AgEagle Aerial Systems Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
AgEagle designs, manufactures and supports small unmanned aerial vehicles and provides aerial imaging, data analytics and software platforms, including FarmLens, HempOverview and ParkView. The company also expanded into commercial drone logistics and package-delivery applications.
The filing covers the three months ended March 31, 2020. The interim financial statements are unaudited. AgEagle reported 15,610,019 common shares outstanding at March 31, 2020 and 33,305,742 shares outstanding as of May 14, 2020.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $391,280 | $45,993 | +751% |
| Gross profit | $216,797 | $12,045 | +1,700% approximately |
| Gross margin | 55.4% | 26.2% | +29.2 percentage points |
| Operating expenses | $620,070 | $577,048 | +7.5% |
| Loss from operations | $(403,273) | $(565,003) | Improved |
| Net loss | $(403,273) | $(565,465) | Improved 28.7% |
| Basic and diluted loss per share | $(0.03) | $(0.04) | Improved |
| Operating cash flow | $(359,629) | $(418,636) | Improved |
Revenue consisted primarily of drone assembly and product sales of $374,278, with software platform sales contributing $17,002. One customer represented 95.6% of Q1 2020 revenue, creating significant customer-concentration risk.
| Balance-sheet metric | March 31, 2020 | December 31, 2019 |
|---|---|---|
| Cash | $356,084 | $717,997 |
| Working capital | $258,093 | Not clearly provided |
| Total assets | $4,255,646 | $4,795,509 |
| Total liabilities | $371,095 | $521,875 |
| Stockholders’ equity | $3,884,551 | $4,273,634 |
| Accrued Series D dividends | $204,000 | $163,555 |
The company reported no interest expense in Q1 2020 and stated that its promissory note was paid in full in April 2019. Series D preferred stock remains outstanding, carries an 8% annual dividend and has senior liquidation rights relative to common stock.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, primarily from drone manufacturing and assembly orders associated with commercial package delivery.
- Gross margin improved to approximately 55% from 26%, reflecting a changed mix of products and services.
- Operating expenses increased modestly. General and administrative expense declined 6.2%, while professional fees increased to $171,498 from $90,019.
- Net loss narrowed by $162,192, although the company remained unprofitable.
- Cash declined by $361,913 during the quarter, and the company continued to consume cash from operations.
- AgEagle converted 189 shares of Series C preferred stock into 350,000 common shares during the quarter.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash on hand, together with cash from operations, was expected to fund operations for the next year, while also indicating an intention to pursue additional outside financing. This statement should be evaluated against the $356,084 cash balance and ongoing operating losses.
Management cited growth opportunities in commercial drone logistics, industrial hemp oversight, sustainable agriculture, software platforms and other aerial-imaging applications. The company also planned to relocate its headquarters and manufacturing operations to Wichita, Kansas during the second quarter of 2020.
- COVID-19 had not materially affected first-quarter operations according to management, but future effects could include supply-chain disruption, manufacturing delays, weaker demand and reduced access to capital.
- Revenue was highly concentrated in one customer, which accounted for 95.6% of quarterly sales.
- The business is seasonal and results may fluctuate significantly between quarters.
- Fixed-price contracts expose the company to cost overruns and potential losses if actual costs exceed estimates.
- Potential dilution was substantial: at March 31, 2020, the company disclosed 4,531,924 warrants, approximately 2.57 million options and Series C preferred stock convertible into 6,133,333 common shares.
- Subsequent to quarter-end, Series C conversion terms were reduced from $0.54 to $0.25 under anti-dilution provisions, resulting in 14,747,984 common shares issued upon conversion during April and May.
- Also after quarter-end, AgEagle entered a $1.05 million Series E preferred financing and announced a May registered offering of approximately $6 million gross proceeds consisting of common shares and pre-funded warrants.
- The May financing was intended partly to repurchase Series E preferred stock and otherwise provide working capital and general corporate funds.
Important Facts for Investors to Verify
- Whether the major package-delivery customer continues placing orders and whether the company can reduce customer concentration.
- Actual cash usage, liquidity and financing availability following the April and May 2020 equity transactions.
- The fully diluted share count after Series C conversions, Series E securities, warrants, options and the May offering.
- Whether the company can achieve sustained positive gross margins and reduce operating losses.
- The status and economics of HempOverview, FarmLens, ParkView and commercial drone-delivery programs.
- The financial and operational effects of the COVID-19 pandemic, supply-chain constraints and the planned Wichita relocation.
- Terms and redemption requirements associated with the Series D preferred stock and accrued dividends.