NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 1 – Description of Business
AgEagle Aerial Systems
Inc. (“AgEagle” or “the Company”) designs, produces and supports technologically-advanced small, unmanned aerial
vehicles (“UAVs” or “drones”). In addition, to providing new utility to UAVs, the Company pioneers and innovates
advanced aerial imaging data collection and analytics technologies capable of addressing the impending food and environmental sustainability
crises that threaten our planet. Historically, the Company’s daily efforts have focused on delivering the tools and strategies
necessary to define and implement commercial drone construction and delivery, along with sustainability and precision farming solutions
that solve important problems confronting the global agricultural industry. In fact, AgEagle, , has spent ten years serving customers
covering more than two million acres in 50 countries and monitoring 53 different crops. AgEagle remains intent on earning distinction
as a trusted partner to clients 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 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 true turnkey aerial imagery capture solution for its customers.
In the first half of 2019,
the Company introduced HempOverview, a scalable, responsive and cost-effective Software-as-a-Solution (“SaaS”)
web- and map-based technology platform to support the operations of domestic industrial hemp programs for state and tribal nation
departments of agriculture, growers and processors – a solution that provides users with what the Company believes is the
gold standard for regulatory oversight, operational assistance and reporting capabilities for the fast emerging industrial hemp
industry.
In the third quarter of
2019, AgEagle announced that it had begun to actively pursue expansion opportunities within the emerging Drone Logistics and Transportation
market and revealed that it had received its first purchase orders from a major ecommerce company to manufacture and assemble UAVs
designed to meet the critical specifications for drones that are meant to carry packaged goods in urban and suburban areas.
Central to the Company’s
long-term growth strategy, AgEagle will continue to identify opportunities to leverage its proprietary technological platform
and industry expertise to penetrate new, high growth market sectors that may benefit from the Company’s advanced aerial
imagery-based data collection and analytics solutions.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 1 – Description of Business – Continued
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. (the “Company, “we,” “our,” or “us”) and AgEagle Sub changed its name initially to “Eagle
Aerial, Inc. and then to” AgEagle Aerial, Inc.
On August 28, 2018, we
closed the transaction contemplated by the Asset Purchase Agreement (the “Purchase Agreement”) dated July 25, 2018 with
AgEagle Aerial, Inc., a wholly-owned subsidiary of the Company; Agribotix, LLC, a Colorado limited liability company (“Agribotix”
or the “Seller”); and the other parties named therein. Pursuant to the Purchase Agreement, we acquired all right, title
and interest in and to all assets owned by Agribotix, which included Agribotix’s primary product, FarmLens™, utilized in
their business for providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision
agriculture.
The Company believes that
purchasing FarmLens benefitted us and our shareholders by developing important vertically integrated products and services.
FarmLens is a subscription cloud analytics service that processes data, primarily collected with a drone such as those produced
by AgEagle; and makes such data actionable by farmers and agronomists. FarmLens is currently sold by AgEagle 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.
To date, FarmLens
has processed agricultural imagery for approximately two million acres of crops and analyzed data for over 53 different crop types
from over 50 countries around the world.
The Company is currently
headquartered in Neodesha, Kansas, but plans to relocate its headquarters and manufacturing operations to Wichita, Kansas in September
2020.
Impact of COVID-19
On January 30, 2020, the
World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”)
and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19
outbreak as a pandemic, based on the rapid increase in exposure globally. In response to the pandemic, many states and jurisdictions
in which we operate have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. We initially
closed our offices only and had our executive and administrative staff work remotely. Our manufacturing operations continued operating
however we experienced delays with some of our ongoing projects in terms of completion due to vendor delays. We continue to follow
guidance from local authorities in determining the appropriate restrictions to put in place for our offices and manufacturing
facility, such as social distancing and limited capacities, to ensure the health and safety of our employees. As
of the date of this filing, our locations and primary suppliers continue to operate. We may experience constrained supply or other
business disruptions that could materially impact our business, results of operations and overall financial performance in future
periods.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 2 – Summary of Significant Accounting
Policies
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 includes condensed consolidated financial
statements of the Company and its wholly owned subsidiaries as of June 30, 2020. 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, 2019 and included in the Form 10-K filed with the SEC on April 13, 2020. 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, 2020.
Basis of Presentation
and Consolidation – These interim condensed consolidated statements are presented in United States dollars
and have been prepared in accordance with accounting principles generally accepted in the United States. The Company has elected
a December 31 fiscal year end.
The interim condensed 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., which was dissolved effective November 2019. All significant
intercompany balances and transactions have been eliminated in consolidation.
The summary of significant
accounting policies presented below is designed to assist in understanding the Company’s interim condensed consolidated financial
statements. Such interim condensed 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 interim condensed 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 reserve for obsolete
inventory, valuation of stock issued for services and stock options, useful life of intangible assets and property and equipment,
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, 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 June 30, 2020 or December 31, 2019. The Company maintains cash balances at financial
institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Company’s
bank balances at times may exceed the FDIC limit. To date, the Company has not experienced any losses on its invested cash.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 2 – Summary of Significant Accounting
Policies – Continued
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 June 30, 2020 and December 31, 2019.
Inventories – Inventories,
which consist of raw materials, finished goods and work-in-process, are stated at the lower of cost or net realizable value, with
cost being determined by the average-cost method, which approximates the first-in, first-out method. Cost components include direct
materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates its ending inventories
for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the
inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of the inventories is also
considered in establishing its valuation. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories
to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis
of the respective inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably,
from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer
inventory levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s estimates and
expectations. As of June 30, 2020 and December 31, 2019, the Company had recorded a provision for obsolescence of $10,000.
Goodwill and Intangible
Assets – The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at
their estimated fair values at the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying
identifiable net assets of acquired businesses. Goodwill is not subject to amortization and is tested annually for the impairment,
or more frequently if events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable.
Intangible assets from
acquired businesses are recognized at fair value on the acquisition date and consist of customer programs, trademarks, customer
relationships, technology and other intangible assets. Customer programs include values assigned to major programs of acquired
businesses and represent the aggregate value associated with the customer relationships, contracts, technology and trademarks
underlying the associated program and are amortized on a straight-line basis over a period of expected cash flows used to measure
fair value, which ranges from four to five years.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 2 – Summary of Significant Accounting
Policies – Continued
Revenue Recognition
and Concentration – The majority of the Company’s revenue is generated pursuant to written contractual arrangements to
develop, manufacture and/or modify complex drone-related products, and to provide associated engineering, technical and other services
according to customer specifications. These contracts are at a fixed price and are accounted for in accordance with ASC Topic 606, Revenue
from Contracts with Customers (“ASC 606”). Under fixed-price
contracts, the Company agrees to perform the specified work for a pre-determined price. To the extent the Company’s actual costs
vary from the estimates upon which the price was negotiated, it will generate more or less profit or could incur a loss. The Company
accounts for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified,
payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
The
Company generally recognizes revenue on sales to customers, dealers and distributors upon satisfaction of performance obligations,
which generally occurs once controls transfer to customers, which is when product is shipped or delivered depending
on specific shipping terms. Additionally, customers are required to place a deposit or pay upon shipping for each UAV or
drone delivery assembly part ordered. Customer payments received in advance of the Company completing performance obligations are
recorded as contract liabilities.
Subscription services for
use of the Company’s proprietary FarmLens and HempOverview platforms are recognized ratably over the 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 six months
ended June 30,
|
Customers
|
|
2020
|
|
2019
|
Customer A
|
|
|
91.8
|
%
|
|
|
67.4
|
%
|
Customer B
|
|
|
—
|
|
|
|
24.2
|
%
|
No accounts receivables
were due from Customer A or B as of June 30, 2020 and December 31, 2019, respectively.
The table below reflects
our revenue for the periods indicated by product mix.
|
|
For the six months ended June 30,
|
Type
|
|
2020
|
|
2019
|
Drone Assembly and Product Sales
|
|
$
|
374,278
|
|
|
$
|
49,801
|
|
Software Platform Sales
|
|
|
33,327
|
|
|
|
16,368
|
|
Total
|
|
$
|
407,605
|
|
|
$
|
66,169
|
|
Vendor Concentration
– As of June 30, 2020, there was one significant vendor that the Company relies upon to perform stitching in
its FarmLens platform. This vendor provides services to the Company which can be replaced by alternative
vendors should the need arise.
Shipping Costs –
Shipping costs for the three months ended June 30, 2020 and 2019 totaled $5,723 and $273, respectively. For the six months
ended June 30, 2020 and 2019 shipping costs totaled $6,024 and $1,031, 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 condensed statements of operations.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 2 – Summary of Significant Accounting
Policies – Continued
Earnings Per Share –
Basic loss per share is computed by dividing net loss attributable to common shareholder by the weighted average number of common
shares outstanding for the period. Diluted loss per share is computed by dividing net loss attributable to common shareholder 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 six-month period ended June 30, 2020, the Company had
3,283,697 warrants, and 2,550,387 options to purchase common stock outstanding. For the six-month period ended June 30, 2019, the Company had 4,531,924 warrants, 2,025,720 options
to purchase common stock, and 3,636 shares of Series C Preferred Stock which were convertible into 6,733,333 shares 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.
Stock-Based Compensation
Awards – The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10, “Compensation
– Stock Compensation,” which requires fair value measurement on the grant date and recognition of compensation
expense for all stock-based payment awards made to employees and directors. For stock options, the Company estimates the fair value
using a closed option valuation (Black-Scholes) model. The estimated fair value is then expensed over the requisite service period
of the award, which is generally the vesting period, and the related amount is recognized in the consolidated statements of operations.
The Company recognizes forfeitures at the time they occur.
The Black-Scholes option-pricing
model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the
expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation
represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment.
As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially
different in the future.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 2 – Summary of Significant
Accounting Policies – Continued
Recently Issued Accounting Pronouncements
Adopted
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 condensed interim consolidated financial
statements.
In February 2016, FASB
issued Account Standards Update 2016-02 – Leases (Topic 842) intended to improve financial reporting of
leasing transactions whereby lessees will need to recognize a right-of-use asset and a lease liability for virtually all their
leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more
than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising
from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP
— which requires only capital leases to be recognized on the balance sheet — the new ASU will require both types of
leases to be recognized on the balance sheet. The Company adopted this ASU on January 1, 2019 and it did not have a material
impact on the Company’s condensed interim consolidated financial statements as the Company currently has no leases with a term
of more than twelve months.
In January 2017, the FASB
issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). The update simplifies the process for assessing goodwill
for impairment. The amended guidance removes the second step that was previously required. Under this ASU, impairment charges to
goodwill are based on the excess of a reporting unit’s carrying value to its fair value. ASU 2017-04 is effective for us for the
fiscal year ending September 30, 2021, with early adoption permitted for periods beginning after January 1, 2017. The Company adopted
ASU 2017-04 on January 1, 2019 and applied the guidance to the annual impairment test (see Note 5).
In August 2018, the FASB
issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic
820). This ASU removes or modifies current disclosures while adding certain new disclosure requirements. The guidance is effective
for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted for the removed
or modified disclosures. The removed and modified disclosures can be adopted retrospectively, and the added disclosures should
be adopted prospectively. The Company adopted this ASU on January 1, 2020 and it did not have a material impact on the Company’s
condensed interim consolidated financial statements.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 2 – Summary of Significant
Accounting Policies – Continued
Pending Adoption
Other recent accounting
pronouncements that have been issued or proposed by FASB did not or are not believed by management to have a material impact on
the Company’s present or future consolidated financial statements.
Note 3 – Inventories
Inventories consist of the following at:
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
|
|
Raw materials
|
|
$
|
259,017
|
|
|
$
|
193,022
|
|
Work-in-process
|
|
|
206,917
|
|
|
|
26,456
|
|
Finished goods
|
|
|
7,109
|
|
|
|
11,689
|
|
Gross inventory
|
|
$
|
473,043
|
|
|
$
|
231,167
|
|
Less obsolete reserve
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
Total
|
|
$
|
463,043
|
|
|
$
|
221,167
|
|
Note 4 — Property and Equipment
Property and equipment consist of the following at:
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
|
|
Property and equipment
|
|
$
|
146,931
|
|
|
$
|
140,758
|
|
Less accumulated depreciation
|
|
|
(110,868
|
)
|
|
|
(102,982
|
)
|
|
|
$
|
36,063
|
|
|
$
|
37,776
|
|
Depreciation expense for the three and six
months ended June 30, 2020 was $3,947 and $7,886, respectively; and for the three and six months ended June 30, 2019, depreciation
expense totaled $2,955 and $6,188, respectively.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 5 – Intangible Assets
Intangible assets are
recorded at cost and consist of assets acquired in 2018 as a result of a business acquisition in 2018. Amortization is computed
using the straight-line method over the estimate useful life of the asset. Intangible assets were comprised of the following at
June 30, 2020:
Intangible Assets
|
|
Estimated Life
|
|
Gross Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
Intellectual property/technology
|
|
5 yrs.
|
|
$
|
433,400
|
|
|
$
|
(158,913
|
)
|
|
$
|
274,487
|
|
Customer base
|
|
5 yrs.
|
|
|
72,000
|
|
|
|
(26,400
|
)
|
|
|
45,600
|
|
Tradenames and trademarks
|
|
5 yrs.
|
|
|
58,200
|
|
|
|
(21,340
|
)
|
|
|
36,860
|
|
Non-compete agreement
|
|
4 yrs.
|
|
|
160,900
|
|
|
|
(73,746
|
)
|
|
|
87,154
|
|
Carrying value as of June 30, 2020
|
|
|
|
$
|
724,500
|
|
|
$
|
(280,399
|
)
|
|
$
|
444,101
|
|
The weighted average remaining
amortization period in years is 2.96 years. Amortization expense for the six months ended June 30, 2020 and 2019 was $76,472
and $80,072, respectively.
Future amortization is
as follows for fiscal years ending:
|
|
2020 (months remaining)
|
|
2021
|
|
2022
|
|
2023
|
Intellectual property/technology
|
|
$
|
43,340
|
|
|
$
|
86,680
|
|
|
$
|
86,680
|
|
|
$
|
57,786
|
|
Customer base
|
|
|
7,200
|
|
|
|
14,400
|
|
|
|
14,400
|
|
|
|
9,600
|
|
Tradenames and trademarks
|
|
|
5,820
|
|
|
|
11,640
|
|
|
|
11,640
|
|
|
|
7,760
|
|
Non-compete agreement
|
|
|
20,113
|
|
|
|
40,225
|
|
|
|
26,817
|
|
|
|
—
|
|
Total
|
|
$
|
76,473
|
|
|
$
|
152,945
|
|
|
$
|
139,537
|
|
|
$
|
75,146
|
|
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 6 – Debt
Promissory Notes
On
May 6, 2020, the Company received a loan in the amount of $107,439 from the Small Business Administration (SBA) as part of Coronavirus
Aid, Relief and Economic Security Act’s Paycheck Protection Plan (PPP). The loan is unsecured, nonrecourse, accrues interest
at one percent per annum, with a due date of May 6, 2022. Under the terms of the loan, a portion or all of the loan is forgivable
to the extent that the loan proceeds are used to fund qualifying payroll, rent and utilities during a designated twenty-four-week
period through October 21, 2020.
The
unforgiven portion of the PPP loan is payable over two years and can be extended to five years if agreed upon by both
parties and bears interest at a rate of 1%, with a deferral of payments for the first six months. The Company intends
to use the proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds
will meet the conditions for forgiveness of the loan, there can be no assurance that the Company will not take actions
that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.
As
part of the liabilities assumed from the 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 – Stockholders’ Equity
Common Stock
Securities Purchase
Agreement Dated May 11, 2020
On May 11, 2020, the Company
and an institutional investor and existing Company shareholder (the “Investor”) entered into a securities purchase
agreement (the “Purchase Agreement”) pursuant to which the Company agreed to sell to the Investor in a registered
direct offering 2,400,000 shares of common stock, par value $0.001, and pre-funded warrants (the “Pre-Funded Warrants”)
to purchase up to 3,260,377 shares of common stock, for gross proceeds of approximately $6 million and net proceeds of $5,950,010
after issuance costs. The purchase price for each share of common stock was $1.06 and the purchase price for each Pre-Funded
Warrant was $1.05999. The exercise price for each Warrant was $0.001. Net proceeds from the sale were used to repurchase 262 shares
of the Company’s Series E Preferred Stock, convertible into 1,048,000 shares of common stock currently held by the Investor
at a repurchase price of $1.06 per share of common stock (see below). The Company expects to use the balance for working
capital and general corporate purposes. The Company has increased net loss available to common stockholders’ in computing
earnings per share for the excess of the consideration paid for the Series E Preferred Stock over its carrying value totaling
$848,880.
Pursuant to the terms of
the Purchase Agreement, the Company has agreed to certain restrictions on future stock offerings, including that during the 60-day
period following the closing, the Company will not issue (or enter into any agreement to issue) any shares of common stock or common
stock equivalents, subject to certain exceptions. The exercise price of the Warrants and the shares of the common stock issuable
upon the exercise thereof will be subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization,
reorganization or similar transaction, as described in the Warrants. The Warrants will be exercisable on a “cashless”
basis in certain circumstances.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 7 – Stockholders’ Equity –
Continued
Securities Purchase Agreement Dated June
24, 2020
On June 24, 2020, the
Company and the Investor entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which
the Company agreed to sell to the Investor in a registered direct offering 4,407,400 shares of common stock, par value $0.001,
pre-funded warrants to purchase up to 1,956,236 shares of common stock, and warrants to purchase up to 2,455,476 shares of common
stock at an exercise price of $1.35 per share (the “Warrants”), for gross proceeds of $7 million (which includes subsequent
payment of the exercise price of the Pre-Funded Warrants in the amount of $1,956) and net proceeds of $6,950,000 after issuance
costs. Upon exercise of the Warrants in full by the Investor, the Company would receive additional gross proceeds of $3,314,892.
The shares of common stock underlying the Pre-Funded Warrants and the Warrants are referred to as “Warrant Shares.”
The purchase price for
each share of common Stock is $1.10 and the purchase price for each Pre-Funded Warrant is $1.099. The exercise price for each Pre-Funded
Warrant is $0.001. Net proceeds from the sale will be used for working capital, capital expenditures and general corporate purposes.
The Shares, Pre-funded Warrants, Warrants and Warrant Shares are being offered by the Company pursuant to an effective shelf registration
statement on Form S-3 (File No. 333-239157), which was declared effective on June 19, 2020.
Pursuant to the terms of
the Purchase Agreement, the Company agreed to certain restrictions on future stock offerings, including that during the 75-day
period following the closing, the Company will not issue (or enter into any agreement to issue) any shares of common stock or common
stock equivalents, subject to certain exceptions, including if the consolidated closing price on the trading market on which the
Company’s common stock is traded at the time is greater than $1.90 (adjusted for any subsequent stock splits or similar capital
adjustments) for five consecutive trading days, the Company may issue such securities at not less than $1.90 per common stock Equivalent.
The Investor has a right from the date of the Purchase Agreement until December 31, 2020 to participate in a subsequent financing
by the Company or any of its Subsidiaries of common stock or common stock Equivalents for cash consideration, indebtedness or a
combination of units thereof (a “Subsequent Financing”), in an amount equal to 50% of the Subsequent Financing on the
same terms, conditions and price provided for in the Subsequent Financing.
The exercise price of
the Prefunded Warrants and the Warrants and the number of Warrant Shares issuable upon the exercise thereof will be subject to
adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction,
as described in the Prefunded Warrants and the Warrants. The Warrants will be exercisable on a “cashless” basis only
in the event there is no effective registration statement registering, or the prospectus contained therein is not available for
the sale of the shares underlying the Warrants. The Pre-Funded Warrants allow for cashless exercise at any time. The Pre-Funded
Warrants and the Warrants each contain a beneficial ownership limitation, such that none of such Pre-Funded Warrants nor the Warrants
may be exercised, if, at the time of such exercise, the holder would become the beneficial owner of more than 9.99% of our outstanding
shares of common stock following the exercise of such Pre-Funded Warrant or Warrant.
Issuances of Stock
On April 13, 2020, the
Company issued in connection with the 2019 Executive Compensation Plan, 100,000 restricted shares to Mr. Barrett Mooney and 70,000
restricted shares to Ms. Nicole Fernandez-McGovern. The Company recognized a total of $59,500 of expense at a fair value of $0.35
per share within stock compensation costs related to these issuances.
On June 30, 2020, the
Company issued in connection with a consulting agreement, dated May 3, 2019, 250,000 shares of its common stock to the consulting
company as a part of their compensation for services. The Company recognized a total of $297,500 of expense at a fair value of
$1.19 per share within general and administrative costs related to these issuances.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 7 – Stockholders’ Equity –
Continued
Series C Preferred Stock
As a result of the Merger,
the Company’s Series C Convertible Preferred Stock (the “Series C Preferred Stock”) included 2,879 of remaining
shares after the conversion and retirement of all the Company’s promissory notes due. These shares were convertible into
1,471,425 shares of the Company’s common stock. Furthermore, an additional 4,000 shares of Series C Preferred Stock were
issued and were convertible into 3,020,797 shares of the Company’s common stock, as they 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”).
On
May 11, 2018, the Company issued an additional 250 shares of our Series C Preferred Stock, convertible into 163,265 shares
of common stock and received a cash payment of $250,000 for the issuance of the Series C Preferred Stock. The Series C Preferred
Stock included a beneficial ownership limitation preventing conversion of shares of Series C Preferred Stock into more
than 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of shares of
common stock upon conversion of the Series C Preferred Stock.
Each share of Series
C Preferred Stock was convertible into a number of shares of common stock equal to the quotient determined by dividing
(x) the stated value of $1,000 per share, by (y) an original conversion price of $1.53. Until the volume weighted average
price of 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 Series C Preferred Stock was subject to full-ratchet, anti-dilution price protection. Under
that provision, if, while that full-ratchet, anti-dilution price protection is in effect, the Company issues shares of
common stock at a price per share (the “Dilutive Price”) that is less than the conversion price, then the conversion
price of the 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 common stock.
The Series C preferred
stock anti-dilution protection was initially triggered on December 27, 2018 as a result of the Company issuing the Series D Preferred
Stock, (the “Series D Preferred Stock”) as described below. The Series D Preferred Stock had a $0.54 conversion price
thereby qualifying as a subsequent equity offering at a price less than $1.53.
On April 7, 2020,
upon the issuance of the Series E Preferred Stock, (the “Series E Preferred Stock”) offering (see below), a
subsequent anti-dilution provision was triggered for the Series C Preferred Stock whereby the conversion price was further adjusted
from $0.54 per share to $0.25 per share (a “Down Round), which resulted in approximately 13,248,000 shares of common
stock being issuable upon conversion of the remaining Series C Preferred Stock. As a result of this Down Round being triggered,
the Company recorded a deemed dividend in the amount of $3,841,920 representing the intrinsic spread between the previous conversion
price of $.54 and the adjusted conversion price of $.25 multiplied by approximately 13,248,000 common stock shares issuable upon
conversion. The deemed dividend was recorded as a reduction of retained earnings and increase in additional paid-in-capital
and increased the net loss to common stockholders by the same amount in computing earnings per share.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 7 – Stockholders’ Equity –
Continued
During the
month of January 2020, Alpha Capital Anstalt (“Alpha”) converted 189 shares of Series C Preferred Stock into
350,000 shares of common stock at a conversion price of $0.54. During the month of April 2020, Alpha converted
3,312 shares of Series C Preferred Stock into 13,247,984 shares of common stock at a conversion price of $0.25. As of
June 30, 2020, no Series C Preferred Stock remain issued and outstanding.
Series D Preferred Stock
On December 27,
2018, the Company entered into a Securities Purchase Agreement (the “Agreement”) with Alpha. Pursuant to the
terms of the Agreement, the Board of Directors of the Company (the “Board”) designated a new series of preferred
stock by filing a certificate of designation, 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 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 Alpha with respect to the Warrant
Shares.
The
Agreement provides that upon a subsequent financing or financings with net proceeds of at least $500,000, the Company must exercise
its optional redemption of the Preferred Stock (as more fully described 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. During the six months ended June 30, 2020 and 2019, the Company recorded
$69,778 and $80,444 of accrued dividends, respectively.
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.
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.
AGEAGLE AERIAL SYSTEMS, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 7 – Stockholders’ Equity – Continued
On April 7, 2020,
upon the issuance of the Series E Preferred Stock, (the “Series E Preferred Stock”) offering (see below), a
subsequent anti-dilution provision was triggered for the Series D Warrants whereby the exercise price of the Warrant Shares
was adjusted from $0.54 to $0.25 per share (a “Warrant Down Round). Upon the Warrant Down Round being triggered,
the Company recognized $208,918 of a deemed dividend for the difference between the fair value of the original warrants
right before modification and the fair value of the modified warrants. The fair value of the warrants was determined
using the Black-Scholes option-pricing model based on the following assumptions: expected life of 3.5 years, expected dividend
rate of 0%, volatility of 90.0%, and an interest rate of 0.29%. The deemed dividend to the preferred stockholders
was a recorded as additional paid in capital and a reduction of retained earnings and as an increase to net loss attributable
to common stockholders in computing earnings per share.
On June 5, 2020, the Company
and Alpha entered into a letter agreement whereby they agreed to amend the Original Series D Preferred Stock, and terminate the
Purchase Agreement. Alpha is a current holder of less than 10% of the Company’s issued and outstanding common stock and has no
material relationship with the Company.
On June 5, 2020, the Board
of Directors of the Company approved an amendment to the Original Series D Preferred Stock Certificate of Designation for Nevada
Profit Corporations with the Secretary of State of the State of Nevada (the “Original Series D Preferred Stock Certificate
of Designation”). The amendment among other things, (i) provided for the ability of the Holder to convert the Original Series
D, including all accrued, but unpaid dividends on the Original Series D, into shares of common stock, par value $0.001 per share
of the Company, (ii) set a conversion price at $0.54 per share (subject to customary adjustments), and (iii) increased
the stated value of the Original Series D from $1,000 to $1,116.67. The Amended and Restated Certificate of Designation of the
Series D Preferred Stock was filed with the Secretary of the State of Nevada effective as of June 8, 2020.
The holder of the Original
Series D approved the amendment to the Original Series D. There is no class or series of stock which is senior to the Original
Series D as to the payment of distributions upon dissolution of the Company, and therefore the approval of any other class or
series of stock of the Company to the amendments to the Original Series D Preferred Stock Certificate of Designation is not required
pursuant to Nevada law.
On the date of the above
amendment to the Original Series D Preferred Stock the fair value of the Company’s common stock price was
$1.45 which is higher than the effective conversion price of $0.54 that was agreed to on June 5th, 2020.
Due to the modification of the Series D Preferred Stock, the Company recorded a deemed dividend of $3,763,591
representing the intrinsic value of $.91 multiplied by the number of common stock shares to be issued upon conversion. The
deemed dividend to the preferred stockholders was a recorded as additional paid in capital and a reduction of retained earnings
and has an increase to net loss attributable to common stockholders in computing earnings per share
During the three months
ended June 30, 2020, the Series D Preferred Stockholders converted 1,890 shares of Series D Preferred Stock and outstanding accrued
dividends totaling $233,333 into 3,500,000 shares of common stock at a conversion price of $0.54. As of June 30,2020, and December,
31, 2019, accumulated accrued dividends totaled $0 and $163,555, respectively, as presented on the condensed interim consolidated
balance sheets.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 7 – Stockholders’ Equity –
Continued
Series E Preferred Stock
On April 7, 2020 the
Company entered into a Securities Purchase Agreement with Alpha, pursuant to the terms of the Agreement, the Board of
Directors of the Company authorized 1,050 shares of a newly designated series of preferred stock, the Series E Convertible
Preferred Stock. The Preferred Stock was convertible at $0.25 per share into an aggregate of 4,200,000 shares of the common
stock, par value $0.001 per share. The purchase price for the Preferred Stock was $1,050,000 of which the Company received
net proceeds of $1,010,000. The Preferred Stock has liquidation rights senior to the common stock, but pari passu with
the Series C Preferred Stock and the Series D Preferred Stock. The Preferred Stock has no voting rights. The conversion price
adjusts for stock splits and combinations and is subject to anti-dilution protection for subsequent equity issuances until
such time as no shares of Series E Preferred Stock are outstanding. The Certificate of Designation of the Series E
Convertible Preferred Stock was filed with the State of Nevada on April 2, 2020.The Company also entered into a Registration
Rights Agreement, granting registration rights to Alpha with respect to the Conversion Shares and common stock
underlying warrants currently owned by Alpha.
On the date that the Series
E Preferred Stock was consummated the fair value of the Company’s common stock price was $0.37 which is higher than the
effective conversion price of $0.25 that was agreed to on April 7th, 2020. As a result, the Company recognized
a beneficial conversion feature (“BCF”) of $378,240 on 788 of Preferred Shares representing
the intrinsic value of $.12 multiplied by the number of common stock shares to be issued upon conversion. The remaining amount
of 262 shares was repurchased as described below. The discount to the Series E Preferred Stock resulting from the BCF
has been presented as an increase to net loss attributable to common stockholders in computing earnings per share.
On May 11, 2020, we entered
into a Securities Purchase Agreement for the sale of common stock as described above with Alpha
whereby we agreed to repurchase 262 shares of Series E Preferred Stock with the proceeds from the new issuance. The
repurchase of the Preferred Series E Stock was convertible into 1,048,000 shares of common stock at a repurchase price of $1.06
per share. The Company has increased net loss available to common stockholders’ in computing earnings per share for the
excess of the consideration paid for the Series E Preferred Stock over it’s carrying value totaling $848,880.
Filing of Registration Statement
Pursuant to the terms of
the Registration Rights Agreement executed on April 7, 2020, the Company filed an initial registration statement registering the
Conversion Shares and the Warrant Shares on April 27, 2020. The Company’s registration statement was declared effective May 6,
2020.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 7 – Stockholders’ Equity –
Continued
Options
On March 26, 2018, the
EnerJex 2017 Omnibus Equity Incentive Plan (the “Plan”) became effective. Under the Plan, the Company can grant equity-based
and other incentive awards to officers, employees and directors of, and consultants and advisers to, the Company. The purpose of
the Plan is to help the Company attract, motivate and retain such persons and thereby enhance shareholder value. The Plan shall
continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which it is adopted by the Board
of Directors (except as to awards outstanding on that date). The Board of Directors in its discretion may terminate the Plan at
any time with respect to any shares for which awards have not theretofore been granted; provided, however, that the Plan’s termination
shall not materially and adversely impair the rights of a holder, without the consent of the holder, with respect to any award
previously granted.
On July 15, 2020 the Company
held its 2020 annual meeting of stockholders and approved a proposal to increase the number
of shares of common stock reserved for issuance under the Plan from 3,000,000 to 4,000,000. To the extent that an award lapses,
expires, is canceled, is terminated unexercised or ceases to be exercisable for any reason, or the rights of its holder terminate,
any shares subject to such award shall again be available for the grant of a new award. The number of shares for which awards which
are options or SARs may be granted to a participant under the Plan during any calendar year is limited to 500,000. For purposes
of qualifying awards as “performance-based” compensation under Code Section 162(m), the maximum amount of cash compensation
that may be paid to any person under the Plan in any single calendar year shall be $500,000.
During the six months
ended June 30, 2020, the Company issued options to purchase 296,167 shares of common stock, in the aggregate, to directors
and employees of the Company at the fair value exercise price ranging from $0.41 to $1.27 per share expiring on dates between
March 30, 2025 and June 29, 2025. The Company determined the fair-market value of the options to be $177,402. In connection
with the issuance of these options to employees and directors, the Company recognized $2,686 in stock compensation expense for
the three and six months ended June 30, 2020. During the three and six months ended June 30, 2020, the Company recognized $9,636
and $64,271, respectively, in stock compensation expense in connection with options issued to employees and directors.
During the six months
ended June 30, 2019, the Company issued options to purchase 602,000 shares of common stock, in the aggregate, to directors
and employees of the Company at the fair value exercise price ranging from $0.29 to $0.54 per share expiring on dates between
December 31, 2023 and March 28, 2029. The Company determined the fair-market value of the options to be $166,756. In connection
with the issuance of these options to employees and directors, the Company recognized $14,545 and $16,488, respectively in stock
compensation expense for the three and six months ended June 30, 2019.
The fair value of options
granted during the six-month periods ending June 30, 2020 and 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.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 7 – Stockholders’ Equity –
Continued
The significant weighted
average assumptions relating to the valuation of the Company’s stock options granted during the six months ended June 30, 2020
were as follows:
|
|
June 30, 2020
|
Dividend yield
|
|
|
0.00
|
%
|
Expected life
|
|
|
3.5 Years
|
|
Expected volatility
|
|
|
90.09
|
%
|
Risk-free interest rate
|
|
|
0.29
|
%
|
A summary of the options
activity for the six months ended June 30, 2020 is as follows:
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value
|
Outstanding at January 1, 2020
|
|
|
2,480,470
|
|
|
$
|
0.39
|
|
|
|
6.28
|
|
|
$
|
378,111
|
|
Granted
|
|
|
296,167
|
|
|
|
0.99
|
|
|
|
4.95
|
|
|
|
—
|
|
Exercised/Forfeited
|
|
|
(226,250
|
)
|
|
|
1.65
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at June 30, 2020
|
|
|
2,550,387
|
|
|
|
0.35
|
|
|
|
5.91
|
|
|
$
|
2,162,940
|
|
Exercisable at period end
|
|
|
1,609,175
|
|
|
$
|
0.22
|
|
|
|
5.69
|
|
|
$
|
1,559,751
|
|
For options granted during
the six months ended June 30, 2020, the fair value of the Company’s stock was based upon the close of market price on the date
of grant. As of June 30, 2020, the future expected stock-based compensation expense to be recognized in future years is $333,199,
through June 30, 2022.
Intrinsic value is measured
using the fair market value at the date of exercise (for shares exercised) or at June 30, 2020 (for outstanding options), less
the applicable exercise price.
A summary of the options
activity for the six months ended June 30, 2019 is as follows:
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value
|
Outstanding at January 1, 2019
|
|
|
1,494,158
|
|
|
$
|
0.46
|
|
|
|
6.93
|
|
|
$
|
409,678
|
|
Granted
|
|
|
602,000
|
|
|
|
0.41
|
|
|
|
8.08
|
|
|
|
—
|
|
Exercised/Forfeited
|
|
|
(70,438
|
)
|
|
|
0.49
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at June 30, 2019
|
|
|
2,025,720
|
|
|
|
0.44
|
|
|
|
6.97
|
|
|
|
215,883
|
|
Exercisable at period end
|
|
|
1,218,544
|
|
|
$
|
0.34
|
|
|
|
6.57
|
|
|
$
|
208,659
|
|
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 8 – Warrants to Purchase
Common Stock
All
warrants outstanding as of June 30, 2020 are scheduled to expire between June 25, 2021 and October 31, 2024.
A summary of activity related
to warrants for the six months ended June 30, 2020 follows:
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
Outstanding at January 1, 2020
|
|
|
4,531,924
|
|
|
$
|
0.72
|
|
|
|
4.05
|
|
Issued
|
|
|
2,455,476
|
|
|
|
1.35
|
|
|
|
1.00
|
|
Exercised
|
|
|
(3,703,703
|
)
|
|
|
0.25
|
|
|
|
—
|
|
Outstanding at June 30, 2020
|
|
|
3,283,697
|
|
|
|
1.39
|
|
|
|
1.71
|
|
Exercisable at June 30, 2020
|
|
|
3,283,697
|
|
|
|
1.39
|
|
|
|
1.71
|
|
A summary of activity related
to warrants for the six months ended June 30, 2019 follows:
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
Outstanding at January 1, 2019
|
|
|
4,531,924
|
|
|
$
|
0.72
|
|
|
|
4.56
|
|
Outstanding at June 30, 2019
|
|
|
4,531,924
|
|
|
|
0.72
|
|
|
|
4.56
|
|
Exercisable at June 30, 2019
|
|
|
4,531,924
|
|
|
|
0.72
|
|
|
|
4.56
|
|
AGEAGLE AERIAL
SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 9 – Commitments and Contingencies
Operating Leases
The Company leases office
space located at 117 South 4th Street, Neodesha, Kansas 66757. This serves as the corporate headquarters and manufacturing
facility. The facility is 4,000 square feet at a cost of $500 per month. This lease terminated on September 30, 2019 but has a
year-to-year option to renew upon approval by the city commission of Neodesha. The Company has exercised its option and has been
approved to renew the lease through September 30, 2020 at a monthly cost of $600 per month.
The Company has a lease
for offices in Boulder, Colorado for $2,000 a month. The Company renewed the lease on May 31, 2019 until December 31, 2020 on a
month-to-month basis with an option to terminate at any time with a 30-day prior notice period.
Total rent expense was
$15,300 and $15,000 for the six months ended June 30, 2020 and 2019, respectively, which is included in general and administrative
expenses on the statements of operations.
GreenBlock Capital LLC Consulting Agreement
On May 3, 2019, the Company
entered into a consulting agreement with GreenBlock Capital LLC (“Consultant”) to serve as strategic advisor and consultant
to the Company with respect to the development of business opportunities and the implementation of business strategies to be agreed
to by both parties. The extent of the services will be set forth in separate scopes of work, from time to time, to be prepared
and mutually agreed to by the parties. As compensation for the services under the terms of the agreement, Consultant shall receive
(i) $25,000 per month during the term of the agreement, (ii) 500,000 shares of restricted common stock upon execution of the agreement,
and (iii) up to 2,500,000 shares of restricted common stock upon the achievement of predetermined milestones.
The Consultant was also
previously engaged by the Company between March 2015 and August 2016 to provide consulting services. In addition, the Consultant
also holds as of June 30, 2020, 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 October 31, 2019, the
consulting agreement with the Consultant was terminated as a result of the Company no longer needing these services to be provided
by an outside consultant. During the term of the agreement, the Company paid to the Consultant (i) $25,000 per month for six
months and issued (ii) 500,000 restricted shares of common stock at the execution of the agreement. The agreement also provided
for the issuance of up to an additional 2,500,000 shares of restricted common stock upon the achievement of milestones that were
to be determined by the Company and the Consultant during the term of the agreement. There are no early termination penalties
incurred as a result of the termination of the consulting agreement. The Consultant may still be entitled to receive the shares
after termination of the Agreement, if the achievement of milestones that commenced during the term of the Agreement are completed.
On June 30, 2020, the
Company issued an additional 250,000 shares of its common stock to the Consultant as part of its compensation
for services. The Company recognized a total of $297,500 of expense at a fair value of $1.19 per share within professional
fees related to these issuances.
AGEAGLE AERIAL
SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 9 – Commitments and Contingencies – Continued
Founder Leak-Out Agreement
On April 7, 2020, as a
condition to the consummation of the Series E Preferred Agreement, the Company entered into a Leak-Out Agreement with Mr. Bret
Chilcott, founder and former director and President of the Company, and Alpha with respect to the shares Mr. Chilcott beneficially
owns. The restriction on the disposition of the shares is for a period of seven months from the date of the closing of the Agreement.
Thereafter, for a period of an additional six months, Mr. Chilcott may sell no more than $25,000 per calendar month of shares
of Company common stock.
Approval of Compensation by Compensation
Committee
Mr. Barrett Mooney and
Mr. Brett Chilcott resigned from their roles with the Company, effective May 5, 2020. Mr. Mooney now serves as Chairman
of the Board, and Mr. Chilcott no longer serves as management of the Company.
On April 16, 2020 the Compensation
Committee agreed to the following terms:
Mr. Barrett Mooney:
Mr. Mooney was entitled
to receive his current salary and benefits between the dates of March 6, 2020 and April 4, 2020. In addition, Mr.
Mooney will be paid $50,000 in cash, $25,000 of which was paid in a lump sum in April 2020 and the balance will be paid in equal
installments over a six-month period beginning on May 5, 2020. Mr. Mooney will remain eligible to receive bonuses of up to $15,000,
as approved by the Board of Directors based on certain revenue and operational targets being achieved. Commencing May 5, 2020
when he accepted the appointment as Chairman of the Board, Mr. Mooney is entitled to receive (i) a quarterly grant of 16,500 stock
options at the fair market value of the stock on the issuance date, vesting over two years and exercisable for a period of five
years; and (ii) reimbursement for travel expenses. Mr. Mooney has agreed to also provide the Company with consulting services,
as needed, at a fixed price of $4,500 per month on a month-to-month basis, plus reimbursement for travel expenses.
Mr. Bret Chilcott:
Mr. Chilcott is entitled
to receive a base annual salary of $140,000, plus benefits, for the twelve-month period commencing May 5, 2020 and ending May
4, 2021. Subsequent to May 4, 2021, Mr. Chilcott will provide the Company with consulting services, as needed, at a fixed fee
of $4,500 per month on a month-to-month basis plus reimbursement of travel expenses.
AGEAGLE AERIAL
SYSTEMS INC.
NOTES TO CONDENSED
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND
SIX MONTHS ENDED JUNE 30, 2020 AND 2019
(Unaudited)
Note 9 – Commitments and Contingencies – Continued
2020 Executive Compensation Plan
The Compensation Committee
also approved a 2020 Executive Compensation Plan for Nicole Fernandez-McGovern, the Chief Financial Officer and EVP of Operations,
and the new Chief Executive Officer the Company expected to hire. The Plan is as follows, with the Cash Bonus, Option and
Restricted Stock Units (RSUs) components to be dependent upon achieving certain to-be-determined financial and operational milestones:
|
|
Chief Executive Officer
|
|
Chief Financial Officer/ EVP of Operations
|
Annual Salary
|
|
$
|
250,000
|
|
|
$
|
200,000
|
|
Cash Bonus
|
|
$
|
50,000
|
|
|
$
|
30,000
|
|
Stock Options (Quarterly Grants)
|
|
|
15,000
|
|
|
|
15,000
|
|
RSUs
|
|
|
150,000
|
|
|
|
125,000
|
|
Appointment of Chief
Executive Officer and Compensatory Arrangements
On April 28, 2020,
the Company extended an offer of employment that was accepted by Mr. Michael Drozd to serve as the Company’s new Chief Executive
Officer. Mr. Drozd officially joined the Company on May 18, 2020. The Company previously announced that Mr. Barrett Mooney would
resign from his role as Chief Executive Officer effective as of May 5, 2020, but would remain with the Company as Chairman of the
Board thereafter. From May 5, 2020 through May 18, 2020, Ms. Nicole Fernandez-McGovern, the Company’s Chief Financial Officer,
served as Interim Chief Executive Officer until Mr. Drozd officially commenced his new role on May 18, 2020. Ms. Fernandez-McGovern
did not receive any additional compensation for serving as Interim Chief Executive Officer.
From 2015 through
2019, Mr. Drozd served as President of Eurofins AgBio Division, a global business focused primarily on testing for the agriculture
sector (seed, plant and animals) with an emphasis on using genetic analysis. From 2014 until 2015, he was Chief Operating Officer
of Arbiom, a French biotechnology company where he restructured the organization, materially increasing overall efficiency and
improving resource allocations through numerous measured steps and initiatives. Mr. Drozd served as President and CEO of Aseptia/Wright
Foods from 2011 through 2014, a leading technology company in shelf-stable food processing and co-packaging.
Mr. Drozd will receive
a base salary of $235,000 per year, which shall be subject to annual performance review by the Compensation Committee of the Board
and may be revised by the Committee, in its sole discretion. Mr. Drozd is entitled to receive an annual 20% bonus, which may be
a mix of cash and stock options, based upon his performance as determined by certain metrics to be established by the Board and
Mr. Drozd. He will receive an initial grant of 100,000 restricted stock units under the Company’s 2017 Omnibus Equity Incentive
Plan (the “Equity Plan”), which will fully vest after one year of continued employment. Mr. Drozd is eligible to receive
a quarterly award of 15,000 non-qualified stock options under the Equity Plan. At the time of issuance, the stock option award
agreements will set forth the vesting, exercisability and exercise price of the stock options as of the date of the grants.
AGEAGLE AERIAL SYSTEMS
INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 10 — Related Party Transactions
The following reflects the related party transactions
during the six months ended June 30, 2020 and 2019.
The Company’s Chief Financial
Officer, Nicole Fernandez-McGovern, is one of the principals of Premier Financial Filings, a full-service financial printer. Premier
Financial Filings provided contracted financial services to the Company and their related expenses have been included within general
and administrative expenses. For the three and six months ended June 30, 2020, Premier Financial Filings provided services to the
Company resulting in fees of $9,344 and $11,949, respectively recorded in general and administrative costs. There are no payables
due to Premier Financials Filings as of June 30, 2020.
The Company
contracted external fractional CTO services to a firm whereby one of our board members is currently a shareholder. For the
three and six months ended June 30, 2020 the Company paid $42,700 and $61,000 in fees, respectively recorded in professional
fess. No expenses related to these services were incurred in 2019. Also, there are no payables due to this company as of June
30, 2020.
Note 11 – Subsequent Events
Preferred D Share Conversions
During the month of July
2020, Alpha converted the remaining 110 Preferred Series D shares at a stated value of $1,116.67
into 227,470 shares of common stock at a conversion price of $0.54.
Pre-Funded Warrant Conversions
On July 7, 2020, Alpha
exercised 1,956,236 of Pre-Funded warrants into 1,956,236 shares of common stock at a conversion price of $0.001.
Warrant Conversions
During the month of July
2020, Alpha converted 1,950,000 warrants into 1,950,000 shares of common stock at a conversion price
of $1.35. The Company received cash proceeds of $2,632,500 associated with exercise of the warrants.
Option Exercises
During the month of July
2020, the Company had conversions of options into 354,954 shares of common stock at a conversion price of $0.06.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 11 – Subsequent Events -Continued
Approval of Compensation by Compensation
Committee
On July 20, 2020, the Board
of Directors of the Company, upon recommendation of the Compensation Committee, approved a change in the compensation of the directors
and of Ms. Nicole Fernandez-McGovern, the Company’s Chief Financial Officer and EVP of Operations. The Compensation Committee engaged
Albeck to perform an independent third party study of compensation to assess if the Company’s compensation of its Board and its
executive officers is in line with the industry averages.
As a result of the study,
and upon the recommendation of the Compensation Committee, the Board approved:
1) an increase in Ms. Fernandez-McGovern’s
annual salary from $200,000 to $220,000 and an increase in quarterly stock options from 12,500 to 15,000. In addition to the previously
approved 2020 bonus structure, Ms. Fernandez-McGovern was awarded an additional performance based bonus of $40,000, equal to 20%
of her current salary; and
2) a cash component for
director compensation in the amount of $60,000 per year payable quarterly and an increase in quarterly stock options from 16,500
to 25,000. The approved compensation is retroactive to July 1, 2020.
As previously disclosed
in an amendment to the Current Report on Form 8-K filed on April 20, 2020, Mr. Barrett Mooney, who is currently the Chairman of
the Board, receives a monthly fee for consulting services he provides to the Company, which is outside of his role as Chairman
of the Board. Mr. Mooney’s consulting fee has been increased to $10,000 per month commencing on August 1, 2020.
Security Purchase Agreement
On August 4, 2020, the
Company, and Alpha entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which
the Company agreed to sell to Alpha in a registered direct offering 3,355,705 shares of common stock, par value $0.001,
and warrants to purchase up to 2,516,778 shares of common stock at an exercise price of $3.30 per share (the “Warrants”),
and received net proceeds of $9,900,000 after issuance costs. Upon exercise of the Warrants in full by the Investor, the
Company would receive additional gross proceeds of approximately $8,305,367. The shares of common stock underlying the Warrants
are referred to as “Warrant Shares.”
The purchase price for
each share of common stock and warrants is $2.98. Net proceeds from the sale will be used for working capital, capital
expenditures and general corporate purposes. The Shares, the Warrants and the Warrant Shares are being offered by the Company
pursuant to an effective shelf registration statement on Form S-3 (File No. 333-239157), which was declared effective on June
19, 2020.
AGEAGLE AERIAL SYSTEMS INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 2020 AND 2019
(Unaudited)
Note 11 – Subsequent Events –Continued
Pursuant to the terms
of the Purchase Agreement, the Company has agreed to certain restrictions on future stock offerings, including that during the
75-day period following the closing, the Company will not issue (or enter into any agreement to issue) any shares of common stock
or common stock equivalents, subject to certain exceptions, including if the consolidated closing price on the trading market
on which the Company’s common stock is traded at the time is greater than $5.00 (adjusted for any subsequent stock splits
or similar capital adjustments) for ten consecutive trading days, the Company may issue such securities at not less than $5.00
per Common Stock Equivalent. In addition, the Company’s executive officers and directors agreed that they shall not sell
(or hedge in any manner) any of their shares of the common stock for a period ending September 7, 2020. Alpha has a right
from the date of the Purchase Agreement until December 31, 2020, to participate in a subsequent financing by the Company or any
of its Subsidiaries of common stock or Common Stock Equivalents for cash consideration, indebtedness or a combination of units
thereof (a “Subsequent Financing”), in an amount equal to 50% of the Subsequent Financing on the same terms, conditions
and price provided for in the Subsequent Financing.
The exercise price of the
Warrants and the number of Warrant Shares issuable upon the exercise thereof will be subject to adjustment in the event of any
stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Warrants.
The Warrants will be exercisable on a “cashless” basis only in the event there is no effective registration statement
registering, or the prospectus contained therein is not available for the sale of the shares underlying the Warrants. The Warrants
contain a beneficial ownership limitation, such that none of such Warrants may be exercised, if, at the time of such exercise,
the holder would become the beneficial owner of more than 9.99% of our outstanding shares of common stock following the exercise
of such Warrant. The Warrant is for a ten-month term and is not exercisable for the first six months.
Lease
On August 3, 2020
(the “Effective Date”), the Company entered into a lease agreement (the “Wichita Lease”) with U.S. Business
Centers, L.L.C. (the “Landlord”) with an expected commencement date of November 1, 2020 (the “Commencement Date”)
and expected expiration date of October 31, 2023 unless the Wichita Lease is sooner terminated or extended. The Wichita Lease premises
include approximately 12,000 square feet, located at 8833 E. 34th Street, Wichita, Kansas 19103 (the “Leased
Premises”). The aggregate estimated rent payments due over the initial three-year term of the Wichita Lease is $297,000. The
Company will post a security deposit in the amount of $9,720.
The Landlord may grant
the Company the option to extend the term of the Wichita Lease for an additional 36 months (the “Option Term”). The aggregate
estimated rent payments due over the Option Term of the Wichita Lease would be $314,640.
In addition, the Landlord
grants the Company the right to take occupancy of the Leased Premises rent free, beginning on September 1, 2020. The Company expects
to use the Leased Premises as its new corporate headquarters and base of operations for manufacturing, assembly, design and engineering
and testing of drones, drone subcomponents and drone-related equipment.