AgEagle Aerial Systems Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
AgEagle designs and delivers drones, sensors and software for agriculture, energy and utilities, infrastructure, government, defense, public safety, surveying and mapping markets. The company operates through its Drones, Sensors and SaaS segments, with operations in the United States and Switzerland.
This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company reported 92,321,375 common shares outstanding as of May 15, 2023 and is classified as a smaller reporting company and non-accelerated filer.
Financial Performance and Position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $4.057 million | $3.842 million | 5.6% increase |
| Gross profit | $1.979 million | $1.365 million | 45.0% increase |
| Gross margin | 48.8% | 35.5% | Increase of approximately 13.3 percentage points |
| Operating loss | $4.161 million | $7.482 million | 44.4% improvement |
| Net loss | $4.599 million | $7.597 million | 39.5% improvement |
| Net loss per common share | $0.05 | $0.10 | Improved |
| Cash used in operating activities | $4.235 million | $6.510 million | 35.0% less cash used |
- Revenue increased $215,091, led by higher sensor sales, partially offset by lower eBee drone revenue and SaaS subscriptions.
- Operating expenses declined 30.6% to $6.140 million. General and administrative expense declined 34.7%, research and development declined 27.6%, and sales and marketing declined 17.2%.
- Interest expense increased materially to $305,497 from $16,332, primarily due to the December 2022 promissory note, debt discount amortization and related financing costs.
- Cash declined to $2.848 million at March 31, 2023 from $4.350 million at December 31, 2022. Working capital was $8.132 million.
- Total assets were $52.187 million and total liabilities were $10.022 million at March 31, 2023. Goodwill was $23.179 million and net intangible assets were $10.856 million.
- Cash used in investing activities was $254,191, compared with $3.503 million in the prior-year quarter, primarily because the prior-year period included the MicaSense and senseFly acquisitions.
- Financing activities provided $3.000 million from the issuance of Series F convertible preferred stock. There were no ATM common-stock sales in Q1 2023, compared with $4.583 million of net ATM proceeds in Q1 2022.
Material Changes Versus the Prior Comparable Period
- Sensor revenue increased by approximately $1.037 million, while drone revenue decreased approximately $772,540 and SaaS revenue decreased approximately $49,546.
- Lower component costs, improved sales volume and reduced supply-chain-related costs increased gross margin substantially.
- Operating losses narrowed as the company continued integrating its 2021 acquisitions and reduced professional fees, consulting costs, headcount-related costs, rent, travel and advertising.
- The company raised $3.000 million through an additional Series F preferred-stock issuance. The issuance included warrants for up to 7,142,715 common shares at an exercise price of $0.42 per share.
- Alpha converted 998 Series F preferred shares into 2,304,762 common shares during the quarter. Common shares outstanding increased to 90,771,375 at March 31, 2023 from 88,466,613 at December 31, 2022.
- The company recorded $255,976 of deemed dividends from a March 2023 down-round adjustment to the Series F preferred stock and related warrants. Accrued Series F dividends were $66,921.
Debt, Liquidity and Going-Concern Matters
- The company had $2.318 million of net promissory-note liability at March 31, 2023, consisting of $933,694 current and $1.384 million long term. The note has an original principal amount of $3.500 million, bears interest at 8%, and matures December 31, 2024.
- Scheduled promissory-note principal payments begin in June 2023. The company must generally use 50% of net equity-financing proceeds to prepay the note.
- COVID loan obligations totaled $857,498, including $451,144 current and $406,354 long term.
- Lease liabilities totaled $3.619 million, including $620,973 current and $2.998 million long term. Undiscounted future lease payments were $4.420 million.
- Purchase commitments for manufacturing services and materials were approximately $2.595 million, expected to be realized during 2023.
- Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern. The company expects to require additional liquidity over the 12 months following issuance of the financial statements and is evaluating additional funding and operational restructuring.
Outlook, Commentary, Risks and Unusual Items
- Management intends to grow through expanded drone, sensor and software offerings, increased penetration of agriculture, energy, infrastructure and government markets, and potential strategic acquisitions.
- Management cited delays in the eBee VISION drone and Field Check mobile application, as well as continuing supply-chain constraints, inflation and adverse labor-market conditions.
- Supply-chain disruptions could limit access to components and parts needed for manufacturing, assembly and quality testing.
- The company has incurred recurring operating losses and had an accumulated deficit of $116.409 million at March 31, 2023. Additional capital may not be available on acceptable terms or at all.
- The company held inventory of $6.584 million, including a $324,630 obsolescence provision. Future demand, product changes and competitive conditions could affect inventory realizability.
- The company has a $185,000 note receivable from Valqari related to a disputed manufacturing arrangement. Valqari previously paid $315,000 of principal; the parties continued negotiating, and AgEagle reserved the right to pursue legal action.
- At March 31, 2023, the company had 28.272 million common-stock warrants outstanding, generally at a $0.42 exercise price, and 2.691 million stock options outstanding. Future exercises or conversions could materially dilute common stockholders.
- The company stated that disclosure controls and procedures were effective as of March 31, 2023 and that no material changes to internal control over financial reporting occurred during the quarter.
Important Facts for Investors to Verify
- Whether the company can secure sufficient financing to address the disclosed going-concern uncertainty and fund operations.
- Actual cash burn, revenue growth and gross-margin sustainability in subsequent quarters.
- Required payments and prepayment obligations under the promissory note beginning June 2023.
- Potential dilution from Series F conversions, preferred-stock down-round provisions, warrants, options and subsequent equity financings.
- Progress and commercial impact of the eBee VISION drone, Field Check application and government or defense programs.
- Exposure to supply-chain, inflation, labor and inventory-obsolescence risks.
- Collectability and resolution of the Valqari note receivable and related contractual dispute.