Business Context and Reporting Period
AgEagle Aerial Systems Inc. designs and manufactures small unmanned aerial vehicles, provides drone-related engineering and contract manufacturing, and offers FarmLens and HempOverview software platforms for agricultural imaging, analytics, and hemp-program administration. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the same 2019 periods.
The company reported that COVID-19 caused supplier and project delays, including delays affecting its ecommerce drone-delivery customer. Headquarters and manufacturing operations were expected to relocate from Neodesha to Wichita, Kansas.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $16,325 versus $20,176 in 2019 | $407,605 versus $66,169 in 2019 |
| Gross profit | $1,295 versus $976 | $218,972 versus $13,021 |
| Gross margin | 7.9% versus 4.8% | 53.7% versus 19.7% |
| Operating expenses | $1,256,663 versus $740,239 | $1,877,613 versus $1,317,287 |
| Loss from operations | $(1,255,368) versus $(739,263) | $(1,658,641) versus $(1,304,266) |
| Net loss | $(1,255,368) versus $(739,302) | $(1,658,641) versus $(1,304,767) |
| Net loss available to common stockholders | $(10,326,250) versus $(779,746) | $(10,769,968) versus $(1,385,211) |
| Basic and diluted loss per share | $(0.31) versus $(0.05) | $(0.44) versus $(0.10) |
Six-month revenue increased 516%, primarily from drone assembly and product sales of $374,278 versus $49,801 in 2019. Software platform sales were $33,327 versus $16,368. Customer concentration was high: one customer represented 91.8% of six-month revenue.
Operating cash flow was $(710,679), compared with $(958,893) in the prior-year period. Investing cash flow was $(6,173), while financing cash flow was $12,906,568, principally from common-stock financings. Cash increased to $12,907,713 from $717,997 at December 31, 2019.
At June 30, 2020, total assets were $17,130,141, total liabilities were $1,115,407, and stockholders’ equity was $16,014,734. Working capital was $12,426,570. The company had a $107,439 PPP loan outstanding, accruing interest at 1%; qualifying amounts may be forgivable, but forgiveness was not assured.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 19% because vendor delays prevented planned drone-related deliveries; six-month revenue increased substantially because of new drone-delivery manufacturing orders.
- Six-month gross margin improved to 53.7% from 19.7%, reflecting a change in product and service mix.
- Operating expenses increased 43% for the six-month period, driven by higher general and administrative costs, professional fees, recruiting, capital-raising activities, consulting, legal services, and business-development spending.
- Net loss available to common stockholders was materially higher because of approximately $7.9 million of non-cash deemed dividends and related preferred-stock accounting, including Series C and Series D down-round or modification charges and Series E issuance and repurchase charges.
- Common shares issued and outstanding increased to 48,979,277 at June 30, 2020 from 15,424,394 at December 31, 2019. The filing reported 57,231,987 shares outstanding as of August 14, 2020.
- The company raised net proceeds of approximately $5.95 million in a May registered direct offering and $6.95 million in a June offering. The June offering also included warrants that could provide approximately $3.3 million of additional gross proceeds if fully exercised.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal 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 indicating that additional financing may be pursued.
Management is focused on expanding HempOverview and FarmLens, contract manufacturing and drone-delivery activities, and related strategic partnerships, acquisitions, and research collaborations. Revenue is seasonal and may fluctuate by quarter.
- COVID-19 may continue to disrupt suppliers, manufacturing, customer projects, demand, financial markets, and access to capital. The company expected delayed ecommerce-related revenues to be recognized in the third quarter of 2020.
- Revenue dependence on a single customer creates significant customer-concentration risk.
- The company depends on third parties for components and certain FarmLens services; replacement vendors may be available, but disruptions could affect operations.
- Future dilution may result from outstanding options, warrants, pre-funded warrants, preferred-stock conversions, and additional equity financings. At June 30, 2020, 2,550,387 options and 3,283,697 warrants were outstanding, excluding other potential equity instruments.
- Subsequent to quarter-end, the company reported July conversions of preferred stock, pre-funded warrants, warrants, and options. It also raised net proceeds of $9.9 million in an August 4 offering and issued warrants that could provide approximately $8.3 million of additional gross proceeds.
- The company entered into a Wichita lease with an estimated initial three-year rent commitment of $297,000, with expected occupancy beginning in September 2020 and lease commencement in November 2020.
- The filing states that no material contractual obligations or material off-balance-sheet arrangements existed, other than standard operating leases.
Investor Verification Items
- Verify the timing, amount, and collectability of ecommerce drone-delivery orders and the extent to which COVID-19-related delays shifted revenue into the third quarter.
- Assess sustainability of the six-month 53.7% gross margin given the unusually low second-quarter margin and changing product mix.
- Reconcile cash usage, working-capital requirements, and the company’s assertion that existing cash would fund at least one year of operations.
- Review the dilution impact of outstanding warrants, options, pre-funded warrants, preferred-stock conversions, and subsequent equity offerings.
- Evaluate the concentration of revenue with Customer A and the company’s ability to diversify customers and recurring software revenue.
- Confirm PPP-loan forgiveness eligibility and any remaining debt obligations.
- Review subsequent financing terms, warrant exercises, executive compensation changes, and the financial impact of the Wichita relocation.