Business Context and Reporting Period
AgEagle Aerial Systems Inc. designs, manufactures and supports small unmanned aerial vehicles and related aerial-imaging, analytics and SaaS platforms. Key offerings include FarmLens, HempOverview and ParkView, with expansion into drone-enabled package delivery. This Form 10-K covers the fiscal year ended December 31, 2019, and was filed April 13, 2020. The company had six full-time and four part-time employees at year-end.
2019 included the first revenue from purchase orders to manufacture and assemble delivery drones for an unnamed major e-commerce customer. The company also secured a multi-year HempOverview engagement with the Florida Department of Agriculture for the 2020-2022 planting seasons.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $296,677 | $107,813 | Up 175% |
| Drone assembly and product sales | $267,622 | $93,217 | Up approximately 187% |
| Subscription sales | $29,055 | $14,596 | Up approximately 99% |
| Gross profit | $94,628 | $46,133 | Up approximately 105% |
| Gross margin | 32% | 43% | Down 11 percentage points |
| Operating expenses | $2,616,821 | $2,106,732 | Up 24% |
| Loss from operations | $(2,522,193) | $(2,060,599) | Higher loss |
| Net loss | $(2,522,694) | $(2,079,683) | Higher loss |
| Basic and diluted loss per share | $(0.17) | $(0.25) | Improved, partly reflecting share-count growth |
| Cash flow used in operations | $(1,818,290) | $(1,778,138) | Higher use |
| Cash balance at year-end | $717,997 | $2,601,730 | Down $1,883,733 |
General and administrative expense increased to $1,850,225, primarily due to salaries, stock compensation, amortization and a $162,984 goodwill impairment charge. Research and development expense was $38,948 versus none reported in 2018. Professional fees declined to $662,633 from $696,222.
At December 31, 2019, total assets were $4,795,509, total liabilities were $521,875 and stockholders’ equity was $4,273,634. Working capital was $607,285. The company had no promissory note outstanding at year-end after repaying $40,998 during 2019. It had $163,555 of accrued dividends, primarily associated with Series D preferred stock, and $264,472 of contract liabilities.
Investing cash use was $24,445, primarily for soil-sampling equipment, compared with $1,560,219 in 2018, which included the Agribotix acquisition. Financing cash use was $40,998, compared with $5,904,798 of financing cash provided in 2018.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, driven principally by delivery-drone assembly and product orders; however, revenue remained very small relative to the company’s operating cost base.
- Gross margin declined from 43% to 32% because of changes in product and service mix.
- Operating expenses increased 24%, and the net loss increased by $443,011 despite the revenue growth.
- Cash declined sharply because operating cash burn continued and 2019 had no comparable equity financing.
- Goodwill declined from $3,270,984 to $3,108,000 after the $162,984 Agribotix impairment charge. Related finite-lived intangible assets were not impaired and were reported at $520,573.
- Common shares outstanding increased from 12,549,394 at December 31, 2018 to 15,424,394 at December 31, 2019. Potential dilution was substantial: outstanding options totaled 2,480,470, warrants totaled 4,531,924, and Series C preferred stock was convertible into approximately 6,483,333 common shares at year-end.
- Customer concentration increased materially: one customer represented 90.8% of 2019 revenue, and all year-end accounts receivable were due from that customer.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified revenue, earnings or cash-flow guidance. Its stated strategy is to expand precision agriculture, HempOverview, ParkView, subscription analytics, university programs and drone logistics. Management expected additional revenue from the delivery-drone project in the first quarter of 2020 and anticipated additional HempOverview clients, but these expectations were not guaranteed.
Management stated that cash on hand, together with operating cash, was expected to fund the next year of operations, while also acknowledging the need to pursue outside financing. The filing warns that failure to achieve sales growth or raise capital could require the company to default on obligations or discontinue or materially reduce operations. The financial statements do not include adjustments that might be necessary if the company cannot continue as a going concern.
- The business has a history of operating losses and expects additional research, development, commercialization and marketing expenditures.
- Revenue is highly concentrated in one customer and the company relies on certain limited suppliers, including a vendor supporting FarmLens image stitching.
- Drone operations and package delivery are subject to evolving FAA requirements; routine delivery beyond visual line of sight requires regulatory approvals, including Part 135 certification pathways.
- HempOverview depends on evolving federal, state and tribal hemp regulations.
- Product liability, aviation accidents, intellectual-property claims, cybersecurity events, supply-chain disruptions and rapid technological change could materially affect results.
- COVID-19 was identified as a developing risk that could disrupt manufacturing, suppliers, customer demand and access to capital.
- The company recorded a $162,984 goodwill impairment and continues to carry $3.1 million of goodwill, making future impairment a risk.
Subsequent to year-end, the CEO and Chairman/President announced leadership transitions effective in 2020. On April 7, 2020, the company issued $1,050,000 of Series E convertible preferred stock, convertible at $0.25 per share into 4,200,000 common shares, subject to registration rights and anti-dilution provisions. Alpha Capital also converted additional Series C preferred stock into common shares in January and April 2020.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019; the auditor was not required to provide an internal-control attestation because AgEagle is a smaller reporting company.
Important Facts for Investors to Verify
- Whether delivery-drone purchase orders convert into recurring, profitable revenue and whether the customer remains concentrated at approximately 90% of sales.
- Current cash, working capital, operating cash burn and the company’s ability to fund operations without repeated equity issuances.
- The terms, conversion mechanics and dilution from the Series E financing, Series C and Series D preferred stock, warrants and options.
- Whether HempOverview and ParkView generate material subscription or contract revenue beyond the Florida engagement and Denver customer.
- The status of the FAA approvals and certifications required for commercial drone package delivery.
- Whether the Agribotix reporting unit and its remaining $3.1 million goodwill balance require additional impairment charges.
- The effect of the 2020 leadership changes and COVID-19-related manufacturing, demand and financing disruptions.