AgEagle Aerial Systems Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. The interim consolidated financial statements are unaudited. AgEagle develops and sells small unmanned aerial vehicles, aerial imagery and analytics platforms, subscription services, and related assembly solutions. Its newer initiatives include FarmLens, ParkView, HempOverview, sustainability services, and drone logistics.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $41,616 | $17,130 | $107,785 | $70,838 |
| Gross profit | $8,888 | $13,701 | $21,910 | $25,437 |
| Gross margin | 21% | 35% | 20% | 36% |
| Operating expenses | $571,926 | $727,176 | $1,889,214 | $1,613,563 |
| Loss from operations | $(563,038) | $(713,475) | $(1,867,304) | $(1,588,126) |
| Net loss | $(563,038) | $(689,593) | $(1,867,805) | $(1,605,300) |
| Basic and diluted loss per share | $(0.04) | $(0.07) | $(0.13) | $(0.19) |
- Q3 revenue increased 143%, and nine-month revenue increased 52%, primarily due to drone delivery assembly sales, continued drone sales, and increased services-oriented activity.
- Gross margin declined because of higher costs associated with repurposing and expanding the FarmLens platform and supporting newer ParkView and HempOverview offerings.
- Q3 operating expenses declined 21%, primarily from lower investor-relations and selling costs. Nine-month operating expenses increased 17%, driven by payroll, stock compensation, amortization of acquired intangibles, and public-company costs.
- Cash was $1.38 million at September 30, 2019, compared with $2.60 million at December 31, 2018. Working capital was $1.02 million.
- Net cash used in operating activities was $1.12 million for the nine months, compared with $2.05 million in the prior-year period. Investing cash use was $57,715, primarily for equipment. Financing cash use was $40,998 for repayment of the promissory note.
- The $125,556 promissory note assumed in the EnerJex merger was paid in full during the first four months of 2019. The balance sheet reported no promissory note at September 30, 2019; the filing does not identify other conventional debt outstanding.
- Total assets were $5.56 million, including $3.27 million of goodwill and $558,810 of net intangible assets. Total liabilities were $629,367.
Material Changes Versus the Prior Comparable Period
- Revenue grew substantially, but gross profit declined because cost of sales increased faster than revenue: 854% year over year in Q3 and 89% for the nine-month period.
- Q3 net loss improved by $126,555, while the nine-month net loss increased by $262,505 because of higher year-to-date operating costs.
- Common shares outstanding increased from 12,549,394 at December 31, 2018 to 15,174,394 at September 30, 2019. The increase included 1.9 million shares issued upon conversion of Series C preferred stock and 550,000 shares issued for consulting and investor-relations services.
- At September 30, 2019, the company had 4,531,924 warrants and 2,403,470 options outstanding, plus Series C preferred stock convertible into approximately 6.73 million common shares. These securities were excluded from diluted loss per share because they were antidilutive.
- Revenue concentration increased: one customer represented 95.9% of nine-month 2019 sales, and two customers represented 80% of accounts receivable at September 30, 2019.
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 financing. This is a management expectation, not a guarantee.
- The company reported first purchase orders from a major e-commerce company for drone logistics and delivery assemblies. Revenue from those orders began in Q3 and management expected it to continue and increase in Q4 2019.
- After the quarter, Florida’s Department of Agriculture and Consumer Services selected HempOverview for hemp registration activities covering the 2020–2022 planting seasons. Financial terms were not provided.
- The GreenBlock Capital consulting agreement was terminated on October 31, 2019. The company had paid $25,000 per month and issued 500,000 restricted shares. Following the Florida contract milestone, it expected to issue an additional 250,000 shares, with up to 750,000 more potentially issuable upon further milestones.
- Series D preferred stock carries an 8% annual dividend and senior liquidation rights. The related agreement requires redemption of the preferred stock from proceeds of subsequent financings with net proceeds of at least $500,000. Accrued dividends were $122,667 at September 30, 2019.
- The company had not yet filed the registration statement for the 3,703,703 common shares underlying the Series D warrant, according to the filing.
- Key risks include continuing operating losses and cash burn, dependence on additional financing, substantial customer concentration, potential dilution from preferred stock, warrants and options, reliance on a significant FarmLens vendor, seasonal revenue, inventory obsolescence, and execution risk associated with new markets and platforms.
- Management reported effective disclosure controls and internal control over financial reporting as of September 30, 2019. The filing does not provide a going-concern qualification.
Investor Verification Checklist
- Verify whether drone logistics purchase orders and the Florida HempOverview contract generated the anticipated revenue and cash collections after September 30, 2019.
- Assess cash runway against the reported $1.12 million nine-month operating cash burn and the company’s need for potential additional financing.
- Review customer concentration, contract liabilities of $385,011, and the collectability of receivables.
- Reconcile the fully diluted share count, including 4.53 million warrants, 2.40 million options, convertible Series C preferred stock, and contingent consulting shares.
- Confirm the status and terms of the required registration statement for Series D warrant shares and any redemption obligation triggered by future financing.
- Evaluate whether newer platforms and services can improve gross margins, which declined to 20% for the first nine months of 2019 from 36% in the comparable period.