AgEagle Aerial Systems Inc. — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
AgEagle designs and delivers autonomous unmanned aerial systems, sensors and software serving agriculture, energy and utilities, infrastructure, government and other markets. The company operates through its Drones and Custom Manufacturing, Sensors and Software-as-a-Service segments and includes the 2021 acquisitions of MicaSense, Measure and senseFly.
The filing covers the three and nine months ended September 30, 2022. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $5.49 million | $2.02 million | $14.62 million | $5.66 million |
| Gross profit | $2.08 million | $0.79 million | $6.00 million | $2.78 million |
| Gross margin | 38% | 39% | 41% | 49% |
| Operating loss | $5.15 million | $3.80 million | $18.02 million | $11.58 million |
| Net income (loss) | $1.66 million | $(3.77) million | $(11.53) million | $(11.38) million |
| Cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(15.34) million | $(6.68) million |
- Q3 revenue increased 172%, driven primarily by eBee drone sales from senseFly, a 71% increase in sensor revenue to $3.26 million and a 36% increase in SaaS revenue to $153 thousand.
- Nine-month revenue increased 158%. Sensor revenue rose 19% to $6.28 million, while SaaS revenue increased 33% to $480 thousand, including a 207% increase in Measure Ground Control subscriptions.
- Operating expenses were $7.23 million in Q3 and $24.02 million for the nine months, up 57% and 67%, respectively. Increases reflected acquired operations, payroll, research and development, amortization, stock compensation and sales and marketing costs.
- Q3 net income included a $6.49 million non-cash gain on debt extinguishment related to settlements and waivers of acquisition-related liabilities. Excluding this unusual item, the company remained materially loss-making.
- Cash declined to $5.30 million at September 30, 2022 from $14.59 million at December 31, 2021. Working capital was $10.22 million and accumulated deficit was $62.59 million.
- Total liabilities were $7.07 million, including $1.01 million of COVID loans and $1.23 million of lease liabilities. Acquisition-related liabilities were reduced to zero after settlement and waiver agreements.
- Total assets were $95.34 million, including $64.87 million of goodwill and $12.22 million of net intangible assets.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected the inclusion of senseFly and continued demand for MicaSense sensors and SaaS products acquired or expanded through the 2021 acquisitions.
- Gross margin declined to 38% in Q3 and 41% for the first nine months, from 39% and 49%, respectively, due to lower-margin drone sales and higher sensor production costs.
- The nine-month operating loss increased 56% to $18.02 million, while research and development expense increased 192% to $6.19 million.
- Q3 results shifted from a $3.77 million net loss to $1.66 million of net income primarily because of the $6.49 million debt-extinguishment gain.
- Operating cash burn increased 129% year over year to $15.34 million, partly because of higher inventory purchases and operating costs associated with the acquired businesses.
- Financing cash inflows decreased to $14.58 million from $45.60 million. The 2022 inflows included $10.00 million from Series F preferred stock and $4.58 million from the ATM common-stock offering.
- Common shares outstanding increased to 87.44 million at September 30, 2022 from 75.31 million at December 31, 2021. Series F preferred stock was convertible into common shares and carried a 5% dividend; additional dilution could result from conversion and warrants.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that sensor supply-chain disruptions caused material production delays and order backlogs, although expanded sourcing had resolved most of the backlog. Management expected the remaining backlog to be largely resolved before year-end 2022.
- The filing identifies continuing risks from COVID-19, the war in Ukraine, inflation, labor-market conditions, component shortages, freight costs and broader supply-chain disruption.
- The company disclosed substantial doubt about its ability to continue as a going concern. It expects to require additional liquidity within 12 months and is evaluating additional funding, operational restructuring, revenue growth and expense reductions.
- Management warned that failure to achieve sales growth or raise capital could result in default on obligations or a significant reduction or discontinuation of operations.
- Purchase commitments were approximately $2.67 million as of September 30, 2022, expected to be realized during 2022.
- The company settled the Measure acquisition holdback dispute: 498,669 shares were released to the sellers and 498,669 were cancelled. Waivers and payments also eliminated remaining MicaSense and senseFly acquisition-related holdback obligations.
- After quarter-end, Alpha converted 248 Series F preferred shares into 400,000 common shares during October and November 2022.
- Management reported no legal proceedings, no material off-balance-sheet arrangements and effective disclosure controls as of September 30, 2022.
Important Facts for Investors to Verify
- Whether additional equity, preferred-stock or other financing was obtained after the filing date and on what dilution and pricing terms.
- Current cash balances, operating cash burn and the duration of available liquidity in light of the disclosed going-concern uncertainty.
- The sustainability of revenue growth after the 2021 acquisitions and the extent to which growth is offset by lower margins and higher operating expenses.
- Progress in resolving sensor supply-chain constraints, production backlogs and inventory exposure.
- The potential dilution from Series F conversion rights, Series F warrants, common-stock warrants, options and restricted stock units.
- The valuation and impairment risk associated with $64.87 million of goodwill and significant acquired intangible assets.
- Whether the $6.49 million debt-extinguishment gain should be excluded when assessing recurring earnings and operating performance.