AgEagle Aerial Systems Inc. — Form 10-Q Summary
Business Context and Reporting Period
AgEagle designs and sells small unmanned aerial vehicles and provides drone-based imagery, data analytics, leasing, and subscription services focused primarily on precision and sustainable agriculture. Following its August 2018 acquisition of Agribotix, the Company also offers the FarmLens cloud analytics platform. During the first half of 2019, AgEagle launched or expanded FarmLens Mobile, ParkView for public green spaces, and HempOverView for hemp-industry oversight and compliance.
This unaudited quarterly report covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods. The Company is a smaller reporting company and listed its common stock on NYSE American under the symbol UAVS. Common shares outstanding were 15,174,394 as of August 13, 2019.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $20,176, down from $24,517 | $66,169, up from $53,707 |
| Gross profit | $976, compared with $6,343 | $13,021, compared with $11,736 |
| Gross margin | 5%, compared with 26% | 20%, compared with 22% |
| Operating loss | $(739,263), compared with $(681,669) | $(1,304,266), compared with $(872,818) |
| Net loss | $(739,302), compared with $(712,210) | $(1,304,767), compared with $(915,707) |
| Basic and diluted loss per share | $(0.05), compared with $(0.07) | $(0.09), compared with $(0.10) |
Six-month revenue consisted of $49,801 of product sales and $16,368 of subscription sales. Operating expenses increased to $1.32 million from $884,554 for the six-month period, driven primarily by higher general and administrative costs, including salaries, stock compensation, Agribotix-related amortization, and public-company costs. Professional fees and selling expenses declined.
At June 30, 2019, cash was $1.57 million, compared with $2.60 million at December 31, 2018. Working capital was $1.53 million. Total assets were $5.73 million, including $3.27 million of goodwill and $597,046 of net intangible assets. Total liabilities were $275,342. The promissory note assumed in the 2018 merger was fully paid by June 30, 2019.
Cash used in operating activities was $958,893 for the first six months of 2019, compared with $1.68 million in the prior-year period. Investing activities used $34,562, primarily for equipment used in soil sampling. Financing activities used $40,998 for promissory-note payments; the prior-year period benefited from approximately $4.0 million of merger-related equity financing.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased 18%, although year-to-date revenue increased 23%, reflecting seasonality and a shift toward services and subscriptions.
- Second-quarter gross margin declined to 5% from 26%; management attributed the decline to FarmLens functionality and repurposing costs and continued low-cost servicing of drones.
- Six-month gross margin declined to 20% from 22%.
- Six-month operating expenses increased 49%, with general and administrative expense rising 238% to $911,096.
- Six-month net loss increased by $389,059 to $1.30 million despite higher revenue.
- The Company issued 1.9 million common shares upon conversion of Series C preferred stock and issued 550,000 common shares for consulting and investor-relations services.
- Common shares outstanding increased from 12,549,394 at December 31, 2018 to 15,174,394 at June 30, 2019, creating dilution risk.
- Product sales declined year over year, while subscription revenue was newly reported at $16,368 for the six-month period.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal quantitative revenue or earnings guidance. Management stated that cash on hand, together with operating cash flows, was expected to fund operations for the next year, while also intending to pursue additional financing. The filing does not provide a clear cash runway calculation or assurance that additional financing will be available.
Growth initiatives include expanding the UAV distribution network, developing subscription and sustainability services, marketing FarmLens, ParkView, and HempOverView, pursuing agricultural and non-agricultural partnerships, and expanding the University Drone Program. Management cautioned that the business is seasonal and that interim results may not be indicative of full-year results.
- Series D preferred stock carries an 8% annual dividend, senior liquidation rights to common stock, and accrued dividends of $80,444 at June 30, 2019. Certain future financings of at least $500,000 require redemption of the Series D preferred stock at 115% of stated value plus accrued amounts, subject to conditions.
- The Series D financing included warrants for 3,703,703 common shares at a $0.54 exercise price, subject to adjustment for lower-priced future equity financings. Total warrants outstanding were 4,531,924.
- Series C preferred stock was convertible into approximately 6.7 million common shares at June 30, 2019 and included full-ratchet anti-dilution protection under specified conditions.
- Outstanding options totaled 2,025,720 shares, and all options, warrants, and convertible instruments were excluded from diluted loss per share because they were antidilutive.
- GreenBlock Capital was entitled to $25,000 per month, 500,000 restricted shares upon execution, and up to 2.5 million additional restricted shares upon achievement of milestones. The consultant was also a significant shareholder and option holder, creating a related-party and dilution consideration.
- Revenue was highly concentrated: two customers represented 91.6% of six-month 2019 revenue. The Company also relied on one significant vendor for FarmLens image stitching, although management stated alternatives were available.
- Goodwill was $3.27 million; management reported no indication of impairment as of June 30, 2019. Inventory included an $8,769 obsolescence reserve.
- The Company disclosed ordinary-course litigation risk and noted that insurance may not cover all potential liabilities.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2019, with no material changes during the quarter.
Important Facts for Investors to Verify
- Whether the services, subscription, ParkView, HempOverView, and sustainability initiatives generate material recurring revenue and improve gross margins.
- The Company’s ability to fund operations without additional equity or other financing, given recurring operating losses and operating cash burn.
- The potential dilution from Series C preferred stock, Series D warrants, other warrants, options, and GreenBlock milestone shares.
- The terms, timing, and funding source for any required Series D redemption following a qualifying financing.
- Customer concentration, renewal rates, and payment performance, particularly for the two customers representing most 2019 revenue.
- Whether goodwill and Agribotix-related intangible assets remain recoverable as the Company transitions toward subscription and service offerings.
- The commercial adoption and financial contribution of FarmLens Mobile, ParkView, HempOverView, and the drone-leasing program.