Share Dilution

Draganfly: New order for Ukraine not a game-changer (NASDAQ:DPRO)

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Investment thesis

Browsing through the trending stocks on Fintwit, I was surprised to find a nano cap there that I covered on SA in July 2021 – Draganfly (NASDAQ: NASDAQ: DPRO).

Trending stocks on Fintwit

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The company’s market valuation rose more than 40% on March 22, at one point even exceeding $3.70 per share. The probable reason for this decision is a new order for medical intervention and search and rescue drones to be delivered to a non-profit organization in Ukraine. In my opinion, the order is too small to reduce the company’s loss and I think this sudden retail investor interest in Draganfly creates a good short selling opportunity. Let’s review.

The Ukrainian order and finances of Draganfly

The order includes a total of 10 drones for Coldchain Delivery Systems, with immediate deployment with Revived Soldiers Ukraine. The latter is a non-profit organization focused on the medical response and rehabilitation of wounded soldiers in Ukraine. Draganfly added that the total initial order size can reach 200 units and CEO Cameron Chell said in an interview on Benzinga Live that the company plans to deliver these drones by August. Scrolling through the company’s product listings on Adorama, we can see that Draganfly’s Commander2 Ready to Fly system is priced at $13,949, with additional packages such as agriculture and public safety bumping the price up. at $23,647. Chell said on Benzinga Live that it was $20,000 units when talking about what happens when a drone is shot down. He then added that Draganfly’s medical drone is priced at $35,000 per unit, while the search and rescue drone is worth around $15,000 to $20,000 per unit. To simplify the math, let’s say the average price of the drones the company sends out is $30,000 per unit. This means that the Ukraine order will bring in just $0.3 million in revenue, which can rise to $6 million if the deal ends up covering 200 units. While the higher figure could double Draganfly’s annual sales, I don’t think it justifies a $15.7 million increase in its market valuation in a single day. Especially considering that it won’t put the company in a position where it’s close to being profitable.

You see, Draganfly has been around since 1998 and prides itself on having several achievements in the industry, including the development of the first quadcopter drone. However, its financial results are less than stellar with third-quarter 2021 revenue of just C$1.35 million ($1.07 million) and an operating loss of over C$8 million (6. $36 million). The gross margin looks good, but I find it really relates to the company’s marketing and advertising spend, which is placed under Office and miscellaneous.

Draganfly income statement

Dragonfly

Draganfly office and miscellaneous expenses

Dragonfly

Turning our attention to the balance sheet, we can see that Draganfly had almost C$28 million ($22.2 million) in cash as of September 2021 and there was no debt. However, I expect the cash balance to decline rapidly even if the company receives a $6 million drone order, given that cash used for operating activities was nearly $17 million. Canadian dollars ($13.5 million) for the first nine months of 2021.

Draganfly balance sheet

Dragonfly

Regarding the future of Draganfly, Chell said in the Benzinga Live interview that when the effectiveness of drones in Ukraine is demonstrated, the company could be sitting on potential orders for thousands of them. I find the statement overly optimistic given Draganfly’s poor sales track record, and I doubt Revived Soldiers Ukraine has the funds to afford even the 200 drones the company keeps talking about. So far, the organization has allocated $19 million to supply Ukrainian civilians and hospitals. He doesn’t have deep pockets and he depends on donations.

Overall, I see Draganfly as a small drone maker losing more than $3 for every $1 in revenue and expect it to continue to rely on inventory dilution to fund its operations. After accounting for a 5:1 reverse stock split, you can see in the table below that the number of shares outstanding has more than doubled since the end of 2019.

Changing the number of Draganfly shares

Dragonfly

In my view, the stock price should resume its downward trend once retail investor interest fades and drops back below $1.10. I think the recent surge in the stock price due to the Ukraine order created a good short selling opportunity. Unfortunately, Fintel data shows that there are currently no shares available to borrow. There are put options available, but I think the only ones that don’t seem too expensive at the moment are those with a strike price of $7.50. You can find some expiring in May and July at around $5.50 to $5.60 at the time of writing.

Dragonfly Options

Looking for Alpha

As for major risks for the downside case, I think there is a slim chance that Chell is right that orders of thousands of units are possible if the company’s drones prove successful in Ukraine. Additionally, I find that meme stocks and retail investor behavior are difficult to predict in the short term, so the stock price could skyrocket again without a clear catalyst.

Takeaway for investors

Draganfly prides itself on being the oldest commercial drone manufacturer in the world, but I find its financial results disappointing. The company’s market valuation has increased significantly due to a new order for Ukraine, but I consider it too small to change its fortunes.

Draganfly’s CEO hopes that once the company’s drones in Ukraine show their capabilities there will be new orders for thousands of units, but I doubt that will happen and the market valuation is now at rock bottom. levels difficult to justify. In my opinion this creates a good short selling opportunity and the only way to take advantage of this is to use put options as there is currently no stock available to borrow.

For risk averse investors, I think it would be best to avoid Draganfly as I view this as a high risk, high reward type of opportunity.