AgEagle Aerial Systems Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in Item 8 of this Form 10-K. This discussion contains forward-looking statements. Please see the explanatory note concerning “Forward-Looking Statements” in Part I of the Annual Report on Form 10-K and Item 1A. Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not materially affected by inflation.

Overview

AgEagle™ Aerial Systems Inc. (“AgEagle”, “Company”, “We”, “Our”, “Us”), through its wholly owned subsidiaries, is actively engaged in designing and delivering best-in-class drones, sensors and software that solve important problems for our customers. Founded in 2010, AgEagle was originally formed to pioneer proprietary, professional-grade, fixed-winged drones and aerial imagery-based data collection and analytics solutions for the agriculture industry. AgEagle’s shift and expansion from solely manufacturing fixed-wing farm drones in 2018, to offering what we believe is one of the industry’s best fixed-wing, full-stack drone solutions, culminated in 2021 when we acquired three market-leading companies engaged in producing UAS airframes, sensors and software for commercial and government use. In addition to a robust portfolio of proprietary, connected hardware and software products; an established global network of over 200 UAS resellers; and enterprise customers worldwide; these acquisitions also brought AgEagle a highly valuable workforce comprised largely of experienced engineers and technologists with deep expertise in the fields of robotics, automation, manufacturing and data science. In 2022, we succeeded in integrating all three acquired companies with AgEagle to form one global company focused on taking autonomous flight performance to a higher level.

AgEagle has also achieved numerous regulatory firsts, earning governmental approvals for its commercial and tactical drones to fly Beyond Visual Line of Sight (“BVLOS”) and/or Operations Over People (“OOP”) in the United States, Canada, Brazil and the European Union.

AgEagle is led by a proven management team with years of drone industry experience and is currently headquartered in Wichita, Kansas, where we house our business and sensor manufacturing operations; and we operate drone manufacturing operations in Lausanne, Switzerland in support of our international business activities.

We intend to grow our business and preserve our leadership position by developing new drones, sensors and software and capturing a significant share of the global drone market. In addition, we expect to accelerate our growth and expansion through strategic acquisitions of companies offering distinct technological and competitive advantages and have defensible IP protection in place, if applicable.

Key Growth Strategies

We intend to materially grow our business by leveraging our proprietary, best-in-class, full-stack drone solutions, industry influence and deep pool of talent with specialized expertise in robotics, automation, custom manufacturing and data science to achieve greater penetration of the global UAS industry – with near-term emphasis on capturing larger market share of the agriculture, energy/utilities, infrastructure and government/military verticals. We expect to accomplish this goal by first bringing three core values to life in our day-to-day operations and aligning them with our efforts to earn the trust and continued business of our customers and industry partners:

• Curiosity – this pushes us to find value where others aren’t looking. It inspires us to see around corners for our customers, understanding the problems they currently face or will be facing in the future, and delivering them solutions best suited for their unique needs.
• Passion – this fuels our obsession with excellence, our desire to try the difficult things and tackle big problems, and our commitment to meet our customers’ needs – and then surpass them.
• Integrity – this is not optional or situational at AgEagle – it is the foundation for everything we do, even when no one is watching.

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Competitive Strengths

We believe that the following attributes and capabilities provide us with long-term competitive advantages:

• Proprietary technologies, in-house capabilities and industry experience – We believe our decade of experience in commercial UAS design and engineering; in-house manufacturing, assembly and testing capabilities; and advanced technology development skillset serve to differentiate AgEagle in the marketplace. In fact, approximately 70% of our global workforce is comprised of engineers and data scientists with deep experience and expertise in robotics, automation, custom manufacturing, and data analytics. In addition, AgEagle is committed to meeting and exceeding quality and safety standards for manufacturing, assembly, design and engineering and testing of drones, drone subcomponents and related drone equipment in our U.S. and Swiss-based manufacturing operations. As a result, we have earned ISO:9001 international certification for our Quality Management System.
• AgEagle is more than just customer- and product-centric, we are obsessed with innovation and knowing the needs of our customers before they do – We are focused on capitalizing on our specialized expertise in innovating and commercializing advanced drone, sensor and software technologies to provide our existing and future customers with autonomous robotic solutions that meet the highest possible safety and operational standards and fit their specific business needs. We have established three Centers of Excellence that our leadership has challenged to cross-pollinate ideas, industry insights and interdisciplinary skillsets to generate intelligent autonomous solutions that efficiently leverage our expertise in robotics, automation and manufacturing to solve problems for our customers, irrespective of the industry sector in which they may operate.

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Impact of the Risks and Uncertainties on Our Business Operations

Global economic challenges, including the impact of the war, pandemics, rising inflation and supply-chain disruptions, regulatory investigations adverse labor and capital market conditions could cause economic uncertainty and volatility. The aforementioned risks and their respective impacts on the UAV industry and our operational and financial performance remains uncertain and outside of our control. Specifically, because of the aforementioned continuing risks, the our ability to access components and parts needed in order to manufacture its proprietary drones and sensors, and to perform quality testing have been, and continue to be, impacted. If either we or any of our third parties in the supply chain for materials used in our manufacturing and assembly processes continue to be adversely impacted, our supply chain may be further disrupted, limiting its ability to manufacture and assemble products.

Three and Nine Months Ended September 30, 2023 as Compared to Three and Nine Months Ended September 30, 2022

Revenues

For the three months ended September 30, 2023, revenues were $3,483,932 as compared to $5,490,714 for the three months ended September 30, 2022, a decrease of $2,006,782, or 36.5%. The decrease mainly was attributable to a decline in revenues of $1,501,085 of our RedEdge-P and Altum-PT™ panchromatic sensors, due to continued supply chain and manufacturing constraints, $454,233 of the eBee series of drone products and $51,464 of our SaaS subscription services related to our HempOverview and Ground Control platforms. In addition, the launch of the panchromatic series commenced in the second quarter of 2022, which resulted in higher sales last year due to immediate strong demand and orders for our next generation sensors.

For the nine months ended September 30, 2023, revenues were $10,819,213 as compared to $14,620,565 for the nine months ended September 30, 2022, a decrease of $3,801,352, or 26.0%. The decline in revenues is mainly attributed to the eBee drone products of $2,995,313, $673,143 of our our RedEdge-P and Altum-PT™ panchromatic sensors and $132,896 of our SaaS subscription services related to our HempOverview and Ground Control platforms. Our continued innovation has demonstrated growth in our sales leading to strong demand of our products, specifically for our panchromatic sensor series, offsetting this growth are delays in our newly announced VISION drone product and Field Check for Measure Ground Control mobile app which we have just begun to deliver to marketplace. Additionally, our business continues to be negatively impacted by supply chain constraints, inflation, adverse labor market conditions and manufacturing disruptions due to the consolidation of our manufacturing facilities.

Cost of Sales and Gross Profit

For the three months ended September 30, 2023, cost of sales was $2,269,858 as compared to $3,407,573 for the three months ended September 30, 2022, a decrease of $1,137,715, or 33.4%. For the three months ended September 30, 2023, gross profit was $1,214,074 or 34.8%, as compared to $2,083,141 or 37.9% for the three months ended September 30, 2022, a decrease of $869,067, or 41.7% in actual gross margin. The primary factors contributing to the decrease in our cost of sales and the gross profit margin were due to the decline in revenues from our sensor and our drone products along with significant price reduction in mid-Q2 to stimulate market demand and bring us in line specifically with competitive products manufactured in China as our products become older while awaiting the new ebee VISION. In addition, our sensor sales continue to experience supply chain pressure, because of increases in raw components and labor costs.

For the nine months ended September 30, 2023, cost of sales was $6,594,973 as compared to $8,622,436 for the nine months ended September 30, 2022, a decrease of $2,027,463, or 23.5%. For the nine months ended September 30, 2023, gross profit was $4,224,240, or 39.0% as compared to $5,998,129 or 41.0% for the nine months ended September 30, 2022, a decrease of $1,773,889, or 29.6% in actual gross margin. The decrease in gross profit margin was a result of our drone products along with significant price reduction in mid-Q2 to stimulate market demand and bring us in line specifically with competitive products manufactured in China as our products become older while awaiting the new ebee VISION. In addition, our sensor sales continue to experience supply chain pressure, because of increases in raw components and labor costs.

Operating Expenses

For the three months ended September 30, 2023, operating expenses were $7,204,187, as compared to $7,230,471 for the three months ended September 30, 2022, a decrease of $26,284, or 0.4%.

For the nine months ended September 30, 2023, operating expenses were $19,247,300, as compared to $24,015,980 for the nine months ended September 30, 2022, a decrease of $4,768,680, or 19.9%.

Operating expenses comprise general and administrative, sales and marketing, research and development and impairment charges for goodwill and an operating lease.

General and Administrative Expenses

For the three months ended September 30, 2023, general and administrative expenses were $3,357,550 as compared to $4,175,090 for the three months ended September 30, 2022, a decrease of $817,540, or 19.6%. The decrease was primarily a result of the integration of the 2021 Business Acquisitions that provided continued decreases in general and administrative costs in professional fees, relating mainly to legal and consulting fees, insurance, lease expenses due to combination of offices, reduction in employee payroll related costs due to integration of roles, ERP consulting integration costs, reduction in R&D consultants, less stock compensation costs offset by increased shareholder annual meeting costs.

For the nine months ended September 30, 2023, general and administrative expenses were $10,435,834 as compared to $14,093,655 for the nine months ended September 30, 2022, a decrease of $3,657,821, or 26.0%. The decrease was primarily a result of the integration of the 2021 Business Acquisitions which provided costs primarily included lease expenses due to combination of offices, reduction in employee payroll related costs due to integration of roles, ERP consulting integration costs, reduction in R&D consultants, less stock compensation costs offset by increased shareholder annual meeting costs.

Research and Development

For the three months ended September 30, 2023, research and development expenses were $1,368,394 as compared to $1,818,540 for the three months ended September 30, 2022, a decrease of $450,146, or 24.8%. The decrease was primarily due to the integration of research and development teams that provide development of our new airframe, sensor and software technologies resulting in a reduction in our consultants and internal headcounts.

For the nine months ended September 30, 2023, research and development expenses were $4,320,216, as compared to $6,185,777 for the nine months ended September 30, 2022, a decrease of $1,865,561, or 30.2%. The decrease was primarily due to the integration of research and development teams that provide development of our new airframe, sensor and software technologies resulting in a reduction in our consultants and internal headcounts.

Sales and Marketing

For the three months ended September 30, 2023, sales and marketing expenses were $978,243 as compared to $1,236,841 for the three months ended September 30, 2022, a decrease of $258,598, or 20.9%. The decrease was primarily due to a decrease of travel and payroll related costs due to the integration of sales and marketing teams, along with a decrease in consulting expenses due to branding and website integration done in prior year along with less tradeshows offset by more in-person demos with our sales and marketing team for the new eBee VISON.

For the nine months ended September 30, 2023, sales and marketing expenses were $2,911,963 as compared to $3,736,548 for the nine months ended September 30, 2022, a decrease of $824,585, or 22.1%. The decrease was primarily due to the integration of sales and marketing teams, along with a decrease in consulting expenses due to branding and website integration done in prior year along with less tradeshows offset by more in-person demos with our sales and marketing team for the new ebee VISON.

Impairment Charges

For the three and nine months ended September 30, 2023, we recognized a goodwill impairment charge of $1,500,000 on our SaaS reporting unit due to its carrying value exceeded its fair value. For the nine months ended September 30, 2023, we also recognized an impairment charge on a subleased operating lease of $79,287 for the excess of the carrying value of the right of use asset at time of the sublease and the expected future cash flows from the sublease.

Other Income (Expense), net

For the three months ended September 30, 2023, other expense, net was $2,030,015 as compared to other income, net of $6,812,282 for the three months ended September 30, 2022. The increase of the expense was primarily attributable to the promissory note’s original issue discount of 4% and interest at 8% per annum issued in December 2022 along with the amendment executed to the promissory note on August 14, 2023, resulting in a debt extinguishment costs of $1,523,867, also the net foreign currency transaction losses incurred by the drone (senseFly) business, the other income for the same period in 2022 was attributable to a non-cash gain on debt extinguishment associated with reductions of holdback liabilities in connection with our acquisitions of senseFly and MicaSense.

For the nine months ended September 30, 2023, other expense, net was $2,887,150 as compared to other income, net of $6,484,495 for the nine months ended September 30, 2022. The increase of the expense was primarily attributable to the promissory note’s original issue discount of 4% and interest at 8% per annum issued in December 2022 along with the amendment executed to the promissory note on August 14, 2023, resulting in a debt extinguishment costs of $1,523,867, also the net foreign currency transaction losses incurred by the drone (senseFly) business, the other income for the same period in 2022 was attributable to a non-cash gain on debt extinguishment associated with reductions of holdback liabilities in connection with our acquisitions of senseFly and MicaSense.

Net Loss

For the three months ended September 30, 2023, we incurred a net loss of $8,020,128 as compared to a net income of $1,664,952 for the three months ended September 30, 2022, a loss increases of $9,685,080, or 581.7 %. Overall, the net loss is primarily a result of a decline in our drone business due to declining revenues from sales our legacy products. In addition, due to the decrease in our sales price for eBee products for the quarter, our margins were severely impacted, diminishing our bottom-line results and reflecting a sharp decrease in our operating expenses for the quarter of approximately $2.0 million. and the $6,486,899 non-cash gain on debt extinguishment associated with reductions of holdback liabilities in connection with our acquisitions of senseFly and MicaSense realized in the third quarter of 2022.

For the nine months ended September 30, 2023, the Company incurred a net loss of $17,910,210 as compared to a net loss of $11,533,356 for the nine months ended September 30, 2022, an increase of $6,376,854, or 55.3%. Overall, the net loss is primarily a result of a decline in our drone and sensor business due to declining revenues from sales of our legacy products net of a decrease in operating costs because of the integration of the 2021 Business Acquisitions and reduction in employee payroll. In addition to the $6,486,899 non-cash gain on debt extinguishment associated with reductions of holdback liabilities in connection with our acquisitions of senseFly and MicaSense realized in the third quarter of 2022.

Cash Flows

Nine Months Ended September 30, 2023 as Compared to the Nine Months Ended September 30, 2022

As of September 30, 2023, cash on hand was $1,600,143, as compared to $4,349,837 as of December 31, 2022, a decrease of $2,749,694.

For the nine months ended September 30, 2023, cash used in operations was $8,829,669, a decrease of $6,339,067 or 41.8%, as compared to cash used of $15,168,736 for the nine months ended September 30, 2022. The decrease in cash used in operating activities was principally driven by lower sales and operating expenses which included significantly lower inventory purchases, prepaids, accounts payable, accrued expenses and contract liabilities.

For the nine months ended September 30, 2023, cash used in investing activities was $564,116, a decrease of $7,498,625, or 93.0%, as compared to cash used of $8,062,741 for the nine months ended September 30, 2022. The decrease in cash used in our investing activities resulted mainly from the business acquisition of MicaSense and senseFly that occurred in 2022 and a decrease in platform and internal use software costs along with purchases of property and equipment.

For the nine months ended September 30, 2023, cash provided by financing activities was $6,730,348, a decrease of $7,674,030 or 53.2%, as compared to cash provided of $14,404,378 for the nine months ended September 30, 2022. The decrease in cash provided by our financing activities was due to less sales of our Common stock through an at-the-market (“ATM”) offering and exercise of warrants in the prior year offset by the sale of Series F Preferred stock issuance of Common Stock and Warrant.

Liquidity and Capital Resources

As of September 30, 2023, we had a working capital of $2,818,220. For the nine months ended September 30, 2023, we incurred a loss from operations of $15,023,060, a decrease of $2,994,791, or 16.6%, as compared to $18,017,851 for the nine months ended September 30, 2022. While we have historically been successful in raising capital to meet its working capital needs, the ability to continue raising such capital to enable us to continue our growth is not guaranteed. We will require additional liquidity to continue its operations and meet its financial obligations over the next twelve (12) months, there is substantial doubt about our ability to continue as a going concern. We are evaluating strategies to obtain the required additional funding for future operations and the restructuring of operations to grow revenues and reduce expenses.

During the nine months ended September 30, 2023, we raised $6,817,400 in equity from the additional sale of Series F Preferred Stock and Offering of our Common Stock.

Off-Balance Sheet Arrangements

On September 30, 2023, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Inflation

During the nine months ended September 30, 2023, inflation had a negative impact on the unmanned aerial vehicle systems industry, our customers and our business globally. Specifically, our ability to access components, parts and labor needed to manufacture our proprietary drones and sensors, and to perform quality testing have been, and continue to be, impacted. If either the Company or any of its third parties in the supply chain for materials used in our manufacturing and assembly processes continue to be adversely impacted, our supply chain may be further disrupted, limiting our ability to manufacture and assemble products. We expect inflation and its effects to continue to have a significant negative impact on our business.

Climate Change

Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

New Accounting Pronouncements

Recently issued by the Financial Accounting Standards Board (“FASB”), most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our consolidated financial position, results of operations or cash flows.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

Evaluation of Disclosure and Control Procedures

The Company’s Chief Executive Officer and the Company’s Interim Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2023 and concluded that the Company’s disclosure controls and procedures are effective. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated, recorded, processed, summarized and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar unctions, as appropriate to allow timely decisions regarding required disclosure to be reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(t) and 15d-15(f) under the Exchange Act, during the nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, and are not required to provide the information under this item.