UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended SeptemberJune 30, 20202021

or

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number 001-36492

AGEAGLE AERIAL SYSTEMS INC.

(Exact name of registrant issuer as specified in its charter)

Nevada88-0422242
(State or other jurisdiction of

incorporation or organization)		(I.R.S. Employer

Identification No.)

8863 E. 34th Street North

Wichita, Kansas67226

(Address of principal executive offices, including zip code)

620-325-6363620-325-6363

Registrant’s phone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockUAVSNYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES

Yes ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding twelve months (or shorter period that the registrant was required to submit and post such files).

YES

Yes ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” or an “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer☐Accelerated filer☐
Non-accelerated filerFiler☒Smaller reporting company☒
Emerging growth company☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

ClassOutstanding at November 13, 2020August 17, 2021
Common stock,Stock, $.001 par value57,980,37775,145,698

Table of Contents

AGEAGLE AERIAL SYSTEMS INC.

 

TABLE OF CONTENTS

 

  Page
PART IFINANCIAL INFORMATION3
   
ITEM 1.FINANCIAL STATEMENTS:3
   
 Condensed Interim Consolidated Balance Sheets as of SeptemberJune 30, 20202021(unaudited) and December 31, 2019 (unaudited)20203
   
 Condensed Interim Consolidated Statements of Operations for the Three and NineSix Months Ended SeptemberJune 30, 2021 and 2020 and 2019 (unaudited)4
   
 Condensed Interim Consolidated StatementStatements of Stockholders’ Equity for the Three and NineSix Months Ended SeptemberJune 30, 2021 and 2020 and 2019 (unaudited)5
   
 Condensed Interim Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 2021 and 2020 and 2019 (unaudited)7
   
 Notes to Condensed Interim Consolidated Financial Statements (unaudited)8
   
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS33
   
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK4540
   
ITEM 4.CONTROLS AND PROCEDURES4540
   
PART IIOTHER INFORMATION4641
   
ITEM 1.LEGAL PROCEEDINGS4641
   
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS4642
   
ITEM 3.DEFAULTS UPON SENIOR SECURITIES4642
   
ITEM 4.MINE SAFETY DISCLOSURES4642
   
ITEM 5.OTHER INFORMATION4642
   
ITEM 6EXHIBITS4643
   
SIGNATURES4744

 

2 

Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2020, AND DECEMBER 31, 2019

(Unaudited)

    
 As of As of
 September 30, December 31, June 30, December 31,
ASSETS 2020 2019 2021 2020
 (Unaudited)  
CURRENT ASSETS:                
Cash $24,693,417  $717,997  $39,214,638  $23,940,333 
Accounts receivable  —   65,833 
Accounts receivable, net  814,712   — 
Inventories, net  158,389   221,167   1,030,977   135,647 
Prepaid and other current assets  120,537   124,163   697,974   122,011 
Notes receivable  500,000   600,000 
Total current assets  24,972,343   1,129,160   42,258,301   24,797,991 
                
Property and equipment, net  93,658   37,776   404,095   122,589 
Right of use asset  1,073,117   257,363 
Intangible assets, net  405,865   520,573   6,210,596   440,527 
Goodwill  3,108,000   3,108,000   64,573,288   3,108,000 
Other assets  25,000   — 
Total assets $28,579,866  $4,795,509  $114,544,397  $28,726,470 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Accounts payable $158,353  $57,432  $1,151,460  $159,812 
Accrued expenses  43,468   36,416 
Accrued dividends  —   163,555 
Accrued expenses and other liabilities  815,515   1,844,825 
Contract liabilities  127,791   264,472   504,180   2,302 
Promissory note  107,439   — 
Current portion of liability related to acquisition agreements  5,471,592   — 
Current portion of lease liability  246,559   85,895 
Current portion of promissory note  —   89,533 
Total current liabilities  437,051   521,875   8,189,306   2,182,367 
        
Long term portion of lease liability  832,117   171,468 
Long term portion of promissory note  —   17,906 
Long term portion of liability related to acquisition agreements  10,625,000   — 
Total liabilities  437,051   521,875   19,646,423   2,371,741 
                
COMMITMENTS AND CONTINGENCIES (SEE NOTE 9)        
COMMITMENTS AND CONTINGENCIES (SEE NOTE 11)        
                
STOCKHOLDERS’ EQUITY:                
Preferred stock, $0.001 par value, 25,000,000 shares authorized:        
Preferred stock, Series C convertible, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding at September 30, 2020 and 3,501 at December 31, 2019  —   4 
Preferred stock, Series D, $0.001 par value, 2,000 shares authorized, 0 shares issued and outstanding at September 30, 2020 and 2,000 at December 31, 2019  —   2 
Common stock, $0.001 par value, 250,000,000 shares authorized, 57,881,002 and 15,424,394 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively  57,881   15,424 
Preferred Stock, $0.001 par value, 25,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2021 and December 31, 2020  —    — 
Common Stock, $0.001 par value, 250,000,000 shares authorized, 74,668,560 and 58,636,365 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively  74,669   58,636 
Additional paid-in capital  46,335,395   12,456,989   123,377,671   47,241,757 
Accumulated deficit  (18,250,461)  (8,198,785)  (28,554,366)  (20,945,664)
Total stockholders’ equity $28,142,815  $4,273,634   94,897,974   26,354,729 
Total liabilities and stockholders’ equity $28,579,866  $4,795,509  $114,544,397  $28,726,470 

 

See accompanying notes to these condensed interim consolidated financial statements.

3 

Table of Contents

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

 

                
 For the Three Months Ended For the Nine Months Ended For the Three Months Ended For the Six Months Ended
 September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Revenues $750,325  $41,616  $1,157,930  $107,785  $1,937,364  $16,325  $3,638,955  $407,605 
Cost of sales  430,683   32,728   620,196   85,875   959,229   15,030   1,658,097   188,633 
Gross Profit  319,642   8,888   537,734   21,910   978,135   1,295   1,980,858   218,972 
                                
Operating Expenses:                                
Selling  16,242   23,302   32,751   52,108 
General and administrative  626,605   396,432   1,782.926   1,305,221   4,062,800   721,705   5,681,928   1,161,066 
Professional fees  254,532   152,192   958,436   531,885   268,987   532,406   1,953,186   703,904 
Research and development  907,000   0   1,335,605   0 
Sales and marketing  559,833   2,552   791,427   12,643 
Total Operating Expenses  897,379   571,926   2,774,113   1,889,214   5,798,620   1,256,663   9,762,146   1,877,613 
Loss from Operations  (577,737)  (563,038)  (2,236,379)  (1,867,304)  (4,820,485)  (1,255,368)  (7,781,288)  (1,658,641)
                                
Other Expenses:                
Loss on disposal of property and equipment  (594)  —   (594)  — 
Interest expense  (275)  —   (275)  (501)
Total Other Expenses  (869)  —   (869)  (501)
Other Income (Expense):                
Interest (expense) income  6,164  —   9,015   — 
Paycheck protection program loan forgiveness  108,532   —   108,532   — 
Loss on disposal of fixed assets  (3,712)  —   (3,712)  — 
Other income, net  31,329   —   58,751   — 
Total Other Income (Expense)  142,313   —  172,586   — 
Loss Before Income Taxes  (578,606)  (563,038)  (2,237,248)  (1,867,805)  (4,678,172)  (1,255,368)  (7,608,702)  (1,658,641)
Provision for income taxes  —   —   —   —   —   —   —   — 
Net Loss $(578,606) $(563,038) $(2,237,248) $(1,867,805) $(4,678,172) $(1,255,368) $(7,608,702) $(1,658,641)
                                
Deemed dividend on Series C Preferred stock and Series D warrants  —   —   (4,050,838)  —   —   (4,050,838)  —   (4,050,838) 
Deemed dividend on redemption of Series D Preferred stock  —   —   (3,763,591)  —   —   (3,763,591)  —   (3,763,591)
Deemed dividend on issuance and repurchase of Series E Preferred stock  —   —   (1,227,120)  —   —   (1,227,120)  —   (1,227,120) 
Series D Preferred stock dividends  —   (40,889)  (69,778)  (121,333)  —   (29,333)  —   (69,778)
                                
Net Loss Available to Common Stockholders  (578,606)  (603,927)  (11,348,575)  (1,989,138)  (4,678,172)  (10,326,250)  (7,608,702)  (10,769,968)
                                
Net Loss Per Share – Basic and Diluted $(0.01) $(0.04) $(0.33) $(0.14)
Net Loss Per Common Share - Basic and Diluted $(0.07) $(0.31) $(0.12) $(0.44)
                                
Weighted Average Number of Shares Outstanding During the Period – Basic and Diluted  55,380,250   15,174,394   34,722,816   14,523,838 
Weighted Average Number of Shares Outstanding During the Period -- Basic and Diluted  68,338,866   33,192,853   64,795,122   24,394,950 

 

See accompanying notes to these condensed interim consolidated financial statements.

4 

Table of Contents

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY

for theFOR THE THREE AND NINE Months Ended SEPTEMBERSIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

 

  Par $ .0001 Preferred Stock Series C Shares Preferred Stock Series C Amount Par $ .0001 Preferred Stock Series D Shares Preferred Stock Series D Amount Par $ .0001 Preferred Stock Series E Shares Preferred Stock Series E Amount Par $ .0001 Common Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total
Stockholders’ Equity
Balance as of December 31, 2019  3,501  $4   2,000  $2   —  $—   15,424,394  $15,424  $12,456,989  $(8,198,785) $4,273,634 
Conversion of Series C Preferred stock  (189)  (1)  —,   —   —   —   350,000   350   (349)  —   — 
Purchase of acquisition  —   —   —   —   —   —   (164,375)  (164)  164   —   — 
Dividend on Series D Preferred stock  —   —   —   —   —   —   —   —   (40,445)  —   (40,445)
Stock-based compensation expense  —   —   —   —   —   —   —   —   54,635   —   54,635 
Net loss  —   —   —   —   —   —   —   —   —   (403,273)  (403,273)
Balance as of March 31, 2020  3,312  3   2,000  2   —  —   15,610,019  15,610  12,470,994  (8,602,058) 3,884,551 
Conversion of Series C Preferred stock  (3,312)  (3)  —   —   —   —   13,247,984   13,248   (13,245)  —   — 
Conversion of Series D Preferred stock and accrued dividends  —   —   (1,890)  (2)  —   —   3,500,000   3,500   200,502   —   204,000 
Conversion of Series D warrants  —   —   —   —   —   —   2,947,739   2,948   (2,948)  —   — 
Issuance of Series E Preferred stock, net of issuance costs  —   —   —   —   1,050   1   —   —   1,009,999   —   1,010,000 
Repurchase of Series E Preferred stock  —   —   —   —   (262)  —   —   —   (1,110,880)  —   (1,110,880)
Conversion of Series E Preferred stock  —   —   —   —   (788)  (1)  3,152,000   3,152   (3,151)  —     
Deemed dividend on Series C Preferred stock and Series D warrants  —   —   —   —   —   —   —   —   4,050,838   (4,050,838)  — 
Deemed dividend on redemption of Series D preferred stock  —   —   —   —   —   —   —   —   3,763,591   (3,763,591)  — 
Sale of Common stock, net of issuance costs  —   —   —   —   —   —   6,807,400   6,807   12,889,935   —   12,896,742 
Sale of Common stock from conversion of warrants  —   —   —   —   —   —   3,260,377   3,260   7   —   3,267 
Issuance of Common stock for consulting services  —   —   —   —   —   —   250,000   250   297,250   —   297,500 
Exercise of options  —   —   —   —   —   —   33,758   34   (34)  —   — 
Stock-based compensation expense  —   —   —   —   —   —   170,000   170   84,752   —   84,922 
Net loss  —   —   —   —   —   —   —   —   —   (1,255,368)  (1,255,368)
Balance at June 30, 2020  —   —   110   —   —   —   48,979,277   48,979   33,637,610   (17,671,855)  16,014,734 
Conversion of Series D Preferred stock and accrued dividends  —   —   (110)  —   —   —   635,815   636   (636)  —   — 
Sales of Common stock from exercise of warrants  —   —   —   —   —   —   3,906,236   3,906   2,630,550   —   2,634,456 
Sale of Common stock, net of issuance costs  —   —   —   —   —   —   3,355,705   3,356   9,896,644   —   9,900,000 
Exercise of options  —   —   —   —   —   —   1,003,969   1,004   46,396   —   47,400 
Stock-based compensation expense  —   —   —   —   —   —   —   —   124,831   —   124,831 
Net Loss  —   —   —   —   —   —   —   —   —   (578,606)  (578,606)
Balance at September 30, 2020  —  $—   —  $—   —  $—   57,881,002  $57,881  $46,335,395  $(18,250,461) $28,142,815 

5 

Table of Contents

                       
  Par $ .0001 Preferred Stock Series C Shares Preferred Stock Series C Amount Par $ .0001 Preferred Stock Series D Shares Preferred Stock Series D Amount     Common Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Equity
Balance at March 31, 2021  —  $—   —  $—      —    62,500,815  $62,501  $62,344,452  $(23,876,194) $38,530,759 
Sale of Common Stock, net of issuance costs  —   —   —   —           5,271,100   5,271   28,641,890   —   28,647,161 
Issuance of Common stock for acquisition of MicaSense  —   —   —   —           540,541   541   2,999,459   —   3,000,000 
Issuance of Common stock for acquisition of Measure                          5,319,145   5,319   24,369,681   —   24,375,000 
Stock issued in exchange for professional services  —   —   —   —           550,000   550   2,906,450   —   2,907,000 
Exercise of options  —   —   —   —           130,557   131   34,314   —   34,445 
Stock-based compensation expense  —   —   —   —           356,402   356   2,081,425   —   2,081,781 
Net Loss  —   —   —   —      —    —   —   —   (4,678,172)  (4,678,172)
Balance at June 30, 2021  —  $—   —  $—      —    74,668,560  $74,669  $123,377,671  $(28,554,366) $94,897,974 
                                             
Balance at December 31, 2020  —  $—   —  $—      —    58,636,365  $58,636  $47,241,757  $(20,945,664) $26,354,729 
Sale of Common Stock, net of issuance costs  —   —   —   —           6,328,314   6,328   34,954,776   —   34,961,104 
Sale of Common Stock from exercise of warrants  —   —   —   —           2,516,778   2,517   8,302,851   —   8,305,368 
Issuance of Common stock for acquisition of MicaSense  —   —   —   —           540,541   541   2,999,459   —   3,000,000 
Issuance of Common stock for acquisition of Measure                          5,319,145   5,319   24,369,681   —   24,375,000 
Stock issued in exchange for professional services  —   —   —   —           550,000   550   2,906,450   —   2,907,000

 

 

Exercise of options  —   —   —   —           406,015   407   75,418   —   75,825 
Stock-based compensation expense  —   —   —   —           371,402   371   2,527,279   —   2,527,650 
Net Loss  —   —   —   —      —    —   —   —   (7,608,702)  (7,608,702)
Balance at June 30, 2021  —  $—   —  $—      —    74,668,560  $74,669  $123,377,671  $(28,554,366) $94,897,974 

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY

for theFOR THE THREE AND NINE Months Ended SEPTEMBER 30, 2019SIX MONTHS ENDED JUNE 30,2021 AND 2020

(Unaudited)

 

  Par $ .0001 Preferred Stock Series B Shares Preferred Stock Series B Amount Par $ .0001 Preferred Stock Series C Shares Preferred Stock Series C Amount Par $ .0001 Preferred Stock Series D Shares Preferred Stock Series D Amount Par $ .0001 Common Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total
Stockholders’ Equity
Balance as of December 31, 2018  —  $—   4,662  $5   2,000  $2   12,549,394  $12,549  $12,171,274  $(5,676,091) $6,507,739 
Conversion of Series C  —   —   (1,026)  (1)  —   —   1,900,000   1,900   (1,899)  —   — 
Dividend on Series D Preferred Stock  —   —   —   —   —   —   —   —   (40,000)  —   (40,000)
Stock-based compensation expense  —   —   —   —   —   —   —   —   60,920   —   60,920 
Net loss  —   —   —   —   —   —   —   —   —   (565,465)  (565,465)
Balance as of March 31, 2019  —  —   3,636  4   2,000  2   14,449,394  14,449  12,190,195  (6,241,556) 5,963,194 
Dividend on Series D Preferred Stock  —   —   —   —   —   —   —   —   (40,444)  —   (40,444)
Additional shares issued for acquisition  —   —   —   —   —   —   175,000   175   (175)  —   — 
Issuance of Common stock for consulting services  —   —   —   —   —   —   550,000   550   189,950   —   190,500 
Stock-based compensation expense  —   —   —   —   —   —   —   —   84,467   —   84,467 
Net loss  —   —   —   —   —   —   —   —   —   (739,302)  (739,302)
Balance as of June 30, 2019  —   —   3,636   4   2,000   2   15,174,394   15,174   12,424,093   (6,980,858)  5,458,415 
Dividend on Series D Preferred Stock  —   —   —   —   —   —   —   —   (40,889)  —   (40,889)
Share compensation period costs  —   —   —   —   —   —   —   —   71,988   —   71,988 
Net loss  —   —   —   —       —   —   —   —   (563,038)  (563,038)
Balance as of September 30, 2019  —  $—   3,636  $4   2,000  $2   15,174,394  $15,174  $12,455,192  $(7,543,896) $4,926,476 
  Par $ .0001 Preferred Stock Series C Shares Preferred Stock Series C Amount Par $ .0001 Preferred Stock Series D Shares Preferred Stock Series D Amount Par $ .0001 Preferred Stock Series E Shares Preferred Stock Series E Amount Par $ .0001 Common Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total
Stockholders’ Equity
Balance at March 31, 2020  3,312  $3   2,000  $2   —  $—   15,610,019  $15,610  $12,470,994  $(8,602,058) $3,884,551 
Conversion of Series C Preferred stock  (3,312)  (3)  —   —   —   —   13,247,984   13,248   (13,245)  —   — 
Conversion of Series D Preferred stock and accrued dividends  —   —   (1,890)  (2)  —   —   3,500,000   3,500   200,502   —   204,000 
Conversion of Series D warrants  —   —   —   —   —   —   2,947,739   2,948   (2,948)  —   — 
Issuance of Series E Preferred Stock, net of issuance costs  —   —   —   —   1,050   1   —   —   1,009,999   —   1,010,000 
Repurchase of Series E Preferred stock  —   —   —   —   (262)  —   —   —   (1,110,880)  —   (1,110,880)
Conversion of Series E Preferred stock  —   —   —   —   (788)  (1)  3,152,000   3,152   (3,151)  —   — 
Deemed dividend on Series C Preferred stock and Series D warrants  —   —   —   —   —   —   —   —   4,050,838   (4,050,838)  — 
Deemed dividend on redemption of Series D Preferred stock  —   —   —   —   —   —   —   —   3,763,591   (3,763,591)  — 
Sale of Common stock, net of issuance costs  —   —   —   —   —   —   6,807,400   6,807   12,889,935   —   12,896,742 
Sale of Common stock from conversion of pre-paid warrants  —   —   —   —   —   —   3,260,377   3,260   7   —   3,267 
Issuance of Common stock for consulting services  —   —   —   —   —   —   250,000   250   297,250   —   297,500 
Exercise of options  —   —   —   —   —   —   33,758   34   (34)  —   — 
Stock-based compensation expense  —   —   —   —   —   —   170,000   170   84,752   —   84,922 
Net loss  —   —   —   —   —   —   —   —   —   (1,255,368)  (1,255,368)
Balance at June 30, 2020  —  $ —   110  $ —   —  $—   48,979,277  $ 48,979  $ 33,637,610  $ (17,671,855) $ 16,014,734 
                                             
Balance at December 31, 2019  3,501  $4   2,000  $2   —  $—   15,424,394  $15,424  $12,456,989  $(8,198,785) $4,273,634 
Purchase of acquisition  —   —   —   —   —   —   (164,375)  (164)  164   —   — 
Conversion of Series C Preferred stock  (3,501)  (4)  —   —   —   —   13,597,984   13,634   (13,594)  —   — 
Conversion of Series D Preferred stock and accrued dividends  —   —   (1,890)  (2)  —   —   3,500,000   3,500   160,057   —   163,555 
Conversion of Series D warrants  —   —   —   —   —   —   2,947,739   2,948   (2,948)  —   — 
Issuance of Series E Preferred Stock, net of issuance costs  —   —   —   —   1,050   1   —   —   1,009,999   —   1,010,000 
Repurchase of Series E Preferred stock  —   —   —   —   (262)  —   —   —   (1,110,880)  —   (1,110,880)
Conversion of Series E Preferred stock  —   —   —   —   (788)  (1)  3,152,000   3,152   (3,151)  —   — 
Deemed dividend on Series C Preferred stock and Series D warrants  —   —   —   —   —   —   —   —   4,050,838   (4,050,838)  — 
Deemed dividend on redemption of Series D Preferred stock  —   —   —   —   —   —   —   —   3,763,591   (3,763,591)  — 
Sale of Common stock, net of issuance costs  —   —   —   —   —   —   6,807,400   6,807   12,889,935   —   12,896,742 
Sale of Common stock from conversion of pre-paid warrants  —   —   —   —   —   —   3,260,377   3,260   7   —   3,267 
Issuance of Common stock for consulting services  —   —   —   —   —   —   250,000   250   297,250   —   297,500 
Exercise of options  —   —   —   —   —   —   33,758   34   (34)  —   — 
Stock-based compensation expense  —   —   —   —   —   —   170,000   170   139,387   —   139,557 
Net loss  —   —   —   —   —   —   —   —   —   (1,658,641)  (1,658,641)
Balance at June 30, 2020  —  $ —   110  $ —   —  $ —   48,979,277  $ 48,979  $ 33,637,610  $ (17,671,855) $ 16,014,734 

 

See accompanying notes to these condensed interim consolidated financial statements.statements

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AGEAGLE AERIAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

 

        
 For the Nine Months Ended September 30, For the Six Months Ended June 30,
 2020 2019 2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss $(2,237,248) $(1,867,805) $(7,608,702) $(1,658,641)
Adjustments to reconcile net loss to net cash used in operating activities:                
Loss on disposal of fixed assets  594   —   3,712   — 
Depreciation and amortization  128,318   128,682   454,876   84,358 
Stock-based compensation expense  264,389   217,375 
Allowance for bad debts  47,262    — 
Stock-based compensation  2,527,650   139,557 
Stock issued in exchange for professional services  297,500   190,500   2,907,000   297,500 
Paycheck protection program loan forgiveness  (108,532)   — 
        
Changes in assets and liabilities:                
Accounts receivable  65,833   (8,951)  (383,059)  65,833 
Inventories  62,778   1,301   (206,031)  (241,876)
Prepaid expenses and other assets  3,626   (30,981)  (220,339)  (47,058)
Contract liabilities  (136,682)  380,119 
Accounts payable  100,921   (136,028)  587,482   84,291 
Accrued expenses and other liabilities  7,052   4,528)  (1,649,198)  60,765 
Contract liabilities  141,644   504,592 
Net cash used in operating activities  (1,442,919)  (1,121,260)  (3,506,235)  (710,679)
                
CASH FLOW FROM INVESTING ACTIVITIES:                
Purchases of property and equipment  (70,086)  (57,715)
Purchases of fixed assets  (210,576)  (6,173)
Acquisition of MicaSense  (14,536,863)  — 
Acquisition of Measure  (9,445,258)  — 
Platform development costs  (369,060)  — 
Net cash used in investing activities  (70,086)  (57,715)  (24,561,757)  (6,173)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from (payments on) promissory note  107,439   (40,998)
Proceeds from promissory note  —   107,439 
Issuance of Series E Preferred stock  1,010,000   —   —   1,010,000 
Repurchase of Series E Preferred stock  (1,110,880)  —   —   (1,110,880)
Sales of common stock, net of issuance cost  22,796,743   — 
Sale of common stock from exercise of warrants  2,637,723   — 
Sales of Common stock, net of issuance cost  34,961,104   12,896,742 
Sale of Common stock from exercise of warrants  8,305,368   3,267 
Exercise of stock options  47,400   —   75,825  — 
Net cash provided by (used in) financing activities  25,488,425   (40,998)
Net cash provided by financing activities  43,342,297   12,906,568 
                
Net increase (decrease) in cash  23,975,420   (1,219,973)
Cash at beginning of period  717,997   2,601,730 
Cash at end of period $24,693,417  $1,381,757 
Net increase in cash  15,274,305   12,189,716 
Cash at the beginning of the year  23,940,333   717,997 
Cash at the end of the period $39,214,638  $12,907,713 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Interest cash paid $—  $462  $—  $— 
Income taxes paid $—  $—  $—  $— 
        
NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Conversion of Series B, C, D and E preferred stock into common stock 6,551  1,026 
Conversion of Series B, C, D and E preferred stock into Common stock $—  $6,441 
Deemed dividends $7,884,207  $—  $—  $7,884,207 
Liability related to MicaSense Acquisition $5,000,000  $— 
Stock consideration for MicaSense Acquisition $3,000,000  $— 
Liability related to Measure Acquisition $5,471,592  $— 
Stock consideration for Measure Acquisition $24,375,000  $— 

 

See accompanying notes to these condensed interim consolidated financial statements.

 

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AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020

(Unaudited)

 

Note 1 – Description of Business

 

AgEagle

AgEagle™ Aerial Systems Inc. (“AgEagle” or “the Company”the “Company”) designs, produces, through its wholly owned subsidiaries, is actively engaged in designing, and supports technologically-advanced small, unmanneddelivering best-in-class drones, sensors and software that solve important problems for our customers. Founded in 2010, AgEagle was originally formed to pioneer proprietary, professional-grade, fixed-winged drones and aerial vehicles (“UAVs” or “drones”). In addition, to providing new utility to UAVs, the Company pioneers and innovates advanced aerial imagingimagery-based data collection and analytics technologies capable of addressingsolutions for the impending food and environmental sustainability crises that threaten our planet. Historically,agriculture industry. Today, 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 onCompany is earning distinction as a trusted partnerglobally respected, industry leader offering best-in-class, full stack drone solutions to clients seekinga wide range of industries, including energy, construction, agriculture and government.  AgEagle is led by a proven management team with years of drone industry experience. Through participation on the U.S. Federal Aviation Administration’s (FAA) Drone Advisory Committee and the FAA’s BEYOND program, AgEagle is helping to adoptestablish entirely new rulemaking guidelines and support productive agricultural approaches to better farming practices which limitregulations for the impact on our natural resources, reduce reliance on inputsfuture of autonomous flight and materially increase crop yields and profits.the full integration of drones into the U.S. airspace.

 

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 introducedHempOverview™, a scalable, responsive and cost-effective Software-as-a-SolutionSoftware-as-a-Service (“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 January 2021, AgEagle acquired MicaSense™, Inc. (“MicaSense”), based in Seattle, Washington. MicaSense has been at the third quarterforefront of 2019, AgEagle announced that it had begun to actively pursue expansion opportunities withinadvanced drone sensor development since its founding in 2014, having formed integration partnerships with several leading fixed wing and multi-rotor drone manufacturers. MicaSense’s patented, high precision thermal and multispectral sensors serve the emerging Drone Logisticsaerial mapping and Transportation marketanalytics needs of the agriculture market. MicaSense’s high performance proprietary products, including Altum™, RedEdge-MX™, RedEdge-MX™ Blue 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 goodsAtlas Flight, have global distribution in urban and suburban areas.over 70 countries.

 

CentralIn April 2021, AgEagle acquired Measure Global, Inc. (“Measure”), a company founded in 2020 with business operations in Washington, D.C. and Austin, Texas. Serving a world class customer base, Measure enables its customers to realize the Company’s long-term growth strategy, AgEagle will continuetransformative benefits of drone technology through its Ground Control solution. Offered as Software-as-a-Service (SaaS), Ground Control is a cloud-based, plug-and-play operating system that empowers pilots and large enterprises with everything they need to identify opportunities to leverage its proprietary technological platformoperate drone fleets, fly autonomously, collaborate globally, visualize data, and industry expertise to penetrate new, high growth market sectors that may benefit from the Company’s advanced aerial imagery-based data collectionintegrate with existing business systems and analytics solutions.processes.

 

8 

TableWe intend to grow our business and preserve our leadership position by developing new drones, sensors and software and capturing a significant share of Contentsthe global drone market. In addition, we expect to accelerate our growth and expansion through strategic acquisitions of companies offering distinct technological and competitive advantages and have defensible IP protection in place, if applicable.

The Company is headquartered in Wichita, Kansas with business operations and several offices located throughout the United States.

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES 

NOTES TO CONDENSED  INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020

(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 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 Asset 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.

In late September 2020, the Company began relocating its headquarters and drone manufacturing operations from Neodesha, Kansas to Wichita, Kansas.

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.

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

 

Note 2 – Summary of Significant Accounting Policies

 

 Basis of Presentation and Consolidation– The accompanyingcondensed 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 September 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. TheStates of America (“U.S. GAAP”). In the opinion of management, the Company has electedmade all necessary adjustments, which include normal recurring adjustments, for a fair statement of the Company’s consolidated financial position and results of operations for the interim periods presented. Certain information and disclosures included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, fiscal2020, included in the Company’s annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2021. The results for the three and six months ended June 30, 2021, and 2020 are not necessarily indicative of the results to be expected for a full year, end.any other interim periods or any future year or period.

 

The interim condensed consolidated financial statements include the accounts of AgEagle Aerial Systems Inc. and its wholly-owned subsidiaries AgEagle Aerial, Inc., EnerJex Kansas,AgEagle Sensors, Inc., Black Sable Energy, LLCMicaSense, Inc., and Black Raven Energy,Measure Global, Inc., which was dissolved effective November 2019.Inc. 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 condensed 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.

 

Correction of Prior Period Information – During the review of the Company’s financial statements for the interim period June 30, 2021, the Company identified an error in the accounting and presentation of revenue and related expenses recorded for the MicaSense acquisition related to the three months ended March 31, 2021. This error resulted in the recording of $394,743 in additional revenue, $129,510 in additional cost of goods sold, and $232,252 in additional operating expenses, resulting in additional net income of $32,033. If reported correctly, the Company would have recorded $1,306,849 in revenue, $492,394 in cost of goods sold, $3,808,236 in operating expenses, and a net loss of ($2,962,563) for the three months ended March 31, 2021. To correct this error, the Company recorded the correction in the three month period ended June 30, 2021. Instead, the Company recorded revenue of $1,701,592, cost of goods sold of $621,904, operating expenses of $4,040,488, and a net loss of ($2,930,530) for the three months ended March 31, 2021. If reported correctly for the three months ended June 30, 2021, then the Company would have reported $2,332,107 in revenue, $1,088,739 in cost of goods sold, $6,030,872 in operating expenses, and a net loss of ($4,646,139). In accordance with the SEC's Staff Accounting Bulletin Nos. 99 and 108 (SAB 99 and SAB 108), the Company evaluated this error and concluded that although the adjustment to revenue was quantitatively material, the cumulative effects were quantitatively and qualitatively immaterial and would not have materially impacted a reasonable investor’s opinion of the Company. This is further supported by the fact that the impact would not have been significant in comparison to prior periods, as the financial results still supported the Company’s increased year-over-year growth in revenue as reported and discussed in both periods within the Management Discussion & Analysis. Therefore, as permitted by SAB 108 and treated under ASC 250 revisions, the Company corrected previously recorded results for the three and six months ended June 30, 2021, to account for the error in this current filing. As a result, the statement of operations for the six months ended June 30, 2021 reflects the corrected revenues, cost of goods sold, operating expenses and net loss.

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 lifevaluation of intangible assets and property and equipment,including goodwill and the valuation of deferred tax assets.

 

Impact of COVID-19 Pandemic– In December 2019, a novel coronavirus disease (“COVID-19”) was reported. On January 30, 2020, the World Health Organization (“WHO”) declared COVID-19 a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.

As of June 30, 2021, our locations and primary suppliers continue to operate. During the first half of 2021, there has been a trend in many parts of the world of increasing availability and administration of the vaccine against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. However, infection rates and regulation continue to fluctuate, and there continues to be global impacts resulting from the pandemic, including increases in costs in connection with logistics services and supply chains, port congestion, supplier delays and shortfalls in microchip supply. We continue to work through supplier constraints caused by the COVID-19 outbreak, as well as the microchip shortage.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 2 – Summary of Significant Accounting Policies – Continued

Fair Value Measurements and Disclosures– The Fair Value Measurements and Disclosures topic of Financial Instruments – Unless otherwisethe Accounting Standards Codification (“ASC”) requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. The Fair Value Measurements and Disclosures topic emphasizes that fair value is a market-based measurement, not an entity-specific measurement.

The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

●Level 1: Quoted market prices in active markets for identical assets or liabilities.
●Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
●Level 3: Unobservable inputs that are not corroborated by market data.

The carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash and cash equivalents, accounts receivable, notes receivable, accounts payable and note payable. The fair value of the Company’s long-term debt is estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value. As of June 30, 2021, the Company did not have any financial instruments, including cash, accounts receivable, accounts payableassets or liabilities measured and accrued expenses, approximates their recorded values due to their short-term maturities.at fair value on the Company’s consolidated balance sheets on a recurring basis.

 

Cash and Cash Equivalents Concentrations – Cash and cash equivalents includes any highly liquid investments with an original maturity of three months or less. The Company held no cash equivalents as of September 30, 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.$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.

 

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TableAs of Contents

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBERJune 30, 2021 and 2020, AND 2019

(Unaudited)

Note 2 – Summary of Significant Accounting Policies – Continuedthere was one significant vendor that the Company relied upon to perform certain services for the Company’s technology platforms. This vendor provides services to the Company which can be replaced by alternative vendors should the need arise.

 

Receivables and Credit PolicPolicyy – 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. Accounts receivable at June 30, 2021 and 2020 was $814,712 and $0, respectively.

 

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$47,262 on allowance was necessary as of SeptemberJune 30, 20202021 and0 allowance was necessary as of December 31, 2019.2020.

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED  INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 2 – Summary of Significant Accounting Policies – Continued

Inventories – Inventories, which consist of raw materials, finished goods and work-in-process, are stated at the lower of cost or net realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. The Company’s sensor equipment is manufactured by a third-party organization. Cost components include direct materials and direct labor, as well as in-bound freight.labor. 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 SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company had recorded a provision for obsolescence of $10,000.$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 fourtwo to fiveten years.

 

11 

TableBusiness Combinations– The Company recognizes, with certain exceptions, 100% of Contentsthe 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 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 condensed interim consolidated statements of operations from the date of acquisition.

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020

(Unaudited)

 

Note 2 – Summary of Significant Accounting Policies – Continued

 

Revenue Recognition and Concentration – The majority of the Company’s revenue is generated pursuant to writtenprimarily by three segments of the business; 1) the sale of sensors and cameras along with the related accessories- 2) contractual arrangementsagreements to develop, manufacture and/or modify complex drone-relateddrone related products, and to provide associated engineering, technical and other services according to customer specifications. Thesespecifications and 3) Software-as-a-Service (“SAAS) subscription sales. All contracts and agreements are at a fixed price and are accounted for in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).

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 and, where applicable, a customer acceptance has been obtained. The fee is not considered to be fixed or determinable until all material contingencies related to the sales have been resolved. The Company records revenue in the statements of operations net of any sales, use, value added, or certain excise taxes imposed by governmental authorities on specific sales transactions and net of any discounts, allowances and returns.

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. Customercustomer payments received in advance of the Company completing performance obligations are recorded as contract liabilities. Customer deposits represent customer prepayments and are recognized as revenue when the term of the sale or performance obligation are completed. The balance of contract liabilities as of June 30, 2021, was $504,180 and $2,302 as of December 31, 2020.

 

Subscription services for use of theThe Company’s proprietary FarmLens, Atlas and HempOverviewGround Control platforms are offered on a subscription basis. These subscription fees are recognized ratably over theeach 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:as follows:

 

Sales concentration information    
 Percent of total sales for nine months
ended September 30,		 Percent of total revenues for the three and six months ended June 30,
Customers 2020 2019 2021 2020
Customer A  94.4%  55.8%  —%  91.8%
Customer B  —   12.2%

 

No accounts receivables werereceivable was due from Customer A or B as of SeptemberJune 30, 2020 and December 31, 2019,2020, respectively.

 

The table below reflects our revenue for the periods indicated by product mix.

  For the nine months ended September 30,
Type 2020 2019
Drone Assembly and Product Sales $1,105,971  $84,745 
Software Platform Sales  51,959   23,040 
Total $1,157,930  $107,785 

Vendor Concentration – As of September 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.

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AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED  INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020

(Unaudited)

 

Note 2 – Summary of Significant Accounting Policies – Continued

 

 The table below reflects our revenue for the quarters indicated by product mix.

Revenue indicated by product mix        
  For the three months ended June 30, For the six months ended June 30,
Type 2021 2020 2021 2020
Drone and Custom Manufacturing Sales $59,893  $ —  $59,893  $374,278 
Sensors Sales  1,705,220   —   3,382,568   — 
Software Subscription Sales  172,251   16,325   196,494   33,327 
Total $1,937,364  $16,325  $3,638,955  $407,605 

Shipping Costs – Shipping costs recorded for the three months ended SeptemberJune 30, 2021 and 2020 were $15,694 and 2019 totaled $98$5,723, respectively and $240, respectively. For$35,590, and $6,024 for the ninesix months ended SeptemberJune 30, 20202021 and 2019, shipping costs totaled $6,122 and $1,271,2020, 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 accompanying condensed interim consolidated statements of operations.

 

EarningsResearch and Development Expenses– Research and development costs are expensed as incurred and are included as part of the accompanying condensed interim consolidated statements of operations. For the three and six months ended June 30, 2021, the Company recorded research and development costs of $907,000 and $1,335,605, respectively. For the three and six months ended June 30, 2020, no research and development costs were recorded during that period.

Loss Per Common 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 stockCommon Stock, par value $0.001 (“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 stockCommon Stock from the calculation of diluted net loss per share, because all such securities are antidilutiveanti-dilutive for the periods presented. ForAs of June 30, 2021, the nine-month period ended SeptemberCompany had no warrants and 2,311,167 options to purchase Common Stock. As of June 30, 2020, the Company had 3,022,254 3,283,697 warrants, and 2,110,1542,550,387 options to purchase common stock outstanding. For the nine-month period ended September 30, 2019,Common Stock.

Leases– The Company accounts for its operating leases in accordance with FASB Accounting Standards Update 2016-02 – Leases (Topic 842). Lessees recognize a right-of-use asset and a lease liability for virtually all their leases. Additionally, the Company had 4,531,924 warrants, 2,270,665 options to purchase common stock,recognizes assets and 3,636 sharesliabilities for leases with lease terms of Series C Preferred Stock which were convertible into 6,733,333 sharesmore than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of common stock.expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.

  

Income Taxes– The Company accounts for income taxes in accordance with FASB (Financial Accounting Standards Board) ASC Topic 740, Accounting for Income Taxes.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. AND SUBSIDIARIES

NOTES TO CONDENSED  INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 2 – Summary of Significant Accounting Policies – Continued

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 accompanying consolidated statements of operations.operations within general and administrative expenses. 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.

 

13 

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 2 – Summary of Significant Accounting Policies – Continued

Recently Issued Accounting Pronouncements

Adopted

 

In JanuaryJune 2016, the FASB issued ASU 2016-01,2016-13, Financial Instruments: Recognition and Measurement of Financial Assets and Financial LiabilitiesInstruments – Credit Losses (Topic 326), which addresses certain aspects of recognition, measurement, presentation and disclosure ofprovides guidance on how an entity should measure credit losses on financial statements.instruments. 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 at the time of adoption

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 effectivesmaller reporting companies for fiscal years beginning after December 15, 2019 and2022, including 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.within those fiscal years. The Company adopteddoes not expect this ASU on January 1, 2020 and it did notto have a material impact on the Company’s condensed interimits consolidated financial statements.

 

14 

TableIn December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of Contents

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 2 – Summarythe accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of Significant Accounting Policies – Continued

Pending Adoptiongoodwill. The ASU became effective for the Company on March 1, 2021 and is not expected to have a significant impact on the Company’s consolidated financial statements.

 

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 in the near term.statements.

 

Note 3 – — Inventories

 

Inventories consist of the following at:

 

 September 30,
2020		 December 31,
2019
Inventories    
     June 30,
2021		 December 31,
2020
Raw materials $92,930  $193,022  $331,642  $88,091 
Work-in-process  68,350   26,456 
Work-in process  615,133   50,447 
Finished goods  7,109   11,689   94,202   7,109 
Gross inventory $168,389  $231,167   1,040,977   145,647 
Less obsolete reserve  (10,000)  (10,000)
Less: inventory reserve  (10,000)  (10,000)
Total $158,389  $221,167  $1,030,977  $135,647 

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 4 – Notes Receivable

On October 14, 2020, the Company executed a Convertible Promissory Note pursuant to which the Company has made a loan to Valqari, LLC (“Valqari”), in the principal aggregate amount of $500,000 (the “Note”), which amount accrues interest at a rate of three percent per annum.

The loan matured on April 15, 2021 (the “Maturity Date”), at which time all outstanding principal and interest that has accrued, but remains, unpaid was due. The Note provides for an automatic six month extension of the Maturity Date under the following circumstances (i) Valqari has received in writing, (x) a good faith acquisition offer at a consideration value greater than $15,000,000, (y) such offer, upon consummation, would result in a change in control (as defined in the note) of Valqari, and (z) at such time Valqari, is actively engaged in the negotiation or finalization of such acquisition transaction; or (ii) Valqari has initiated, or is in the process of initiating, a conversion to a “C-Corporation” under the Internal Revenue Code, whereas such conversion will be completed no later than one day prior to the extended Maturity Date. Valqari may not prepay the Note prior to the Maturity Date. On April 15, 2021, the Note was extended for an additional six months as outlined per the agreement until October 15, 2021.

 In the event of a change in control or conversion of Valqari to a “C-Corporation” under the Internal Revenue Code on or before the Maturity Date, the Company may convert the outstanding principal amount of the Note and any unpaid accrued interest into (i) Class B Common Units of Valqari: immediately prior to the closing of a Change in Control or (ii) upon Valqari’s conversion to a C-corporation, shares of Valqari Common Stock, in both cases at a conversion price no higher than a pre-money valuation of $15,000,000.

The Note is subject to customary representations and warranties by Valqari, as well as events of default, which may lead to acceleration of the payment of the Note such as (i) failure to pay all of the outstanding principal, plus accrued interest on the Maturity Date, (ii) Valqari filing a petition or action under any bankruptcy, or other law, or (iii) an involuntary petition is filed again Valqari under any bankruptcy statute (that is not dismissed or discharged within 60 days). The indebtedness evidenced by the Note is subordinated in right of payment to the prior payment in full of any senior indebtedness (as defined in the Note) in existence on the date of the Note or incurred thereafter.

AgEagle demanded payment of the Note, including accrued interest; based on the initial maturity date of April 14, 2021; however, Valqari has alleged that the note’s maturity date was extended to October 14, 2021.  AgEagle disputes this extension; however, for practical reasons AgEagle intends to wait until October in order to pursue collection actions, if necessary.

On November 16, 2020, the Company (Payee) executed a promissory note in connection with a proposed acquisition (the “Proposed Acquisition”) by the Payee or its affiliate, for 100% of the capital stock of MicaSense Inc., (“MicaSense”). As of June 30, 2021, Parrot Drones S.A.S. promised to pay to the Company the principal amount of $100,000 provided, however that such principal amount was off-set and reduced by all amounts paid or due in connection with the purchase price upon closing of the Proposed Acquisition.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 5 — Property and Equipment

 

Property and equipment consist of the following at:

 

 September 30,
2020		 December 31,
2019
    
Property and equipment $197,063  $140,758 
Property and Equipment      
Type Estimated Life June 30, 2021 December 31, 2020
Leasehold improvements 3 Years $22,265  $22,265 
Equipment and vehicles 5 Years  126,667   100,532 
Computer equipment 3-5 Years  290,788   23,369 
Office furniture 5 Years  110,586   54,798 
Drone equipment 3 Years  95,393   32,138 
Production fixtures 5 Years  125,936   — 
Total    771,635   233,102 
Less accumulated depreciation  (103,405)  (102,982)    (367,540)  (110,513)
 $93,658  $37,776 
Total Property and equipment, net   $404,095  $122,589 

 

Depreciation expense for the three and nine months ended SeptemberJune 30, 2021 and 2020 was $5,722 $34,321 and $13,608, respectively;$3,947, respectively and $54,055  and $7,886 for the three and ninesix months ended SeptemberJune 30, 2019, depreciation expense totaled $4,1852021 and $10,373, respectively, which is included in general and administrative expenses on the condensed interim consolidated statements of operations.2020, respectively.

 

15 

Table of Contents

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 56 –Goodwill and Intangible Assets

 

Intangible assets are recorded at cost and consist of the assets acquired for the acquisition of the FarmLens platform completed in 2018, our HempOverview platform development costs, and the intangibles acquired as a result of a business acquisition in 2018. Amortization is computed using the straight-line method over the estimate useful lifeacquisitions of  the asset. IntangibleMicaSense, Inc. and Measure Global, Inc. (see Note 7).

Goodwill and intangible assets were comprised of the following at Septemberas of June 30, 2021 and December 31, 2020:

 

Intangible Assets Estimated Life Gross Cost Accumulated Amortization Net Book Value            
Name Estimated Life Balance at December 31, 2020 Additions Amortization Impairment Balance at June 30, 2021
Intellectual property/technology 5 yrs. $433,400  $(180,583) $252,817   5-7 Years $231,146  $2,664,448  $(163,724) $—  $2,731,870 
Customer base 5 yrs.  72,000   (30,000)  42,000 
Customer relationships  3-10 Years  38,400   1,878,658   (103,094)  —   1,813,964 
Tradenames and trademarks 5 yrs.  58,200   (24,250)  33,950   5-10 Years  31,040   1,196,203   (46,022)  —   1,181,221 
Non-compete agreement 4 yrs.  160,900   (83,802)  77,098  2-4 Years  67,042   62,521   (27,927)  —   101,636 
Carrying value as of September 30, 2020   $724,500  $(318,635) $405,865 
Platform development costs 3 Years  72,899   369,060   (60,054)  —   381,905 
Total Intangible Assets   $440,527  $ 6,170,890  $ (400,821) $    $6,210,596 
Goodwill    3,108,000   61,465,288   —   —   64,573,288 
Total   $3,548,527  $67,636,178  $(400,821) $—  $70,783,884 

 

The weighted average remaining amortization period in years is 2.71 6.69 years. Amortization expense for the three and nine months ended SeptemberJune 30, 2021, and 2020 was $38,236$288,065 and $114,710, respectively,$38,236, respectively; and $38,236$400,821 and $118,309, respectively,$76,472 for the three and ninesix months ended September 2019, which is included in generalJune 30, 2021 and administrative expenses on the condensed interim consolidated statements of operations.2020, respectively.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 6 – Goodwill and Intangible Assets -Continued

 

Future amortization is as follows for fiscal years ending:

 

Future amortization                        
 2020 (months remaining) 2021 2022 2023 2021 2022 2023 2024 2025 and Thereafter Total
Intellectual property/technology $21,670  $86,680  $86,680  $57,786  $233,658  $467,315  $438,422  $380,635  $1,211,840  $2,731,870 
Customer base  3,600   14,400   14,400   9,600 
Customer relationships  150,460   300,921   296,121   180,819   885,643   1,813,964 
Tradenames and trademarks  2,910   11,640   11,640   7,760   65,630   131,260   127,380   119,620   737,330   1,181,220 
Non-compete agreement  10,057   40,225   26,817   —   35,743   58,077   7,816   —   —   101,636 
Platform development costs  73,660   147,320   147,320   13,606   —   381,906 
Total $38,237  $152,945  $139,537  $75,146  $559,151  $1,104,893  $1,017,059  $694,680  $2,834,813  $6,210,596 

 

Note 7 – Acquisition

16 

TableOn January 27, 2021, the Company entered into a stock purchase agreement (the “MicaSense Purchase Agreement”) with Parrot Drones S.A.S. and Justin B. McAllister (the “MicaSense Sellers”) pursuant to which the Company agreed to acquire 100% of Contentsthe issued and outstanding capital stock of MicaSense, Inc. (“MicaSense”) from the MicaSense Sellers. MicaSense is based in Washington and manufactures and sells its patented, high precision thermal and multispectral sensors, serving the aerial mapping and analytics needs of the agriculture market. In addition, MicaSense’s patented technologies are well positioned to address applications in advanced inspection in the energy, construction and government sectors, among other solutions. MicaSense’s high performance proprietary products, including Altum, RedEdge-MX, RedEdge-MX Blue and Atlas Flight, have global distribution in over 70 countries. The aggregate purchase price for the shares of MicaSense was $23,000,000, less any debt and subject to a customary working capital adjustment. A portion of the consideration is comprised of shares of common stock of the Company, having an aggregate value of $3,000,000 based on a volume weighted average trading price of the Common Stock over a ten consecutive trading day period prior to the date of issuance of the shares of Common Stock to the MicaSense Sellers on April 27, 2021 (the “Shares”), in the amount of 540,541 restricted shares of Common Stock. The consideration is also subject to a $4,750,000 holdback to cover any post-closing indemnification claims and to satisfy any purchase price adjustments. The holdback is scheduled to be released in two equal installments, less any amounts paid or reserved for outstanding indemnity claims, on March 31, 2022 and March 31, 2023 in accordance with the terms of the MicaSense Purchase Agreement. As a result of this transaction, MicaSense is now a wholly-owned subsidiary of the Company.

The Company filed a Form S-3 Registration Statement (the “Registration Statement”) covering the resale of the Shares with the SEC on May 10, 2021. The Registration Statement was declared effective on June 1, 2021 (File Number: 333-255940). In addition, the Company shall use its best efforts to keep the Registration Statement effective and in compliance with the provisions of the Securities Act (including by preparing and filing with the SEC such amendments, including post-effective amendments, and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary) until all Shares and other securities covered by such Registration Statement have been disposed of. The MicaSense Sellers are required to reimburse the Company up to $50,000 for reasonable legal fees and expenses incurred by the Company in connection with such registration.

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020

(Unaudited)

 

Note 67 – DebtAcquisition – Continued

The MicaSense Purchase Agreement contains certain customary representations, warranties and covenants, including representations and warranties by the MicaSense Sellers with respect to MicaSense’s business, operations and financial condition. The MicaSense Purchase Agreement also includes post-closing covenants relating to the confidentiality and employee non-solicitation obligations of the MicaSense Sellers, and the agreement of the MicaSense Sellers not to compete with certain aspects of the business of MicaSense following the closing of the transaction. The completion of the transactions contemplated by the MicaSense Purchase Agreement is subject to customary closing conditions, including, among others: (i) the absence of a material adverse effect on MicaSense, (ii) the delivery by the parties of certain ancillary documents, including the Registration Rights Agreement, and (iii) the execution by a key employee of MicaSense of an employment agreement. Subject to certain limitations, each of the parties will be indemnified for damages resulting from third party claims and breaches of the parties’ respective representations, warranties, and covenants in the MicaSense Purchase Agreement.

.

The fair value of the purchase consideration was allocated to the net tangible assets acquired and to the separately identifiable intangible assets. The excess of the aggregate fair value of the net tangible assets and identified intangible assets has been treated as goodwill in accordance with ASC 805.

The Company has performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed. Using the total consideration for the Acquisition, the Company has estimated the allocations to such assets and liabilities.

The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of tangible assets; (2) changes in allocations to intangible assets such as trade names, developed technology and customer relationships, as well as goodwill; and (3) other changes to assets and liabilities. As of June 30, 2021, the Company has recorded a change to Goodwill as a result of changes in the preliminary allocation used to determine revenue and costs attributed to the purchase price allocation.

The following table summarizes the allocation of the purchase price as of the acquisition date of January 27, 2021:

Schedule of allocation preliminary purchase price  
Calculation of Goodwill:  
Net purchase price, including debt paid at close $23,554,169 
     
Plus: fair value of liabilities assumed:    
Deferred revenue  40,812 
Fair value of liabilities assumed $40,812 
     
Less: fair value of assets acquired:    
Cash & short-term investments  885,272 
Other tangible assets  542,978 
Identifiable intangibles  3,133,141 
     
Fair value of assets acquired $4,561,391 
     
Net nonoperating assets  25,000 
Adjustment for seller transaction expenses related to purchase price allocation  

32,032

 
Goodwill $18,976,558 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 7 – Acquisition – Continued

On April 19, 2021, the Company entered into a stock purchase agreement (the “Measure Purchase Agreement”) with Brandon Torres Declet, in his capacity as Measure Sellers’ representative, and the sellers named in the Measure Purchase Agreement (the “Measure Sellers”) pursuant to which the Company agreed to acquire 100% of the issued and outstanding capital stock of Measure Global Inc., a Delaware corporation (“Measure”) from the Measure Sellers. Measure is an aerial intelligence company that builds software to automate drone operations workflows. The aggregate purchase price for the shares of Measure is $45,000,000, less the amount of Measure’s debt and transaction expenses and subject to a customary working capital adjustment. The purchase price is comprised of $15,000,000 in cash, and shares of common stock of the Company, having an aggregate value of $30,000,000 based on a volume weighted average trading price of the Common Stock over a seven consecutive trading day period prior to the date of issuance of the shares of Common Stock to the Measure Sellers (the “Shares”). The Company issued 5,319,145 shares, in the aggregate, to the Measure Sellers and will pay $5,000,000 of the cash portion of the purchase price 90 days after the closing date of the transaction. As a result of this transaction, Measure is now a wholly-owned subsidiary of the Company.

The consideration is also subject to a $5,625,000 holdback to cover any post-closing indemnification claims and to satisfy any purchase price adjustments. The holdback is scheduled to be released on the date that is 18 months from the closing date, less any amounts paid or reserved for outstanding indemnity claims and certain amounts subject to employee retention conditions set forth in the Measure Purchase Agreement.

The Measure Purchase Agreement contains certain customary representations, warranties and covenants, including representations and warranties by the Measure Sellers with respect to Measure’s business, operations and financial condition. The Measure Purchase Agreement also includes post-closing covenants relating to the confidentiality and employee non-solicitation obligations of the Measure Sellers, and the agreement of the Measure Sellers not to compete with certain aspects of the business of Measure following the closing of the transaction. The completion of the transactions contemplated by the Purchase Agreement is subject to: (i) the absence of a material adverse effect on Measure, (ii) the delivery by the parties of certain ancillary documents, and (iii) the execution by key employees of Measure of employment offer letters. Subject to certain limitations, each of the parties will be indemnified for damages resulting from third party claims and breaches of the parties’ respective representations, warranties and covenants in the Purchase Agreement.

The Shares issuable to the Measure Sellers pursuant to the Measure Purchase Agreement were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), to a limited number of persons who are “accredited investors” or “sophisticated persons” as those terms are defined in Rule 501 of Regulation D promulgated by the SEC, without the use of any general solicitation or advertising to market or otherwise offer the securities for sale. None of the Shares have been registered under the Securities Act, or applicable state securities laws, and none may be offered or sold in the United States absent registration under the Securities Act or an exemption from such registration requirements.

The fair value of the purchase consideration was allocated to the preliminary fair value of the net tangible assets acquired and to the separately identifiable intangible assets. The excess of the aggregate fair value of the net tangible assets and identified intangible assets has been treated as goodwill in accordance with ASC 805.

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 7 – Acquisition – Continued

The Company has performed a preliminary valuation analysis of the fair market value of the assets to be acquired and liabilities to be assumed. Using the total consideration for the Acquisition, the Company has estimated the allocations to such assets and liabilities.

The preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of tangible assets; (2) changes in allocations to intangible assets such as trade names, developed technology and customer relationships, as well as goodwill; and (3) other changes to assets and liabilities.

The following table summarizes the allocation of the preliminary purchase price as of the acquisition date of April 19, 2021:

Schedule of allocation preliminary purchase price  
Calculation of Goodwill:  
Net purchase price, including debt paid at close $45,403,394 
     
Plus: fair value of liabilities assumed:    
Deferred revenue  319,422 
Fair value of liabilities assumed $319,422 
     
Less: fair value of assets acquired:    
Cash  486,544 
Other tangible assets  39,078 
Identifiable intangibles  2,668,689 
     
Fair value of assets acquired $3,194,311 
     
Net nonoperating assets  39,775 
Goodwill $42,488,730 

Note 8 –Promissory NotesNote

 

On May 6, 2020, the Company received a loan in the amount of $107,439$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, 2022.2022. 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 unforgivenunforgiveable portion of the PPP loan iswas payable over two years and cancould 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 intendsintended to use the proceeds for purposes consistent with the PPP. WhileOn May 16, 2021, the outstanding principal and interest accrued on the PPP Term Note were fully forgiven. The Company currently believes that its use ofrecognized $108,532 in gain on 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,PPP Term Note including interest accrued, which was recorded 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 (which includes subsequent payment of the exercise price of the Pre-Funded Warrants in the amount of $3,267). 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 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 as presentedother (expense) income on the condensed interim consolidated statements of operations.

Pursuant to the terms of the Purchase Agreement, the Company had agreed to certain restrictions on future stock offerings, including that during the 60-day period following the closing, the Company did 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 were 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, and were exercisable on a “cashless” basis in certain circumstances.

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AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020

(Unaudited)

 

Note 79 – Stockholders’ Equity – Continued

 

Capital Stock Issuances

On January 2021, the Company issued 1,057,214 shares of Common Stock in connection with a securities purchase agreement (the “December Purchase Agreement”) entered on December 31, 2020, the gross proceeds associated to this exercise were $6,313,943.

On February 8, 2021, the Company received $8,305,368 in additional gross proceeds associated with the exercise of 2,516,778 of warrants issued at a price of $3.30 in connection with a securities purchase agreement dated August 4, 2020.

Securities Purchase Agreement Dated June 24,December 31, 2020

 

On June 24,December 31, 2020, the Company and thean Investor entered into athe December 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 (the “Warrants”“December Pre-Funded Warrants”) to purchase up to 2,455,4761,057,214 shares of common stock at an exercise price of $1.35 per share,Common Stock, par value $0.001 Common Stock, for gross proceeds of $7approximately $6.35 million (which includes subsequent payment of the exercise price of the December 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 will receive additional gross proceeds of $3,314,892.$1,057). The shares of common stockCommon Stock underlying the December Pre-Funded Warrants and the Warrants are referred to as “Junethe “December Warrant Shares.”

 

The purchase price for each share of common Stock is $1.10 and the purchase price for eachDecember Pre-Funded Warrant is $1.099. Thewas $6.029, the exercise price for each December Pre-Funded Warrant iswas $0.001. Net proceeds from the sale will bewere used for working capital, capital expenditures and general corporate purposes.capital. The Shares, Pre-funded Warrants,December Pre-Funded Warrants and Junethe December Warrant Shares are beingwere 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 December Purchase Agreement, the Company agreed to certain restrictions on future stock offerings, including that during the 75-day45-trading day period following the closing, the Company willdid not issue (or enter into any agreement to issue) any shares of common stockCommon Stock or common stockCommon 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.limited exceptions. The Investor hashad a right from the date of the December Purchase Agreement until December 31, 2020April 30, 2021 to participate in a subsequent financing by the Company or any of its Subsidiaries of common stockCommon Stock or common stock EquivalentsCommon 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 December Prefunded Warrants and the Warrants and the number of JuneDecember Warrant Shares issuable upon the exercise thereof will bewere subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the December 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. TheDecember Pre-Funded Warrants allowallowed for cashless exercise at any time. The December Pre-Funded Warrants and the Warrants each containcontained a beneficial ownership limitation such that none of suchthe December 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. During the three and nine months ended September 30, 2020 the Company received $2,632,500 in additional gross proceeds associated with exercise of 1,950,000 of the June Warrant Shares into common stock. As of September 30, 2020, 505,476 June Warrant Shares at an exercise price of $1.35 per share remain outstanding.

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 7 – Stockholders’ Equity – Continued

Securities Purchase Agreement Dated August 4, 2020

On August 4, 2020, the Company and an institutional investor and existing Company stockholder (the “Investor”) entered into a Purchase Agreement pursuant to which the Company agreed to sell to the Investor in a registered direct offering 3,355,705 shares of common stock and warrants to purchase up to 2,516,778 shares of Common Stock at an exercise price of $3.30 per share (the “Warrants”), for proceeds of $9,900,000 net of issuance costs of $100,000. Upon exercise of the Warrants in full by the Investor, the Company will receive additional gross proceeds of approximately $8,305,367. The shares of Common Stock underlying the Warrants are referred to as “August Warrant Shares.”

The purchase price for each share of Common Stock 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 August 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 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. 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 Warrants and the number of August 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 maycould 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.December Pre-Funded Warrants.

 

IssuancesAGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 9 – Equity – Continued

Filing of StockRegistration Statement and Restricted Stock UnitsSales Agreement

Pursuant to the terms of the Registration Rights Agreement executed on February 5, 2021, the Company filed an initial registration statement for up to $200,000,000 of securities which may be issued by the registrant from time to time in indeterminate amounts and at indeterminate times.

 

On April 13,May 25, 2021, the Company entered into an at-the-market Sales Agreement (the “Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated and Raymond James & Associates, Inc. as sales agents (the “Agents”), in connection with the offer and sale from time to time of shares of the Company’s common stock, having an aggregate offering price of up to $100,000,000 (the “ATM Shares”), through an at-the-market equity offering program (the “ATM Offering”).

The ATM Shares are being offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-252801), which was filed with the Securities and Exchange Commission (the “SEC”) on February 5, 2021 and declared effective on May 6, 2021. A prospectus supplement relating to the ATM Offering was filed with the SEC on May 25, 2021.

Subject to the terms and conditions of the Sales Agreement, the Sales Agents will use reasonable efforts, consistent with its normal trading and sales practices and applicable law and regulations to sell ATM Shares from time to time based upon the Company’s instructions, including any price, time or size limits or other customary parameters or conditions the Company may impose.

Under the Sales Agreement, the Sales Agents may sell ATM Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations thereunder, including, without limitation, sales made by means of ordinary brokers’ transactions, directly on or through NYSE American LLC, on or through any other national securities exchange or facility thereof, a trading facility of a national securities association, an alternative trading system, or any other market venue, in the over-the-counter market, in privately negotiated transactions, to or through a market maker or a combination of any such methods. The Company agreed to pay the Sales Agents a commission equal to 3% of the gross proceeds from the sales of ATM Shares pursuant to the Sales Agreement.

The Sales Agreement contains customary representations and warranties and also contains customary indemnification obligations of the Company and the Sales Agents, including for liabilities under the Securities Act, other obligations of the parties and termination provisions.

The provisions of the Sales Agreement, including the representations and warranties contained therein, are not for the benefit of any party other than the parties to such agreement and are not intended as documents for investors and the public to obtain factual information about the current state of affairs of the parties to those documents and agreements. Rather, investors and the public should look to other disclosures contained in the Company’s filings with the SEC.

During the period from May 29, 2021, through June 30, 2021, the Company sold 5,271,100 shares of Common Stock, par value $0.001, at a stock price between $5.02 and $6.30 per shares, for proceeds of $28,647,161, net of costs.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 9 – Equity – Continued

Issuances of Restricted Stock Units (RSUs)

On May 18, 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 expense related to these issuances for the nine months ended September 30, 2020, which is included in general and administrative expenses on the condensed interim consolidated statements of operations.

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 7 – Stockholders’ Equity – Continued

On May 18, 2020, the company issued in connection with the commencement of theemployment of its Chief Executive officer,Officer, 100,000 shares of 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. The Company determined the fair-market value of the restricted stock units to be $134,000. In connection with the issuance of these restricted stock units, the Company recognized $33,688 and $49,794$50,516 in stock compensation expense for the three and ninesix months ended SeptemberJune 30, 2020, respectively,2021 which is included in general and administrative expenses on the condensed interim consolidated statements of operations. TheThere was no remaining unrecognized stock compensation expense as of $84,206 will be recognized through May 2021.

On June 30, 2020,2021.

On March 5, 2021, the Company issued in connection with a consulting agreement, dated May 3, 2019, 250,000its Chief Financial Officer 10,000 restricted shares of its common stockCommon Stock and 5,000 restricted shares of Common Stock to another employee of the consulting company as a part of their compensation for services.Company. The Company recognized a total of $297,500$87,600 of expense at a fair value of $1.19$5.84 per share within stock compensation expense related to these issuances. withinissuances for the six months ended June 30, 2021, which is included in general and administrative costsexpenses on the condensed interim consolidated statements of operations. In addition,

On April 19, 2021, the board of directors of the Consultant also held optionsCompany (the “Board”), upon recommendation of the Compensation Committee, approved an award under the Company’s Plan of 100,000 RSUs to purchase 207,055 sharesthe Company’s former Chief Executive Officer, and 125,000 RSUs to the Company’s Chief Financial Officer and EVP of Operations, in accordance therewith with their amended respective employment letters. The Company determined the fair market value of the restricted stock units to be $1,215,000 based on the market price of the Company’s common stock that were cashless exercised at the date of grant and will vest equally on a pricepro-rata basis over one year of $0.06 per sharecontinued employment. For the three and six months ended June 30, 2021, the Company recorded $179,271 in stock expense related to these awards which is included in general and administrative expenses on July 20, 2020 into 201,791 sharesthe consolidated statements of common stock.operations.

Series C Preferred Stock

As a resultOn April 19, 2021, the Board approved, in connection with the acquisition of Measure, an award of 125,000 RSUs under the Company’s Plan to Brandon Torres-Declet upon his appointment as senior management of the Merger,Company. The Company determined 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 sharesfair market value 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 sharesrestricted stock units to be $675,000 based on the market price of the Company’s common stock as they were issuedat the date of grant and will vest equally on a pro-rata basis over one year of continued employment. For the three and six months ended June 30, 2021, the Company recorded $134,273 in stock expense related to these awards which is included in general and administrative expenses on the current holderconsolidated statements of Series C Preferred Stockoperations.

On April 19, 2021, the Board approved, in connection with a $4 million financingthe acquisition of Series C Preferred Stock (the “Financing”).

On May 11, 2018,Measure, an award of 10,000 RSUs under the Company’s Plan to Jesse Stepler upon his appointment of as senior management of Measure Global, Inc. 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 fordetermined the issuancefair market value 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%restricted stock units to be $54,000 based on the market price 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 ofCompany’s common stock at the date of grant and will vest equally on a price per share (the “Dilutive Price”) thatpro-rata basis over one year of continued employment. For the three and six months ended June 30, 2021, the Company recorded $10,738 in stock expense related to these awards which is less thanincluded in general and administrative expenses on the conversion price, thenconsolidated statements of operations.

During the conversionmonth of May 2021, pursuant to a review of the compensation of the senior management managements’ performance in 2020, the Board granted 229,750 RSUs to certain senior managers of the Company. These awards were valued at approximately $1,196,565 at the date of issuance, based upon the market 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 ofCompany’s 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 resultdate of the grant, and vested immediately.  For the three and six months ended June 30, 2021, the Company issuingrecorded $1,196,565 in stock-based expense related to these awards which is included in general and administrative expenses on 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.consolidated statements of operations.

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AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020

(Unaudited)

 

Note 79 – Stockholders’ Equity – Continued

 

On April 7, 2020, uponMay 24, 2021, the issuanceCompany issued to the former Chief Executive Officer, 26,652 RSUs as part 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 inseparation agreement. These awards were valued at 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.

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$125,000 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 September 30, 2020, no Series C Preferred Stock remain issued and outstanding.

Series D Preferred Stock

On December 27, 2018, the Company entered into a Purchase 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 “Series D 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 Series D 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 nine months ended September 30, 2020 and 2019, the Company recorded $69,778 and $121,333 of accrued dividends, respectively. As of September 30, 2020, and December 31, 2019, accumulated accrued dividends totaled $0 and $163,555, respectively, as presented on the condensed interim consolidated balance sheets.

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 Series D Warrant Shares, or the Series D Warrant Shares can be exercised through a cashless exercise without restriction under Rule 144, (iii) the Series D 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 Series D 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.

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AGEAGLE AERIAL SYSTEMS, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 the condensed interim consolidated statements of operations.

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 issuance, based upon the above amendment to the Original Series D Preferred Stock the fair valuemarket price of the Company’s common stock price was $1.45 which is higher thanat the effective conversion price of $0.54 that was agreed to on June 5th, 2020. Due to the modificationdate of the Series D Preferred Stock,grant, and vested immediately. For the three and six months ended June 30, 2021, the Company recorded a deemed dividend$125,000 in stock expense related to these awards which is included in general and administrative expenses on the consolidated statements of $3,763,591 representingoperations.

The following table outlines the intrinsic valuerestricted stock unit activity for the six months ended June 30, 2021:

Schedule of restricted stock unit activity    
    Weighted
    Average
    Grant Date
  Shares Fair Value
Non-vested, December 31, 2020  100,000  $1.34 
Granted  631,402  $5.31 
Canceled  (91,667) $5.40 
Released during period  (100,000) $1.34 
Vested  (323,067) $5.23 
Non-vested, June 30, 2021  216,668  $5.40 

As of $0.91 multiplied byJune 30, 2021, the numberCompany had approximately $1,124,716 of total unrecognized compensation cost related to stock options which will be amortized over approximately ten months.

Issuance of common stock for acquisitions

On April 19, 2021, the Company issued 5,319,145 shares to be issued upon conversion. The deemed dividendof Common Stock in connection with the Measure Purchase Agreement based on a volume weighted average trading price of the Common Stock over a ten consecutive trading day period prior to the preferred stockholders was a recorded as additional paid in capital and a reductiondate of retained earnings and has an increase to net loss attributable to common stockholders in computing earnings per share

During the monthissuance of June 2020, the Series D Preferred Stockholder converted 1,890these shares of Series D PreferredCommon Stock and all outstanding accrued dividends totaling $233,333 into 3,500,000 shares of common stock at a conversion price of $0.54.

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 7 – Stockholders’ Equity – Continued

During the three months ended September 30, 2020, the Series D Preferred Stockholders converted the remaining 110 shares of the Series D Preferred Stock into 635,815 shares of common stock at a conversion price of $0.54 which includes an additional 421,308 of common stock shares to correct conversions that occurred in June 2020 computed using the statedfair market value of $1,000 rather than $1,116.67.

Series E Preferred Stock$24,375,000.

 

On April 7, 202027, 2021, the Company entered into aissued 540,541 shares of Common Stock in connection with the MicaSense Purchase Agreement with Alpha, pursuantbased on a volume weighted average trading price of the Common Stock over a ten consecutive trading day period prior to the termsdate of the Agreement, the Boardissuance of Directors of the Company authorized 1,050these shares of a newly designated series of preferred stock, the Series E Convertible Preferred Stock. The PreferredCommon 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 market 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 the condensed interim consolidated statements of operations.

On May 11, 2020, the Company entered into a 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 increased its 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.

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.

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 7 – Stockholders’ Equity – Continued$3,000,000.

 

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.

 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 9 – Equity – Continued

On July 15, 2020June 16, 2021, the Company held its 20202021 annual meeting of stockholders and approved a proposal to increase the number of shares of common stockCommon Stock reserved for issuance under the Plan from 3,000,0004,000,000 to 4,000,000.10,000,000. 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 ninesix months ended SeptemberJune 30, 2020,2021, the Company issued options to purchase 481,167659,500 shares of common stock, in the aggregate,Common Stock to directors and employees of the Company at the fair value exercise priceprices ranging from $0.41$5.03 to $3.10$10.11 per share expiring on dates between February 23,January 3, 2025 and SeptemberJune 29, 2025.2026. The Company determined the fair-market value of thethese unvested options to be $439,530.$2,474,944. In connection with the issuance of these options to employees and directors, the Company recognized $26,575$224,305 and 29,262$326,495 in stock compensation expense for the three and ninesix months ended SeptemberJune 30, 2020. During the three and nine months ended September 30, 2020, the Company recognized $64,248 and $125,833, respectively, in stock compensation expense in connection with options previously issued to employees and directors in the prior years.2021, respectively.

 

During the nine months ended September 30, 2019, theThe Company previously issued options to purchase 1,054,0003,469,540 shares of common stock, in the aggregate,Common Stock to directors and employees of the Company at the fair value exercise priceprices ranging from $0.29$0.06 to $0.54$3.18 per share expiring on dates between December 31,June 30, 2023 and March 28,June 29, 2029. The Company determined the fair-market value of the options to be $248,761. In connection with the issuance of these options to employees and directors, the Company recognized $15,873$417,191 and $32,362, respectively$93,344 in stock compensation expense for the three and ninesix months ended SeptemberJune 30, 2019. During the three2021 and nine months ended September 30, 2020, the Company recognized $56,115 and $185,014, respectively, in stock compensation expense in connection with options previously issued to employees and directors in the prior years.respectively.

 

The fair value of options granted during the nine-month periods ending Septembersix months ended June 30, 20202021 and 20192020 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 usingand represents the averageperiod of vesting period and contractual term. .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.

 

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 ninesix months ended SeptemberJune 30, 20202021 were as follows:

 

September 30, 2020
Dividend yield0.00%
Expected life 3.5 Years
Expected volatility89.19 to 90.09%
Risk-free interest rate 0.16 to 0.29%
Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions    
 March 31, 2021  June 30, 2021
Dividend yield0.00%   0.00% 
Expected life3.02 Years   3.01 Years 
Expected volatility85.41%   84.16% 
Risk-free interest rate0.36%   0.32% 
Exercise price$0.06 - $0.56   $0.06 - $2.28 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 9 – Equity – Continued

 

A summary of the options activity for the ninesix months ended SeptemberJune 30, 20202021 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  481,167   1.52   4.75   — 
Exercised/Forfeited  (851,483)  0.53   —   — 
Outstanding at September 30, 2020  2,110,154   0.59   5.67  $3,605,844 
Exercisable at period end  1,156,062  $0.31   5.89  $2,276,254 
Summary of Stock Options        
  Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value
Outstanding at December 31, 2020  2,255,267  $1.46   5.31 years   $10,247,548 
Granted  659,500   6.99   4.74 years   2,400 
Exercised  (406,015)  0.21   —   2,090,198 
Expired/Forfeited  (197,585)  5.53   —   81,485 
Outstanding at June 30, 2021  2,311,167  $ 2.92   4.59 years  $ 6,526,820 
Exercisable at period end  1,187,099  $1.41   4.46 years  $4,820,479 

 

For options granted during the ninesix months ended SeptemberJune 30, 2020,2021, the fair value of the Company’s stockCommon Stock was based upon the close of market price on the date of grant. As of September 30, 2020, theThe future expected stock-based compensation expense expected to be recognized in future years is $535,658$2,697,970 through SeptemberJune 30, 2022.

During the nine months ended September 30, 2020, the Company had exercises of options to purchase 430,220 shares of common stock, in the aggregate, to directors and employees.

During the month the nine months ended September 30, 2020, 466,344 options were converted into 430,220 shares of common stock at a weighted average exercise price of $0.22. The Company received cash proceeds of $47,400 associated with exercise of the exercise.2023.

 

Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at SeptemberJune 30, 20202021 (for outstanding options), less the applicable exercise price.

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 7 – Stockholders’ Equity – Continued

A summary of the options activity for the nine months ended September 30, 2019 is as follows:

  Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years)��Aggregate Intrinsic Value
Outstanding at January 1, 2019  1,494,158  $0.46   6.93  $409,678 
Granted  1,054,000   0.37   6.61   — 
Exercised/Forfeited  (144,688)  0.49   —   — 
Outstanding at September 30, 2019  2,403,470   0.39   6.41   235,896 
Exercisable at period end  1,339,467  $0.33   6.54  $226,958 

 

Note 810 – Warrants to Purchase Common Stock

 

Warrant IssuedConversions

On June 24, 2020, the Company entered into a Purchase Agreement, described above in Note 7, pursuant to which the Company agreed to sell to the Investor in a registered direct offering June Warrant Shares to purchase up to 2,455,476 shares of common stock at an exercise price of $1.35 per share. During the three and nine months ended September 30, 2020February 8, 2021, the Company received $2,632,500$8,305,368 in additional gross proceeds associated with the exercise of 1,950,000 2,516,778 of the June Warrant Shares into common stock. As of September 30, 2020, 505,476 of the June Warrant Shareswarrants issued at an exercisea price of $1.35 per share remain outstanding.

On$3.30 in connection with a securities purchase agreement dated August 4, 2020, the Company entered into a Purchase Agreement, described above in Note 7, pursuant to which the Company agreed to sell to the Investor in a registered direct offering Warrants to purchase up to 2,516,778 shares of common stock at an exercise price of $3.30 per share. Upon exercise of the Warrants in full by the Investor, the Company will receive additional gross proceeds of approximately $8,305,367. As of September 30, 2020, all of these Warrants remain outstanding.

Warrant Conversions

During the nine months ended September 30, 2020, 6,481,924 warrants were converted into 5,303,455 shares of common stock at a weighted average conversion price of $0.74. The Company received cash proceeds of $2,632,500 associated with exercise of the warrants.

All warrants outstanding as of September 30, 2020 are scheduled to expire between June 06, 2021 and June 25, 2021.

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 8 – Warrants to Purchase Common Stock-Continued2020.

 

A summary of activity related to warrants for the ninesix months ended SeptemberJune 30, 20202021 follows:

 

  Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term
Outstanding at January 1, 2020   4,531,924  $0.72   4.05 
Issued   4,972,254   2.34   0.92 
Exercised   (6,481,924)  0.74   — 
Outstanding at September 30, 2020   3,022,254   2.97   0.69 
Exercisable at September 30, 2020   505,476   2.97   0.69 
Summary of activity related to warrants      
  Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term
Outstanding at January 1, 2021   2,516,778  $3.30   0.83 
Issued   —   —   — 
Exercised   (2,516,778)  3.30   — 
Outstanding at June 30, 2021   —  $—   — 

 

A summary of activity related to warrants for the ninesix months ended SeptemberJune 30, 20192020 follows:

 

  Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term
Outstanding at January 1, 2019   4,531,924  $0.72   5.05 
Outstanding at September 30, 2019   4,531,924   0.72   4.31 
Exercisable at September 30, 2019   4,531,924   0.72   4.31 
  Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term
Outstanding at January 1, 2020   4,531,924  $0.72   4.05 
Outstanding at June 30, 2020   4,531,924  $0.72   3.80 
Exercisable at June 30, 2020   4,531,924  $0.72   3.80 

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

 

Note 911 – Commitments and Contingencies

 

Operating Leases

 

Right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease terms at the commencement dates. The Company leases office space located at 117 South 4th Street, Neodesha, Kansas 66757. This servesuses its incremental borrowing rates as the corporate headquarters and manufacturing facility. The facilitydiscount rate for its leases, which is 4,000 square feet atequal to the rate of interest the Company would have to pay on a cost of $500 per month. This lease terminated on September 30, 2019 but has a year-to-year optioncollateralized basis to renew upon approval by the city commission of Neodesha. The Company has exercised its option and has been approvedborrow an amount equal to renew the lease through September 30, 2020 atpayments under similar terms. The incremental borrowing rate for all existing leases as of the opening balance sheet date was based upon the remaining terms of the leases; the incremental borrowing rate for all new or amended leases is based upon the lease terms. The lease terms for all the Company’s leases include the contractually obligated period of the leases, plus any additional periods covered by options to extend the leases that the Company is reasonably certain to exercise.

Operating lease expense is recognized on a monthly cost of $600 per month.straight-line basis over the lease term and is included in operating costs or General and administrative expense. Variable lease payments are expensed as incurred.

 

The Company hasdetermines if an arrangement is or contains a lease for offices in Boulder, Colorado for $2,000at contract inception and recognizes a month. The Company renewedright-of-use asset and a lease liability at the lease on May 31, 2019 until December 31, 2020 on a month-to-month basiscommencement date. Leases with an option to terminateinitial term of 12 months or less but greater than one month are not recorded on the balance sheet for select asset classes. The lease liability is measured at any time with a 30-day prior notice period.the present value of future lease payments as of the lease commencement date, or the opening balance sheet date for leases existing at adoption of Topic 842. The right-of-use asset recognized is based on the lease liability adjusted for prepaid and deferred rent and unamortized lease incentives.

 

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TableThe Company has various operating leases, one of Contents

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 9 – Commitments and Contingencies – Continued

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 expectedwhich is located at 8863 E. 34th Street North, Wichita, Kansas 67226, which serves as our corporate headquarters. The commencement date of the lease was November 1, 2020 (the “Commencement Date”) and expected expiration date ofwill expire on October 31, 2023, unless the Wichita Lease is sooner terminated or extended. The Wichita Lease premises includes approximately 12,000 square feet, located at 8833 E. 34th Street, Wichita, Kansas 19103 (the “Leased Premises”). second lease is for office space in Seattle, Washington under a noncancelable operating lease that expires in January 2026 with a 3% per year increase, and two months of abated rent for December 2020 and January 2021. Both leases are operating leases and included in the right-of-use asset, current portion of lease liability and long-term lease liability captions on the Company’s consolidated balance sheet.

As a result of the Measure acquisition the Company acquired leases for office space in Washington, D.C., under a monthly operating lease expiring in September 2021 for Austin, Texas also under a monthly operating lease expiring December 2021 that are both less twelve months currently. The remaining lease payments due for these offices are $46,115.

The aggregate estimated rent payments due over the initial three-yearthree-to-six-year term is $1,374,097. Operating lease assets are recorded net of accumulated amortization of $1,078,676 as of June 30, 2021. Lease expense for lease payments is recognized on a straight-line basis over the Wichita Lease is $297,000. The lease requires a security deposit in the amount of $9,720 upon payment.

The Landlord may grant the Company the option to extend the term of the Wichita Lease for an additional 36 months (the “Option Term”).terms. The aggregate estimated rent payments due over the Option Term of the Wichita Leaseoption term would be $314,640.

In addition, the Landlord granted 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 Lease expense payment was $217,428 and base of operations for manufacturing, assembly, design and engineering and testing of drones, drone subcomponents and drone-related equipment.

Total rent expense associated with the above leases was $23,100 and $22,500$15,300 for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, which is included in general and administrative expenses on the condensed interim consolidated statements of operations.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 11 – Commitments and Contingencies - Continued

The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of June 30, 2021:

Schedule of operating lease liabilities  
Year Ending December 31, Amount
2021  $120,173 
2022   257,133 
2023   262,886 
2024   200,500 
2025   219,125 
2026   18,859 
 Total  $1,078,676 

 

GreenBlock Capital LLC Consulting Agreement

 

On May 3, 2019, the Companywe 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 new business opportunities and the implementation of business strategies related to be agreed to by both parties.expansion into the emerging domestic hemp cultivation market. 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, the Consultant shallcan receive (i) $25,000 per month during the term of the agreement, (ii) 500,000 shares of restricted common stockCommon Stock upon execution of the agreement and up to (iii) up to 2,500,000 shares of restricted common stockCommon 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 held options to purchase 207,055 shares of the Company’s common stock that were cashless exercised at a price of $0.06 per share on July 20, 2020 into 201,791 shares of common stock.

 

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 Company has settled with the term of the agreement, the Company paid to theConsultant. The Consultant (i) $25,000 per monthmade a demand for six months and issued (ii) 500,000 restrictedan additional 750,000 shares of common stock atto be issued. Although the execution ofCompany disputed that the agreement. The agreement also provided formilestones were successfully achieved by the issuance of up to anConsultant and believed that no additional 2,500,000 shares of restricted common stock uponCommon Stock were owed, the achievement of milestones that were to be determined by the Company has offered and the Consultant duringhas accepted, in the termform of a settlement, a total of 550,000 additional shares of Common Stock issued on May 17, 2021. On March 31, 2021, the Company recorded additional stock compensation expense within general & administrative expenses in the amount of $1,407,000 based upon the fair market value of $4.69 per share of the agreement. There are no early termination penalties incurredCompany’s Common Stock as of May 12, 2021, resulting in a resultliability amount of $2,907,000 for purposes of payment 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.settlement.

 

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AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020

(Unaudited)

 

Note 911 – Commitments and Contingencies –- Continued

 

Valqari Agreement

On June 30,October 14, 2020, the Company issuedin connection with, and as an additional 250,000 shares of its common stockincentive to the Consultant as part of its compensationentry into a two-year exclusive manufacturing agreement to produce a patented Drone Delivery Station 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.

Founder Leak-Out Agreement

On April 7, 2020, as a condition to the consummation of the Series E Preferred Agreement, Valqari, the Company entered into a Leak-Out AgreementConvertible Promissory Note (see Note 4).

Also on October 14, 2020, AgEagle entered into a manufacturing agreement with Mr. Bret Chilcott, founderValqari for the manufacture and former directorassembly of Valqari’s patented Drone Delivery Station, in accordance with the specifications provided by, and Presidentthe components designated by Valqari, for sale and delivery to its customers. AgEagle was appointed as Valqari’s exclusive manufacturer of its products in the United States of America for a term of two-years, unless terminated earlier. Valqari, based in Chicago, Illinois, is engaged in the development, manufacture and sale of a patented Drone Delivery Station, including related software.

In June 2021, AgEagle gave notice of termination of the Company,manufacturing agreement for cause based on material defects in the specifications and Alphaother information provided by Valqari, and without cause as otherwise permitted in the agreement.  Valqari disputes the allegations of breach, but AgEagle believe that Valqari has in effect consented to termination of the agreement, with respectboth parties reserving their rights to claim damages based on alleged past breaches.  AgEagle has claimed that Valqari owes $43,945 for two outstanding invoices from AgEagle for units built and delivered, as well as additional amounts for two units as to which Valqari has refused to take delivery.

AgEagle has also demanded payment of the shares Mr. Chilcott beneficially owns. The restrictionnote, including accrued interest; based on the disposition of the shares is for a period of seven months from theinitial maturity date of April 14, 2021; however, Valqari has alleged that the closing of the Agreement. Thereafter,note’s maturity date was extended to October 14, 2021.  AgEagle disputes this extension; however, 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.

On August 26, 2020, the Company, together with Mr. Chilcott and Alpha Capital Anstalt, who was a partypractical reasons AgEagle intends to the Leak Out Agreement, agreedwait until October in order to amend the Leak Out Agreement to change the restrictions on the disposition of Mr. Chilcott’s shares that are subject to the Leak Out Agreement (the “Amended Leak Out Agreement”). The Amended Leak Out Agreement provides that Mr. Chilcott (together with his affiliates) may sell or otherwise dispose of his shares for a period of twelve (12) months commencing on September 7, 2020 (the “Restricted Period”) in an amount representing no more than 50,000 shares per calendar month during the Restricted Period. After the Restricted Period, the restrictions set forth in the Amended Leak Out Agreement cease.pursue collection actions, if necessary.

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.

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 9 – Commitments and Contingencies – Continued

 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 increased to $10,000 per month commencing on August 1, 2020.

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.

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. 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 ExecutiveOperating Officer and Compensatory Arrangements

On April 28, 2020,19, 2021, in connection with the acquisition of Measure, the Board of Directors of the Company extended an offer(the “Board”) approved the appointment of employment that was accepted by Mr. Michael Drozd to serveBrandon Torres Declet as the Company’s new Chief ExecutiveOperating Officer. Mr. Drozd officially joinedDeclet also served as the President of Measure, the Company’s wholly-owned subsidiary. Prior to joining 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,Declet, age 45, co-founded Measure and 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.its President since 2014.

 

From 2015 through 2019, Mr. Drozd servedIn his position as President of Eurofins AgBio Division, a global business focused primarily on testing for the agriculture sector (seed, plant and animals). 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.

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AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

Note 9 – Commitments and Contingencies – Continued

Mr. Drozd will receiveDeclet received a base salary of $235,000$225,000 per year, whichsubject to increase at the discretion of the Board. Mr. Declet will be eligible for an annual cash bonus of up to 20% of his then-current base salary, as determined by the Board in its good faith discretion, based on the achievement of a combination of personal and Company objectives. Mr. Declet was also eligible to participate in any benefit plans offered by the Company as in effect from time to time on the same basis as generally made available to other employees of the Company. Mr. Declet was awarded a one-time grant of 125,000 Restricted Stock Units (RSUs) that will vest on a pro rata basis over one year commencing on the date of closing of the acquisition of Measure. Such grant of 125,000 RSUs shall be subject to annual performance review by the Compensation Committeeterms of an RSU grant agreement. Additionally, Mr. Declet will be granted, on a quarterly basis, non-qualified options to acquire 25,000 shares of Company Common Stock. Such options will be subject to 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 mixterms 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”“Plan”), whichand the vesting requirements, the term of the option and exercisability at an exercise price equal to the fair market value of the option shares 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 willbe set forth in a grant agreement as of each date of grant.

Mr. Declet is subject to the vesting, exercisabilityterms of a confidentiality and exercise priceproprietary rights agreement. In the event that Mr. Declet is terminated by the Company other than for cause or for good reason (as such terms are defined in Mr. Declet’s employment offer letter), he is entitled to base salary continuation for six months, reimbursement of COBRA health insurance premiums for a period of 6 months, and a grant of fully-vested restricted shares of Common Stock of the stock options asCompany with a fair market value of $125,000 on the date of termination of employment. Furthermore, in the grants.event the Board determines in its discretion that Mr. Declet must relocate from his principal place of performance of his duties, the Company shall pay and/or reimburse him for expenses, up to $100,000, in connection with such relocation.

 

Appointment of Director

Effective on April 19, 2021, the closing date of Measure acquisition, Mr. Declet was appointed to serve as a non-independent member of the Board until his successor is elected and qualified or until his earlier death or resignation.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

Note 11 – Commitments and Contingencies - Continued

Approval of Changes to Executive Compensation

On July 20, 2020,April 19, 2021, the Board of Directors of the Company, upon recommendation of the Compensation Committee, approved a changechanges in the compensation of Mr. Michael Drozd, the directorsCompany’s Chief Executive Officer, and of Ms. Nicole Fernandez-McGovern, the Company’s Chief Financial Officer and EVP of Operations.Operations, and in accordance therewith, amended their respective employment offer letters. With respect to Mr. Drozd, the Board approved the following amendments to current compensation terms: (i) an additional one-time grant of 100,000 RSUs that will vest on a pro rata basis over one year subject to the terms of an RSU grant agreement, and (ii) an increase in the number of grants, on a quarterly basis, of non-qualified options from 15,000 to 25,000 shares of Company common stock subject to the terms of the Plan, and the vesting requirements, the term of the option and exercisability at an exercise price equal to the fair market value of the option shares will be set forth in a grant agreement as of each date of grant. Mr. Drozd’s current base salary and potential bonus payments have not been changed.

With respect to Ms. Fernandez-McGovern, the Board approved: (i) an additional one-time grant of 125,000 RSUs that will vest on a pro rata basis over one year subject to the terms of an RSU grant agreement, and (ii) an increase in the number of grants, on a quarterly basis, of non-qualified options from 15,000 to 25,000 shares of Company Common Stock subject to the terms of the Plan, and the vesting requirements, the term of the option and exercisability at an exercise price equal to the fair market value of the option shares will be set forth in a grant agreement as of each date of grant. Ms. Fernandez-McGovern’s current base salary and potential bonus payments have not been changed.

In addition, Mr. Drozd and Ms. Fernandez-McGovern were provided with severance benefits in the event of termination without cause or for good reason, as defined in the amended employment offer letters. The Compensation Committee engaged Albeckseverance benefits consist of (i) 6 months of base salary, paid in the form of salary continuation, in accordance with the terms of a Separation Agreement to performbe entered into at the time of termination; (ii) reimbursement of COBRA health insurance premiums at the same rate as if the executive officer were an independent third-party studyactive employee of compensationthe Company (conditioned on the executive officer having elected COBRA continuation coverage) for a period of 6 months or, if earlier, until the executive officer is eligible for group health insurance benefits from another employer; and (iii) a grant of fully-vested restricted shares of Common Stock of the Company with a fair market value of $125,000 on the date of termination of employment, pursuant to assess the Company’s compensationterms of, and effective on the effective date of, the Separation Agreement. The severance benefits are conditioned upon each persons (i) continued compliance in all material respects with their respective continuing obligations to the Company, including, without limitation, the terms of the amended employment offer letter and of the confidentiality agreement that survive termination of employment with the Company, and (ii) signing (without revoking if such right is provided under applicable law) a separation agreement and general release in a form provided to the executive officer by the Company on or about the date of termination of employment. Furthermore, in the event the Board determines in its Board and itsdiscretion that the executive officers must relocate their principal place of performance of their duties, the Company shall pay and/or reimburse them for expenses, up to $100,000, in comparison to industry averages.connection with such relocation.

 

As a resultOn June 11, 2021, the Board of Directors of the study, andCompany, upon the recommendation of the Compensation Committee, the Board approved an increase in Ms. Fernandez-McGovern’sMr. Torres Declet’s annual base salary from $200,000$225,000 to $220,000 and quarterly stock options from 12,500$235,000, effective as of May 24, 2021, 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. Also approved was 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 per director. The approved compensation is retroactive for all to July 1, 2020.be commensurate with his new position as Chief Executive Officer.

 

As previously disclosed in an amendment to the Current Report on Form 8-K filed on April 20,AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 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.

(Unaudited)

 

Note 10 — 11 – Commitments and Contingencies Continued

Departure-Appointment of Certain Officers and Changes in Compensatory Arrangements

On May 24, 2021, the Company and J. Michael Drozd mutually agreed to Mr. Drozd’s resignation as Chief Executive Officer of the Company, effective on May 24, 2021 (the “Termination Date”). Mr. Drozd resigned to pursue new career opportunities.

In connection with Mr. Drozd’s departure, the Company and Mr. Drozd entered into a Separation Agreement and General Release, dated June 11, 2021 (the “Separation Agreement”), pursuant to which, among other things, the Company has agreed to pay Mr. Drozd (i) regular base salary at the annual rate of $235,000 through the Termination Date; (ii) an annual performance bonus consisting of $37,130 in cash and 118,500 shares of the Company’s common stock, (iii) severance pay equal to six (6) months of his base salary as of the Termination Date; and (iv) cash payment equal to three (3) days of accrued and unused vacation days.

Pursuant to the Separation Agreement, Mr. Drozd was also granted 26,652 fully-vested restricted shares of the Company’s common stock valued at approximately $125,000 on the Termination Date. In addition, Mr. Drozd’s outstanding equity awards from the Company continue to be governed by the terms of the applicable award agreements, except that 8,333 of the 100,000 RSUs granted to him in accordance with his employment agreement with the Company became vested as of the effective date of the Separation Agreement.

Mr. Drozd’s receipt of any of the payments or benefits set forth in the Separation Agreement was conditioned upon the execution and non-revocation of a general release of claims, and was made in lieu of any payments, severance or other benefits described in his employment agreement. Under the Separation Agreement, Mr. Drozd confirmed the continued effectiveness of the restrictive covenants applicable to him under his existing confidentiality and proprietary rights agreement with the Company and his continuing noncompetition and non-solicitation obligations to the Company. 

Mr. Brandon Torres Declet, the Company’s current Chief Operating Officer, was appointed to serve as the new Chief Executive Officer of the Company. Mr. Torres Declet will not continue to serve as Chief Operating Officer.

On June 14, 2021, the Company’s Board, upon recommendation of the Compensation Committee, also approved the adoption of its 2021 Executive Bonus Plan pursuant to which, if all performance milestones related to the Company’s operational, financial and strategic targets are met, the following bonuses shall be paid:

(i) Mr. Torres Declet, as the Company’s Chief Executive Officer, can receive up to a maximum of an additional $47,000 (i.e., 20% of the annual base salary) in cash bonus and 300,000  RSUs;

(ii) Ms. Nicole Fernandez-McGovern, the Company’s Chief Financial Officer, can receive up to a maximum of an additional $44,000 (i.e., 20% of the annual base salary) in cash bonus and 275,000 RSUs; and

(iii) the Company’s Chief Operating Officer, at such time as the position has been filled, can receive up to a maximum of an additional $45,000 (i.e., 20% of the annual base salary) in cash bonus and 285,000 RSUs.

On June 14, 2021, the Company’s Board also approved the promotion of Mr. Jesse Stepler, SVP of Product and Strategy of Measure Global, Inc., the Company’s wholly-owned subsidiary (“Measure”) to become President of Measure, effective June 17, 2021.

Purchase Commitment

The Company routinely places orders for manufacturing services and material. At June 30, 2021, the Company had purchase commitments that approximate $2,000,000. These commitments are expected to be realized during the 2021 and 2022 fiscal years.

Note 12 – Related Party Transactions

 

The following reflects the related party transactions during the ninethree months ended SeptemberJune 30, 20202021 and 2019.2020.

Transactions with Officers

 

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 ninesix months ended SeptemberJune 30, 2021 and 2020, Premier Financial Filings provided services to the Company resulting in fees of $7,597$17,907 and $18,720,$11,949, respectively.

One of four directors, Thomas Gardner, is one of the principals of NeuEon, Inc, which provide fractional Chief Technology Officer services to the Company. For the six months ended June 30, 2021 and 2020, the Company recorded $82,500 and $61,000, respectively, recordedof expenses which is included in general and administrative costs. There were $825 payables due to Premier Financials Filings as of September 30, 2020.expenses.

 

The Company contracted external fractional CTO services to a firm whereby one of our board members is currently a shareholder. For the three and nine months ended September 30, 2020, the Company paid $25,000 and $86,000 in fees, respectively, recorded in professional fees on the condensed interim statements of operations. No expenses related to these services were incurred in 2019. Also, there are no payables due to this company as of September 30, 2020.

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AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020

(Unaudited)

 

Note 1113 – Subsequent Events

 

The Company signed a new operating lease agreement for its office space in Washington, D.C. and Austin, Texas in July 2021. The commitment term is for fifteen months and will begin on October 1, 2021. Monthly rent expense will be approximately $13,654.

Valqari AgreementITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

On October 14, 2020, in connection with, and as an incentive to the entry into a two-year exclusive manufacturing agreement to produce a patented Drone Delivery Station for Valqari LLC (“Valqari”), the Company entered into a Convertible Promissory Note pursuant to which the Company has made a loan to Valqari, in

The following discussion highlights the principal aggregate amountfactors that have affected our financial condition and results of $500,000 (the “Note”), which amount accrues interest at a rate of three percent per annum.

The loan matures on April 14, 2021 (the “Maturity Date”), at which time all outstanding principal and interest that has accrued, but remains, unpaid shall be due. The Note provides for an automatic six month extension of the Maturity Date under the following circumstances (i) Valqari has received in writing, (x) a good faith acquisition offer at a consideration value greater than $15,000,000, (y) such offer, upon consummation, would result in a change in control (as defined in the note) of Valqari, and (z) at such time Valqari, is actively engaged in the negotiation or finalization of such acquisition transaction; or (ii) Valqari has initiated, or is in the process of initiating, a conversion to a “C-Corporation” under the Internal Revenue Code, whereas such conversion will be completed no later than one day prior to the extended Maturity Date. Valqari may not prepay the Note prior to the Maturity Date.

In the event of a change in control or conversion of Valqari to a “C-Corporation” under the Internal Revenue Code on or before the Maturity Date, the Company may convert the outstanding principal amount of the Note and any unpaid accrued interest into (i) Class B Common Units of Valqari: immediately prior to the closing of a Change in Control or (ii) upon Valqari’s conversion to a C-Corporation, shares of Valqari common stock, in both cases at a conversion price no higher than a pre-money valuation of $15,000,000.

The Note is subject to customary representations and warranties by Valqari,operations as well as events of default, which may lead to accelerationour liquidity and capital resources for the periods described. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8 of the paymentForm 10-K as filed on March 31, 2021. This discussion contains forward-looking statements. Please see the explanatory note concerning “Forward-Looking Statements” in Part I of the Note such as (i) failure to pay all of the outstanding principal, plus accrued interest on the Maturity Date, (ii) Valqari filing a petition or action under any bankruptcy, or other law, or (iii) an involuntary petition is filed again Valqari under any bankruptcy statute (that is not dismissed or discharged within 60 days). The indebtedness evidenced by the Note is subordinated in right of payment to the prior payment in full of any senior indebtedness (as defined in the Note) in existence on the date of the Note or incurred thereafter.

Also, on October 14, 2020, AgEagle entered into a manufacturing agreement with Valqari for the manufacture and assembly of Valqari’s patented Drone Delivery Station, in accordance with the specification provided by, and the components designated by Valqari, for sale and delivery to its customers. AgEagle has been appointed as Valqari’s exclusive manufacturer of its products in the United States of America for a term of two-years, unless terminated earlier. Valqari, based in Chicago, Ilinois, is engaged in the development, manufacture and sale of a patented Drone Delivery Station, including related software, which is the only universal, standardized, safe and secure drone landing station that protects people, property and packages.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K and Item 1A. Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the year ended December 31, 2019 filed with the Securities and Exchange Commission on April 13, 2020 (the “Form 10-K”) and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.periods presented were not significantly affected by inflation.

 

The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Form 10-K in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.Company Overview

 

Except as otherwise indicated herein or as the context otherwise requires, references in this offering circular to “we,” “us,” “our,” “Company,” and “AgEagle” refer to AgEagle Aerial Systems, Inc., a Nevada corporation.

Company Overview

AgEagleAgEagle™ Aerial Systems Inc. (“AgEagle” orAgEagle,” “the Company”Company,” “us,” “we,” “our”) designs, producesthrough its wholly owned subsidiaries, is actively engaged in designing and supports technologically-advanced small, unmanneddelivering best-in-class drones, sensors, and software that solve important problems for our customers.  Founded in 2010, AgEagle was originally formed to pioneer proprietary, professional-grade, fixed-winged drones and aerial vehicles (“UAVs” or “drones”). In addition, providing new utility to UAVs, we pioneer and innovate advanced aerial imagingimagery-based data collection and analytics technologies capable of addressingsolutions for the impending food and environmental sustainability crises that threatenagriculture industry.  Today, our planet. Historically, our 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. We have spent ten years serving customers, covering more than two million acres in 50 countries monitoring 53 different crops. AgEagle remains intent onCompany is earning distinction as a trusted partnerglobally respected, industry leader offering best-in-class, full stack drone solutions to clients seekinga wide range of industries, including energy, construction, agriculture and government.  AgEagle is led by a proven management team with years of drone industry experience.   Through participation on the U.S. Federal Aviation Administration’s (FAA) Drone Advisory Committee and the FAA’s BEYOND program, AgEagle is helping to adoptestablish entirely new rulemaking guidelines and support productive agricultural approaches to better farming practices which limitregulations for the impact on our natural resources, reduce reliance on inputsfuture of autonomous flight and materially increase crop yields and profits.the full integration of drones into the U.S. airspace. 

 

In addition to UAV sales, in late 2018, we introduced a new drone-leasing program, alleviating farmers and agribusinesses from significant upfront costs associated with purchasing a drone, while also relieving them from ongoing drone maintenance and support requirements. Additionally, the new program provides the option of engaging a trained AgEagle pilot to operate the drone and manage the entire image collection process, creating a truly turnkey aerial imagery capture solution for its customers.

In the first half of 2019, wethe Company introducedHempOverview™, a scalable, responsive and cost-effective Software-as-a-SolutionSoftware-as-a-Service (“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 we believethe Company believes is the gold standard for regulatory oversight, operational assistance and reporting capabilities for the fast emerging industrial hemp industry.

  In January 2021, AgEagle acquired MicaSense™, Inc. (“MicaSense”), based in Seattle, Washington. MicaSense has been at the forefront of advanced drone sensor development since its founding in 2014, having formed integration partnerships with several leading fixed wing and multirotor drone manufacturers. MicaSense’s patented, high precision thermal and multispectral sensors serve the aerial mapping and analytics needs of the agriculture market. MicaSense’s high performance proprietary products, including Altum™, RedEdge-MX™, RedEdge-MX™ Blue and Atlas Flight, have global distribution in over 70 countries. 

  In April 2021, AgEagle acquired Measure Global, Inc. (“Measure”), a company founded in 2020 with business operations in Washington, D.C. and Austin, Texas.  Serving a world class customer base, Measure enables its customers to realize the transformative benefits of drone technology through its Ground Control solution. Offered as Software-as-a-Service (SaaS), Ground Control is a cloud-based, plug-and-play operating system that empowers pilots and large enterprises with everything they need to operate drone fleets, fly autonomously, collaborate globally, visualize data, and integrate with existing business systems and processes.

  We intend to grow our business and preserve our leadership position by developing new drones, sensors and software and capturing a significant share of the global drone market.  In addition, we expect to accelerate our growth and expansion through strategic acquisitions of companies offering distinct technological and competitive advantages and have defensible IP protection in place, if applicable.  

  The Company is headquartered in Wichita, Kansas with business operations and several offices located throughout the United States.  

 

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

Research and development activities are integral to our business and we follow a disciplined approach to investing our resources to create new technologies and solutions.

 Our business is seasonal in nature and, as a result, our revenue and expenses and associated revenue trends fluctuate from quarter to quarter.

Key Growth Strategies

Commercial Drone Package Delivery

Over the past year, there has been a surge of prominent companies, including Alphabet (Google), FedEx, Intel, Qualcomm, Amazon, Target, Walmart, Alibaba, UPS, 7-Eleven, UberOur near- and many others, actively developing commercialmid-term growth strategies are centered on designing high performance, full stack drone delivery service initiatives as part of their long-term strategic plans. These companies intend to leverage the latest in UAV technologies to deliver food, consumer products, medicines and other types of lightweight freight direct to consumers and businesses in the fastest, most cost efficient and environmentally responsible manner possible – a practical alternative to costly auto transport.

AgEagle’s proven expertise in manufacturing rugged, reliable and professional grade UAVs makes us a logical partnersolutions for designing, manufacturing and testing drone platforms in the fast growing package delivery market – a market forecasted by Research and Markets will climb to $11.2 billion by 2022 and subsequently rise to $29.06 billion by 2027. The anticipated growth of the industry is expected to be largely fueled by the high usage of drones in the ecommerce industry for delivery of products in rural areas, where automotive transport vehicles cannot readily reach or where deliveries take longer time to arrive.

In September 2019, we announced that we were actively pursuing expansion opportunities within the Drone Logistics and Transportation market, and reported that we had received our first purchase order from a major unnamed ecommerce company to manufacture and assemble UAVs designed to meet the critical specifications for drones that are meant to carry goods in urban and suburban areas. AgEagle is currently working in close collaboration with this new customer on its tethered test flight operations and ongoing development. In association with the initial purchase order, AgEagle recorded its first revenues in the second half of 2019 and had recognized additional revenues from the project in the first quarter of 2020.

In the second quarter of 2020, we announced that we had received follow-on purchase orders from the ecommerce company client relating to the continued manufacture and assembly of drones used for the testing and refining of client’s commercial drone small delivery vehicles, systems and operations currently in development. Due to the impact of the global COVID-19 pandemic and the resulting delivery delays of components ordered from certain suppliers for this project, revenues associated with these purchase orders will be reported in the third quarter, ending September 30, 2020. It is our belief that we will continue to perpetuate and enhance our relationship with this customer on a moving-forward basis.

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Our Unmanned Aerial Vehicles Business

Our first commercially available product was the AgEagle Classic, which was followed shortly thereafter by the RAPID System. As we improved and matured our product, we launched the RX-60 and subsequently our current UAV product, the RX-48. The success AgEagle has achieved with its legacy products, which we believe has carried over into the continued improvement of the RX-60 and RX-48, stems from AgEagle’s ability to invent and deliver advanced solutions utilizing its proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently. Our core technological capabilities, developed over five years of research and innovation, include a lightweight laminated shell that allows the UAV platform to perform under challenging flying conditions, a camera with a Near Infrared (NIR) filter, a rugged foot launcher (RX-60), and high-end software that automates drone flights and provides geo-referenced data. All of AgEagle’s proprietary UAVs are electrically powered, weigh approximately six pounds fully loaded, are capable of flying over approximately 400 acres (roughly 60 minutes of airtime) per flight from their launch location, and are configured to carry a camera with an NIR filter that uses near infrared images to capture crop data. Our leadership believes that these characteristics make its UAVs well suited for providing a complete aerial view of a farmer’s field to help precisely identify crop health and field conditions faster than any other method available.

Our UAVs were initially specifically designed to help farmers increase profits by pinpointing areas where nutrients or chemicals need to be applied, as opposed to traditional widespread land application processes, thus decreasing input costs, reducing the amount of chemicals applied and potentially increasing yields. AgEagle’s products were designed for busy agriculture professionals who do not have the time to process images on their computers, which some of its competitors require. The software can automatically take pictures from the camera, stitch the photos together through the cloud, and deliver a geo-referenced, high quality aerial map to the user’s desktop or tablet device using specialty precision agriculture software such as SST Software, SMS Software or most other agricultural software solutions. The result is a prescription or zone map that can then be usedcustomers in a field computer that is typically found in a sprayer or applicator designedbroad range of industries, including energy, construction,agriculture and government. We aim to drive through fields to precisely apply the amount of nutrients or chemicals required to continue or restore the production of healthy crops.

In addition to UAV sales, in late 2018, AgEagle introduceddefine a new drone-leasing program, alleviating farmersworld in which autonomous drones play a key role in making businesses more efficient, infrastructure safer and agribusinesses from significant upfront costs associated with purchasing a drone, while also relieving them from ongoing drone maintenance and support requirements. Additionally, the new program provides the option of engaging a trained AgEagle pilot to operate the drone and manage the entire image collection process, creating a truly turnkey aerial imagery capture solution for our customers.

HempOverview Platform

With the passing of the 2018 Farm Bill in December 2018, industrial hemp is now recognized as an agricultural commodity, such as corn, wheat or soybeans.

More specifically, the 2018 Farm Bill authorizes state departments of agriculture, including agencies representing the District of Columbia, the Commonwealth of Puerto Rico and any other territory or possession of the United States, and Indian tribal governments, to submit plans to the USDA applying for primary regulatory authority over the production of hemp in their respective state or tribal territory.

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As one of the agriculture industry’s leading pioneers of advanced aerial-image-based data collection and analytics solutions, AgEagle is intent on leveraging our expertise to champion the use of proven, advanced web- and map-based technologies as a means to streamline and ultimately standardize hemp cultivation in the United States. Growers need to be registered/permitted; crops need to be monitored and inspected; and enforcement operations must be established to ensure compliance with state and federal mandates. Through the introduction of HempOverview, AgEagle represents the first agriculture technology company to its knowledge to bring to market an advanced agtech

solution that is designed to meet the unique complexities and vigorous oversight, compliance and enforcement demands of the emerging American hemp industry and the unique needs and demands of its key stakeholders.

HempOverview is comprised of four modules:

1)Registration: secure, scalable software to handle all farmer and processer application and licensing matters.
2)Best Management Practices: iterative, intelligent data collection and analysis utilizing satellite imagery and advanced, proprietary algorithms to help farmers reduce input costs, avoid missteps, detect pest impacts and monitor water usage.
3)Oversight and Enforcement: integration of data management and satellite imagery to provide continuous monitoring of all hemp fields in the state, predict and respond to issues and assist in proper crop testing.
4)Reporting: generation of actionable reports for USDA requirements, legislative oversight and support of research institutions.

In November, 2019, AgEagle announced that the Florida Department of Agriculture and Consumer Services (“FDACS”) had chosen the HempOverview solution to manage its online application submission and registration process for hemp growers and their farms and hemp fields in the State of Florida for the years 2020, 2021 and 2022. In addition, the Company has entered discussions with several other states across the nation, as well as with certain growers and processors, and expects to announce additional new HempOverview clients in 2020.

HempOverview focuses on simultaneously collecting data, analyzing field-related problems and providing readily accessible analysis and reporting for achieving and sustaining end-to-end visibility and best management practices for the growing industrial and CBD hemp supply chain.

FarmLens Platform

Our FarmLens platform has benefitted us and our shareholders by developing important vertically integrated products and services with our drone-enabled software technologies. 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. The FarmLens platform extends AgEagle’s reach as a business through key partnerships.

Growth Strategy

Moving forward, the Company intends to concentrate its growth strategies on three focused pursuits:

1)Contract Manufacturing: establishing AgEagle as the dominant commercial drone design, engineering, manufacturing, assembly and testing company in the United States with emphasis on quality;
2)Drone Solutions: establishing AgEagle as the world’s trusted source for turn-key drone delivery services and solutions; and
3)Ag Solutions: leveraging our reputation as one of the leading technology solutions providers to the Agriculture industry with best-in-class drones and data analytics for hemp and other commercial crops.

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people more connected.

Key components of our growth strategy include the following:

 

●Delivering new and innovative solutions. AgEagle’s research and development efforts are the foundation of the Company, and we intend to continue investing in our own innovations, pioneering new and enhanced products and solutions that enable us to exceed the expectations of our customers. AgEagle believes that by investing in research and development, the Company can be a leader in delivering innovative drones, sensors and software that address applications and needs within our current target verticals, enabling us to create new opportunities for growth.
●Pursuing new business opportunities outside of our legacy focus on agriculture as we continue to expand and grow AgEagle’s full stack solutions. We intend to grow our business and preserve our leadership position by developing new drones, sensors and software and capturing a significant share of the global drone market.  We are confident that the efficiencies and value which we have endeavored to provide our customers in the agriculture industry can be expanded to an increasing number of customers in the energy, construction and government verticals.
●Achieving greater market penetration of the U.S. industrial hemp industry by industry.  We areworking to establish HempOverview and other related products and services software platformas the gold industry standard for hemp cultivation oversight, compliance, enforcement and commerce. AgEagle is – and intends to remain – at the leading edge of leveraging best-in-class technology to provide turnkey solutionsa solution for state and tribal regulatory departments of agriculture, industrial hemp and hemp-derived CBD growers and processors. At this time, AgEagle believes that it is the only company in the nation with extensive experience in agriculture that is effectively addressing the emerging needs and challenges of the domestic hemp cultivation industry.
●Growth through acquisition. Through successful execution of our growth-through-acquisition strategies, we intend to acquire technologically advanced companies and intellectual property that complement and strengthen our value proposition to the market. We believe that by investing in complementary acquisitions, we can accelerate our revenue growth and deliver a broader array of innovative drone systems and solutions that address specialized market needs within our current target markets and in emerging drone industry through the applicationsectors.  

Competitive Strengths

AgEagle believes the following attributes and capabilities provide us with long-term competitive advantages:

●Proprietary technologies, in-house capabilities and industry experience. We believe our eleven years of experience in commercial drone design and engineering; in-house manufacturing, assembly and testing capabilities; and advanced technology – a key competitive differential that the Company hopesdevelopment serve to capitalize ondifferentiate AgEagle in the coming year.marketplace. As of today, we develop and manufacture our products and software in the United States. Also, through our acquisitions of MicaSense and Measure, we have added people to the AgEagle team with dozens of years of experience operating in the global drone industry with unique insights into regulations and how to operationalize drones and scale their use for enterprise customers.

●Advanced technology solutions allow users to remove the guesswork in effectively managing hemp cultivation oversight, compliance, enforcement, reporting and commerce. To our knowledge, there is no other SaaS solution available on the market today – particularly one that has been developed by a proven Agtech company with the level of experience and expertise of AgEagle – that provides the multi-faceted level of support and services that HempOverview offers to all stakeholders in the industry.
   
 ●Pursue the expansionAgEagle is a respected industry pioneer helping to establish entirely new standards of the AgEagle platform of products and solutions into other complementary industries besides agriculture, including the Drone Logistics and Transportation market. We have begun actively exploring opportunities outside of traditional agriculture as we continue to expand and grow the AgEagle platform. We are confident in the UAV products and solutions we offer today and believe that these products and solutions could provide other industries the same kind of optimization we are currently providing the agriculture industry. In addition to drone package deliveries, we believe that our solutions and services may also be well suitedrule for the future of autonomous flight. Through our active advocacy efforts and direct involvement with government- and industry-sponsored agencies and organizations, AgEagle’s leadership team remains at the forefront of shaping the rulemaking guidelines and regulations that will make autonomous flight of unmanned aerial imagingsystems safe, reliable and data collection and analytics needs involved in land surveying and scanning, insurance, inspections and search and rescue operations, among other industrial applications. Prioraccessible to the end of September 2020, we manufactured all of our proprietary and contracted products at our secure manufacturing facility in Neodesha, Kansas, which allows us to avoid many of the potential difficulties that may arise if our manufacturing facilities were otherwise located outside the U.S., which is of particular importance to those AgEagle customers who rely on confidentiality and protection of trade secrets in the development of their drone package delivery initiatives. In later September 2020, we began relocating our Neodesha-based manufacturing operations to a facility in Wichita, Kansas, providing us with ample room for the planned scaling of our contract manufacturing, assembly, design, engineering and testing business.more businesses worldwide.
   
 ●Deliver newThrough our wholly owned subsidiary MicaSense, AgEagle offers branded multispectral and innovativethermal sensor solutions that provides users with unparalleled operational efficiency, collecting and outputting multiple data sets which provide actionable intelligence to its customers. From farmers to scientists to researchers, MicaSense sensors are relied upon for the agriculturecomputer-aided analysis of data to detect crop disease, crop stress, field moisture conditions, weed populations and other emerging commercial drone markets.factors.
●Through our wholly owned subsidiary Measure Global and its proprietary Ground Control aerial intelligence solution, AgEagle provides customers with the ability to capitalize on significant economic, safety and efficiency benefits made possible by drones used at scale. Our researchWith end-to-end program management, user-friendly flight control, and development efforts are the foundation of our Company, and we intend to continue investing in our own innovations, pioneering new and enhanced products and solutions that enable us to satisfyin-platform data analysis, Ground Control helps our customers – bothsave thousands of hazardous man-hours and create millions of dollars in response to and in anticipation of their needs. We believe that by investing in research and development, we can be a leader in delivering innovative products that address market needs within our current target markets, enabling us to create new opportunities for growth.

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●Pursue the expansion of the AgEagle platform of products and solutions into other industries besides agriculture and drone package delivery. The Company may investigate and pursue opportunities outside of agriculture and drone package delivery as we continue to expand and grow the AgEagle platform. We are confident in the UAV products, services and solutions we offer today and believe that these products, services and solutions could provide other industries the same kind of optimization we are currently providing the agriculture and emerging drone package industry. These industries have yet to be identified by the AgEagle team but may include verticals such as land surveying and scanning, insurance, inspections and search and rescue, among others.operational benefits.

 

Impact of COVID-19 On Our Business Operations

 

The outbreak of the novel coronavirus (COVID-19) has evolved into a global pandemic. The coronavirus has spread to many regions of the world, including the United States. The extent to which COVID-19 impacts our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain the coronavirus or treat its impact, among others.

 

Should the coronavirus continue to spread, our business operations could be delayed or interrupted. For instance, we currently utilize third parties to, among other things, manufacture components and parts for the proprietary and contracted drones we produce, and to perform quality testing. We also manufacture and assemble products and perform various services at our manufacturing facility. If either we or any third-parties in the supply chain for materials used in our manufacturing and assembly processes are adversely impacted by restrictions resulting from the coronavirus pandemic, our supply chain may be disrupted, limiting our ability to manufacture and assemble products.

 

The spread of the coronavirus, which has caused a broad impact globally, including restrictions on travel and quarantine policies put into place by businesses and governments, may have a material economic effect on our business. While the potential economic impact brought on by and the duration of the pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruptions of global financial markets, which may reduce our future ability to access capital either at all or on favorable terms. In addition, a recession, depression or other sustained adverse market event resulting from the spread of the coronavirus could materially and adversely affect our business and the value of our common stock.Common Stock.

 

The ultimate impact of the current pandemic, or any other health epidemic, is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business or the global economy as a whole. However, these effects could have a material impact on our operations in the future. We will continue to monitor the situation closely.

 

During the nine months ended September 30, 2020, in addition to complying with ’shelter at home’ mandates in those states affecting our employees, most of whom worked virtually from their homes, our supply chain was adversely impacted by the pandemic, causing material delays in the delivery of critical supply orders associated with timely fulfilling our obligations to our large ecommerce client. As a consequence, revenues originally expected to be reported in the second quarter 2020 will be reported in our third quarter 2020 results.

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Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Our most critical estimates include those related to revenue recognition, inventories and reserves for excess and obsolescence, accounting for stock-based awards, and income taxes. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

 

SeeWe believe the following critical accounting estimates affect the more significant judgments and estimates used in preparing our consolidated financial statements. Please see Note 2 to our unaudited condensed consolidated interim financial statements, which are included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report, for our Summary of Significant Accounting Policies. There have been no material changes made to the critical accounting estimates during the periods presented in the accompanying unaudited condensecondensed interim consolidated financial statements for a listing of our critical accounting policies.statements.

 

Results of Operations

 

For the Three and NineSix Months Ended SeptemberJune 30, 20202021 as Compared to the Three and 2019Six Months Ended June 30, 2020

 

For the three months ended SeptemberJune 30, 2020,2021, we recorded revenues of $750,325$1,937,364 compared to revenues of $41,616$16,325 for the same period in 2019,2020, a 1,703%11,767% increase. The increase for this quarter in comparison to the prior quarter was largelymainly due to new revenues derived from follow-on purchase ordersthe acquisition of MicaSense business related specifically to manufacturesensor sales for the Red Edge and assemble drone related products that had been deferred due to vendor delaysAltum. Revenue growth was also positively impacted by COVID-19 shut-downs.increased sales of our HempOverview platform to the State of Iowa and Florida. Lastly the increase in revenue was also impacted by the Measure acquisition, which accounted for subscription sales related to the Ground Control platform. For the ninesix months ended SeptemberJune 30, 2020,2021, we recorded revenues of $1,157,930$3,638,955 compared to revenues of $107,785$407,605 for the same period in 2019, a 974%2020, an 793% increase. The increase was largely due to new revenues derived from follow-on purchase ordersthe acquisition of MicaSense specifically to manufacture and assemble drone delivery products designed to meet specific criteria for package delivery in urban and suburban area. In addition, revenuesensor sales along with the acquisition of the Measure business.and continued growth was also positively impacted by continued focus on expansion offrom our platforms, providing for aerial imaging and analytics solutions which serve new and emerging markets including registration, oversight and compliance of hemp fields by state departments of agriculture.HempOverview platform sales.

 

ForDuring the three months ended SeptemberJune 30, 2020 and 2019,2021, cost of sales totaled $430,683 and $32,728, respectively, an$959,229, a $944,199, or 6,282%, increase of $397,955 or 1,216%.when compared to $15,030 in the three months ended June 30, 2020. Costs of sales totaled $620,196$1,658,097 and $85,875,$188,633, for the ninesix months ended September 30,June 30,2021 and 2020, and 2019, respectively, reflecting an increase in our cost of goods sold of 622% commensurate with the increase in sales.

779%. We also had a gross profit of $319,642,$978,135, or 43%,50% gross profit margin, during the three months ended SeptemberJune 30, 20202021, compared to $8,888,$1,295, or 21%,8% gross profit margin, for the comparable period in 2019, resulting in an increase in our profit margin in the current period.three months ended June 30, 2020. For the ninesix months ended SeptemberJune 30, 20202021, and 2019,2020, we had a gross profit of $537,734$1,980,858 or 46%54% and $21,910$218,972 or 20%54%, respectively, an increase in our profit margins of 2,354%805%. The primary factors contributing to the increase in our cost of sales and gross profit margin was due to theincrease in our sales volume along with continued shift in mix of products and services we now offer customers in the new markets we serve that have resulted in higher margin for our sales.sales specifically for our sensor sales related to MicaSense acquisition and SaaS offerings.

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We recorded total operating expenses of $897,379$5,798,620 during the three months ended SeptemberJune 30, 2020,2021, a 57%361% increase as compared to operating expenses of $571,926$1,256,663 in the same period of 2019.2020. Our operating expenses are comprised of general and administrative costs,expenses, professional fees, research and sellingdevelopment and sales and marketing expenses. General and administrative expenses totaled $626,605 in$4,062,800 during the three months ended SeptemberJune 30, 20202021, compared to $396,432$721,705 in 2019,the same period of 2020, an increase of 58%463%. The increase was primarily due primarily to stock compensation expenses, investor relations costs payments to directors as compensation fees, andfor additional payroll and bonus payments madeassociated with new hires and existing employees for the MicaSense and Measure acquisitions, and stock compensation expenses related to employees.employees and directors, expenses related to annual shareholders meeting, rent cost associated to the new leases for Wichita, Seattle, Washington D.C. and Austin offices, and additional amortization expense associated to the intangibles acquired as part of the recent acquisitions and platform development costs. Professional fees also increased 67%decreased 50% as we had $254,532$268,987 of expenses for the current period versus $152,192$532,406 in the comparable prior period. The increase wasperiod mainly due to additionalbecause of the termination of GreenBlock consulting service fees related to fractional CTO services, an operational consultant and business development consultants required to expand our growth opportunities along with incremental legal expenses as a result of our capital raising activities. Lastly,agreement. Also included in operating expenses was sellingsales and marketing costs that decreased 30%increased 21,837% to $16,242$559,833 versus $23,302$2,522 in the prior year’s comparable period due to less travelthe addition of the MicaSense and conferenceMeasure sales and marketing teams and the hiring of a new Director of Marketing. Lastly, we recorded research and development expenses totaled $907,000 during the three months ended June 30, 2021, no expenses were recorded for the purposessame period during 2020, the increase was due to the MicaSense and Measure acquisitions costs incurred for the development of new business development as a result of COVID-19.sensor products and software maintenance costs.

 

We recorded total operating expenses of $2,774,113$9,762,146 and $1,889,214,$1,877,613, respectively, for the ninesix months ended SeptemberJune 30, 2021, and 2020, and 2019, a 47%420% increase. Our operating expenses are comprised of general and administrative costs, professional fees, research and sellingdevelopment and sales and marketing expenses. For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we recorded $1,782,926$5,681,928 and $1,305,221$1,161,066 in general and administrative expenses, respectively, resulting in a 37%389% increase. The increase is mainlywas primarily due to recruiting fees associated with search for new CEO, costs for public relations services, payments to directors as compensation fees, additional payroll and bonus payments made toassociated with new hires and existing employees for the MicaSense and Measure acquisitions, and stock compensation expenses related to employees and investor relations costs.directors, expenses related to annual shareholders meeting, rent cost associated to the new leases for Wichita, Seattle, Washington D.C. and Austin offices, additional amortization expense associated to the intangibles acquired as part of the recent acquisitions and platform development costs and added costs associated to financial audits, tax and valuation services. Professional fees also increased 80%178% as we had $958,436$1,953,186 of expenses for the current period versus $531,885$703,904 in the comparable prior period. The increase wasperiod mainly due to additional consulting service fees related to fractional CTO services, an operational consultant and business development consultants required to expand our growth opportunities alongstock-based compensation associated with incremental legal expenses as a resultthe termination of our capital raising activities. Lastly,the GreenBlock Capital agreement. Also included in our operating expenses was sellingsales and marketing costs that decreased 37%increased 6,160% to $32,751$791,427 versus $52,108$12,643 in the prior year’s comparable period due to less traveladdition of the MicaSense and conferenceMeasure sales and marketing teams and the hiring of a new Director of Marketing. Lastly, we recorded research and development expenses fortotaled $1,335,605 during the purposes of new business development as a result of COVID-19.

During the three and ninesix months ended SeptemberJune 30, 2020 we recorded a loss on disposal of fixed assets due to our moving to Wichita of $594. There2021, no expenses were no other expenses recorded for the same period during 2019.2020, the increase was due to the MicaSense and Measure acquisitions costs incurred for the development of new sensor products and software products.  

 

Interest expenseOther income (expense) for the three and ninesix months ended SeptemberJune 30, 20202021, was $275 related to$31,329 and $58,751, respectively there was no other income(expense) recorded for the Paycheck Protection Plan (PPP)comparable periods during 2020. The majority of the increase represented the forgiveness of the PPP loan compared to $0 during the three months ended September 30, 2019 and $501for the nine months ended September 30, 2019.for AgEagle offset by loss on disposal of fixed assets.

 

Our net loss was $578,606 and $563,038$4,678,172 for the three months ended SeptemberJune 30, 2020 and 2019, respectively and $2,237,248 and $1,867,805, for2021. This represents a $3,422,804 increase over our net loss of $1,255,368 in the ninesame period during 2020. For the six months ended SeptemberJune 30, 2021 and 2020, we had a net loss of $7,608,702 and 2019, respectively.$1,658,641 respectively, an increase of $5,950,061 or 359%. Overall, the increase in net loss is due to an increase in ourgreater operating costs as a resultmostly within general and administrative costs along with added professional and research and development costs because of the shiftsshift in our sales and long-term growth strategies that required increased resources and investments to support our business development growth and acquisition strategies. We are in the process of continuing to address these shifts by developing new platforms, products and services that support prevailing growth opportunities in the domestic industrial hemp market, sustainable agriculture market and the growing drone-enabled package delivery business.full stack drone solutions market.

 

For the three months ended SeptemberJune 30, 20202021, and 2019,2020, our net loss available to common stockholders decrease to $578,606 from $603,927,was $4,678,172 and $10,326,250, respectively, a decrease of 4%. Our$5,648,078. For the six months ended June 30, 2021 and 2020, our net loss available to common stockholders forwas $7,608,702 and $10,769,968, respectively, a decrease of $3,161,266. The net loss available to common stockholders decrease during this period compared to the nine-monthprior period ended September 30, 2020 and 2019 was $11,348,575 and $1,989,138, respectively. The increase is due to Series D Preferred Stock dividends recorded during the period of June 2020, non-cash charges stemming from required deemed dividend accounting for modifications to certain preferred stock, redemption of preferred stock and the trigger of Down Rounddown round provisions on certain preferred stock and warrants.

 

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Cash Flows

 

SeptemberJune 30, 20202021 As Compared to December 31, 2019June 30, 2020

 

Cash on hand was $24,693,417 at September$39,214,638 on June 30, 20202021, an increase of $26,306,925 compared to the $717,997$12,907,713 on hand at December 31, 2019, an increase of $23,975,420.June 30, 2020. Cash used in operations for the ninesix months ended September 30, 2020June 30,2021 was $(1,442,919)$3,506,235 compared to $(1,121,260)$710,679 of cash used inby operations for the nine months ended September 30, 2019.same period during 2020. The increase in cash used in operating activities was driven largelymainly driven by payments received from revenue that was initially recorded as a contract liability offset by additional accounts payablesan increase in operating loss due to greater overhead expenses along with an increase in accrued expenses related to purchasesissuance of inventories associated with this project.common stock and accrued liabilities for the MicaSense and Measure acquisitions.

 

There was $(70,086) cash used in our investing activities during the nine months ended September 30, 2020 as compared to $(57,715)Cash used in investing activities during the ninesix months ended SeptemberJune 30, 2019.2021 was $24,561,757, compared to $6,173 during the same period during 2020. The increase in cash used in our investing activities resulted from purchasesthe acquisitions of MicaSense and Measure, purchase of property and equipment and building improvements forrelated to the new leased warehouse.warehouse and corporate offices in Wichita, along with recording capitalized costs associated with the development of the HempOverview platform.

 

Cash provided by financing activities during the six months ended June 30, 2021 was $43,342,297, which compared to $12,906,568 cash used in financing activities during the nine months ended September 30, 2020 was $25,488,425 compared to cash used in financing activitiessame period of $(40,998) as of September 30, 2019.2020. The increase in cash provided by our financing activities was due to sales of our preferred stock, common stock,Common Stock and the exercise of warrants and promissory note proceeds as part of Coronavirus Aid, Relief and Economic Security Act’s Paycheck Protection Plan (PPP).issued in connection with a securities purchase agreement executed in August 2020.

 

Liquidity and Capital Resources

 

As of SeptemberJune 30, 2020,2021, we had working capital of $24,535,292$34,068,995 and a loss from operations of $2,237,248$7,608,702 for the period then ended. While there can be no guarantees, we believe cash on hand, in connection with cash generated from operations,revenue, will be sufficient to fund operations for the next year of operations. In addition, we intend to pursue other opportunities of financingraising capital with outside investors.

 

 On April 7, 2020,During 2021, we entered intoraised capital of $6,313,943 as a Securities Purchase Agreement ( the “Purchase Agreement”)with an institutional investor, pursuant to the termsresult 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 we 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.We also entered into a Registration Rights Agreement, granting registration rights to the Purchaser with respect to the Conversion Shares and common stock underlying warrants currently owned by the Purchaser.

On May 11, 2020, we entered into a Purchase Agreement with an institutional investor and existing Company shareholder (the “Investor”) pursuant to which we 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 our 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. We expect to use the balance for working capital and general corporate purposes.

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Pursuant to the terms of the Purchase Agreement, we agreed to certain restrictions on future stock offerings, including that during the 60-day period following the closing, where we 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 were 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, and were exercisable on a “cashless” basis in certain circumstances.

On June 24, 2020, we entered into a Purchase Agreement with an Investor pursuant to which we 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 $1,956.24). Upon exercise of the Warrants in full by the Investor, we will receive additional gross proceeds of $3,314,892.60. 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 us 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, we agreed to certain restrictions on future stock offerings, including that during the 75-day period following the closing, we 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 our 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, we 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 us 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 outstanding1,057,214 shares of common stock following the exercise of such Pre-Funded Warrant or Warrant. During the three and nine months ended September 30, 2020Common Stock in connection with a securities purchase agreement (the “December Purchase Agreement”) entered on December 31, 2020. Also on February 8, 2021, we received $2,632,500$8,305,368 in additional gross proceeds associated with the exercise of the Warrant Shares. As2,516,778 of September 30, 2020, 505,476 Warrant Shareswarrants issued at an exercise price of $1.35 per share remain outstanding.

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On August 4, 2020, we and an institutional investor and existing Company shareholder entered into a Purchase Agreement, pursuant to which we agreed to sell to the Investor in a registered direct offering 3,335,705 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, for gross proceeds of approximately $10 million. Upon exercise of the Warrants in full by the Investor, we would receive additional gross proceeds of approximately $8,305,367.

Theconnection with a securities purchase price for each share of Common Stock was $2.98. Net proceeds from the sale will be used for working capital, capital expenditures and general corporate purposes. The shares and the warrant were being offered by us pursuant to an effective shelf registration statement on Form S-3 (File No. 333-239157), which was declared effective on June 19,agreement dated August 4, 2020.

 

PursuantDuring the period from May 29, 2021, through June 30, 2021, we raised approximately $28,647,161 by utilizing our ATM Offering with co-agents Stifel, Nicolaus & Company, Incorporated and Raymond James & Associates.

We continue to the termsrealize losses from operations. However, as a result of the Purchase Agreement,our capital raise efforts, we have agreed to certain restrictions on future stock offerings, including that during the 75-day period following the closing,believe we will not issue (or enter into any agreementhave sufficient cash 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 themeet our Common Stock is traded at the time is greater than $5.00 (adjusted for any subsequent stock splits or similaranticipated operating costs and capital adjustments) for ten consecutive trading days, we may issue such securities at not less than $5.00 per Common Stock Equivalent. In addition, our 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. The Investor has a right from the date of the Purchase Agreement untilexpenditure requirements through December 31, 2020, to participate in a subsequent financing by us or any of our 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.

2022. Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, acquisitions, debt service, and for general corporate purposes. To date, ourOur primary source of liquidity is funds generated by financing activities and from private placements. Our ability to fund our operations, to make planned capital expenditures, to make planned acquisitions, to make scheduled debt payments, and to repay or refinance indebtedness depends on our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control.

 

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Off-Balance Sheet Arrangements

 

At SeptemberOn June 30, 2020,2021, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

Contractual Obligations

We have no material contractual obligations.

Inflation

 

Our opinion is that inflation has not had, and is not expected to have, a material effect on our operations.

 

Climate Change

 

Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

 

New Accounting Pronouncements

 

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on ourthe Company’s consolidated financial position, results of operations or cash flows.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company iswe are not required to provide information required by this Item.

 

Item 4. Controls and Procedures.

ITEM 4CONTROLS AND PROCEDURES

 

Evaluation of Disclosure and Control Procedures

The Company’s Chief Executive Officer and the Company’s Chief Financial Officer evaluated the effectiveness of the Company’sWe maintain disclosure controls and procedures as of September 30, 2020 and had concluded that the Company’s disclosure controls and procedures are effective. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in theour reports that it files or submitsfiled under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and proceduresare designed to ensureprovide reasonable assurance that information required to be disclosed by the Company in theour reports that it files or submitsfiled under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executiveour Chief Executive Officer and principal financial officers, or persons performing similar functions,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, and in light of the material weakness in internal controls described below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective as of June 30, 2021.

Our internal control over financial reporting did not result in the accurate recording of revenues, costs of goods sold and other operating expenses for the period ended March 31, 2021. Therefore internal controls over financial reporting were not effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosures. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

No change in our internal control over financial reporting occurred during the three months ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(t) and 15d-15(f) under the Exchange Act, during the nine monthsthree-month period ended SeptemberJune 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.The Company’s management is in the process of the remediation and improvement of our internal control over financial reporting.

 

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PART IIOTHER INFORMATION

 

PART II — OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

 

Item 1. Legal Proceedings.Proceedings

 

From time to time, we may become involved in lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Although we currently maintain liability insurance coverage intended to cover professional liability and certain other claims, we cannot assure that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us in the future where the outcomes of such claims are unfavorable to us. Liabilities in excess of our insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on our business, financial condition and results of operations.

Lopez v. AgEagle Aerial Systems, Inc., et al., Case No. 2:21-cv-01810 (C.D. Cal.), consolidated with Madrid v. AgEagle Aerial Systems, Inc., et al., Case No. 2:21-cv-01991 (C.D. Cal.)

As previously disclosed, AgEagle and certain of its current and former officers and directors were named as defendants in two putative securities class actions filed in the U.S. District Court for the Central District of California (Lopez v. AgEagle Aerial Systems Inc., et al., Case No. 2:21-cv01810; and Madrid v. AgEagle Aerial Systems Inc., et al., Case No. 2:21-cv-01991). These matters were consolidated, and a Lead Plaintiff designated by Court Order. On July 30, 2021, the Court-appointed Lead Plaintiff filed a voluntary dismissal of the consolidated securities class action.

Nostrand and Rickerson v. Mooney et al. (Defendants) and AgEagle Aerial Systems, Inc. (Nominal Defendant), Case No. 3:21-cv-00130 (D. Nev.)

As previously disclosed, two shareholders filed a shareholder derivative complaint on behalf of nominal defendant AgEagle against Barrett Mooney, Grant Begley, Luisa Ingargolia, Thomas Gardner, Bret Chilcott, J. Michael Drozd, and Nicole Fernandez-McGovern. On July 20, 2021, the Plaintiffs in this derivative action filed a voluntary dismissal of the action, and the Court designated the case “closed” and “terminated.”

Granja v. AgEagle Aerial Systems Inc. (Nominal Defendant), et al, Case No. 2:21-cv-06056 (C.D. Cal.)

On July 27,2021, a separate shareholder filed a similar derivative complaint on behalf of the Company and against certain of its current and former officers and directors in the U.S. District Court for the Central District of California (Granja v. AgEagle Aerial Systems Inc., et al, Case No. 2:21-cv-06056). This action currently remains pending.  As of this date and to the best of our knowledge, neither the Company nor the individual Defendants have been served or have agreed to accept service of the summons and complaint.  On August 11, 2021, the Plaintiff in this California derivative action filed a voluntary dismissal of the action.

 

Item 1A. Risk Factors.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2. Recent Sales of Unregistered Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information.

 

None.As previously reported in a Current Report on Form 8-K filed with the SEC on May 26, 2021, the Company and J. Michael Drozd mutually agreed to Mr. Drozd’s resignation as Chief Executive Officer of the Company, effective on May 24, 2021 (the “Termination Date”). In connection with Mr. Drozd’s departure, the Company and Mr. Drozd entered into a Separation Agreement and General Release, dated June 11, 2021 (the “Separation Agreement”), pursuant to which, among other things, the Company has agreed to pay Mr. Drozd (i) regular base salary at the annual rate of $235,000 through the Termination Date; (ii) an annual performance bonus consisting of $37,130 in cash and 118,500 shares of the Company’s common stock, (iii) severance pay equal to six (6) months of his base salary as of the Termination Date; and (iv) cash payment equal to three (3) days of accrued and unused vacation days.

Pursuant to the Separation Agreement, Mr. Drozd was also granted 26,652 fully-vested restricted shares of the Company’s common stock valued at approximately $125,000 on the Termination Date. In addition, Mr. Drozd’s outstanding equity awards from the Company continue to be governed by the terms of the applicable award agreements, except that 8,333 of the 100,000 RSUs granted to him in accordance with his employment agreement with the Company became vested as of the effective date of the Separation Agreement.

Mr. Drozd’s receipt of any of the payments or benefits set forth in the Separation Agreement was conditioned upon the execution and non-revocation of a general release of claims, and was made in lieu of any payments, severance or other benefits described in his employment agreement. Under the Separation Agreement, Mr. Drozd confirmed the continued effectiveness of the restrictive covenants applicable to him under his existing confidentiality and proprietary rights agreement with the Company and his continuing noncompetition and non-solicitation obligations to the Company.

The foregoing description of the Separation Agreement set forth under this Item 5.02 does not purport to be complete and is qualified in its entirety by reference to the Separation Agreement, a copy of which is filed as Exhibit 10.3 and is incorporated herein by reference.

Item 6. Exhibits

 

Exhibit No. Description
31.110.1 Stock Purchase Agreement, dated as of January 26, 2021, by and among Parrot Drones S.A.S., Justin B. McAllister, AgEagle Aerial Systems Inc. and AgEagle Sensor Systems, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on January 27, 2021)
10.2Registration Rights Agreement, dated as of January 27, 2021, by and among Parrot Drones S.A.S., Justin B. McAllister, AgEagle Aerial Systems Inc. and AgEagle Sensor Systems, Inc. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on January 27, 2021)
10.3

Separation Agreement and General Release, dated June 11, 2021, by and between AgEagle Aerial Systems Inc. and Michael Drozd.

31.1Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer
31.2 Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial and accounting officer
32.1 Section 1350 Certification of principal executive officer
32.2 Section 1350 Certification of principal financial and accounting officer
101.INS XBRL INSTANCE DOCUMENT
101.SCH  XBRL TAXONOMY EXTENSION SCHEMA
101.CAL  XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF  XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.PRE  XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

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SIGNATURES

 

Pursuant to the requirements ofIn accordance with Section 13 or 15(d) of the Securities Exchange Act, of 1934, the Registrant has dulyregistrant caused this Reportreport to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 AgEagle Aerial Systems, Inc.AGEAGLE AERIAL SYSTEMS INC.
   
Dated: August 17, 2021By:/s/ J. Michael DrozdBrandon Torres Declet
  J. Michael DrozdBrandon Torres Declet
  Chief Executive Officer
(Principal Executive Officer) & Board Director
   
Dated: August 17, 2021By:/s/ Nicole Fernandez-McGovern
  Nicole Fernandez-McGovern
  Chief Financial Officer,
(Principal Financial EVP of Operations and Accounting Officer)Secretary

 

Date: November 13, 2020

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