Hi Eric,

Hope everyone had a peaceful holiday season.

As expected, the missile and drone attacks have intensified. Infrastructure is compromised and there is no water in parts of Kyiv. It has become extremely cheap for Russia to scale such attacks. At this pace, the Ukrainian air defense systems cannot keep up. Russians continue to iterate quickly. The anti-Shahed mobile units today reported that it has become much harder to intercept the drones as black materials create a smaller cross-section. They have changed their flying pattern, no longer flying straight but rather doing a ton of turning and flying much closer to the ground. We need to do more. I have attached the list of action items that would help Ukraine's air defense situation more immediately. D3 cannot address the whole set of issues, but having such a list guides our investment focus.

Deal Flow

Total = 236 (+6)

We continue to meet with several UGV companies. We would love to add at least one company in this space to the portfolio but, unfortunately, none of them have passed our selection yet. They typically have team issues that make them not investable at the moment.

Portfolio news

• Swarmer received an additional $150K @ $6M valuation cap from Angel One Fund, which gives D3 ~2X multiple in less than a quarter.
• Drone Space had 3 of its core engineers mobilized to serve in the army. That is a big blow to their team (~20 headcount).
• Three-month OKRs have been defined for the entire portfolio. See objectives below and detailed OKRs attached.

2. Revenue generation
3. $1M Seed round funding | | Drone Space | 1. Start procurement with the government
4. Mass production of ground stations
5. Start procurement trench ECM | | Frontline | 1. R&D: finalize design of the recon copter
6. Production: manufacture the pre-series batch and enter the market
7. Operations: company (legal, financial), staff, processes | | High Cat | 1. Validate our products
8. Get the military aid contract ($10M)
9. Build production capabilities for 300 HCI drones per month
10. Development and testing of the HAWK production concept
11. Ensure seed-round financing | | Swarmer | 1. Styx AI operation control center is used by 2 vendors by Q3 2024
12. AI Copilot is fully adopted with 3 customers by 2024
13. FW/Streaming reached full adoption to 3 customers in 2024 | | Tytan | 1. Start procurement with the Ukraine aid program in Germany
14. Expand mission portfolio
15. Complete testing of 250 km/h fixed-wing UAV prototype | | Zvook | 1. Increase coverage by Zvook sensors
16. Get new orders
17. Expand product line |

We saw a visible uptick in mobilization in the past month. This will affect an already tight job market. The new mobilization law is being drafted/debated. We can expect new legislation to come into effect within a month and it will close several loopholes on the current conscription system. We have serious concerns about the D3 team, with 2 members (out of 5) eligible for mobilization. We are working on a contingency plan such that if they get mobilized we will push for them to go to units where they can be more useful, continue to work part-time with us as much as possible, and not end up in the trenches.

Loans/GR

• Airlogix reported they have already used 52% of their loan on the purchase of cameras and communication links, shortening the order delivery timeline dramatically. That was the point of the loans.
• There is a major development in working capital as the government (Rustem+Kamyshin) are working to extend the existing 5-7-9% incentive program from agriculture to the defense sector. In this case, the government can cover the difference between what the company is paying in interest (~10% in the case of Airlogix), and down to as low as 5%. This will make even the most financially conservative companies go after these working capital loans if available.

Donations

Technary/Prytula Foundation has reported that 500 out of the 900 thermal optics systems for the MANPADS that will be used to protect Odessa are already in Poland and will soon be in Ukraine in action.

<aside> 💡 You can find previous updates on the link.

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Slava Ukraini🇺🇦