AgEagle Aerial Systems Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2020; filed November 13, 2020. AgEagle designs and manufactures small unmanned aerial vehicles and provides drone-enabled imagery, analytics, agriculture, hemp-compliance, leasing, and software-as-a-service solutions. The company is also expanding into contract manufacturing and commercial drone delivery. Operations began relocating from Neodesha, Kansas, to a larger Wichita facility in late September 2020.
Financial Performance and Position
| Metric | Three Months Ended Sept. 30, 2020 | Three Months Ended Sept. 30, 2019 | Nine Months Ended Sept. 30, 2020 | Nine Months Ended Sept. 30, 2019 |
|---|---|---|---|---|
| Revenue | $750,325 | $41,616 | $1,157,930 | $107,785 |
| Gross profit | $319,642 | $8,888 | $537,734 | $21,910 |
| Gross margin | 43% | 21% | 46% | 20% |
| Operating expenses | $897,379 | $571,926 | $2,774,113 | $1,889,214 |
| Loss from operations | $(577,737) | $(563,038) | $(2,236,379) | $(1,867,304) |
| Net loss | $(578,606) | $(563,038) | $(2,237,248) | $(1,867,805) |
| Net loss per share | $(0.01) | $(0.04) | $(0.33) | $(0.14) |
- Revenue increased 1,703% year over year in the quarter and 974% year over year for the nine-month period, primarily from drone assembly and product sales tied to follow-on orders from a major, unnamed ecommerce customer.
- Nine-month revenue consisted of $1,105,971 from drone assembly and product sales and $51,959 from software platform sales. One customer represented 94.4% of nine-month revenue.
- Cash was $24.69 million at September 30, 2020, compared with $718,000 at December 31, 2019. Working capital was $24.54 million.
- Operating cash flow was $(1.44) million for the nine months, compared with $(1.12) million in the prior-year period. Investing cash flow was $(70,086), primarily for property and equipment. Financing cash flow was $25.49 million.
- Total assets were $28.58 million and total liabilities were $437,051 at September 30, 2020. Stockholders’ equity was $28.14 million.
- The company had $107,439 of PPP promissory note debt outstanding, bearing interest at 1% and maturing May 6, 2022, subject to potential forgiveness for qualifying uses.
Material Changes Versus the Prior Comparable Period
- Gross margin expanded to 43% for the quarter and 46% for the nine months, compared with 21% and 20%, respectively, in 2019, reflecting a shift toward higher-margin drone-related products and services.
- Operating expenses increased 57% for the quarter and 47% for the nine months. Higher general and administrative costs reflected stock compensation, investor relations, director compensation, payroll, bonuses, and CEO recruiting. Professional fees increased due to consulting, fractional CTO, business development, legal, and capital-raising activities.
- Nine-month net loss increased to $2.24 million from $1.87 million, although quarterly net loss was broadly stable. Net loss available to common stockholders increased to $11.35 million from $1.99 million because of $7.88 million in non-cash deemed dividends and related preferred-stock accounting adjustments.
- Common shares outstanding increased to 57,881,002 at September 30, 2020 from 15,424,394 at December 31, 2019, primarily due to preferred-stock conversions, warrant exercises, equity offerings, and compensation issuances.
- Financing activities generated approximately $22.80 million from common-stock sales, $2.64 million from warrant exercises, and additional amounts from preferred-stock transactions and the PPP loan.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash on hand, together with cash from operations, is expected to fund operations for the next year, while also indicating an intention to pursue additional outside financing. The filing provides no formal revenue or earnings guidance.
- COVID-19 caused supplier and project delays, shifting revenue associated with ecommerce-customer purchase orders from the second quarter into the third quarter. Further supply-chain constraints, manufacturing interruptions, reduced capital-market access, and economic disruption remain risks.
- The business is seasonal, and quarterly revenue and expenses may fluctuate. Customer concentration is substantial, with one customer accounting for 94.4% of nine-month revenue.
- As a subsequent event, on October 14, 2020, AgEagle loaned Valqari $500,000 under a 3% convertible promissory note maturing April 14, 2021, and entered into a two-year exclusive U.S. manufacturing agreement for Valqari’s drone delivery stations. The note is subordinated to senior indebtedness and subject to default and conversion provisions.
- The company entered a three-year Wichita lease with estimated aggregate rent of $297,000 and a potential additional three-year option term with estimated rent of $314,640.
- As of September 30, 2020, outstanding potentially dilutive securities included 2,110,154 options and 3,022,254 warrants. The filing states that these securities were antidilutive for earnings-per-share purposes.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the major ecommerce customer continues to place orders and whether customer concentration declines.
- The timing, profitability, and execution risk of the Wichita manufacturing relocation and the Valqari manufacturing arrangement.
- The collectability and conversion terms of the $500,000 Valqari note, including its subordination and possible six-month maturity extension.
- Whether the PPP loan qualifies for forgiveness and the amount ultimately repayable.
- The potential dilution from outstanding options, warrants, and future equity financings; the filing reports 57.98 million shares outstanding as of November 13, 2020.
- The effect of recurring operating losses and negative operating cash flow on future financing needs.
- The filing contains an apparent discrepancy in the August 2020 offering: Note 7 reports 3,355,705 shares sold, while the MD&A section reports 3,335,705 shares. This should be reconciled against the filed offering documents.