NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
1 – Description of Business
AgEagle
Aerial Systems, Inc. (the “Company” and/or “AgEagle”) designs, produces, distributes and supports technologically-advanced
small unmanned aerial vehicles (UAVs or drones) that are offered for sale commercially to the precision agriculture industry.
AgEagle Sub was founded in 2010 by Bret Chilcott, our President and Chief Executive Officer, as Solutions by Chilcott, LLC, a
Kansas limited liability company. In April 2015, Solutions by Chilcott was converted into a corporation and then merged into AgEagle
Sub, a newly-formed Nevada corporation. Its first commercially available product was the AgEagle Classic which was followed shortly
thereafter by the RAPID System. The Company has improved and matured its initial product, the RX-60 and subsequently the current
products are the RX-47 and RX-48. In February 2016, the Company signed a worldwide distribution agreement with Raven Industries,
Inc. (“Raven”) under which they can purchase the RX-60 or RX-48 for the agriculture markets for resale through their
network of dealers worldwide. Raven and its network of dealers offer the RX-60 and RX-48 systems to the public, including a subscription
for a software package that is provided by a third party. The first shipment of our RX-60 system to Raven occurred in March 2016.
The
Company believes its success has been achieved with its products, stems from its ability to invent and deliver advanced solutions
utilizing our proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals
operate more effectively and efficiently. The company’s core technological capabilities, developed over five years of innovation,
include a lightweight laminated shell that allows the UAV platform to perform under challenging flying conditions, a camera with
a Near Infrared (NIR) filter, a rugged foot launcher (RX-60), and high end software provided by third parties that automates drone
flights and provides geo-referenced data.
The
Company is headquartered in Neodesha, Kansas 66757. Its website address is http://www.ageagle.com.
Corporate
History; Recent Business Combination
The
Company was formerly known as Millennium Plastics Corporation and was incorporated in the State of Nevada on March 31, 1999. In
August 2006, the Company acquired Midwest Energy, Inc., a Nevada corporation pursuant to a reverse merger. After such merger,
Midwest Energy became a wholly-owned subsidiary, and as a result of such merger, the former Midwest Energy stockholders controlled
approximately 98% of our outstanding shares of common stock. The Company changed its name to EnerJex Resources, Inc., (“EnerJex”)
in connection with this merger, and in November 2007, it changed the name of Midwest Energy (one of our wholly-owned subsidiaries)
to EnerJex Kansas, Inc. (“EnerJex Kansas”). All of its operations conducted prior to this merger were through EnerJex
Kansas, Inc., Black Sable Energy, LLC, a Texas limited liability company (“Black Sable”) and Black Raven Energy, Inc.
a Nevada corporation (“Black Raven”). The Company’s leasehold interests were held in our wholly-owned subsidiaries
Black Sable, Working Interest, LLC, EnerJex Kansas and Black Raven.
On
March 26, 2018 (the “Merger Date), the Company consummated the transactions contemplated by that certain Agreement and Plan
of Merger (the “Merger Agreement”), dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., a Nevada corporation
and our wholly-owned subsidiary, 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 its wholly-owned subsidiary (the “Merger”).
In connection with the Merger, the Company changed its name to AgEagle Aerial Systems Inc. and AgEagle Sub changed its name to
“Eagle Aerial Systems, Inc.” The Company’s common stock continues to trade on the NYSE American under its new
symbol “UAVS” since March 27, 2018.
In
November 2017, the Company entered into a multi-agreement arrangement with Agribotix, LLC (“Agribotix”), headquartered
in Boulder, Colorado, a leading agricultural information processing company providing actionable data to the agriculture industry.
See Note 5 for further details about the transaction.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
-
These 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 financial
statements are prepared using the accrual method of accounting. The Company has elected a December 31 fiscal year end.
The
accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted
in the United States and pursuant to SEC rules and regulations for interim financial information. Accordingly, they do not include
all of the information and footnotes required for complete financial statements. In the opinion of management, these condensed
consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the
Company’s financial position at March 31, 2018 and December 31, 2017, the results of operations for the three months
ended March 31, 2018 and 2017, and cash flows for the three months ended March 31, 2018 and 2017. The results for the
three months ended March 31, 2018 and 2017 are not necessarily indicative of the results to be expected for the full year.
These statements should be read in conjunction with the Company’s audited financial statements and management’s discussion
and analysis included the Company’s annual financial statements for the years ended December 31, 2017 and 2016
included as part of the Form 8-K filed March 29, 2018.
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 and the valuation of deferred tax assets. Therefore, the determination of estimates requires the exercise of
judgment.
Fair
Value of Financial Instruments -
Unless otherwise disclosed, the fair value of the Company’s financial instruments including
cash, accounts receivable, convertible debt, 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.
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 March 31, 2018 and December 31, 2017.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
2 – Summary of Significant Accounting Policies – Continued
Inventories
-
Inventories, which consist of raw materials, finished goods and work-in-process, are stated at the lower of cost or net
realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. Cost
components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates
its ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand
in relation to the inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of
the inventories is also considered in establishing its valuation
.
Based upon the evaluation, provisions are made to reduce excess or obsolete inventories to their
estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the respective
inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from the amounts
that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory
levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s estimates and expectations.
Provisions
for Inventory Obsolescence –
The Company has a provision for estimated obsolescence and shrinkage of inventory as of
March 31, 2018 of $15,369. Our estimates consider the cost of inventory, forecasted demand, the estimated market value, the shelf
life of the inventory and our historical experience. If demand for a product declines or a change in the features of our products
changes the components required to build it is reasonably likely that circumstances may cause the estimate to change, which would
result in additional charges to net income.
Research
and Development -
The Company expenses research and development costs during the period incurred, which totaled $476 and $316
for the three months ended March 31, 2018 and 2017, respectively.
Property
and Equipment -
Property and equipment are recorded at cost, and are being depreciated using the straight-line method over
the estimated useful lives of the related assets, ranging from three to seven years. Leasehold improvements are recorded at cost
and are amortized on a straight- line basis over the shorter of their estimated lives or the remaining lease term. Significant
renewals and betterments are capitalized. Maintenance and repairs that do not improve or extend the lives of the respective assets
are expensed. At the time property and equipment are retired or otherwise disposed of, the cost and related accumulated depreciation
accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are reflected in the statements of
operations.
Investment
in Unconsolidated Investee
-
The Company accounts for investments in which the Company owns more than 20% or more of
the investee, using the equity method in accordance with ASC Topic 323,
Investments—Equity Method and Joint Ventures
.
Under the equity method, an investor initially records an investment in the stock of an investee at cost, and adjusts the carrying
amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of acquisition.
The amount of the adjustment is included in the determination of net income by the investor, and such amount reflects adjustments
similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and
to amortize, if appropriate, any difference between investor cost and underlying equity in net assets of the investee at the date
of investment. The investment of an investor is also adjusted to reflect the investor's share of changes in the investee's capital.
Dividends received from an investee reduce the carrying amount of the investment. A series of operating losses of an investee
or other factors may indicate that a decrease in value of the investment has occurred which is other than temporary and which
should be recognized even though the decrease in value is in excess of what would otherwise be recognized by application of the
equity method.
Shipping
Costs -
Shipping costs for the three months ended March 31, 2018 and 2017 totaled $952 and $649, 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 in shipments of operations.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
2 – Summary of Significant Accounting Policies – Continued
Revenue
Recognition and Concentration -
The Company recognizes revenues for the sale of its products in the period when persuasive
evidence of an arrangement with a customer, distributor or dealer exists, product delivery and acceptance have occurred and title
has transferred to the customer, dealer or the distributor, the sales price is fixed or determinable and collectability of the
resulting receivable is reasonably assured.
The
Company generally recognizes revenue on sales to customer, dealer and distributors upon satisfaction of our performance obligations
when the goods are shipped. For consignment sales, we recognize revenue when the goods are pulled from consignment inventory.
The Company generally ships FOB Shipping Point terms. Shipping documents are used to verify delivery and customer acceptance.
The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction
and quantity of drones being purchased. The Company assesses collectability based on the creditworthiness of the customer as determined
by evaluations and the customer’s payment history. Additionally, customers are required to place a deposit on each drone
ordered.
The
Company has executed one significant non-exclusive worldwide distributor agreement in 2016 and a dealer agreement whereby the
dealer and distributor agreed to purchase AgEagle drones and other related products. Only the non-exclusive worldwide distributor
has the right of return within twelve months of purchase up to a certain percentage of the annual sales volume less a restocking
fee. As of March 31, 2018, no sales of the Company are subject to this right of return clause per the distributor agreement.
Sales
concentration information for customers comprising more than 10% of our total net sales such customers is summarized below:
|
|
|
Percent
of total sales for period ended March 31,
|
|
Customers
|
|
2018
|
|
2017
|
|
Customer
A
|
|
31.8%
|
|
*
|
|
Customer
B
|
|
27.8%
|
|
*
|
|
Customer
C
|
|
19.1%
|
|
*
|
|
Customer
D
|
|
*
|
|
29.5%
|
|
Customer
E
|
|
*
|
|
17.7%
|
|
Customer
F
|
|
*
|
|
10.02%
|
|
*-
Represents less than 10% of total revenue
|
Advertising
costs
– Advertising costs are expensed as incurred. Advertising costs amounted to $906 and $1,036 for the three months
ended March 31, 2018 and 2017, respectively
.
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. As of March 31, 2018, the Company had 828,200 warrants and 1,184,300 options to purchase common stock,
and 623,293 Preferred Series B and C shares which may be converted into 4,497,611 of common shares. As of March 31, 2017, the
Company had 200,000 warrants and 125,000 options to purchase common stock, and 511,647 potential convertible shares which may
be issued resulting from the provisions of convertible notes.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
2 – Summary of Significant Accounting Policies – Continued
Income
Taxes -
The Company accounts for income taxes in accordance with FASB 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.
Recently
Issued Adopted Accounting Standards
In May 2014, the FASB
issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This
updated guidance supersedes the current revenue recognition guidance, including industry-specific guidance. The updated guidance
introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or
services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. This standard provides a single set of guidelines for revenue recognition to be used across all industries
and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017.
Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect
the consideration to which the Company expects to be entitled in exchange for those goods or services and recognize revenue under
the new standard as costs are incurred. Under previous U.S. generally accepted accounting principles (GAAP), revenue was generally
recognized when deliveries were made, performance milestones were attained, or as costs were incurred. The new standard accelerates
the timing of when the revenue is recognized, however, it does not change the total amount of revenue recognized on these contracts.
The new standard does not affect revenue recognition for purposes of the Company’s sales as each of the Company’s
revenue transactions represent a single performance obligation that is satisfied at a point time, as defined in the new ASU.
Accordingly, the Company recognizes revenue for these customers at the point in time when the Company’s performance obligation
is complete, which is when the customer accepts delivery of the drone. The Company adopted the updated guidance effective January
1, 2018 using the full retrospective method, however the new standard did not have a material impact on our consolidated financial
position and consolidated results of operations, as it did not change the manner or timing of recognizing revenue on a majority
of our revenue transactions.
In
January 2016, the FASB issued ASU 2016-01,
Financial Instruments: Recognition and Measurement of Financial Assets and
Financial Liabilities
, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial
statements. This guidance will be effective in the first quarter of fiscal year 2019 and early adoption is not permitted. The
Company is currently evaluating which transition method it will adopt and the expected impact of the updated guidance, but does
not believe the adoption of the updated guidance will have a significant impact on its consolidated financial statements.
In
February, 2016, FASB issued Account Standards Update 2016-02 –
Leases
(Topic 842) intended to improve financial reporting
of leasing transaction whereby lessees will need to recognize a right-of-use asset and a lease liability for virtually all of
their leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms
of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement,
and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a
finance or operating lease. However, unlike current GAAP—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 is currently evaluating
the impact of the updated guidance, but does not believe the adoption of the updated guidance will have a significant impact on
its 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.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
2 – Summary of Significant Accounting Policies – Continued
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,
2018
|
|
December
31,
2017
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
84,930
|
|
|
$
|
91,201
|
|
|
Work-in-process
|
|
|
33,053
|
|
|
|
34,850
|
|
|
Finished
goods
|
|
|
25,383
|
|
|
|
32,581
|
|
|
|
|
$
|
143,366
|
|
|
$
|
158,632
|
|
Note
4 — Property and Equipment
Property
and equipment consist of the following at:
|
|
|
March
31,
2018
|
|
December
31,
2017
|
|
|
|
|
|
|
|
Property
and equipment
|
|
$
|
108,663
|
|
|
|
108,664
|
|
|
Less
accumulated depreciation
|
|
|
(74,112
|
)
|
|
|
(69,961
|
)
|
|
|
|
$
|
34,551
|
|
|
$
|
38,703
|
|
Depreciation
expense for the three months ended March 31, 2018 and 2017 was $4,151 and $4,156, respectively.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
5 —Investment in Unconsolidated Investee
In
November 2017, AgEagle entered into a multi-agreement arrangement with Agribotix, LLC (“Agribotix”), headquartered
in Boulder, Colorado, an agricultural information processing company providing actionable data to the agriculture industry.
Agribotix’s platform delivers agricultural intelligence to increase yields and profits using drone-enabled technologies.
Agribotix was founded in 2013 by Dr. Tom McKinnon, its Chief Technology Officer.
The
Company believes that developing a strong working relationship with Agribotix will benefit AgEagle and its shareholders in developing
important vertically integrated products and services. Agribotix’s primary product is FarmLens™, a subscription
cloud analytics service that processes data, primarily collected with a drone such as the Company’s, and makes such data
usable by farmers and agronomists. FarmLens is currently sold by Agribotix as a subscription and offered either standalone or
in a bundle with major drone platforms manufactured by leading drone providers like AgEagle, DJI, and senseFly.
Agribotix
extends the reach of its FarmLens platform by partnering with and directly integrating into offerings by leading agricultural
companies like John Deere’s Operations Center and The Climate Corporation’s FieldView. To date, Agribotix has
processed agricultural imagery for over 50 different crop types from over 50 countries around the world.
The
agreements reached between the Company and Agribotix include:
|
|
•
|
Dealer
Agreement whereby the Company appointed Agribotix as a non-exclusive dealer of the Company’s products on a worldwide,
best efforts basis. The term of the agreement is for twelve months with marketing and sales commencing on or after January
1, 2018, and automatically renews for one-year periods unless otherwise terminated. Either party may terminate the agreement
with 30 days written notice. Both parties agree to provide standard reporting and support services. Agribotix
is required to maintain proper insurance and is obligated to standard confidentiality clauses. The Company has the right
to audit Agribotix on an annual basis for its business under this agreement. Both parties agreed to standard indemnification
clauses.
|
|
|
|
|
|
|
•
|
Distribution
and Resale Agreement whereby Agribotix appointed the Company as a non-exclusive distributor of Agribotix products and analytic
services including FarmLens on a worldwide, best efforts basis. The term of the agreement is for twelve months and automatically
renews for one-year periods unless otherwise terminated. Either party may terminate the agreement with 90 days’
written notice. Both parties agree to provide standard reporting and support services. The Company is required to maintain
proper insurance and is obligated to standard confidentiality clauses. Both parties agree to standard indemnification clauses.
|
|
|
|
|
|
|
•
|
Exchange
Agreement whereby, to further align interests between the parties, the Company has agreed to exchange shares of the Company’s
common stock it receives in the Merger equal to an aggregate value of $1,000,000 for 20% of the equity membership interests
of Agribotix. As of the date of the closing of the Merger, 200,000 shares of EnerJex were issued to Agribotix as outlined
per the Exchange Agreement. The shares did not affect the Merger exchange ratio, and therefore was not additionally dilutive
to the EnerJex shareholders.
|
|
|
|
|
|
|
•
|
As
part of the signing of the exchange agreement three promissory notes totaling $110,000
with a 6% per annum interest payable that were executed between Agribotix and the Company
in exchange for exclusive dealing until the later of 120 days after the signing date,
or the termination date as defined per the exchange agreement has been recorded as part
of its’s investment in unconsolidated investee as of the date of close of the Merger
Agreement
|
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
5 —Investment in Unconsolidated Investee - Continued
The
Company accounts for its investment in Agribotix using the equity method of accounting. The difference between the fair value
of the Company’s investment, and the amount of underlying equity in the net assets of Agribotix, totaling approximately
$1,489,000 is accounted for as if Agribotix was a consolidated subsidiary and all identifiable assets, including goodwill, were
recorded at fair value and amortized, with this amortization recorded in “memo” and the Company’s portion included
in its share of earnings of Agribotix. Condensed unaudited summary financial information for Agribotix LLC as of March 31, 2018
and for the three months ended March 31, 2018 is as follows:
|
|
|
March
31,
2018
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
37,645
|
|
|
Accounts
receivable
|
|
|
21,151
|
|
|
Property
and equipment
|
|
|
9,070
|
|
|
Inventories
|
|
|
4,740
|
|
|
Marketable
securities in EnerJex at fair market value
|
|
|
866,000
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
938,606
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' DEFICIT
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
103,406
|
|
|
Deferred
revenue
|
|
|
9,067
|
|
|
Debt
|
|
|
1,855,913
|
|
|
Members'
deficit
|
|
|
(1,029,780
|
)
|
|
|
|
|
|
|
|
Total
liabilities and members' deficit
|
|
$
|
938,606
|
|
|
|
|
For
the Three
Months
Ended
March
31, 2018
|
|
|
|
(Unaudited)
|
|
STATEMENT
OF OPERATIONS
|
|
|
|
|
|
Revenues
|
|
$
|
85,897
|
|
|
Cost
of sales
|
|
|
49,860
|
|
|
Gross
profit
|
|
|
36,037
|
|
|
Operating
expenses
|
|
|
139,096
|
|
|
Operating
loss
|
|
|
(103,059
|
)
|
|
Other
(expense) income
|
|
|
178
|
|
|
Net
loss
|
|
|
(102,881
|
)
|
|
Loss
on marketable securities
|
|
|
(134,000
|
)
|
|
Comprehensive
loss
|
|
$
|
(236,881
|
)
|
|
Ownership
interest
|
|
|
20
|
%
|
|
Share
of net loss as of date of investment
|
|
$
|
(914
|
)
|
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
6 — Debt
Convertible
Notes Payable
On
May 6, 2015, the Company closed a private placement pursuant to a subscription agreement whereby two institutional investors (the
“2015 Holders”) purchased convertible notes having an aggregate principal amount of $500,000, convertible into common
stock of the Company at $2.00 per share and maturing on November 6, 2016. Interest on the notes accrues at a rate of 8% annually
and is payable quarterly. It was determined that there were no aggregate beneficial conversion features. On or about March 4,
2016, the Company and the 2015 Holders entered into extension and modification agreements whereby the 2015 Holders agreed to extend
the maturity date of the notes to November 6, 2016, and permanently waive all rights and remedies, of whatever nature, with respect
to the various defaults that occurred under this subscription agreement and notes, including, without limitation, (I) the Company’s
failure to become a public SEC reporting company on or before September 30, 2015, (ii) the Company’s failure to pay interest
on the notes, and (iii) modifying and waiving certain participation rights in future financings. For the three months ended March
31, 2018 and 2017, the Company recorded $9,111 and $10,000 of interest expense, respectively. As of the Merger Date, the principal
amount of the promissory note of $500,000 and its accrued interest of $114,556 were converted at $1.25 per share into AgEagle
common stock of 491,644 shares.
On
June 6, 2016, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor
(the “2016 Holder”) purchased a convertible note having a principal amount of $300,000, convertible into common stock
of the Company at $3.00 per share and maturing on June 30, 2017. Interest on the note accrues at a rate of 8% annually and is
payable quarterly. It was determined that there were no aggregate beneficial conversion features. For the three months ended March
31, 2018 and 2017, the Company recorded $5,467 and $6,000 of interest expense, respectively. As of the Merger Date, the principal
amount of the promissory note of $300,000 and its accrued interest of $42,933 were converted at $1.25 per share into AgEagle common
stock of 274,347 shares.
On
February 3, 2017, the Company closed a private placement pursuant whereby a bridge loan (the “2017 Note A”) agreement
was executed with an accredited investor (the “2017 Holder Note A”) to purchase a convertible promissory note with
an aggregate principal amount of $175,000, an original issue discount of $25,000, convertible into common stock of the Company
at $2.50 per share and maturing 90 days following issuance, or May 4, 2017. After payment of a finder’s fee and other expenses,
the Company received net proceeds of $101,250. In addition, the Company also issued to the 2017 Holder Note A warrants to purchase
200,000 shares of the Company’s common stock at an exercise price per share of $2.50. To the extent the entire unpaid principal
balance of the note is not paid in full on the maturity date, (i) interest on the unpaid principal balance will accrue from the
maturity date at the rate of 18% per annum, and will continue until the date the note is paid in full, and (ii) the Company will
issue to the 2017 Holder Note A an additional warrant to purchase 100,000 shares of common stock for each ninety (90) calendar
day period that the unpaid principal balance of the note and any accrued interest is not paid in full by such date. The Company
had not paid the unpaid balance on May 4, 2017 thereby resulting in a default of the loan and additional warrants to purchase
100,000 shares of common stock were issued.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
6 — Debt - Continued
For
the three months ended March 31, 2018 and 2017, the Company recorded $7,077 and $4,833, respectively. As of the date of the merger
March 26, 2018, the principal amount of the promissory note of $175,000 and its accrued interest of $35,642 were converted at
$2.50 per share into AgEagle common stock of 84,257 shares.
On
July 2017, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor
(the “2017 Note B”) purchased a convertible note having a principal amount of $100,005, convertible into common stock
of the Company at $2.00 per share and maturing on February 28, 2018. Interest on the note accrues at a rate of 8% annually payable
upon maturity. It was determined that there were no aggregate beneficial conversion features. For the three months ended March
31, 2018, the Company recorded $1,822 of interest expense. As of the date of the Merger Date, the principal amount of the promissory
note of $100,005 and its accrued interest of $5,600 were converted at $1.25 per share into AgEagle common stock of 84,484 shares.
On
September 2017, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional
investor (the “2017 Note C”) purchased a convertible note having a principal amount of $35,000, convertible into common
stock of the Company at $2.00 per share and maturing on February 28, 2018. Interest on the note accrues at a rate of 8% annually
payable upon maturity. It was determined that there were no aggregate beneficial conversion features. For the three months ended
March 31, 2018, the Company recorded $638 of interest expense. As a date of the Merger Date, the principal amount of the promissory
note of $35,000 and the accrued interest of $1,369 were converted at $1.25 per share into AgEagle common stock of 29,095 shares.
On
October 2017, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor
purchased a convertible note having a principal amount of $50,000, (the “2017 Note D”) convertible into common stock
of the Company at $2.00 per share and maturing on February 28, 2018. Interest on the note accrues at a rate of 8% annually payable
upon maturity. It was determined that there were no aggregate beneficial conversion features. For the three months ended March
31, 2018, the Company recorded $911 of interest expense. As a date of the Merger Date, the principal of $50,000 and the accrued
interest of $1,722 were converted at $1.25 per share into AgEagle common stock of 41,378 shares.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
6 — Debt - Continued
Promissory
Notes - Related Parties
On
December 15, 2016, the Company issued a promissory note with an aggregate principal amount of $30,000 to a related party. On January
24, 2017, the Company issued a 2
nd
promissory note with an aggregate principal amount of $30,000 to the same related
party. On June 14, 2017, the Company issued a 3
rd
promissory note with an aggregate principal amount of $16,050 to
the same related party. All three promissory notes (the “Related Party Notes A”) accrue interest at an annual rate
of 2% and matured on November 6, 2017. On or about August 1, 2017, the Company and the related party promissory note A holders
entered into extension and modification agreements whereby they agreed to extend the maturity date of the Related Party Notes
A to February 28, 2018, added a conversion feature whereby the debt can be converted into common stock of the Company at $2.00
per share and amended the interest rate on the note retroactively to accrue at a rate of 8% annually. It was determined that there
were no aggregate beneficial conversion features. For the three months ended March 31, 2018 and 2017, the Company recorded $1,386
and $870 of interest expense, respectively. As of the date of the Merger Date, the principal of $76,050 and the accrued interest
of $7,239 were converted at $1.25 per share into AgEagle common stock of 66,631 shares.
On
March 5, 2017, the Company issued a promissory note with an aggregate principal amount of $10,000 to a related party. On May 15,
2017, the Company issued a 2
nd
promissory note with an aggregate principal amount of $10,000 to the same related party.
On June 15, 2017, the Company issued a 3
rd
promissory note with an aggregate principal amount of $32,000 to the same
related party that is part of management of the Company. On July 25, 2017, the Company issued a 3
rd
promissory note
with an aggregate principal amount of $3,000 to the same related party that is part of management of the Company with the amended
terms agreed to on August 1, 2017 per the modification agreement. The promissory notes (the “Related Party Notes B”)
accrue interest at an annual rate of 2% and mature on November 6, 2017. On or about August 1, 2017, the Company and the related
party promissory note B holders entered into extension and modification agreements whereby they agreed to extend the maturity
date of the Related Party Notes B to February 28, 2018, added a conversion feature whereby the debt can be converted into common
stock of the Company at $2.00 per share and amended the interest rate on the note retroactively to accrue at a rate of 8% annually.
It was determined that there were no aggregate beneficial conversion features. For the three months ended March 31, 2018 and 2017,
the Company recorded $1,002 and $37 of interest expense, respectively. As of the date of the Merger Date, the principal of $55,000
and the accrued interest of $3,686 were converted at $1.25 per share into AgEagle common stock of 46,949 shares.
As
of the date of the Merger Date, all the AgEagle common shares issued in connection with conversion of debt noted above were subsequently
converted into EnerJex shares and then split at a rate of 25 to 1 resulting in a conversion rate of 1.6564 per AgEagle share into
a total of a series of EnerJex common stock of 787,891 shares and 1,631 of Series C preferred shares.
As
part of the liabilities acquired from EnerJex the Company recorded a promissory note for a principal amount of $125,556 and accrued
interest of $4,171 payable over twelve months and maturing on March 26, 2019. The total amount outstanding as of March
31, 2018 was $129,727.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
7 – Equity
Capital
Stock Issuances
As
a result of the Merger all the holders of EnerJex’s 10% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series
A Preferred Stock”) had their shares automatically converted into 896,640 shares of the Company’s common stock. EnerJex’s
Series B Convertible Preferred Stock (the “Series B Preferred Stock”) remains outstanding, and 1,623.79 shares of
Series C Convertible Preferred Stock (the “Series C Preferred Stock”) are now convertible into 1,060,432 shares of
the Company’s common stock. Furthermore, an additional 5,050.60 shares of Series C Preferred Stock, convertible into
3,298,348 shares of the Company’s common stock, were issued to the current holder of Series C Preferred Stock in connection
with a $4 million financing of Series C Preferred Stock (the “Financing”) and the conversion and retirement
of $425,000 in prior EnerJex promissory notes due and owing to such holder.
As
of the Merger Date, the former shareholders of AgEagle Sub own approximately 67% of the Company’s common stock (inclusive
of the AgEagle Sub assumed stock options and warrants), the former EnerJex holders of common stock, the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock, which were outstanding immediately prior to the Financing, collectively
own 12.7% of the Company’s common stock on a fully-diluted basis.
Options
The
Board of Directors of the Company has unanimously approved a proposal to adopt and approve the EnerJex 2017 Omnibus Equity Incentive
Plan (the “Plan”). The Board of Directors of EnerJex 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.
On
March 31, 2018, the Company issued options to purchase 49,500 shares of common stock to directors of the Company at the fair-market
value exercise price of $4.33 per share expiring on March 30, 2023. The Company determined the fair-value of the options to be
$156,258. In connection with the issuance of these options the Company recognized no stock compensation expense for the three
months ended March 31, 2018 as the vesting period will commence April 1, 2018.
On
October 4, 2017, the Company 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. In connection with the issuance of these options to employees and directors
for the three months ended March 31, 2018, the Company recorded $2,491 of stock compensation expense.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
7 – Equity - continued
On
March 1, 2015, the Company entered into a strategic consulting agreement with a related party and granted 207,055 stock options
exercisable over five years from the grant date at an exercise price per share of $2.60. On October 4, 2017, the Company held
a board meeting to approve the modification of the existing 207,055 options to purchase common stock from an exercise price of
$2.60 to $0.06 per share.
The
fair value of options granted during the three months ended March 31, 2018, 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, 2018 were as follows:
|
|
|
March
31, 2018
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
life
|
|
|
7
|
yrs.
|
|
Expected
volatility
|
|
|
78.66
|
%
|
|
Risk-free
interest rate
|
|
|
2.68
|
%
|
A
summary of the options activity as of March 31, 2018, are 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
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
7 – Equity - continued
For
options granted in 2018, the fair value of the Company’s stock was obtained per the close of market as of March 30, 2018.
The future expected stock-based compensation expense expected to be recognized in future years is $171,204.
Intrinsic
value is measured using the fair market value at the date of exercise (for shares exercised) or at March 31,2018 (for outstanding
options), less the applicable exercise price.
Note
8 – Warrants to Purchase Common Stock
As
of March 31, 2018, the Company had outstanding, in connection with the issuance of debentures in the prior year, warrants
to purchase 828,221 shares of the Company’s common stock at an exercise price of $1.51. All warrants outstanding as of March
31, 2018 are scheduled to expire between February 2, 2024 and October 31, 2024.
A
summary of activity related to warrants for the three months ended March 31, 2018 follows:
|
|
|
Shares
|
|
Weighted-
Average Exercise Price ($)
|
|
Weighted-Average
Remaining Contractual Term
|
|
|
Outstanding
at December 31, 2017
|
|
|
|
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
|
|
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
9 – Commitments and Contingencies
Operating
Leases
The
Company leases office space in Neodesha, Kansas for $300 a month. The lease terminates on September 30, 2018 with no option to
renew unless approved by the city commission of Neodesha. Rent expense was $900 and $900 for the three months ended March 31,
2018 and 2017, respectively.
Service
Agreements
The
Company provides a one-year warranty for all units sold to a customer through their exclusive dealer agreement that is included
in the price of the product. Based on historical experience, the Company has recorded as an estimate for the warranty accrual
expense of $0 for the three-month ended March 31, 2018 and $4,618 for the three months ended March 31, 2017 which represents approximately
1% of sales revenue for the year. The warranty accrual will remain until the product contractual warranty period is over or the
Company is required to perform product maintenance on the product as contractually required.
Merger
Agreement
On
March 26, 2018, EnerJex Resources, Inc. (“EnerJex”), a Nevada company, consummated the transactions contemplated by
that certain Agreement and Plan of Merger, dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., a Nevada corporation
and a wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems, Inc., a privately held company organized
under the laws of the state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as a wholly-owned subsidiary of
EnerJex (the “Merger”). In connection with the Merger, EnerJex changed its name to AgEagle Aerial Systems, Inc. (the
“Company, “we,” “our,” or “us”) and AgEagle Sub changed its name to “Eagle Aerial
Systems, Inc.” Our common stock will continue to trade on the NYSE American under its new symbol “UAVS” commencing
on March 27, 2018. As a result of the Merger, through AgEagle Sub, we are now engaged in the business of designing, developing,
producing, distributing and supporting technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we supply
to the precision agriculture industry.
Each
share of common stock issued and outstanding and underlying options and warrants of AgEagle Sub outstanding immediately prior
to the Merger was exchanged for 1.66 shares of Company common stock (the “Exchange Ratio”). As a result, at the effective
time of the Merger Date (the “Effective Time”), 5,439,526 shares of AgEagle Sub’s capital stock, representing
all currently outstanding common shares and all other debt or equity securities convertible into common shares (except options
and warrants as described below) were automatically converted into 7,944,941 shares of Company common stock. In addition, at the
Effective Time, 685,100 outstanding options and 500,000 warrants to purchase shares of AgEagle Sub common stock were assumed by
EnerJex and converted into 1,134,830 options and 828,221 warrants to purchase shares of common stock of the Company.
All
holders of EnerJex’s 10% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”)
had their shares automatically converted into 896,640 shares of the Company’s common stock. EnerJex’s Series B Convertible
Preferred Stock (the “Series B Preferred Stock”) remains outstanding, and 1,623.79 shares of Series C Convertible
Preferred Stock (the “Series C Preferred Stock”) are now convertible into 1,060,432 shares of Company common stock.
Furthermore, an additional 5,050.60 shares of Series C Preferred Stock, convertible into 3,298,348 shares of Company common
stock, were issued to the current holder of Series C Preferred Stock in connection with a $4 million financing of Series C Preferred
Stock (the “Financing”) and the conversion and retirement of $425,000 in prior EnerJex promissory notes due and owing
to such holder.
As
of the Effective Time, the former shareholders of AgEagle Sub own approximately 67% of the Company’s common stock (inclusive
of the AgEagle Sub assumed stock options and warrants), the former EnerJex holders of common stock, the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock, which were outstanding immediately prior to the Financing, collectively
own 12.7% of the Company’s common stock on a fully-diluted basis.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
9 – Commitments and Contingencies - Continued
In
connection with the Merger, AgEagle waived the requirement for EnerJex to have paid and satisfied in full all outstanding indebtedness
of EnerJex such that there would be no continuing liabilities of EnerJex subsequent to the closing of the Merger (“Liability
Condition”). In consideration for AgEagle waiving the Liability Condition, the 1,215,278 shares of common stock to be held
in escrow (valued at $350,000) owned by certain former principal stockholders, officers and directors of EnerJex to secure losses,
if any, that may be suffered by the AgEagle indemnified parties pursuant to the indemnification obligations under the Merger Agreement,
were never issued and such former principal stockholders, officers and directors are not entitled to receive such shares. However,
such former principal stockholders, officers and directors received, in the aggregate, deferred salaries and fees valued at approximately
$297,500. In lieu of payment of the deferred salaries and fees in cash, such amounts have been converted into an aggregate of
1,032,986 shares of Company common stock.
Prior
to the Merger, EnerJex operated as an oil exploration and production company engaged in the acquisition, development, exploration
and production of oil in Eastern Kansas. In connection with the Merger, EnerJex disposed of its principal assets, consisting primarily
of its Kansas oil and gas properties.
Note
10 — Related Party Transactions
The
following reflects the related party transactions during the three months ended March 31, 2018.
Consulting
Agreement
The
Company issued promissory notes for an aggregate amount of $76,050 (the “Related Party Notes A”) that accrued interest
at an annual rate of 8% and were set to mature as of the date of the Merger. For the three months ended March 31, 2018, the Company
recorded $1,386 of interest expense and for the three months ended March 31, 2017, $870 of interest expense was recorded. As of
the date of the Merger Date, the principal of $76,050 and the accrued interest of $7,239 were converted at $1.25 per share into
110,371 shares of the Company’s common stock.
The
Company issued promissory notes for an aggregate amount of $55,000 (the “Related Party Notes B”) that accrued interest
at an annual rate of 8% and were set to mature as of the date of the Merger. For the three months ended March 31, 2018, the Company
recorded $1,002 of interest expense and for the three months ended March 31, 2017, $37 of interest expense was recorded. As of
the date of the Merger Date, the principal of $55,000 and the accrued interest of $3,686 were converted at $1.25 per share into
77,769 shares of the Company’s common stock.
AGEAGLE
AERIAL SYSTEMS, INC.
NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
(Unaudited)
Note
11 – Subsequent Events
In
April 2018, 8.25 shares of Series B Preferred Stock were converted into 5,388 common shares at a conversion price of $1.53 and
621.86 shares of Series C Preferred Stock was converted into 406,129 common shares at a conversion price of $1.53.
On
May 11, 2018, we consummated a private placement of 250 shares of Series C Preferred Stock, convertible into 163,400 shares
of Company common stock to Alpha Capital Anstalt (“Alpha”). We received a cash payment of $250,000 for the issuance
of the Series C Preferred Stock. The Series C Preferred Stock includes a beneficial ownership limitation preventing conversion
of shares of Series C Preferred Stock into more than 9.99% of the number of shares of common stock outstanding immediately after
giving effect to the issuance of shares of common stock upon conversion of the Series C Preferred Stock.