Business Context and Reporting Period
AgEagle Aerial Systems Inc. filed its Form 10-K for the fiscal year ended December 31, 2018; the filing includes fourth-quarter results within the annual financial statements. The company designs and manufactures small unmanned aerial vehicles for precision agriculture and provides aerial-imaging, data-processing, subscription, leasing, and sustainability services.
- On March 26, 2018, the former EnerJex Resources completed a reverse merger with AgEagle and changed its name to AgEagle Aerial Systems; the stock began trading under “UAVS.”
- On August 28, 2018, AgEagle acquired substantially all operating assets of Agribotix, including FarmLens, a subscription cloud analytics platform. The acquisition contributed goodwill of $3.3 million and intangible assets of $0.7 million.
- At December 31, 2018, the company had five full-time and one part-time employee and operated manufacturing facilities in Neodesha, Kansas.
Financial Performance and Position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $107,813 | $116,035 | Down 7% |
| Gross profit | $46,133 | $22,676 | Up 103% |
| Gross margin | 43% | 20% | Up 23 percentage points |
| Operating expenses | $2,106,732 | $689,539 | Up 206% |
| Loss from operations | $(2,060,599) | $(666,863) | Loss increased |
| Net loss | $(2,079,683) | $(797,215) | Loss increased $1,282,468 |
| Basic and diluted loss per share | $(0.25) | $(0.19) | Higher loss per share |
| Cash at year-end | $2,601,730 | $35,289 | Up $2,566,441 |
| Working capital | $2,531,264 | Not clearly provided | — |
- Product sales were $93,219, or 87% of revenue, compared with $116,035, or 100%, in 2017. Subscription sales were $14,594, or 13% of revenue, compared with none in 2017.
- Cash used in operating activities was $1,778,138, compared with $328,878 in 2017. Cash used in investing activities was $1,560,219, including $925,000 for the Agribotix acquisition and $891,474 for liabilities assumed in the reverse merger.
- Cash provided by financing activities was $5,904,798, primarily from merger-related equity financing of approximately $4.0 million, a $250,000 Series C preferred stock issuance, and a $2.0 million Series D preferred stock and warrant financing.
- Year-end current liabilities were $300,412 versus $1,967,419 in 2017. Convertible notes and related-party notes were eliminated through conversion or repayment; $40,998 remained outstanding under a promissory note due in 2019.
- Series D preferred stock carries an 8% annual dividend. The related financing also included warrants for 3,703,703 common shares at $0.54 per share through December 2023.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly as the market shifted from do-it-yourself farmer purchases toward services provided by agronomists and other service-oriented users.
- Gross margin improved substantially because the company sold UAVs without cellular connectivity, used lower-cost manufacturing configurations, avoided an additional inventory-obsolescence reserve, and began generating higher-margin subscription revenue.
- Operating expenses increased significantly due to public-company compliance, insurance, professional fees, employee compensation, stock-based compensation, investor relations, Agribotix-related amortization, and software costs.
- The company transitioned from an exclusively product-sales model toward an integrated platform combining UAVs, FarmLens subscriptions, leasing, pilot services, and sustainability analytics.
- Capital structure changed materially through the reverse merger, conversion of debt into common stock, Agribotix-related share issuances, Series C financing, Series D preferred stock issuance, and substantial new warrants and options.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide quantified revenue, earnings, or cash-flow guidance. Management stated that it expected cash on hand and cash generated from operations to fund approximately the next year of operations, while also intending to pursue additional outside financing.
- Growth initiatives include expansion of global distribution, the 2019 sustainability monitoring and drone-leasing service, continued FarmLens development, university programs, strategic partnerships, and potential expansion beyond agriculture.
- Management expected agricultural seasonality, with generally stronger customer activity in the second and third quarters and weaker activity during winter and year-end.
- A FarmLens mobile application was planned for commercial launch toward the end of the second quarter of 2019.
- Key risks include limited operating history, continuing losses and cash burn, need for additional funding, uncertain market adoption, rapid technological change, competition, FAA and international regulation, supplier concentration, intellectual-property protection, product liability, insurance limitations, cybersecurity, and agricultural and economic conditions.
- The Agribotix acquisition generated $3.0 million of goodwill and $724,500 of acquired intangible assets, requiring future impairment and amortization assessments.
- At December 31, 2018, the company had 4,662 Series C preferred shares potentially convertible into 8,633,333 common shares, 4,531,924 outstanding warrants, and 1,494,158 outstanding options. These instruments were excluded from diluted loss per share because they were antidilutive.
- Subsequent to year-end, Alpha converted Series C preferred stock into 1,833,369 common shares during January through March 2019. The CFO’s annual salary increased to $180,000 effective January 1, 2019, accompanied by additional stock options.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; no external auditor attestation was required because the company was a smaller reporting company.
Most Important Facts for Investors to Verify
- Verify whether the company can convert its substantial cash balance into recurring revenue and reduce operating cash burn.
- Assess the sustainability of the 43% gross margin and the commercial traction of FarmLens subscriptions, leasing, and sustainability services.
- Review the Agribotix acquisition valuation, including the $3.3 million goodwill balance and impairment assumptions.
- Model potential dilution from Series C conversion rights, Series D preferred stock, 4.5 million warrants, and 1.5 million options.
- Confirm the terms and redemption requirements of the 8% Series D preferred stock and related warrant.
- Evaluate customer and vendor concentration, FAA compliance requirements, insurance coverage, and dependence on third-party software providers.
- Reconcile the post-merger share count, subsequent 2019 conversions, and any additional financing or capital requirements disclosed after the filing date.