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Drones Makers EPAZ & UAVS Flying High With AI

Drones Makers EPAZ & UAVS Flying High With AI
Written by
Michael Sheikh
Published on
April 26, 2023
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Epazz, Inc, (OTCMKTS: EPAZ) is a pure play on the drone market with an artificial intelligence (AI) twist. The ZenaDrone 1000 is actually a battle tested drone with a number of features and applications for both commercial and military use. If investors were to view videos of the ZenaDrone 1000 in action they would think one of the big aircraft makers like Lockheed Martin (NYSE: LMT), Northrup Grumman (NYSE:NOC), or Boeing (NYSE: BA) was the maker because the quality is that good. Many investors may not realize it but the cheapest drone in the military’s arsenal is BA’s Scaneagle, with a price tag of $1.4 million. The company is on the verge of large scale military contract awards in the millions or possibly tens of millions yet here it hovers with a $3.75 million market cap.Next on the list of undervalued drone makers is AgEagle Aerial Systems Inc. (AMEX: UAVS) with a market cap of $35 million trading at a hair less than 2 times sales. The eBee X series drone is a backpack drone that became the first drone compliant with the small Unmanned Aircraft System (sUAS) regulations published by the FAA. No waiver is required to conduct Operations Over People (OOP) or Operations Over Moving Vehicles giving them a massive first mover competitive advantage in the marketplace. The company is also vertically integrated with bolt on components, sensors, and software upgrades for commercial and military applications. The stock suffers from shorts trying to capitalize on a reverse stock split that was never approved and a recently reported S-3 for $3.0 million. Using the traditional metrics of sales, Cytta Corp. (OTCMKTS: CYCA) is not an undervalued name with a market cap of $17 million. While the company has nil in sales, what they do have is a national first responders communication network that ties in with drones. When you look at the realestate they own in the cloud its grossly undervalued. The Integrated Global Area Network (IGAN) technology is a platform that first responders use. It can stream voice and video in real time with multiple agencies over a unified secure communication system with geomapping. Along with this global network that they are tied into they have incredible compression technology to stream 4K from drones. In environments where bandwidth is limited this could translate into a lifesaving application. Coupled with Artificial intelligence the CYCA compression technology accelerates the iterative process that uses AI to aid in real time decision making.

Military Contract Potential

When it comes to military contracts, there is a reason why they are so sought after, and that has to do with the long-term nature and certainty of revenue streams. When the military invests in technology, they aren’t necessarily looking for the most cost-effective, but rather the most capable and ruggedized piece of equipment that can operate in hostile wartime scenarios. This capability manifests in reliable technology that can achieve the stated military objectives. The technology has to pass many grueling tests. Still, if it does, the manufacturer is awarded a generous long-term contract and the potential for technology upgrades over the contract's lifetime. EPAZ is poised to capture several drone contracts that could span all the primary military services. The evidence of this military potential started to build in the press releases early this year. EPAZ has submitted several SBIR grants. These grants are a great source of non-dilutive funding for technology R&D and the building blocks of an eventual military contract. CEO Shaun Passley said, “The SBIR would open us up to the whole federal government to our drone technology.” The company is currently in a Phase 2 submission process due in part to a $1.2 million proposal being submitted with their partner AI Predictive. The company will unveil more partnerships with established defense contractors in April. Working with established defense contractors on proposals accelerates their pathway to Phase 3 solicitations. In March, they experienced another significant notable advance: they were upgraded to Technology Readiness Level TRL 7 on a scale of 1 to 9, being the most mature technologies. Along with this upgrade was a Letter of Support from the Air Force for drone cargo delivery, which includes blood transport. They will be testing the ZenaDrone 1000 in battlefield conditions, which may lead to an upgrade of their TRL. They are also qualified to submit for external funding. The scale of their potential contracts was revealed in their last press release. When they announced increasing production of ZenaDrone 100 for signed pilot customers in 2022, they produced ten units. Their goal by the end of 2023 is to produce at the rate of 20 drones per month with the capacity to double production at the same facility if needed. Based on earnings of $2.0 million, the drones they are selling are averaging $200,000. This is a conservative estimate for military sales because the lowest-priced drone is $1.0 million. Without revenue guidance, these projections could scale very quickly. Assuming they can ramp sales to 20 as anticipated, this could generate close to $4.0 million monthly or $48 million annually. If the company were to trade one times sales it would have around a $50 million market cap.

Bashers Create Incredible Value

An army of bashers started on EPAZ on March 11, 2023 while the stock was in the momentum phase calling it a scam and allowing the shorts to catch their breath. The CEO Shaun Passley is the real deal with a Masters degree from Northwestern University in Law and Product Development. Without presenting any evidence of wrongdoing by Passley, the bashers present themselves as the saviors of the small investor. Hopefully investors can see through this ruse, but the current market weakness is a testament to relentless agenda.

Marketing Blitz

CEO Passley launched an all-out Blitzkrieg assault on sales this past quarter. It started with a tweet that they would focus on the German market based on a beta project in Berlin with expansion plans to the rest of Europe. Then they started giving indications that they were getting traction in Germany. Then there was an interlude with a renewed focus on the US markets. Then they introduced a patented product, a charging pad for drones with a 4K - 15K price point demanding size. Updated news from the company indicated the field service business sector was seeing traction in the UK. They just recently completed the International trade fair for aviation in Germany.

US Bans Chinese Drones

In mid-February, the United States prohibited using Chinese drones, which opened up SBIR funding to set up US manufacturing of the leading product ZenaDrone 1000. The new initiative is called the BlueUAS program. At the beginning of March, they showcased the drone at one of California's Air Force bases. Then they got the go-ahead to proceed with their phase 1 SBIR proposal. Over a week later, they partnered with AI predictive on a phase 2 proposal. They went to the Reservation Economic Summit in Las Vegas at the beginning of April.

Merger / Acquisition Potential

UAVS acquired 3 companies in 2021 and in 2022 figured out how to integrate them under a unified brand. They bought MicaSense in January 2021 for its agricultural sensors. In April 2021 they purchased Measure Global which has a cloud based Software as a Service (SaaS) ground control system for pilots looking to operate a fleet of drones so they could fly autonomously. Their final and most exciting acquisition was in October 2021, with the purchase of SenseFly, a fixed wing drone with an impressive operational history that also had the eBee brand. In a recent conference call, the CEO indicated the acquisitions were on track to showing strong signals that they could generate positive cash flow this year. They also went into the rationale for requesting a stock split, which was to give the board flexibility when acquiring additional assets. When you look at the share structure it's very evident that they must have been looking at a mammoth acquisition because there was room to double the O/S without maxing out the share count. While they are not opposed to additional acquisitions they spelled the characteristics of their ideal M&A target. They are looking for the best growth in an acquisition candidate versus the one that's simply easy to do on paper. They wanted something to expand their reach and they were looking for new markets. This wish list is almost a carbon copy of what EPAZ is working on. They are entering the military market with incredible growth prospects and have a UAV much larger than their eBee and the price of EPAZ is ridiculously cheap and would barely dip into their treasury. After digesting 3 acquisitions successfully it seems that EPAZ is firmly in their sights to be acquired. The only question for EPAZ shareholders is how much would UAVS be willing to offer because it has to make economical sense to join forces instead of competing. The recent joint ventures with EPAZ sets in motion a potential trigger for investors to pile into EPAZ should any JV deal with UAVS be announced, because there would be a number of future synergies in that merger. A dark horse candidate of an acquisition by UAVS is CYCA due to is extensive global network that already tied in to the government via the first responders network. The combination of the FAA approved eBee drone pictured above and the IGAN's system could be an unstoppable niche. UAVS just earned GSA certification and cleared with the FAA for operations over people. The package deal to schools, first responders, police, fire, private security, churches, or sporting events could be massive because the GSA certification enables the client easy access to buy if the budget is available. It could be an incredible joint venture opportunity or acquisition that meets UAVS's acquisition parameters.

Financial Analysis

EPAZ has 600 million shares authorized and has 536 million shares in the O/S which means they are only 12% from being maxed out which means there is little room for any additional dilution. There are no toxic notes in the company, but related party payables total $2.3 million, which demonstrate significant skin in the game. An important feature of EPAZ is that they have 2 consecutive years with approximately $2.0 million in sales and net profits. In UAVS there are 250,000 million shares authorized and 88.4 million shares in the O/S as of end of year. One major highlight in UAVS is the 96% revenue growth year over year resulting in $19.1 million in sales. The company has a $35 million dollar market cap. The company reduced debt and took over 2 companies. The company has been reducing their cost structure to align it with their long term growth strategy. They raised $17.9 million over last year. They are looking for larger government contracts but will work on the commercial side in the interim.

Investment Thesis

EPAZ is the most undervalued drone company in OTC and NASDAQ thanks to a band of bashers. As a growing technology company it should be valued at a multiple of sales. The Company currently has $2.0 million in annual sales and is making a profit and has a share structure that is close to maxed out and not easily diluted. A $3.5 million market cap is extremely depressed. The company is on the cusp of a major military contract award and could catalyze the stock higher. Piecing together their production output it appears they have the potential to do anywhere from $50 million to $240 million in annual revues should the military contracts come in as anticipated. A $50 million market cap represents $.083/share or roughly a 10X return from existing levels. Their margins are expected to improve as they move to mass scale operation. The CEO’s intense activity in the past quarter along with the tide shifting away from using Chinese drones is a net positive for the company. Their partnering efforts with AI are also very notable. UAVS is also undervalued but its softness is from a recent S-3 preferred stock offering for 14.2 million common shares. The overhang is pretty much cleaned out judging by the volume spike. On April 25th, they announced a Multiple Award Schedule (MAS) with the government in the form of a GSA contract. This makes their drones accessible to all areas of government. They still need to bid for contracts but most of the heavy listing in the sales cycle was completed. Their market cap is very attractive but investors are reluctant for fear of another round of dilution. Management seems very focused on getting to positive cash flow and that reduces the threat of dilution. While the company says they are planning fewer press releases, we think any sort of collaboration with EPAZ could be the smoking gun of a merger acquisition. While UAVS is better funded than EPAZ the risk to reward is better with EPAZ given that it is trading less than 2 times prior years revenues. Both of these companies are great ways to play the burgeoning drone sector benefiting from the new drone policy against Chinese imports.


Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. A guest contributor wrote this article and solely reflects his opinions.

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