|Shares Out. (in M):||57||P/E||N/A||N/A|
|Market Cap (in $M):||119||P/FCF||N/A||N/A|
|Net Debt (in $M):||0||EBIT||-3||0|
|TEV (in $M):||107||TEV/EBIT||N/A||N/A|
|Borrow Cost:||Tight 15-50% cost|
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AgEagle Aerial Systems, Inc. (NYSE: UAVS)
AgEagle Aerial Systems, Inc. (“AgEagle”, “UAVS”) is an engineer / designer, manufacturer, and seller of unmanned aerial vehicles (“drones”) based in Wichita, Kansas. UAVS primarily sells their drones to farmers in conjunction with their software offerings, which provide aerial imaging data collection and analytics. The company’s value proposition to its customers hinges on using its commercial drone and data collection capabilities to assist growers and urban green managers to assess and manage their crops and infrastructure.
Most of UAVS’s customers are hemp farmers in the United States; in the company’s view, their drones coupled with their software / analytics solutions provide for the “gold standard for regulatory oversight, operational assistance, and reporting capabilities for the emerging industrial hemp industry”. Elsewhere, the company is also pushing to enter the drone delivery market, an area of opportunity which management has identified as critical to their future growth prospects. Since 3Q19, the company has cited a book of orders from an unnamed e-commerce company to manufacture and assemble delivery-purposed drones. Most recently, the company announced a two-year manufacturing agreement with Valqari, LLC to build Valqari’s patented drone delivery station.
UAVS went public through an RTO with EnerJex in 2018 with the assistance of Alpha Capital Anstalt (“Alpha Capital”), a micro-cap investment firm that has been involved with the stock since as early as 2015. The company had previously failed to IPO on the NASDAQ at a US$34mn valuation in 2016.
Situation / Set Up
AgEagle’s cash degenerative and unprofitable business model is broken and exhibits little to no prospects of growing into the drone delivery giant that the market is pricing it to be at present. I believe a short on UAVS’ commons present a favourable risk / reward opportunity with material downside driven by 1) the company’s existential threats, unprofitability, and callow nature coming to greater light, 2) a resolution to the management’s stock promotion schemes, and 3) a material revaluation of the company’s as motivated insiders and retail investors dump their shares as the hype fades.
I believe this opportunity exists because of intense retail speculation, stock promotion, and beta from the recent market rally. Over the LTM, UAVS’s stock has risen by ~6x; this run has been understated by ~4x due to its share count rising by ~3x during the same period (Chart 1). This is a direct result of the company’s reliance on equity capital markets and its toxic financing dealings with Alpha Capital, which have seen 3 classes of preferred shares – all of which were issued to and wholly purchased by Alpha – convert into commons. Heavy retail demand and sorely misguided speculation of a drone package delivery partnership with Amazon have also helped spur froth in the equity.
UAVS trades at a substantial premium to its peers. Despite having recently shored up a substantial amount of cash onto its balance sheet, none of the company’s existential threats have disappeared and are unlikely to be mitigated in the coming quarters. I believe the risks to this trade are containable and the possibility of being closed out on a position in the next 12-months are slim given its current capital structure and fundamental prospects.
1) Misunderstood / Obfuscated Business Prospects Based on Unproven Rumours
UAVS touts of having earned distinction as one of the industry’s “leading pioneers of technologically advanced commercial drones and aerial imagery-based data collection and analytics solutions for the precision farming, hemp, and emerging drone-enabled package delivery markets”. Buzz-words aside, this is clearly a company that thinks highly of themselves. Yet, for the type of company one would expect it to be it is surprisingly difficult to ascertain UAVS’ true performance due to there being very little disclosure surrounding their product’s unit economics, the nature of their service / assembly partnerships, and their capital spending. Unfortunately for the retail investing community, all evidence suggests that AgEagle is more unsophisticated than management is making themselves out to be.
An assessment of the company’s sales economics should provide a good start to our analysis. The company assembles and sells two models: the AgEagle RX-60 and the AgEagle RX-48, of which this operation has historically comprised ~85% of the firm’s revenue. The RX-60 is their high-end product and is sold to larger farms, whereas the RX-48 is price competitive and sold to smaller operations; both these products have been quoted at varying price points (US$4,995 – US$8,766 ). There is very little disclosure and a blatant lack of transparency regarding these product’s unit economics, which should in of itself be a concern for investors. Luckily for us, there was some (albeit brief) disclosure a few years back. In 2016 and 2017, the company sold a respective 50 and 24 units, which when divided into the company’s total drone sales yields an average price / unit of ~US$6,150. Assuming no alterations have been made to their pricing schemes since FY17, this would imply the company sells ~2-6 drones / quarter. Any pricing increases would resultantly suggest the company sold even less units (Chart 2). It should also be noted that the company sold no drones in 2Q20. While this is admittedly circumstantial, it is clear that the company’s operational scale in relation to their current valuation is – at the least – questionable, and – at worst – unwarranted.
Moreover, the company appears to hold no patents or trademark protections for their drones or any of their products. In fact, the company appears to own no special rights to any of the components that go into making the drones. The only trademark on file appears to pertain to their marketing efforts, as per a recent trademark filing for the use of “The Drone Age” made in June 2020; at the time of writing, this trademark is still under review and has received kickback from the reviewing attorney. No further patents or trademarks have been registered. It should further be noted that the CEO’s brother, R. Brian Drozd, along with his law firm are UAVS’ legal representatives. This is the first of many examples to come of the company’s related party transactions.
What is also absent is any evidence of the company having a track record of successful capital expending and / or research & development spending. Historically, these figures have represented moot amounts, with no capex being spent in 6/10 last quarters and no R&D expenses being spent in the last 7/10 quarters. Despite this, the company nonetheless states in all their filings that:
“Research and development activities are integral to our business and we follow a disciplined approach to investing our resources to create new technologies and solutions.”
If I am being generous here, I will acknowledge that it does indeed take a great amount of contrarian discipline to spend absolutely nothing on ensuring that your company retains some semblance of a competitive edge. The company’s depreciation has also historically always sat higher than capex, signalling a significant amount of underinvestment and exhibiting just how cash-strapped the company has been (Chart 3). However, perhaps I am being too harsh. Management is, after all, promising investors that the company will be able to successfully move into the drone-delivery market, an area of opportunity that could spell tremendous growth for the company.
The stock has rallied hard after management first announced in 3Q19 that they had partnered with an unnamed e-commerce firm to design and build suburban and urban delivery-purposed drones. Speculation that the company was partnering with Amazon ran amok, further fueling the stock’s rise. Management to date has made no efforts in denying these claims or dispelling this speculation. Instead, they fanned the fire by remaining silent on this partnership, even going so far as to reference Amazon in their most recent investor presentation. Evidence of this mystery ecommerce company not being Amazon is well documented and Amazon appears to already be building their own drones. Most recently, the Wichita Business Journal even dispelled these Amazon rumors. So then, what happens to retail bull thesis now that Amazon is out of the picture? More “revenue growth” hype, apparently.
On October 15th, the company announced another exciting development pertaining to their drone-delivery endeavours; UAVS entered into a two-year exclusive contract manufacturing agreement with Chicago-based start up Valqari, LLC to produce Valqari’s Drone Delivery Systems. Additionally, UAVS extended a US$500,000 convertible loan to Valqari. The loan may convert into commons in the event of 1) a change of control or 2) conversion of Valqari into a C-corporation. In both cases, the conversion price will be no higher than a pre-money valuation of US$15mn. Valqari, unlike AgEagle, has a patent on their products, which is cause for some further excitement. Still, the company is a small operation and far from being an established market player, with the company having last raised ~US$1.6mn in seed capital and having only ~19 listed employees on LinkedIn. Valqari is also only in the prototype phases of its development and does not expect to debut its pilot tests until the end of this year. I suspect that it will take longer for UAVS to realize the benefits of this partnership than they are letting investors on, which if so will prove a burden on their top line.
I believe that investors should also be more concerned with management’s willingness to misguidedly promote their stock on the back of rumors without substantiating their claims with hard evidence and facts (more on this below). The company currently contracts Gateway IR for these services, a firm which also services the questionable likes of Workhorse Group, Ballard Power Systems, CarParts.com, Riot Blockchain, and a whole gang of speculative SPACs. I believe that Gateway’s track record of assisting these controversial stocks (and at what appear to be at times blatant pump-and-dumps) should have investors further questioning the integrity of the content within UAVS’ wealth of press releases (more on this below).
Taking into consideration AgEagle’s lack of real operational success, absence of any proprietary tech (especially as it pertains to delivery-purposed drones), historical mooted levels of research and development / capex, the hollow nature of their announced partnerships, all in conjunction with management’s willingness to jump on hype trains in what appear to be efforts to divert attention away from the company’s underlying struggles, I find it difficult to comprehend how the company expects to grow itself into the drone industry leader / giant it claims it already is.
2) A Dubious Gang of Management / Insiders and Stealthy Stock Promotion
Coincident with AgEagle’s operational woes is management team and stable of insiders plagued with trouble, scandals, and a whole host of red flags. For starters, the company has, until this most recent quarter, relied heavily on toxic financing to keep its operations’ lights on. Beginning in 2015, Alpha Capital Anstalt began lending capital to the company through a series of convertible preferred shares that all eventually converted into commons. These preferred shares contained anti-dilution clauses that would trigger should new securities be issued afterwards (effectively lowering the conversion price and increasing the number of commons to issued upon conversion). In all cases, Alpha Capital was the one whom these new securities would be issued to and purchased by, which would in turn trigger their own anti-dilution clauses (which is insane upside for Alpha). Most recently, the company issued 1,050 units of Series E of converts (strike @ US$0.25 / sh.) which in no later than a month was partially repurchased using funds raised from a common equity financing round (purchase price @ US$1.06 / sh.), marking a significant gain return on Alpha’s investment. The remaining Series E notes, along with the remainder of the Series C and Series D notes were also converted into commons.
The net effect of these transactions has resulted in AgEagle’s share count increasing by ~5.75x over the last 12 quarter. As you already may have surmised, these securities proved to be tremendously lucrative opportunities for Alpha Capital, as they would sell most of these freshly converted commons almost immediately into the open market. While there are none of these convertibles outstanding today, these dealings represent an unfortunate dilution cost to AgEagle shareholders that I believe has not yet truly being appreciated by the investment community.
Alpha Capital and its principal manager, Barry Honig, have had numerous run ins with the SEC and have been sued on multiple occasions for securities fraud and engineering pump and dumps. Their track record of fraudulent behaviour, orchestrating pump and dumps, and outright deception is well documented by regulators and journalists alike and their deep involvement with AgEagle should be plenty cause for alarm in of itself. Unfortunately, this is not where this story ends. It appears that Honig is still busy at work pumping UAVS through a paid team of fake promoters and anonymous online.
UAVS’ stealth promotion network includes a handful of real people and fake accounts who have touted the same stocks with such regularity that it is impossible to view their posts as a coincidence (Table 1). The list includes:
Many of these articles were picked up by Nasdaq.com (ironic, given that the company failed to list on the exchange), Yahoo.com, and Google.com, most notably those written by InvestorPlace.com authors Larry Ramer, Chris Markoch, and collaborator Louis Navellier. InvestorPlace.com is a marketing firm with a penchant for stock-picking and SEO marketing. I have discovered that a great deal of concentration of these stories were found days and weeks leading up to share sales and always before and after material press releases / market-moving events (Chart 4).
Louis Navellier is also an interesting addition to the mix; he runs his own investment firm based in Nevada (though his current address is in Lantana, FL) and was charged a couple months prior by the SEC for using “marketing materials that included false and misleading statements” regarding his firm’s investment strategies. He appears to be working with InvestorPlace.com staff to provide bullish reports on UAVS. It would come as no surprise to me if Mr. Navellier and Mr. Honig were working in concert to pump this stock. The pair appear connected (they are a ~26-minute drive’s away from each other) and even attended the same prep school, where they are now both alumni donors. Louis’ buy list has also historically comprised of companies pumped by Mr. Honig (MARA, RIOT).
What has become evident through my analysis is that UAVS’ impressive historical returns profile was likely orchestrated by a concentrated group of insiders / investors that stood to benefit significantly more than the common shareholder. This is another obvious red flag. Bullish investors content on staying aboard the euphoria /growth train should be more concerned with insiders’ and management’s allowance of promotional activity and must further ask themselves how long they truly think the party can go on for.
As if that was not enough, prominent insiders have begun unwinding a significant portion of their holdings. After the expiry of a “leak out” agreement in which the company’s executives and directors were restricted from selling shares until September 7th, former CEO Bret Chilcott and CFO Ms. Fernandez-McGovern began dumping shares in September and October. Mr. Chilcott now owns ~½ of what he owned at the beginning of the year and Ms. Fernandez-McGovern too owns ~½ of what she held for the same period, marking significant profits for both parties.
The company’s new CEO, Dr. Michael Drozd owns no known shares of the company as of the time of writing. However, he is set to receive a 20% bonus (off of US$235k / yr.) in cash and stock, with an additional 100k restricted stock units that vest around April of next year. Time will only tell whether this newly appointed executive truly believes in the AgEagle’s story.
All things considered, there is plenty of evidence here pointing towards a group of highly misaligned executives who’s behaviour should have investors questioning the extent to which management – specifically the company’s longest standing and most seasoned members – truly believe in their own story.
3) AgEagle Operates an Unprofitable, Cash Flow Degenerative Business Despite Little Direct Competition
AgEagle may not compete with other agricultural-purposed drones, but they indirectly compete with continuously advancing drone technology, which is itself characterized by intense competition among major technology companies. Still, it seems that the company’s market-leadership of agricultural drones has not created any profits or generated an ounce of positive free cash flow or EBITDA since it went public. Moreover, despite revenues nearly tripling over the past year, the company has not been able to translate any benefits into operating income (Chart 5).
The inescapable conclusion we draw from AgEagle’s financials is that developing and selling drones for hemp growers is a structurally unprofitable business. Even more concerning is the fact that no research & development or capex is being factored into this equation right now; the addition of such spending programs would make this story even uglier than it already is.
Elsewhere, AgEagle has also been unable to generate any leverage on its other operating expense lines. The company spends its common stock frivolously on consulting agreements with GreenBlock Capital and repeatedly references public relations / capital raising fees in their expense line items. As the financials exhibit, these consulting agreements and marketing efforts have been inadequately leveraged (if that was possible in the first place). Selling drones to farmers is clearly too capital market- and marketing-intensive to lend itself to efficiency gains and associated increases in profitability, even as their product lines face no material competition. The company has stated that intends to hire ~60 people upon relocation to its new facility. However, given the company’s historical performance, I have serious doubts that the company will be able to translate any benefits from a larger workforce into their financial performance. OpEx burdens will likely continue to face pressure as well as the company moves to a more expensive facility this year (~3x increase in rental burden). What is more, as of the time of writing, the company has posted no new job opportunities on its career page and the postings of recent have pertained solely to office managerial / admin work.
AgEagle is consistently unprofitable, has no operating leverage, historically burns through ~-US$600k in cash per quarter, and has a working capital deficit of -US$482k as of 2Q20. All things considered, the company’s inability to generate even a crumb of GAAP accounting profits, EBITDA, or free cash flow in the face of little direct competition illustrates just how bad a business AgEagle’s really is. Tough times even in the best of times.
Valuation & Returns Profile
AgEagle operates a business that has shown itself time and time again to be structurally unprofitable and incapable of generating any real value to common shareholders, even during the best of times. Given the company’s underlying fundamental and operational weaknesses, existential threats, aggressive stock promotion tendencies, and new capital structure, I believe that UAVS’ commons are poised for a revaluation with material downside. UAVS trades like a market leader (~175x LTM EV / Sales) even among its valuation-rich drone peers. Taking into account all of the above considerations and AgEagle’s historical valuations, I believe the company should trade closer to ~80x EV / Sales, implying a downside of ~-20%-40%.
Short-squeeze, buy-out risk, party goes on and incremental drone delivery opportunity plays out, management gets paid on a potential acquisition of Valqari
Borrow is expensive on this trade, at ~42.4%. On the other hand, this trade can be closed relatively quickly, and I believe buy-out risk is negligible. Additionally, the float is decently large and insiders who have been dripped out of selling the past few months are likely to continue to be motivated sellers, mitigating slightly squeeze / close-out risks. Nonetheless, position sizing will have to be small.
 https://www.sec.gov/Archives/edgar/data/8504/000157570518000200/uavs_424b3.htm (Page 20)
 https://www.411.com/address/1440-S-Ocean-Blvd/Lantana-FL/3R0MHj3otsNiZsd4ItFZOw and https://www.411.com/name/Barry-Charles-Honig/Boca-Raton-FL/17xbkbkm
Amazon / large ecommerce partnership speculation fading, unit economics / cash flow / unprofitability issues becoming apparent through earnings releases, another equity / capital raise following complete cash burn
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