AgEagle Aerial Systems Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
The filing reports results for the year ended December 31, 2020, with comparable results for 2019. AgEagle develops and manufactures commercial unmanned aerial vehicle systems, provides drone-enabled agricultural and analytics software, and is expanding into contract manufacturing, package delivery, infrastructure inspection, public safety and other commercial applications. The company relocated its headquarters and manufacturing operations to Wichita, Kansas, in November 2020.
Revenue was increasingly concentrated in contract manufacturing for a major e-commerce customer, while software revenue included FarmLens and HempOverview subscriptions. The company had 10 full-time and one part-time employee at year-end.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1.285 million | $0.297 million | Up 333% |
| Drone and custom manufacturing revenue | $1.219 million | $0.268 million | Up substantially |
| Software subscription revenue | $66,648 | $29,055 | Up substantially |
| Gross profit | $573,733 | $94,628 | Up 506% |
| Gross margin | 45% | 32% | Up 13 percentage points |
| Operating expenses | $5.505 million | $2.617 million | Up 110% |
| Loss from operations | $4.931 million | $2.522 million | Loss increased |
| Net loss | $4.932 million | $2.523 million | Loss increased |
| Net loss available to common stockholders | $14.044 million | $2.685 million | Primarily affected by deemed dividends |
| Basic and diluted loss per share | $0.35 loss | $0.18 loss | Loss per share increased |
| Cash at year-end | $23.940 million | $0.718 million | Up $23.222 million |
| Operating cash flow | $(2.257) million | $(1.818) million | Cash use increased |
| Investing cash flow | $(0.779) million | $(0.024) million | Higher investment |
| Financing cash flow | $26.258 million | $(0.041) million | Material equity financing |
Year-end working capital was $22.616 million. Total assets were $28.726 million, total liabilities were $2.372 million, and stockholders’ equity was $26.355 million. Debt consisted principally of the $107,439 PPP loan, with $89,533 classified as current and $17,906 as long term, plus lease liabilities totaling $257,363. Management expected the PPP loan to qualify for forgiveness but stated that forgiveness was not assured.
Cash provided by financing activities primarily reflected common-stock offerings, warrant exercises, the Series E preferred-stock transaction and PPP proceeds. Management stated that cash on hand and expected revenue would fund approximately the next year of operations and later stated that available cash was expected to fund anticipated operating costs and capital requirements through December 2022, subject to operating performance and market conditions.
Material changes versus the prior comparable period
- Revenue increased sharply, primarily from drone manufacturing and assembly work related to package delivery. A major customer represented 93.7% of 2020 revenue, compared with 90.8% in 2019.
- Gross margin improved to 45% from 32%, reflecting a higher-margin mix of products and services.
- Operating expenses increased by $2.888 million. General and administrative expense rose 48% to $2.732 million, and professional fees rose 308% to $2.703 million. Selling expense declined to $40,003, partly because COVID-19 reduced travel and conference activity.
- The net loss increased primarily because operating costs and professional fees rose. The much larger loss attributable to common stockholders also reflected approximately $9.111 million of deemed dividends and related preferred-stock accounting adjustments.
- Cash increased substantially because the company raised approximately $22.797 million from common-stock sales, received $3.320 million from warrant exercises and completed other financing transactions.
- Common shares outstanding increased from 15.424 million at December 31, 2019 to 58.636 million at December 31, 2020, reflecting conversions, equity offerings and warrant and option exercises.
- The company reported no goodwill impairment in 2020; it recorded approximately $163,000 of goodwill impairment in 2019.
Guidance, outlook, risks and unusual items
Management did not provide specific revenue or earnings guidance. Its outlook emphasized expansion of agricultural solutions, HempOverview, contract manufacturing and turnkey drone solutions, supported by research and development, additional partnerships and potential acquisitions. The company also participated in the U.S. Department of Transportation’s BEYOND program in Kansas to support beyond-visual-line-of-sight drone operations.
- COVID-19 caused supply-chain and logistics delays, including delays in fulfilling orders for the major e-commerce customer. Revenue expected in the second quarter was recognized in the third quarter.
- Management expects possible additional supply-chain delays in 2021 and relies on a limited number of suppliers for certain components. The company also relies on a significant vendor for FarmLens image stitching, although alternatives may be available.
- The business remains loss-making and requires additional capital if revenue growth and operating cash generation are insufficient. Management stated that failure to raise capital could require reduced or discontinued operations.
- Drone adoption depends on evolving FAA rules, including Remote ID, operations over people, nighttime operations and eventual authorization of broader beyond-visual-line-of-sight operations. HempOverview is exposed to changing federal, state and tribal hemp regulations.
- The company is exposed to customer concentration, contract-performance requirements, possible termination or penalties, competition from better-funded companies, rapid technological change, intellectual-property risks, product liability, cybersecurity risks and limited insurance availability.
- The company recorded a $1.5 million contingent loss related to a former consultant’s demand for up to 750,000 additional shares. AgEagle disputed that the milestones were achieved but offered 250,000 shares as a settlement.
- Three shareholder-related lawsuits were filed in 2021 alleging securities-law or fiduciary-duty violations concerning statements about the company’s e-commerce relationship. The company stated that it considered the claims meritless and intended to defend them.
- On January 27, 2021, the company completed the acquisition of MicaSense for an aggregate purchase price of $23 million, subject to debt and working-capital adjustments, including a $4.75 million holdback and approximately $3 million of stock consideration.
- The company entered into a two-year exclusive North American manufacturing agreement with Valqari and issued a $500,000 convertible note to Valqari bearing 3% interest and maturing April 15, 2021, subject to specified extension and conversion provisions.
Important facts for investors to verify
- Whether the major e-commerce customer relationship continues, expands or terminates, and the resulting effect on revenue concentration and backlog.
- Whether the company can convert the 2020 revenue increase into recurring, profitable operations while controlling professional, compensation and acquisition-related costs.
- Actual cash burn, remaining liquidity after the MicaSense acquisition, and the company’s need for further equity or debt financing.
- The terms, dilution potential and exercise status of outstanding warrants and options, including 2.517 million warrants exercisable at $3.30 per share at year-end 2020.
- The final accounting impact, integration performance and financing consequences of the MicaSense acquisition.
- The resolution and potential dilution or cash cost associated with the former consultant’s claim and the shareholder litigation.
- Whether the PPP loan was forgiven and whether the Valqari note was repaid, converted or extended.
- Progress in commercializing HempOverview, FarmLens, proprietary drones and contract-manufacturing programs beyond the principal customer.
- Regulatory developments affecting FAA approvals, BVLOS operations, Remote ID and domestic hemp cultivation.