Serve Robotics Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Serve develops and operates autonomous, low-emissions sidewalk robots for last-mile delivery. The comparative period is Q1 2023. Financial statements are unaudited and prepared on a going-concern basis.
Financial highlights
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $946,711 | $40,252 |
| Gross profit (loss) | $594,273 | ($327,009) |
| Gross margin | 62.8% | (812.8%) |
| Operating expenses | $8,305,722 | $3,900,205 |
| Operating loss | ($7,711,449) | ($4,227,214) |
| Net loss | ($9,037,971) | ($5,138,122) |
| Net loss per share, basic and diluted | ($0.37) | ($0.77) |
| Cash used in operating activities | $4,078,380 | $3,713,409 |
- Revenue mix: Software services $851,101; delivery services $51,760; branding fees $43,850. The software services revenue primarily arose from a Magna contract expected to be completed in Q2 2024.
- Cash and liquidity: Cash was $427,482 at quarter-end, versus $6,756 at December 31, 2023. Current assets were $3.03 million and current liabilities were $12.79 million. Current assets include $973,491 of deferred offering costs, which are not cash.
- Debt and obligations: The balance sheet reports $4.55 million of convertible notes, net of discount, and a $1.49 million derivative liability. It also reports a $1.00 million current note payable and $2.34 million of current lease-financing liability. The notes disclose a $985,016 net balance on the Silicon Valley Bank loan at March 31, 2024; investors should reconcile this with the balance-sheet presentation. Operating lease liabilities are also reported.
- Cash flows: Financing activities provided $4.50 million, principally from $4.84 million of net January-note proceeds, partly offset by debt and lease repayments. Investing cash outflow was $3,340.
- Operations metrics: Daily active robots averaged 39, up from 23; daily supply hours averaged 300, up from 152.
Changes versus Q1 2023
- Revenue rose $906,549, or 2,252%, largely reflecting new software-services revenue. The company cautions that service revenue may be inconsistent.
- Gross result improved by $921,282, moving from a loss to a profit, as revenue increased while cost of revenue declined slightly.
- Operating expenses increased 113%, primarily from research and development, which rose about $4.55 million. This included approximately $4.18 million of stock-based compensation related to the Magna warrant, as well as increased headcount and software costs.
- Net loss increased by $3.90 million, or 76%; interest expense also rose substantially, largely due to debt-discount amortization on January convertible notes.
- Operating cash use increased by approximately $0.36 million, which management attributed primarily to working-capital changes.
Outlook, risks and unusual items
- Outlook: Management expects operating losses to continue in 2024 and 2025. It plans to use offering proceeds to increase research and development, scale the robot fleet, expand sales and business development, and grow headcount. Its stated goal is to increase the operating fleet tenfold over two years and expand beyond its current Los Angeles operating area; this is a goal, not a quantified financial forecast.
- Going concern: Management said recurring losses and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. It requires additional capital, and there is no assurance it can obtain financing on acceptable terms or at all. The financial statements contain no adjustments for the outcome of this uncertainty.
- Subsequent financing: After quarter-end, the company completed an April 2024 public offering of 10 million shares at $4.00 per share, with approximately $35.7 million in net proceeds. The January notes converted into 2,104,562 common shares at $2.42 per share. The company also issued offering-related warrants. The financing materially improved liquidity after March 31 but increased share count and potential dilution.
- Magna arrangement: Serve issued Magna a warrant for up to 2,145,000 shares at $0.01 per share, exercisable in tranches subject to conditions and a manufacturing milestone, with change-of-control provisions. Its reported fair value was $8.57 million; $4.18 million of related stock compensation was recorded in Q1 research and development.
- Key operating risks: One customer generated 90% of Q1 2024 revenue and represented 83% of accounts receivable. Management also cites dependence on delivery-platform demand and utilization, supply-chain constraints and component costs, municipal permissions and regulation, reliance on third parties, and the need to commercialize at scale.
- Controls and contingencies: Management concluded disclosure controls were not effective and identified previously disclosed material weaknesses involving staffing, segregation of duties, formal accounting policies, and review processes. The company reported no pending, threatened, or actual material legal proceedings and did not expect ordinary-course proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether revenue and robot utilization diversify beyond the concentrated customer and whether the Magna software-services revenue is recurring after Q2 2024.
- Cash runway and planned spending after the $35.7 million offering, given ongoing losses and management’s stated fleet-expansion plans.
- Full dilution from the offering, note conversion, Magna warrant, placement-agent warrants, and other outstanding options and warrants; the filing reported 37,080,717 common shares outstanding as of May 13, 2024.
- Debt and lease obligations, including reconciliation of the balance-sheet note-payable amounts with the Silicon Valley Bank loan disclosure, and the terms of the robot-asset financing.
- Progress and testing of remediation for the material weaknesses and ineffective disclosure controls.
- Internal inconsistencies in the filing’s MD&A expense figures: it gives research and development as both $6,638,441 and $6,638,411, and total operating expenses as both $8,305,722 and $8,305,772. The financial statements report $6,638,441 and $8,305,722, respectively.