Ageagle Aerial Systems, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2019, compared with the three months ended March 31, 2018. AgEagle designs and sells small unmanned aerial vehicles and provides aerial-imaging, data-analytics, leasing, and subscription services focused primarily on precision and sustainable agriculture. The company acquired Agribotix in August 2018, adding the FarmLens subscription platform, and launched the ParkView platform for public-sector green-space applications in March 2019.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $45,993 | $29,191 | Up 58% |
| Product revenue | $38,083 | $29,191 | Up 30% |
| Subscription revenue | $7,910 | — | New revenue stream |
| Cost of sales | $33,948 | $23,798 | Up 43% |
| Gross profit | $12,045 | $5,393 | Up 123% |
| Gross margin | 26% | 18% | Up 8 percentage points |
| Operating expenses | $577,048 | $196,541 | Up 194% |
| Loss from operations | $(565,003) | $(191,148) | Loss increased |
| Net loss | $(565,465) | $(203,497) | Loss increased 178% |
| Basic and diluted loss per share | $(0.04) | $(0.04) | No change reported |
| Cash used in operating activities | $(418,636) | $(769,799) | Use decreased |
| Cash balance | $2,151,124 | $3,466,745 | Period-end comparison |
Cash declined by $450,606 during the quarter from $2,601,730 at December 31, 2018. Working capital was $2,031,786 at March 31, 2019. Investing activities had no cash impact in Q1 2019. Financing activities used $31,970 for promissory-note payments.
Total assets were $6.30 million and total liabilities were $331,840 at March 31, 2019. The remaining promissory-note balance was $9,028 at quarter-end and was paid in full in April 2019. The company also had $41,333 of accrued dividends, primarily associated with Series D preferred stock. Series D preferred stock carries an 8% annual dividend and was issued with warrants to purchase 3,703,703 common shares.
Material Changes Versus the Prior Comparable Period
- Revenue increased 58%, supported by higher product sales and the introduction of $7,910 in FarmLens subscription revenue.
- Gross margin improved to 26% from 18%, partly because of FarmLens sales and reduced discounting of slow-moving components.
- Operating expenses rose sharply, principally because of Agribotix-related amortization, directors-and-officers insurance, public-company filing and investor-relations costs, increased payroll, stock compensation, and higher business-development travel.
- General and administrative expense increased to $474,902 from $40,853; professional fees declined to $90,019 from $151,061 as merger-related work subsided.
- Interest expense fell to $462 from $27,414 following the conversion or repayment of most debt associated with the reverse merger.
- Common shares outstanding increased to 14,449,394 at March 31, 2019 from 12,549,394 at December 31, 2018, primarily from the conversion of 1,026 Series C preferred shares into 1.9 million common shares.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected cash on hand, together with operating cash flows, to fund operations for the next year, while also stating that it intended to pursue additional outside financing. This assessment is subject to continued operating losses and cash use.
- The business is seasonal, and management cautioned that quarterly revenue and expenses may fluctuate materially.
- Revenue concentration was high: two customers represented 68.0% and 29.1% of Q1 2019 sales.
- The company reported no impairment losses and no material off-balance-sheet arrangements other than standard operating leases. Goodwill was $3.27 million and management reported no indication of impairment as of March 31, 2019.
- Series C preferred stock has full-ratchet anti-dilution protection. Outstanding warrants totaled 4,531,924 shares, and options totaled 1,963,720 shares at quarter-end, creating substantial potential dilution.
- A subsequent financing with net proceeds of at least $500,000 would require redemption of the Series D preferred stock using the financing proceeds, subject to specified conditions. The filing does not provide a stated redemption amount at quarter-end beyond accrued dividends.
- On May 3, 2019, the company entered into a consulting agreement requiring $25,000 per month, 500,000 restricted shares upon execution, and up to 2.5 million additional restricted shares tied to milestones. The consultant beneficially owned approximately 5.86% of common stock and held additional options.
- A director resigned effective April 15, 2019. The board then consisted of four directors, three of whom were independent.
- The company disclosed ordinary-course litigation risk and noted that insurance may not fully cover future claims. The filing text does not identify a specific material pending legal proceeding.
- The filing states that disclosure controls were effective as of March 31, 2019. In the internal-control discussion, management also states that its assessment concluded controls were effective as of December 31, 2018; investors should review the exact wording in the filing.
Important Facts for Investors to Verify
- Whether the new subscription, leasing, ParkView, and sustainability offerings can generate recurring revenue at sufficient scale to offset the company’s operating-cost base.
- The company’s cash runway, financing needs, and ability to fund operations while continuing to report significant losses and negative operating cash flow.
- Customer concentration and the effect of seasonal agricultural demand on quarterly results.
- The full dilution impact of Series C conversion rights, Series D warrants, outstanding warrants, options, and subsequent restricted-stock commitments.
- The terms and potential cash cost of Series D redemption, including the 8% dividend and 115% redemption premium provisions.
- The apparent difference between 14,449,394 common shares outstanding at March 31, 2019 and 14,949,394 shares reported as outstanding at May 15, 2019.