With a lot having happened in the last 6 months, time for a review of the big issues.
Recapping XRG’s current investment outlook:
· Entertainment business unit exit: we await news on this, but the expectation is that FREAK is being shut down and probably a small cost and iFly is on the market with a price tag that should cover the current debt of ~$5m plus give them ~$5m additional cash.
· Operator XR base line sales to smaller PD’s remain solid and underpins growth and the basic business case, which has me valuing the business at around 8c (was 9c pre dilution from cap raise)
· Large deals, as we see with the Texas deal offer significant value upside and provide validation to support and potentially grow sale rates to smaller PD’s.
· Debt is still an issue, but half was capitalised and the remaining ~$5m pushed out to 2027 maturity which moved it from a red to orange flag. As @UlladullaDave notes this is now a green flag with the announced $4.3m Q2 receipt expected from the Texas deal able to cover most of this assuming normal cash flows outside of this deal.
· Director buying over the past year has provided a lot of support as @Goldfish notes. I would add that the capitalisation of the $4.6m Birkdale Holdings at 5c a share was also a strong insider signal of confidence in the businesses direction at a time the market was very very sceptical and priced accordingly.
FY26 Watch List, what I am looking for:
· DoD contract outcome: If they don’t have a follow on engagement of a similar size or larger size by the end of this contract then AR (as opposed to the VR in market with Operator XR) may be a dead end. If they do, we are looking at a new product/customer line (Military) that is worth 4x the current Law Enforcement opportunity.
· Exit Entertainment: as noted above, I expect this complete in FY26.
· Distributors Ex-USA: There has been a lot of positive talk on the European and Asian interest in Operator XR, with distributors appointed. I would be disappointed if there were no sales in these regions by the end of Q2 and worried if none this year. I expect margins for sales to be lower than US sales, but this is incremental income, so offers high returns on the bottom line for a much higher valuation outlook.
· Product Development: We had the upgrade to Op XR2 in FY25 which also consolidated the separate police and military applications (improved product and development efficiencies). In FY26 we have the NRF grant kicking in (~$250k cash each quarter), we should hear more about cloud developments and see some enhanced functionalities flowing to customers – plus lots of mention of the word AI… Note also R&D tax rebates should also grow to offset some of this investment.
· Debt: While debt may still exist by year end, I would expect to see positive net cash. The sale of iFly and the Texas deal underpin this expectation. I expect capex to increase but not significantly above what the NRF grant provides.
Valuation:
· I am sitting on my previous 9.1c valuation which is just based on the Enterprise business in isolation, but with dilution is probably around 8c. It doesn’t assume any upside from any of my FY26 expectations or Texas deal and NRF grant just announced. Hence it is very conservative.
· I am sitting on this value because I don’t have any solid figures to project things like the sales distributors may generate (or margins), what further contracts with the DoD may look like or the likelihood/value of other big Texas type contracts.
· These all simply provide the asymmetric upside on my 8c valuation. If the price hit’s 8c without any new information I may have to reassess, but it is likely that such a value uplift would be on further information about these.
Risks (beyond already noted):
· Cash has been a risk but managed well and is now less of a risk, so we will now start to see how the company and management will employ excess cash. They have been judicious in it’s use to build a growing Enterprise business out of the excess cash flows from a stagnant Entertainment business, but where to from here?
· Competition: they are providing a tech product in an increasingly AI world that is accelerating development cycles. Competition may come quick and hard if they prove a large and high value market exists. However I would note that management love the problem not the solution. They have been focused on developing effective training tools (based on their previous experience of what was needed for special forces) more than a particular product, hence I think they will embrace and adapt to the market needs rapidly rather than continue to invest in a product that fails to deliver or compete.
· Trump: always a risk that something he does will cause issues for XRG, beyond just tariffs which at worst will drop margins a little. The cancelling of law enforcement grants available to small PD’s to purchase equipment like Operator XR is a big risk, but not terminal for the business. The DoD contract may also be influenced by Trump issues.
Investing in XRG is investing in a business that is only a few years old, being the Enterprise business (Operator XR). They have runs on the board, but it’s very early days. Management have persisted and adapted through previous business iterations (iFly then FREAK) and have good board and investor support.
I see them as genuine and of good integrity, which I expect is the culture across the company. As their SAS history implies, they are brave but careful and diligent in managing and growing the business. In the face of setbacks, I will be comfortable provided these assumptions hold.
Disc: I own RL+SM
