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 March 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
incorporation or organization) 		  (I.R.S. Employer
Identification No.)

 

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  ☐

 

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 May 15, 2019
Common Stock, $.001 par value   14,949,394

 

 

 

TABLE OF CONTENTS

 

    Page
PART I FINANCIAL INFORMATION 3
     
ITEM 1. FINANCIAL STATEMENTS: 3
     
  Condensed Interim Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018 (audited) 3
     
  Condensed Interim Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018 (unaudited) 4
     
  Condensed Interim Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited) 6
     
  Notes to Condensed Interim Consolidated Financial Statements (unaudited) 7
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31
     
ITEM 4. CONTROLS AND PROCEDURES 31
     
PART II OTHER INFORMATION 32
     
ITEM 1. LEGAL PROCEEDINGS 32
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 33
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 33
     
ITEM 4. MINE SAFETY DISCLOSURES 33
     
ITEM 5. OTHER INFORMATION 33
     
ITEM 6 EXHIBITS 33
     
SIGNATURES 34

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements .

 

AGEAGLE AERIAL SYSTEMS, INC.

CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2019, AND DECEMBER 31, 2018

(Unaudited) 

 

    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.

 

4  

 

AGEAGLE AERIAL SYSTEMS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2019

 

    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 

 

5  

 

AGEAGLE AERIAL SYSTEMS, INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

 

    For the Three Months Ended March 31,
    2019   2018
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (565,465 )   $ (203,497 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     45,068       4,151  
Stock-based compensation     60,920       2,491  
                 
Changes in assets and liabilities:                
Accounts receivable     (11,400 )     171  
Inventories     15,345       15,267  
Prepaid expenses and other assets     13,498       (114,276 )
Contract liability     (2,368 )     —  
Accounts payable     30,131       (461,415 )
Accrued liabilities     (20,016 )     (39,634 )
Accrued interest     —       27,412  
Accrued payroll liabilities     15,651       (469 )
Net cash used in operating activities     (418,636 )     (769,799 )
                 
CASH FLOW FROM INVESTING ACTIVITIES:                
Cash received in reverse merger     —       256,255  
Investment in unconsolidated investee     —       (35,000 )
Net cash provided by investing activities     —       221,255  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
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     (450,606 )     3,431,456  
Cash at beginning of period     2,601,730       35,289  
Cash at end of period   $ 2,151,124     $ 3,466,745  
                 
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  
Accounts payable     —       (860,812 )
Net liabilities assumed   $ —     $ (604,557 )
                 
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.

 

6  

 

AGEAGLE AERIAL SYSTEMS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(Unaudited)

 

Note 1 – Description of Business

 

AgEagle Aerial Systems Inc. (“AgEagle,” “the Company,” “we,” “our,” “us” or “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 AgEagle 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 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 its customers.

 

Central to the Company’s long-term growth strategy, AgEagle will continue to identify opportunities to leverage its proprietary technological platform and industry expertise to penetrate new, high growth market sectors that may benefit from the Company’s advanced aerial imagery-based data collection and analytics solutions.

 

The Company is headquartered at 117 South 4 th Street, Neodesha, Kansas 66757. Its website address is http://www.ageagle.com.

 

Corporate History; Recent Business Combination

 

On March 26, 2018, our predecessor company, 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 and AgEagle Sub changed its name to “Eagle Aerial, Inc.”

 

Prior to the Merger, EnerJex was formerly known as Millennium Plastics Corporation (“Millennium) and was incorporated in the State of Nevada on March 31, 1999. In August 2006, Millennium 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. 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”). Our leasehold interests were held in our wholly-owned subsidiaries Black Sable, Working Interest, LLC, EnerJex Kansas and Black Raven.

 

7  

 

AGEAGLE AERIAL SYSTEMS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(Unaudited)

 

Note 1 – Description of Business-Continued

 

On August 28, 2018, AgEagle acquired 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™, will 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 a bundle with drone platforms manufactured by leading 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 under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information, which included condensed consolidated financial statements of the Company and its wholly owned subsidiaries as of March 31, 2019. Accordingly, the condensed consolidated financial statements do not include all the information and notes necessary for a comprehensive presentation of the financial position and results of operations and should be read in conjunction with the audited financial statements of 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) have been made, which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year 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 understanding the Company’s consolidated financial statements. Such consolidated financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the 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.

 

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 Polic y  - 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.

 

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 March 31, 2019 and December 31, 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

 

Inventorie s - 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.

 

Goodwill – Goodwill is recognized for the excess of cost of 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 fair value of the reporting unit. As of March 31, 2019, there have been no events or changes in circumstances that indicate that it is more likely than not that a goodwill impairment has occurred since the assessment date of August 2018.

 

Intangible Assets – Acquired in Business Combinations – The Company performs valuations of assets acquired and liabilities 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, growth rates, useful lives and discount rates. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed.

 

10  

 

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

 

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 the FarmLens ™ 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 its FarmLens platform. 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 months ended March 31, 2019 and 2018 totaled $758 and $952, respectively . 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 on the statement of operations.

 

Advertising Costs  – Advertising costs are expensed as incurred. No advertising costs were recorded for the three months ended March 31, 2019, and $906 for the three months ended 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 Common shares outstanding plus Common 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 Stock from the calculation of diluted net loss per share because all such securities are antidilutive for the periods presented. For 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 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 1,184,300 options to purchase Common Stock, 6,887 shares of Preferred Series B and C shares which were convertible into 4,498,002 of 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. 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.

 

12  

 

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

 

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. The Company’s adoption of ASU No. 2016-01 effective January 1, 2019 did not have a material impact on the consolidated financial statements.

 

In February 2016, FASB issued Account Standards Update 2016-02 –  Leases  (Topic 842) intended to improve financial reporting of leasing transactions whereby lessees will need to recognize a right-of-use asset and a lease liability for virtually all 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 — which requires only capital leases to be recognized on the balance sheet — the new ASU will require both types of leases to be recognized on the balance sheet. The Company adopted this ASU on January 1, 2019 and it did not have a material impact on the 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: 

 

    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:

 

    March 31,
2019 		  December 31,
2018
         
Property and equipment   $ 116,313     $ 116,313  
Less accumulated depreciation     (91,171 )     (87,939 )
    $ 25,142     $ 28,374  

 

Depreciation expense for the three months ended March 31, 2019 and 2018 was $3,232 and $4,151, respectively.

 

Note 5 — Intangible Assets

 

Intangible assets are recorded at cost and consist of the assets acquired in 2018 related to the acquisition of Agribotix. Amortization is computed using the straight-line method over the estimate useful life of the asset. We will annually assess intangible and other long-lived assets for impairment. Intangible assets were comprised of the following at March 31, 2019:

 

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  

 

Amortization expense for the three months ended March 31, 2019 and 2018 was $41,836 and $0, respectively.

 

14  

 

AGEAGLE AERIAL SYSTEMS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(Unaudited)

 

Note 6 — Promissory Note

 

  As part of the liabilities assumed 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 27, 2019. The total amount outstanding as March 31, 2019 was $9,028, resulting in principal payments of $31,970 made in the first three months of 2019. The Company recorded interest of $462 for the three months ended March 31, 2019. The note was paid in full in April 2019.

 

Note 7 – Equity

 

Capital Stock Issuances

 

During the three months ended March 31, 2019, Alpha Capital Anstalt converted 1,026 shares of Series C Preferred Stock into 1,900,000 shares of Common Stock at a conversion price of $0.54.

 

Series D Preferred Stock

 

On December 27, 2018, AgEagle 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 2,000 shares of Preferred Stock and a warrant to purchase 3,703,703 shares of common stock, par value $0.001 per share (the “Warrant,” and the shares of common stock underling the warrants, the “Warrant Shares”) for $2,000,000 in gross proceeds. The Company also entered into a Registration 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 accrued dividends.

 

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 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 Preferred Stock has no voting rights, except that the Company shall not undertake certain corporate actions as set forth in the Certificate of Designation that would materially impact the holders of Preferred Stock without their consent.

 

15  

 

AGEAGLE AERIAL SYSTEMS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 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-Continued

 

Series 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.

 

O ptions Issued

 

The Board of Directors of the Company 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 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.

 

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 540,000 shares of Common Stock to directors and employees of the Company at the fair value exercise price ranging from $0.41 to $0.54 per share expiring on March 30, 2024 to March 31, 2029. The Company determined the fair-market value of the options to be $156,134. In connection with the issuance of these options, the Company recognized $1,944 in stock compensation expense for the three months ended March 31, 2019.

 

During the year ended December 31, 2018, the Company issued options to purchase 534,598 shares of Common Stock to directors and employees of the Company at the fair value exercise price ranging from $0.51 to $4.33 per share expiring between March 30, 2023 to December 17, 2028. The Company determined the fair-market value of the options to be $449,491. In connection with the issuance of these options, the Company recognized $57,627 stock compensation expense for the three months ended March 31, 2019.

 

On October 4, 2017, AgEagle Sub issued options to purchase 927,774 shares of Common 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 months ended March 31, 2019 and 2018, the Company recorded $1,349 and $2,491, respectively of stock compensation expense.

 

 The fair value of options granted during the three months ended March 31, 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-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 three months ended March 31, 2019 were as follows: 

 

    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 three months ended March 31, 2019 is as follows:

 

    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       8.68 Years        —  
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 during the three months ended March 31, 2019, the fair value of the Company’s stock was based upon the close of market price on the date of grant. The future expected stock-based compensation expense expected to be recognized in future years is $383,614, through March 29, 2022.

 

Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at March 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     $ —  

 

18  

 

AGEAGLE AERIAL SYSTEMS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(Unaudited)

 

Note 8 – Warrants to Purchase Common Stock

 

As of March 31, 2019, the Company had outstanding, in connection with the issuance of debentures in 2017, warrants to purchase 828,221 shares of the Company’s Common Stock at an exercise price of $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 March 31, 2019 are scheduled to expire between December 26, 2023 and October 21, 2024.

 

A summary of activity related to warrants for the three months ended March 31, 2019 follows:

 

    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  

 

19  

 

AGEAGLE AERIAL SYSTEMS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 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 $500 a month. The lease terminates on September 30, 2019 with a year to year option to renew upon approval by the city commission of Neodesha. Rent expense was $1,500 and $900 for the three months ended March 31, 2019 and 2018, respectively.

 

As a result of the Agribotix acquisition, the Company assumed a lease for offices in Boulder, Colorado for $2,000 a month. The lease ends on May 31, 2019 and has an option to terminate at any time with a 30-day prior notice period. Rent expense was $6,000 for the three months ended March 31, 2019 and 2018, respectively.

 

Note 10 — Related Party Transactions

 

The following reflects the related party transactions during the three months ended March 31, 2019 and 2018.

 

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 months ended March 31, 2019 and 2018, Premier Financial Filings provided services to the Company resulting in fees of $2,674 and $110, respectively. The fee incurred during the three months ended March 31, 2019 is included in accounts payable as of March 31, 2019.

 

20  

 

AGEAGLE AERIAL SYSTEMS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(Unaudited)

 

Note 11 – Subsequent Events

 

On 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 business opportunities and the 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 April 15, 2019, AgEagle Aerial Systems, Inc. (the “Company”), received notification from Mr. Corbett Kull that effective immediately he is resigning as a director of the Company. Mr. Kull did not serve on any of the committees of the Board of Directors (the “Board”). Mr. Kull’s resignation was not due to a disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

 

As a result of Mr. Kull’s resignation, the Board currently consists of four directors, three of whom are independent. The Company is not looking for a replacement for Mr. Kull at this time.

 

21  

 

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 our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on March 28, 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 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 10-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 utilizes drone-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.” As a result of the Merger, through AgEagle Sub, we are 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 systems (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.

 

Our first commercially available product was the AgEagle Classic which was followed shortly thereafter by the RAPID System. As we improved and matured our product, we launched the RX-60 and the RX-48. The success we have achieved with our legacy products, which we believe has carried over into the continued 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-end software that automates drone flights and provides geo-referenced data.

 

Our UAV is an advanced fixed wing drone. Its design is based upon the years of experience our management has with aircraft and 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.

 

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. 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 most other agricultural software solutions. The result is a prescription or zone map that can then be used in a field computer that is typically found in a sprayer or applicator designed to drive through fields to precisely apply the amount of nutrients or chemicals required to continue or restore the production of healthy crops.

 

In 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.

 

Acquisition of Agribotix

 

On August 28, 2018, we closed the transactions contemplated by the Asset Purchase Agreement (the “Purchase Agreement”) dated July 25, 2018 with AgEagle Aerial, Inc., a wholly-owned subsidiary of the Company; Agribotix, LLC, a Colorado limited liability company (“Agribotix” or the “Seller”); and the other parties named therein. Pursuant to the Purchase Agreement, we acquired all right, title and interest in 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.

 

  The FarmLens platform extends our reach as a business through key partnerships with, and direct integration into offerings by leading agricultural companies, 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’s FieldView™ platform, enabling farmers to share images from FarmLens to their FieldView 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.

 

I n December 2018, we unveiled our plans to develop a FarmLens Mobile app, extending the numerous benefits of the FarmLens platform to mobile devices. The FarmLens 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. Through 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 sustainable agriculture.

 

For the 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 of FarmLens , in March 2019 AgEagle introduced ParkView , 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 of ParkView , the Company announced that it signed Denver Parks and Recreation in Denver, Colorado as the first customer on the ParkView 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 AgEagle FarmLens 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 consolidated 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. Our most critical estimates include those related to revenue recognition, inventories and 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. Our actual results may differ from 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 Months ended March 31, 2019 and 2018

 

For the three months ended March 31, 2019, we recorded revenues of $45,993 compared to revenues of $29,191 for the same period in 2018, a 58% increase. The increase was due to a shift in the drone industry from do-it-yourself, early adopter farmers to a more services-oriented model whereby advanced aerial imagery-based data collection and analytics solutions that utilize drone-based aerial imagery to help promote and proactively support corporate and farming sustainability initiatives . The Company is in the process of continuing 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 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 toward sustainable markets as result of the recent infusion of operating capital and significant reduction of debt.

 

For the three months ended March 31, 2019, cost of sales totaled $33,948, a $10,150 or 43% increase as compared to $23,798 for the three months ended 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, resulting in an increase in our profit margin in the current period. The main contributor to the increase in our cost of sales was due to the additional sales recorded for the quarter, which also led to an increase in our gross margin. Gross margin also increased due to sales of our FarmLens platform for purposes of processing the imagery and less slow-moving such as newer sensors, cameras and other parts for the planes being sold at a discount.

 

We recorded total operating expenses of $577,048 during the three months ended March 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 administrative costs, professional fee and selling costs. General and administrative expenses totaled $474,902 in the three months ended March 31, 2019 compared to $40,853 in 2018, an increase of 1,062%, due to amortization costs associated with intangibles assets acquired as a result of the Agribotix acquisition, D&O insurance, financial filing fees and investor relations in connection with on-going expenses related to us being publicly traded not incurred in the prior period. We also had additional general and administrative costs related to an increase in salary costs for new and existing employees along with stock compensation costs for employees and directors due to the issuance of options. Professional fees totaling $90,019 in the three months ended March 31, 2019 were expenses incurred for legal and accounting, compared to $151,061 in the three months ended March 31, 2018 which related to a decrease in legal and accounting and consulting services associated with the completion of the reverse merger finalized on March 26, 2018. For the three months ended March 31, 2019, we recorded selling expenses of $12,127 compared to $4,627 for the three months ended March 31, 2018, representing an increase of 162% due to more travel expenses for purposes of business development.

 

There was no 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 decrease due the reversal of dealer termination costs accrued from prior periods as a result of all liabilities having been fully satisfied during the period.

 

Interest expense for the three months ended March 31, 2019 was $462 as compared to $27,414 in the three months ended March 31, 2018. The increase was due to the conversion of all debt, except for a promissory note assumed as a result of the EnerJex merger, and the amortization of debt discounts and warrant expense upon completion of the reverse merger on March 26, 2018.

 

Our net loss was $565,465 in the three months ended March 31, 2019. This represents a $361,968 increase from our net loss of $203,497 in the three months ended March 31, 2018, Overall the increase in net loss is due to more operating costs and less growth in our sales for the period as we begin to implement our new initiatives in the sustainable agriculture market. 

 

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Cash Flows

 

March 31, 2019 compared to December 31, 2018

 

Cash on hand was $2,151,124 at March 31, 2019 compared to the $2,601,730 at December 31, 2018, a decrease of $450,606. Cash used in operations for the three months ended March 31, 2019 was $(418,636) compared to $(769,799) of cash used in operations for the three months ended March 31, 2018. The decrease was driven mainly by payments of payables for legal expenses, accounting and auditing expenses and a tail-policy for D&O insurance as a result of the reverse merger that was paid in the first quarter of 2018.

 

There 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 three months ended March 31, 2018 of $221,255. The use of cash in the quarter ended March 31, 2018 was due to cash received from the merger and a payment made to Agribotix for purposes of its future acquisition.

 

Cash used in financing activities during the three months ended March 31, 2019 was $31,970 compared to cash provided by investing of $3,980,000 as of March 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 exchange for Common and Preferred shares in the Company,

 

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 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.

 

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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 20 th calendar 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 90 th calendar day following the Filing Date or, in the event of a “full review” by the Commission, the 120 th 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 were 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.

  

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 and Control Procedures

 

The Company’s Chief Executive Officer and the Company’s Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2019 and had concluded that the Company’s disclosure controls and procedures are effective. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

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Management’s Report on Internal Control over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The 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 in accordance with 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, projection of any evaluation of effectiveness to future periods is 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 has conducted, with the participation of our Chief Executive Officer and our Chief Financial Officer, an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2019. Management’s assessment of 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”) in Internal Control over Financial Reporting — Guidance for Smaller Public Companies. Based on this evaluation, Management concluded that our system of internal control over financial reporting was effective as of December 31, 2018, based on these criteria. 

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(t) and 15d-15(f) under the Exchange Act, during the three months ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From 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 in the future where the outcomes of such claims are unfavorable to us. Liabilities in excess of our insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on our business, financial condition and results of operations.

 

Item 1A. Risk Factors.

 

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. Recent Sales of Unregistered Equity Securities and Use of Proceeds

 

None.

   

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits

 

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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SIGNATURES

 

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)

  

Date: May 15, 2019

 

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