AgEagle Aerial Systems Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
AgEagle designs and delivers autonomous unmanned aerial systems, sensors and software for agriculture, energy and utilities, infrastructure, government and other commercial markets. The company operates through three segments: Drones and Custom Manufacturing, Sensors, and Software-as-a-Service. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Results include the acquired MicaSense, Measure and senseFly businesses, although the 2021 comparison period does not include all acquired operations for the full quarter.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $3.842 million | $1.702 million | Up 125.8% |
| Gross profit | $1.365 million | $1.080 million | Up 26.4% |
| Gross margin | 35.5% | 63.4% | Down 27.9 percentage points |
| Operating loss | $7.482 million | $2.961 million | Loss increased 152.7% |
| Net loss | $7.597 million | $2.931 million | Loss increased 159.2% |
| Basic and diluted loss per share | $0.10 | $0.05 | Loss per share doubled |
| Cash used in operations | $6.510 million | $1.129 million | Use increased 121.0% |
Revenue growth was driven primarily by $2.739 million of drone revenue from senseFly and a $149,975 increase in SaaS revenue. Sensor revenue declined by $748,571. Gross profit increased, but cost of sales rose 298.3%, producing a materially lower gross margin because of component and supply-chain costs and a less favorable product mix.
Operating expenses increased 119.0% to $8.847 million, including general and administrative expense of $5.481 million, research and development expense of $2.185 million, and sales and marketing expense of $1.181 million. Stock-based compensation was $1.754 million, compared with $445,869 in the prior-year quarter, and depreciation and amortization was $875,990, compared with $135,105.
Cash, liquidity and debt
- Cash declined to $9.187 million at March 31, 2022, from $14.591 million at December 31, 2021.
- Working capital was $3.101 million. Current assets were $19.218 million and current liabilities were $16.117 million.
- Cash used in investing activities was $3.503 million, including $2.447 million for the MicaSense acquisition, $490,000 for senseFly, and $492,000 of capitalized platform and internal-use software costs.
- Financing activities provided $4.614 million, primarily from $4.583 million of net ATM equity proceeds. The company issued 4.251 million shares during the quarter.
- Acquisition-related liabilities totaled $13.000 million, with $9.000 million current and $4.000 million long term. Scheduled payments were $9.000 million in the remainder of 2022 and $4.000 million in 2023.
- SenseFly COVID loan obligations totaled $1.248 million, including $445,778 current and $802,683 long term.
- Operating lease liabilities totaled $1.869 million, including $1.176 million current.
- The company stated that available cash and capital-raising efforts were expected to fund anticipated operating costs and capital expenditures through March 2023, while also warning that additional capital may be required.
Material changes versus the prior comparable period
- Revenue more than doubled, primarily because of the senseFly acquisition and increased SaaS subscriptions.
- Gross margin contracted sharply as supply-chain constraints, inflation and product mix increased manufacturing costs.
- Operating losses expanded substantially as the acquired businesses added personnel, research and development, sales and marketing, lease, amortization and other corporate costs.
- Cash used in operations increased primarily because of higher operating expenses, inventory purchases and prepayments. Inventory rose to $5.309 million from $4.039 million at year-end 2021.
- Financing inflows were lower than in Q1 2021, when the company received substantial proceeds from warrant exercises and equity sales.
- Shares outstanding increased to 81.569 million at March 31, 2022, from 75.315 million at December 31, 2021.
- The filing identifies a prior-period accounting error related to MicaSense revenue and expenses for Q1 2021. The filing states that the correctly reported Q1 2021 revenue would have been $1.307 million and net loss would have been $2.963 million, rather than the originally reported $1.702 million of revenue and $2.931 million of net loss. The correction was recorded in the three months ended June 30, 2021.
Guidance, outlook, management commentary, risks and unusual items
Management’s strategy is to integrate the acquired drone, sensor and software businesses, establish centers of excellence, invest in product and software development, expand in agriculture, energy and utilities, infrastructure and government markets, and pursue additional acquisitions. No specific revenue, earnings or margin guidance was provided.
- COVID-19, the war in Ukraine, inflation, labor-market conditions and supply-chain disruptions affected component availability, quality testing and fulfillment. Management expects these effects may continue for an extended period.
- Supply-chain delays affected fulfillment for a large e-commerce customer, and the company made significant inventory purchases in 2021 to mitigate potential shortages.
- The company has incurred recurring operating losses and relies substantially on financing activities and private placements for liquidity. Management warned that failure to achieve sales growth or raise additional capital could result in defaults or a significant reduction in operations.
- As of March 31, 2022, purchase commitments were approximately $3.267 million, expected to be realized during 2022.
- On April 19, 2022, the company sought to offset the entire $5.625 million Measure acquisition holdback against claimed operating losses exceeding $13 million allegedly resulting from seller breaches. The outcome was uncertain and settlement negotiations had begun.
- The company continued negotiations with Valqari concerning collection of a note receivable. Valqari had paid $315,000 of principal, but the remaining dispute and collectibility were unresolved.
- The former Chief Executive Officer resigned in January 2022 and received contractual salary continuation, benefits and fully vested restricted stock units.
- Michael O’Sullivan was appointed Chief Commercial Officer effective April 11, 2022, with salary, bonus, equity and severance arrangements denominated in Swiss francs.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2022, and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth from the 2021 acquisitions can continue after adjusting for the partial-period comparability of the prior-year results.
- Whether gross margins recover from 35.5% amid continuing supply-chain, inflation and product-mix pressures.
- The pace of cash burn and whether the company can meet the $9.000 million of acquisition-related payments due in the remainder of 2022.
- Whether additional equity financing will be required, and the resulting dilution to common shareholders.
- The resolution and ultimate recoverability of the Measure holdback and the Valqari note receivable.
- Whether management’s stated liquidity runway through March 2023 remains valid given operating losses, acquisition obligations and capital expenditures.
- The effect of the disclosed Q1 2021 accounting error and its correction on comparisons with prior filings.
- The carrying value and future impairment risk associated with $64.867 million of goodwill and $13.292 million of intangible assets.