AgEagle Aerial Systems Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022; filed August 15, 2022. The condensed consolidated financial statements are unaudited. AgEagle provides autonomous drones, sensors and software through its Drones and Custom Manufacturing, Sensors and SaaS segments. The 2022 results include the full-period effects of the 2021 acquisitions of MicaSense, Measure and senseFly.
Financial performance and position
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $5.29 million | $1.94 million | $9.13 million | $3.64 million |
| Gross profit | $2.55 million | $0.98 million | $3.91 million | $1.98 million |
| Gross margin | 48.2% | 50.5% | 42.9% | 54.4% |
| Operating loss | $(5.39) million | $(4.82) million | $(12.87) million | $(7.78) million |
| Net loss | $(5.60) million | $(4.68) million | $(13.20) million | $(7.61) million |
| Net loss per share | $(0.07) | $(0.07) | $(0.17) | $(0.12) |
| Operating cash flow | Not separately provided | Not separately provided | $(11.63) million | $(3.51) million |
- Second-quarter revenue increased 172.9%, primarily from senseFly eBee drone products. Six-month revenue increased 150.9%.
- Gross profit increased, but margins declined because senseFly drone sales carried lower margins and sensor costs increased.
- Operating expenses rose 36.9% in the quarter and 71.9% year to date. Six-month research and development expense increased 227%, while sales and marketing expense increased 215.8%, primarily due to the acquired businesses and expanded teams.
- Cash used in operations increased substantially because of higher operating expenses, inventory purchases and prepayments. Inventory increased to $5.65 million from $4.04 million at December 31, 2021.
- Cash was $13.51 million at June 30, 2022, compared with $14.59 million at year-end 2021. Working capital was $8.77 million.
- Total assets were $105.53 million, including $64.87 million of goodwill and $12.88 million of net intangible assets. Stockholders’ equity was $83.60 million.
Debt, obligations and capital resources
- The filing reports no conventional bank debt. Outstanding COVID loans totaled $1.21 million, with $604,067 classified as current and $604,412 as long term.
- Liabilities related to acquisition agreements totaled $13.00 million at June 30, 2022, including $9.00 million current and $4.00 million long term. These obligations primarily represented acquisition holdbacks.
- Operating lease liabilities totaled $1.55 million, including $981,632 current.
- During the first six months, AgEagle raised $4.58 million net through its at-the-market common-stock offering and $9.92 million net from issuing Series F convertible preferred stock.
- The Series F preferred stock is convertible into 16.13 million common shares at $0.62 per share and was issued with warrants to purchase 16.13 million common shares at $0.96 per share. Additional Series F financing of up to $25 million may be available subject to conditions, including shareholder approval.
- As of June 30, 2022, 82.45 million common shares were outstanding; as of August 15, 2022, 87.00 million shares were outstanding.
Material changes and unusual items
- The 2021 acquisitions materially expanded revenue but also increased operating expenses, amortization, research and development, sales and marketing costs and acquisition-related obligations.
- The company corrected prior-period 2021 information for an accounting error involving MicaSense revenue and related expenses. Management concluded the cumulative effect was quantitatively and qualitatively immaterial, but the comparative 2021 figures in this filing reflect the correction.
- Foreign-currency transaction losses were $304,738 for the six months ended June 30, 2022, compared with no such losses in the prior-year period. The prior-year period included $108,532 of PPP loan forgiveness income.
- On April 19, 2022, the company notified the Measure sellers that it sought to offset the $5.625 million holdback against alleged operating losses exceeding $13 million arising from alleged breaches of representations and warranties. Settlement negotiations were ongoing, and management could not assure the outcome.
- After quarter-end, AgEagle paid $1.18 million related to the MicaSense holdback and $2.26 million and $0.22 million related to senseFly S.A. and senseFly Inc. holdbacks, respectively, under waiver agreements that reduced or eliminated remaining holdback obligations.
- After quarter-end, Alpha converted 2,821 Series F preferred shares into 4.55 million common shares, increasing potential dilution and common shares outstanding.
Guidance, outlook and risks
- Management stated that cash on hand, anticipated revenue and capital-raising activities were expected to fund operations and capital expenditures through August 2023, although the MD&A also states that cash on hand and revenue should fund the next twelve months. The filing warns that additional capital may be needed.
- Management expected sales backlog caused by supply-chain constraints to be resolved no later than the end of the third quarter of 2022.
- COVID-19, the war in Ukraine, inflation, labor-market conditions and supply-chain disruptions affected component availability, manufacturing, quality testing and customer deliveries. The company made significant inventory purchases in 2021 to mitigate anticipated delays.
- Management warns that failure to achieve significant sales growth or raise additional capital could result in defaults on obligations or a significant reduction or discontinuation of operations. The financial statements contain no going-concern adjustments.
- Purchase commitments for manufacturing services and materials were approximately $5.58 million as of June 30, 2022, expected to be realized during 2022.
- The company reported no legal proceedings, no material off-balance-sheet arrangements and effective disclosure controls as of June 30, 2022.
Investor verification points
- Verify whether revenue growth from senseFly and the other acquisitions translated into sustainable margins, given the decline in gross margin and continuing operating losses.
- Reconcile cash burn, acquisition-related holdback payments, COVID-loan maturities and purchase commitments against the company’s stated August 2023 liquidity expectation.
- Review the Measure holdback dispute, the claimed losses exceeding $13 million and the ultimate settlement or litigation outcome.
- Assess dilution from the Series F conversion feature, Series F warrants, the potential $25 million Series F option and subsequent common-stock issuances.
- Monitor supply-chain constraints, inventory levels, backlog conversion and the effect of inflation on component, labor and freight costs.
- Evaluate the carrying value and impairment risk of $64.87 million of goodwill and $12.88 million of intangible assets.
- Confirm the impact of the prior-period accounting correction and the subsequent holdback waiver payments in later filings.