AUD435m
• Contract Asset Balance continues to fall as payments are received from customers - gross contract asset 30 Jun 23 = $109m, $30m less than gross contract asset at 31 Mar 23
• More cash flow improvements in 2HFY23 are expected from (1) termination of SpaceLink Venture (2) $25m cost reduction program
• Positive global market for EOS products during Q2 from Ukraine conflict and impact on demand from NATO countries
• Continued to deliver products in Defence Systems, Space Technologies, EM Solutions
• Continued to develop and commercialise Anti-Drone Counter Uncrewed Aerial System
• Continued to ensure working capital loan covenants not breached - first $20m principal due 6 Sep 2023 - well placed to repay given $84m cash balance on 28 Jul 2023
• No surprises as all the above has been announced during the Quarter - transparency and detail from the new management in recent months have helped boost confidence of the Turnaround journey

WHAT WAS NOT SO GOOD

Nothing to not like from this report for a change!

WHAT TO LOOK OUT FOR

• Continued sales momentum
• Continued momentum in contract delivery and conversion to cash receipts
• Continued meeting of working capital loan covenants and ability to repay the first $20m due in Sep 2023 - this looks comfortable
• Further progress in EOS 2.0 Turnaround Phase 2 planned for 2023-2024 - Implementation of Strategy

WATCH STATUS:

Very Encouraged, but not yet ready to add to holdings

SUMMARY

• The flow of news from EOS has been overwhelmingly more positive than negative this CY
• New management have defined a Turnaround Plan, have executed Phase 1 of the plan and this is translating to improved sales, revenue, delivery and cashflow
• The question is whether EOS will sustain this course to the point where it is back into growth mode - the signs are positive, but would like to see Part 2 of the Turnaround Plan implemented and sustained first to be sure
• Happy to continue to hold, but am not quite prepared to top-up just yet, until perhaps when the Working Capital debt is mostly repaid

Went through the FY23 AGM notes and preso and took stock of what to do with my (painful!) holdings of EOS.

Discl: Hold EOS 1.02% IRL

AGM FY23 Summary

• FY 2022 was a year of existential crisis
• Completely new managementn now in place
• $70m debt funding from SOL - came at very significant cost, but was a survival lifeline to keep the company going
• Completed restructuring and rightsizing program - reduced global workforce from 550 to 400, 30% headcount reduction
• Exited SpaceLink - capital intensive program, unable to raise capital
• Embedding new culture of (1) commercially minded (2) cost-conscious culture (3) fiscal discipline
• Weathered the most challenging period in EOS’ history
• FY2023 to be a period of stabilisation
• EOS foundations - technologies, people, are sound
• Global geopolitical and technological currents - headwinds - Ukraine war, increased national defence security spending across the globe
• Drones, counter-drone systems, unmanned vehicles have taken centre stage in Ukraine war - defence programs seeking innovative technologies that can provide operational advantages on the battlefield - EOS’ current and emerging product suite has the solutions, provide the opportunity to anchor demand
• Recent contracts for the supply of the EOS Remote Weapon System and new contract to supply the Royal Australian Navy sends message that EOS remains very much open for business

Positive Changes

• The SOL debt funding in Oct 2022 in exchange for equity was a vote of (no dount, highly opportunistic from a SOL perspective) confidence
• The debt covenants keeps EOS on a very short monthly cash flow leash - track record has been that those debt covenants have been met through to April 2023
• Complete revamp of management who, in the AGM, clearly acknowledged the existential crisis that engulfed EOS
• Initial turnaround actions have been executed - now appear significantly more focused on cash flow and cost management, significantly leaner organisation 
• Successfully re-negotiated contracts from the Middle East now favour better cash inflows
• Green shoots of increasing sales momentum from recent wins

Risks

• Inability to meet SOL debt covenants - entirely possible, but there is now a 3M track record of meeting the covenants
• Sales is very lumpy and uncertain - this is the nature of the business, however, appears to have the right technologies in place, with plans to grow the product offerings
• Reduced cost base does not stick/sustain
• Turnaround actions do not embed/stick - entirely possible, trajectory thus far is positive, but needs close monitoring

Why Remain Invested/Why Not Exit

• Holdings currently valued at $9.0k - have adequate cash in the portfolio - exiting EOS today at 86.5c, will have an immaterial impact on the overall portfolio cash balance
• Provides good direct exposure to increased defence spending on new disruptive defence technologies - defence spending is only going to go up in the coming years, in Australia and globally - EOS is well positioned to capitalise on this if they can get their act together
• Share price recovery has been positive and steady - price has doubled since the low of 43c on 29 Mar 2023, but is way, way below historical prices, supports the positive steps in the turnaround journey
• Not prepared to top up until at least when the SOL debt is paid off, and the company is able to stand on its own operationally

Well aware that turnarounds rarely succeed, but total loss from this point on is ~$9.0k vs an unknown upside - not a bad risk reward position in the overall context of the portfolio.