UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2018March 31, 2019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 001-36492
AGEAGLE AERIAL SYSTEMS, INC.
(Exact name of registrant issuer as specified in its charter)
| Nevada | 88-0422242 | |
(State or other jurisdiction of
| (I.R.S. Employer
|
117 S. 4th Street
Neodesha, Kansas 66757
(Address of principal executive offices, including zip code)
620-325-6363
Registrant’s phone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES☒NO☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding twelve months (or shorter period that the registrant was required to submit and post such files).
YES☒NO☐
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” or an “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐No☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at | |
| Common Stock, $.001 par value |
2
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2018MARCH 31, 2019, AND DECEMBER 31, 20172018
(Unaudited)
| As of | ||||||||
| June 30, 2018 | December 31, 2017 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 2,560,062 | $ | 35,289 | ||||
| Accounts receivable | 6,362 | 255 | ||||||
| Inventories | 132,314 | 158,632 | ||||||
| Prepaid expense | 117,159 | 3,384 | ||||||
| Total current assets | 2,815,897 | 197,560 | ||||||
| Property and equipment, net | 30,400 | 38,703 | ||||||
| Investment in unconsolidated investee | 1,079,648 | 75,000 | ||||||
| Total assets | $ | 3,925,945 | $ | 311,263 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 381,174 | $ | 426,154 | ||||
| Accrued expenses | 26,482 | 59,354 | ||||||
| Accrued interest | 2,337 | 185,335 | ||||||
| Payroll liabilities | 5,328 | 5,521 | ||||||
| Convertible notes payable | — | 1,160,005 | ||||||
| Promissory note | 93,215 | — | ||||||
| Promissory notes – related party | — | 131,050 | ||||||
| Total current liabilities | 508,536 | 1,967,419 | ||||||
| Total liabilities | 508,536 | 1,967,419 | ||||||
| COMMITMENTS AND CONTINGENCIES (SEE NOTE 9) | ||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT): | ||||||||
| Preferred stock, $0.001 par value, 25,000,000 shares authorized: | ||||||||
| Preferred stock Series B, $0.001 par value, 1,764 shares authorized, 0 shares issued and outstanding at June 30, 2018 | — | — | ||||||
| Preferred stock Series C Convertible, $0.001 par value, 10,000 shares authorized, 6,507 shares issued and outstanding at June 30,2018 | 7 | — | ||||||
| Common stock, $0.001 par value; 250,000,000 shares authorized; 10,164,001 shares issued and outstanding at June 30, 2018 | 10,164 | — | ||||||
| Common stock, $0.0001 par value; 100,000,000 shares authorized; 4,200,000 shares issued and outstanding at December 31, 2017 | — | 420 | ||||||
| Preferred stock, $0.001 par value, 25,000,000 shares authorized: | ||||||||
| Additional paid-in capital | 7,919,354 | 1,939,832 | ||||||
| Accumulated deficit | (4,512,116 | ) | (3,596,408 | ) | ||||
| Total stockholders’ equity (deficit) | 3,417,409 | (1,656,156 | ) | |||||
| Total liabilities and stockholders’ equity (deficit) | $ | 3,925,945 | $ | 311,263 | ||||
| As of | ||||||||
| March 31, | December 31, | |||||||
| ASSETS | 2019 | 2018 | ||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 2,151,124 | $ | 2,601,730 | ||||
| Accounts receivable | 11,493 | 93 | ||||||
| Inventories, net | 134,137 | 149,482 | ||||||
| Prepaid and other current assets | 66,872 | 80,370 | ||||||
| Total current assets | 2,363,626 | 2,831,675 | ||||||
| Property and equipment, net | 25,142 | 28,374 | ||||||
| Intangible assets, net | 635,282 | 677,118 | ||||||
| Goodwill | 3,270,984 | 3,270,984 | ||||||
| Total assets | $ | 6,295,034 | $ | 6,808,151 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Accounts payable | $ | 227,958 | $ | 197,827 | ||||
| Accrued expenses | 21,825 | 41,841 | ||||||
| Accrued dividends | 41,333 | 1,333 | ||||||
| Contract liability | 2,524 | 4,892 | ||||||
| Payroll liabilities | 29,172 | 13,521 | ||||||
| Promissory note | 9,028 | 40,998 | ||||||
| Total current liabilities | 331,840 | 300,412 | ||||||
| Total liabilities | 331,840 | 300,412 | ||||||
| COMMITMENTS AND CONTINGENCIES (SEE NOTE 9) | ||||||||
| STOCKHOLDERS’ EQUITY : | ||||||||
| Preferred stock, $0.001 par value, 25,000,000 shares authorized: | ||||||||
| Preferred stock, Series B, $0.001 par value, 0 shares authorized, 0 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | — | — | ||||||
| Preferred stock, Series C Convertible, $0.001 par value, 10,000 shares authorized, 3,636 shares issued and outstanding at March 31, 2019 and 4,662 at December 31, 2018 | 4 | 5 | ||||||
| Preferred stock, Series D Convertible, $0.001 par value, 2,000 shares authorized, 2,000 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | 2 | 2 | ||||||
| Common Stock, $0.001 par value, 250,000,000 shares authorized, 14,449,394 and 12,549,394 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | 14,449 | 12,549 | ||||||
| Additional paid-in capital | 12,190,295 | 12,171,274 | ||||||
| Accumulated deficit | (6,241,556 | ) | (5,676,091 | ) | ||||
| Total stockholders’ equity | $ | 5,963,194 | $ | 6,507,739 | ||||
| Total liabilities and stockholders’ equity | $ | 6,295,034 | $ | 6,808,151 | ||||
See accompanying notes to the condensed interim consolidated financial statements.
3
AGEAGLE AERIAL SYSTEMS, INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | $ | 45,993 | $ | 29,191 | ||||
| Cost of sales | 33,948 | 23,798 | ||||||
| Gross Profit | 12,045 | 5,393 | ||||||
| Operating Expenses: | ||||||||
| Selling expenses | 12,127 | 4,627 | ||||||
| General and administrative | 474,902 | 40,853 | ||||||
| Professional fees | 90,019 | 151,061 | ||||||
| Total Operating Expenses | 577,048 | 196,541 | ||||||
| Loss from Operations | (565,003 | ) | (191,148 | ) | ||||
| Other Income (Expenses): | ||||||||
| Other income | — | 15,065 | ||||||
| Interest expense | (462 | ) | (27,414 | ) | ||||
| Total Other Expenses, Net | (462 | ) | (12,349 | ) | ||||
| Loss Before Income Taxes | (565,465 | ) | (203,497 | ) | ||||
| Provision for income taxes | — | — | ||||||
| Net Loss | $ | (565,465 | ) | $ | (203,497 | ) | ||
| Net Loss Per Share - Basic and Diluted | $ | (0.04 | ) | $ | (0.04 | ) | ||
| Weighted Average Number of Shares Outstanding During the Period -- Basic and Diluted | 13,254,949 | 4,919,236 | ||||||
See accompanying notes to the condensed interim consolidated financial statements.
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4
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF OPERATIONSCHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(Unaudited)MARCH 31, 2019
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenues | $ | 24,517 | $ | 47,192 | $ | 53,707 | $ | 82,391 | ||||||||
| Cost of sales | 18,174 | 36,905 | 41,971 | 43,183 | ||||||||||||
| Gross Profit | 6,343 | 10,287 | 11,736 | 39,208 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Selling expenses | 27,005 | 8,376 | 36,460 | 14,850 | ||||||||||||
| General and administrative | 233,797 | 75,999 | 269,823 | 142,625 | ||||||||||||
| Professional fees | 426,210 | 15,578 | 576,795 | 101,550 | ||||||||||||
| Consulting fees – related party | 1,000 | 6,397 | 1,000 | 7,992 | ||||||||||||
| Research and development | — | 1,563 | 476 | 5,880 | ||||||||||||
| Total Operating Expenses | 688,012 | 107,913 | 884,554 | 272,897 | ||||||||||||
| Loss from Operations | (681,669 | ) | (97,626 | ) | (872,818 | ) | (233,689 | ) | ||||||||
Loss on Investment from Unconsolidated Investee | (30,352 | ) | — | (30,352 | ) | — | ||||||||||
| Other Income (Expenses): | ||||||||||||||||
| Other income | 1,645 | 535 | 16,711 | 5,189 | ||||||||||||
| Interest expense | (1,834 | ) | (36,383 | ) | (29,248 | ) | (77,554 | ) | ||||||||
| Total Income (Expenses), Net | (189 | ) | (35,848 | ) | (12,537 | ) | (72,365 | ) | ||||||||
| Loss Before Income Taxes | (712,210 | ) | (133,474 | ) | (915,707 | ) | (306,054 | ) | ||||||||
| Provision for income taxes | — | — | — | — | ||||||||||||
| Net Loss | $ | (712,210 | ) | $ | (133,474 | ) | $ | (915,707 | $ | (306,054 | ) | |||||
| Net Loss Per Share – Basic and Diluted | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.10 | ) | $ | (0.07 | ) | ||||
| Weighted Average Number of Shares Outstanding During the Period – Basic and Diluted | 10,044,454 | 4,200,000 | 9,440,717 | 4,200,000 | ||||||||||||
| Par $ .0001 Preferred Stock Series A Shares | Preferred Stock Series A Amount | Par $ .0001 Preferred Stock Series B Shares | Preferred Stock Series B Amount | Par $ .0001 Preferred Stock Series C Shares | Preferred Stock Series C Amount | Par $ .0001 Preferred Stock Series D Shares | Preferred Stock Series D Amount | Par $ .0001 Common Shares | Common Stock Amount | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 | — | $ | — | — | $ | — | 4,662 | $ | 5 | 2,000 | $ | 2 | 12,549,394 | $ | 12,549 | $ | 12,171,274 | $ | (5,676,091 | ) | $ | 6,507,739 | ||||||||||||||||||||||||||||||
| Conversion of Series C Preferred Stock | — | — | — | — | (1,026 | ) | (1 | ) | — | — | 1,900,000 | 1,900 | (1,899 | ) | — | — | ||||||||||||||||||||||||||||||||||||
| Dividend on Series D Preferred Stock | — | — | — | — | — | — | — | — | — | — | (40,000 | ) | — | (40,000 | ) | |||||||||||||||||||||||||||||||||||||
| Share compensation period costs | — | — | — | — | — | — | — | — | — | — | 60,920 | — | 60,920 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | — | (565,465 | ) | (565,465 | ) | |||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2019 | — | $ | — | — | $ | — | 3,636 | $ | 4 | 2,000 | $ | 2 | 14,449,394 | $ | 14,449 | $ | 12,190,295 | $ | (6,241,556 | ) | $ | 5,963,194 | ||||||||||||||||||||||||||||||
AGEAGLE AERIAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2018
| Par $ .0001 Preferred Stock Series A Shares | Preferred Stock Series A Amount | Par $ .0001 Preferred Stock Series B Shares | Preferred Stock Series B Amount | Par $ .0001 Preferred Stock Series C Shares | Preferred Stock Series C Amount | Par $ .0001 Preferred Stock Series D Shares | Preferred Stock Series D Amount | Par $ .0001 Common Shares | Common Stock Amount | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2017 | 80,000 | $ | — | 14 | $ | — | 12 | $ | — | — | $ | — | 651,796 | $ | 420 | $ | 1,939,832 | $ | (3,596,408 | ) | $ | (1,656,156 | ) | |||||||||||||||||||||||||||||
| Pre-merger issuances and conversions of shares | (80,000 | ) | — | (6 | ) | — | (12 | ) | — | — | — | 3,548,204 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| AgEagle debt conversion into common shares | — | — | — | — | — | — | — | — | 787,891 | 788 | 1,503,013 | — | 1,503,801 | |||||||||||||||||||||||||||||||||||||||
| Ag Eagle shareholder common stock conversion to Enerjex common shares | — | — | — | — | 2,056 | — | — | — | 2,757,063 | 6,537 | (6,537 | ) | — | — | ||||||||||||||||||||||||||||||||||||||
| Investment in Agribotix | — | — | — | — | — | — | — | 200,000 | 200 | 999,800 | — | 1,000,000 | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common and prefered stock for Enerjex Series shareholders upon merger | — | — | — | 0.01 | 197 | 1 | — | — | 1,887,094 | 1,887 | (606,443 | ) | — | (604,555 | ) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock Series C in connection with investment upon merger | — | — | — | — | 4,626 | 6 | — | — | — | — | 3,979,994 | — | 3,980,000 | |||||||||||||||||||||||||||||||||||||||
| Share compensation period costs | — | — | — | — | — | — | — | — | — | — | 2,491 | — | 2,491 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | (203,497 | ) | (203,497 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2018 | — | $ | — | 8 | $ | 0.01 | 6,879 | $ | 7 | — | $ | — | 9,832,048 | $ | 9,832 | $ | 7,812,150 | $ | (3,799,905 | ) | $ | 4,022,084 | ||||||||||||||||||||||||||||||
Note: Amounts have been adjusted to reflect 25 to 1 stock split upon merger
See accompanying notes to the condensed interim consolidated financial statements.statements
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5
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2019 AND 2018 AND 2017
(Unaudited)
| For the Six Months Ended | ||||||||||||||||
| June 30, | June 30, | For the Three Months Ended March 31, | ||||||||||||||
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net loss | $ | (915,707 | ) | $ | (306,054 | ) | $ | (565,465 | ) | $ | (203,497 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Depreciation | 8,304 | 9,452 | ||||||||||||||
| Loss on investment from unconsolidated investee | 30,352 | — | ||||||||||||||
| Depreciation and amortization | 45,068 | 4,151 | ||||||||||||||
| Stock-based compensation | 24,514 | 6,397 | 60,920 | 2,491 | ||||||||||||
| Shares issued in exchange for professional services | 135,600 | — | ||||||||||||||
| Warrants issued with convertible promissory note | — | 4,927 | ||||||||||||||
| Accretion for debt discounts, warrants and issuance costs | — | 25,000 | ||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Accounts receivable | (6,107 | ) | 12,210 | (11,400 | ) | 171 | ||||||||||
| Inventories | 26,318 | 1,225 | 15,345 | 15,267 | ||||||||||||
| Prepaid expenses and other assets | (113,775 | ) | 805 | 13,498 | (114,276 | ) | ||||||||||
| Contract liability | (2,368 | ) | — | |||||||||||||
| Accounts payable | (865,508 | ) | 41,897 | 30,131 | (461,415 | ) | ||||||||||
| Accrued liabilities | (32,872 | ) | (84,861 | ) | (20,016 | ) | (39,634 | ) | ||||||||
| Accrued interest | 25,577 | 45,985 | — | 27,412 | ||||||||||||
| Accrued payroll liabilities | (194 | ) | (2,966 | ) | 15,651 | (469 | ) | |||||||||
| Net cash used in operating activities | (1,683,498 | ) | (245,983 | ) | (418,636 | ) | (769,799 | ) | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Cash received in reverse merger | 256,255 | — | — | 256,255 | ||||||||||||
| Investment in unconsolidated investee | (35,000 | ) | — | — | (35,000 | ) | ||||||||||
| Purchases of fixed assets | — | (12,775 | ) | |||||||||||||
| Net cash provided by (used in) investing activities | 221,255 | (12,775 | ) | |||||||||||||
| Net cash provided by investing activities | — | 221,255 | ||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Issuance of convertible notes payable | — | 248,050 | ||||||||||||||
| Payments on note payable | (32,342 | ) | — | |||||||||||||
| Shares repurchased from shareholder | (210,642 | ) | — | |||||||||||||
| Issuance of common stock and Series C convertible preferred stock in connection upon merger, net of $20,000 in fees | 3,980,000 | — | ||||||||||||||
| Sale of Series C convertible preferred stock | 250,000 | — | ||||||||||||||
| Net cash provided by financing activities | 3,987,016 | 248,050 | ||||||||||||||
| Payments on promissory note | (31,970 | ) | — | |||||||||||||
| Proceeds from the issuance of Common Stock and Series C convertible preferred stock in connection with merger, net of $20,000 in fees | — | 3,980,000 | ||||||||||||||
| Net cash (used in) provided by financing activities | (31,970 | ) | 3,980,000 | |||||||||||||
| Net increase (decrease) in cash | 2,524,773 | (10,708 | ) | (450,606 | ) | 3,431,456 | ||||||||||
| Cash at beginning of period | 35,289 | 15,887 | 2,601,730 | 35,289 | ||||||||||||
| Cash at end of period | $ | 2,560,062 | $ | 5,179 | $ | 2,151,124 | $ | 3,466,745 | ||||||||
| SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||||
| Assets acquired and (liabilities assumed) in reverse merger: | ||||||||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||
| Interest cash paid | $ | 462 | $ | — | ||||||||||||
| Income taxes paid | $ | — | $ | — | ||||||||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||||
| Assets acquired (liabilities assumed) in reverse merger: | ||||||||||||||||
| Cash | $ | 256,255 | $ | — | $ | — | $ | 256,255 | ||||||||
| Accounts payable | (950,258 | ) | — | — | (860,812 | ) | ||||||||||
| Net liabilities assumed | $ | (694,003 | ) | $ | — | $ | — | $ | (604,557 | ) | ||||||
| Issuance of common stock for investment made in unconsolidated investee | $ | 1,000,000 | $ | — | ||||||||||||
| Conversion of Series B and C preferred stock into common stock | $ | 412 | $ | — | ||||||||||||
| Investment made in unconsolidated investee | $ | — | $ | 1,000,000 | ||||||||||||
| Accrued dividends on Series D Preferred Stock | $ | 40,000 | $ | — | ||||||||||||
See accompanying notes to the condensed interim consolidated financial statements.
5
6
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
(Unaudited)
Note 1 – Description of Business
AgEagle Aerial Systems Inc. (the “Company” and/(“AgEagle,” “the Company,” “we,” “our,” “us” or “AgEagle”“its,”) was created to pioneer, innovate and advance aerial imaging data collection and analytics technologies capable of addressing the impending food and environmental sustainability crises that threaten our planet. The Company’s daily efforts are focused on delivering the metrics, tools and strategies necessary to define and implement intelligent sustainability and precision farming solutions that solve important problems confronting the agricultural industry. Since its founding in 2010, AgEagle has been intent on becoming a trusted partner to major food manufacturers and precision growers seeking to adopt and support productive agricultural approaches to better farming practices which limit the impact on our natural resources, reduce reliance on inputs and materially increase crop yields and profits.
In early 2019, AgEagle expanded its marketing efforts to provide for the introduction of its proprietary aerial imagery and data analytics platform to municipal, state and federal agencies charged with assessing and supporting sustainability initiatives involving public parks and recreation areas, also referred to as urban green spaces.
The Company also designs, produces, distributes and supports technologically-advanced small unmanned aerial vehicles (UAVs or drones) that the CompanyAgEagle offers for sale commercially to the precision agriculture industry. In addition to UAV sales, in late 2018, the Company introduced a new drone-leasing program, alleviating farmers and agribusinesses from significant upfront costs associated with purchasing a drone, while also relieving them from ongoing drone maintenance and support requirements. Additionally, the Company recently announcednew program provides the option of engaging a new service offering usingtrained AgEagle pilot to operate the drone and manage the entire image collection process, creating a truly turnkey aerial imagery capture solution for its UAVs and associated data processing services for the sustainable agriculture industry. The Company’s first commercially available product was the AgEagle Classic which was followed shortly thereafter by the RAPID System. As the Company improved and matured its products the Company launched the RX-60 and subsequently its current products, the RX-47 and RX-48. In February 2016, the Company signed a worldwide distribution agreement with Raven Industries, Inc. (“Raven”) under which Raven would purchase the RX-60 for the agriculture markets for resale through their network of dealers worldwide. The first shipment of our RX-60 system to Raven occurred in March 2016. In 2017, the Company amended its agreement with Raven to make it non-exclusive and to allow the Company to sell its products directly into the market. As a result, the Company began selling its products directly to farmers and agronomists and the Company does not anticipate sales to, or through Raven in the near future.customers.
The Company believes the success it has achieved with its products, stems from its ability to invent and deliver advanced solutions utilizing our proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently. The Company’s core technological capabilities, developed over five years of innovation, include a lightweight laminated shell that allows the UAV platform to perform under challenging flying conditions, a camera with a Near Infrared (NIR) filter, a rugged foot launcher (RX-60), and high end software provided by third parties that automates drone flights and provides geo-referenced data. Research and development activities are integralCentral to the Company’s businesslong-term growth strategy, AgEagle will continue to identify opportunities to leverage its proprietary technological platform and it follows a disciplined approachindustry expertise to investing our resources to createpenetrate new, technologieshigh growth market sectors that may benefit from the Company’s advanced aerial imagery-based data collection and analytics solutions.
The Company is headquartered inat 117 South 4th Street, Neodesha, Kansas 66757. Its website address is http://www.ageagle.com.
Corporate History; Recent Business Combination
On March 26, 2018, (the “Merger Date)our predecessor company, EnerJex Resources, Inc. (“EnerJex”), the Companya Nevada company, consummated the transactions contemplated by that certainthe Agreement and Plan of Merger (the “Merger Agreement”), dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., a Nevada corporation and oura wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems Inc., a privately held company organized under the laws of the state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as itsa wholly-owned subsidiary of EnerJex (the “Merger”). In connection with the Merger, the CompanyEnerJex changed its name to AgEagle Aerial Systems Inc.Inc and AgEagle Sub changed its name to “AgEagle“Eagle Aerial, Inc.” The Company’s common stock continues to trade on the NYSE American under its new symbol “UAVS” since March 27, 2018.
Prior to the merger, the CompanyMerger, EnerJex was formerly known as Millennium Plastics Corporation (“Millennium) and was incorporated in the State of Nevada on March 31, 1999. In August 2006, the CompanyMillennium acquired Midwest Energy, Inc., a Nevada corporation pursuant to a reverse merger. After such merger, Midwest Energy became a wholly-owned subsidiary, and as a result of such merger, the former Midwest Energy stockholders controlled approximately 98% of our outstanding shares of common stock. The CompanyCommon Stock. Midwest then changed its name to EnerJex Resources, Inc., (“EnerJex”) in connection with this merger, and in November 2007, it changed the name of Midwest Energy (one of our wholly-owned subsidiaries) to EnerJex Kansas, Inc. (“EnerJex Kansas”). All of its operations conducted prior to this merger were through EnerJex Kansas, Inc., Black Sable Energy, LLC, a Texas limited liability company (“Black Sable”) and Black Raven Energy, Inc. a Nevada corporation (“Black Raven”). The Company’sOur leasehold interests were held in our wholly-owned subsidiaries Black Sable, Working Interest, LLC, EnerJex Kansas and Black Raven.
6
7
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
(Unaudited)
Note 1 – Description of Business-Continued
In November 2017,
On August 28, 2018, AgEagle Sub entered into a multi-agreement arrangement withacquired all right, title and interest in and to all assets owned by Agribotix, LLC, Agribotix, LLC, a Colorado limited liability company (“Agribotix”) to be utilized in their business of providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture. AgEagle’s management believes that purchasing Agribotix’s primary product, FarmLens™, headquarteredwill benefit the Company and its shareholders by developing important vertically integrated products and services. FarmLens is a subscription cloud analytics service that processes data, primarily collected with a drone such as ours, and makes such data actionable by farmers and agronomists. FarmLens is currently sold by the Company as a subscription service and offered either standalone or in Boulder, Colorado, a bundle with drone platforms manufactured by leading agricultural information processing company providing actionable data to the agriculture industry. See Note 5 for further details about the transaction. drone providers like AgEagle, DJI and senseFly.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Consolidation - These consolidated financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States. The Company’s consolidated financial statements are prepared using the accrual method of accounting. The Company has elected a December 31 fiscal year end.
The consolidated financial statements include the accounts of AgEagle Aerial Systems, Inc. and its wholly-owned subsidiaries AgEagle Aerial, Inc., EnerJex Kansas, Inc., Black Sable Energy LLC and Black Raven Energy, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inunder the United States and pursuant to SEC rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. information, which included condensed consolidated financial statements of the Company and its wholly owned subsidiaries as of March 31, 2019.Accordingly, theythe condensed consolidated financial statements do not include all of the information and footnotes requirednotes necessary for completea comprehensive presentation of the financial statements. Inposition and results of operations and should be read in conjunction with the opinion of management, these condensed consolidatedaudited financial statements containof the Company for the year ended December 31, 2018 and included in the Form 10-K filed with the SEC on March 27, 2019. It is management’s opinion that all material adjustments (consisting of normal recurring adjustments consideredadjustments) have been made, which are necessary for a fair presentation of the Company’s financial position at June 30, 2018 and December 31, 2017, the results of operations for the three and six months ended June 30, 2018 and 2017, and cash flows for the six months ended June 30, 2018 and 2017.statement presentation. The results for the six months ended June 30, 2018 and 2017interim period are not necessarily indicative of the results to be expected for the full year. These statements should be readyear ending December 31, 2019.
8
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(Unaudited)
Note 2 – Summary of Significant Accounting Policies-Continued
The summary of significant accounting policies presented below is designed to assist in conjunction with AgEagle Sub’s, AgEagle Aerial, Inc.’s auditedunderstanding the Company’s consolidated financial statements. Such consolidated financial statements and management’s discussion and analysis foraccompanying notes are the years ended December 31, 2017 and 2016 included as partrepresentations of the Form 8-K filed byCompany’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the Company on March 29, 2018.United States of America (“US GAAP”) in all material respects and have been consistently applied in preparing the accompanying consolidated financial statements.
Use of Estimates -The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for bad debt warranty and dealer termination costs, obsolete inventory, valuation of stock issued for services and stock options, valuation and estimated useful life of intangible assets and the valuation of deferred tax assets. Therefore, the determination of estimates requires the exercise of judgment.
Fair Value of Financial Instruments -Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash, accounts receivable, convertible debt, promissory notes, accounts payable and accrued expenses, approximates their recorded values due to their short-term maturities.
Cash and Cash Equivalents -Cash and cash equivalents includes any highly liquid investments with an original maturity of three months or less. The Company held no cash equivalents as of March 31, 2019 or December 31, 2018. The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 Our bank balances at time may exceed the FDIC limit. To date, the Company has not experienced any losses on its invested cash.
Receivables and Credit Policy -Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Terms with our distributor allow for payment terms of 45 days from the invoice date. Trade receivables are stated at the amount billed to the customer. The Company generally does not charge interest on overdue customer account balances. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
7
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited)
Note 2 – Summary of Significant Accounting Policies – Continued
The Company estimates an allowance for doubtful accounts based upon an evaluation of the current status of receivables, historical experience, and other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. The Company determined that no allowance was necessary as of June 30, 2018March 31, 2019 and December 31, 2017.2018.
9
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(Unaudited)
Note 2 – Summary of Significant Accounting Policies-Continued
Inventories -Inventories, which consist of raw materials, finished goods and work-in-process, are stated at the lower of cost or net realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of the inventories is also considered in establishing its valuation. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the respective inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s estimates and expectations. As of March 31, 2019 and December 31, 2018, the Company had recorded a provision for obsolescence of $10,000 and $10,369, respectively.
ProvisionsGoodwill– Goodwill is recognized for Inventory Obsolescence –The Company has a provision for estimated obsolescence and shrinkagethe excess of inventory as of June 30, 2018 of $19,285. Our estimates consider the cost of inventory, forecasted demand,an acquired entity over the amounts assigned to the assets acquired and liabilities assumed in a business combination. The Company’s goodwill relates to an acquisition that occurred in August 2018. Goodwill is not amortized, but evaluated for recoverability if events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable or at least annually.When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform a two-step impairment test. If we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment, which is the first step of the two-step impairment test. In the two-step impairment test, we measure the recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill, to the estimated marketfair value the shelf life of the inventory and our historical experience. If demand for a product declinesreporting unit.As of March 31, 2019, there have been no events or a changechanges in the features of our products changes the components required to buildcircumstances that indicate that it is reasonablymore likely than not that circumstances may causea goodwill impairment has occurred since the estimate to change, which would result in additional charges to net income.assessment date of August 2018.
Research and Development -Intangible Assets – Acquired in Business Combinations– The Company expenses researchperforms valuations of assets acquired and developmentliabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of each acquired business to our respective net tangible and intangible assets. Acquired intangible assets include customer relationships, technology, noncompete agreements and trade names. The Company uses valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions and estimates including projected revenue, gross margins, operating costs, during the period incurred, which totaled $0growth rates, useful lives and $476 for the three and six months ended June 30, 2018, respectively and $1,563 and $5,880 for the three and six months ended June 30, 2017, respectively.
Property and Equipment -Property and equipmentdiscount rates. Intangible assets are recorded at cost, and are being depreciatedamortized over their estimated useful lives using the straight-line method overwhich approximates the estimated useful lives of the related assets, ranging from three to seven years. Leasehold improvements are recorded at cost and are amortized on a straight- line basis over the shorter of their estimated lives or the remaining lease term. Significant renewals and betterments are capitalized. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed. At the time property and equipment are retired or otherwise disposed of, the cost and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are reflected in the statements of operations.
Investment in Unconsolidated Investee-The Company accounts for investmentspattern in which the Company owns more than 20% or more of the investee, using the equity method in accordance with ASC Topic 323,Investments—Equity Method and Joint Ventures. Under the equity method, an investor initially records an investment in the stock of an investee at cost, and adjusts the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of acquisition. The amount of the adjustment is included in the determination of net income by the investor, and such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in net assets of the investee at the date of investment. The investment of an investor is also adjusted to reflect the investor's share of changes in the investee's capital. Dividends received from an investee reduce the carrying amount of the investment. A series of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred which is other than temporary and which should be recognized even though the decrease in value is in excess of what would otherwise be recognized by application of the equity method. economic benefits are consumed.
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10
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
(Unaudited)
Note 2 – Summary of Significant Accounting Policies – ContinuedPolicies-Continued
Long-Lived Assets–The Company reviews its long-lived assets and certain identifiable intangible assets held and used for impairment whenever events or changes in circumstances indicate that their carrying value of such assets may not be recoverable. If the estimated undiscounted cash flows that are expected to result from the use of the assets is less than the carrying amount of the assets, an impairment loss is recorded equal to the excess of the carrying amount of the fair value of the assets less costs to sell. There were no impairment losses recorded by the Company during the three-month period ending March 31, 2019 or 2018.
Business Combinations - The Company recognizes, with certain exceptions, 100% of the fair value of assets acquired, liabilities assumed, and non-controlling interests when the acquisition constitutes a change in control of the acquired entity. Shares issued in consideration for a business combination, contingent consideration arrangements and pre-acquisition loss and gain contingencies are all measured and recorded at their acquisition-date fair value. Subsequent changes to the fair value of contingent consideration arrangements are generally reflected in earnings. Any in-process research and development assets acquired are capitalized as of the acquisition date. Acquisition-related transaction costs are expensed as incurred. The operating results of entities acquired are included in the accompanying consolidated statements of operations from the date of acquisition.
Revenue Recognition and Concentration -The Company generally recognizes revenue on sales to customers, dealers and distributors upon satisfaction of our performance obligations when the goods are shipped and control transfers to our customers. Revenue reflects the consideration we expect to receive in exchange for our products. The Company generally ships using FOB Shipping Point terms.. The Company assesses collectability based on the creditworthiness of the customer as determined by evaluations and the customer’s payment history. Additionally, customers are required to place a deposit on each UAV ordered.
As a result of the Agribotix acquisition, the Company now has an additional product line which is the sale of subscription services for use of theFarmLens™ platform to process aerial imaging. These subscription fees are recognized ratably over each monthly membership period as the services are provided.
Sales concentration information for customers comprising more than 10% of the Company’s total net sales is summarized below:
| Percent of total sales for three months ended March 31, | ||||||||
| Customers | 2019 | 2018 | ||||||
| Customer A | 68.0 | % | — | |||||
| Customer B | 29.1 | % | — | |||||
| Customer C | — | 31.8 | % | |||||
| Customer D | — | 27.8 | % | |||||
| Customer E | — | 19.1 | % | |||||
11
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(Unaudited)
Note 2 – Summary of Significant Accounting Policies-Continued
The table below reflects our revenue for the periods indicated by product mix.
| For three months ended March 31, | ||||||||
| Type | 2019 | 2018 | ||||||
| Product Sales | $ | 38,083 | $ | 29,191 | ||||
| Subscription Sales | 7,910 | — | ||||||
| Total | $ | 45,993 | $ | 29,191 | ||||
Vendor Concentration- As of March 31, 2019, there was one significant vendor upon which the Company relied to perform stitching in itsFarmLensplatform. This vendor provided services to the Company which can be replaced by alternative vendors should the need arise.
Shipping Costs -Shipping costs for the three and six months ended June 30,March 31, 2019 and 2018 totaled $2,548$758 and $1,597,$952, respectively and $1,904 and $2,553 for the three and six months ended June 30, 2017.. All shipping costs billed directly to the customer are directly offset to shipping costs resulting in a net expense to the Company which is included in cost of goods sold in shipmentson the statement of operations.
Revenue Recognition and Concentration
The Company generally recognizes revenue on sales to customer, dealer and distributors upon satisfaction of our performance obligations when the goods are shipped. For consignment sales, the Company recognizes revenue when the goods are pulled from consignment inventory. The Company generally ships FOB Shipping Point terms. Shipping documents are used to verify delivery and customer acceptance. The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction and quantity of drones being purchased. The Company assesses collectability based on the creditworthiness of the customer as determined by evaluations and the customer’s payment history. Additionally, customers are required to place a deposit on each drone ordered.
The Company has executed one significant non-exclusive worldwide distributor agreement in 2016 and a dealer agreement whereby the dealer and distributor agreed to purchase AgEagle drones and other related products. In 2017, the Company amended its agreement with Raven to make it non-exclusive and to allow the Company to sell its products directly into the market. Only the non-exclusive worldwide distributor has the right of return within twelve months of purchase up to a certain percentage of the annual sales volume less a restocking fee. As of June 30, 2018, no sales of the Company are subject to this right of return clause per the distributor agreement.
Sales concentration information for customers comprising more than 10% of our total net sales such customers is summarized below:
| Percent of total sales for six months ended June 30, | ||||
| Customers | 2018 | 2017 | ||
| Customer A | 17.2% | * | ||
| Customer B | 15.1% | * | ||
| Customer C | 13.1% | * | ||
| Customer D | 10.6% | * | ||
| Customer E | 10.1% | * | ||
| Customer F | * | 12.8% | ||
| Customer G | * | 10.6% | ||
| Customer H | * | 10.6% | ||
| *- Represents less than 10% of total revenue | ||||
9
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENS CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited)
Note 2 – Summary of Significant Accounting Policies – Continued
Advertising Costs – Advertising costs are expensed as incurred. AdvertisingNo advertising costs amounted to $483 and $1,389were recorded for the three and six months ended June 30, 2018March 31, 2019, and 2017, respectively and $5,043 and $ 6,078$906 for the three and six months ended June 30, 2017, respectively.March 31, 2018.
Earnings Per Share - Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of commonCommon shares outstanding plus common stockCommon Stock equivalents (if dilutive) related to warrants, options and convertible instruments.
Potentially Dilutive Securities - The Company has excluded all common equivalent shares outstanding for warrants, options and convertible instruments to purchase common stockCommon Stock from the calculation of diluted net loss per share because all such securities are antidilutive for the periods presented. AsFor the three-month period ended March 31, 2019, the Company had 4,531,924 warrants and 1,756,665 options to purchase Common Stock, and 3,636 shares of June 30,Series C Preferred Stock which may be converted into 6,733,067 shares of Common Stock. For the three-month period ended March 31, 2018,the Company had 828,200 warrants and 1,246,3291,184,300 options to purchase common stock, and 6,257Common Stock, 6,887 shares of Preferred Series B and C shares which may be convertedwere convertible into 4,214,672 common shares. As4,498,002 of June 30, 2017, the Company had 498,000 warrants and 207,500 options to purchase common stock, and 1,544,869 potential convertible shares which may be issued resulting from the provisions of convertible notes.Common Stock.
Income Taxes -The Company accounts for income taxes in accordance with FASB (Financial Accounting Standards Board) ASC Topic 740,Accounting for Income Taxes.Taxes. This topic requires an asset and liability approach for accounting for income taxes. The Company evaluates its tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual is necessary for uncertain tax positions. The Company will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. All income tax returns not filed more than three years ago are subject to federal and state tax examinations by tax authorities.
Recently Issued and Adopted Accounting Standards -In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This updated guidance supersedes the current revenue recognition guidance, including industry-specific guidance. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017. Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services and recognize revenue under the new standard as costs are incurred. Under previous U.S. generally accepted accounting principles (GAAP), revenue was generally recognized when deliveries were made, performance milestones were attained, or as costs were incurred. The new standard accelerates the timing of when the revenue is recognized, however, it does not change the total amount of revenue recognized on these contracts. The new standard does not affect revenue recognition for purposes of the Company’s sales as each of the Company’s revenue transactions represent a single performance obligation that is satisfied at a point time, as defined in the new ASU. Accordingly, the Company recognizes revenue for these customers at the point in time when the Company’s performance obligation is complete, which is when the customer accepts delivery of the drone. The Company adopted the updated guidance effective January 1, 2018 using the full retrospective method, however the new standard did not have a material impact on our consolidated financial position and consolidated results of operations, as it did not change the manner or timing of recognizing revenue on a majority of our revenue transactions.
10
12
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
(Unaudited)
Note 2 – Summary of Significant Accounting Policies – ContinuedPolicies-Continued
Share-Based Compensation Awards - The value the Company assigns to the options that are issued is based on the fair market value as calculated by the Black-Scholes pricing model. To perform a calculation of the value of our options, we determine an estimate of the volatility of our stock. We need to estimate volatility because there has not been enough trading of our stock to determine an appropriate measure of volatility. We believe our estimate of volatility is reasonable, and we review the assumptions used to determine this whenever we issue a new equity instruments. If we have a material error in our estimate of the volatility of our stock, our expenses could be understated or overstated. All share-based awards are expensed on a straight-line basis over the vesting period of the options.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial statements. This guidance will be effective in the first quarter of fiscal year 2019 and early adoption is not permitted. The Company is currently evaluating which transition method it will adopt and the expected impact of the updated guidance, but does not believe theCompany’s adoption of the updated guidance willASU No. 2016-01 effective January 1, 2019 did not have a significantmaterial impact on itsthe consolidated financial statements.
In February 2016, FASB issued Account Standards Update 2016-02 –Leases (Topic 842) intended to improve financial reporting of leasing transactiontransactions whereby lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—GAAP — which requires only capital leases to be recognized on the balance sheet—sheet — the new ASU will require both types of leases to be recognized on the balance sheet. The Company is currently evaluating the impact of the updated guidance, but doesadopted this ASU on January 1, 2019 and it did not believe the adoption of the updated guidance will have a significantmaterial impact on itsthe Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations—Clarifying the definition of a business (Topic 805). This ASU clarifies the definition of a business with the objective of providing a more robust framework to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company’s adoption of ASU No. 2017-01 effective May 1, 2018 did not have a material impact on the consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718). This ASU reduces the diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change in terms or conditions of a share-based payment award. The Company’s adoption of ASU No. 2017-09 effective May 1, 2018 did not have a material impact on its consolidated financial statements.
13
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(Unaudited)
Other recent accounting pronouncements issued by FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
Note 3 — Inventories
Inventories consist of the following at:
June 30, 2018 | December 31, 2017 | |||||||
| Raw materials | $ | 98,739 | $ | 106,569 | ||||
| Work-in-process | 30,997 | 34,850 | ||||||
| Finished goods | 21,864 | 32,582 | ||||||
| Gross Inventory | 151,600 | 174,001 | ||||||
| Less obsolete reserve | (19,286 | ) | (15,369 | ) | ||||
| Total | $ | 132,314 | $ | 158,632 | ||||
11
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited)
| March 31, 2019 | December 31, 2018 | |||||||
| Raw materials | $ | 97,427 | $ | 109,826 | ||||
| Work-in-process | 27,364 | 30,088 | ||||||
| Finished goods | 19,346 | 19,937 | ||||||
| Gross inventory | $ | 144,136 | $ | 158,851 | ||||
| Less obsolete reserve | (10,000 | ) | (10,369 | ) | ||||
| Total | $ | 134,137 | $ | 149,482 | ||||
Note 4 — Property and Equipment
Property and equipment consist of the following at:
June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
| Property and equipment | $ | 108,664 | $ | 108,664 | $ | 116,313 | $ | 116,313 | ||||||||
| Less accumulated depreciation | (78,264 | ) | (69,961 | ) | (91,171 | ) | (87,939 | ) | ||||||||
| $ | 30,400 | $ | 38,703 | $ | 25,142 | $ | 28,374 | |||||||||
Depreciation expense for the three and six months ended June 30,March 31, 2019 and 2018 was $3,232 and $4,151, and $8,304, respectively and for the three and six months ended June 30, 2017 was $5,295 and $9,452, respectively.
Note 5 —Investment in Unconsolidated Investee— Intangible Assets
In November 2017, AgEagle Sub entered into a multi-agreement arrangement with Agribotix, LLC (“Agribotix”), headquarteredIntangible assets are recorded at cost and consist of the assets acquired in Boulder, Colorado, an agricultural information processing company providing actionable data2018 related to the agriculture industry. Agribotix’s platform delivers agricultural intelligence to increase yieldsacquisition of Agribotix. Amortization is computed using the straight-line method over the estimate useful life of the asset. We will annually assess intangible and profits using drone-enabled technologies. Agribotix was founded in 2013 by Dr. Tom McKinnon, its Chief Technology Officer.other long-lived assets for impairment. Intangible assets were comprised of the following at March 31, 2019:
The Company believes that developing a strong working relationship with Agribotix will benefit the Company and its shareholders by developing important vertically integrated products and services. Agribotix’s primary product is FarmLens™, a subscription cloud analytics service that processes data, primarily collected with a drone such as the Company’s, and makes such data usable by farmers and agronomists. FarmLens is currently sold by Agribotix as a subscription and offered either standalone or in a bundle with major drone platforms manufactured by leading drone providers like AgEagle, DJI, and senseFly.
| Intangible Assets | Estimated Life | Gross Cost | Accumulated Amortization | Net Book Value | ||||||||||
| Intellectual Property/Technology | 5 yrs. | $ | 433,400 | $ | (50,563 | ) | $ | 382,837 | ||||||
| Customer Base | 5 yrs. | 72,000 | (8,400 | ) | 63,600 | |||||||||
| Tradenames - Trademarks | 5 yrs. | 58,200 | (6,790 | ) | 51,410 | |||||||||
| Non-compete agreement | 4 yrs. | 160,900 | (23,465 | ) | 137,435 | |||||||||
| Carrying value as of March 31, 2019 | $ | 724,500 | $ | (89,218 | ) | $ | 635,282 | |||||||
Agribotix extendsAmortization expense for the reach of its FarmLens platform by partnering withthree months ended March 31, 2019 and directly integrating into offerings by leading agricultural companies like John Deere’s Operations Center2018 was $41,836 and The Climate Corporation’s FieldView. To date, Agribotix has processed agricultural imagery for over 50 different crop types from over 50 countries around the world.
The agreements reached between the Company, through AgEagle Sub, and Agribotix include:$0, respectively.
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AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018
(Unaudited)
Note 5 —Investment in Unconsolidated Investee - Continued
The Company accounts for its investment in Agribotix using the equity method of accounting. The difference between the fair value of the Company’s investment, and the amount of underlying equity in the net assets of Agribotix, totaling approximately $445,108 is accounted for as if Agribotix was a consolidated subsidiary and all identifiable assets, including goodwill and identifiable intangibles, were recorded at fair value and amortized, with this amortization recorded in “memo” and included in the Company’s portion of earnings of Agribotix. Condensed unaudited summary financial information for Agribotix LLC as of June 30, 2018 and for the three amonths ended June 30, 2018 is as follows:
June 30, 2018 | ||||
| (Unaudited) | ||||
| ASSETS | ||||
| Cash | $ | 42,388 | ||
| Accounts receivable | 21,325 | |||
| Property and equipment | 7,019 | |||
| Inventories | 8,400 | |||
| Prepayments | 1,976 | |||
| Marketable securities in the Company’s at fair value | 364,000 | |||
| Total assets | $ | 445,108 | ||
| LIABILITIES AND MEMBERS' DEFICIT | ||||
| Accounts payable and accrued expenses | $ | 125,019 | ||
| Deferred revenue | 15,079 | |||
| Debt | 2,014,149 | |||
| Members' deficit | (1,709,139 | ) | ||
| Total liabilities and members' deficit | $ | 445,108 | ||
13
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited)
Note 5 —Investment in Unconsolidated Investee - Continued
For the Three Months Ended June 30, 2018 | ||||
| (Unaudited) | ||||
| STATEMENT OF OPERATIONS | ||||
| Revenues | $ | 107,290 | ||
| Cost of sales | 63,782 | |||
| Gross profit | 43,508 | |||
| Operating expenses | 142,420 | |||
| Operating loss | (98,912 | ) | ||
| Other expense | (38,000 | ) | ||
| Net loss | (136,912 | ) | ||
| Amortization of “memo” intangible assets | (14,848 | ) | ||
| Total adjusted net loss | (151,760 | ) | ||
| Unrealized loss on Company’s common stock | (502,000 | ) | ||
| Comprehensive loss | $ | (653,760 | ) | |
| Ownership interest | 20 | % | ||
| Share of adjusted net loss | $ | (30,352 | ) | |
Note 6 — Debt
Convertible Notes Payable
On May 6, 2015, the Company closed a private placement pursuant to a subscription agreement whereby two institutional investors (the “2015 Holders”) purchased convertible notes having an aggregate principal amount of $500,000, convertible into common stock of the Company at $2.00 per share and maturing on November 6, 2016. Interest on the notes accrues at a rate of 8% annually and is payable quarterly. It was determined that there were no aggregate beneficial conversion features. On or about March 4, 2016, the Company and the 2015 Holders entered into extension and modification agreements whereby the 2015 Holders agreed to extend the maturity date of the notes to November 6, 2016, and permanently waive all rights and remedies, of whatever nature, with respect to the various defaults that occurred under this subscription agreement and notes, including, without limitation, (I) the Company’s failure to become a public SEC reporting company on or before September 30, 2015, (ii) the Company’s failure to pay interest on the notes, and (iii) modifying and waiving certain participation rights in future financings. For the three months ended MarchMARCH 31, 2018 and 2017, the Company recorded $9,111 and $10,000 of interest expense, respectively. As of the Merger Date, the principal amount of the promissory note of $500,000 and its accrued interest of $114,556 were converted at $1.25 per share into 814,381 shares of common stock.
On June 6, 2016, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor (the “2016 Holder”) purchased a convertible note having a principal amount of $300,000, convertible into common stock of the Company at $3.00 per share and maturing on June 30, 2017. Interest on the note accrues at a rate of 8% annually and is payable quarterly. It was determined that there were no aggregate beneficial conversion features. For the three months ended March 31, 2018 and 2017, the Company recorded $5,467 and $6,000 of interest expense, respectively. As of the Merger Date, the principal amount of the promissory note of $300,000 and its accrued interest of $42,933 were converted at $1.25 per share into 454,440 shares of common stock.
14
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 20182019
(Unaudited)
Note 6 — Debt - Continued
On February 3, 2017, the Company closed a private placement pursuant whereby a bridge loan (the “2017Promissory Note A”) agreement was executed with an accredited investor (the “2017 Holder Note A”) to purchase a convertible promissory note with an aggregate principal amount of $175,000, an original issue discount of $25,000, convertible into common stock of the Company at $2.50 per share and maturing 90 days following issuance, or May 4, 2017. After payment of a finder’s fee and other expenses, the Company received net proceeds of $101,250. In addition, the Company also issued to the 2017 Holder Note A warrants to purchase 200,000 shares of the Company’s common stock at an exercise price per share of $2.50. To the extent the entire unpaid principal balance of the note is not paid in full on the maturity date, (i) interest on the unpaid principal balance will accrue from the maturity date at the rate of 18% per annum, and will continue until the date the note is paid in full, and (ii) the Company will issue to the 2017 Holder Note A an additional warrant to purchase 100,000 shares of common stock for each ninety (90) calendar day period that the unpaid principal balance of the note and any accrued interest is not paid in full by such date. Upon conversion the Company had issued an additional 300,000 warrants to purchase shares resulting from the default of the loan.
For the three months ended March 31, 2018 and 2017, the Company recorded $7,077 and $4,833 of interest expense, respectively. As of the date of the merger March 26, 2018, the principal amount of the promissory note of $175,000 and its accrued interest of $35,642 were converted at $2.50 per share into 139,567 shares of common stock.
On July 2017, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor (the “2017 Note B”) purchased a convertible note having a principal amount of $100,005, convertible into common stock of the Company at $2.00 per share and maturing on February 28, 2018. Interest on the note accrues at a rate of 8% annually payable upon maturity. It was determined that there were no aggregate beneficial conversion features. For the three months ended March 31, 2018, the Company recorded $1,822 of interest expense. As of the date of the Merger Date, the principal amount of the promissory note of $100,005 and its accrued interest of $5,600 were converted at $1.25 per share into 139,943 shares of common stock.
On September 2017, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor (the “2017 Note C”) purchased a convertible note having a principal amount of $35,000, convertible into common stock of the Company at $2.00 per share and maturing on February 28, 2018. Interest on the note accrues at a rate of 8% annually payable upon maturity. It was determined that there were no aggregate beneficial conversion features. For the three months ended March 31, 2018, the Company recorded $638 of interest expense. As a date of the Merger Date, the principal amount of the promissory note of $35,000 and the accrued interest of $1,369 were converted at $1.25 per share into 48,194 shares of common stock.
On October 2017, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor purchased a convertible note having a principal amount of $50,000, (the “2017 Note D”) convertible into common stock of the Company at $2.00 per share and maturing on February 28, 2018. Interest on the note accrues at a rate of 8% annually payable upon maturity. It was determined that there were no aggregate beneficial conversion features. For the three months ended March 31, 2018, the Company recorded $911 of interest expense. As a date of the Merger Date, the principal of $50,000 and the accrued interest of $1,722 were converted at $1.25 per share into 68,540 shares of common stock.
15
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited)
Note 6 — Debt - Continued
Promissory Notes - Related Parties
On December 15, 2016, the Company issued a promissory note with an aggregate principal amount of $30,000 to a related party. On January 24, 2017, the Company issued a 2nd promissory note with an aggregate principal amount of $30,000 to the same related party. On June 14, 2017, the Company issued a 3rd promissory note with an aggregate principal amount of $16,050 to the same related party. All three promissory notes (the “Related Party Notes A”) accrue interest at an annual rate of 2% and matured on November 6, 2017. On or about August 1, 2017, the Company and the related party promissory note A holders entered into extension and modification agreements whereby they agreed to extend the maturity date of the Related Party Notes A to February 28, 2018, added a conversion feature whereby the debt can be converted into common stock of the Company at $2.00 per share and amended the interest rate on the note retroactively to accrue at a rate of 8% annually. It was determined that there were no aggregate beneficial conversion features. For the three months ended March 31, 2018 and 2017, the Company recorded $1,386 and $870 of interest expense, respectively. As of the date of the Merger Date, the principal of $76,050 and the accrued interest of $7,239 were converted at $1.25 per share into 110,371 shares of common stock.
On March 5, 2017, the Company issued a promissory note with an aggregate principal amount of $10,000 to a related party. On May 15, 2017, the Company issued a 2nd promissory note with an aggregate principal amount of $10,000 to the same related party. On June 15, 2017, the Company issued a 3rd promissory note with an aggregate principal amount of $32,000 to the same related party that is part of management of the Company. On July 25, 2017, the Company issued a 3rd promissory note with an aggregate principal amount of $3,000 to the same related party that is part of management of the Company with the amended terms agreed to on August 1, 2017 per the modification agreement. The promissory notes (the “Related Party Notes B”) accrue interest at an annual rate of 2% and mature on November 6, 2017. On or about August 1, 2017, the Company and the related party promissory note B holders entered into extension and modification agreements whereby they agreed to extend the maturity date of the Related Party Notes B to February 28, 2018, added a conversion feature whereby the debt can be converted into common stock of the Company at $2.00 per share and amended the interest rate on the note retroactively to accrue at a rate of 8% annually. It was determined that there were no aggregate beneficial conversion features. For the three months ended March 31, 2018 and 2017, the Company recorded $1,002 and $37 of interest expense, respectively. As of the date of the Merger Date, the principal of $55,000 and the accrued interest of $3,686 were converted at $1.25 per share into 77,769 shares of common stock.
As of the date of the Merger Date, all the AgEagle common shares issued in connection with conversion of debt noted above were subsequently converted into EnerJex shares and then split at a rate of 25 to 1 resulting in a conversion rate of 1.6564 per AgEagle share into a total of a series of EnerJex common stock of 787,891 shares and 1,631 of Series C preferred shares.
As part of the liabilities acquiredassumed from the EnerJex Merger, the Company recorded a promissory note for a principal amount of $125,556 and accrued interest of $4,171 payable over twelve months and maturing on March 26,27, 2019. The total amount outstanding as March 31, 2019 was $9,028, resulting in principal payments of June 30, 2018 was $95,552 and accrued interest$31,970 made in the first three months of $2,337.2019. The Company recorded interest of $1,834$462 for the three and six months ended June 30, 2018.
16
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited)
March 31, 2019. The note was paid in full in April 2019.
Note 7 – Equity
Capital Stock Issuances
As a result ofDuring the Merger all the holders of the Company’s 10% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”) had their shares automatically converted into 896,640 shares of the Company’s common stock. The Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”) remains outstanding, and 1,623.79 shares of Series C Convertible Preferred Stock (the “Series C Preferred Stock”) are now convertible into 1,060,432 shares of the Company’s common stock. Furthermore, an additional 5,050.60 shares of Series C Preferred Stock, convertible into 3,298,348 shares of the Company’s common stock, were issued to the current holder of Series C Preferred Stock in connection with a $4 million financing of Series C Preferred Stock (the “Financing”) and the conversion and retirement of $425,000 in the Company’s promissory notes due and owing to such holder.
As of the Merger Date, the former shareholders of AgEagle Sub own approximately 67% of the Company’s common stock (inclusive of the AgEagle Sub assumed stock options and warrants), the former EnerJex holders of common stock, the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, which were outstanding immediately prior to the Financing, collectively own 12.7% of the Company’s common stock on a fully-diluted basis.
On April 16, 2018,three months ended March 31, 2019, Alpha Capital Anstalt converted 8.25 shares of Series B Preferred Stock, at a conversion price of $1.53 representing the last outstanding Series B shares, into 5,388 shares of common stock.
During the month of April 2018 Alpha capital Anstalt converted 621.861,026 shares of Series C Preferred Stock into 406,1291,900,000 shares of common stockCommon Stock at a conversion price of $1.53.$0.54.
Series D Preferred Stock
On May 11,December 27, 2018, weAgEagle Aerial Systems Inc.(the “Company”) entered into a Securities Purchase Agreement (the “Agreement”) with Alpha Capital Anstalt (the “Purchaser”). Pursuant to the terms of the Agreement, the Board of Directors of the Company (the “Board”) designated a new series of preferred stock, the Series D Preferred Stock, which is non-convertible and provides for an 8% annual dividend and is subject to optional redemption by the Company (the “Preferred Stock”). The Company issued an additional 2502,000 shares of our Series C Convertible Preferred Stock convertible into 163,265and a warrant to purchase 3,703,703 shares of our common stock, par value $0.001 per share (the “Warrant,” and receivedthe shares of common stock underling the warrants, the “Warrant Shares”) for $2,000,000 in gross proceeds. The Company also entered into a cash paymentRegistration Rights Agreement, granting registration rights to the Purchaser with respect to the Warrant Shares. During the three months ended March 31, 2019, the Company recorded $40,000 of $250,000 foraccrued dividends.
The Agreement provides that upon a subsequent financing or financings with net proceeds of at least $500,000, the issuanceCompany must exercise its optional redemption of the Preferred Stock (as more fully described below in Item 5.03) and apply any and all net proceeds from such financing(s) to the redemption in full of the Preferred Stock.
The Preferred Stock is non-convertible, provides for an 8% annual dividend payable semi-annually and has liquidation rights senior to the Common Stock, but pari passu with the Company’s Series C Preferred Stock. The Series C Convertible Preferred Stock includes a beneficial ownership limitation preventing conversionhas no voting rights, except that the Company shall not undertake certain corporate actions as set forth in the Certificate of sharesDesignation that would materially impact the holders of Series C Convertible Preferred Stock into more than 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series C Convertible Preferred Stock.without their consent.
17
15
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
(Unaudited)
The Preferred Stock is subject to optional redemption by the Company at 115% of the stated value of the Preferred Stock outstanding at the time of such redemption, plus any accrued but unpaid dividends and all liquidated damages or other amounts due. Any such optional redemption may only be exercised after giving notice and upon satisfaction of certain equity conditions set forth in the Certificate of Designation, including (i) all dividends, liquidated damages and other amounts have been paid; (ii) there is an effective registration statement covering the Warrant Shares, or the Warrant Shares can be exercised through a cashless exercise without restriction under Rule 144, (iii) the Warrant Shares are listed on an exchange, (iv) the holder is not in possession of material, non-public information, (v) there is a sufficient number of authorized shares for issuance of all Warrant Shares, and (vi) for each trading day in a period of 20 consecutive trading days prior to the redemption date, the daily trading volume for the Common Stock on the principal trading market exceeds $200,000 per trading day.
Note 7 – Equity - ContinuedEquity-Continued
OptionsSeries C Preferred Stock
On November 21, 2017, Alpha Capital Anstalt (“Alpha”) signed a binding commitment letter EnerJex to provide prior to or at the closing of the Merger a minimum of $4 million in new equity capital (the “Private Placement”). The Private Placement was consummated on March 26, 2018. In connection with the Private Placement, Alpha purchased an additional 4,000 shares of Series C Preferred Stock at a purchase price of $1,000 per share for total aggregate consideration of $4 million. At the time of private placement the Series C Preferred Stock was convertible into 2,612,245 shares of our Common Stock. In addition, as consideration for their funding commitment, Alpha received a fee equal to 408,552 shares of our Common Stock.
Each share of Series C Preferred Stock is convertible into a number of shares of our Common Stock equal to the quotient determined by dividing (x) the stated value of $1,000 per share, by (y) a conversion price of $1.53. Until the volume weighted average price of our Common Stock on NYSE exceeds $107.50 with average trading volume of 200,000 shares per day for ten consecutive trading days, the conversion price of our Series C Preferred Stock is subject to full-ratchet, anti-dilution price protection. Under that provision, if, while that full-ratchet, anti-dilution price protection is in effect, we issue shares of our Common Stock at a price per share (the “Dilutive Price”) that is less than the conversion price, then the conversion price of our Series C Preferred Stock is automatically reduced to be equal to the Dilutive Price. The effect of that reduction is that, upon the issuance of shares of Common Stock at a Dilutive Price, the Series C Preferred Stock would be convertible into a greater number of shares of our Common Stock.
Options Issued
The Board of Directors of the Company has unanimously approved a proposal to adopt and approve the EnerJex 2017 Omnibus Equity Incentive Plan (the “Plan”). The Board of Directors recommended that this proposal be presented to the EnerJex shareholders for approval. The Plan became effective on March 26, 2018, the date of the Merger, and is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees and directors of, and consultants and advisers to, the Company. The purpose of the Plan is to help the Company attract, motivate and retain such persons and thereby enhance shareholder value.
The Company has reserved a total of 2,000,000 shares of common stockCommon Stock for issuance as or under awards to be made under the Plan. To the extent that an award lapses, expires, is canceled, is terminated unexercised or ceases to be exercisable for any reason, or the rights of its holder terminate, any shares subject to such award shall again be available for the grant of a new award. The Plan shall continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which it is adopted by the Board of Directors (except as to awards outstanding on that date). The Board of Directors in its discretion may terminate the Plan at any time with respect to any shares for which awards have not theretofore been granted; provided, however, that the Plan’s termination shall not materially and adversely impair the rights of a holder, without the consent of the holder, with respect to any award previously granted. The number of shares for which awards which are options or SARs may be granted to a participant under the Plan during any calendar year is limited to 500,000. For purposes of qualifying awards as “performance-based” compensation under Code Section 162(m), the maximum amount of cash compensation that may be paid to any person under the Plan in any single calendar year shall be $500,000.
On June 30, 2018,
16
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(Unaudited)
Note 7 – Equity-Continued
During the three months ended March 31, 2019, the Company issued options to purchase 49,500540,000 shares of common stockCommon Stock to directors and employees of the Company at the fair-marketfair value exercise price of $1.82ranging from $0.41 to $0.54 per share expiring on June 29, 2023.March 30, 2024 to March 31, 2029. The Company determined the fair-valuefair-market value of the options to be $62,252.$156,134. In connection with the issuance of these options, the Company recognized no$1,944 in stock compensation expense for the three and six months ended June 30, 2018 as the vesting period will commence July 1, 2018.March 31, 2019.
On MarchDuring the year ended December 31, 2018, the Company issued options to purchase 62,000534,598 shares of common stockCommon Stock to directors and an employeeemployees of the Company at the fair-marketfair value exercise price ofranging from $0.51 to $4.33 per share expiring onbetween March 30, 2023.2023 to December 17, 2028. The Company determined the fair-valuefair-market value of the options to be $156,258.$449,491. In connection with the issuance of these options, the Company recognized $19,932$57,627 stock compensation expense for the three and six months ended June 30, 2018 as the vesting period will commenced April 1, 2018.March 31, 2019.
On October 4, 2017, AgEagle Sub issued options to purchase 927,774 shares of common stockCommon Stock to employees and directors, that were approved by the board at an exercise price of $0.06 per share. These options were assumed by the Company in the Merger. In connection with the issuance of these options to employees and directors for the three and six months ended June 30,March 31, 2019 and 2018, the Company recorded $2,491$1,349 and $4,982,$2,491, respectively of stock compensation expense.
On March 1, 2015, AgEagle Sub entered into a strategic consulting agreement with a related party and granted 207,055 stock options exercisable over five years from the grant date at an exercise price per share of $2.60. On October 4, 2017, AgEagle Sub held a board meeting to approve the modification of the existing 207,055 options to purchase common stock from an exercise price of $2.60 to $0.06 per share. These options were assumed by the Company in the Merger. In connection with these options the Company recognized no stock compensation expense for the three and six months ended June 30, 2018.
18
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited)
Note 7 — Equity – Continued
The fair value of options granted during the three months and six months ended March 31, 2018,2019 were determined using the Black-Scholes option valuation model. The expected term of options granted is based on the simplified method in accordance with Securities and Exchange Commission Staff Accounting Bulletin 107 and represents the period of time that options granted are expected to be outstanding. The Company makes assumptions with respect to expected stock price volatility based on the average historical volatility of peers with similar attributes. In addition, the Company determines the risk freerisk-free rate by selecting the U.S. Treasury with maturities similar to the expected terms of grants, quoted on an investment basis in effect at the time of grant for that business day.
The significant weighted average assumptions relating to the valuation of the Company’s stock options granted during the sixthree months ended June 30, 2018March 31, 2019 were as follows:
For the three months ended | For the three months ended | |||||||
| March 31, 2018 | June 30, 2018 | |||||||
| Dividend yield | 0 | % | 0 | % | ||||
| Expected life | 3.5 yrs. | 3.5 yrs. | ||||||
| Expected volatility | 77.03 | % | 78.66 | % | ||||
| Risk-free interest rate | 2.81 | % | 2.68 | % | ||||
| March 31, 2019 | ||||
| Dividend yield | 0% | |||
| Expected life | 3.5-6.5 Years | |||
| Expected volatility | 82.4% | |||
| Risk-free interest rate | 2.23% | |||
17
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(Unaudited)
Note 7 – Equity-Continued
A summary of the options activity for the sixthree months ended June 30, 2018, areMarch 31, 2019 is as follows:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Term | Value | |||||||||||||
| Outstanding at January 1, 2018 | 1,134,830 | $ | 0.06 | 8.5 years | $ | — | ||||||||||
| Granted | 111,500 | 2.93 | 5.0 years | — | ||||||||||||
| Outstanding at June 30, 2018 | 1,246,330 | $ | 0.32 | 7.8 years | $ | — | ||||||||||
| Exercisable at end of the year | 851,088 | $ | 0.09 | 7.6 years | $ | — | ||||||||||
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2019 | 1,494,158 | $ | 0.46 | 6.93 Years | $ | 409,678 | ||||||||||
| Granted | 540,000 | 0.42 | 8.68Years | — | ||||||||||||
| Exercised/Forfeited | (70,438 | ) | 0.49 | — Years | — | |||||||||||
| Outstanding at March 31, 2019 | 1,963,720 | 0.45 | 7.19 Years | 256,049 | ||||||||||||
| Exercisable at period end | 1,101,835 | $ | 0.26 | 6.75 Years | $ | 256,049 | ||||||||||
For options granted in 2018,during the three months ended March 31, 2019, the fair value of the Company’s stock was obtained perbased upon the close of market asprice on the date of June 30, 2018.grant. The future expected stock-based compensation expense expected to be recognized in future years is $211,433$383,614, through June 30, 2020.
March 29, 2022.
Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at June 30, 2018March 31, 2019 (for outstanding options), less the applicable exercise price.
A summary of the options activity for the three months ended March 31, 2018 is as follows:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Term | Value | |||||||||||||
| Outstanding at January 1, 2018 | 1,134,830 | $ | 0.06 | 8.5 years | $ | — | ||||||||||
| Granted | 49,500 | 4.33 | 5.0 years | — | ||||||||||||
| Outstanding at March 31, 2018 | 1,184,330 | $ | 4.19 | 4.0 years | $ | — | ||||||||||
| Exercisable at end of the year | 786,914 | $ | 0.06 | 4.0 years | $ | — | ||||||||||
19
18
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
(Unaudited)
Note 8 – Warrants to Purchase Common Stock
As of June 30, 2018,March 31, 2019, the Company had outstanding, in connection with the issuance of debentures in the prior year,2017, warrants to purchase 828,221 shares of the Company’s common stockCommon Stock at an exercise price of $1.51. $1.51 with expiration on August 2, 2024.
On December 27, 2018, the Company issued 2,000 shares of Preferred Stock and a warrant (the “Warrant”) to purchase 3,703,703 shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), for $2,000,000 in gross proceeds. The shares of Common Stock underling the Warrant are referred to as the “Warrant Shares”. The Company also entered into a registration rights agreement (the “Registration Rights Agreement”) granting registration rights to the Purchaser with respect to the Warrant Shares.
The Warrant is exercisable for a period of five years through December 26, 2023, at an exercise price equal to $0.54 per share, and is subject to customary adjustments for stock splits dividend, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Company undertakes a subsequent equity financing or financings at an effective price per share that is less than $0.54, the exercise price of the Warrant shall be reduced to the lower price.
The Warrant provides that the Warrant holder shall have a “Beneficial Ownership Limitation” equal to 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Warrant holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation, as provided for in the Warrant.
All warrants outstanding as of June 30, 2018March 31, 2019 are scheduled to expire between February 2, 2024December 26, 2023 and October 31,21, 2024.
A summary of activity related to warrants for the sixthree months ended June 30, 2018March 31, 2019 follows:
| Shares | Weighted- Average Exercise Price ($) | Weighted-Average Remaining Contractual Term | ||||||||||||
| Outstanding at December 31, 2017 | 828,221 | $ | 1.51 | — | ||||||||||
| Outstanding at June 30, 2018 | 828,221 | $ | 1.51 | 6.10 | ||||||||||
| Exercisable at June 30, 2018 | 828,221 | $ | 1.51 | 6.10 | ||||||||||
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | ||||||||||
| Outstanding at January 1, 2019 | 4,531,924 | $ | 0.72 | 5.05 | ||||||||
| Outstanding at March 31, 2019 | 4,531,924 | 0.72 | 5.05 | |||||||||
| Exercisable at March 31, 2019 | 4,531,924 | 0.72 | 5.05 | |||||||||
20
19
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
(Unaudited)
A summary of activity related to warrants for the three months ended March 31, 2018 follows:
| Shares | Weighted- Average Exercise Price ($) | Weighted-Average Remaining Contractual Term | ||||||||||
| Outstanding at January 1, 2018 | 828,221 | $ | 1.51 | — | ||||||||
| Outstanding at March 31, 2018 | 828,221 | $ | 1.51 | 6.10 | ||||||||
| Exercisable at March 31, 2018 | 828,221 | $ | 1.51 | 6.10 | ||||||||
Note 9 – Commitments and Contingencies
Operating Leases
The Company leases office space in Neodesha, Kansas for $300$500 a month. The lease terminates on September 30, 20182019 with noa year to year option to renew unless approvedupon approval by the city commission of Neodesha. Rent expense was $1,800$1,500 and $1,800$900 for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively.
Service Agreements
The Company provides a one-year warranty for all units sold to a customer through their exclusive dealer agreement that is included in the price of the product. Based on historical experience, the Company has recorded as an estimate for the warranty accrual expense of $424 for the six-month ended June 30, 2018 and $220 for the six months ended June 30, 2017 which represents approximately 1% of sales revenue for the year. The warranty accrual will remain until the product contractual warranty period is over or the Company is required to perform product maintenance on the product as contractually required.
Merger Agreement
On March 26, 2018, EnerJex Resources, Inc. (“EnerJex”), a Nevada company, consummated the transactions contemplated by that certain Agreement and Plan of Merger, dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems, Inc., a privately held company organized under the laws of the state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as a wholly-owned subsidiary of EnerJex (the “Merger”). In connection with the Merger, EnerJex changed its name to AgEagle Aerial Systems, Inc. (the “Company, “we,” “our,” or “us”) and AgEagle Sub changed its name to “Eagle Aerial Systems, Inc.” Our common stock will continue to trade on the NYSE American under its new symbol “UAVS” commencing on March 27, 2018. As a result of the Merger, through AgEagle Sub,Agribotix acquisition, the Company is now engagedassumed a lease for offices in the business of designing, developing, producing, distributingBoulder, Colorado for $2,000 a month. The lease ends on May 31, 2019 and supporting technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we supplyhas an option to the precision agriculture industry.
Each share of common stock issued and outstanding and underlying options and warrants of AgEagle Sub outstanding immediately prior to the Merger was exchanged for 1.66 shares of Company common stock (the “Exchange Ratio”). As a result,terminate at the effectiveany time of the Merger Date (the “Effective Time”), 5,439,526 shares of AgEagle Sub’s capital stock, representing all currently outstanding common shares and all other debt or equity securities convertible into common shares (except options and warrants as described below) were automatically converted into 7,944,941 shares of Company common stock. In addition, at the Effective Time, 685,100 outstanding options and 500,000 warrants to purchase shares of AgEagle Sub common stock were assumed by EnerJex and converted into 1,134,830 options and 828,221 warrants to purchase shares of common stock of the Company.
All holders of EnerJex’s 10% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”) had their shares automatically converted into 896,640 shares of the Company’s common stock. EnerJex’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”) remains outstanding, and 1,623.79 shares of Series C Convertible Preferred Stock (the “Series C Preferred Stock”) are now convertible into 1,060,432 shares of Company common stock. Furthermore, an additional 5,050.60 shares of Series C Preferred Stock, convertible into 3,298,348 shares of Company common stock, were issued to the current holder of Series C Preferred Stock in connection with a $4 million financing of Series C Preferred Stock (the “Financing”)30-day prior notice period. Rent expense was $6,000 for the three months ended March 31, 2019 and the conversion and retirement of $425,000 in prior EnerJex promissory notes due and owing to such holder.
212018, respectively.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited)
Note 9 – Commitments and Contingencies - Continued
As of the Effective Time, the former shareholders of AgEagle Sub own approximately 67% of the Company’s common stock (inclusive of the AgEagle Sub assumed stock options and warrants), the former EnerJex holders of common stock, the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, which were outstanding immediately prior to the Financing, collectively own 12.7% of the Company’s common stock on a fully-diluted basis.
In connection with the Merger, AgEagle waived the requirement for EnerJex to have paid and satisfied in full all outstanding indebtedness of EnerJex such that there would be no continuing liabilities of EnerJex subsequent to the closing of the Merger (“Liability Condition”). In consideration for AgEagle waiving the Liability Condition, the 1,215,278 shares of common stock to be held in escrow (valued at $350,000) owned by certain former principal stockholders, officers and directors of EnerJex to secure losses, if any, that may be suffered by the AgEagle indemnified parties pursuant to the indemnification obligations under the Merger Agreement, were never issued and such former principal stockholders, officers and directors are not entitled to receive such shares. However, such former principal stockholders, officers and directors received, in the aggregate, deferred salaries and fees valued at approximately $297,500. In lieu of payment of the deferred salaries and fees in cash, such amounts have been converted into an aggregate of 1,032,986 shares of Company common stock.
Prior to the Merger, EnerJex operated as an oil exploration and production company engaged in the acquisition, development, exploration and production of oil in Eastern Kansas. In connection with the Merger, EnerJex disposed of its principal assets, consisting primarily of its Kansas oil and gas properties.
Note 10 — Related Party Transactions
The following reflects the related party transactions during the three months ended June 30,March 31, 2019 and 2018.
Consulting Agreement
The Company issued promissory notes for an aggregate amount of $76,050 (the “Related Party Notes A”) that accrued interest at an annual rate of 8% and were set to mature as of the date of the Merger. For the three months ended March 31, 2018, the Company recorded $1,386 of interest expense and for the three months ended March 31, 2017, $870 of interest expense was recorded. As of the date of the Merger Date, the principal of $76,050 and the accrued interest of $7,239 were converted at $1.25 per share into 110,371 shares of the Company’s common stock.
The Company issued promissory notes for an aggregate amount of $55,000 (the “Related Party Notes B”) that accrued interest at an annual rate of 8% and were set to mature as of the date of the Merger. For the three months ended March 31, 2018, the Company recorded $1,002 of interest expense and for the three months ended March 31, 2017, $37 of interest expense was recorded. As of the date of the Merger Date, the principal of $55,000 and the accrued interest of $3,686 were converted at $1.25 per share into 77,769 shares of the Company’s common stock.
Transactions with Officers
The Company’s Chief Financial Officer, Nicole Fernandez-McGovern, is one of the principals of Premier Financial Filings, a full-service financial printer. Premier Financial Filings provided contracted financial services to the Company and their related expenses have been included within general and administrative expenses. For the three and six months ended months ended June 30,March 31, 2019 and 2018, Premier Financial Filings provided services to the Company resulting in fees of $3,055$2,674 and $110, respectively. The fee incurred during the three months ended March 31, 2019 is included in accounts payables of $1,475payable as of June 30, 2018.
March 31, 2019.
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AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
(Unaudited)
Note 11 – Subsequent Events
AppointmentOn May 3, 2019, AgEagle Aerial Systems Inc. (the “Company”), entered into a Consulting Agreement with GreenBlock Capital LLC (“Consultant”), to serve as strategic advisor and consultant to the Company with respect to the development of Board Memberbusiness opportunities and CEOthe implementation of business strategies to be agreed to by both parties (the “Services”). The extent of the Services will be set forth in separate scopes of work, from time to time, to be prepared and mutually agreed to by the parties. As compensation for the Services under the terms of the agreement, Consultant shall receive (i) $25,000 per month during the term of the agreement, (ii) 500,000 shares of restricted stock upon execution of the agreement, and (iii) up to 2,500,000 shares of restricted stock upon the achievement of to-be-determined milestones.
The Consultant was previously engaged by the Company between March 2015 and August 2016 to provide consulting services. The Consultant beneficially owns approximately 5.86% of the shares of the Company’s common stock issued and outstanding shares, and holds options to purchase 207,055 shares of the Company’s common stock, exercisable until January 14, 2021 at an exercise price of $0.06 per share.
On July 10, 2018, the Company appointedApril 15, 2019, AgEagle Aerial Systems, Inc. (the “Company”), received notification from Mr. Corbett Kull that effective immediately he is resigning as an independenta director toof the Company. Mr. Kull did not serve on any of the company’s boardcommittees of directorsthe Board of Directors (the “Board”). Mr. Kull’s appointment fillsresignation was not due to a vacancydisagreement with the Company on any matter relating to the Board.Company’s operations, policies or practices.
As compensationa result of Mr. Kull’s resignation, the Board currently consists of four directors, three of whom are independent. The Company is not looking for his services as an independent director,a replacement for Mr. Kull shall receive an initial grant of 41,250 stock options at an exercise price of $1.77 per share (the “Initial Grant”). The Initial Grant is exercisable for a period of five years and vests in equal quarterly installments over a one-year period from the date of grant. In addition, Mr. Kull will receive a quarterly grant of 16,500 with an exercise price at the current market price of the Company’s common stock at the time of issuance (the “Quarterly Options”). The Quarterly Options are exercisable for a period of five years from the date of grant and vest in equal quarterly installments over a period of two years from the date of grant.
Effective as of July 18, 2018, Mr. Barrett Mooney joined the Company, as Chief Executive Officer. Mr. Bret Chilcott, founder of the Company, stepped down as Chief Executive Officer, but will remain with the Company as President and Chairman of the Board.this time.
Pursuant to an employment offer letter dated July 9, 2018, Mr. Mooney will receive as compensation for his services as Chief Executive Officer a base salary of $220,000 per year, which shall be subject to annual performance review by the Compensation Committee of the Board and may be revised by the Board, in its sole discretion. Mr. Mooney received an initial grant of 75,000 shares of restricted common stock of the Company which is fully vested. Mr. Mooney shall also be eligible to receive an award of 75,000 shares of restricted common stock of the Company which shall fully vest as of January 1, 2019 if, and only if, the stock price of the Company reaches $3.55 per share and the closing price per share is at or above such price at the end of the day on January 1, 2019.
In addition, Mr. Mooney is eligible to receive an award of 20,000 nonqualified stock options under the Company’s 2017 Omnibus Equity Incentive Plan (the “Equity Plan”) upon securing one sustainability pilot program on or before October 31, 2018, and an additional award of 30,000 nonqualified stock options under the Equity Plan upon securing a second sustainability pilot program on or before January 31, 2019. Both awards shall provide for immediate vesting and exercisability at an exercise price equal to the fair market value of the Company’s shares of common stock underlying the options as of the date of grant. Mr. Mooney will also be eligible receive an award of up to 55,000 nonqualified stock options under the Equity Plan based upon the results of his annual performance review in the first quarter of 2019.
Shares Issued
In connection with an investor relations agreement, dated April 4, 2018, the Company issued 60,000 shares of its common stock to the investor relations firm, and its affiliates, and agreed to register such shares on its next registration statement (the “Registration Rights”). On July 24, 2018 in connection with the filing of the Company’s registration statement on form S-1, a waiver of the Registration Rights was obtained from the investor relationship firm in exchange for 125,000 additional shares, which were issued and approved by the Board.
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21
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(Unaudited)
Note 11 – Subsequent Events - Continued
Asset Purchase Agreement
On July 25, 2018, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Eagle Aerial Systems, Inc., a wholly-owned subsidiary of the Company, Agribotix, LLC, a Colorado limited liability company (the “Seller”), and the other parties named therein. Pursuant to the Purchase Agreement, the Company shall, upon the closing, acquire all right, title and interest in and to all assets owned by the Seller utilized in the Seller’s business of providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture, except for certain excluded assets as set forth in the Purchase Agreement (the “Purchased Assets”). At closing, the Company shall also assume certain liabilities under various third party contracts, accounts payable and indebtedness pursuant to the terms of the Purchase Agreement. The Company anticipates that the closing of the transaction will occur within the next 30 days in accordance with the terms of the Purchase Agreement, subject to the closing conditions described therein.
The consideration for the Purchased Assets includes the following to be made at closing: (a) a cash payment of $150,000 (of which $110,000 was previously paid), (b) 200,000 shares of common stock of the Company (the “Common Stock”) at a value of $5.00 per share (all of which shares were issued to the Seller pursuant to an exchange agreement between the Company and the Seller dated as of November 20, 2017), (c) an amount payable at closing equal to the sum of: (i) the number of shares of Common Stock that is calculated by dividing $1,000,000 by the average closing daily price per share of the Common Stock on the NYSE, for each of the 20 trading days ending on the date immediately preceding the closing date (the “Average Price”), provided that in no event shall the Average Price be less than $2.00 (the “Closing Shares”); and (ii) $450,000 in cash.
In addition, the Seller shall pay an amount on the 90th day following the closing equal to the sum of: (i) the number of shares of Common Stock that is calculated by dividing $2,000,000 by the Average Price (calculated as if the 20-trading day period ends on the 89th day following the closing), provided that in no event shall the Average Price be less than $2.00 (the “Post-Closing Shares”); and provided further that in the event that the Average Price so calculated is more than the Average Price calculated in the preceding paragraph, the Average Price shall be the Average Price calculated as set forth in the preceding paragraph); and (ii) $400,000 in cash.
If revenue of the business for the one year period ending on the first anniversary of the closing date is at least $1,000,000, plus the Capital Investment Multiplier (as defined below), then the Seller shall earn the number of shares of Common Stock that is calculated by dividing $250,000 by the Average Price (calculated as if the 20–trading day period to which reference is made above ends on such first anniversary), provided that in no event shall the Average Price be less than $2.00. “Capital Investment Multiplier” means 1.5 times the amount of capital invested by the Company or its affiliates in the Seller to support and advance the business, inclusive of loans or other investments provided to Seller prior to the closing, less $250,000.
The Purchase Agreement contains customary representations, warranties and covenants, including covenants obligating the Seller to continue to conduct its business in the ordinary course. In addition, the Purchase Agreement contains provisions for indemnification in the event of any damages suffered by either party as a result of, among other things, breaches of representations and warranties contained therein. An aggregate amount equal $75,000 in cash, 50% of the number of Closing Shares and 25% of the number of Post-Closing Shares shall be deposited in an escrow account with a third party escrow agent to secure the indemnification obligations of the Seller pursuant to the terms of the Purchase Agreement.
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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
The information contained in this Form 10-Q is intended to update the information contained in the financial statementsour Annual Report on Form 10-K for the year ended December 31, 20172018 filed with the Securities and Exchange Commission on March 29, 201828, 2019 (the “Form 8-K”) and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 8-K.10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.
The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Form 8-K10-K in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.
Except as otherwise indicated herein or as the context otherwise requires, references in this offering circular to “we,” “us,” “our,” “Company,” and “AgEagle” refer to AgEagle Aerial Systems, Inc., a Nevada corporation.
Company Overview
Headquartered in Neodesha, Kansas we are one of the industry’s leading pioneers of technologically advanced aerial imagery-based data collection and analytics solutions that utilizesdrone-based aerial imagery to help promote and proactively support corporate and farming sustainability initiatives. We are trusted to help the world’s growers and consumer packaged goods companies proactively assess and manage the health of commercial crops, reduce the chemicals in produced foods and products and preserve and protect natural resources.
On March 26, 2018, EnerJex Resources, Inc. (“EnerJex”), a Nevada company, consummated the transactions contemplated by the Agreement and Plan of Merger (the “Merger Agreement”), dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems Inc., a privately held company organized under the laws of the state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as a wholly-owned subsidiary of EnerJex (the “Merger”). In connection with the Merger, EnerJex changed its name to AgEagle Aerial Systems Inc. (the “Company, “we,” “our,” or “us”) and AgEagle Sub changed its name to “AgEagle Aerial, Inc.” Our common stock will continue to trade on the NYSE American under its new symbol “UAVS” commencing on March 27, 2018. As a result of the Merger, through AgEagle Sub, we are now engaged in the business of designing, developing, producing, distributing and supporting technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we supply to the precision agriculture industry.
Additionally, we recently announced a new service offering using our leased UAVs and associated data processing services for the sustainable agriculture industry. We are headquartered in Neodesha, Kansas, and are a manufacturer of unmanned aerial vehicles focused on providing actionable data to the precision agriculture industry.
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Our Unmanned Aerial Vehicles Business
We design, produce, distribute and support technologically-advanced small unmanned aerial vehiclessystems (UAVs or drones) that we offer for sale commercially to the precision agriculture industry. Additionally, we recently announced a new service offering using our leased UAVs and associated data processing services for the sustainable agriculture industry.
Historically, AgEagle’s derivedOur first commercially available product was the majority of its revenue from the sale of our AgEagle Classic which was followed shortly thereafter by the RAPID System. As we improved and RAPID Systems. However, as a result of the development ofmatured our new product, we launched the RX-60 RX-47 and RX-48, we will no longer manufacture and distribute our previous two systems. We believe that the UAV industry is currently in the early stages of development and has significant growth potential. Additionally, we believe that some of the innovative potential products in our research and development pipeline will emerge and gain traction as new growth platforms in the future, creating market opportunities.
In February 2016, we signed a worldwide distribution agreement with Raven Industries, Inc. (“Raven”) under which Raven would purchase the RX-60 for the agriculture markets for resale through their network of dealers worldwide. The first shipment of our RX-60 system to Raven occurred in March 2016. In 2017, we amended our agreement with Raven to make it non-exclusive and to allow us to sell our products directly into the market. As a result, we began selling our products directly to farmers and agronomists and we do not anticipate sales to, or through Raven in the near future.
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RX-48. The success we have achieved with our legacy products, which we believe has carried over into the new RX-47continued improvement of the RX-60 and RX-48, stems from our ability to invent and deliver advanced solutions utilizing our proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently.
Our core technological capabilities, developed over five years of research and innovation, include a lightweight laminated shell that allows the UAV platform to perform under challenging flying conditions, a camera with a Near Infrared (NIR) filter, a rugged foot launcher (RX-60), and high endhigh-end software provided by third parties that automates drone flights and provides geo-referenced data. We
Our UAV is an advanced fixed wing drone. Its design allis based upon the years of experience our UAVs to be man-portable, thereby allowing one person to launchmanagement has with aircraft and operate them through a hand-held control unit or tablet.composite parts construction. All of our UAVs are electrically powered, weigh approximately six pounds fully loaded, are capable of flying over approximately 400 acres (roughly 60 minutes of airtime) per flight from their launch location, and are configured to carry a camera with our NIR filter that uses near infrared images to capture crop data. We believe that these characteristics make our UAVs well suited for providing a complete aerial view of a farmer’s field to help precisely identify crop health and field conditions faster than any other method available.
We believe the success that has been achieved with our products, stems from its ability to invent and deliver advanced solutions utilizing our proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently. Our UAVs were initially specifically designed to help farmers increase profits by pinpointing areas where nutrients or chemicals need to be applied, as opposed to traditional widespread land application processes, thus decreasing input costs, reducing the amount of chemicals applied and potentially increasing yields. Our products were designed for busy agriculture professionals who do not have the time to process images on their computers, which some of our competitors require, and our first generation product, the AgEagle Classic used to do. Our UAVs can be programmed using a tablet device to overlay a flight path over a farmer’s specific crop area.require. The software can automatically take pictures from the camera, stitch the photos together through the cloud, and deliver a geo-referenced, high quality aerial map to the user’s desktop or tablet device using specialty precision agriculture software such as SST Software, SMS Software or SMS Software.most other agricultural software solutions. The result is a prescription or zone map that can then be used in a field computer that canis typically be found in a sprayer or applicator that has been designed to drive through fields to precisely apply the amount of nutrients or chemicals required to continue or restore the production of healthy yieldscrops.
ResearchIn addition to UAV sales, in late 2018, we introduced a new drone-leasing program, alleviating farmers and agribusinesses from significant upfront costs associated with purchasing a drone, while also relieving them from ongoing drone maintenance and support requirements. Additionally, the new program provides the option of engaging a trained AgEagle pilot to operate the drone and manage the entire image collection process, creating a truly turnkey aerial imagery capture solution for our customers.
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Our business is seasonal in nature and, as a result, our revenue and expenses and associated revenue trends fluctuate from quarter to quarter. In addition, research and development activities are integral to our business and we follow a disciplined approach to investing our resources to create new technologies and solutions.
In November 2017,Acquisition of Agribotix
On August 28, 2018, we entered intoclosed the transactions contemplated by the Asset Purchase Agreement (the “Purchase Agreement”) dated July 25, 2018 with AgEagle Aerial, Inc., a multi-agreement arrangement withwholly-owned subsidiary of the Company; Agribotix, LLC, a Colorado limited liability company (“Agribotix” or the “Seller”), headquartered; and the other parties named therein. Pursuant to the Purchase Agreement, we acquired all right, title and interest in Boulder, Colorado,and to all assets owned by Agribotix and utilized in their business of providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture, except for certain excluded assets as set forth in the Purchase Agreement. At closing, we also assumed certain commitments under various third-party contracts pursuant to the terms of the Purchase Agreement.
We believe that purchasing Agribotix’s primary product,FarmLens™, will benefit us and our shareholders by developing important vertically integrated products and services.FarmLens is a subscription cloud analytics service that processes data, primarily collected with a drone such as ours, and makes such data actionable by farmers and agronomists.FarmLens is currently sold by us as a subscription service and offered either standalone or in a bundle with drone platforms manufactured by leading drone providers like AgEagle, DJI and senseFly.
TheFarmLens platform extends our reach as a business through key partnerships with, and direct integration into offerings by leading agricultural information processing company providing actionablecompanies, including John Deere and The Climate Corporation, a subsidiary of Bayer. In October 2018, AgEagle announced that we were expanding on Agribotix’s existing partnership with The Climate Corporation’sFieldView™platform, enabling farmers to share images fromFarmLens to theirFieldView accounts and compare them alongside other valuable metrics, including planting and yield data. To date, Agribotix has processed agricultural imagery for approximately 1.3 million acres of crops and analyzed data for over 50 different crop types from over 50 countries around the world.
In December 2018, we unveiled our plans to develop aFarmLens Mobile app, extending the numerous benefits of theFarmLensplatform to mobile devices. TheFarmLens Mobile app will be commercially launched toward the end of the second quarter 2019 and available for download on any iPhone, iPad or Android device.
Our Sustainability Platform
The negative impact of agriculture on both the environment and society has been widely documented with unsustainable farming practices serving to confound land conversion and habitat loss, wasteful water consumption, soil erosion and degradation, pollution and climate change. It has been reported that agricultural production is believed to be responsible for 70% of river and stream pollution from chemicals, silt and animal waste (source: Food and Agriculture Organization of the United Nations). Moreover, agriculture is the largest consumer of the Earth’s available freshwater: 70% of withdrawals from watercourses and groundwater are for agricultural usage, three times more than 50 years ago. By 2050, the global water demand of agriculture is estimated to increase by a further 19% due to irrigational needs (source: GlobalAgriculture.org).
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Left unchecked, many believe that farming practiced without care presents the greatest global threat to species and ecosystems, especially given that demand for more food - and healthier food - is rising exponentially. According to the World Resources Institute, our planet will need 70 percent more food to feed a global population of 9.6 billion by 2050. In view of looming environmental and social crises facing our planet, both consumer packaged goods companies and their supply chain partners recognize the need to accelerate their shift towards greater transparency in their sustainability practices and policies as they assume greater responsibility for mitigating the use of chemicals in crop production and preserving natural resources.
In support of our efforts to promote our sustainability platform, in October 2018 we became a corporate partner of the Cool Farm Alliance (CFA), a non-profit organization promoting sustainability in the agriculture industry. See Note 5Through the CFA’s Cool Farm Tool, businesses can utilize farming data to collaborate and develop sustainability metrics that provide the necessary insights to decrease their impact on the environment. By combining AgEagle’s technological capabilities and the unique data we can collect with the knowledge and expertise of the CFA team, we see an opportunity to measurably contribute to the establishment of a gold industry standard for further details aboutsustainable agriculture.
For the transaction.upcoming growing season, we announced an agreement with one of the largest specialty crop producers in North America as our first customer on our sustainability platform and drone leasing program for the 2019 crop season. As part of the agreement, we are providing access to UAVs equipped with sensors for the growing season, along with access to data connected devices for farms covering thousands of acres in the United States. We are also setting up a network of soil moisture monitoring devices with rain gauges and soar sensors to provide in-depth data analytics at the field level. All of this is expected to culminate in a sustainability dashboard and scorecard that will provide data to assess and affirm soil health, water utilization efficiency and pest and disease control; which will, in turn, aid this specialty crop producer in showcasing its sustainability efforts and results to its customers and supply chain partners.
Leveraging the underlying imaging technology and robust analytics capabilities ofFarmLens, in March 2019 AgEagle introducedParkView, a proprietary aerial imagery and data analytics platform designed specifically for assessing and supporting sustainability initiatives involving municipal, state and federal public parks and recreation areas. In tandem with the formal market launch ofParkView, the Company announced that it signed Denver Parks and Recreation in Denver, Colorado as the first customer on theParkView platform. DPR will utilize aerial imagery and sensor data to better inform vegetative maintenance and natural resource preservation for its green infrastructure, comprising more than 6,000 acres of public green space within the city limits. In addition, our staff will also provide DPR with in-depth training on best management practices for UAV operations in a municipal setting.Research has shown that urban green infrastructure can materially improve water quality and conservation, attract investment, revive distressed neighborhoods, encourage redevelopment and provide outdoor recreational opportunities for cities of all scope and sizes worldwide, thus effectively helping to align social, economic, public health and environmental goals.
Our Growth Strategy
We intend to grow our business by achieving greater market penetration of the growing precision agriculture marketplace; by promoting our new service targeting the sustainable agriculture marketplace for the 2019 growing season; and by creating new, easier to use and higher value products that position AgEagle as a leading innovator and trusted solutions provider in high growth markets where advanced aerial imaging and data capture technology can be used to achieve specific business and sustainability objectives. Currently, our management is actively exploring new vertical expansion opportunities in other industries outside of agriculture and its related areas.
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Key components of our growth strategy include the following:
| ● | Build a strong worldwide distribution network to offer a best-in-class precision agriculture platform.We believe we can establish our flying wing product and systems as leading technologies in the precision agriculture marketplace. We will work to identify and establish relationships with dealers and customers in key agricultural regions worldwide, which will help make it possible for every farmer in those markets to have access to the AgEagle platform. Potential distributors are spread across six continents, covering a majority of the world’s major regions including the U.S., Canada, South America, Eastern and Western Europe, Southeast Asia and Oceania. | |
| ● | Market our new UAV-based monitoring service for large food manufacturers desiring to achieve and maintain optimal sustainability practices on their farms. We are in the process of marketing a new service for the 2019 growing season targeted towards large food manufacturers that are being pressured by consumers to create food products with less chemicals that are more sustainably sourced. We believe our current technology, combined with other available third-party platforms/solutions via a well-defined modern RESTful API, will allow us to offer a product to these consumer products manufacturers that will serve to accelerate business growth faster than if we just focused on growth opportunities within the precision agriculture marketplace. | |
| ● | Continue to explore partnerships with companies that can expand our offerings. We intend to expand our product offerings by building relationships and partnerships with companies that have vertical, synergistic technologies. In addition, other technology alliances may include the acquisition or development of other electronics, software, sensors or more advanced aerial platforms. We are constantly meeting and in discussions with groups that could fill these roles and collaborate with us on new development ideas. | |
| ● | Support and expand our University Drone Program.Subsequent to the end of 2018, we introduced our new University Drone Program providing for AgEagle’s aerial imaging collection and data processing systems to be purchased and utilized by colleges and universities to enhance the curriculum of their agriculture technology departments – including in precision ag, agronomy, plant science and mapping, among other related study areas. In January 2019, we announced that both Arkansas State University-Newport (ASU) and Modesto Junior College (MJC) in California have teamed with our Company to provide students with hands-on training and experience properly operating drones, creating digital aerial maps through the AgEagleFarmLens platform, and using data collected to achieve sustainable farming objectives. We believe that our University Drone Program not only represents a new revenue channel for us, but it will serve as a powerful brand-building opportunity for AgEagle among those who are studying to become commercial growers, agronomists and precision and sustainability ag experts and specialists. | |
| ● | Deliver new and innovative solutions in the precision agriculture space. Our research and development efforts are the foundation of our Company, and we intend to continue investing in our own innovations, pioneering new and enhanced products and solutions that enable us to satisfy our customers – both in response to and in anticipation of their needs. We believe that by investing in research and development, we can be a leader in delivering innovative products that address market needs within our current target markets, enabling us to create new opportunities for growth. | |
| ● | Pursue the expansion of the AgEagle platform of products and solutions into other industries besides agriculture.We have begun actively exploring opportunities outside of traditional agriculture as we continue to expand and grow the AgEagle platform. We are confident in the UAV products and solutions we offer today and believe that these products and solutions could provide other industries the same kind of optimization we are currently providing the agriculture industry. These industries have yet to be identified by the AgEagle team but may include verticals such as land surveying and scanning, insurance, inspections and search and rescue. |
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Off-Balance Sheet Arrangements
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.
Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations are based on our unaudited condensedconsolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. SignificantOur most critical estimates include but are not limited to: collectability of receivables, realizability ofthose related to revenue recognition, inventories warranty accruals, valuation of share-based transactions, and valuation of deferred tax assets.reserves for excess and obsolescence, accounting for stock-based awards, and income taxes. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. ActualOur actual results couldmay differ from those estimates.these estimates under different assumptions or conditions.
See Note 2 in the accompanying unaudited condense interim consolidated financial statements for a listing of our critical accounting policies.
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Results of Operations
For the Three and Six Months ended June 30,March 31, 2019 and 2018 and 2017
For the three months ended June 30, 2018 and 2017,March 31, 2019, we recorded revenues of $24,517$45,993 compared to revenues of $47,192$29,191 for the same period in 2017, representing2018, a 48% decrease. For the six months ended June 30, 2018 and 2017, we recorded revenues of $53,707 compared to revenues of $82,391 for the same period in 2017, a 35% decrease.58% increase. The decreaseincrease was due to a shift in the drone industry from do-it-yourself, early adopter farmers to a more services orientedservices-oriented model whereby independent agronomists provided prescriptions for the application of chemicals based onadvanced aerial imagery-based data they collect throughcollection and analytics solutions that utilizedrone-based aerial imagery to help promote and drones.proactively support corporate and farming sustainability initiatives. The Company is in the process of addressingcontinuing to address this change in the market through strategic acquisitions, promoting our new service targeting the sustainable agriculture marketplace for the 2019 growing season; and the launch ofby creating new, easier to use and higher value products that position AgEagle as a service oriented modelleading innovator and trusted solutions provider in high growth markets toward sustainable markets as result of the recent infusion of operating capital and significant reduction of debt.
For the three months ended June 30, 2018 and 2017,March 31, 2019, cost of sales totaled $18,174 and $36,905, respectively,$33,948, a decrease of 50%. Costs of sales totaled $41,971 and $43,183,$10,150 or 43% increase as compared to $23,798 for the sixthree months ended June 30,March 31, 2018. We also had gross profit of $12,045 or 26% during the three months ended March 31, 2019 compared to $5,393 or 18% for the comparable period in 2018, and 2017, respectively, reflecting a decreaseresulting in an increase in our profit margin in the current period. The main contributor to the increase in our cost of goods sold of 3%. Forsales was due to the three months ended June 30, 2018, and 2017 we had a gross profit of $6,343 or 26% and $10,287 or 22% representingadditional sales recorded for the quarter, which also led to an increase of 4% in our profit margins. For the six months ended June 30, 2018 and 2017, we had a gross profit of $11,736 or 22% and $39,208 or 48%, a decrease in our profit margins of 26%. For the three months ended June 30, 2018, our cost of sales decreased while increasing our gross margin as we did not sell our slow-moving inventory during the period and instead focused on our UAVS sales. The decrease in our gross margin. Gross margin also increased due to sales of ourFarmLens platform for purposes of processing the imagery and increase in our costs of goods soldless slow-moving such as newer sensors, cameras and other parts for the six months ended June 30, 2018 in comparison to the comparable prior periods is due to the increase of slow-moving inventory due to the innovation of our products which resulted in raw-materialsplanes being sold at a discount such as sensors, cameras and other parts.
discount.
For the three months ended June 30, 2018, and 2017 we had a gross profit of $6,343 or 26% and $10,287 or 22% representing an increase of 4% in our profit margins. For the six months ended June 30, 2018 and 2017, we had a gross profit of $11,736 or 22% and $39,208 or 48%, a decrease in our profit margins of 26%. For the three months ended June 30, 2018, our cost of sales decreased while increasing our gross margin as we did not sell our slow-moving inventory during the period and instead focused on our UAVS sales. The decrease in our gross margin and increase in our costs of goods sold for the six months ended June 30, 2018 in comparison to the comparable prior periods is due to the increase of slow-moving inventory due to the innovation of our products which resulted in raw-materials being sold at a discount such as sensors, cameras and other parts
We recorded total operating expenses of $688,012 and $107,913, respectively, for$577,048 during the three months ended June 30, 2018March 31, 2019, a 194% increase as compared to operating expenses of $196,541 in the same period of 2018. Our operating expense are comprised of general and 2017, resultingadministrative costs, professional fee and selling costs. General and administrative expenses totaled $474,902 in an 538% increase. For the three months ended June 30,March 31, 2019 compared to $40,853 in 2018, and 2017 we recorded $428,044 and $15,578 in professional fees, respectively, a 2,648% increase. Thean increase is mainlyof 1,062%, due to more professionalamortization costs associated with intangibles assets acquired as a result of the Agribotix acquisition, D&O insurance, financial filing fees related to legal, accounting and consulting servicesinvestor relations in connection with the Merger completed on March 26, 2018 and the on-going expenses related to us being publicly traded such as legal, audit and consulting services. Generalnot incurred in the prior period. We also had additional general and administrative expenses also increased 208% as we had $233,797 of expenses for the current period versus $75,999 in the comparable prior period. This was mainly duecosts related to an increase in salaries, financial service fees, investor relationssalary costs for new and existing employees along with stock compensation expensecosts for employees and directors due to the issuance of shares and options to directors and employees. Lastly included in operating expenses was selling costs that increased 222% to $27,005 versus $8,377options. Professional fees totaling $90,019 in the prior comparable period due to attendance to various trade shows in that propel our sustainable market initiatives.
We recorded total operating expenses of $884,544 and $272,897, respectively, for the sixthree months ended June 30, 2018March 31, 2019 were expenses incurred for legal and 2017, a 224% increase. Foraccounting, compared to $151,061 in the sixthree months ended June 30,March 31, 2018 and 2017 we recorded $578,629 and $101,550 in professional fees, respectively, a 470% increase. The increase is mainly due to more professional feeswhich related to a decrease in legal and accounting and consulting services in connectionassociated with the completion of the reverse merger completedfinalized on March 26, 2018 and2018. For the on-goingthree months ended March 31, 2019, we recorded selling expenses relatedof $12,127 compared to us being publically traded such as legal, audit and consulting services. General and administrative expenses also increased 89% as we had $269,823 of expenses for the current period versus $142,625 in the comparable prior period. This was mainly due to an increase in salaries, financial service fees, investor relations costs and stock compensation expense due to the issuance of shares and options to directors and employees. Lastly included in operating expenses was selling costs that increased 146% to $36,460 versus $14,850 in the prior comparable period due to attendance to various trade shows in that propel our sustainable market initiatives.
Other income$4,627 for the three months ended June 30,March 31, 2018, and 2017representing an increase of 162% due to more travel expenses for purposes of business development.
There was $(189) and $(35,848), respectivelyno other income recorded during the three months ended March 31, 2019, compared to $15,065 for the three months ended March 31, 2018, representing a 99% decrease and $16,711 and $5,189, respectively fordue the six months ended June 30, 2018 and 2017, representing a 83% decrease. The other income is a resultreversal of dealer termination costs being accrued infrom prior periods that were reversed as a result of all liabilities having been satisfied.
fully satisfied during the period.
Interest expense for the three months ended June 30, 2018 and 2017March 31, 2019 was $0 and $36,383, respectively and$462 as compared to $27,414 and $77,554, forin the six monththree months ended June 30, 2018 and 2017, respectively.March 31, 2018. The decrease is mainlyincrease was due to the conversion of all debt, as of the date of the merger with EnerJex except for thea promissory note assumed as a result of the EnerJex merger, and the amortization of debt discounts in 2017 totaling $18,621 that was not recorded inand warrant expense upon completion of the reverse merger on March 26, 2018.
Our net loss was $712,210 and $133,474 for$565,465 in the three months ended June 30, 2018 and 2017, respectively and $915,707 and $306,054, for the six month ended June 30, 2018 and 2017, respectively.March 31, 2019. This represents a $578,736 or 434%$361,968 increase forfrom our net loss of $203,497 in the three months ended June 30,March 31, 2018, and $609,653 or 199% increase for the six months ended June 30, 2018 and 2017. Overall the increase in net loss is due to more operating costs and less growth in our sales andfor the recording ofperiod as we begin to implement our new initiatives in the loss from the unconsolidated investee of $30,352.sustainable agriculture market.
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Cash Flows
June 30, 2018March 31, 2019 compared to December 31, 20172018
Cash on hand was $2,560,062$2,151,124 at June 30, 2018March 31, 2019 compared to the $35,289$2,601,730 at December 31, 2017, an increase2018, a decrease of $2,524,773.$450,606. Cash used in operations for the sixthree months ended June 30, 2018March 31, 2019 was $(1,683,498)$(418,636) compared to $(245,983)$(769,799) of cash used in operations for the sixthree months ended June 30, 2017.March 31, 2018. The increasedecrease was driven mainly by payments of payables for legal expenses, accounting and auditing expenses and a significant amounttail-policy for D&O insurance as a result of accounts payable assumed by usthe reverse merger that was paid in the amountfirst quarter of $950,258 from EnerJex in connection with the Merger and added insurance expenses that were prepaid of $ 101,282. We also recorded non-cash expenses of $135,600 for stock issued in exchange for services and investment in unconsolidated investee of $30,352.2018.
CashThere was no cash provided by or used in investing activities during the three months ended March 31, 2019 as compared to cash provided by investing activities during the sixthree months ended June 30,March 31, 2018 of $221,255. The use of cash in the quarter ended March 31, 2018 was $221,255 compareddue to cash used in investing activities duringreceived from the six months ended June 30, 2017 of $12,775, the increase was mainly due to the $265,255 of cash acquired in connection with the Mergermerger and . a payment made to Agribotix for purposes of $35,000 related to the investment made in Agribotix..its future acquisition.
Cash provided byused in financing activities during the sixthree months ended June 30, 2018March 31, 2019 was $3,987,016$31,970 compared to $248,050cash provided by investing of $3,980,000 as of June 30, 2017. ThisMarch 31, 2018. The decrease was as a result of a $4,000,000 investment that occurred in the first quarter of 2018, net of $20,000 in fees invested in the company in exchange for commonCommon and preferred shares. Cash was also used to repurchasePreferred shares from a shareholder for $210,642 and make payments of $32,341 onin the promissory note assumed from Enerjex offset by additional cash that was received in connection with issuance of the Series C Preferred StockCompany,
Liquidity and Capital Resources
As of March 31, 2019, we had working capital of $2,031,786 and a loss from operations of $565,465 for the period then ended. While there can be no guarantees, we believe cash on hand, in connection with cash from operations will be sufficient to fund operations for the next year of operations. In addition, we intend to pursue other financing opportunities with outside investors.
On November 21, 2017, Alpha Capital Anstalt (“Alpha”) signed a binding commitment letter with EnerJex to provide prior to or at the closing of the Merger a minimum of $4 million in new equity capital (the “Private Placement”). The Private Placement was consummated on March 26, 2018. In connection with the Private Placement, Alpha purchased an additional 4,000 shares of Series C Preferred Stock at a purchase price of $1,000 per share for total aggregate consideration of $4 million. TheAt the time of private placement the Series C Preferred Stock iswas convertible into 2,612,245 shares of our common stock.Common Stock. In addition, as consideration for their funding commitment, Alpha received a fee equal to 408,552 shares of our common stock.
On May 11, 2018, we issued an additional 250 shares of our Series C Convertible Preferred Stock, convertible into 163,265 shares of our common stock. received a cash payment of $250,000 for the issuance of the Series C Preferred Stock. The Series C Convertible Preferred Stock includes a beneficial ownership limitation preventing conversion of shares of Series C Convertible Preferred Stock into more than 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series C Convertible PreferredCommon Stock.
Each share of Series C Preferred Stock is convertible into a number of shares of our common stockCommon Stock equal to the quotient determined by dividing (x) the stated value of $1,000 per share, by (y) a conversion price of $1.53. Until the volume weighted average price of our common stockCommon Stock on NYSE exceeds $107.50 with average trading volume of 200,000 shares per day for ten consecutive trading days, the conversion price of our Series C Preferred Stock is subject to full-ratchet, anti-dilution price protection. Under that provision, if, while that full-ratchet, anti-dilution price protection is in effect, we issue shares of our common stockCommon Stock at a price per share (the “Dilutive Price”) that is less than the conversion price, then the conversion price of our Series C Preferred Stock is automatically reduced to be equal to the Dilutive Price. The effect of that reduction is that, upon the issuance of shares of common stockCommon Stock at a Dilutive Price, the Series C Preferred Stock would be convertible into a greater number of shares of our common stock.Common Stock.
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On December 27, 2018, AgEagle Aerial Systems, Inc. (the “Company”) entered into Securities Purchase Agreement (the “Agreement”) with an institutional investor (the “Purchaser”). Pursuant to the terms of the Agreement, the Board of Directors of the Company (the “Board”) designated a new series of preferred stock, the Series D Preferred Stock, which is non-convertible and provides for an 8% annual dividend and is subject to optional redemption by the Company (the “Preferred Stock”). The Company issued 2,000 shares of Preferred Stock and a warrant (the “Warrant”) to purchase 3,703,703 shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), for $2,000,000 in gross proceeds. The shares of Common Stock underling the Warrant are referred to as the “Warrant Shares”. The Company also entered into a registration rights agreement (the “Registration Rights Agreement”) granting registration rights to the Purchaser with respect to the Warrant Shares.
The Agreement provides that upon a subsequent financing or financings with net proceeds of at least $500,000, the Company must exercise its optional redemption of the Preferred Stock (as more fully described in Item X) and apply any and all net proceeds from such financing(s) to the redemption in full of the Preferred Stock.
The Warrant is exercisable for a period of five years through December 26, 2023, at an exercise price equal to $0.54 per share, and is subject to customary adjustments for stock splits dividend, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Company undertakes a subsequent equity financing or financings at an effective price per share that is less than $0.54, the exercise price of the Warrant shall be reduced to the lower price.
The Warrant provides that the Warrant holder shall have a “Beneficial Ownership Limitation” equal to 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Warrant holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation, as provided for in the Warrant.
Pursuant to the terms of the Registration Rights Agreement, the Company shall file an initial registration statement registering the Warrant Shares no later than the 20thcalendar day following the required filing date of the Company’s Annual Report on Form 10-K for the year ending December 31, 2018 (the “Filing Date”) and, with respect to any additional registration statements, the earliest practical date on which the Company is permitted by SEC Guidance to file such additional registration statement related to such registrable securities. The Company shall have the registration statement declared effective with the Securities and Exchange Commission (the “Commission”) no later than the 90th calendar day following the Filing Date or, in the event of a “full review” by the Commission, the 120th calendar day following the Filing Date. There are no penalties for failure to file or be declared effective by the dates set forth above.
The Series C and D Preferred Stock waswere issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, in reliance on the recipient’s status as an “accredited investor” as defined in Rule 501(a) of Regulation D.,
As of June 30, 2018, we had working capital of $2,307,361 and a loss from operations of $900,203 for the period then ended. While there can be no guarantees, we believe cash on hand, in connection with cash from operations and this offering, will be sufficient to fund operations for the next year of operations. In addition, we intend to pursue other opportunities of financing with outside investors. Off-Balance Sheet Arrangements
At March 31, 2019, 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.
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Contractual Obligations
We have no material contractual obligations.
Inflation
Our opinion is that inflation has not had, and is not expected to have, a material effect on our operations.
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
There were various updates recently issued, 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 the Company’s consolidated financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Control Procedures
We conducted an evaluation under the supervision and with the participation of our management, including ourThe Company’s Chief Executive Officer and the Company’s Chief Financial Officer ofevaluated the effectiveness of the design and operation of ourCompany’s disclosure controls and procedures.procedures as of March 31, 2019 and had concluded that the Company’s disclosure controls and procedures are effective. The term “disclosuredisclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), proceduresmeans controls and other procedures of a company that are designed to ensure that information required to be disclosed by the companyCompany in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a companythe Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’sCompany’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2018, that our disclosure controls and procedures were effective.
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Management’s Report on Internal Control Overover Financial Reporting
OurThe Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in RulesRule 13a-15(f) and 15d-15(f) under the Exchange Act. OurThe Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The internal controls for the Company are provided by executive management’s review and approval of all transactions. Our internal control over financial reporting also includes those policies and procedures that:
1. pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and
3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.Generally Accepted Accounting Principles (“GAAP”).
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance of such reliability and may not prevent or detect misstatements. Also, projectionsprojection of any evaluation of effectiveness to future periods areis subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessedhas conducted, with the participation of our Chief Executive Officer and our Chief Financial Officer, an assessment of the effectiveness of the Company’sour internal control over financial reporting as of June 30, 2018. In making thisMarch 31, 2019. Management’s assessment managementof internal control over financial reporting used the criteria set forth in SEC Release 33-8810 based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Integrated Framework. Management’s assessment included an evaluation of the design of our internal controlControl over financial reporting and testing of the operational effectiveness of these controls.
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Financial Reporting — Guidance for Smaller Public Companies.Based on this assessment, management hasevaluation, Management concluded that asour system of June 30, 2018, our internal control over financial reporting was effective.effective as of December 31, 2018, based on these criteria.
This Quarterly Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Quarterly Report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, foras defined in Rules 13a-15(t) and 15d-15(f) under the Exchange Act, during the three months ended June 30, 2018,March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We know of no material, active or pendingFrom time to time, we may become involved in lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Although we currently maintain liability insurance coverage intended to cover professional liability and certain other claims, we cannot assure that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us norin the future where the outcomes of such claims are we involved as a plaintiffunfavorable to us. Liabilities in any material proceedings or pending litigation. There are no proceedings in which anyexcess of our directors, officers or affiliates, or any beneficial shareholder are an adverse party or hasinsurance coverage, including coverage for professional liability and certain other claims, could have a material interest adverse to us.effect on our business, financial condition and results of operations.
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.
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Item 2. UnregisteredRecent Sales of Unregistered Equity Securities and Use of Proceeds.Proceeds
We previously disclosed on a Current Report on Form 8-K filed on March 29, 2018, the sale and issuance of 4,626 shares of Series C Preferred Stock, which issuance was pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, in reliance on the recipient’s status as an “accredited investor” as defined in Rule 501(a) of Regulation D.None.
There Company repurchased 139,567 shares of our common stock during the three-month period ended June 30, 2018 in a private repurchase for $210,642.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures
Not applicable.applicable
None.
| Exhibit No. | Description | |
| 31.1 | Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer | |
| 31.2 | Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial officer | |
| 32.1 | Section 1350 Certification of principal executive officer | |
| 32.2 | Section 1350 Certification of principal financial officer and principal accounting officer | |
| 101.INS | XBRL INSTANCE DOCUMENT | |
| 101.SCH | XBRL TAXONOMY EXTENSION SCHEMA | |
| 101.CAL | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE | |
| 101.DEF | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE | |
| 101.LAB | XBRL TAXONOMY EXTENSION LABEL LINKBASE | |
| 101.PRE | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AgEagle Aerial Systems, Inc. | ||
| By: | /s/ Barrett Mooney | |
| Barrett Mooney | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ Nicole Fernandez-McGovern | |
| Nicole Fernandez-McGovern | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||