Business Context and Reporting Period
This Form 8-K Current Report, dated December 27, 2017, details a strategic partnership entered into by Aerovironment, Inc. (the "Company"). The filing reports the execution of three definitive agreements on December 27, 2017, involving the Company, HAPSMobile, Inc. ("HAPSMobile"), and SoftBank Corp. HAPSMobile is a newly formed Japanese corporation, 5% owned by the Company and 95% owned by SoftBank Corp.
Key Financial Metrics and Agreements
- Design and Development Agreement (DDA): The Company agreed to design and build prototype solar-powered high-altitude aircraft ("Solar HAPS") and ground control stations. The maximum net value of the agreement is capped at $65,011,481. HAPSMobile will reimburse all actual costs incurred plus a percentage profit fee.
- Joint Venture Investment: The Company purchased a 5% stake in HAPSMobile for 210,000,000 yen (approximately $1.9 million) effective December 27, 2017.
- Future Capital Commitments: To maintain its 5% ownership, the Company committed to additional capital contributions of 150,000,000 yen (approx. $1.3 million) in April 2018 and 209,500,000 yen (approx. $1.8 million) in January 2019.
- Intellectual Property (IPLA): The Company and SoftBank licensed background IP to HAPSMobile. In return, HAPSMobile granted the Company a perpetual, exclusive license to "New Intellectual Property" for non-commercial applications (excluding Japanese government applications). Royalties are non-applicable until revenue is generated, at which point they will be on a FRAND basis.
Material Changes and Strategic Rights
The filing represents a material change in the Company's business scope through the entry into the DDA and the formation of the joint venture. Key strategic rights include:
- Ownership Expansion: The Company has the option to purchase additional shares to increase its HAPSMobile ownership to 19% prior to the first flight test of the prototype aircraft.
- Market Exclusivity: HAPSMobile holds exclusive rights to Solar HAPS for commercial applications and non-commercial applications in Japan. The Company holds exclusive rights for non-commercial applications globally, excluding Japan, subject to conditions regarding material negative impacts on HAPSMobile.
- IP Acquisition Rights: If HAPSMobile ceases operations or decides not to commercialize the New Intellectual Property, the Company and SoftBank have options to purchase the IP. The purchase price would be based on development costs or fair market value.
Guidance, Risks, and Contingencies
The filing does not provide specific financial guidance, revenue forecasts, or profit margins for the upcoming fiscal periods. However, it outlines several contingencies and risks:
- Termination Clauses: The DDA may be terminated by either party for material breach (after a 60-day cure period), force majeure (lasting over 180 days), or insolvency. HAPSMobile retains the right to terminate the DDA for convenience at any time.
- Ramp Down: In the event of termination, the Company must undergo a 60-day ramp-down process, during which it will be paid for costs incurred plus the applicable fee.
- Confidentiality: The Company intends to seek confidential treatment for certain portions of the agreements, which will be filed as exhibits to the Form 10-Q for the quarter ending January 27, 2018.
Investor Verification Checklist
- Verify the exact terms of the "percentage profit fee" in the DDA, as the specific rate is not disclosed in this summary.
- Monitor the upcoming Form 10-Q (quarter ending January 27, 2018) for the full text of the DDA, IPLA, and JVA to review confidential provisions.
- Track the Company's cash flow to ensure it can meet the committed capital contributions of approximately $3.1 million in 2018 and 2019.
- Assess the competitive landscape for "Solar HAPS" to evaluate the viability of the Company's exclusive rights for non-commercial applications outside Japan.
- Confirm the status of the "first flight test" milestone, which triggers the option to increase ownership to 19%.