AgEagle Aerial Systems, Inc. 2018 Q2 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2018, with comparative periods ended June 30, 2017. AgEagle designs, manufactures, distributes and supports small unmanned aerial vehicles and related data services for precision and sustainable agriculture.
On March 26, 2018, the company completed a reverse merger with EnerJex Resources, changed its name to AgEagle Aerial Systems, Inc., and began trading under the symbol UAVS. The company’s common stock had 10,289,001 shares outstanding as of August 14, 2018.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $24,517 vs. $47,192 | $53,707 vs. $82,391 |
| Gross profit | $6,343 vs. $10,287 | $11,736 vs. $39,208 |
| Gross margin | 26% vs. 22% | 22% vs. 48% |
| Operating expenses | $688,012 vs. $107,913 | $884,554 vs. $272,897 |
| Net loss | $712,210 vs. $133,474 | $915,707 vs. $306,054 |
| Basic and diluted loss per share | $0.07 loss vs. $0.03 loss | $0.10 loss vs. $0.07 loss |
Six-month operating cash flow was negative $1.68 million, compared with negative $245,983 in the prior-year period. Investing activities provided $221,255, primarily from cash acquired in the merger, while financing activities provided $3.99 million, primarily from the $4.0 million Series C preferred-stock financing, net of fees, and an additional $250,000 Series C issuance.
Cash was $2.56 million at June 30, 2018, compared with $35,289 at December 31, 2017. Working capital was $2.31 million. Current liabilities were $508,536, including a $93,215 promissory note; convertible notes and related-party notes reported at December 31, 2017 had been converted or otherwise retired in connection with the merger. Total assets were $3.93 million and stockholders’ equity was $3.42 million, compared with a $1.66 million deficit at year-end 2017.
Material changes versus the prior comparable period
- Revenue declined 48% in the quarter and 35% for the first six months, which management attributed to a market shift from do-it-yourself early adopters toward services provided by agronomists.
- Quarterly gross margin improved to 26% from 22%, but year-to-date gross margin fell to 22% from 48% because slow-moving inventory and obsolete components were sold at discounts.
- Operating expenses increased substantially, driven by merger-related legal, accounting and consulting fees, public-company costs, salaries, investor relations, stock compensation and trade-show activity.
- The company recorded a $30,352 loss from its 20% equity-method investment in Agribotix.
- Interest expense declined materially as most debt was converted into equity at the merger; a remaining promissory note had approximately $95,552 outstanding plus $2,337 of accrued interest at June 30, 2018.
- Cash increased primarily through equity financing rather than operating performance; operating cash consumption increased materially year over year.
Guidance, outlook, risks and unusual items
The filing provides no formal revenue, earnings or margin guidance. Management stated that it is addressing the industry shift through strategic acquisitions and a service-oriented model focused on sustainable agriculture. Management believed available cash, operating cash and financing resources would fund approximately the next year of operations, while also stating that additional outside financing may be pursued.
Key risks include continuing losses and negative operating cash flow, dependence on additional financing, declining revenue, inventory obsolescence, customer concentration, execution risk in transitioning to services, and dilution from convertible preferred stock, options and warrants. Series C preferred stock has full-ratchet anti-dilution protection until specified market-price and trading-volume conditions are met, potentially increasing future conversion dilution.
Agribotix reported a $151,760 adjusted net loss for the quarter, and AgEagle recognized its 20% share of that loss. Agribotix also had reported debt of approximately $2.01 million and members’ deficit of approximately $1.71 million at June 30, 2018.
Subsequent events included the appointment of Barrett Mooney as CEO effective July 18, 2018, with founder Bret Chilcott remaining President and Chairman; issuance of additional shares related to investor-relations services; and a July 25, 2018 asset purchase agreement to acquire Agribotix’s operating assets. The proposed consideration included cash, 200,000 previously issued shares, additional shares based on market prices, contingent shares tied to revenue, and additional cash payments. The filing stated that closing was expected within 30 days, subject to conditions.
Management reported effective disclosure controls and internal control over financial reporting as of June 30, 2018. No material legal proceedings were reported. The filing does not provide a separate auditor attestation on internal controls because the company qualified for the applicable smaller-reporting-company exemption.
Important facts for investors to verify
- Whether the Agribotix asset acquisition closed and the final cash, share and contingent consideration issued.
- The company’s ongoing cash-burn rate and available liquidity after the June 30 reporting date.
- The fully diluted share count, including Series C preferred conversion rights, 1,246,330 options and 828,221 warrants.
- Whether the service-oriented business model and sustainable-agriculture initiatives produce sustained revenue growth and improved margins.
- The recoverability of $132,314 of inventory, including a $19,286 obsolescence reserve.
- The effect of customer concentration, with six customers each representing more than 10% of six-month revenue in 2018.
- The filing’s inconsistent presentation of certain expense and cash-flow amounts, including the stated six-month operating loss in MD&A versus the financial-statement totals.