See accompanying notes to the
condensed interim consolidated financial statements.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 1 – Description of Business
AgEagle Aerial Systems
Inc. (“AgEagle,” “the Company,” “we,” “our,” “us” or “its,”)
was created to pioneer, innovate and advance aerial imaging data collection and analytics technologies capable of addressing the
impending food and environmental sustainability crises that threaten our planet. The Company’s daily efforts are focused
on delivering the metrics, tools and strategies necessary to define and implement intelligent sustainability and precision farming
solutions that solve important problems confronting the agricultural industry. Since its founding in 2010, AgEagle has been intent
on becoming a trusted partner to major food manufacturers and precision growers seeking to adopt and support productive agricultural
approaches to better farming practices which limit the impact on our natural resources, reduce reliance on inputs and materially
increase crop yields and profits.
In
early 2019, AgEagle expanded its marketing efforts to provide for the introduction of its proprietary aerial imagery and data analytics
platform to municipal, state and federal agencies charged with assessing and supporting sustainability initiatives involving public
parks and recreation areas, also referred to as urban green spaces.
The Company
also designs, produces, distributes and supports technologically-advanced small unmanned aerial vehicles (UAVs or drones) that
AgEagle offers for sale commercially to the precision agriculture industry. In addition to UAV sales, in late 2018, the Company
introduced a new drone-leasing program, alleviating farmers and agribusinesses from significant upfront costs associated with purchasing
a drone, while also relieving them from ongoing drone maintenance and support requirements. Additionally, the new program provides
the option of engaging a trained AgEagle pilot to operate the drone and manage the entire image collection process, creating a
truly turnkey aerial imagery capture solution for its customers.
Central to the Company’s
long-term growth strategy, AgEagle will continue to identify opportunities to leverage its proprietary technological platform and
industry expertise to penetrate new, high growth market sectors that may benefit from the Company’s advanced aerial imagery-based
data collection and analytics solutions.
The Company is headquartered
at 117 South 4
th
Street, Neodesha, Kansas 66757. Its website address is http://www.ageagle.com.
Corporate History; Recent Business
Combination
On
March 26, 2018, our predecessor company, EnerJex Resources, Inc. (“EnerJex”), a Nevada company, consummated the transactions
contemplated by the Agreement and Plan of Merger (the “Merger Agreement”), dated October 19, 2017, pursuant to which
AgEagle Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems
Inc., a privately held company organized under the laws of the state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving
as a wholly-owned subsidiary of EnerJex (the “Merger”). In connection with the Merger, EnerJex changed its name to
AgEagle Aerial Systems Inc and AgEagle Sub changed its name to “Eagle Aerial, Inc.”
Prior to the Merger,
EnerJex was formerly known as Millennium Plastics Corporation (“Millennium) and was incorporated in the State of Nevada on
March 31, 1999. In August 2006, Millennium acquired Midwest Energy, Inc., a Nevada corporation pursuant to a reverse merger. After
such merger, Midwest Energy became a wholly-owned subsidiary, and as a result of such merger, the former Midwest Energy stockholders
controlled approximately 98% of our outstanding shares of Common Stock. Midwest then changed its name to EnerJex Resources, Inc.,
(“EnerJex”) in connection with this merger, and in November 2007, it changed the name of Midwest Energy (one of our
wholly-owned subsidiaries) to EnerJex Kansas, Inc. (“EnerJex Kansas”). All of its operations conducted prior to this
merger were through EnerJex Kansas, Inc., Black Sable Energy, LLC, a Texas limited liability company (“Black Sable”)
and Black Raven Energy, Inc. a Nevada corporation
(“Black Raven”). Our leasehold interests were held in our wholly-owned subsidiaries Black Sable, Working Interest,
LLC, EnerJex Kansas and Black Raven.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 1 – Description of Business-Continued
On August 28, 2018,
AgEagle acquired all right, title and interest in and to all assets owned by Agribotix, LLC, Agribotix, LLC, a Colorado limited
liability company (“Agribotix” ) to be utilized in their business of providing integrated agricultural drone solutions
and drone-enabled software technologies and services for precision agriculture. AgEagle’s management believes that purchasing Agribotix’s
primary product, FarmLens™, will benefit the Company and its shareholders by developing important vertically integrated products
and services. FarmLens is a subscription cloud analytics service that processes data, primarily collected with a drone such as
ours, and makes such data actionable by farmers and agronomists. FarmLens is currently sold by the Company as a subscription service
and offered either standalone or in a bundle with drone platforms manufactured by leading drone providers like AgEagle, DJI and
senseFly.
Note 2 – Summary of Significant
Accounting Policies
Basis of Presentation
and Consolidation
- These consolidated financial statements are presented in United States dollars and have been
prepared in accordance with accounting principles generally accepted in the United States. The Company’s consolidated financial
statements are prepared using the accrual method of accounting. The Company has elected a December 31 fiscal year end.
The consolidated
financial statements include the accounts of AgEagle Aerial Systems, Inc. and its wholly-owned subsidiaries AgEagle Aerial, Inc.,
EnerJex Kansas, Inc., Black Sable Energy LLC and Black Raven Energy, Inc. All significant intercompany balances and transactions
have been eliminated in consolidation.
The accompanying
interim unaudited condensed consolidated financial statements have been prepared under the rules and regulations of the Securities
and Exchange Commission (“SEC”) for interim financial information, which included condensed consolidated financial
statements of the Company and its wholly owned subsidiaries as of March 31, 2019.
Accordingly,
the condensed consolidated financial statements do not include all the information and notes necessary for a comprehensive presentation
of the financial position and results of operations and should be read in conjunction with the audited financial statements
of the Company for the year ended December 31, 2018 and included in the Form 10-K filed with the SEC on March 27, 2019.
It is management’s opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which
are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of
the results to be expected for the year ending December 31, 2019.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 2 – Summary of Significant
Accounting Policies-Continued
The summary of significant
accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements.
Such consolidated financial statements and accompanying notes are the representations of the Company’s management, who are
responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted
in the United States of America (“US GAAP”) in all material respects and have been consistently applied in preparing
the accompanying consolidated financial statements.
Use of Estimates
-
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance
for bad debt warranty and dealer termination costs, obsolete inventory, valuation of stock issued for services and stock options,
valuation and estimated useful life of intangible assets and the valuation of deferred tax assets.
Fair Value of
Financial Instruments -
Unless otherwise disclosed, the fair value of the Company’s financial instruments, including
cash, accounts receivable, convertible debt, promissory notes, accounts payable and accrued expenses, approximates their recorded
values due to their short-term maturities.
Cash and Cash
Equivalents -
Cash and cash equivalents includes any highly liquid investments with an original maturity of three months
or less. The Company held no cash equivalents as of March 31, 2019 or December 31, 2018
.
The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000 Our bank balances at time may exceed the FDIC limit. To date, the Company has not experienced any losses on its
invested cash.
Receivables
and Credit Polic
y
-
Trade receivables due from customers are uncollateralized customer obligations due under normal
trade terms requiring payment within 30 days from the invoice date. Terms with our distributor allow for payment terms of 45 days
from the invoice date. Trade receivables are stated at the amount billed to the customer. The Company generally does not charge
interest on overdue customer account balances. Payments of trade receivables are allocated to the specific invoices identified
on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
The Company estimates
an allowance for doubtful accounts based upon an evaluation of the current status of receivables, historical experience, and other
factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will
change. The Company determined that no allowance was necessary as of March 31, 2019 and December 31, 2018.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 2 – Summary of Significant
Accounting Policies-Continued
Inventorie
s
- Inventories, which consist of raw materials, finished goods and work-in-process, are stated at the lower of cost or net
realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. Cost
components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates
its ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand
in relation to the inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of the
inventories is also considered in establishing its valuation. Based upon the evaluation, provisions are made to reduce excess or
obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments
to the cost basis of the respective inventories. These adjustments are estimates, which could vary significantly, either favorably
or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic
conditions, customer inventory levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s
estimates and expectations. As of March 31, 2019 and December 31, 2018, the Company had recorded a provision for obsolescence of
$10,000 and $10,369, respectively.
Goodwill
–
Goodwill is recognized for the excess of cost of an acquired entity over the amounts assigned to the assets acquired and liabilities
assumed in a business combination. The Company’s goodwill relates to an acquisition that occurred in August 2018. Goodwill
is not amortized, but evaluated for recoverability if events or changes in circumstances indicate that the carrying amount of such
asset may not be recoverable or at least annually.
When
assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of
events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less
than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not
that the fair value of a reporting unit is less than its carrying amount, then we perform a two-step impairment test. If we conclude
otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative
assessment, which is the first step of the two-step impairment test. In the two-step impairment test, we measure the recoverability
of goodwill by comparing a reporting unit’s carrying amount, including goodwill, to the estimated fair value of the reporting
unit.
As of March 31, 2019, there have been no events or changes in circumstances that indicate that it is more likely than
not that a goodwill impairment has occurred since the assessment date of August 2018.
Intangible Assets
– Acquired in Business Combinations
–
The Company performs valuations of assets acquired and liabilities
assumed on each acquisition accounted for as a business combination and allocates the purchase price of each acquired business
to our respective net tangible and intangible assets. Acquired intangible assets include customer relationships, technology, noncompete
agreements and trade names. The Company uses valuation techniques to value these intangibles assets, with the primary technique
being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions and estimates including
projected revenue, gross margins, operating costs, growth rates, useful lives and discount rates. Intangible assets are
amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic
benefits are consumed.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 2 – Summary of Significant
Accounting Policies-Continued
Long-Lived Assets
–
The Company reviews its long-lived assets and certain identifiable intangible assets held and used for impairment
whenever events or changes in circumstances indicate that their carrying value of such assets may not be recoverable. If the estimated
undiscounted cash flows that are expected to result from the use of the assets is less than the carrying amount of the assets,
an impairment loss is recorded equal to the excess of the carrying amount of the fair value of the assets less costs to
sell. There were no impairment losses recorded by the Company during the three-month period ending March 31, 2019 or 2018.
Business Combinations
-
The Company recognizes, with certain exceptions, 100% of the fair value of assets acquired, liabilities assumed, and non-controlling
interests when the acquisition constitutes a change in control of the acquired entity. Shares issued in consideration for a business
combination, contingent consideration arrangements and pre-acquisition loss and gain contingencies are all measured and recorded
at their acquisition-date fair value. Subsequent changes to the fair value of contingent consideration arrangements are
generally reflected in earnings. Any in-process research and development assets acquired are capitalized as of the acquisition
date. Acquisition-related transaction costs are expensed as incurred. The operating results of entities acquired are included
in the accompanying consolidated statements of operations from the date of acquisition.
Revenue Recognition
and Concentration -
The Company generally recognizes revenue on sales to customers, dealers and distributors upon satisfaction
of our performance obligations when the goods are shipped and control transfers to our customers. Revenue reflects the consideration
we expect to receive in exchange for our products. The Company generally ships using FOB Shipping Point terms.. The Company assesses
collectability based on the creditworthiness of the customer as determined by evaluations and the customer’s payment history.
Additionally, customers are required to place a deposit on each UAV ordered.
As a result of the
Agribotix acquisition, the Company now has an additional product line which is the sale of subscription services for use of the
FarmLens
™ platform to process aerial imaging. These subscription fees are recognized ratably over each monthly membership
period as the services are provided.
Sales concentration
information for customers comprising more than 10% of the Company’s total net sales is summarized below:
|
|
Percent of total sales for three months
ended March 31,
|
Customers
|
|
2019
|
|
2018
|
Customer A
|
|
|
68.0
|
%
|
|
|
—
|
|
Customer B
|
|
|
29.1
|
%
|
|
|
—
|
|
Customer C
|
|
|
—
|
|
|
|
31.8
|
%
|
Customer D
|
|
|
—
|
|
|
|
27.8
|
%
|
Customer E
|
|
|
—
|
|
|
|
19.1
|
%
|
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 2 – Summary of Significant
Accounting Policies-Continued
The table below
reflects our revenue for the periods indicated by product mix.
|
|
For three months ended March 31,
|
Type
|
|
2019
|
|
2018
|
Product Sales
|
|
$
|
38,083
|
|
|
$
|
29,191
|
|
Subscription Sales
|
|
|
7,910
|
|
|
|
—
|
|
Total
|
|
$
|
45,993
|
|
|
$
|
29,191
|
|
Vendor Concentration
- As of March 31, 2019, there was one significant vendor upon which the Company relied to perform stitching in its
FarmLens
platform. This vendor provided services to the Company which can be replaced by alternative vendors
should the need arise.
Shipping
Costs -
Shipping costs for the three months ended March 31, 2019 and 2018
totaled $758 and $952, respectively . All shipping costs billed directly to the customer are directly offset to shipping costs
resulting in a net expense to the Company which is included in cost of goods sold on the statement of operations.
Advertising Costs
–
Advertising costs are expensed as incurred. No advertising costs were recorded for the three months ended March 31, 2019, and $906
for the three months ended March 31, 2018.
Earnings
Per Share
- Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding
for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of Common shares outstanding
plus Common Stock equivalents (if dilutive) related to warrants, options and convertible instruments.
Potentially
Dilutive Securities
- The Company has excluded all common equivalent shares outstanding for warrants, options and convertible
instruments to purchase Common Stock from the calculation of diluted net loss per share because all such securities are antidilutive
for the periods presented. For the three-month period ended March 31, 2019, the Company had 4,531,924 warrants and 1,756,665 options
to purchase Common Stock, and 3,636 shares of Series C Preferred Stock which may be converted into 6,733,067 shares of
Common Stock. For the three-month period ended March 31, 2018,
the Company had 828,200 warrants and 1,184,300 options to
purchase Common Stock, 6,887 shares of Preferred Series B and C shares which were convertible into 4,498,002 of Common
Stock.
Income Taxes
-
The Company accounts for income taxes in accordance with FASB (Financial Accounting Standards Board) ASC Topic 740, Accounting
for Income Taxes. This topic requires an asset and liability approach for accounting for income taxes. The Company evaluates its
tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual is necessary for
uncertain tax positions. The Company will recognize future accrued interest and penalties related to unrecognized tax benefits
in income tax expense if incurred. All income tax returns not filed more than three years ago are subject to federal and state
tax examinations by tax authorities.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 2 – Summary of Significant
Accounting Policies-Continued
Share-Based Compensation
Awards
- The value the Company assigns to the options that are issued is based on the fair market value as calculated
by the Black-Scholes pricing model. To perform a calculation of the value of our options, we determine an estimate of the volatility
of our stock. We need to estimate volatility because there has not been enough trading of our stock to determine an appropriate
measure of volatility. We believe our estimate of volatility is reasonable, and we review the assumptions used to determine this
whenever we issue a new equity instruments. If we have a material error in our estimate of the volatility of our stock, our expenses
could be understated or overstated. All share-based awards are expensed on a straight-line basis over the vesting period of the
options.
In January 2016,
the FASB issued ASU 2016-01,
Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities
,
which addresses certain aspects of recognition, measurement, presentation and disclosure of financial statements. The Company’s
adoption of ASU No. 2016-01 effective January 1, 2019 did not have a material impact on the consolidated financial statements.
In
February 2016, FASB issued Account Standards Update 2016-02 –
Leases
(Topic 842) intended to improve financial
reporting of leasing transactions whereby lessees will need to recognize a right-of-use asset and a lease liability for
virtually all their leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with
lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification
as a finance or operating lease. However, unlike current GAAP — which requires only capital leases to be recognized on the
balance sheet — the new ASU will require both types of leases to be recognized on the balance sheet. The Company adopted
this ASU on January 1, 2019 and it
did not have a material impact on the Company’s consolidated financial statements.
In August 2016,
the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
.
The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of cash flows.
This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The
adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2017,
the FASB issued ASU 2017-01,
Business Combinations—Clarifying the definition of a business
(Topic 805).
This ASU clarifies the definition of a business with the objective of providing a more robust framework to evaluate whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The Company’s adoption of ASU No. 2017-01
effective May 1, 2018 did not have a material impact on the consolidated financial statements.
In May 2017, the
FASB issued ASU 2017-09,
Compensation—Stock Compensation
(Topic 718). This ASU reduces the diversity in
practice and cost and complexity when applying the guidance in Topic 718 to a change in terms or conditions of a share-based payment
award. The Company’s adoption of ASU No. 2017-09 effective May 1, 2018 did not have a material impact on its consolidated
financial statements.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Other recent accounting
pronouncements issued by FASB did not or are not believed by management to have a material impact on the Company’s present
or future financial statements.
Note 3 — Inventories
Inventories consist of the following at:
|
|
March 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Raw materials
|
|
$
|
97,427
|
|
|
$
|
109,826
|
|
Work-in-process
|
|
|
27,364
|
|
|
|
30,088
|
|
Finished goods
|
|
|
19,346
|
|
|
|
19,937
|
|
Gross inventory
|
|
$
|
144,136
|
|
|
$
|
158,851
|
|
Less obsolete reserve
|
|
|
(10,000
|
)
|
|
|
(10,369
|
)
|
Total
|
|
$
|
134,137
|
|
|
$
|
149,482
|
|
Note 4 — Property and Equipment
Property and equipment consist of the following at:
|
|
March 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Property and equipment
|
|
$
|
116,313
|
|
|
$
|
116,313
|
|
Less accumulated depreciation
|
|
|
(91,171
|
)
|
|
|
(87,939
|
)
|
|
|
$
|
25,142
|
|
|
$
|
28,374
|
|
Depreciation expense for the three months
ended March 31, 2019 and 2018 was $3,232 and $4,151, respectively.
Note 5 — Intangible Assets
Intangible
assets are recorded at cost and consist of the assets acquired in 2018 related to the acquisition of Agribotix. Amortization
is computed using the straight-line method over the estimate useful life of the asset. We will annually assess intangible and
other long-lived assets for impairment. Intangible assets were comprised of the following at March 31, 2019:
Intangible Assets
|
|
Estimated Life
|
|
Gross Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
Intellectual Property/Technology
|
|
5 yrs.
|
|
$
|
433,400
|
|
|
$
|
(50,563
|
)
|
|
$
|
382,837
|
|
Customer Base
|
|
5 yrs.
|
|
|
72,000
|
|
|
|
(8,400
|
)
|
|
|
63,600
|
|
Tradenames - Trademarks
|
|
5 yrs.
|
|
|
58,200
|
|
|
|
(6,790
|
)
|
|
|
51,410
|
|
Non-compete agreement
|
|
4 yrs.
|
|
|
160,900
|
|
|
|
(23,465
|
)
|
|
|
137,435
|
|
Carrying value as of March 31, 2019
|
|
|
|
$
|
724,500
|
|
|
$
|
(89,218
|
)
|
|
$
|
635,282
|
|
Amortization expense for the three
months ended March 31, 2019 and 2018 was $41,836 and $0, respectively.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 6 — Promissory Note
As
part of the liabilities assumed from the EnerJex Merger, the Company recorded a promissory note for a principal amount of $125,556
and accrued interest of $4,171 payable over twelve months and maturing on March 27, 2019. The total amount outstanding as March
31, 2019 was $9,028, resulting in principal payments of $31,970 made in the first three months of 2019. The Company recorded interest
of $462 for the three months ended March 31, 2019. The note was paid in full in April 2019.
Note 7 – Equity
Capital Stock Issuances
During the three
months ended March 31, 2019, Alpha Capital Anstalt converted 1,026 shares of Series C Preferred Stock into 1,900,000 shares of
Common Stock at a conversion price of $0.54.
Series D Preferred
Stock
On December 27,
2018, AgEagle Aerial Systems Inc.(the “Company”) entered into a Securities Purchase Agreement (the “Agreement”)
with Alpha Capital Anstalt (the “Purchaser”). Pursuant to the terms of the Agreement, the Board of Directors
of the Company (the “Board”) designated a new series of preferred stock, the Series D Preferred Stock, which is non-convertible
and provides for an 8% annual dividend and is subject to optional redemption by the Company (the “Preferred Stock”).
The Company issued 2,000 shares of Preferred Stock and a warrant to purchase 3,703,703 shares of common stock, par value $0.001
per share (the “Warrant,” and the shares of common stock underling the warrants, the “Warrant Shares”)
for $2,000,000 in gross proceeds. The Company also entered into a Registration Rights Agreement, granting registration rights
to the Purchaser with respect to the Warrant Shares. During the three months ended March 31, 2019, the Company recorded $40,000
of accrued dividends.
The Agreement provides
that upon a subsequent financing or financings with net proceeds of at least $500,000, the Company must exercise its optional redemption
of the Preferred Stock (as more fully described below in Item 5.03) and apply any and all net proceeds from such financing(s) to
the redemption in full of the Preferred Stock.
The Preferred Stock
is non-convertible, provides for an 8% annual dividend payable semi-annually and has liquidation rights senior to the Common Stock,
but pari passu with the Company’s Series C Preferred Stock. The Preferred Stock has no voting rights, except that the Company
shall not undertake certain corporate actions as set forth in the Certificate of Designation that would materially impact the holders
of Preferred Stock without their consent.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
The Preferred Stock
is subject to optional redemption by the Company at 115% of the stated value of the Preferred Stock outstanding at the time of
such redemption, plus any accrued but unpaid dividends and all liquidated damages or other amounts due. Any such optional redemption
may only be exercised after giving notice and upon satisfaction of certain equity conditions set forth in the Certificate of Designation,
including (i) all dividends, liquidated damages and other amounts have been paid; (ii) there is an effective registration statement
covering the Warrant Shares, or the Warrant Shares can be exercised through a cashless exercise without restriction under Rule
144, (iii) the Warrant Shares are listed on an exchange, (iv) the holder is not in possession of material, non-public information,
(v) there is a sufficient number of authorized shares for issuance of all Warrant Shares, and (vi) for each trading day in a period
of 20 consecutive trading days prior to the redemption date, the daily trading volume for the Common Stock on the principal trading
market exceeds $200,000 per trading day.
Note 7 – Equity-Continued
Series C Preferred Stock
On November 21,
2017, Alpha Capital Anstalt (“Alpha”) signed a binding commitment letter EnerJex to provide prior to or at the closing
of the Merger a minimum of $4 million in new equity capital (the “Private Placement”). The Private Placement was consummated
on March 26, 2018. In connection with the Private Placement, Alpha purchased an additional 4,000 shares of Series C Preferred Stock
at a purchase price of $1,000 per share for total aggregate consideration of $4 million. At the time of private placement the Series
C Preferred Stock was convertible into 2,612,245 shares of our Common Stock. In addition, as consideration for their funding commitment,
Alpha received a fee equal to 408,552 shares of our Common Stock.
Each share of Series
C Preferred Stock is convertible into a number of shares of our Common Stock equal to the quotient determined by dividing (x) the
stated value of $1,000 per share, by (y) a conversion price of $1.53. Until the volume weighted average price of our Common Stock
on NYSE exceeds $107.50 with average trading volume of 200,000 shares per day for ten consecutive trading days, the conversion
price of our Series C Preferred Stock is subject to full-ratchet, anti-dilution price protection. Under that provision, if, while
that full-ratchet, anti-dilution price protection is in effect, we issue shares of our Common Stock at a price per share (the “Dilutive
Price”) that is less than the conversion price, then the conversion price of our Series C Preferred Stock is automatically
reduced to be equal to the Dilutive Price. The effect of that reduction is that, upon the issuance of shares of Common Stock at
a Dilutive Price, the Series C Preferred Stock would be convertible into a greater number of shares of our Common Stock.
O
ptions Issued
The
Board of Directors of the Company unanimously approved a proposal to adopt and approve the EnerJex 2017 Omnibus Equity
Incentive Plan (the “Plan”). The Board of Directors recommended that this proposal be presented to the EnerJex
shareholders for approval. The Plan became effective on March 26, 2018, the date of the Merger, and is a comprehensive
incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees
and directors of, and consultants and advisers to, the Company. The purpose of the Plan is to help the Company attract,
motivate and retain such persons and thereby enhance shareholder value.
The Company
has reserved a total of 2,000,000 shares of Common Stock for issuance as or under awards to be made under the Plan. To the
extent that an award lapses, expires, is canceled, is terminated unexercised or ceases to be exercisable for any reason, or
the rights of its holder terminate, any shares subject to such award shall again be available for the grant of a new award.
The Plan shall continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which it is
adopted by the Board of Directors (except as to awards outstanding on that date). The Board of Directors in its discretion
may terminate the Plan at any time with respect to any shares for which awards have not theretofore been granted; provided,
however, that the Plan’s termination shall not materially and adversely impair the rights of a holder, without the
consent of the holder, with respect to any award previously granted. The number of shares for which awards which are options
or SARs may be granted to a participant under the Plan during any calendar year is limited to 500,000. For purposes of
qualifying awards as “performance-based” compensation under Code Section 162(m), the maximum amount of cash
compensation that may be paid to any person under the Plan in any single calendar year shall be $500,000.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 7 – Equity-Continued
During
the three months ended March 31, 2019, the Company issued options to purchase 540,000 shares of Common Stock to directors and
employees of the Company at the fair value exercise price ranging from $0.41 to $0.54 per share expiring on March 30, 2024 to
March 31, 2029. The Company determined the fair-market value of the options to be $156,134. In connection with the issuance of
these options, the Company recognized $1,944 in stock compensation expense for the three months ended March 31, 2019.
During
the year ended December 31, 2018, the Company issued options to purchase 534,598 shares of Common Stock to directors and employees
of the Company at the fair value exercise price ranging from $0.51 to $4.33 per share expiring between March 30, 2023 to
December 17, 2028. The Company determined the fair-market value of the options to be $449,491. In connection with the issuance
of these options, the Company recognized $57,627 stock compensation expense for the three months ended March 31, 2019.
On October 4, 2017,
AgEagle Sub issued options to purchase 927,774 shares of Common Stock to employees and directors, that were approved by the board
at an exercise price of $0.06 per share. These options were assumed by the Company in the Merger. In connection with the issuance
of these options to employees and directors for the three months ended March 31, 2019 and 2018, the Company recorded $1,349 and
$2,491, respectively of stock compensation expense.
The fair value
of options granted during the three months ended March 31, 2019 were determined using the Black-Scholes option valuation model.
The expected term of options granted is based on the simplified method in accordance with Securities and Exchange Commission Staff
Accounting Bulletin 107 and represents the period of time that options granted are expected to be outstanding. The Company makes
assumptions with respect to expected stock price volatility based on the average historical volatility of peers with similar attributes.
In addition, the Company determines the risk-free rate by selecting the U.S. Treasury with maturities similar to the expected terms
of grants, quoted on an investment basis in effect at the time of grant for that business day.
The significant
weighted average assumptions relating to the valuation of the Company’s stock options granted during the three months ended
March 31, 2019 were as follows:
|
|
March 31, 2019
|
Dividend yield
|
|
|
0%
|
|
Expected life
|
|
|
3.5-6.5 Years
|
|
Expected volatility
|
|
|
82.4%
|
|
Risk-free interest rate
|
|
|
2.23%
|
|
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 7 – Equity-Continued
A summary of the
options activity for the three months ended March 31, 2019 is as follows:
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
Outstanding at January 1, 2019
|
|
|
1,494,158
|
|
|
$
|
0.46
|
|
|
|
6.93 Years
|
|
|
$
|
409,678
|
|
Granted
|
|
|
540,000
|
|
|
|
0.42
|
|
|
|
8.68
Years
|
|
|
|
—
|
|
Exercised/Forfeited
|
|
|
(70,438
|
)
|
|
|
0.49
|
|
|
|
— Years
|
|
|
|
—
|
|
Outstanding at March 31, 2019
|
|
|
1,963,720
|
|
|
|
0.45
|
|
|
|
7.19
Years
|
|
|
|
256,049
|
|
Exercisable at period end
|
|
|
1,101,835
|
|
|
$
|
0.26
|
|
|
|
6.75 Years
|
|
|
$
|
256,049
|
|
For options granted
during the three months ended March 31, 2019, the fair value of the Company’s stock was based upon the close of market
price on the date of grant. The future expected stock-based compensation expense expected to be recognized in future years is
$383,614, through March 29, 2022.
Intrinsic value
is measured using the fair market value at the date of exercise (for shares exercised) or at March 31, 2019 (for outstanding options),
less the applicable exercise price.
A summary of the
options activity for the three months ended March 31, 2018 is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2018
|
|
|
1,134,830
|
|
|
$
|
0.06
|
|
|
|
8.5 years
|
|
|
$
|
—
|
|
Granted
|
|
|
49,500
|
|
|
|
4.33
|
|
|
|
5.0 years
|
|
|
|
—
|
|
Outstanding at March 31, 2018
|
|
|
1,184,330
|
|
|
$
|
4.19
|
|
|
|
4.0 years
|
|
|
$
|
—
|
|
Exercisable at end of the year
|
|
|
786,914
|
|
|
$
|
0.06
|
|
|
|
4.0 years
|
|
|
$
|
—
|
|
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 8 – Warrants to Purchase Common Stock
As of March 31,
2019, the Company had outstanding, in connection with the issuance of debentures in 2017, warrants to purchase 828,221 shares
of the Company’s Common Stock at an exercise price of $1.51 with expiration on August 2, 2024.
On December 27,
2018, the Company issued 2,000 shares of Preferred Stock and a warrant (the “Warrant”) to purchase 3,703,703 shares
of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), for $2,000,000 in gross proceeds.
The shares of Common Stock underling the Warrant are referred to as the “Warrant Shares”. The Company also entered
into a registration rights agreement (the “Registration Rights Agreement”) granting registration rights to the Purchaser
with respect to the Warrant Shares.
The Warrant is exercisable
for a period of five years through December 26, 2023, at an exercise price equal to $0.54 per share, and is subject to customary
adjustments for stock splits dividend, rights offerings, pro rata distributions and fundamental transactions. In addition, in the
event the Company undertakes a subsequent equity financing or financings at an effective price per share that is less than $0.54,
the exercise price of the Warrant shall be reduced to the lower price.
The Warrant provides
that the Warrant holder shall have a “Beneficial Ownership Limitation” equal to 9.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this
Warrant. The Warrant holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation, as provided
for in the Warrant.
All
warrants outstanding as of March 31, 2019 are scheduled to expire between December 26, 2023 and October 21, 2024.
A summary of activity
related to warrants for the three months ended March 31, 2019 follows:
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
Outstanding at January 1, 2019
|
|
|
4,531,924
|
|
|
$
|
0.72
|
|
|
|
5.05
|
|
Outstanding at March 31, 2019
|
|
|
4,531,924
|
|
|
|
0.72
|
|
|
|
5.05
|
|
Exercisable at March 31, 2019
|
|
|
4,531,924
|
|
|
|
0.72
|
|
|
|
5.05
|
|
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
A summary of activity
related to warrants for the three months ended March 31, 2018 follows:
|
|
Shares
|
|
Weighted- Average Exercise Price ($)
|
|
Weighted-Average Remaining Contractual Term
|
Outstanding
at January 1, 2018
|
|
|
828,221
|
|
|
$
|
1.51
|
|
|
|
—
|
|
Outstanding at March 31, 2018
|
|
|
828,221
|
|
|
$
|
1.51
|
|
|
|
6.10
|
|
Exercisable at March 31, 2018
|
|
|
828,221
|
|
|
$
|
1.51
|
|
|
|
6.10
|
|
Note 9 – Commitments and Contingencies
Operating Leases
The Company leases
office space in Neodesha, Kansas for $500 a month. The lease terminates on September 30, 2019 with a year to year option to renew
upon approval by the city commission of Neodesha. Rent expense was $1,500 and $900 for the three months ended March 31, 2019 and
2018, respectively.
As a result of
the Agribotix acquisition, the Company assumed a lease for offices in Boulder, Colorado for $2,000 a month. The lease ends on
May 31, 2019 and has an option to terminate at any time with a 30-day prior notice period. Rent expense was $6,000 for the three
months ended March 31, 2019 and 2018, respectively.
Note 10 — Related Party Transactions
The following reflects the related party
transactions during the three months ended March 31, 2019 and 2018.
The Company’s
Chief Financial Officer, Nicole Fernandez-McGovern, is one of the principals of Premier Financial Filings, a full-service financial
printer. Premier Financial Filings provided contracted financial services to the Company and their related expenses have been included
within general and administrative expenses. For the three months ended March 31, 2019 and 2018, Premier Financial Filings provided
services to the Company resulting in fees of $2,674 and $110, respectively. The fee incurred during the three months ended March
31, 2019 is included in accounts payable as of March 31, 2019.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH
31, 2019
(Unaudited)
Note 11 – Subsequent Events
On May 3, 2019,
AgEagle Aerial Systems Inc. (the “Company”), entered into a Consulting Agreement with GreenBlock Capital LLC (“Consultant”),
to serve as strategic advisor and consultant to the Company with respect to the development of business opportunities and the implementation
of business strategies to be agreed to by both parties (the “Services”). The extent of the Services will be set forth
in separate scopes of work, from time to time, to be prepared and mutually agreed to by the parties. As compensation for the Services
under the terms of the agreement, Consultant shall receive (i) $25,000 per month during the term of the agreement, (ii) 500,000
shares of restricted stock upon execution of the agreement, and (iii) up to 2,500,000 shares of restricted stock upon the achievement
of to-be-determined milestones.
The Consultant was
previously engaged by the Company between March 2015 and August 2016 to provide consulting services. The Consultant beneficially
owns approximately 5.86% of the shares of the Company’s common stock issued and outstanding shares, and holds options to
purchase 207,055 shares of the Company’s common stock, exercisable until January 14, 2021 at an exercise price of $0.06 per
share.
On April 15,
2019, AgEagle Aerial Systems, Inc. (the “Company”), received notification from Mr. Corbett Kull that effective immediately
he is resigning as a director of the Company. Mr. Kull did not serve on any of the committees of the Board of Directors (the “Board”).
Mr. Kull’s resignation was not due to a disagreement with the Company on any matter relating to the Company’s operations,
policies or practices.
As a result of Mr. Kull’s resignation,
the Board currently consists of four directors, three of whom are independent. The Company is not looking for a replacement for
Mr. Kull at this time.