AgEagle Aerial Systems, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2018. AgEagle designs, manufactures, distributes and supports small unmanned aerial vehicles for the precision-agriculture market, including the RX-47, RX-48 and RX-60 systems. On March 26, 2018, former EnerJex Resources completed a reverse merger with AgEagle, changed its name to AgEagle Aerial Systems, Inc., and began trading under the NYSE American symbol UAVS on March 27, 2018.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior period | Change |
|---|---|---|---|
| Revenue | $29,191 | $35,199 | Down 17% |
| Gross profit | $5,393 | $22,768 | Down 76% |
| Gross margin | Approximately 18% | Approximately 65% | Down substantially |
| Operating expenses | $196,541 | $158,831 | Up 24% |
| Loss from operations | $(191,148) | $(136,063) | Higher loss |
| Net loss | $(203,497) | $(172,580) | Loss increased 18% |
| Basic and diluted loss per share | $(0.04) | $(0.04) | No change shown |
| Cash at period end | $3,466,745 | $24,478 | Substantially higher |
| Net cash used in operations | $(769,799) | $(168,634) | Higher cash burn |
At March 31, 2018, total assets were $4.87 million, total liabilities were $850,322 and stockholders’ equity was $4.02 million, compared with a stockholders’ deficit of $1.66 million at December 31, 2017. Current assets were $3.73 million and current liabilities were $850,322, producing reported working capital of approximately $2.88 million.
Debt was substantially reduced through the merger. Convertible notes and related-party notes were converted into equity at or around the merger date. The remaining principal promissory note assumed from EnerJex was $125,556, with $4,171 of accrued interest, and is payable over 12 months through March 26, 2019.
Investing cash flow was $221,255, including $256,255 of cash acquired in the merger and a $35,000 cash investment in Agribotix. Financing cash flow was $3.98 million, primarily from the $4 million Series C preferred-stock financing, net of $20,000 in fees.
Material changes versus the prior comparable period
- Revenue declined 17%, while cost of sales increased 91%, primarily because slow-moving sensors, cameras and other aircraft components were sold at discounts.
- Gross margin fell from approximately 65% to approximately 18%. The MD&A states gross profit as $5,394, while the financial statements report $5,393; the filing does not explain the $1 difference.
- Professional fees increased 75% to $150,585, principally because of legal, accounting and consulting costs associated with the reverse merger.
- General and administrative expense declined 39% to $40,853, mainly due to lower payroll costs from reduced staffing.
- Interest expense declined to $27,414 from $41,171 as debt was converted or retired in connection with the merger and prior-period debt-discount amortization did not recur.
- Cash increased by $3.43 million, but operating cash use increased materially to $769,799, partly reflecting accounts payable assumed in the merger and the Agribotix investment.
Guidance, outlook, risks and unusual items
Management provided no quantified revenue, earnings or operating guidance. Management stated that the drone market is shifting from do-it-yourself early adopters toward a services-oriented model led by agronomists and intends to address the shift through strategic acquisitions and a service-oriented model.
Management stated that cash on hand, operating cash flow and financing proceeds are expected to fund operations for the next year, although it also intends to pursue additional financing. The company remained loss-making and cash-flow negative during the quarter.
- The reverse merger and $4 million preferred-stock financing materially changed the capital structure. Series C preferred stock was convertible into substantial common-stock equivalents and included full-ratchet anti-dilution protection under specified conditions.
- As of March 31, 2018, the company had 1,184,330 options and 828,221 warrants outstanding. Preferred shares could convert into approximately 4.50 million common shares, creating significant potential dilution.
- Customer concentration was high: four customers each represented more than 10% of Q1 revenue, including three customers representing 31.8%, 27.8% and 19.1%, respectively.
- The company held a 20% equity-method investment in Agribotix. Agribotix reported $1.86 million of debt and a members’ deficit of $1.03 million at March 31, 2018.
- Inventory included a $15,369 provision for obsolescence, and future demand or product changes could require additional write-downs.
- The company reported no material pending legal proceedings, no defaults upon senior securities and effective disclosure controls and internal control over financial reporting as of March 31, 2018.
- Subsequent events included conversions of preferred stock into common shares and a May 11, 2018 issuance of $250,000 of Series C preferred stock convertible into 163,400 common shares.
Important facts for investors to verify
- Reconcile the post-merger share count, preferred-stock conversion rights, anti-dilution provisions, options and warrants to determine fully diluted ownership.
- Assess whether the $3.47 million cash balance is sufficient given the quarterly operating cash burn of approximately $770,000 and the company’s stated intention to seek additional financing.
- Evaluate whether the shift toward a services-oriented agriculture model can offset declining hardware revenue and substantially lower gross margins.
- Review customer concentration, distributor relationships and the company’s dependence on a limited number of purchasers.
- Verify the financial condition, debt burden and expected contribution of Agribotix, including the carrying value of the $1.11 million investment.
- Confirm the treatment and settlement of liabilities assumed in the reverse merger, including the remaining $125,556 promissory note and accrued interest.