NASDAQ: DFNS
Tom Kerr, CFA: Hello, everyone. My name is Tom Kerr. I'm a senior equity analyst at Zacks Small Cap Research, and welcome to another episode of our CEO Chat program. Today we have the CEO of T3 Defense, Menny Shalom. T3 Defense (NASDAQ: DFNS) is a global aerospace and defense holding company focused on acquiring and operating mission-critical defense businesses. The company's headquartered in New York City, and currently most of the company's operations are in Israel, but they are looking to expand into other markets. We initiated coverage of T3 in June of this year with a price target of $1.50 per share US. Welcome, Menny.
Menny Shalom: Hi, Tom. Thank you for having us.
TK: All right, let's start with a few minutes on the background of the company and its history, and what led us to where we are today.
MS: T3 came to the market as Nukkleus originally back in December '23. It was a de-SPAC of a failed fintech company. I got the company back in September of 2024, and I announced the first defense deal back in December of '24. It took us quite some time to make the shift regulation-wise, operationally, and financially, but technically and officially, we started trading as a defense holding company in January of this year. That's when we announced the closing of the original acquisition of Rimon. Rimon is a player in generators and tactical vehicles here in Israel. We also announced acquisitions of a few other companies, including ITS, Tiltan, and ZorroNet. Although we've been in the market since December of '23, we've only been in the market as a defense company since January of this year, and that will continue going forward.
TK: Got it. Let's get into the details of the operating subsidiaries you have now. There are six, and we'll talk about that announcement in a few minutes. But maybe start with what you just mentioned, Rimon.
MS: Sure. Rimon was our first acquisition. Rimon is a manufacturer of generators and masts for the defense industry. They are the sole and exclusive provider of the generators for the Israeli Iron Dome, an anti-missile system sold worldwide. We also import and sell mast and lightning solutions, and we also manufacture tactical vehicles for the defense industry and government agencies in Israel and outside of Israel. This is actually our fastest-growing subsidiary right now, and we're seeing great results there.
Our second acquisition was a company called Tiltan, a software company specializing in the defense sector and providing solutions for GPS-denied navigation, mainly for drones and other vehicles, and, let's say, robotic systems worldwide. It's a company supervised by the Israeli Ministry of Defense, but it sells all around the world.
Then there's ITS, a superior engineering and assembly-line provider for the defense industry, established 35 years ago and considered one of the highest-ranking in Israel. ITS has a subsidiary called Positech, an electromechanical solutions provider that provides the neck for many of the rotating systems worldwide, mainly for radars, tracking devices, anti-missile systems, and so on.
Of the last two subsidiaries, one is called Nimbus. It's the most recent acquisition and the smallest one. It's a company that deals with drones; it imports and sells drones in Israel to the Israeli defense ecosystem, but also provides guidance, instructions, and other services for those drones. The last one is SC II, for which we also initiated and sponsored a SPAC. It was its own publicly traded vehicle looking for an acquisition, and the great thing about that is it's a non-dilutive way of adding value to T3 shareholders, because the SPAC has the ability to acquire a significant business — a couple of hundred million dollars and up — but it has its own publicly traded stock. It can raise its own money, and it did raise its own money, without diluting our shareholders.
TK: Got it. We can go back to the SPAC in just a few minutes. It is an interesting part of the balance sheet and capital structure, but I believe you guys just announced a recent acquisition last week, Project35. Can you give us an update on that?
MS: Right. Project35 is a very interesting company. It was founded by a couple of senior executives in the Israeli defense ecosystem who used to work for Rafael, Elbit, and Israel Aerospace Industries. They founded their own company, Project35, and Project35 does two things. First, it provides services to the defense industry, mainly engineering and assembly, very similar to ITS. We like those companies – they're a very good source of products, services, and clients to whom we can cross-sell our other subsidiaries' products.
But more importantly, they also provide two anti-drone solutions, and this is what we liked about them. They developed their own drone, which is used to intercept other drones, and they also developed a unique system — not commercial yet, but hopefully to be announced in the next couple of months — which is a very significant player in the anti-drone world. As we all know, drones, anti-drones, and related robotic solutions are becoming more and more important on the modern battlefield. For us, it's important to diversify our holdings with assets in those fields. All of our companies are revenue-generating, and most of them are profitable on their own. They are mature businesses that we buy because we think they can grow even further.
TK: Right. Let’s expand on that now. You guys are still in acquisition mode, I believe. Can you talk about what the acquisition criteria are, what size, and what you are looking for in future M&A activity?
MS: We started the year with five acquisitions, and we thought we'd do maybe one or two more this year, and that's the current pace, because we want to spend a lot of time on integration. Criteria-wise, we're looking for revenue-generating businesses, usually family-owned, doing somewhere between $10 million and $100 million in revenue.
Our first and most important criterion is growth potential; we want to see that we're ahead of the growth curve and that we can help accelerate that growth to the market. That's the most important thing. They could be losing money — we'd prefer they weren't — but we want to see there's demand for the product or service and a big upside.
We're looking for revenue-generating businesses, hopefully profitable, with significant growth ahead of them, mature management teams — although we do have the ability to help them grow even further — and we want to see some cross-sell synergies within the group, meaning we can sell their product to our existing customer base and expand internationally. Those are the critical points we're looking to identify.
TK: Are you looking at North America, the European Union, for these acquisitions, all over, or where, specifically?
MS: Although most of our operations are currently in Israel, most of our sales are geared toward international markets, directly and indirectly. Most of the sales our group makes go through integrators, through Tier 1 providers, and are done internationally. If Rafael sells an Iron Dome to a European country or to the US Navy, we're selling our generator through that. 85% of Tiltan's sales are outside of Israel, and so are all the other providers'.
Indirectly, we're currently an international company. Our base and operations, yes, are in Israel, but we're selling globally and looking to increase our global footprint. We've identified several interesting acquisitions. We're looking to start our operating base in the US and grow the market even further there. We see all the initiatives the current administration is taking, not just around drones. Obviously, drones are very well known now, but we see other initiatives that we think we should be, and can be, part of. We're looking to have a significant operating base in the US by the end of the year to grow our presence there.
TK: Got it. That sounds like a great plan. Let's go back to that SPAC for a second. It's an important part of the story where it's a SPAC you sponsored in 2025. There's $172 million of cash in trust to make acquisitions like you indicated, but can you explain the dynamics there? Is it once they make an acquisition, is it something you hold, or can you sell it to find other acquisitions?
MS: There were several good reasons to do that. It's relatively rare for a public company to sponsor a SPAC, which is itself a public company. Number one, a SPAC is a vehicle that allows us to make significant acquisitions without diluting our shareholder base, meaning it has its own pocket and its own sources to do that. On the other hand, it also brings a lot of value. Once there's an acquisition, we, as the sponsor, get somewhere between 20% and 30% of the de-SPAC'd company, and that by itself could be a great source of value for our shareholders.
We're relatively open as to whether we hold it or sell it. I think it's a matter of what this de-SPAC would look like and how it performs, but both ways will be valuable for our shareholder base. It could either be part of our balance sheet, adding significant value there, or it could be a great source of cash flow that we can sell out and liquidate over time.
And again, this is a great way for us to raise money by selling those SPAC shares without diluting our shareholders. We don't need to go back to the market and raise money from our shareholders, diluting them, when we can sell that asset instead. All those factors led us to believe this could be a very interesting and lucrative approach. On top of that, we saw some good opportunities where T3 wasn't a good fit for them, but we think a standalone business, or standalone public company, is a good way for them to move forward, and that's the reason we did it.
TK: No, that's great. It's a great asset to have in a great kind of multi-use situation. Before we get into some company financials, let's just talk about the whole defense industry for a second. Global defense spending could reach $2.9 trillion. We know the US has a budget of $1 trillion. Any thoughts on that?
MS: There's a very interesting and important Morningstar report from a couple of years ago showing that the world is at a historic low in the number of airplanes, battleships, tanks, ammunition, and missiles. And I think there's a cycle — every time we get to that low, wars start somewhere in the world, and the world realizes we need to shape up.
Last year, the European Union announced an $800 billion acquisition of defense-related assets. Obviously, the US administration keeps raising its budget too. Unlike fashion or consumer goods, number one, everybody thinks they understand what defense means; in biotech, that's not the case. Number two, there's no real sensitivity to price. If we need a tank, an airplane, or a missile, we'd just go and get it.
I don't think we're even close to being at the top. I think that trend is going to increase. I think it's not just a matter of scale. It's also a matter of what people are buying. I think robotics, autonomy, and related solutions are going to play a bigger role. Again, I think today those get a lot of the headlines, not necessarily the capacity. Capacity is still with tanks, airplanes, and submarines, the good old way of winning wars.
I think whoever wants to win a war needs to have scale; that's number one. It's not just about having a sophisticated weapon or a sophisticated way of flying a new drone — you also have to have scale, and that's what we see in Ukraine. The number of drones and anti-drone solutions being tested there daily shows that you have to have something innovative, but you also have to have a lot of it. It's not enough just to try it.
I think defense as a sector is going to outperform the overall indexes for the next few years. Defense is usually an era that's delayed. Once you see a war, it takes a couple of years until it's translated into companies' balance sheets and profit and loss. But once it gets there, it's a very long cycle. It's not a cycle that starts and ends quickly like a few other trends we've seen, like Treasury deals or cannabis. I think defense, although it's delayed, is a long cycle once it's there. That's why I think defense as a sector is going to outperform the index for the next few years.
TK: You guys are in a great spot. As you said, we still need the tanks and the planes, but I think they're saying now the growth will come from what they call “low-altitude defense,” which is drones or small-footprint defense, robotics, autonomy, that sort of stuff. You guys are right in the middle of those growth areas in the defense spending, I believe. Just specifically on the company, you gave revenue guidance of about US$26 million for the 2026 calendar year. What's driving that? Has anything changed in that projection?
MS: We're going to update that, I think, in the next few weeks. Obviously, the acquisitions are a good or significant way for those adjustments, but we also see some updates in the market. We see bigger demands for our services and products, but again, you have to remember defense is a marathon, it's not a sprint. The time that you see the demand increasing until it translates into increased revenue, it takes time because usually the government or the Ministry of Defense needs to tender it, they need to think of what the requirement is, and they need to engineer it. Then, someone needs to design it, and then it goes to the manufacturers, and then you have to do the purchasing. The cycles are long. The long-term in defense, I think, and for us specifically, is promising, and we see growing demand for that.
TK: Yeah, there's an old saying in this type of business: the revenues come in slowly, but they go out slowly as well because of these long-term contracts. In terms of profitability, I know you said most of your subsidiaries are profitable or close to it, but you have a lot of corporate expenses. Talk about 2027 and 2028 in terms of EBITDA, profitability, or net profitability. I know you guys aren't giving guidance yet, but just generally speaking about future profitability.
MS: Sure. '26, I think, as I mentioned earlier, is the integration year. During that year, we'll see increased expenses in our administrative and general expenses at the corporate level. We need to hire more people, standardize our systems, and implement ERP solutions. We need to invest in the infrastructure for the company to grow. I believe during '27, both the increased revenue and the stability to reach some kind of equilibrium — a steady place for the company — will allow us to become profitable at some point during the year; I'm not sure exactly when. And I think '28 will be the next phase of increasing that.
A lot of that comes down to understanding, or in a way, choosing the specific subsector within defense. Defense is a huge space. Some of it is industrial companies, some are SaaS or software companies, some are pure AI, and some are a kind of hybrid. In a way, we're trying to be an ETF of that sector, trying to balance and diversify, not just hold one asset, because we think everything is needed for success on the modern battlefield. We're trying to hold assets of different kinds.
TK: Okay, that sounds good. We're almost out of time here. Any closing comments or thoughts before we let you go?
MS: First, thank you for having us. I really appreciate what you guys are doing. I'm very bullish on the sector, as I said. I think the sector itself is a very good place to be for the next couple of years, at least — probably longer. It's a long-term play, not a sprint. People investing in that sector need to be patient — they need to understand geopolitics; they need to understand the world economy. A lot of the factors are out of the hands of the specific companies, and they're affected by that, not to mention the stock itself. But I think this is a good place to be as part of a bigger portfolio.
TK: No, you're right. It is a good long-term story, and I'll just bring up that our price target of $1.50 incorporates a 10-year discounted cash flow. We're looking at what can happen 5 to 10 years from now with this portfolio of businesses, and that's obviously worth a lot more than today's stock price.
Thanks, Menny, for your time today. To read all of our reports, investors can go to scr.zacks.com as well as our social media channels. If you want more specific information on the company, you can go to their website at t3dfns.com. That concludes our chat. Thanks again, Menny.
MS: Thank you so much.
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