AgEagle Aerial Systems Inc. — Form 10-Q Summary
Business Context and Reporting Period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the same periods in 2017. AgEagle designs and sells small unmanned aerial vehicles and related precision-agriculture solutions. During 2018, the company completed a reverse merger with EnerJex Resources and acquired Agribotix, including the FarmLens subscription-based agricultural analytics platform.
The company operates under the ticker UAVS on the NYSE American. Management states that the business is seasonal, with the second and third quarters generally expected to be strongest.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | Nine Months 2018 | Nine Months 2017 |
|---|---|---|---|---|
| Revenue | $17,130 | $23,218 | $70,838 | $105,609 |
| Gross profit | $13,701 | $17,041 | $25,437 | $30,202 |
| Gross margin | 80% | 73% | 36% | 29% |
| Operating expenses | $727,176 | $82,372 | $1,613,563 | $329,222 |
| Loss from operations | $(713,475) | $(65,331) | $(1,588,126) | $(299,020) |
| Net loss | $(689,593) | $(91,300) | $(1,605,300) | $(397,354) |
| Basic and diluted loss per share | $(0.07) | $(0.02) | $(0.14) | $(0.09) |
| Net cash used in operating activities | Not separately provided for the quarter | $(2,045,032) | $(345,876) |
At September 30, 2018, cash was $1.68 million, compared with $35,289 at December 31, 2017. Working capital was $975,504. Total assets were $5.96 million, including $3.27 million of goodwill and $712,655 of acquired intangible assets. Total liabilities were $964,355, including a $62,043 promissory note. Nearly all prior convertible debt was converted into equity in connection with the merger.
Financing activities provided $3.96 million during the first nine months, primarily from the $4.0 million Series C preferred-stock financing, the $250,000 sale of additional Series C preferred stock, and other equity activity. Investing activities used $268,745, including $525,000 paid for the Agribotix acquisition, partly offset by $256,255 of cash acquired in the merger.
Material Changes Versus Prior Comparable Period
- Revenue declined 26% in the third quarter and 33% for the first nine months, reflecting a shift from do-it-yourself farmer purchases toward service-oriented solutions delivered by agronomists.
- Gross margin improved to 80% in the quarter and 36% year to date, primarily because the company sold lower-cost UAV products and did not sell slow-moving inventory with cellular connectivity. Subscription revenue also contributed to the quarter.
- Operating expenses increased substantially, driven by merger-related legal, accounting and consulting costs, public-company expenses, salaries, investor relations, stock compensation and selling expenses.
- Net loss increased by $598,293 in the quarter and $1.21 million year to date, largely because lower revenue was more than offset by increased operating expenses.
- Operating cash burn increased to $2.05 million year to date from $345,876 in the prior-year period, despite noncash charges for stock-based compensation and shares issued for services.
- The Agribotix acquisition added FarmLens and related analytics capabilities. Only post-acquisition activity from August 29 through September 30, 2018 was consolidated; pro forma nine-month revenue and net loss were $306,832 and $(2.23) million, respectively.
Guidance, Outlook, Risks and Unusual Items
No formal revenue or earnings guidance was provided. Management expects to use the Agribotix acquisition, FarmLens subscriptions and a new service-oriented sustainable-agriculture model to broaden the company’s offerings and address changing industry demand. Management stated that cash on hand, operating cash and financing resources were expected to fund operations for the next year, while also indicating an intention to pursue additional financing.
- The company remains loss-making and cash-flow negative, with substantial operating losses relative to revenue.
- Series C preferred stock is convertible into common stock and contains full-ratchet anti-dilution protection until specified market-price and trading-volume conditions are met, creating potential future dilution.
- At September 30, 2018, the company had 828,221 warrants and 1,264,142 options outstanding, in addition to Series C preferred stock convertible into approximately 4.18 million common shares.
- The Agribotix purchase consideration included $3.0 million of stock, $600,000 of cash and $400,000 of additional cash obligations, plus potential post-closing share and cash payments tied to specified conditions.
- Goodwill of $3.27 million and acquired intangible assets of $712,655 are subject to impairment and amortization considerations.
- Revenue is concentrated among several customers: five customers each represented more than 10% of nine-month 2018 sales, with the largest representing 14.4%.
- Inventory included a $15,369 obsolescence reserve, and future demand or product changes could require additional write-downs.
- The filing reports no material pending legal proceedings and no material off-balance-sheet arrangements other than standard operating leases.
- Management reported effective disclosure controls and internal control over financial reporting as of September 30, 2018; the auditor was not required to provide an attestation because the company is a smaller reporting company.
Important Facts for Investors to Verify
- Whether FarmLens and other subscription or service offerings can produce meaningful recurring revenue and reduce reliance on UAV hardware sales.
- The company’s ability to control operating expenses and reduce its quarterly cash burn.
- Available liquidity after considering the remaining Agribotix obligations, operating losses and potential need for additional financing.
- The fully diluted share count, including Series C conversion rights, options, warrants and contingent acquisition-related share issuances.
- The recoverability of the $3.27 million goodwill balance and $712,655 of acquired intangible assets.
- Customer concentration, seasonal demand and the company’s transition away from anticipated Raven distribution sales toward direct and service-oriented channels.
- The effects of the reverse merger and Agribotix acquisition on comparability with 2017 results.