See accompanying notes to the condensed interim
consolidated financial statements.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 1 — Description of Business
AgEagle Aerial Systems
Inc. (“AgEagle,” or “the Company,”) was originally 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.
In
addition, we also introduced in the first half of 2019 registration, oversight, compliance and enforcement, and reporting solutions
in support of the United States’ emerging hemp cultivation industry and its key stakeholders; namely, state and territorial
departments of agriculture, hemp growers and hemp processors.
The Company also
designs, produces, distributes and supports technologically advanced small unmanned aerial vehicles (UAVs or drones) that AgEagle
offers for commercial sale 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.
In the third quarter
of 2019, AgEagle announced that we had begun to actively pursue expansion opportunities within the emerging Drone Logistics and
Transportation market and revealed that we had received our first purchase orders from a major ecommerce company to manufacture
and assemble UAVs designed to meet the critical specifications for drones that are meant to carry packaged goods in urban and suburban
areas.
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 4th 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 “AgEagle Aerial, Inc.”
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 1 — Description of Business – Continued
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.
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., 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 September 30, 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.
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 (“GAAP”) in all material respects and have been consistently applied in preparing
the accompanying consolidated financial statements.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 2 — Summary of Significant
Accounting Policies – Continued
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 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 September 30, 2019 or December 31, 2018.
The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000. Our bank balances at time may exceed the FDIC limit. To date, the Company has not experienced any losses on its
invested cash.
Receivables and
Credit Policy – Trade receivables due from customers are uncollateralized customer obligations due
under normal trade terms requiring payment within 30 days from the invoice date. Terms with our distributor allow for payment terms
of 45 days from the invoice date. Trade receivables are stated at the amount billed to the customer. The Company generally does
not charge interest on overdue customer account balances. Payments of trade receivables are allocated to the specific invoices
identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
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 September 30, 2019 and December 31, 2018.
Inventories –
Inventories, which consist of raw materials, finished goods and work-in-process, are stated at the lower of cost or net
realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. Cost
components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates
its ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand
in relation to the inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of
the inventories is also considered in establishing its valuation. Based upon the evaluation, provisions are made to reduce excess
or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments
to the cost basis of the respective inventories. These adjustments are estimates, which could vary significantly, either favorably
or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic
conditions, customer inventory levels, product discontinuances, sales return levels or competitive conditions differ from the
Company’s estimates and expectations. As of September 30, 2019 and December 31, 2018, the Company had recorded a provision
for obsolescence of $7,145 and $10,369, respectively.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 2 — Summary of Significant Accounting
Policies – Continued
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 September
30, 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.
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 nine-month period ending September 30, 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 and/or when the goods are shipped and control transfers to our customers. Revenue mainly reflects
the consideration we expect to receive in exchange for our products and a small amount for performance of services. 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
or pay upon shipping for each UAV or drone delivery assembly part ordered. Customer payments received in advance of the Company
completing performance obligations are recorded as a contract liability.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 2 — Summary of Significant Accounting
Policies – Continued
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 nine months
ended September 30,
|
Customers
|
|
2019
|
|
2018
|
Customer A
|
|
|
95.9
|
%
|
|
|
—
|
|
Customer B
|
|
|
12.2
|
%
|
|
|
—
|
|
Customer C
|
|
|
—
|
|
|
|
14.4
|
%
|
Customer D
|
|
|
—
|
|
|
|
13.6
|
%
|
Customer E
|
|
|
—
|
|
|
|
11.9
|
%
|
Customer F
|
|
|
—
|
|
|
|
10.3
|
%
|
Accounts
receivable due from customers A & B comprised 80% of accounts receivable as of September 30, 2019.
The table below reflects
our revenue for the periods indicated by product mix.
|
|
For nine months ended September 30,
|
Type
|
|
2019
|
|
2018
|
Product Sales
|
|
$
|
54,060
|
|
|
$
|
67,213
|
|
Product Assembly Sales
|
|
|
30,685
|
|
|
|
—
|
|
Subscription Sales
|
|
|
23,040
|
|
|
|
3,625
|
|
Total
|
|
$
|
107,785
|
|
|
$
|
70,838
|
|
Vendor Concentration
- As of September 30, 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 and nine months ended September 30, 2019
and 2018 totaled $240 and $1,271, respectively, and $1,218 and $3,766, respectively, which is included in cost of goods sold on
the statement of operations.
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 shares of Common Stock
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. As of September 30, 2019, the Company had 4,531,924 warrants and 2,270,665 options to purchase Common
Stock, and 3,636 shares of Series C Preferred Stock, which may be converted into 6,733,333 shares of Common Stock. As of September
30, 2018, the Company had 828,200 warrants and 1,471,192 options to purchase Common Stock, and 6,199 shares of Preferred
Series C shares which were convertible into 4,176,907 of Common Stock.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 2 — Summary of Significant Accounting
Policies – Continued
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.
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
Recent Accounting Pronouncements
- 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 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.
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.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 3 — Inventories
Inventories consist of the following at:
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Raw materials
|
|
$
|
111,296
|
|
|
$
|
109,826
|
|
Work-in-process
|
|
|
26,456
|
|
|
|
30,088
|
|
Finished goods
|
|
|
17,574
|
|
|
|
19,937
|
|
Gross inventory
|
|
$
|
155,326
|
|
|
$
|
159,851
|
|
Less obsolete reserve
|
|
|
(7,145
|
)
|
|
|
(10,369
|
)
|
Total
|
|
$
|
148,181
|
|
|
$
|
149,482
|
|
Note 4 — Property and Equipment
Property and equipment consist of the following at:
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Property and equipment
|
|
$
|
174,028
|
|
|
$
|
116,313
|
|
Less accumulated depreciation
|
|
|
(98,312
|
)
|
|
|
(87,939
|
)
|
|
|
$
|
75,716
|
|
|
$
|
28,374
|
|
Depreciation expense for
the three and nine months ended September 30, 2019 was $4,185 and $10,373, respectively; and for the three and nine months ended
September 30, 2018, depreciation expense totaled $4,151 and $12,454, 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 September 30, 2019:
Intangible Assets
|
|
Estimated
Life
|
|
Gross
Cost
|
|
Accumulated Amortization
|
|
Net Book
Value
|
Intellectual Property/Technology
|
|
5 yrs.
|
|
$
|
433,400
|
|
|
$
|
(93,903
|
)
|
|
$
|
339,497
|
|
Customer Base
|
|
5 yrs.
|
|
|
72,000
|
|
|
|
(15,600
|
)
|
|
|
56,400
|
|
Tradenames - Trademarks
|
|
5 yrs.
|
|
|
58,200
|
|
|
|
(12,610
|
)
|
|
|
45,590
|
|
Non-compete agreement
|
|
4 yrs.
|
|
|
160,900
|
|
|
|
(43,577
|
)
|
|
|
117,323
|
|
Carrying value as of September 30, 2019
|
|
|
|
$
|
724,500
|
|
|
$
|
(165,690
|
)
|
|
$
|
558,810
|
|
Amortization expense for
the three and nine months ended September 30, 2019 was $38,236 and $118,309, respectively; and amortization expense for the three
and nine months ended September 30, 2018 was $11,845 and $11,845, respectively.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 6 — Promissory Note
On
March 26, 2018, 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. As of September 30, 2019, the promissory note has been paid in full resulting in principal payments of $40,998
made during the first four months of 2019. The Company recorded interest of $501 for the nine months ended September 30, 2019.
Note 7 — Equity
Capital Stock Issuances
During the nine months
ended September 30, 2019, Alpha Capital Anstalt converted a total of 1,026 shares of Series C Preferred Stock into 1,900,000 shares
of Common Stock at a conversion price of $0.54.
On June 18, 2019, the Company
issued in connection with a consulting agreement, dated May 3, 2019, 500,000 shares of its Common Stock to the consulting company
as a part of their compensation for services. The Company recognized a total of $170,000 of investor relations expense at a fair
value of $0.34 per share within general and administrative costs related to these issuances.
On
June 18, 2019, the Company issued in connection with an investor relations agreement, dated April 4, 2018, 50,000 shares of its
Common Stock to the investor relations firm. The Company recognized a total of $20,500 of investor relations expense at a fair
value of $0.41 per share within general and administrative costs related to these issuances.
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 nine months ended September 30, 2019, the Company recorded $121,333 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 and apply any and all net proceeds from such financing(s) to the redemption in full
of the Preferred Stock.
The Preferred Stock is
nonconvertible, 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.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 7 — Equity – Continued
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.
Series C Preferred Stock
On November 21, 2017, Alpha
Capital Anstalt (“Alpha”) signed a binding commitment letter with EnerJex to provide prior to or at the closing of
the Merger a minimum of $4 million in new equity capital (the “Private Placement”). The Private Placement was consummated
on March 26, 2018. In connection with the Private Placement, Alpha purchased an additional 4,000 shares of Series C Preferred Stock
at a purchase price of $1,000 per share for total aggregate consideration of $4 million. At the time of the 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 $0.54. Until the volume weighted average price of our Common Stock
on NYSE exceeds $107.50 with average trading volume of 200,000 shares per day for ten consecutive trading days, the conversion
price of our Series C Preferred Stock is subject to full-ratchet, anti-dilution price protection. Under that provision, if, while
that full-ratchet, anti-dilution price protection is in effect, we issue shares of our Common Stock at a price per share (the “Dilutive
Price”) that is less than the conversion price, then the conversion price of our Series C Preferred Stock is automatically
reduced to be equal to the Dilutive Price. The effect of that reduction is that, upon the issuance of shares of Common Stock at
a Dilutive Price, the Series C Preferred Stock would be convertible into a greater number of shares of our Common Stock.
Options Issued
On
March 26, 2018, the EnerJex 2017 Omnibus Equity Incentive Plan (the “Plan”) became effective. Under the Plan, 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 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.
On
June 18, 2019, at the Annual Meeting of Shareholders of the Company, the shareholders approved a proposal to increase the number
of shares of Common Stock reserved for issuance under the Plan from 2,000,000 to 3,000,000. 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 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.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 7 — Equity – Continued
During the nine months
ended September 30, 2019, the Company issued options to purchase 1,054,000 shares of Common Stock to directors and employees of
the Company at the fair value exercise prices ranging from $0.29 to $0.54 per share expiring on dates between December 31, 2023
and March 28, 2029. The Company determined the fair-market value of the options to be $248,761. In connection with the issuance
of these options to employees and directors, the Company recognized $15,873 and $32,361, respectively, in stock compensation expense
for the three and nine months ended September 30, 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 prices ranging from $0.51 to $4.33 per share expiring on dates between March 30, 2023 and December 15, 2028.
The Company determined the fair-market value of the options to be $387,052. In connection with the issuance of these options to
employees and directors, the Company recognized $54,766 and $180,966 in stock compensation expense for the three and nine months
ended September 30, 2019, respectively.
On October 4, 2017, AgEagle
Sub issued options to purchase 927,775 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, the Company recognized $1,349 and $4,048 in stock compensation expense for the three
and nine months ended September 30, 2019, respectively.
The fair value of options
granted during the nine months ended September 30, 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 nine months ended September
30, 2019 were as follows:
|
|
September 30, 2019
|
Dividend yield
|
|
|
0%
|
|
Expected life
|
|
|
3.5-6.5 Years
|
|
Expected volatility
|
|
|
82.38-85.89%
|
|
Risk-free interest rate
|
|
|
1.56-2.23%
|
|
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 7 — Equity – Continued
A summary of the options
activity for the nine months ended September 30, 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
|
|
|
1,054,000
|
|
|
|
0.37
|
|
|
|
6.61 Years
|
|
|
|
—
|
|
Exercised/Forfeited
|
|
|
(144,688
|
)
|
|
|
0.49
|
|
|
|
— Years
|
|
|
|
—
|
|
Outstanding at September 30, 2019
|
|
|
2,403,470
|
|
|
|
0.39
|
|
|
|
6.41 Years
|
|
|
|
235,896
|
|
Exercisable at period end
|
|
|
1,339,467
|
|
|
$
|
0.33
|
|
|
|
6.54 Years
|
|
|
$
|
226,958
|
|
For options granted during
the nine months ended September 30, 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 $281,183
through March 31, 2022.
Intrinsic value is measured
using the fair market value at the date of exercise (for shares exercised) or at September 30, 2019 (for outstanding options),
less the applicable exercise price.
A summary of the options
activity for the nine months ended September 30, 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
|
|
|
231,250
|
|
|
|
2.29
|
|
|
|
5.0 years
|
|
|
|
—
|
|
Cancelled
|
|
|
(101,938
|
)
|
|
|
0.06
|
|
|
|
2.3 years
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
1,264,142
|
|
|
$
|
0.47
|
|
|
|
7.8 years
|
|
|
$
|
—
|
|
Exercisable at end of the year
|
|
|
912,489
|
|
|
$
|
0.15
|
|
|
|
7.4 years
|
|
|
$
|
—
|
|
Note 8 — Warrants to Purchase Common
Stock
As of September 30, 2019,
the Company had outstanding warrants, in connection with the issuance of debentures in 2017, to purchase 828,221 shares of the
Company’s Common Stock at an exercise price of $1.51 with an expiration date 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 for $2,000,000 in gross proceeds. The
shares of Common Stock underlying 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.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 8 — Warrants to Purchase Common
Stock – Continued
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 September 30, 2019 are scheduled to expire between December 26, 2023 and October 21, 2024.
A summary of activity related
to warrants for the nine months ended September 30, 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 September 30, 2019
|
|
|
4,531,924
|
|
|
$
|
0.72
|
|
|
|
4.31
|
|
Exercisable at September 30, 2019
|
|
|
4,531,924
|
|
|
$
|
0.72
|
|
|
|
4.31
|
|
A summary of activity related
to warrants for the nine months ended September 30, 2018 follows:
|
|
Shares
|
|
Weighted- Average Exercise Price ($)
|
|
Weighted-Average Remaining Contractual Term
|
Outstanding at January 1, 2018
|
|
|
828,221
|
|
|
$
|
1.51
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
828,221
|
|
|
$
|
1.51
|
|
|
|
6.10
|
|
Exercisable at September 30, 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 $4,500 and $4,500 for the nine months ended September 30, 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 ended on May 31, 2019
and the Company renewed the lease for another year with an option to terminate at any time with a 30-day prior notice period.
Rent expense was $18,000 for the nine months ended September 30, 2019.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
(Unaudited)
Note 9 — Commitments and Contingencies – Continued
GreenBlock Capital LLC Consulting Agreement
On May 3, 2019, 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 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 Common Stock
upon execution of the agreement, and (iii) up to 2,500,000 shares of restricted Common Stock upon the achievement of predetermined
milestones.
The Consultant was also
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; 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.
Directors of the
Company
On April 15, 2019, the Company received notification from Mr. Corbett Kull that effective immediately he was
resigning as a director of the Company. Mr. Kull did not serve on any of the committees of the Board of Directors. 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 of directors currently consists of four directors,
three of whom are independent. The Company is not looking for a replacement for Mr. Kull at this time.
Note 10 — Related Party Transactions
The following reflects
the related party transactions during the three and nine months ended September 30, 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 its related expenses have
been included within general and administrative expenses. For the three and nine months ended September 30, 2019, Premier Financial
Filings provided services to the Company resulting in fees of $1,428 and $7,753, respectively. The fees incurred during
the three and nine months ended September 30, 2019 are included in accounts payable as of September 30, 2019.
Note 11 — Subsequent Events
GreenBlock Capital LLC Consulting Agreement
On October 31,
2019, the consulting agreement with the Consultant (See Note 9) was terminated as a result of the Company no longer needing
these services to be provided by an outside consultant. During the term of the agreement, the Company paid to the Consultant
(i) $25,000 per month, and issued (ii) 500,000 restricted shares of Common Stock at the execution of the agreement.
The agreement also provided for the issuance of up to an additional 2,500,000 shares of restricted Common Stock
upon the achievement of milestones that were to be determined by the Company and the Consultant during the term of the agreement.
There are no early termination penalties incurred as a result of the termination of the consulting agreement. The Consultant
may still be entitled to receive the Shares after termination of the Agreement, if the achievement of milestones that commenced
during the term of the Agreement are completed after termination.
On
November 12, 2019, the Company announced that the Florida Department of Agriculture and Consumer Services (FDACS) had chosen
AgEagle’s HempOverview software-as-a-solution (SaaS) platform to manage the online application submission and
registration process for hemp growers and their farms and hemp fields for the 2020, 2021 and 2022 planting seasons (the
“Florida Contract”). Prior to the termination of the Agreement with the Consultant, as part of the
Consultant’s services, Consultant introduced the Company to the FDACS, which introduction resulted in the Company
signing the Florida Contract. Since the Consultant was instrumental in identifying and introducing the Company to FDACS prior
to termination of the Agreement, the execution of the Florida Contract is a milestone achieved by the Consultant under the
terms of the Agreement. As a result of the achievement of that milestone, the Company will issue 250,000 shares of Common
Stock to the Consultant. The Consultant may be entitled to receive up to another 750,000 shares of Common Stock, which will
be contingent upon further milestones to be achieved under the Florida Contract.
Note 11 — Subsequent Events – Continued
Compensation Arrangements for Officers
On September 30,
2019, the Company’s board of directors and the compensation committee of the board approved new compensatory
arrangements for certain of Company’s officers.
Barrett Mooney, Chief Executive Officer
Commencing on September
30, 2019, Mr. Mooney shall receive quarterly awards of stock options to purchase 15,000 shares of the Company’s Common Stock
under the Company’s current shareholder-approved equity incentive plan. The exercise price at the time of the awards shall
be based on the fair market value of the Company’s Common Stock on the NYSE American on the date of grant. The options will
be issued quarterly for a period of two years, will vest in equal amounts over a two-year term from the date of grant, and will
be exercisable for a period of five years from date of grant.
Mr. Mooney is also entitled
to receive bonuses up to $48,000 in cash, 250,000 shares of restricted Common Stock and 225,000 stock options upon the
achievement of certain Company operational milestones.
Nicole Fernandez-McGovern, Chief Financial
Officer
On September 30, 2019,
Ms. Fernandez-McGovern was awarded a stock option to purchase 25,000 shares of the Company’s Common Stock under the Company’s
current shareholder-approved equity incentive plan. The option will vest in equal amounts over a two-year term from the date of
grant, and will be exercisable for a period of five years from date of grant. The exercise price of the stock option is $0.31 per
share, which was the fair market value of the Company’s Common Stock on the NYSE American on September 30, 2019.
Ms. Fernandez-McGovern
is also entitled to receive bonuses up to $39,000 in cash, 170,000 shares of restricted Common Stock and 175,000 stock
options upon the achievement of certain Company operational milestones.
The foregoing compensation
arrangements are in addition to the current compensation received by each of Mr. Mooney and Ms. Fernandez-McGovern under their
respective employment agreements.