S-1/A 1 uavs_s1a2.htm FORM S-1/A

As filed with the Securities and Exchange Commission on September 7, 2018

Registration No. 333-226324

 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

—————

  

FORM S-1/A

(Amendment No. 2)

  

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

—————

AGEAGLE AERIAL SYSTEMS INC.

(Exact name of registrant as specified in its charter)

 

Nevada 3721 88-0422242

(State or other jurisdiction of

incorporation or organization)

(Primary standard industrial

classification code number)

(I.R.S. employer

identification number)

 

117 South 4th Street
Neodesha, Kansas 66757
(316) 202-2076

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

 

Barrett Mooney, Chief Executive Officer
AgEagle Aerial Systems Inc.
117 South 4th Street
Neodesha, Kansas 66757
Phone: (316) 202-2076

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

 

Copies to:

Mitchell S. Nussbaum, Esq.
Tahra Wright, Esq.
David J. Levine, Esq.
Loeb & Loeb LLP
345 Park Avenue
New York, NY 10154
(212) 407-4000 - Telephone
(212) 407-4990 – Facsimile

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer Accelerated filer

Non-accelerated filer

(Do not check if smaller reporting company)

  Smaller reporting company
Emerging Growth Company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐ 

 

 

CALCULATION OF REGISTRATION FEE

Title of Class of Securities to be Registered Amount to be Registered Proposed Maximum Aggregate Price Per Share (2) Proposed Maximum Aggregate Offering Price Amount of Registration Fee (3)
Common Stock, $0.001 par value per share 4,249,469 $1.86 $7,904,012.34 $984.05

 

 

  (1)  Pursuant to Rule 416 of the Securities Act of 1933, as amended, the shares of Common Stock offered hereby also include such presently indeterminate number of shares of our Common Stock as shall be issued by us to the selling stockholder as a result of stock splits, stock dividends or similar transactions.
  (2)  Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low prices of our common stock reported on the NYSE American on July 20, 2018.
  (3)  Previously paid.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 
 

 

 

 

 

 

The information in this Preliminary Prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This Preliminary Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.


 

 

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 7, 2018

 

PRELIMINARY PROSPECTUS

 

 

 

This prospectus relates to the public offering of up to 4,249,469 shares of common stock, par value $0.001 per share (the “Shares”), of AgEagle Aerial Systems Inc., by the selling stockholder set forth in the Selling Stockholder table on page 55 (the “Selling Stockholder”). The Shares are issuable upon the conversion of outstanding shares of our Series C Convertible Preferred Stock held by the Selling Stockholder. The Shares may be sold from time to time by the Selling Stockholder. The Shares were issued to the Selling Stockholder in private transactions, which were exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended.

We will not receive any proceeds from the sale of the shares by the Selling Stockholder. See “Use of Proceeds” on page 18. We have agreed to pay the expenses in connection with the registration of these shares.

Our common stock is listed on the NYSE American under the symbol “UAVS.” The closing price of our common stock on September 6, 2018 was $1.94.

INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 8 OF THIS PROSPECTUS BEFORE PURCHASING ANY OF THE SHARES OFFERED BY THIS PROSPECTUS. 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

Prospectus dated , 2018.

 

 

 

 

 

 

 

 

  

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY 1
 
RISK FACTORS 6
   
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 15
   
USE OF PROCEEDS 16
   
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 17
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
   
DESCRIPTION OF BUSINESS 24
   
DIRECTORS AND EXECUTIVE OFFICERS 34
   
CORPORATE GOVERNANCE 37
   
EXECUTIVE COMPENSATION 39
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45
   
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 47
   
DESCRIPTION OF SECURITIES TO BE REGISTERED 49
   
SELLING STOCKHOLDER 52
   
PLAN OF DISTRIBUTION 53
   
LEGAL MATTERS 55
   
EXPERTS 55
   
WHERE YOU CAN FIND MORE INFORMATION 55
   
INDEX TO FINANCIAL STATEMENTS F-1

 

 

 

 

 

INDUSTRY AND MARKET DATA

 

Industry and market data used throughout this prospectus was obtained through Company research, surveys and studies conducted by third parties and industry and general publications. Certain information contained in “Description of Business” is based on studies, analyses and surveys prepared by the United Nations Food and Agriculture Organization, ABI Research, the Association for Unmanned Vehicle Systems International, The Teal Group, CB Insights, Goldman Sachs and Markets and Markets. While we are not aware of any misstatements regarding the industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”

 

 

 

 

 

ii 

 

  

PROSPECTUS SUMMARY

 

The following summary highlights information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary does not contain all of the information that may be important to you. You should read and carefully consider the following summary together with the entire prospectus, including our financial statements and the notes thereto appearing elsewhere in this prospectus and the matters discussed in the sections in this prospectus entitled “Risk Factors,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before deciding to invest in our units. Some of the statements in this prospectus constitute forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those discussed in the “Risk Factors” section and other sections of this prospectus.

 

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

 

 

Overview

We design, produce, distribute and support technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we offer for sale commercially to the precision agriculture industry. Additionally, we recently announced a new service offering using our UAVs and associated data processing services for the sustainable agriculture industry.

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 products, the RX-47 and RX-48. In February 2016, we signed a worldwide distribution agreement with Raven Industries, Inc. (“Raven”) under which Raven would purchase the RX-60 for the agriculture markets for resale through their network of dealers worldwide. The first shipment of our RX-60 system to Raven occurred in March 2016. In 2017, we amended our agreement with Raven to make it non-exclusive and to allow us to sell our products directly into the market. As a result, we began selling our products directly to farmers and agronomists and we do not anticipate sales to, or through Raven in the near future.

 

The success we have achieved with our products, which we believe has carried over into the new RX-47 and RX-48, stems from our ability to invent and deliver advanced solutions utilizing our proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently. Our core technological capabilities, developed over five years of innovation, include a lightweight laminated shell that allows the UAV platform to perform under challenging flying conditions, a camera with a Near Infrared (NIR) filter, a rugged foot launcher (RX-60), and high end software provided by third parties that automates drone flights and provides geo-referenced data.

 

Our UAV is an advanced fixed wing model UAV whose design is based upon the years of experience our management has with aircraft and composite parts construction. We design all of our UAVs to be man-portable, thereby allowing one person to launch and operate them through a hand-held control unit or tablet. All of our 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 our NIR filter that uses near infrared images to capture crop data. We believe that these characteristics make our 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. Our products were designed for busy agriculture professionals who do not have the time to process images on their computers, which some of our competitors require, and our first generation product, the AgEagle Classic used to do. Through a relationship with our strategic partner, Botlink, our UAV can be programmed using a tablet device to overlay a flight path over a farmer’s specific crop area. 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 or SMS Software. The result is a prescription or zone map that can then be used in a field computer that can typically be found in a sprayer or applicator that has been designed to drive through fields to precisely apply the amount of nutrients or chemicals required to continue or restore the production of healthy yields.

 

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.

 

1

 

Our Growth Strategy

 

We intend to grow our business by establishing our leadership position in the growing precision agriculture marketplace, launching a new service targeting the sustainable agriculture marketplace for the 2019 growing season, and by creating new, easier to use and higher value products that enable us to remain a leading platform available to our customers. We may also elect to pursue additional opportunities in different industries outside of agriculture and its related areas. Key components of this strategy include the following:

 

Build a strong worldwide distribution network to offer a best-in-class precision agriculture platform.

 

We believe we can establish our flying wing product and systems as leading technologies in the precision agriculture marketplace. We will work to identify and establish relationships with dealers and customers in key agricultural regions worldwide, which will help make it possible for every farmer in those markets to have access to the AgEagle platform. Potential distributors are spread across six continents, covering a majority of the world’s major regions including the U.S., Canada, South America, Eastern and Western Europe, Southeast Asia, and Oceania.

 

Launch and market our new UAV based monitoring service for large food manufacturers desiring to monitor sustainability practices on their farms

 

We are in the process of launching a new service for the 2019 grow season targeted towards large food manufacturers that are being pressured by consumers to create food products with less chemicals that are more sustainably sourced. We believe our current technology, combined with other third-party technologies will allow us to offer a product to these food manufacturers and could allow us to accelerate business growth faster than if we just focused on the precision agriculture marketplace.

 

Continue to explore partnerships with companies that can expand our offerings.

 

We intend to expand our product offerings by building relationships and partnerships with companies that have vertical, synergistic technologies. In addition, other technology alliances may include the acquisition or development of other electronics, software, sensors or more advanced aerial platforms. We are constantly meeting and in discussions with groups that could fill these roles and help with additional development ideas.

 

Deliver new and innovative solutions in the precision agriculture space.

 

Our research and development efforts are the foundation of our Company, and we plan to continue to invest in R&D. We plan to continue innovating new and enhanced products that enable us to satisfy our customers through better, more capable products and services, both 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.

 

Pursue the expansion of the AgEagle platform of products into other industries besides agriculture.

 

We may investigate and pursue opportunities outside of agriculture as we continue to expand and grow the AgEagle platform. We are confident in the UAV product we have today, and believe that this product could provide other industries the same kind of optimization we are currently providing the agriculture 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.

 

2

 

Competitive Strengths

 

We believe the following attributes and capabilities provide us with long-term competitive advantages:

 

Proprietary Technology and Trade Secrets

 

We believe our unique design and assembly process differentiates our product from any competition. We are confident that our UAVs are industry-leading in durability due to the lightweight laminated shell of the wing, which is made using a proprietary manufacturing process developed by our President and CEO over five years of innovating. This process, which hardens the material used to build the shell, allows the UAV to perform in harsh weather conditions (with wind speeds up to 30 miles per hour) and bring itself to an unassisted landing, all at a total weight of about six pounds. This design is an important trade secret, and we have non-disclosure agreements with our employees in order to keep it unique to AgEagle.

 

Product Has Global Appeal

 

We believe that our technology addresses a need for better data in the agriculture industry worldwide. With our new global distribution platform, we believe that we are well-positioned for our advanced products to be a viable solution for farmers worldwide.

 

Increased Margins for Farmers

 

We believe our UAVs will directly enhance margins of our customers by reducing the amount of nutrients and chemicals needed to manage their farms. The software equipped on our UAVs deliver a high-quality aerial map upon completion of the flight, allowing the user to accurately identify the specific areas that are malnourished. This software is compatible with precision applicator tractors, which assist users in applying a precise amount of nutrients in only the necessary areas.

 

Increased transparency for Food Manufacturers

 

We believe our UAV’s and the data platform we are building offer a unique opportunity to be one of the first companies to offer major food manufacturers a way to connect to the sustainable efforts being made by the farmers from whom they purchase ingredients for their food products. This could allow food manufacturers to confidently claim their food products are made with less chemicals on their packaging and in their marketing.

 

Empower Customers Through Our Self-Serve Platform

 

Our UAVs are specially designed to provide users with a portable and easy to operate device, which can be controlled with a hand-held unit or tablet. Through our partnership with Botlink, users will be able to plan and track an efficient flight path for their UAV. The UAVs are equipped with a camera and NIR filter whose images provide a holistic aerial view of the fields along with meaningful data that is uploaded and delivered to the user within a very short time frame. As a result, this platform allows users to quickly detect any issues in their fields, which enables them to address such issues in a timely manner before any damage, or further damage affects their fields.

 

All Manufacturing of our Products is Completed in the United States

 

As of today, we manufacture all of our products at our 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. In addition, all of our research and development activities are performed in the U.S.

 

Risks Relating to Our Business

 

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks include, but are not limited to, risks associated with:

 

our need for additional funding;

 

our ability to protect our intellectual property rights;

 

rapid technological changes in the industry;

 

governmental policies and regulations regarding our industry;

 

our ability to maintain strong relationships with our customers, suppliers and distributors, including Raven; and

 

worldwide and domestic economic trends and financial market conditions, including an economic decline in the agricultural industry.

 

3

 

Recent Development

On March 26, 2018, EnerJex Resources, Inc. (“EnerJex”), a Nevada company, consummated the transactions contemplated by that certain Agreement and Plan of Merger (the “Merger Agreement”), dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems, Inc., a privately held company organized under the laws of the state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as a wholly-owned subsidiary of EnerJex (the “Merger”). In connection with the Merger, EnerJex changed its name to AgEagle Aerial Systems Inc. (the “Company, “we,” “our,” or “us”) and AgEagle Sub changed its name to “Eagle Aerial Systems, Inc.” Our common stock will continue to trade on the NYSE American under its new symbol “UAVS” commencing on March 27, 2018. As a result of the Merger, through AgEagle Sub, we are now engaged in the business of designing, developing, producing, distributing and supporting technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we supply to the precision agriculture industry.

 

Our Corporate Information

 

We were incorporated in the State of Nevada on April 22, 2015. Our principal executive offices are located at 117 S. 4th Street, Neodesha, Kansas 66757 and our telephone number is (316) 202-2076. Our website address is http://www.ageagle.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

 

 

 

4

 

 

 

The Offering

 

This prospectus relates to the sale by the Selling Stockholder of up to 4,249,469 shares of our common stock.

 

Common stock offered by Selling Stockholder 4,249,469 shares
NYSE American Symbol    UAVS
Risk Factors    See “Risk Factors” beginning on page 8 and other information included in this prospectus for a discussion of factors you should consider before deciding to invest in shares of our common stock.

 

5

 


RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before investing in our units. If any of the following risks occur, our business, operating results and financial condition could be seriously harmed. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

 

Risks Related to Our Business and Industry

 

We may fail to realize the anticipated benefits of the Merger.

 

The success of the Merger will depend on, among other things, the combined company’s ability to achieve its business objectives, including the successful development of its products. If we are not able to achieve these objectives, the anticipated benefits of the Merger may not be realized fully, may take longer to realize than expected, or may not be realized at all.

 

Prior to the consummation of the Merger, EnerJex and AgEagle operated independently. Any delays in the integration process or inability to realize the full extent of the anticipated benefits of the Merger could have an adverse effect on the business prospects and results of operations of the combined company. Such an adverse effect may impact the value of the shares of the combined company’s common stock after the completion of the Merger.

 

Potential difficulties that may be encountered in the integration process include the following:

using the combined company’s cash and other assets efficiently to develop the business of the combined company;
potential unknown or currently unquantifiable liabilities associated with the Merger and the operations of the combined company; and
performance shortfalls as a result of the diversion of management’s attention that was caused by completing the Merger.

 

We have a limited operating history and there can be no assurance that we can achieve or maintain profitability.

 

Through our wholly-owned subsidiary, AgEagle Sub, we have been operating for approximately eight years. However, AgEagle Sub has only been in the UAV business for half of that time. We are currently in the business development stage and have limited commercial sales of our products and, accordingly, we cannot guarantee that we will become profitable. Moreover, even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability and its failure to do so would adversely affect its business, including its ability to raise additional funds.

 

We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, curtail or eliminate one or more of our research and development programs or commercialization efforts.

 

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts on product development. We will require additional funds to support continued research and development activities, as well as the costs of commercializing, marketing and selling any new products resulting from those research and development activities. We have based this estimate, however, on assumptions that may prove to be wrong, and we could spend available financial resources much faster than we currently expect.

 

Until such time, if ever, that we can generate a sufficient amount of product revenue and achieve profitability, we expect to seek to finance future cash needs through equity or debt financings or corporate collaboration and strategic arrangements. We currently have no other commitments or agreements relating to any of these types of transactions and cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital, we may have to delay, curtail or eliminate commercializing, marketing and selling one or more of our products.

 

6

  

Product development is a long, expensive and uncertain process.

 

The development of both UAV software and hardware is a costly, complex and time-consuming process, and investments in product development often involve a long wait until a return, if any, can be achieved on such investment. We might face difficulties or delays in the development process that will result in our inability to timely offer products that satisfy the market, which might allow competing products to emerge during the development and certification process. We anticipate making significant investments in research and development relating to our products and services, but such investments are inherently speculative and require substantial capital expenditures. Any unforeseen technical obstacles and challenges that we encounter in the research and development process could result in delays in or the abandonment of product commercialization, may substantially increase development costs, and may negatively affect our results of operations.

 

Successful technical development of our products does not guarantee successful commercialization.

 

Although we have successfully completed the technical development of our two original UAV systems, as well as the new RX-60 and RX-47 and RX-48 systems, we may still fail to achieve commercial success for a number of reasons, including, among others, the following:

 

failure to obtain the required regulatory approvals for their use;

 

rapid evolvement of the product due to new technologies;

 

prohibitive production costs;

 

competing products;

 

lack of product innovation;

 

unsuccessful distribution and marketing through our sales channels;

 

insufficient cooperation from our supply and distribution partners; and

 

product development that does not align with or meet customer needs.

 

Our success in the market for the products and services we develop will depend largely on our ability to properly demonstrate their capabilities. Upon demonstration, our platform of systems may not have the capabilities they were designed to have or that we believed they would have. Furthermore, even if we do successfully demonstrate our products’ capabilities, potential customers may be more comfortable doing business with a competitor, or may not feel there is a significant need for the products we develop. As a result, significant revenue from our current and new product investments may not be achieved for a number of years, if at all.

 

Our software platform, offered through our partnership with Botlink, is at risk of unexpected technical failure due to the unavailability of a cellular connection or other technical issues with the software.

 

Botlink’s technology is relatively new and has only been active in the field for less than one year. As a result, our UAV products may experience technical difficulties that prevent customers from collecting and processing the crop data in real-time. The most common technical problem our customers may experience is the unavailability of a cellular connection, which is necessary in order to wirelessly process the collected data through the cloud. While this will not affect the performance of the UAV or the collection of the data, it could potentially prevent customers from being able to access their completed crop analysis in real-time. While these technical difficulties may be an issue for our customers in the U.S., customers outside of the U.S. will not be subject to such technical difficulties, as their product will be designed for the manual removal and downloading of files through a memory card due to the unavailability of cellular connections in certain areas of the world. We are currently in the final stages of integrating our manual and cellular connected products so that our U.S. customers will be able to access their data at all times, even in the absence of a cellular connection.

 

7

  

If we fail to protect our intellectual property rights, we could lose our ability to compete in the marketplace.

 

Our intellectual property and proprietary rights are important to our ability to remain competitive and successful in the development of our products and our business. Patent protection can be limited and not all intellectual property can be patented. We expect to rely on a combination of patent, trademark, copyright, and trade secret laws as well as confidentiality agreements and procedures, non-competition agreements and other contractual provisions to protect our intellectual property, other proprietary rights and our brand. As we currently do not have any granted patent, trademark or copyright protections, we must rely on trade secrets and nondisclosure agreements, which provide limited protections. Our intellectual property rights may be challenged, invalidated or circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees or competitors.

 

Furthermore, our competitors may independently develop technologies and products that are substantially equivalent or superior to our technologies and products, which could result in decreased revenues. Litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and substantial diversion of management attention. If we do not adequately protect our intellectual property, our competitors could use it to enhance their products. Our inability to adequately protect our intellectual property rights could adversely affect our business and financial condition, and the value of our brand and other intangible assets.

 

Other companies may claim that we infringe their intellectual property, which could materially increase our costs and harm our ability to generate future revenue and profit.

 

We do not believe that our technologies infringe on the proprietary rights of any third party, but claims of infringement are becoming increasingly common and third parties may assert infringement claims against us. It may be difficult or impossible to identify, prior to receipt of notice from a third party, the trade secrets, patent position or other intellectual property rights of a third party, either in the United States or in foreign jurisdictions. Any such assertion may result in litigation or may require us to obtain a license for the intellectual property rights of third parties. If we are required to obtain licenses to use any third party technology, we would have to pay royalties, which may significantly reduce any profit on our products. In addition, any such litigation could be expensive and disruptive to its ability to generate revenue or enter into new market opportunities. If any of our products were found to infringe other parties’ proprietary rights and we are unable to come to terms regarding a license with such parties, we may be forced to modify our products to make them non-infringing or to cease production of such products altogether.

 

The nature of our business involves significant risks and uncertainties that may not be covered by insurance or indemnification.

 

We have developed and sold products and services in circumstances where insurance or indemnification may not be available; for example, in connection with the collection and analysis of various types of information. In addition, our products and services raise questions with respect to issues of civil liberties, intellectual property, trespass, conversion and similar concepts, which may create legal issues. Indemnification to cover potential claims or liabilities resulting from the failure of any technologies that we develop or deploy may be available in certain circumstances but not in others. Currently, the unmanned aerial systems industry lacks a formative insurance market. We may not be able to maintain insurance to protect against all operational risks and uncertainties that our customers confront. Substantial claims resulting from an accident, product failure, or personal injury or property liability arising from our products and services in excess of any indemnity or insurance coverage (or for which indemnity or insurance coverage is not available or is not obtained) could harm our financial condition, cash flows and operating results. Any accident, even if fully covered or insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us to compete effectively.

 

We may incur substantial product liability claims relating to our products.

 

As a manufacturer of UAV products, and with aircraft and aviation sector companies under increased scrutiny, claims could be brought against us if use or misuse of one of our UAV products causes, or merely appears to have caused, personal injury or death. In addition, defects in our products may lead to other potential life, health and property risks. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources. We are unable to predict if we will be able to obtain or maintain product liability insurance for any products that may be approved for marketing.

 

8

 

If we are unable to recruit and retain key management, technical and sales personnel, our business would be negatively affected.

 

For our business to be successful, we need to attract and retain highly qualified technical, management and sales personnel. The failure to recruit additional key personnel when needed, with specific qualifications, on acceptable terms and with an ability to maintain positive relationships with our partners, might impede our ability to continue to develop, commercialize and sell our products and services. To the extent the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting and training costs in order to attract and retain such employees. The loss of any members of our management team may also delay or impair achievement of our business objectives and result in business disruptions due to the time needed for their replacements to be recruited and become familiar with our business. We face competition for qualified personnel from other companies with significantly more resources available to them and thus may not be able to attract the level of personnel needed for our business to succeed.

 

If our proposed marketing efforts are unsuccessful, we may not earn enough revenue to become profitable.

 

Our future growth depends on our gaining market acceptance and regular production orders for our products and services. Our marketing plan includes attendance at trade shows, making private demonstrations, advertising, promotional materials and advertising campaigns in print and/or broadcast media. In the event we are not successful in obtaining a significant volume of orders for our products and services, we will face significant obstacles in expanding our business. We cannot give any assurance that our marketing efforts will be successful. If they are not, revenue may not be sufficient to cover our fixed costs and we may not become profitable.

 

Our operating margins may be negatively impacted by reduction in sales or products sold.

 

Expectations regarding future sales and expenses are largely fixed in the short term. We maintain raw materials and finished goods at a volume we feel is necessary for anticipated distribution and sales. Therefore, we may not be able to reduce costs in a timely manner to compensate for any unexpected shortfalls between forecasted and actual sales.

 

We face a significant risk of failure because we cannot accurately forecast our future revenues and operating results.

 

The rapidly changing nature of the markets in which we compete makes it difficult to accurately forecast our revenues and operating results. Furthermore, we expect our revenues and operating results to fluctuate in the future due to a number of factors, including the following:

 

the timing of sales of our products;

 

unexpected delays in introducing new products;

 

increased expenses, whether related to sales and marketing, or administration; and

 

costs related to possible acquisitions of businesses.

 

Rapid technological changes may adversely affect the market acceptance of our products and could adversely affect our business, financial condition and results of operations.

 

The market in which we compete is subject to technological changes, introduction of new products, change in customer demands and evolving industry standards. Our future success will depend upon our ability to keep pace with technological developments and to timely address the increasingly sophisticated needs of our customers by supporting existing and new technologies and by developing and introducing enhancements to our current products and new products. We may not be successful in developing and marketing enhancements to our products that will respond to technological change, evolving industry standards or customer requirements. In addition, we may experience difficulties internally or in conjunction with key vendors and partners that could delay or prevent the successful development, introduction and sale of such enhancements and such enhancements may not adequately meet the requirements of the market and may not achieve any significant degree of market acceptance. If release dates of our new products or enhancements are delayed or, if when released, they fail to achieve market acceptance, our business, operating results and financial condition may be adversely affected.

9

  

Our products are subject to regulations of the Federal Aviation Administration (the “FAA”).

 

In August 2016, regulations from the FAA relating to the commercial use of UAVs in the United States became law. As a result, users of systems like ours are only required to take a knowledge exam at an approved FAA testing station similar to an automobile driver’s license exam. Prior to the new law, users had to hold a pilot’s license, have an observer present and file various documents before flights. We saw a decrease in revenues of approximately 52% during 2016, which we believe may have been partially due to the uncertainty of the FAA regulations prior to the enactment of the new law. In the event new FAA rules or regulations are promulgated or current rules are revised that may negatively affect commercial usage of our UAVs, such rules and laws could adversely disrupt our operations and overall sales.

 

Our future results may be affected by various legal and regulatory proceedings and legal compliance risks, including those involving product liability, antitrust, intellectual property, environmental, regulations of the FAA, the U.S. Foreign Corrupt Practices Act and other anti-bribery, anti-corruption, or other matters.

 

The outcome of any future legal proceedings may differ from our expectations because the outcomes of litigation, including regulatory matters, are often difficult to reliably predict. Various factors or developments can lead us to change current estimates of liabilities and related insurance receivables where applicable, or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on our results of operations or cash flows in any particular period. We are not currently involved in or subject to any such legal or regulatory proceedings, but we cannot guarantee that such proceedings may not occur in the future.

 

If we do not receive the governmental approvals necessary for the sales or export of our products, or if our products are not compliant in other countries, our sales may be negatively impacted. Similarly, if our suppliers and partners do not receive government approvals necessary to export their products or designs to us, our revenues may be negatively impacted and we may fail to implement our growth strategy.

 

A license may be required in the future to initiate marketing activities. We may also be required to obtain a specific export license for any hardware exported. We may not be able to receive all the required permits and licenses for which we may apply in the future. If we do not receive the required permits for which we apply, our revenues may be negatively impacted. In addition, if government approvals required under these laws and regulations are not obtained, or if authorizations previously granted are not renewed, our ability to export our products could be negatively impacted, which may have a negative impact on our revenues and a potential material negative impact on our financial results.

 

We may pursue additional strategic transactions in the future, which could be difficult to implement, disrupt our business or change our business profile significantly.

 

We intend to consider additional potential strategic transactions, which could involve acquisitions of businesses or assets, joint ventures or investments in businesses, products or technologies that expand, complement or otherwise relate to our current or future business. We may also consider, from time to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments. Should our relationships fail to materialize into significant agreements or should we fail to work efficiently with these companies, we may lose sales and marketing opportunities and its business, results of operations and financial condition could be adversely affected.

 

These activities, if successful, create risks such as, among others: (i) the need to integrate and manage the businesses and products acquired with our own business and products; (ii) additional demands on our resources, systems, procedures and controls; (iii) disruption of our ongoing business; and (iv) diversion of management’s attention from other business concerns. Moreover, these transactions could involve: (a) substantial investment of funds or financings by issuance of debt or equity securities; (b) substantial investment with respect to technology transfers and operational integration; and (c) the acquisition or disposition of product lines or businesses. Also, such activities could result in one-time charges and expenses and have the potential to either dilute the interests of our existing shareholders or result in the issuance of, or assumption of debt. Such acquisitions, investments, joint ventures or other business collaborations may involve significant commitments of financial and other resources. Any such activities may not be successful in generating revenue, income or other returns, and any resources we committed to such activities will not be available to us for other purposes. Moreover, if we are unable to access the capital markets on acceptable terms or at all, we may not be able to consummate acquisitions, or may have to do so on the basis of a less than optimal capital structure. Our inability to take advantage of growth opportunities or address risks associated with acquisitions or investments in businesses may negatively affect our operating results.

 

Additionally, any impairment of goodwill or other intangible assets acquired in an acquisition or in an investment, or charges to earnings associated with any acquisition or investment activity, may materially reduce our earnings. Future acquisitions or joint ventures may not result in their anticipated benefits and we may not be able to properly integrate acquired products, technologies or businesses with our existing products and operations or successfully combine personnel and cultures. Failure to do so could deprive us of the intended benefits of those acquisitions.

 

10

 

Breaches of network or information technology security could have an adverse effect on our business.

 

Cyber-attacks or other breaches of network or IT security may cause equipment failures or disrupt our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attack, malware, computer viruses and other means of unauthorized access. The potential liabilities associated with these events could exceed the insurance coverage we maintain. Our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to other competitors in the defense electronics market. In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation. To date, we have not been subject to cyber-attacks or other cyber incidents which, individually or in the aggregate, resulted in a material adverse effect on our business, operating results and financial condition.

 

The preparation of our financial statements involves use of estimates, judgments and assumptions, and our financial statements may be materially affected if our estimates prove to be inaccurate.

 

Financial statements prepared in accordance with generally accepted accounting principles in the United States require the use of estimates, judgments, and assumptions that affect the reported amounts. Different estimates, judgments, and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments, and assumptions are likely to occur from period to period in the future. These estimates, judgments, and assumptions are inherently uncertain, and, if they prove to be wrong, then we face the risk that charges to income will be required.

 

Our results could be adversely affected by natural disasters, public health crises, political crises, or other catastrophic events.

 

Natural disasters, such as hurricanes, tornadoes, floods, earthquakes, and other adverse weather and climate conditions; unforeseen public health crises, such as pandemics and epidemics; political crises, such as terrorist attacks, war, labor unrest, and other political instability; or other catastrophic events, such as disasters occurring at our manufacturing facilities, could disrupt our operations or the operations of one or more of our vendors. In particular, these types of events could impact our product supply chain from or to the impacted region and could impact our ability to operate. In addition, these types of events could negatively impact consumer spending in the impacted regions. Disasters occurring at our manufacturing facilities could impact our reputation and our customers’ perception of our brands. To the extent any of these events occur, our operations and financial results could be adversely affected.

 

Worldwide and domestic economic trends and financial market conditions, including an economic decline in the agricultural industry, may adversely affect our operating performance.

 

We intend to distribute in a number of countries and derive revenues from both inside and outside the United States. We expect our business will be subject to global competition and may be adversely affected by factors in the United States and other countries that are beyond our control, such as disruptions in financial markets, economic downturns in the form of either contained or widespread recessionary conditions, elevated unemployment levels, sluggish or uneven recovery, in specific countries or regions, or in the agricultural industry; social, political or labor conditions in specific countries or regions; natural and other disasters affecting our operations or our customers and suppliers; or adverse changes in the availability and cost of capital, interest rates, tax rates, or regulations in the jurisdictions in which we operate. Unfavorable global or regional economic conditions, including an economic decline in the agricultural industry, could adversely impact our business, liquidity, financial condition and results of operations.

 

11

  

For certain of the components included in our products there are a limited number of suppliers we can rely upon and if we are unable to obtain these components when needed we could experience delays in the manufacturing of our products and our financial results could be adversely affected.

 

We acquire most of the components for the manufacture of our products from suppliers and subcontractors. We have not entered into any agreements or arrangements with any potential suppliers or subcontractors. Suppliers of some of the components may require us to place orders with significant lead-times to assure supply in accordance with its manufacturing requirements. Our present lack of working capital may cause us to delay the placement of such orders and may result in delays in supply. Delays in supply may significantly hurt our ability to fulfill our contractual obligations and may significantly hurt our business and result of operations. In addition, we may not be able to continue to obtain such components from these suppliers on satisfactory commercial terms. Disruptions of its manufacturing operations would ensue if we were required to obtain components from alternative sources, which would have an adverse effect on our business, results of operations and financial condition.

 

We indemnify our officers and directors against liability to us and our security holders, and such indemnification could increase our operating costs.

 

Our bylaws allow us to indemnify our officers and directors against claims associated with carrying out the duties of their offices. Our bylaws also allow us to reimburse them for the costs of certain legal defenses. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our officers, directors or control persons, the SEC has advised that such indemnification is against public policy and is therefore unenforceable.

 

Risks Associated with our Capital Stock

 

One of our stockholders beneficially owns a majority of our outstanding capital stock and will have the ability to control our affairs.

 

Our Chairman of the Board and President, Bret Chilcott, currently owns approximately 57.1% of our issued and outstanding capital stock. By virtue of his holdings, he may influence the election of the members of our board of directors, our management and our affairs, and may make it difficult for us to consummate corporate transactions such as mergers, consolidations or the sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other stockholders.

 

We do not know whether an active, liquid and orderly trading market will develop for our common stock.

 

An active trading market for our securities may not develop. The lack of an active or liquid market may impair your ability to sell our securities at the time you wish to sell them or at a price that you consider reasonable.

 

The market price of our securities may be volatile and may fluctuate in a way that is disproportionate to our operating performance.

 

Our securities may experience substantial volatility as a result of a number of factors, including, among others:

 

sales or potential sales of substantial amounts of our common stock;

 

announcements about us or about our competitors or new product introductions;

 

developments concerning our product manufacturers;

 

the loss or unanticipated underperformance of our global distribution channel;

 

litigation and other developments relating to our patents or other proprietary rights or those of our competitors;

 

conditions in the UAV industry;

 

governmental regulation and legislation;

 

variations in our anticipated or actual operating results;

 

changes in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations;

 

foreign currency values and fluctuations; and

 

overall political and economic conditions.

 

 

12

 

Many of these factors are beyond our control. The stock markets have historically experienced substantial price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors could reduce the market price of our securities, regardless of our actual operating performance.

 

We do not intend to pay cash dividends. As a result, capital appreciation, if any, will be your sole source of gain.

 

We intend to retain future earnings, if any, to fund the development and growth of our business. In addition, the terms of existing and future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, our common stock will be your sole source of gain for the foreseeable future.

 

Provisions in our articles of incorporation, our by-laws and Nevada law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Provisions of our articles of incorporation, our by-laws and Nevada law may have the effect of deterring unsolicited takeovers or delaying or preventing a change in control of our company or changes in our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. These provisions include:

 

the inability of stockholders to call special meetings; and

 

the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could include the right to approve an acquisition or other change in our control or could be used to institute a rights plan, also known as a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors.

 

The existence of the forgoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

 

FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our securities.

 

The Financial Industry Regulatory Authority, Inc. (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for certain customers. FINRA requirements will likely make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity in the shares, resulting in fewer broker-dealers may be willing to make a market in our shares, potentially reducing a stockholder’s ability to resell our securities.

 

13

 

We are eligible to be treated as an “emerging growth company,” as defined in the JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial statements and two years of selected financial data in this prospectus. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any March 31 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, after which, in each case, we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, the price of our securities and trading volume could decline.

 

The trading market for our securities will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analyst’s cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, the price of our securities could decline.

 

14

  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the information in this prospectus contains forward-looking statements within the meaning of the federal securities laws. These statements include, among others, the following:

 

our goals and strategies;

 

our future business development, results of operations and financial condition;

 

our ability to protect our intellectual property rights;

 

projected revenues, profits, earnings and other estimated financial information;

 

our ability to maintain strong relationships with our customers and suppliers;

 

our planned use of proceeds; and

 

governmental policies regarding our industry.

 

These statements may be found under “Prospectus Summary,” “Risk Factors,” Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements typically are identified by the use of terms such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms, although some forward-looking statements are expressed differently. You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to the factors referenced above.

 

These risks and uncertainties are not exhaustive. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. The forward-looking statements contained in this prospectus speak only as of the date of this prospectus or, if obtained from third-party studies or reports, the date of the corresponding study or report, and are expressly qualified in their entirety by the cautionary statements in this prospectus. Since we operate in an emerging and evolving environment and new risk factors and uncertainties emerge from time to time, you should not rely upon forward-looking statements as predictions of future events. Except as otherwise required by the securities laws of the United States, we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

 

15

  

USE OF PROCEEDS

 

We will not receive any portion of the net proceeds by the Selling Stockholder from the sale of its shares of common stock.

 

16

  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Our common stock trades on the NYSE American under the symbol “UAVS.” The following table lists the quotations for the high and low sales prices of our common stock for each quarter during the years ended December 31, 2016 and December 31, 2017, and through July 17, 2018.

 

Year Ended December 31, 2016     High     Low  
Quarter ended March 31, 2016     $ 6.25     $ 6.00  
Quarter ended June 30, 2016     $ 7.45     $ 6.75  
Quarter ended September 30, 2016     $ 11.02     $ 9.25  
Quarter ended December 31, 2016     $ 7.61     $ 7.25  
Year Ended December 31, 2017                  
Quarter ended March 31, 2017     $ 9.48     $ 8.55  
Quarter ended June 30, 2017     $ 8.38     $ 7.13  
Quarter ended September 30, 2017     $ 7.57     $ 7.50  
Quarter ended December 31, 2017     $ 5.75     $ 4.95  
Year Ended December 31, 2018                  
Quarter ended March 31, 2018     $ 5.65     $ 3.55  
Quarter ended June 30, 2018 (through July 17, 2018)     $ 1.88     $ 1.75  

 

Holders

 

As of June 30, 2018, there were 349 holders of record of our common stock and one holder of our Series C preferred stock.  

 

Dividends

 

We do not intend to pay cash dividends to our stockholders in the foreseeable future. We currently intend to retain all of our available funds and future earnings, if any, to finance the growth and development of our business. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table sets forth information as of the fiscal year ended December 31, 2017 regarding outstanding options granted under our stock option plans and options reserved for future grant under the plans.

 

Plan Category  

Number

of shares to be issued

upon exercise of

outstanding options,

warrants and rights (a)

   

Weighted-average

exercise price of

outstanding options, warrants and rights (b)

   

Number of shares

remaining available for

future issuance under

equity compensation

plans (excluding shares

reflected in column (a) (c)

 
Equity compensation plans approved by stockholders     560,100     $ 9.76       439,900  
                         

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our results of operations and financial condition since the Company’s inception should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Prospectus. All statements, other than statements of historical facts, included in this report are forward-looking statements. When used in this report, the words “may,” “will,” “should,” “would,” “anticipate,” “estimate,” “possible,” “expect,” “plan,” “project,” “continuing,” “ongoing,” “could,” “believe,” “predict,” “potential,” “intend,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, availability of additional equity or debt financing, changes in sales or industry trends, competition, retention of senior management and other key personnel, availability of materials or components, ability to make continued product innovations, casualty or work stoppages at our facilities, adverse results of lawsuits against us and currency exchange rates. Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, as there can be no assurance that these forward-looking statements will prove to be accurate and speak only as of the date hereof. Management undertakes no obligation to publicly release any revisions to these forward-looking statements that may reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. This cautionary statement is applicable to all forward-looking statements contained in this report.

 

Overview of Business

On March 26, 2018, 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 to “AgEagle Aerial, Inc.” Our common stock will continue to trade on the NYSE American under its new symbol “UAVS” commencing on March 27, 2018. As a result of the Merger, through AgEagle Sub, we are now engaged in the business of designing, developing, producing, distributing and supporting technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we supply to the precision agriculture industry.

We are headquartered in Neodesha, Kansas, and are a manufacturer of unmanned aerial vehicles focused on providing actionable data to the precision agriculture industry. We design, produce, distribute and support technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we offer for sale commercially to the precision agriculture industry. Additionally, we recently announced a new service offering using our UAVs and associated data processing services for the sustainable agriculture industry.

Historically, AgEagle’s derived the majority of its revenue from the sale of our AgEagle Classic and RAPID Systems. However, as a result of the development of our new product, the RX-60, RX-47 and RX-48, we will no longer manufacture and distribute our previous two systems. We believe that the UAV industry is currently in the early stages of development and has significant growth potential. Additionally, we believe that some of the innovative potential products in our research and development pipeline will emerge and gain traction as new growth platforms in the future, creating market opportunities. 

In February 2016, we signed a worldwide distribution agreement with Raven Industries, Inc. (“Raven”) under which Raven would purchase the RX-60 for the agriculture markets for resale through their network of dealers worldwide. The first shipment of our RX-60 system to Raven occurred in March 2016. In 2017, we amended our agreement with Raven to make it non-exclusive and to allow us to sell our products directly into the market. As a result, we began selling our products directly to farmers and agronomists and we do not anticipate sales to, or through Raven in the near future.

 

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The success we have achieved with our products, which we believe has carried over into the new RX-47 and RX-48, stems from our ability to invent and deliver advanced solutions utilizing our proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently.

Our core technological capabilities, developed over five years of innovation, include a lightweight laminated shell that allows the UAV platform to perform under challenging flying conditions, a camera with a Near Infrared (NIR) filter, a rugged foot launcher (RX-60), and high end software provided by third parties that automates drone flights and provides geo-referenced data. We design all of our UAVs to be man-portable, thereby allowing one person to launch and operate them through a hand-held control unit or tablet. All of our 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 our NIR filter that uses near infrared images to capture crop data. We believe that these characteristics make our 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.

We believe the success that has been achieved with our products, stems from its ability to invent and deliver advanced solutions utilizing our proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently. 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. Our products were designed for busy agriculture professionals who do not have the time to process images on their computers, which some of our competitors require, and our first generation product, the AgEagle Classic used to do. Our UAVs can be programmed using a tablet device to overlay a flight path over a farmer’s specific crop area. 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 or SMS Software. The result is a prescription or zone map that can then be used in a field computer that can typically be found in a sprayer or applicator that has been designed to drive through fields to precisely apply the amount of nutrients or chemicals required to continue or restore the production of healthy yields

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.

In November 2017, we entered into a multi-agreement arrangement with Agribotix, LLC (“Agribotix”), headquartered in Boulder, Colorado, a leading agricultural information processing company providing actionable data to the agriculture industry. See Note 5 to the [unaudited financial statements] further details about the transaction.

 

Off-Balance Sheet Arrangements

 

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.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our unaudited condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these 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 financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates include, but are not limited to: collectability of receivables, realizability of inventories, warranty accruals, valuation of share-based transactions, and valuation of deferred tax assets. 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. Actual results could differ from those estimates.

 

See Note 2 in the accompanying audited and unaudited financial statements for a listing of our critical accounting policies.

 

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Revenue Recognition

Revenue is recognized when earned. AgEagle’s revenue recognition policies are in compliance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, and the Securities and Exchange Commission Staff Accounting Bulletin No. 101 and 104.

AgEagle recognizes revenues for the sale of its products in the period when persuasive evidence of an arrangement with a customer, distributor or dealer exists, product delivery and acceptance have occurred and title has transferred to the customer, dealer or the distributor, the sales price is fixed or determinable and collectability of the resulting receivable is reasonably assured.

 

AgEagle generally ships FOB Shipping Point terms. Shipping documents are used to verify delivery and customer acceptance. AgEagle assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund. AgEagle assesses collectability based on the creditworthiness of the customer as determined by evaluations and the customer’s payment history. Additionally, dealers are required to place a deposit on each drone ordered. AgEagle has executed various agreements to sell its products, including one exclusive worldwide distributor agreement 2016 whereby both the dealers and distributor agreed to purchase AgEagle drones and other related products. Under the terms of the dealer agreements except the recently executed agreement with its distributor, the dealer takes ownership of the products, and AgEagle deems the items sold upon release of shipment to the dealer. This distributorship agreement was made non-exclusive in 2017. Prior to the execution of the distributor agreement in February 2016, AgEagle sold its products through various dealers in the United States and Canada; all these agreements have since been terminated.

 

RESULTS OF OPERATIONS

 

Year ended December 31, 2017 compared to year ended December 31, 2016

During the year ended December 31, 2017, we recorded revenues of $116,035 compared to revenues of $373,324 for the same period in 2016, a 69% decrease. The decrease was the result of the worldwide distribution agreement with Raven Industries, Inc. (“Raven”) not resulting in increased sales growth as anticipated. Also we launched a newer more competitive UAVS model the RX-48 later than projected. The RX-48 is able to compete with the popular drone copters models that are easier to use in smaller farms and provide a lower price point versus the RX-60 model that is used for larger farms with a higher price point. During 2017, we sold or converted 24 UAVs, resulting in lower revenue per unit compared to the 50 UAVs sold in 2016.

During the year ended December 31, 2017, cost of sales totaled $111,811, a $226,433 or 67% decrease as compared to $338,244 in the year ended December 31, 2016. We had a gross profit of $4,224 or 4% during the year ended December 31, 2017 compared to $35,080 or 9% for the comparable period in 2016, resulting in a decrease in our profit margin. The decrease in our gross margin in comparison to the prior year is due to an inventory valuation that was conducted as part of our year-end observation procedures that resulted in the recording of $15,359 to cost of goods sold a slow-moving obsolescence reserve for sensors, cameras and other parts due to the development of the UAVS models resulting in the replacement of these items for more technologically advanced parts.

We recorded total operating expenses of $671,087 during 2017, a 60% decrease as compared to operating expenses of $1,675,545 in the same period of 2016. General and administrative expenses totaled $219,164 in 2017 compared to $363,787 in 2016, a decrease of 40%, due to decreases in wages, office expenses, and insurance expense. Selling expenses in 2017 were $31,004 compared to $56,340 in 2016. The decrease was driven by less advertising, and expenses relating to less industry shows as a result of the execution of the Raven agreement it was expected they market our product as our exclusive dealer at the time. Consulting fees – related party totaled $7,992 for 2017 as a result of the no new awards of common stock and stock options compared to $694,356 in 2016 where stock awards and options were granted. Professional fees totaling $402,706 in 2017 were expenses incurred for legal and accounting, compared to $554,043 in 2016 which related to increased legal, audit, accounting, financial filing and underwriter fees associated with the filing of the Company’s prior registration statement on Form S-1 with the Securities and Exchange Commission (the “Commission”).

 

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Dealer termination expense for the year ended December 31, 2017 was ($12,458), as compared to $114,727 which was mainly due to termination costs in the prior year as a result of entering the Raven exclusive distributor agreement. The agreement triggered termination costs with our existing U.S. and Canadian dealers at that time which required us to buyback or convert various UAVS systems that the dealers were holding in inventory. These termination requirements were all completed in 2017 and any remaining accrued liability was reversed.

Interest expense for year ended December 31, 2017 was $142,810 as compared to $53,575 in the prior year. The increase was due to (i) a convertible note of $300,000 issued by us in February 2017 to a new holder, (ii) various promissory notes totaling $131,050 issued to related parties throughout 2017, and (iii) two promissory notes for $185,005 from existing investors.

 

Our net loss was $797,215 in 2017. This represents a $1,015,300 decrease from our net loss of $1,812,515 in 2016, due mainly to less salary, professional, consulting, accounting expenses, dealer terminations costs offset by reduced sales and lower gross margins.

 

Cash Flows

 

December 31, 2017 compared to December 31, 2016

 

Cash on hand was $35,289 at December 31, 2017, an increase of $19,402 compared to the $15,887 on hand at December 31, 2016. Cash used in operations for 2017 was $328,878 compared to $896,829 of cash used by operations for 2015. The decrease was driven by less legal, audit, accounting, financial filing and underwriter fees associated with the filing of our prior registration statement on Form S-1 with the Commission (which was subsequently abandoned), as well as stock and option compensation expense associated with a strategic consulting agreement-with a related party.

 

Cash used by investing activities during 2017 was $12,775 for the purchase of new machinery needed to make the RX-48 model compared to cash provided by investing activities during 2016 of $5,341 from the sale of a competitor UAV. We also issued notes receivable totaling $75,000 to Enerjex for working capital purposes.

 

Cash provided by financing activities during 2017 was $436,055 as a result of (i) a promissory noted executed with a face value of $175,000 resulting in proceeds of $150,000, (ii) $185,005 in promissory notes from existing investors, and (iii) various promissory notes from related parties for $131,050 to us for working capital purposes.

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Results of Operations

Three and Six Months ended June 30, 2018 and 2017

For the three months ended June 30, 2018 and 2017, we recorded revenues of $24,517 compared to revenues of $47,192 for the same period in 2017, representing a 48% decrease. For the six months ended June 30, 2018 and 2017, we recorded revenues of $53,707 compared to revenues of $82,391 for the same period in 2017, a 35% decrease. The decrease was due to a shift in the drone industry from do-it-yourself, early adopter farmers to a more services oriented model whereby independent agronomists provided prescriptions for the application of chemicals based on data they collect through aerial imagery and drones. The Company is in the process of addressing this change in the market through strategic acquisitions and the launch of a service oriented model toward sustainable markets as result of the recent infusion of operating capital and significant reduction of debt.

For the three months ended June 30, 2018 and 2017, cost of sales totaled $18,174 and $36,905, respectively, a decrease of 50%. Costs of sales totaled $41,971 and $43,183, for the six months ended June 30, 2018 and 2017, respectively, reflecting a decrease in our cost of goods sold of 3%. For the three months ended June 30, 2018, and 2017 we had a gross profit of $6,343 or 26% and $10,287 or 22% representing an increase of 4% in our profit margins. For the six months ended June 30, 2018 and 2017, we had a gross profit of $11,736 or 22% and $39,208 or 48%, a decrease in our profit margins of 26%. For the three months ended June 30, 2018, our cost of sales decreased while increasing our gross margin as we did not sell our slow-moving inventory during the period and instead focused on our UAVS sales. The decrease in our gross margin and increase in our costs of goods sold for the six months ended June 30, 2018 in comparison to the comparable prior periods is due to the increase of slow-moving inventory due to the innovation of our products which resulted in raw-materials being sold at a discount such as sensors, cameras and other parts.

For the three months ended June 30, 2018, and 2017 we had a gross profit of $6,343 or 26% and $10,287 or 22% representing an increase of 4% in our profit margins. For the six months ended June 30, 2018 and 2017, we had a gross profit of $11,736 or 22% and $39,208 or 48%, a decrease in our profit margins of 26%. For the three months ended June 30, 2018, our cost of sales decreased while increasing our gross margin as we did not sell our slow-moving inventory during the period and instead focused on our UAVS sales. The decrease in our gross margin and increase in our costs of goods sold for the six months ended June 30, 2018 in comparison to the comparable prior periods is due to the increase of slow-moving inventory due to the innovation of our products which resulted in raw-materials being sold at a discount such as sensors, cameras and other parts

We recorded total operating expenses of $688,012 and $107,913, respectively, for the three months ended June 30, 2018 and 2017, resulting in an 538% increase. For the three months ended June 30, 2018 and 2017 we recorded $428,044 and $15,578 in professional fees, respectively, a 2,648% increase. The increase is mainly due to more professional fees related to legal, accounting and consulting services in connection with the Merger completed on March 26, 2018 and the on-going expenses related to us being publicly traded such as legal, audit and consulting services. General and administrative expenses also increased 208% as we had $233,797 of expenses for the current period versus $75,999 in the comparable prior period. This was mainly due to an increase in salaries, financial service fees, investor relations costs and stock compensation expense due to the issuance of shares and options to directors and employees. Lastly included in operating expenses was selling costs that increased 222% to $27,005 versus $8,377 in the prior comparable period due to attendance to various trade shows in that propel our sustainable market initiatives.

We recorded total operating expenses of $884,544 and $272,897, respectively, for the six months ended June 30, 2018 and 2017, a 224% increase. For the six months ended June 30, 2018 and 2017 we recorded $578,629 and $101,550 in professional fees, respectively, a 470% increase. The increase is mainly due to more professional fees related to legal, accounting and consulting services in connection with the reverse merger completed on March 26, 2018 and the on-going expenses related to us being publically traded such as legal, audit and consulting services. General and administrative expenses also increased 89% as we had $269,823 of expenses for the current period versus $142,625 in the comparable prior period. This was mainly due to an increase in salaries, financial service fees, investor relations costs and stock compensation expense due to the issuance of shares and options to directors and employees. Lastly included in operating expenses was selling costs that increased 146% to $36,460 versus $14,850 in the prior comparable period due to attendance to various trade shows in that propel our sustainable market initiatives.

Other income for the three months ended June 30, 2018 and 2017 was $(189) and $(35,848), respectively representing a 99% decrease and $16,711 and $5,189, respectively for the six months ended June 30, 2018 and 2017, representing a 83% decrease. The other income is a result of dealer termination costs being accrued in prior periods that were reversed as a result of all liabilities having been satisfied. 

Interest expense for the three months ended June 30, 2018 and 2017 was $0 and $36,383, respectively and $27,414 and $77,554, for the six month ended June 30, 2018 and 2017, respectively. The decrease is mainly due to the conversion of all debt as of the date of the merger with EnerJex except for the promissory note assumed as a result of the merger and the amortization of debt discounts in 2017 totaling $18,621 that was not recorded in 2018. 

Our net loss was $712,210 and $133,474 for the three months ended June 30, 2018 and 2017, respectively and $915,707 and $306,054, for the six month ended June 30, 2018 and 2017, respectively. This represents a $578,736 or 434% increase for the three months ended June 30, 2018 and $609,653 or 199% increase for the six months ended June 30, 2018 and 2017. Overall the increase in net loss is due to more costs and less sales and the recording of the loss from the unconsolidated investee of $30,352.

 

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Cash Flows

June 30, 2018 compared to December 31, 2017

Cash on hand was $2,560,062 at June 30, 2018 compared to the $35,289 at December 31, 2017, an increase of $2,524,773. Cash used in operations for the six months ended June 30, 2018 was $(1,683,498) compared to $(245,983) of cash used in operations for the six months ended June 30, 2017. The increase was driven mainly by a significant amount of accounts payable assumed by us in the amount of $950,258 from EnerJex in connection with the Merger and added insurance expenses that were prepaid of $ 101,282. We also recorded non-cash expenses of $135,600 for stock issued in exchange for services and investment in unconsolidated investee of $30,352.

Cash provided by investing activities during the six months ended June 30, 2018 was $221,255 compared to cash used in investing activities during the six months ended June 30, 2017 of $12,775, the increase was mainly due to the $265,255 of cash acquired in connection with the Merger and . a payment to Agribotix of $35,000 related to the investment made in Agribotix..

Cash provided by financing activities during the six months ended June 30, 2018 was $3,987,016 compared to $248,050 as of June 30, 2017. This was as a result of $4,000,000 net of $20,000 in fees invested in the company in exchange for common and preferred shares. Cash was also used to repurchase shares from a shareholder for $210,642 and make payments of $32,341 on the promissory note assumed from Enerjex offset by additional cash that was received in connection with issuance of the Series C Preferred Stock.

 

Liquidity and Capital Resources

 

On November 21, 2017, Alpha Capital Anstalt (“Alpha”) signed a binding commitment letter with EnerJex to provide prior to or at the closing of the Merger a minimum of $4 million in new equity capital (the “Private Placement”). The Private Placement was consummated on March 26, 2018. In connection with the Private Placement, Alpha purchased an additional 4,000 shares of Series C Preferred Stock at a purchase price of $1,000 per share for total aggregate consideration of $4 million. The Series C Preferred Stock is convertible into 2,612,245 shares of our common stock. In addition, as consideration for their funding commitment, Alpha received a fee equal to 408,552 shares of our common stock.

 

On May 11, 2018, we issued an additional 250 shares of our Series C Convertible Preferred Stock, convertible into 163,265 shares of our common stock. received a cash payment of $250,000 for the issuance of the Series C Preferred Stock. The Series C Convertible Preferred Stock includes a beneficial ownership limitation preventing conversion of shares of Series C Convertible Preferred Stock into more than 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series C Convertible Preferred Stock.

 

Each share of Series C Preferred Stock is convertible into a number of shares of our common stock equal to the quotient determined by dividing (x) the stated value of $1,000 per share, by (y) a conversion price of $1.53. Until the volume weighted average price of our common stock on NYSE exceeds $107.50 with average trading volume of 200,000 shares per day for ten consecutive trading days, the conversion price of our Series C Preferred Stock is subject to full-ratchet, anti-dilution price protection. Under that provision, if, while that full-ratchet, anti-dilution price protection is in effect, we issue shares of our common stock at a price per share (the “Dilutive Price”) that is less than the conversion price, then the conversion price of our Series C Preferred Stock is automatically reduced to be equal to the Dilutive Price. The effect of that reduction is that, upon the issuance of shares of common stock at a Dilutive Price, the Series C Preferred Stock would be convertible into a greater number of shares of our common stock.

 

The Series C Preferred Stock was issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, in reliance on the recipient’s status as an “accredited investor” as defined in Rule 501(a) of Regulation D.

 

As of June 30, 2018, we had working capital of $2,307,361 and a loss from operations of $900,203 for the period then ended. While there can be no guarantees, we believe cash on hand, in connection with cash from operations and this offering, will be sufficient to fund operations for the next year of operations. In addition, we intend to pursue other opportunities of financing with outside investors. 

 

Off-Balance Sheet Arrangements

 

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.

 

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DESCRIPTION OF BUSINESS

 

Organizational History

 

AgEagle Aerial Systems Inc. (“AgEagle,” the “Company,” “we” or us”), headquartered in Neodesha, Kansas, is a leading manufacturer of unmanned aerial vehicles focused on providing actionable data to the precision agriculture industry. The Company was founded in 2010 by Bret Chilcott, our President and Chairman of the Board as Solutions by Chilcott, LLC, a Kansas limited liability company. In April 2015, Solutions by Chilcott was converted into a corporation and then merged into AgEagle, a newly-formed Nevada corporation.

 

Our history is rooted in advanced composite parts manufacturing, first for commercial trucks and then as a vendor to the government manufacturing micro wind turbine blades. Around 2011, we also began applying our expertise in composite parts manufacturing on a research project at Kansas State University that was attempting to use model airplanes to monitor and analyze crops. After several months, Mr. Chilcott and the university agreed to continue the commercialization phase of this project under the auspices of the Company, and in 2012, we completed the first prototype of our UAV. Over the next year, Mr. Chilcott traveled throughout the mid-western United States meeting with farmers and agronomists, compiling test data, operating history, market information, and then in early 2014 we sold our first commercial UAV.

 

Our Products and Services

We design, produce, distribute and support technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we offer for sale commercially to the precision agriculture industry. 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 products the RX-47 and RX-48. In February 2016, we signed a worldwide distribution agreement with Raven Industries, Inc. (“Raven”) under which Raven would purchase the RX-60 for the agriculture markets for resale through their network of dealers worldwide. The first shipment of our RX-60 system to Raven occurred in March 2016. In 2017, we amended our agreement with Raven to make it non-exclusive and to allow us to sell our products directly into the market. As a result, we recently changed our focus to a more direct sales model targeting agronomists in the precision agriculture market as well as providing aerial imagery services to the sustainable agriculture market, and we do not anticipate sales to, or through Raven in the near future.

Our UAV is an advanced fixed wing model UAV whose design is based upon the years of experience our management has with aircraft and composite parts construction. We design all of our UAVs to be man-portable, thereby allowing one person to launch and operate them through a hand-held control unit or tablet. All of our UAVs are electrically powered, weigh approximately four to 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 our NIR filter that uses near infrared images to capture crop data. We believe that these characteristics make our 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 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 and increasing yields. The RX-60 and RX-48 systems, were designed for busy agriculture professionals who do not have the time to process images on their computers, which some of our competitors require. Through a relationship with our strategic partner, our UAV can be programmed using a tablet device to overlay a flight path over a farmer’s specific crop area. 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 or SMS. The result is a prescription or zone map that can then be used on a field computer in a spray and precisely apply the amount of nutrients or chemicals required to continue or restore the production of healthy crops for farmers. 

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Figure 1: Figure 1: Prescription Map

 

Partnership with Raven

 

In February 2016, we signed a worldwide, exclusive distribution agreement with Raven Industries. Under this initial three-year distribution agreement, Raven would private label and purchase our fixed wing UAVs, exclusively for the agriculture markets over the initial term, for resale through their network of Ag Retailers worldwide. Raven has the right to renew the agreement after the expiration of the initial term. In 2017, we amended our agreement with Raven to make it non-exclusive and to allow us to sell our products directly into the market. The agreement contains other standard termination provisions, covenants and warranties, as more fully set forth therein. We recently changed our focus to a more direct sales model targeting agronomists in the precision agriculture market as well as providing aerial imagery services to the sustainable agriculture market, and we do not anticipate sales to, or through Raven in the near future.

 

On the date we entered into the distribution agreement with Raven, we also simultaneously entered into a stock purchase agreement with Raven whereby we sold 200,000 shares of our common stock to Raven for an aggregate purchase price of $500,000. In connection with the financing, Raven was entitled to designate one director to serve on our board of directors. In March 2016, Raven exercised this right and we appointed Lindsay Edwards to the board. Ms. Edwards subsequently resigned as a director in May 2018 after we became a public company. Raven is a publicly traded corporation (NASDAQ: RAVN) based in Sioux Falls, South Dakota that is a leading provider of precision agriculture products designed to reduce operating costs, decrease inputs and improve yields of farmers through their Applied Technology division.

Agribotix – Data and SAAS Agreements

In November 2017, AgEagle entered into a multi-agreement arrangement with Agribotix, LLC (“Agribotix”), headquartered in Boulder, Colorado, a leading agricultural information processing company providing actionable data to the agriculture industry. Agribotix’s platform delivers agricultural intelligence to increase yields and profits using drone-enabled technologies. Agribotix was founded in 2013 by Dr. Tom McKinnon, its Chief Technology Officer.

AgEagle believes that developing a strong working relationship with Agribotix will benefit AgEagle and its shareholders in developing important vertically integrated products and services. Agribotix’s primary product is FarmLens™, a subscription cloud analytics service that processes data, primarily collected with a drone such as AgEagle’s, and makes such data usable by farmers and agronomists. FarmLens is currently sold by Agribotix as a subscription and offered either standalone or in a bundle with major drone platforms manufactured by leading drone providers like AgEagle, DJI, and senseFly.

Agribotix extends the reach of its FarmLens platform by partnering with and directly integrating into offerings by leading agricultural companies like John Deere’s Operations Center and The Climate Corporation’s FieldView. To date, Agribotix has processed agricultural imagery for over 50 different crop types from over 50 countries around the world.

The agreements reached between AgEagle and Agribotix include:

 

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Dealer Agreement whereby AgEagle appointed Agribotix as a non-exclusive dealer of AgEagle’s products on a worldwide, best efforts basis. The term of the agreement is for twelve months with marketing and sales commencing on or after January 1, 2018, and automatically renews for one-year periods unless otherwise terminated. Either party may terminate the agreement with 30 days’ written notice. Both parties agree to provide standard reporting and support services. Agribotix is required to maintain proper insurance and is obligated to standard confidentiality clauses. AgEagle has the right to audit Agribotix on an annual basis for its business under this agreement. Both parties agreed to standard indemnification clauses.
Distribution and Resale Agreement whereby Agribotix appointed AgEagle as a non-exclusive distributor of Agribotix products and analytic services including FarmLens on a worldwide, best efforts basis. The term of the agreement is for twelve months and automatically renews for one-year periods unless otherwise terminated. Either party may terminate the agreement with 90 days’ written notice. Both parties agree to provide standard reporting and support services. AgEagle is required to maintain proper insurance and is obligated to standard confidentiality clauses. Both parties agree to standard indemnification clauses.
Exchange Agreement whereby, to further align interests between the parties, AgEagle has agreed to exchange shares of the Company’s common stock it receives in the Merger equal to an aggregate value of $1,000,000 for 20% of the equity membership interests of Agribotix. As of the date of the closing of the Merger, 200,000 shares of EnerJex were issued to Agribotix as outlined per the Exchange Agreement. The shares did not affect the Merger exchange ratio, and therefore was not additionally dilutive to the EnerJex shareholders.

As part of the signing of the exchange agreement, three promissory notes totaling $110,000 with a 6% per annum interest payable were executed between Agribotix and the Company in exchange for exclusive dealing rights until the later of 120 days after the signing date, or the termination date as defined in the exchange agreement, has been recorded as part of our investment in unconsolidated investee as of the closing date of the Merger.

 

On July 25, 2018, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Eagle Aerial Systems, Inc., our wholly-owned subsidiary, Agribotix and the other parties named therein. Pursuant to the Purchase Agreement, we shall, upon the closing, acquire all right, title and interest in and to all assets owned by Agribotix utilized in Agribotix’s business of providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture, except for certain excluded assets as set forth in the Purchase Agreement (the “Purchased Assets”). At closing, we shall also assume certain liabilities under various third party contracts, accounts payable and indebtedness pursuant to the terms of the Purchase Agreement. We anticipate that the closing of the transaction will occur within the next 30 days in accordance with the terms of the Purchase Agreement, subject to the closing conditions described therein.

The consideration for the Purchased Assets includes the following to be made at closing: (a) a cash payment of $150,000 (of which $110,000 was previously paid), (b) 200,000 shares of our common (the “Common Stock”) at a value of $5.00 per share (all of which shares were issued to Agribotix pursuant to the Exchange Agreement, (c) an amount payable at closing equal to the sum of: (i) the number of shares of Common Stock that is calculated by dividing $1,000,000 by the average closing daily price per share of the Common Stock on the NYSE, for each of the 20 trading days ending on the date immediately preceding the closing date (the “Average Price”), provided that in no event shall the Average Price be less than $2.00 (the “Closing Shares”); and (ii) $450,000 in cash.

In addition, Agribotix shall pay an amount on the 90th day following the closing equal to the sum of: (i) the number of shares of Common Stock that is calculated by dividing $2,000,000 by the Average Price (calculated as if the 20-trading day period ends on the 89th day following the closing), provided that in no event shall the Average Price be less than $2.00 (the “Post-Closing Shares”); and provided further that in the event that the Average Price so calculated is more than the Average Price calculated in the preceding paragraph, the Average Price shall be the Average Price calculated as set forth in the preceding paragraph); and (ii) $400,000 in cash.

If revenue of the business for the one year period ending on the first anniversary of the closing date is at least $1,000,000, plus the Capital Investment Multiplier (as defined below), then Agribotix shall earn the number of shares of Common Stock that is calculated by dividing $250,000 by the Average Price (calculated as if the 20–trading day period to which reference is made above ends on such first anniversary), provided that in no event shall the Average Price be less than $2.00. “Capital Investment Multiplier” means 1.5 times the amount of capital invested by us or our affiliates in Agribotix to support and advance the business, inclusive of loans or other investments provided to Agribotix prior to the closing, less $250,000.

The Purchase Agreement contains customary representations, warranties and covenants, including covenants obligating Agribotix to continue to conduct its business in the ordinary course. In addition, the Purchase Agreement contains provisions for indemnification in the event of any damages suffered by either party as a result of, among other things, breaches of representations and warranties contained therein. An aggregate amount equal $75,000 in cash, 50% of the number of Closing Shares and 25% of the number of Post-Closing Shares shall be deposited in an escrow account with a third party escrow agent to secure the indemnification obligations of Agribotix pursuant to the terms of the Purchase Agreement.  

Consumer Products and Services

 

UAV Market Overview

 

Unmanned aerial vehicles, or UAVs, have been in use for decades, whether it be a drone for military surveillance by the U.S. Government, a commercial UAV used to scan and survey property, or by hobbyists who fly their personal devices simply to get a different view of the world. All three of these examples fall under the same burgeoning industry, one that is increasing in number and effectiveness as aircrafts, sensors and automation technologies mature. As the potential benefits of UAV technology extend beyond its traditional military use, commercial customers have started to shift resources into the drone opportunity so as to reach levels of efficiency not previously experienced. Despite the obstacles the industry will continue to face and be required to maneuver through, the first operational rules for routine commercial use of UAVs went into effect on August 20, 2016. The current landscape and targeted industries in the UAV marketplace can be seen below:

 

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Figure 2: Industries in the UAV Marketplace

 

The military’s use of drones is recognized and have been around for many years. The participants in this market are well entrenched at this point, with companies such as Boeing, Lockheed Martin and AeroVironment providing surveillance and attack drones to the U.S. military and Department of Defense. The growth of unmanned systems for military and civil use is projected to continue through the next decade. It is estimated that UAV spending in the civil market will increase substantially over the next decade, from $2.8 billion worldwide in 2017 to $11.8 billion in 2026, and the segment is expected to generate $73.5 billion over the next 10 years, according to The Teal Group. Commercial use is expected to be the fastest growing civil segment, rising more than twelvefold from $512 million in 2017 to $6.5 billion in 2026. This growth is forecasted to be fueled, in part, by the estimated $1.3 billion in investments in the sector by technology companies and venture capitalists since 2013.

 

As compared to the relatively mature military drone sector, the hobbyist and consumer market has been growing steadily over the past five years. Market leaders include companies such as Dajiang Innovation Technology (“DJI”) and Parrot EPA with many smaller, lessor known companies jumping into the fray. Should consumers continue to adopt this technology, not only do we believe the industry will experience its projected growth, but it will provide for a significant number of purchasing options as competition increases.

 

The segment of the UAV industry that has received the most attention recently is the commercial market, which was brought into the spotlight in early 2015 when the FAA released its new proposed guidelines for commercial UAV use, and then in June 2016, when the FAA announced it had finalized the first operational rules for routine commercial use of UAVs. These rules went into effect on August 20, 2016. According to CB Insights, 2016 saw a record number of investments in the drone industry, topping $454 million across 100 transactions, due to venture firms and technology companies moving into the drone space with sizable investments. In Q1 of 2017, the sector saw a quarterly deals record of 32 investments worth $113 million giving 2017 a funding run-rate of 122 deals worth over $506 million, both new records. While regulatory uncertainty has kept many on the sidelines, the new clarity from the FAA has started to help investors get more comfortable. The primary segments in the commercial market, as seen in the above chart, include Precision Agriculture, Inspection/Surveillance, Mapping/Surveying, Film/Photo/Video and Public Safety/First Responders. AgEagle falls under the precision agriculture segment, which as an industry is relatively new and ripe with opportunity for those innovative solutions that solve today’s current problems.

 

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Figure 3: Global UAV Investment History

 

Precision Agriculture Industry Overview

Precision agriculture is a farming management concept based on observing, measuring, and responding to inter and intra-field variability in crops. Over the years, as farmers have been increasingly under pressure to increase profit margins and comply with new governmental regulations, entrepreneurs have been searching for solutions that present the prospect of new operational efficiencies. This has led to a number of changes in the agricultural industry, with precision agriculture being recognized by some as one of the largest technological opportunities in agriculture since the introduction of hydraulics in the 1940’s. As agriculture and technology companies realize the potential benefits from this new technology, many are introducing innovative products and services to the agriculture arena, focused on helping farmers capitalize upon this new technology.

 

Precision agriculture technologies provide the information and systems that allow a farmer to optimize and customize the timing, amount, and placement of inputs (seed, fertilizer, pesticides, irrigation, etc.) for any given section of a field. This allows the farmer to produce the maximum yield from the entire field at the lowest possible cost. The concept has been enabled by technologies that include:

 

Crop yield monitors mounted on GPS-equipped combines;

 

variable rate technology, like seeders, sprayers, etc.;

 

an array of real-time vehicle mountable sensors that measure everything from chlorophyll levels to plant water status; and

 

multi- and hyper-spectral aerial and satellite imagery, from which products like Normalized Difference Vegetation Index (“NDVI”) maps can be made.

 

 

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The total value of U.S. crops in 2014 was estimated at $195 billion. While 2015 and 2016 saw slight downturns due to commodity pricing, even a modest improvement in yield would have a substantial aggregate economic impact for the roughly $200 billion industry. There are a few trends that drive where we believe the precision agriculture marketplace is heading: the increased use of auto steering and variable rate controls for inputs, advanced sensors and Big Data, the push into the food and grocery industry by Walmart and Amazon, and customers who are realizing their return on investment.

 

The first trend is possibly the most important. Guidance and auto steering have provided farmers with significant benefits by reducing costly application overlaps by field equipment. This, combined with variable rate application equipment, will allow farmers to break their fields into specific sections based on criteria such as soil type and historical yield. With this information available on a section by section basis, farmers are then able to minimize their costs and increase profitability across the farm as a whole.

However, we believe it is the data behind the equipment that is going to drive the ag industry forward. Advanced sensors and filters allow the farmer to not only view weather and soil data, but through use of a device such as a drone, it would allow that information to be coupled with real time plant health data for in-depth analysis. This analysis supports real time predictive decision-making to drive costs lower and improve crop yields.

Finally, as farmers have begun to adopt this new technology, we believe the returns on their investments are beginning to materialize. By having this increased functionality and the expanded offerings of precision agriculture devices, integrated software, analytics, and cloud services, the hope is that the adoption rates of these new solutions continue to grow over the coming years

 

Figure 4: AgEagle Crop Health Map

 

As the demographic for farmers shift to a younger, more technologically-minded group, many are forecasting an increase in the rate of growth of precision agriculture. A current estimate of the precision agriculture market by Markets and Markets projects a roughly $7.9 billion global marketplace by 2022, with an estimated compound annual growth rate of 13.5% from 2016 to 2022. The growth rate outside the U.S., including developing countries where the need to improve productivity is even greater, is expected to be higher. More companies, ranging from large public companies (e.g., Monsanto (biotech, seeds, chemicals) and John Deere (equipment)), to small privately owned or venture backed companies, are expected to begin focusing on this opportunity with the goal of providing specialty farm management software, cloud services, sensors, data analytics, and even drone imaging services.

Precision Agriculture UAV Market

While precision agriculture is beginning to transform traditional farming methods, we believe that the commercial UAV market is strategically placed to play a substantial role in this transformation. UAVs have many commercial applications, as described above, and many industry experts now expect one of the biggest impacts to be on the agriculture industry. Drone technology, if executed properly, can make farming more efficient, lower operating costs and reduce farming’s environmental impact. Current estimates from Zion Market Research expect the industry for drones used in agriculture to reach more than $3.0 billion by 2021, up from approximately $674 million in 2015. These estimates are in spite of the ban that was previously in place by the FAA prior to the announcement in June 2016 that the FAA finalized the first operational rules for routine commercial use of UAVs, which went into effect on August 20, 2016.

 

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The use of drones for agriculture can add real time high definition imagery collected on demand to help farmers see what is happening in the field without having to walk through the field. UAVs costs a fraction of what an airplane or a satellite costs, and at the same time, they can provide a superior set of images with a potential resolution equivalent of taking a picture while standing next to the plant. These small, unmanned rotary and fixed wing aircrafts can fly at low altitudes and be programmed to fly a certain pattern using a variety of software. They can take high definition images with visual and multi spectral cameras, providing specific plant health information in real time. This new imagery would need to be integrated with all the other data a farmer collects to increase productivity. Successful entrants in the UAV space will be the ones who can integrate the existing data and the science of agronomy into the images through partnering or acquisitions.

 

Market Size

 

We believe that the precision agriculture sector of the UAV market presents robust opportunities for our products. The United Nations Food and Agriculture Organization (“FAO”) projects that the world will require 70% more food production by 2050 in order to keep up with population growth. That number is nearly 100% when looking at just developing countries. To accomplish this, the agriculture sector will need to become more efficient, producing an average of 250 bushels per acre (“bpa”), possibly as much as 300, from the approximately 200 bpa that are currently produced. Farmers and agronomists are seeking ways to increase yields while lowering input costs and overall environmental impact of chemicals and water consumption. In collaboration with the precision agriculture products already available today, we believe our UAVs can help to accomplish this goal with the actionable data we provide to growers.

Recent estimates from a report published by Goldman Sachs in March 2016 further estimates the total addressable market for precision agriculture to be $1.4 billion in the U.S. and $5.9 billion globally over the next five years. Such market size translates to approximately 47,000 UAV units in the U.S. and 197,400 UAV units around the world. In addition, Goldman Sachs suggests that the commercial UAV industry has a $21 billion total addressable market with an estimated triple-digit compound annual growth rate from 2016 to 2020.

 

Other research firms have published their estimates for the precision agriculture market over the last couple years as well. PricewaterhouseCoopers pegs the addressable market for agriculture drones to be worth $32.4 billion, second only to the infrastructure sector. Global Market Insights sees the market surpassing $1.0 billion by 2024, with global shipments exceeding 200,000 UAV units by 2024. Markets and Markets expects the agriculture drone market to grow from $864 million in 2016 to $4.2 billion in 2022, representing a 30%+ CAGR during that period.

 

Our Growth Strategy

Build a distribution network to offer a best-in-class precision ag platform.

We believe we can establish our UAV product and systems as leading technologies in the precision agriculture marketplace. Through organic growth we believe we can identify and build relationships with dealers and customers in key agricultural regions worldwide, which will help make it possible for farmers in those markets to have access to the AgEagle platform. We intend to target the U.S. initially and then target Australia and South America as we grow our operations.

Continue to explore partnerships with companies that can expand our offerings.

We intend to expand our product offerings by building relationships, partnerships and possibly acquisitions of companies that have vertical, synergistic technologies. Our first venture into this concept has been and will continue to be to integrate our UAV system with various precision agriculture products in order to connect the data and improve the effectiveness and efficiency of this data for farmers. In addition, other technology alliances may include the acquisition or development of other electronics, software, sensors or more advanced aerial platforms. We are constantly meeting and in discussions with groups that could fill these roles and help with additional development ideas. We see the potential to acquire such synergistic companies to be an exciting potential growth strategy for AgEagle, especially as the number of companies in the market start to consolidate over the coming years.

 

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Deliver new and innovative solutions in the sustainable agriculture markets.

In an effort to help farmers and agribusinesses better identify sustainability opportunities we intend to use our expertise in high resolution imagery capture to verify and validate best management practices. With the application of precision imagery and analytics, we will offer value from the farm gate to the retail outlet for sustainability measurement. While less than 20% of companies in the S&P 500 reported on their sustainability initiatives in 2011, that number has increased significantly to 85% today. Many companies, including Fortune 500 corporations and major food manufactures, are experiencing increased pressure from consumers to manage their businesses in a sustainable manner. Most food manufacturers are not set up to monitor how the ingredients they purchase from farmers are treated and handled in the field, yet consumers are demanding full transparency and accountability on the chemical treatment of their food. That is where we come in. Using the same suite of imagery capture and data analytics we developed for the precision agriculture market, we intend to help food manufacturers meet their sustainable farming initiatives by helping them reduce water usage and the chemicals that go into our food. Management believes that our product and data platform is uniquely designed to support different corporations’ sustainability goals by tracking and documenting sustainability efforts on the farm.

Pursue the expansion of the AgEagle platform of products into other industries besides agriculture.

We may investigate and pursue opportunities outside of agriculture as we continue to expand and grow the AgEagle platform. We are confident in the UAV product we have today, and believe that this product could provide other industries the same kind of optimization we are currently providing the agriculture 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.

 

Competitive Strengths

 

We believe the following attributes and capabilities provide us with long-term competitive advantages:

 

Proprietary Technology and Trade Secrets. We believe our unique design and assembly process differentiates our product from our competitors. We are confident that our UAVs are industry-leading in durability due to the lightweight laminated shell of the wing, which is made using a proprietary manufacturing process developed by our founder over five years of innovating. This process, which hardens the material used to build the shell, allows the UAV to perform in harsh weather conditions (with wind speeds up to 30 miles per hour) and bring itself to an unassisted landing, all at a total weight of about four to six pounds. This design is an important trade secret and we have non-disclosure agreements with our employees in order to keep it unique to AgEagle.

 

Product Has Global Appeal. We believe that our technology addresses a need for better data in the agriculture industry worldwide. With our new global distribution platform, we believe that we are well-positioned for our advanced products to be a viable solution for farmers worldwide.

 

Increased Margins for Farmers. We believe our UAVs will directly enhance margins of our customers by reducing the amount of nutrients and chemicals needed to manage their farms. The software equipped on our UAVs will deliver a high-quality aerial map upon completion of the flight, allowing the user to accurately identify the specific areas that are malnourished. This software is compatible with precision applicator tractors, which assist users in applying a precise amount of nutrients in only the necessary areas.

Empower Customers Through Our Self-Serve Platform. Our UAVs are specially designed to provide users with a portable and easy to operate device, which can be controlled with a hand-held unit or tablet. The UAVs are equipped with a camera and near infrared filter whose images provide a holistic aerial view of the fields along with meaningful data that is uploaded and delivered to the user within a very short time frame. As a result, this platform allows users to quickly detect any issues in their fields, which enables them to address such issues in a timely manner before any damage, or further damage affects their fields.

 

All Manufacturing of our Products is Completed in the United States. As of today, we manufacture all of our products at our 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. In addition, all of our research and development activities are performed in the U.S.

 

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Government Regulation

 

Our products are subject to regulations of the FAA. On June 21, 2016, the announced it had finalized the first operational rules for routine commercial use of small UAS, which for purposes of the regulations are unmanned aircraft weighing less than 55 pounds that are conducting non-hobbyist operations. UAS operators-for-hire will have to pass a written test and be vetted by the TSA, but no longer need to be airplane pilots as current law requires. The rules went into effect on August 20, 2016. Among other things, the new regulations require

 

preflight inspection by the remote pilot in command;

 

minimum weather visibility of 3 miles from the control station;

 

visual line-of-sight to the aircraft from the pilot and person manipulating the controls;

 

prohibit flying the aircraft over any persons not directly participating in the operation, not under a covered structure or not inside a covered stationary vehicle;

 

daylight or civil twilight operations (30 minutes before official sunrise to 30 minutes after official sunset, local time);

 

maximum groundspeed of 100 mph (87 knots); and

 

maximum altitude of 400 feet above ground level or, if higher than 400 feet above ground level, the aircraft must remain within 400 feet of a structure.

 

The new regulations also establish a remote pilot in command position. A person operating a small unmanned aircraft must either hold a remote pilot airman certificate with a small unmanned aircraft system rating or be under the direct supervision of a person who does hold a remote pilot certificate (remote pilot in command). A pilot’s license is no longer required. To qualify for a remote pilot certificate, a person must: demonstrate aeronautical knowledge by either passing an initial aeronautical knowledge test at an FAA-approved knowledge testing center, or hold a part 61 pilot certificate other than student pilot, complete a flight review within the previous 24 months, and complete a small UAS online training course provided by the FAA. The person must also be vetted by the TSA and be at least 16 years old. Applicants will obtain a temporary remote pilot certificate upon successful completion of TSA security vetting. The FAA anticipates that it will be able to issue a temporary remote pilot certificate within 10 business days after receiving a completed remote pilot certificate application.

 

The regulations do not require the use of a visual observer. In addition, FAA airworthiness certification is not required. However, the remote pilot in command must conduct a preflight check of the small UAS to ensure that it is in a condition for safe operation.

 

Most of the restrictions can be waived by the FAA if the applicant demonstrates that his or her operation can safely be conducted under the terms of a certificate of waiver. The FAA maintains an online portal where a company or individual can apply for a certificate of waiver.

 

Manufacturing

As of today, we manufacture all of our products at our manufacturing facility in Neodesha, Kansas. We believe our current facilities are sufficient to adapt to our growth plans for the next two to three years and we have no current plans to expand our manufacturing capabilities.

 

Suppliers

Currently, we have strong relationships established with companies that provide many of the parts and services necessary to construct our advanced fixed wing and newly introduced UAVS drones, such as Botlink, MicaSense and 3DR. We have relationships with these suppliers and hope to continue to build and find new relationships from which we can source cheaper and better supplies to stay ahead of the needs of the market.

 

Our flight planning and photo stitching software is provided by Botlink, a private company in North Dakota. We have worked closely with Botlink to optimize their software to work with our platforms. We consider our relationship with Botlink to be good; however, a loss of this relationship could have a materially adverse effect on our product offerings and results of operations.

 

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Research and Development

Research and development activities are part of our business and we follow a disciplined approach to investing our resources to create new technologies and solutions. A fundamental part of this approach is a well-defined screening process that helps us identify commercial opportunities that support current desired technological capabilities in the precision agriculture space. Our research includes the expansion of our wing products so as to build a portfolio of UAVs, as well as other solutions to problems with which agriculture professionals struggle.

 

Employees

 

As of March 31, 2018, we had a total of four employees, which includes two part-time employees. We plan to increase the number of employees as we execute on our new growth strategy. We have not experienced a work stoppage since we commenced operations. None of our employees are represented by employee union(s). We believe relations with all of our employees are good.

 

Intellectual Property

 

We currently have a registered trademark on the AgEagle name and logo. We have also filed provisional patents on certain aspects of our current and future technology. Finally, we consider our UAV manufacturing process to be a trade secret, and have non-disclosure agreements with current employees so as to protect those and other trade secrets held by the Company.

 

Property

 

We have one leased facility located at 117 South 4th Street, Neodesha, Kansas 66757. This serves as the corporate headquarters and manufacturing facility. The facility is a lease of 4,000 square feet at a cost of $200 per month. Monthly rent increases of $100 every year until the expiration of the lease in September 30, 2018 which we plan on extending.

 

Legal Proceedings

 

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

 

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DIRECTORS AND EXECUTIVE OFFICERS

 

Directors and Executive Officers

 

The following table sets forth information concerning our directors, executive officers and other key employees as of as of the date of this prospectus.

 

Name   Age   Positions Held
Barrett Mooney   33   Chief Executive Officer
Bret Chilcott   57   Chairman of the Board, President and Secretary
Nicole Fernandez-McGovern   45   Chief Financial Officer
Grant Begley (1)(2)(3)   65   Director
Scott Burell (1)(2)(3)   53   Director
Thomas Gardner (1)(2)(3)   43   Director
Corbett Kull          50   Director

———————

(1)       Member of the Audit Committee

(2)       Member of the Compensation Committee

(3)       Member of the Nominating and Corporate Governance Committee

 

Barrett Mooney. Mr. Mooney joined as Chief Executive Officer as of July 18, 2018. Mr. Mooney brings an extensive track record of growing agriculture and sustainability businesses. From May 1, 2017 to July 18, 2018, he served as Group Product Lead for The Climate Corporation, a subsidiary of Monsanto (recently acquired by Bayer), where he led the satellite imagery team, managed a team focused on using artificial intelligence to enhance crop yield production an introduced a new organizational structure to improve sales efficiency. Prior to The Climate Corporation, from July 1, 2012 to May 1, 2017, Mr. Mooney co-founded and was CEO and president of HydroBio, a software company that used satellite-driven image analytics to conserve water and maximize crop yields. In May 2017, he sold HydroBio to The Climate Corporation. Mr. Mooney holds a Doctor of Philosophy in Agricultural and Biological Engineering from the University of Florida. He is also a member of the American Society of Agricultural and Biological Engineers.

Bret Chilcott. Mr. Chilcott has served as a member of our board of directors and as President since the inception of the Company in April 2014 and as Chief Executive Officer since February 2016. As of July 18, 2018, Mr. Chilcott stepped down as Chief Executive Officer and currently serves as President, Secretary and Chairman of the Board. The path to AgEagle started when Mr. Chilcott established his advanced composite manufacturing company, Solutions by Chilcott, LLC, whose manufacturing processes led the way to the initial AgEagle fixed wing design. Previously, Mr. Chilcott spent over 12 years with Cobalt Boats in Neodesha, Kansas, where he held a variety of positions from Director of Product Development and Engineering to Director of Sales and Marketing. In those positions, he was responsible for developing strategic product plans for the company as well as the management of regional sales managers. Prior to Cobalt Boats, Mr. Chilcott also spent a number of years working at the Cessna Aircraft Company and Snap-on Tools. It was at Snap-on Tools, acting as a national accounts manager, that Mr. Chilcott first established his blueprint for a dealer network, a model which he carried over successfully to AgEagle when AgEagle began selling its product. Mr. Chilcott graduated from Kansas Community College in 1982 with a degree in Sales and Marketing. We believe that Mr. Chilcott’s background and experience in composite parts manufacturing provides him with a broad familiarity of the range of issues confronting our company in the market, which makes him a qualified member of our board.

 

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Nicole Fernandez-McGovern. Ms. Fernandez-McGovern has served as our Chief Financial Officer since April 2016. From April 2013 to January 2016, Ms. Fernandez-McGovern served as the CEO and CFO of Trunity Holdings, Inc. (OTCQB: TNTY), where she was able to lead a successful restructuring of the company by acquiring a new compounding pharmacy business and finalizing the spin-out of the legacy educational business into a newly formed private company. From January 2011 to April 2013, Ms. Fernandez-McGovern was President of RCM Financial Consulting, a consulting firm where she provided interim accounting and financial services to small and medium sized companies. Ms. Fernandez-McGovern was also a financial manager at Elizabeth Arden, Inc. (NASDAQ: RDEN) from July 2001 to October 2010, where she was involved in all aspects of the SEC and financial reporting process. Her career began with KPMG LLP in the audit and assurance practice where she managed various large scale engagements for both public and privately held companies. Ms. Fernandez-McGovern has a Master of Business Administration with a concentration in Accounting and International Business and a Bachelor of Business Administration with a concentration in accounting, both from the University of Miami. She is also a Certified Public Accountant in the State of Florida, serves on the boards of the South Florida Chapter of Financial Executives International and Pembroke Pines Charter Schools Advisory Board and is fluent in Spanish.

 

Grant Begley. Mr. Begley has served as a member of our board of directors since June 2016. Since July 2011, Mr. Begley has served as President of Concepts to Capabilities Consulting LLC, which advises global executive clients on competitive positioning and performance in aerospace. From August 2010 to September 2011, Mr. Begley was Corporate Senior Vice President for Alion Science and Technology. Prior to Alion, Mr. Begley served as Pentagon Senior Advisor to the Office of the Under Secretary of Defense, for Unmanned Systems, advising on critical issues and leading development of DoD’s 2011 Unmanned Systems Roadmap. Mr. Begley’s career includes defense industry leadership positions for the development of advanced capabilities with Raytheon and Lockheed Martin where he initiated and led cross-corporation unmanned systems and robotics successes. Mr. Begley served in the United States Navy for 26 years, where his duties included operational assignments flying fighter aircraft, designated Top Gun, followed by acquisition assignments for the development and management of next generation manned and unmanned aircraft systems, weapon systems and joint executive acquisition assignments. Mr. Begley holds Master’s degrees in Aerospace and Aeronautic Engineering from the Naval Post-Graduate School and a Bachelor’s degree in General Engineering from the U.S. Naval Academy. We believe that Mr. Begley’s 20 plus years of experience as a UAV industry expert, focused on UAV technologies, regulations and commercial applications, will be an invaluable resource to our board.

 

Scott Burell. Mr. Burell has served as a member of our board of directors since June 2016. Concurrently from November 2006 until November 2017, he served as the Chief Financial Officer, Secretary and Treasurer of CombiMatrix Corporation (NASDAQ: CBMX), a publicly traded diagnostics laboratory that was acquired in November 2017 by Invitae Corporation (NYSE: NVTA). Mr. Burell served as CombiMatrix’s Vice President of Finance since November 2001 and as Controller from February 2001 to November 2001. From May 1999 to February 2001, Mr. Burell was the Controller for Network Commerce, Inc. (NASDAQ: SPNW), a publicly traded technology and information infrastructure company located in Seattle, Washington. Prior to this, Mr. Burell spent nine years with Arthur Andersen’s Audit and Business Advisory practice in Seattle. During his tenure in public accounting, Mr. Burell worked with many clients, both public and private, in the high-tech and healthcare markets, and was involved in numerous public offerings, spin-offs, mergers and acquisitions. Mr. Burell has been a licensed C.P.A. in the State of Washington since 1992 (currently inactive). Mr. Burell also serves on the Board of Directors of Microbot Medical, Inc. (NASDAQ: MBOT), an Israeli-based medical device company specializing in the researching, designing, developing and commercializing of transformational micro-robotics medical technologies. He also is a member of the Board of Directors of CollPlant, as well as CollPlant (TLV: CLPT), a regenerative medicine company focused on development and commercializing tissue repair products, initially for orthobiologics and advanced would care markets. He is a member of the National Association of Corporate Directors, the Orange County chapter of the Forum for Corporate Directors and is a member of the American Institute of Certified Public Accountants. He holds Bachelor of Science degrees in both Accounting and Business Finance from Central Washington University. We believe that Mr. Burell’s background in accounting and experience as a chief financial officer of a public company, coupled with his corporate governance expertise, qualify Mr. Burell as a valuable member of our board.

 

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Thomas Gardner. Mr. Gardner has served as a member of our board of directors since June 2016 and he and his firm has been engaged as a consultant to AgEagle. Since May 2010, Mr. Gardner has served as COO and Director at NeuEon, Inc., a technology advisory consulting firm, where he oversees operations and provides strategic technology and business guidance to select clients. Mr. Gardner has extensive experience in the areas of business and technology leadership across many industries, including financial services, manufacturing, telecommunications and consumer goods. Within these sectors, Mr. Gardner has specific expertise in the areas of process improvement, digitization and standardization, mergers and acquisitions, system implementations, enterprise resource planning and work-force optimization. Mr. Gardner holds a dual Bachelor of Science in Accounting and Management from Bryant University. We believe that Mr. Gardner’s experience as a data analytics expert, along with his strategic technology and business expertise, brings a unique perspective to our board.

 

Corbett Kull. Mr. Kull has served as a member of our board of directors since July 2018. Since December 8, 2014, Mr. Kull has served as senior director of marketing for The Climate Corporation, a subsidiary of Monsanto (now Bayer), which provides software, hardware and insurance products to farmers worldwide. Prior to his role at The Climate Corporation, in 2013. Kull co-founded 640 Labs, an agribusiness that leveraged the power of analytics, mobile technologies and cloud computing to help farmers capture and store in-field data. In December 2014, he sold 640 Labs to The Climate Corporation. Kull received his Master in Business Administration, with an emphasis in Marketing, from the Illinois Institute of Technology. He earned Bachelors of Science in Electrical Engineering from Rose-Hulman Institute of Technology. We believe that Mr. Kull’s business expertise regarding analytics, mobile technologies and cloud computing qualify Mr. Kull as a valuable member of our board.

 

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CORPORATE GOVERNANCE

 

Director Independence

 

The board of directors has reviewed the independence of our directors based on the listing standards of the NYSE American. Based on this review, the board of directors determined that each of Messrs. Begley, Burell, Gardner and Kull are independent within the meaning of the NYSE American. In making this determination, our board of directors considered the relationships that each of these non-employee directors has with us and all other facts and circumstances our board of directors deemed relevant in determining their independence. As required under applicable NYSE American rules, we anticipate that our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present.

 

Committees of the Board

 

Our board of directors has established a standing audit committee, compensation committee, and nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board.

 

Audit Committee

 

The audit committee is responsible for assisting our board of directors in its oversight of the integrity of our financial statements, the qualifications and independence of our independent auditors, and our internal financial and accounting controls. The audit committee has direct responsibility for the appointment, compensation, retention (including termination) and oversight of our independent auditors, and our independent auditors report directly to the audit committee. The audit committee also prepares the audit committee report that the SEC requires to be included in our annual proxy statement.

 

The members of the audit committee are Messrs. Begley, Burell and Gardner. Mr. Burell serves as chair of the audit committee. Each member of the audit committee qualifies as an independent director under the corporate governance standards of the NYSE American and the independence requirements of Rule 10A-3 of the Exchange Act. Our board of directors has determined that Mr. Burell qualifies as an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K and meets the financial sophistication requirements of the NYSE American. The audit committee has adopted a written charter that satisfies the applicable standards of the SEC and the NYSE American, which is available on our website.

 

Compensation Committee

 

The compensation committee approves the compensation objectives for the company, approves the compensation of the chief executive officer and approves or recommends to our board of directors for approval the compensation of other executives. The compensation committee reviews all compensation components, including base salary, bonus, benefits and other perquisites.

 

The members of the compensation committee are Messrs. Begley, Burell and Gardner. Mr. Begley serves as chair of the compensation committee. Each member of the compensation committee is a non-employee director within the meaning of Rule 16b-3 of the rules promulgated under the Exchange Act, each is an outside director as defined by Section 162(m) of the United States Internal Revenue Code of 1986, as amended, or the Code, and each is an independent director as defined by the NYSE American. The compensation committee has adopted a written charter that satisfies the applicable standards of the SEC and the NYSE American, which is available on our website.

 

Nominating and Corporate Governance Committee

 

The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the structure and composition of our board and the board committees. In addition, the nominating and corporate governance committee will be responsible for developing and recommending to our board corporate governance guidelines applicable to the company and advising our board on corporate governance matters.

 

The members of the nominating and corporate governance committee are Messrs. Begley, Burell and Gardner, and Mr. Gardner will serve as chair of the nominating and corporate governance committee. Each member of the nominating and corporate governance committee will be an independent director as defined by the NYSE American. The nominating and corporate governance committee has adopted a written charter that satisfies the applicable standards of the NYSE American, which is available on our website.

 

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Board Leadership Structure

 

With the new appointment of Mr. Mooney as our Chief Executive Officer, Mr. Chilcott no longer has the dual role of Chief Executive Officer and Chairman of the board.

 

Risk Oversight

 

Our board of directors oversees a company-wide approach to risk management. Our board of directors assists management to determine the appropriate risk level for us generally, assess the specific risks faced by us and review the steps taken by management to manage those risks. While our board of directors has ultimate oversight responsibility for the risk management process, its committees will oversee risk in certain specified areas.

 

Specifically, our compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements, and the incentives created by the compensation awards it administers. Our audit committee will oversee management of enterprise risks and financial risks, as well as potential conflicts of interests. Our board of directors is responsible for overseeing the management of risks associated with the independence of our board of directors.

 

Code of Business Conduct and Ethics

 

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics is posted on our website. We intend to disclose future amendments to the code or any waivers of its requirements on our website to the extent permitted by the applicable rules and Exchange Act requirements.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of our compensation committee has ever been an officer or employee of the company. None of our executive officers serves, or has served since inception, as a member of the board of directors, compensation committee or other board committee performing equivalent functions of any entity that has one or more executive officers serving as one of our directors or on our compensation committee.

  

 

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EXECUTIVE COMPENSATION

 

In connection with the Merger, all of the EnerJex executive officers and directors resigned from their positions with EnerJex, and the officers and directors of AgEagle Sub were appointed to serve as officers and directors of the Company post-merger. EnerJex’s named executive officers for the fiscal years ended December 31, 2017 and 2016 are no longer current executive officers of AgEagle. As a result, and for ease of reference we have included a separate executive compensation section to reflect the prior years’ compensation for the EnerJex executive officers and directors.

 

EXECUTIVE COMPENSATION – AGEAGLE (POST-MERGER)

 

Summary Compensation Table

 

The following summary compensation table indicates the total compensation received by, or earned by Mr. Bret Chilcott in his role as Chief Executive Officer and President of AgEagle Sub during the years ended December 31, 2017 and 2016. Mr. Chilcott was our only named executive officer during the years ended December 31, 2017 and 2016.

 

Name and Principal Position   Year   Salary   Bonus   Equity
Awards
  All Other
Compensation
  Total
Bret Chilcott (1)   2016  $ 31,200  $ -0-  $ -0-  $ -0-  $ 31,200
  2017  $ 31,200  $ -0-  $ -0-  $ -0-  $ 31,200
Barrett Mooney (2)   2016  $ --  $ --  $ --  $ --  $ --
    2017  $ --  $ --  $ --  $ --  $ --
Nicole Fernandez-McGovern(3)   2016  $ 10,000  $ -0-  $ -0-  $ -0-  $ 10,000
    2017  $ 20,000  $ -0-  $ 11,320  $ -0-  $ 31,320

______________________________
(1) Mr. Chilcott served as Chief Executive Officer and President of AgEagle Sub, and of the Company until April 18, 2018.

(2) Mr. Mooney was not a named executive officer of the Company during 2017 and 2016. Mr. Mooney was appointed as Chief Executive Officer of the Company effective as of July 18. 2018.

(3) Ms. Fernandez-McGovern was appointed as Chief Financial Officer effective April 6, 2016.

 

Employment Agreements

Barrett Mooney

Pursuant to an employment offer letter dated July 9, 2018, Mr. Mooney will receive as compensation for his services as Chief Executive Officer a base salary of $220,000 per year, which shall be subject to annual performance review by the Compensation Committee of the Board and may be revised by the Board, in its sole discretion. Mr. Mooney received an initial grant of 75,000 shares of restricted common stock of the Company which is fully vested. Mr. Mooney shall also be eligible to receive an award of 75,000 shares of restricted common stock of the Company which shall fully vest as of January 1, 2019 if, and only if, the stock price of the Company reaches $3.55 per share and the closing price per share is at or above such price at the end of the day on January 1, 2019. In addition, Mr. Mooney is eligible to receive an award of 20,000 nonqualified stock options under the Company’s 2017 Omnibus Equity Incentive Plan (the “Equity Plan”) upon securing one sustainability pilot program on or before October 31, 2018, and an additional award of 30,000 nonqualified stock options under the Equity Plan upon securing a second sustainability pilot program on or before January 31, 2019. Both awards shall provide for immediate vesting and exercisability at an exercise price equal to the fair market value of the Company’s shares of common stock underlying the options as of the date of grant. Mr. Mooney will also be eligible receive an award of up to 55,000 nonqualified stock options under the Equity Plan based upon the results of his annual performance review in the first quarter of 2019.

Nicole Fernandez-McGovern

As the Chief Financial Officer of AgEagle Sub and now of AgEagle (Post-Merger), Ms. Fernandez earns a salary of $66,000 per year, payable in monthly installments of $5,500. As of December 31, 2017, Ms. Fernandez was owed $71,000 for deferred compensation for services rendered in 2017 and part of 2016. As part of her compensation, Ms. Fernandez shall also receive ten-year stock options to purchase 265,032 shares of common stock at an exercise price of $0.06 per share, of which half of the options vest upon issuance and the remainder will vest equally over two years. Ms. Fernandez will be awarded additional stock options to purchase 12,500 shares of common stock on a quarterly basis at an exercise price per share equal to the market price of our common stock at the time of issuance during the term of her employment.

We have no other formal employment agreements with our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of our named executive officers, from a change-in-control, or from a change in any executive officer’s responsibilities following a change-in-control. However, it is possible we will enter into formal employment agreements with our executive officers in the future.

 

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Outstanding Equity Awards At Fiscal Year-End

 

Mr. Chilcott did not have any equity-based compensation outstanding at the fiscal year ended December 31, 2017.

 

Non-Employee Director Compensation

Pursuant to their respective offer letters all independent directors, except Mr. Corbett Kull, are entitled to receive for their service on the board: (1) an initial grant of five year options to purchase 77,356 shares of common stock as accrued for time served as a board member since 2016, at an exercise price of $0.06 per share that vested half upon issuance and the remainder is vesting equally over 2 years and (2) additional five year options to purchase 16,500 shares of common stock issuable per calendar quarter of service at an exercise price per share equal to the market price of our common stock at the time of issuance that will vest equally over two years.

Pursuant to his offer letter Mr. Corbett Kull is entitled to receive for his service on the board: (1) an initial grant of five year options to purchase 41,250 shares of common stock upon appointment, which was at an exercise price of $1.77 (equal to the market price of our common stock on the date of grant) that will vest in equal installments every calendar quarter over a one year period, and (2) five year options to purchase 16,500 shares of common stock per calendar quarter of service at an exercise price per share equal to the market price of our common stock at the time of issuance that will vest in equal installments every calendar quarter for the two year period after date the grant.

 

Company 2017 Omnibus Equity Incentive Plan

 

The 2017 Omnibus Equity Plan is a comprehensive incentive compensation plan under which we 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 us attract, motivate and retain such persons and thereby enhance shareholder value. The Plan provides for the grant of awards which are incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), unrestricted shares , restricted shares, restricted stock units, performance stock, performance units, SARs, tandem stock appreciation rights, distribution equivalent rights, or any combination of the foregoing, to key management employees, non-employee directors, and non-employee consultants of the Company or any of its subsidiaries (each a “participant”) (however, solely Company employees or employees of the Company’s subsidiaries are eligible for incentive stock option awards). We have reserved a total of 2,000,000 shares of common stock for issuance as or under awards to be made under the Plan.

 

Types of Stock Awards

 

The Plan, provides for the grant of incentive stock options and non-qualified stock options. Stock options may be granted to employees, including officers, non-employee directors and consultants of the company or our affiliates, except that incentive stock options may be granted only to employees.

 

Share Reserve

 

The aggregate number of shares of our common stock that have been reserved for issuance is 2,000,000 shares. The number of shares of our common stock available for future issuance is 919,475, in addition to the 1,080,525 shares to be granted pursuant to the authorized option grants described above. If a stock option award expires, terminates, is canceled or is forfeited for any reason, the number of shares subject to the stock option award will again be available for issuance. In addition, if stock awards are settled in cash, the share reserve will be reduced by the number of shares of common stock with a value equal to the amount of the cash distributions as of the time that such amount was determined and if stock options are exercised using net exercise, the share reserve will be reduced by the gross number of shares of common stock subject to the exercised portion of the option. As of the date of this prospectus, 1,080,525 shares will be granted under the Plan and 207,055 shares have been granted outside of the Plan.

 

40

 

Administration

 

Our board of directors or a duly authorized committee thereof, has the authority to administer the Plan. Subject to the terms of the Plan, our board of directors or the authorized committee, referred to herein as the committee, determines recipients, dates of grant, the numbers and types of stock awards to be granted and the terms and conditions of the stock option awards, including the period of exercisability and vesting schedule applicable to a stock option award. Subject to the limitations set forth below, the committee will also determine the exercise price and the types of consideration to be paid for the award. The committee has the authority to modify outstanding awards under the Plan. The committee has the authority to adopt, alter and repeal administrative rules, guidelines and practices governing the Plan and to perform all other acts, including delegating administrative responsibilities, as it deems advisable to construe and interpret the terms and provisions of the Plan and any stock option award granted under the Plan. Decisions and interpretations or other actions by the committee are in the discretion of the committee and are final binding and conclusive on the company and all participants in the Plan.

 

Stock Options

 

Incentive stock options and non-qualified stock options are granted pursuant to stock option award agreements adopted by the committee. The committee determines the exercise price for a stock option, within the terms and conditions of the Plan, provided that the exercise price shall not be less than (i) in the case of a grant of any NQSO or an ISO to a key employee who at the time of the grant does not own stock representing more than ten percent (10%) of the total combined voting power of all classes of our stock or of any subsidiary, one hundred percent (100%) of the fair market value of a share of common stock as determined on the date the stock option award is granted; (ii) in the case of a grant of an ISO to a key employee who, at the time of grant, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of our stock or of any subsidiary, one hundred ten percent (110%) of the fair market value of a share of common stock, as determined on the date the stock option award is granted. The fair market value of the common stock for purposes of determining the exercise price shall be determined by the Committee in accordance with any reasonable method of valuation consistent with applicable requirements of Federal tax law, including, as applicable, the provisions of Code Section 422(c)(8) and 409A as applicable. Stock options granted under the Plan will become exercisable at the rate specified by the committee and may be exercisable for restricted stock, if determined by the committee.

 

The committee determines the term of stock options granted under the Plan, up to a maximum of ten years. The option holder’s stock option agreement shall provide the rights, if any, that such holder has to exercise the stock option at such time that such holder’s service relationship with us, or any of our affiliates, ceases for any reason, including disability, death, with or without cause, or voluntary resignation. All unvested stock option awards are forfeited if the participant's employment or service is terminated for any reason, unless our compensation committee determines otherwise.

 

Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the committee and may include (i) check, bank draft or money order, or wire transfer, (ii) if the company's common stock is publicly traded, a broker-assisted cashless exercise, or (iii) such other methods as may be approved by the committee, including without limitation, the tender of shares of our common stock previously owned by the option holder or a net exercise of the option.

 

Unless the committee provides otherwise, options generally are not transferable except by will, the laws of descent and distribution. The committee may provide that a non-qualified stock option may be transferred to a family member, as such term is defined under the applicable securities laws.

 

Tax Limitations on Incentive Stock Options

 

The aggregate fair market value, determined at the time of grant, of our common stock with respect to incentive stock options that are exercisable for the first time by an option holder during any calendar year may not exceed $100,000. Options or portions thereof that exceed such limit will generally be treated as non-qualified stock options. No incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our affiliates unless (i) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and (ii) the term of the incentive stock option does not exceed five years from the date of grant.

 

41

 

Adjustments for Changes in Capital Structure and other Special Transactions

 

In the event of a stock dividend, stock split, or recapitalization, or a corporate reorganization in which we are a surviving corporation (and our shareholders prior to such transaction continue to own at least 50% of our capital stock after such transaction), including without limitation a merger, consolidation, split-up or spin-off, or a liquidation, or distribution of securities or assets other than cash dividends, the number or kinds of shares subject to the Plan or to any stock option award previously granted, and the exercise price, shall be adjusted proportionately by the committee to reflect such event.

 

In the event of a merger, consolidation, or other form of reorganization with or into another corporation (other than a merger, consolidation, or other form of reorganization in which we are the surviving corporation and our shareholders prior to such transaction continue to own at least 50% of the capital stock after such transaction), a sale or transfer of all or substantially all of the assets of the Company or a tender or exchange offer made by any corporation, person or entity (other than an offer made by us), all stock options held by any option holder shall be fully vested and exercisable by the option holder.

 

Furthermore, the committee, either before or after the merger, consolidation or other form of reorganization, may take such action as it determines in its sole discretion with respect to the number or kinds of shares subject to the Plan or any option under the Plan.

 

Amendment, Suspension or Termination

 

The committee may at any time amend, suspend, or terminate any and all parts of the Plan, any stock option award granted under the Plan, or both in such respects as the committee shall deem necessary or desirable, except that no such action may be taken which would impair the rights of any option holder with respect to any stock option award previously granted under the Plan without the option holder’s consent.

 

42

 

  

EXECUTIVE COMPENSATION – ENERJEX (PRE-MERGER)

 

  

The following table sets forth summary compensation information for the fiscal year ended December 31, 2017, and the year ended December 31, 2016, for our former chief executive officer, former chief financial officer and other former highly compensated executive officers. We did not have any other executive officers as of the end of 2017 or 2016, whose total compensation exceeded $100,000. We refer to these persons as the EnerJex Pre-Merger Named Executive Officers elsewhere in this report.

 

                       
Name and Principal Position Fiscal Year   Salary ($)   Bonus ($)   Stock Awards ($)   Option Awards ($)   All Other compensation ($)  

Total

($)

Louis G. Schott, Former Interim Chief Executive Officer and Secretary(1) 2016                          
  2017   75,000                   $ 75,000
Robert Schleizer, Former Chief Financial Officer(4) 2016                        
  2017   $  75,000   $   $    $   $   $ 75,000
Robert G. Watson, Jr., Former President, Chief Executive Officer (2) 2016   $ 234,375   $     $   $   $   $ 234,375
  2017   $ 15,000   $   $   $   $   $ 15,000
Douglas M. Wright, Former Chief Financial Officer (3) 2016   $ 192,708   $   $     $   $   $ 192,708
  2017   $ 96,000   $   $   $   $   $ 96,000
David L. Kunovic, Former Executive Vice President, Exploration (54)  2016   $ 229,167   $   $   $ 78,907   $   $ 297,711
  2017   $ 108,865                         108,865
Kent A. Roach, Former Executive Vice President, Engineering (54) 2016   $ 229,167   $     $   $   $   $ 297,711
  2017     108,865   $         $   $   $ 108,865

  (1) Mr. Schott joined the Company as Interim CEO on February 10, 2017 and resigned in connection with the Merger.
  (2) Mr. Watson resigned as a director and officer of the Company on February 10, 2017.
  (3) Resigned on February 10, 2017.
  (4) Mr. Schleizer joined the Company as Chief Financial Officer on August 17, 2017 and resigned in connection with the Merger.
  (5)

Resigned in connection with the Merger.

 

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Employment Agreements

 

Louis G. Schott. — Former Interim Chief Executive Officer

 

On February 10, 2017, the Company entered into an employment agreement with Louis G. Schott, as interim chief executive officer of the Company. The employment agreement provides an annual base salary of $225,000. Mr. Schott resigned from his position as interim chief executive officer in connection with the Merger.

 

Option Exercises for Fiscal 2017 and 2016

 

There were no options exercised by the EnerJex Pre-Merger Named Executive Officers in fiscal years 2017 and 2016.

 

Grants of Plan-Based Awards in Fiscal Year 2017 and 2016

 

We granted to Mr. Wright an option expiring on July 31, 2017, to purchase 50,000 shares of our common stock at a cash exercise price equal to $10.50. One third of the options vest on the first anniversary of the date of grant, and the remaining options vest in twenty-four (24) equal tranches each month for the next two (2) year period. Mr. Wright’s employment with the company ended effective February 17, 2017, and therefore pursuant to the 2013 Plan he must exercise the options within three (3) months of employment termination (May 17, 2017) or forfeit them. The options were not exercised

 

Outstanding Equity Awards at 2017 Fiscal Year-End

 

The following table lists the outstanding equity incentive awards held by the EnerJex Pre-Merger Named Executive Officers as of the fiscal year ended December 31, 2017.

    Option Awards        
   

Fiscal
Year

Granted 

  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
  Number of
Securities
Underlying
Unexercised
Options
Un-exercisable
(#)
  Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
  Option
Exercise
Price
($)
  Option
Expiration
Date
David L. Kunovic     2013       50,000                 $ 10.50       12/31/2023  
Kent A. Roach     2014       39,743       10,417           $ 10.50       12/31/2019  

 

DIRECTOR COMPENSATION

 

For the fiscal year ended December 31, 2017, the EnerJex Pre-Merger non-employee directors received no compensation.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT

 

The following table sets forth certain information regarding the beneficial ownership of our common stock as of September 7, 2018 by:

 

each person, or group of affiliated persons, known to us to own beneficially more than 5% of our common stock;

 

each of our current directors;

 

each of our named executive officers; and

 

all of our current directors and executive officers as a group.

 

The information in the following table has been presented in accordance with the rules of the SEC. Under such rules, beneficial ownership of a class of capital stock includes any shares of such class as to which a person, directly or indirectly, has or shares voting power or investment power and also any shares as to which a person has the right to acquire such voting or investment power within 60 days through the exercise of any stock option, warrant or other right. If two or more persons share voting power or investment power with respect to specific securities, each such person is deemed to be the beneficial owner of such securities. Except as we otherwise indicate below and under applicable community property laws, we believe that the beneficial owners of the common stock listed below, based on information they have furnished to us, have sole voting and investment power with respect to the shares shown. Except as otherwise indicated, each stockholder named in the table is assumed to have sole voting and investment power with respect to the number of shares listed opposite the stockholder’s name.

 

As of September 7, 2018, there were 10,164,001 shares of common stock outstanding.

 

Name and Address of

Beneficial Owner (1)(2)

 

Amount and

Nature of

Beneficial

Ownership (2)

   

Percentage

Ownership

     
                 
Bret Chilcott, Chairman of the Board, President and Director      5,800,321       57.07%      
                     
Barrett Mooney, Chief Executive Officer (3)     75,000       *      
                     
Nicole Fernandez-McGovern, Chief Financial Officer (3)     182,210       1.79%      
                     
Grant Begley, Director (3)     55,245       *      
                     
Thomas Gardner, Director (3)     112,185       1.10%      
                     
Scott Burell, Director (3)     55,245       *      
                     
Corbett Kull (3)     859       *      
                     
All directors and executive officers as a group (seven individuals)     6,281,065       61.80%      
                     
5% Stockholder                    
                     

GreenBlock Capital, LLC

420 Royal Palm Way

Palm Beach, Florida 33480 (4)

    846,569       8.33%      
                     

Alpha Capital Anstalt

Pradafant 7, Furstentums 9490

Vaduz, Liechtenstein (5)

    1,006,236       9.99%      

———————

* Less than 1%

 

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(1)Unless otherwise indicated, such individual’s address is c/o AgEagle, 117 South 4th Street, Neodesha, Kansas 66757.

 

(2)The persons named in this table have sole voting and investment power with respect to all shares of common stock reflected as beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such person within sixty (60) days from July 17, 2018, and the total outstanding shares used to calculate each beneficial owner’s percentage includes such shares, although such shares are not taken into account in the calculations of the total number of shares or percentage of outstanding shares. Beneficial ownership as reported does not include shares subject to option or conversion that are not exercisable within 60 days of July 17, 2018.

  

(3)All shares are comprised of options that have vested or will vest within 60 days.

 

(4)Excludes options to purchase 207,055 shares of common stock which are subject to vesting and ownership limitation provisions. Mr. Chris Spencer, a Partner of GreenBlock Capital, LLC, has sole investment and voting power with respect to the shares. The address for GreenBlock Capital, LLC is 420 Royal Palm Way, Palm Beach, Florida 33480.

 

(5)Alpha owns 462,390 shares of common stock and owns 6,507 shares of Series C Preferred Stock, which are currently convertible into 4,249,469 shares of common stock. The table includes only 1,006,236 of the shares of common stock that Alpha is deemed to be the beneficially owner because under the terms of the Series C Certificate of Designation, the holder thereof may not own in excess of 9.99% of the Company’s voting (i.e., common) stock. The address for Alpha Anstalt is Pradafant 7, Furstentums 9490, Vaduz, Liechtenstein.

  

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

AgEagle is a party to a consulting agreement dated as of March 1, 2015 with GreenBlock Capital, LLC, or GreenBlock, which beneficially owns approximately 8.33% of our common stock. Under the terms of the agreement, the Company agreed to issue 368,099 (post-split) shares of the Company’s common stock on May 1, 2015, an additional 368,099 (post-split) shares of common stock on January 15, 2016 and 207,055 (post-split) stock options exercisable for five years from the issuance date at an exercise price per share of $0.06 pursuant to the consulting agreement. As of December 31, 2015, no shares had been issued to the consultant. The Company recognized $1,250,000 of consulting expense during 2015 and 2016 related to the value of the shares earned, which was based on the estimated fair value of the stock as of December 31, 2015, based on the terms of a transaction which ultimately closed in February 2016, as there was no dis-incentive for non-performance. No additional expense was recorded for the nine months September 30, 2017 for the common shares granted in connection with the strategic consulting agreement executed in March 2015. During 2015, AgEagle recorded $69,528 of non-cash compensation expense related to the vested stock options granted to GreenBlock. The consulting agreement terminated by mutual agreement of the parties on August 31, 2016. During 2016, AgEagle recognized $138,802 related to the stock options. During the nine months ended September 30, 2017, the Company recognized $6,397 of additional consulting expense related to the issuance of the common stock for the stock options as a result of the modification of the exercise price of the options from $2.60 per share to $0.10 per share.

 

On (i) December 15, 2016, the Company issued a promissory note with an aggregate principal amount of $30,000 to GreenBlock Capital, a related party, (ii) January 24, 2017, AgEagle issued a 2nd promissory note with an aggregate principal amount of $30,000 to GreenBlock, and (iii) June 14, 2017, a 3rd promissory note with an aggregate principal amount of $16,050 was issued to GreenBlock (the “Related Party Notes A”). The Related Party Notes A accrue interest at an annual rate of 2% and matured on November 6, 2017. On or about August 1, 2017, GreenBlock entered into extension and modification agreements with AgEagle whereby they agreed to extend the maturity date of the Related Party Notes A to February 28, 2018, and in exchange a conversion feature was added whereby the debt can be converted into AgEagle common stock at $2.00 per share, and amended the interest rate on the note retroactively to accrue at a rate of 8% annually.

 

Between the dates of March 15 and July 12, 2017 AgEagle issued seven new promissory notes totaling an aggregate amount of $55,000 to Bret Chilcott, who is our Chairman of the Board and President, and at the time was also our CEO. The promissory notes (the “Related Party Notes B”) accrue interest at an annual rate of 2% and matured on November 6, 2017. On or about August 1, 2017, Mr. Chilcott entered into extension and modification agreements with AgEagle whereby they agreed to extend the maturity date of the Related Party Notes B to February 28, 2018, and in exchange a conversion feature was added whereby the debt can be converted into AgEagle common stock at $2.00 per share, and amended the interest rate on the note retroactively to accrue at a rate of 8% annually.

 

AgEagle from time to time retains Thomas Gardner, its Director, to provide consulting and strategic planning services for the company. Mr. Gardner has been compensated previously through the issuance of stock options. There is no formal agreement between the parties.

 

Policies and Procedures for Related Person Transactions

 

While the Company has not adopted a written related party transaction policy for the review, approval and ratification of transactions involving “related parties,” related parties are deemed to be directors and nominees for director, executive officers and immediate family members of the foregoing, as well as security holders known to beneficially own more than five percent of our common stock. The policy covers any transaction, arrangement or relationship, or series of transactions, arrangements or relationships, in which the Company was, is or will be a participant and the amount exceeds $120,000, and in which a related party has any direct or indirect interest.  The policy is administered by the Audit Committee.

 

In determining whether to approve or ratify a related party transaction, the Audit Committee will consider whether or not the transaction is in, or not inconsistent with, the best interests of the appropriate company.  In making this determination, the Audit Committee is required to consider all of the relevant facts and circumstances in light of the following factors and any other factors to the extent deemed pertinent by the committee:

 

47

 

The position within or relationship of the related party with the Company;

 

The materiality of the transaction to the related party and the Company, including the dollar value of the transaction, without regard to profit or loss;

 

The business purpose for and reasonableness of the transaction, taken in the context of the alternatives available for attaining the purposes of the transaction;

 

Whether the transaction is comparable to a transaction that could be available on an arms-length basis or is on terms and conditions offered generally to parties that are not related parties;

 

Whether the transaction is in the ordinary course of business and was proposed and considered in the ordinary course of business; and

 

The effect of the transaction on the business and operations, including on internal control over financial reporting and system of disclosure controls or procedures, and any additional conditions or controls (including reporting and review requirements) that should be applied to such transactions.

 

The policy contains standing pre-approvals for certain types of transactions which, even though they may fall within the definition of a related party transaction, are deemed to be pre-approved by the Company given their nature, size and/or degree of significance to the company. These include compensation arrangements with directors and executive officers for which disclosure is required in the proxy statement and sales of products or services in the ordinary course of business.

 

In the event the Company inadvertently enters into a related party transaction that requires, but has not received, pre-approval under the policy, the transaction will be presented to the appropriate Board for review and ratification promptly upon discovery. In such event, the committee will consider whether such transaction should be rescinded or modified and whether any changes in our controls and procedures or other actions are needed.

 

48

  

DESCRIPTION OF SECURITIES TO BE REGISTERED

 

This prospectus relates to the sale of up to 4,249,469 shares of Common Stock by the selling stockholder. The total amount of shares consists of 4,249,469 shares of Common Stock which are issuable upon conversion of Series C Convertible Preferred Stock.

 

Authorized Capital Stock

 

Our authorized capital stock consists of 275,000,000 shares, of which 250,000,000 shares are designated as common stock par value $.001 per share, and 25,000,000 shares are designated as preferred stock, par value $.001 per share of which (i) 1,764 shares have been designated as Series B Preferred Stock, and (ii) 10,000 shares have been designated as Series C Preferred Stock.  As of the date hereof, we have 10,164,001 shares of common stock, no shares of Series B Preferred Stock, and 6,507 shares of Series C Preferred Stock outstanding.

 

Common Stock

 

Holders of shares of common stock have the right to cast one vote for each share of common stock in their name on the books of our company, whether represented in person or by proxy, on all matters submitted to a vote of holders of common stock, including election of directors. There is no right to cumulative voting in election of directors. Except where a greater requirement is provided by statute, by our articles of incorporation, or by our bylaws, the presence, in person or by proxy duly authorized, of the one or more holders of a majority of the outstanding shares of our common stock constitutes a quorum for the transaction of business. The vote by the holders of a majority of outstanding shares is required to effect certain fundamental corporate changes such as liquidation, merger, or amendment of our articles of incorporation.

 

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. We do not plan to declare any dividends in the foreseeable future.

 

Holders of shares of our common stock are not entitled to preemptive or subscription or conversion rights, and no redemption or sinking fund provisions are applicable to our common stock. All outstanding shares of common stock are fully paid and non-assessable.

 

Anti-takeover Effects of Our Articles of Incorporation and By-laws

 

Our articles of incorporation and bylaws contain certain provisions that may have anti-takeover effects, making it more difficult for or preventing a third party from acquiring control of our company or changing our Board and management.  The holders of our common stock do not have cumulative voting rights in the election of our directors, which makes it more difficult for minority stockholders to be represented on the Board.  Our articles of incorporation allow our Board to issue additional shares of our common stock and new series of preferred stock without further approval of our stockholders.  The existence of authorized but unissued shares of common stock and preferred could render more difficult or discourage an attempt to obtain control of our company by means of a proxy contest, tender offer, merger, or otherwise.

 

Anti-takeover Effects of Nevada Law

 

Business Combinations

 

The “business combination” provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or NRS, generally prohibit a Nevada corporation with at least 200 stockholders of record, a “resident domestic corporation,” from engaging in various “combination” transactions with any “interested stockholder” unless certain conditions are met or the corporation has elected in its articles of incorporation to not be subject to these provisions.  We have not elected to opt out of these provisions and if we meet the definition of resident domestic corporation, now or in the future, our company will be subject to these provisions.

 

49

 

A “combination” is generally defined to include (a) a merger or consolidation of the resident domestic corporation or any subsidiary of the resident domestic corporation with the interested stockholder or affiliate or associate of the interested stockholder; (b) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition, in one transaction or a series of transactions, by the resident domestic corporation or any subsidiary of the resident domestic corporation to or with the interested stockholder or affiliate or associate of the interested stockholder having: (i) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the resident domestic corporation, (ii) an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the resident domestic corporation, or (iii) 10% or more of the earning power or net income of the resident domestic corporation; (c) the issuance or transfer in one transaction or series of transactions of shares of the resident domestic corporation or any subsidiary of the resident domestic corporation having an aggregate market value equal to 5% or more of the resident domestic corporation to the interested stockholder or affiliate or associate of the interested stockholder; and (d) certain other transactions with an interested stockholder or affiliate or associate of the interested stockholder.

 

An “interested stockholder” is generally defined as a person who, together with affiliates and associates, owns (or within two years, did own) 10% or more of a corporation’s voting stock. An “affiliate” of the interested stockholder is any person that directly or indirectly through one or more intermediaries is controlled by or is under common control with the interested stockholder. An “associate” of an interested stockholder is any (a) corporation or organization of which the interested stockholder is an officer or partner or is directly or indirectly the beneficial owner of 10% or more of any class of voting shares of such corporation or organization; (b) trust or other estate in which the interested stockholder has a substantial beneficial interest or as to which the interested stockholder serves as trustee or in a similar fiduciary capacity; or (c) relative or spouse of the interested stockholder, or any relative of the spouse of the interested stockholder, who has the same home as the interested stockholder.

 

If applicable, the prohibition is for a period of two years after the date of the transaction in which the person became an interested stockholder, unless such transaction is approved by the board of directors prior to the date the interested stockholder obtained such status; or the combination is approved by the board of directors and thereafter is approved at a meeting of the stockholders by the affirmative vote of stockholders representing at least 60% of the outstanding voting power held by disinterested stockholders; and extends beyond the expiration of the two-year period, unless (a) the combination was approved by the board of directors prior to the person becoming an interested stockholder; (b) the transaction by which the person first became an interested stockholder was approved by the board of directors before the person became an interested stockholder; (c) the transaction is approved by the affirmative vote of a majority of the voting power held by disinterested stockholders at a meeting called for that purpose no earlier than two years after the date the person first became an interested stockholder; or (d) if the consideration to be paid to all stockholders other than the interested stockholder is, generally, at least equal to the highest of: (i) the highest price per share paid by the interested stockholder within the three years immediately preceding the date of the announcement of the combination or in the transaction in which it became an interested stockholder, whichever is higher, plus compounded interest and less dividends paid, (ii) the market value per share of common shares on the date of announcement of the combination and the date the interested stockholder acquired the shares, whichever is higher, plus compounded interest and less dividends paid, or (iii) for holders of preferred stock, the highest liquidation value of the preferred stock, plus accrued dividends, if not included in the liquidation value. With respect to (i) and (ii) above, the interest is compounded at the rate for one-year United States Treasury obligations from time to time in effect.

 

Applicability of the Nevada business combination statute would discourage parties interested in taking control of our company if they cannot obtain the approval of our Board. These provisions could prohibit or delay a merger or other takeover or change in control attempt and, accordingly, may discourage attempts to acquire our company even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.

 

50

 

Control Share Acquisitions

 

The “control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS, apply to “issuing corporations” that are Nevada corporations with at least 200 stockholders of record, including at least 100 stockholders of record who are Nevada residents, and that conduct business directly or indirectly in Nevada, unless the corporation has elected to not be subject to these provisions.

 

The control share statute prohibits an acquirer of shares of an issuing corporation, under certain circumstances, from voting its shares of a corporation’s stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s disinterested stockholders. The statute specifies three thresholds: (a) one-fifth or more but less than one-third, (b) one-third but less than a majority, and (c) a majority or more, of the outstanding voting power. Generally, once a person acquires shares in excess of any of the thresholds, those shares and any additional shares acquired within 90 days thereof become “control shares” and such control shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who do not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters’ rights.

 

A corporation may elect to not be governed by, or “opt out” of, the control shares provisions by making an election in its articles of incorporation or bylaws, provided that the opt-out election must be in place on the 10th day following the date an acquiring person has acquired a controlling interest, that is, crossing any of the three thresholds described above.  We have not opted out of these provisions and will be subject to the control share provisions of the NRS if we meet the definition of an issuing corporation upon an acquiring person acquiring a controlling interest unless we later opt out of these provisions and the opt out is in effect on the 10th day following such occurrence.

 

The effect of the Nevada control share statute is that the acquiring person, and those acting in association with the acquiring person, will obtain only such voting rights in the control shares as are conferred by a resolution of the stockholders at an annual or special meeting. The Nevada control share law, if applicable, could have the effect of discouraging takeovers of our company.

 

51

 

 

SELLING STOCKHOLDER

 

We are registering shares of common stock beneficially owned by the Selling Stockholder listed below to be sold under this prospectus.

 

The following table sets forth the name of the Selling Stockholder, the number of shares of common stock owned by the Selling Stockholder immediately prior to the date of this prospectus and the number of shares to be offered by the Selling Stockholder pursuant to this prospectus. Percentage of beneficial ownership before this offering is based on 10,164,001 shares of our common stock outstanding as of July 17, 2018. Beneficial ownership is based on information furnished by the Selling Stockholder.

 

The Selling Stockholder is not a broker dealer or an affiliate of a broker dealer. The Selling Stockholder may offer for sale all or part of the shares from time to time. The table below assumes that the Selling Stockholder will sell all of the Shares offered for sale. The Selling Stockholder is under no obligation, however, to sell any of the Shares pursuant to this prospectus.

 

On November 21, 2017, Alpha Capital Anstalt signed a binding commitment letter with us to provide prior to or at the closing of the Merger a minimum of $4 million in new equity capital. The private placement was consummated on March 26, 2018. In connection with the private placement, we issued 4,626 shares of our Series C Convertible Preferred Stock, convertible into 3,021,061 shares of our common stock. The number of shares of Series C Convertible Preferred Stock issued in the private placement also includes shares of Series C Convertible Preferred Stock issued as a funding commitment equal to 2.5% of the outstanding shares of our common stock on a fully diluted basis.

 

On March 26, 2018, we issued to Alpha Capital Anstalt 1,631 shares of our Series C Convertible Preferred Stock in connection with the Merger. These shares of our Series C Convertible Preferred Stock are convertible into 1,065,142 shares of our common stock. Also on March 26, 2018, we issued 225 shares of Series C Convertible Preferred Stock in exchange for the retirement of $225,000 in debt. These 225 shares were converted into 146,946 shares of common stock and disposed of by the selling stockholder.

 

During the month of April 2018, the selling stockholder converted 8.25 shares of Series B Preferred Stock, representing the last outstanding Series B shares, into 5,388 shares of common stock, and 396.86 shares of Series C Preferred Stock into 259,184 shares of common stock at a conversion price of $1.53.

 

On May 11, 2018, we issued an additional 250 shares of our Series C Convertible Preferred Stock, convertible into 163,265 shares of our common stock. The Series C Convertible Preferred Stock includes a beneficial ownership limitation preventing conversion of shares of Series C Convertible Preferred Stock into more than 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series C Convertible Preferred Stock.

 

    Beneficial Ownership   Before Offering(1)       Beneficial Ownership   After Offering
Selling Stockholder   Number   Percentage   Number of Shares Offered   Number   Percentage
Alpha Capital Anstalt (2)   4,711,859     9.99 %     4,249,469     462,390     4.5 %

 

*Less than one percent

 

(1) Beneficial ownership and percentage ownership are determined in accordance with the rules of the Securities and Exchange Commission. In calculating the number of shares beneficially owned and the percentage ownership of a Selling Stockholder, shares underlying options held by the Selling Stockholders that are either currently exercisable or exercisable within 60 days from May 23, 2018 are deemed outstanding. These shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other Selling Stockholders.
   
(2) Alpha Capital Anstalt holds 6,507 shares of Series C Convertible Preferred Stock which are currently convertible into an aggregate of 4,249,469 shares of our common stock. Under the terms of the Series C Preferred Certificate of Designation, the holder thereof may not own in excess of 9.9% of the Company’s common stock, which currently is equal to 1,006,236 shares of common stock. The address for Alpha Capital Anstalt is Pradafant 7, Furstentums 9490, Vaduz, Liechtenstein. Konrad Ackermann holds voting and dispositive power over such shares.

 

  

 

52

 

 

PLAN OF DISTRIBUTION

 

The Selling Stockholder and any of their pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock being offered under this prospectus on any stock exchange, market or trading facility on which shares of our common stock are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholder may use any one or more of the following methods when disposing of the shares:

 

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

purchases by a broker-dealer as principal and resales by the broker-dealer for its account;

 

an exchange distribution in accordance with the rules of the applicable exchange;

 

privately negotiated transactions;

 

to cover short sales made after the date that the registration statement of which this prospectus is a part is declared effective by the SEC;

 

broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

 

to or through underwriters;

 

a combination of any of these methods of sale; and

 

any other method permitted pursuant to applicable law.

 

The shares may also be sold under Rule 144 under the Securities Act of 1933, as amended, if available for a Selling Stockholder, rather than under this prospectus. The Selling Stockholderhas the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.

 

The Selling Stockholder may pledge their shares to its brokers under the margin provisions of customer agreements. If a Selling Stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.

 

Broker-dealers engaged by the Selling Stockholder may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholder (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law.

 

If sales of shares offered under this prospectus are made to or through underwriters and broker-dealers as principals, we would be required to file a post-effective amendment to the registration statement of which this prospectus is a part. In the post-effective amendment, we would be required to disclose the names of any participating underwriters broker-dealers and the compensation arrangements relating to such sales.

 

The Selling Stockholder and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales. Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Any broker-dealers or agents that are deemed to be underwriters may not sell shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part.

 

53

 

 

The Selling Stockholder and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the Selling Stockholder or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.

 

If any of the shares offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders. We offer no assurance as to whether the Selling Stockholders will sell all or any portion of the shares offered under this prospectus.

 

We have agreed to pay all fees and expenses we incur incident to the registration of the shares being offered under this prospectus. However, the Selling Stockholder and purchaser is responsible for paying any discounts, commissions and similar selling expenses it incurs.

 

We and the Selling Stockholder have agreed to indemnify one another against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities Act.

 

54

 

 

LEGAL MATTERS

 

Certain legal matters governed by the laws of the State of New York and of Nevada with respect to the validity of the offered securities will be passed upon for us by Loeb & Loeb LLP, New York, New York.

 

EXPERTS

 

The consolidated financial statements of AgEagle Aerial Systems Inc. (f/k/a EnerJex Resources, Inc.) and its subsidiaries as of December 31, 2017 and 2016 incorporated in this prospectus by reference from the Company’s Annual Report on Form 10-K have been audited by RBSM LLP, an independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements audited by RBSM, are the financial statements of EnerJex Resources. Inc., prior to the consummation of the Merger.

 

The financial statements of Eagle Aerial Systems, Inc. (f/k/a AgEagle Aerial Systems, Inc.), as of December 31, 2017 and 2016 incorporated in this prospectus by reference from the Company’s Current Report on Form 8-K, filed with the Commission on March 29, 2018, have been audited by D. Brooks and Associates CPA's, P.A. (“D. Brooks”), an independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements audited by D. Brooks are the financial statements of AgEagle Aerial Systems, Inc., prior to the consummation of the Merger.

 

The financial statements of Agribotix, LLC as of and for the fiscal years ended December 31, 2017 and 2016 included in this prospectus and in the registration statement have been audited by EKS&H LLLP and have been included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

  

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act for the shares of common stock being offered by this prospectus. This prospectus, which is part of the registration statement, does not contain all of the information included in the registration statement and the exhibits. For further information about us and the common stock offered by this prospectus, you should refer to the registration statement and its exhibits. References in this prospectus to any of our contracts or other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may read and copy any document that we file at the SEC’s public reference room located at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. SEC filings are also available to the public at the SEC’s website at http://www.sec.gov.

 

We are subject to the reporting and information requirements of the Exchange Act and, as a result, will file periodic and current reports, proxy statements and other information with the SEC. We expect to make our periodic reports and other information filed with or furnished to the SEC, available, free of charge, through our website as soon as reasonably practicable after those reports and other information are filed with or furnished to the SEC. Additionally, these periodic reports, proxy statements and other information will be available for inspection and copying at the public reference room and website of the SEC referred to above.

 

Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance we refer you to the copy of the contract or document filed or incorporated by reference as an exhibit to the registration statement or as an exhibit to our Exchange Act filings, each such statement being qualified in all respects by such reference.

 

55

  

 

INDEX TO FINANCIAL STATEMENTS

 

Contents Page
   
Audited Financial Statements of EnerJex  Resources, Inc. and Subsidiaries  
   
Report of Independent Registered Public Accounting Firm - RBSM LLP  F-2
   
Consolidated Balance Sheets as of December 31, 2017 and 2016     F-3
   
Consolidated Statements of Operations for the Years ended December 31, 2017 and 2016  F-4
   
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity for the Years ended December 31, 2017 and 2016  F-5
   
Consolidated Statements of Cash Flows for the Years ended December 31, 2017 and 2016  F-6
   
Notes to Consolidated Financial Statements  F-7
   
Audited Financial Statements of AgEagle Aerial Systems, Inc.          
   
Report of Independent Registered Public Accounting Firm - D. Brooks and Associates CPA's, P.A.  F-30
   
Balance Sheets as of December 31, 2017 and 2016     F-31
   
Statements of Operations for the years ended December 31, 2017 and 2016  F-32
   
Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2017 and 2016  F-33
   
Statements of Cash Flows for the years ended December 31, 2017 and 2016  F-34
   
Notes to Financial Statements  F-35
   
Unaudited Financial Statements of AgEagle Aerial Systems, Inc.   
   
Condensed Interim Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 (audited)

 F-48
   
Condensed Interim Consolidated Statements of Operations and Comprehensive Loss for the Three Months and Six Months Ended June 30, 2018 and 2017

 F-49
   
Condensed Interim Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2018 and 2017

 F-50
   
Notes to Condensed Interim Consolidated Financial Statements  F-51
   
Selected Historical Financial Information for Agribotix, LLC  
Audited Financial Statements of AgriBotix, LLC  
   
Report of Independent Registered Public Accounting Firm – EKS&H LLLP F-70
   
Balance Sheets as of December 31, 2017 and 2016 F-72
   
Statements of Operations for the years ended December 31, 2017 and 2016 F-73
   
Statement of Changes in Members' Deficit F-74
   
Statements of Cash Flows F-75
   
Notes to Financial Statements F-76
   
Unaudited Financial Statements and ProForma for Agribotix, LLC  

Balance Sheet as of June 30, 2018 and 2017

F-85
   

Statement of Operations for the three and six months ended June 30, 2018 and 2017

F-86
   
Statement of Cash Flows for the Six Months ended June 30, 2018 and 2017 F-87 
   
Unaudited Pro Forma Combined Financial Data of AgEagle and AgriBotix, LLC F-88

 

F-1

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To The Board of Directors and Stockholders of 

EnerJex Resources Inc. 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of EnerJex Resources, Inc. (the “Company”), as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2017 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

The Company's Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, has an accumulated deficit and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans in regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ RBSM, LLP 

 

New York, New York

March 23, 2018

 

We have served as the Company’s auditor since 2014

 

 

New York | Washington, DC | California | Nevada 

China | India | Greece 

Member ANTEA INTERNATIONAL with offices worldwide

 

F-2

 

 

EnerJex Resources, Inc. and Subsidiaries 

Consolidated Balance Sheets

    December 31,  
    2017     2016  
             
Assets                
Current Assets:                
Cash unrestricted   $ 677,936     $ 128,035  
Restricted cash           50,000  
Accounts receivable     143,799       600,255  
Derivative receivable           10,570  
Inventory           185,733  
Marketable securities           210,990  
Deposits and prepaid expenses     223,648       493,384  
Total current assets     1,045,383       1,678,967  
                 
Non-current assets:                
Fixed assets, net of accumulated depreciation of $618,661 and $1,817,711     178,115       2,077,055  
Oil & gas properties using full cost accounting, net of accumulated DD&A of $8,597,539 and $15,189,716     1,411,225       3,437,030  
Other non-current assets           798,809  
Total non-current assets     1,589,340       6,312,894  
Total assets   $ 2,634,723     $ 7,991,861  
                 
Liabilities and Stockholders’ (Deficit)                
                 
Current liabilities:                
Accounts payable   $ 217,941     $ 294,241  
Accrued liabilities     1,034,827       1,535,165  
Current portion of long term debt     4,876,903       17,925,000  
Total current liabilities     6,129,671       19,754,406  
                 
Non-Current Liabilities:                
Asset retirement obligation     1,611,845       3,314,191  
Other long-term liabilities     6,919,579       3,401,149  
Total non-current liabilities     8,531,424       6,715,340  
Total liabilities     14,661,095       26,469,746  
                 
Commitments and Contingencies                
                 
Stockholders’ (Deficit):                
10% Series A Cumulative Redeemable Perpetual Preferred Stock, $.001 par value, 25,000,000 shares authorized, 1,999,998 and 938,248 shares issued and outstanding, respectively     2,000       938  
Series B Convertible Preferred stock, $.001 par value, 1,764 shares authorized, 352 and 1,764 issued and outstanding, respectively     1       2  
Series C Convertible Preferred stock, $.001 par value, 500 shares authorized, 300 and 0 issued and outstanding, respectively     1        
Series C Convertible Preferred stock issuable     200,000        
Common stock, $0.001 par value, 250,000,000 shares authorized, 16,294,891 and 8,423,936 shares issued and outstanding, respectively     16,295       8,424  
Paid in capital     74,185,091       69,090,613  
Accumulated deficit     (86,429,760 )     (87,577,862 )
Total stockholders’ (deficit)     (12,026,372 )     (18,477,885 )
Total liabilities and stockholders’ (deficit)   $ 2,634,723     $ 7,991,861  

 

See Notes to Consolidated Financial Statements.

 

F-3

 

EnerJex Resources, Inc. and Subsidiaries 

Consolidated Statements of Operations

    Year Ended December 31,  
    2017     2016  
             
Crude oil revenues   $ 1,309,496     $ 2,390,024  
Natural gas revenues     19,509       71,703  
Total revenues     1,329,005       2,461,727  
                 
Expenses:                
Direct operating costs     1,363,946       2,661,258  
Depreciation, depletion and amortization     346,197       413,967  
Impairment of oil and gas assets           8,032,670  
Professional fees     1,390,512       310,471  
Salaries     350,863       1,723,789  
Administrative expense     545,267       458,375  
Total expenses     3,996,785       13,600,530  
Loss from operations     (2,667,780 )     (11,138,803 )
                 
Other income (expense):                
Interest expense     (1,250,191 )     (1,911,906 )
Gain on loan sale agreement     11,500,124        
(Loss) on mark to market of derivative contracts           (2,531,401 )
Other income     692,879       2,406,340  
Total other income (expense)     10,942,812       (2,036,967 )
Income (loss) before provision for income taxes     8,275,032       (13,175,770 )
Provision for income taxes            
                 
Net income (loss)   $ 8,275,032     $ (13,175,770 )
                 
Net income (loss)   $ 8,275,032     $ (13,175,770 )
Beneficial Conversion on Series C Preferred Stock     (208,500 )      
Deemed dividend for anti-dilution provision     (3,400,000 )      
Preferred dividends     (3,518,430 )     (3,010,211 )
Net income (loss) attributable to common stockholders   $ 1,148,102     $ (16,185,981 )
Net income (loss) per common share basic   $ 0.11     $ (1.92 )
Weighted average shares basic     10,503,070       8,423,936  
Net income (loss) per common share diluted   $ 0.11     $ (1.92 )
Weighted average shares diluted     10,503,070       8,423,936  

 

See Notes to Consolidated Financial Statements.

 

F-4

 

 

EnerJex Resources, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ (Deficit)

For the Years Ended December 31, 2017 and 2016

                                                                                             
      10% Series A      Series B   Series C           Series C                 Total  
      Preferred Stock     Preferred Stock   Preferred
Stock
    Common Stock     Preferred
Stock
    Paid In     Retained     Stockholders’  
    Shares     Amount     Shares     Amount   Shares   Amount     Shares     Amount     Issuable     Capital     Deficit     (Deficit)  
Balance, January 1, 2016     938,248     938       1,764     2     —      —        8,423,936      $ 8,424      $ —       $ 68,848,944     (71,391,881 )    $ (2,533,573 )
Stock based compensation     —        —        —        —       —      —        —        —        —        241,669       —        241,669  
Preferred stock dividends     —        —        —        —      —       —        —        —        —        —        (3,010,211 )     (3,010,211 )
Net loss for the year     —        —        —        —        —        —        —        —        —        —        (13,175,770 )     (13,175,770 )
Balance, December 31, 2016     938,248       938       1,764       2     —      —        8,423,936       8,424       —        69,090,613       (87,577,862 )     (18,477,885 )
Stock based compensation                                                                         13,690               13,690  
Preferred stock dividends                                                                                 (3,518,430 )     (3,518,430 )
Common stock issued for anti-dilution provision                                                 597,461       597               299,403       (300,000      
Warrants exercised                                                 1,771,428       1,772               529,658               531,430  
Sale of series A preferred stock     1,061,750       1,062                                                           648,729               649,791  
Sale of series C preferred stock                                   300       1                                 299,999                300,000   
Series C preferred stock issuable                                                                 200,000                       200,000  
Conversion of series B preferred stock                     (1,412 )     (1 )                 5,502,066       5,502               (5,501 )              
Beneficial conversion feature                                                                         208,500       (208,500 )      
Deemed dividend for anti-dilution provision                                                                         3,100,000       (3,100,000 )      
Net income for the year                                                                                 8,275,032       8,275,032  
Balance, December 31, 2017     1,999,998     $ 2,000       352     $ 1     300     $ 1       16,294,891     $ 16,295     $ 200,000     $ 74,185,091     $ (86,429,760 )   $ (12,026,372 )
                                                                                                   

 

 

See Notes to Consolidated Financial Statements.

 

F-5

  

EnerJex Resources, Inc. and Subsidiaries 

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2017 and 2016

 

    Year Ended December 31,  
    2017     2016  
Cash flows from operating activities                
Net income (loss)   $ 8,275,032     $ (13,175,770 )
Adjustments to reconcile net income (loss) (used in) operating activities:                
Depreciation, depletion and amortization     234,135       413,967  
Write-off of inventory     71,982        
Amortization of deferred financing costs     223,790          
Impairment of oil and gas assets           8,032,670  
Stock, options and warrants issued for services     13,690       241,669  
Accretion of asset retirement obligation     112,062       225,480  
Settlement of asset retirement obligations           (2,767 )
(Gain) loss on derivatives           2,520,831  
Gain on loan sale agreement, net of cash     (11,500,124 )      
Changes in current assets and liabilities                
Accounts receivable     105,772       377,233  
Inventory     (15,943 )     (41,406 )
Deposits and prepaid expenses     252,478       (246,059 )
Accounts payable     (94,783 )     (848,601 )
Accrued liabilities     1,080,420       404,108  
Cash flows used in operating activities     (1,241,489 )     (2,098,645 )
                 
Cash flows from investing activities                
Purchase of fixed assets           (241,683 )
Oil and gas properties additions     (4,632 )     (17,089 )
Increase in restricted cash           (50,000 )
Cash flows (used in) investing activities     (4,632 )     (308,772 )
                 
Cash flows from financing activities                
Proceeds from sale of stock and warrant exercise     1,681,221        
Proceeds from borrowings     225,000        
Repayments of long-term debt     (67,653 )     (686,660 )
Bank account transfer on loan sale agreement     (92,546 )      
Cash released from restricted cash     50,000        
Deferred financing costs           120,430  
Cash flows provided by (used in) financing activities     1,796,022       (566,230 )
(Decrease) increase in cash and cash equivalents     549,901       (2,973,647 )
Cash and cash equivalents, beginning     128,035       3,101,682  
Cash and cash equivalents, end   $ 677,936     $ 128,035  
                 
Supplemental disclosures:                
Interest paid   $     $ 922,072  
Income taxes paid   $     $  
Non-cash investing and financing activities:                
Beneficial conversion feature on Series C preferred stock accounted as preferred dividend   $ 208,500        
Common stock issued for anti-dilution provision   $ 597        
Conversion of Series B preferred stock into common stock   $ 5,502        
Share-based payments issued for services   $ 13,690     $ 241,669  
Payroll liability converted to note payable   $ 113,750        
Non-cash note payable issued in conjunction with the LSA   $ 105,806        
Deemed dividend for anti-dilution provision   $ 3,400,000        
Preferred dividends payable   $ 3,518,430     $ 3,010,211  
Loan settled and exchanged with assets including oil and gas properties and liabilities    $ 13,425,000       

 

See Notes to Consolidated Financial Statements.

 

F-6

 

EnerJex Resources, Inc.

For the Years Ended December 31, 2017 and 2016

Notes to Consolidated Financial Statements

 

Note 1 - Summary of Accounting Policies

 

Basis of Presentation

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Our operations are considered to fall within a single industry segment, which are the acquisition, development, exploitation and production of crude oil and natural gas properties in the United States.  Our consolidated financial statements include our wholly-owned subsidiaries.

 

All significant intercompany balances and transactions have been eliminated upon consolidation.  Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. 

 

Nature of Business

 

We are an independent energy company engaged in the business of producing and selling crude oil and natural gas. The crude oil and natural gas is obtained primarily by the acquisition and subsequent exploration and development of mineral leases.  Development and exploration may include drilling new exploratory or development wells on these leases. These operations are conducted primarily in Kansas.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates included in the consolidated financial statements are: (1) oil and gas revenues and reserves; (2) depreciation, depletion and amortization; (3) valuation allowances associated with income taxes (4) accrued assets and liabilities; (5) stock-based compensation; (6) asset retirement obligations, (7) valuation of derivative instruments and (8) impairment of oil and gas assets.  Although management believes these estimates are reasonable, changes in facts and circumstances or discovery of new information may result in revised estimates.  Actual results could differ from those estimates.

 

Trade Accounts Receivable

 

Trade accounts receivable are recorded at the invoiced amount and do not bear any interest.  We regularly review receivables to insure that the amounts will be collected and establish or adjust an allowance for uncollectible amounts as necessary using the specific identification method.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

Inventory

 

Inventories are comprised of crude oil held in storage and materials and supplies used in field operations. Crude oil inventories are valued at lower of cost or market, on a first-in, first out basis. Material and supplies are valued at lower of cost or market, based upon specific cost or by using a weighted average cost.

 

Share-Based Payments

 

The value we assign to the options and warrants that we issue is based on the fair market value as calculated by the Black-Scholes pricing model. To perform a calculation of the value of our options and warrants, we determine an estimate of the volatility of our stock.  We need to estimate volatility because there has not been enough trading of our stock to determine an appropriate measure of volatility. We believe our estimate of volatility is reasonable, and we review the assumptions used to determine this whenever we issue new equity instruments.

 

F-7

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized when items of income and expense are recognized in the financial statements in different periods than when recognized in the applicable tax return. Deferred tax assets arise when expenses are recognized in the financial statements before the tax returns or when income items are recognized in the tax return prior to the financial statements. Deferred tax assets also arise when operating losses or tax credits are available to offset tax payments due in future years. Deferred tax liabilities arise when income items are recognized in the financial statements before the tax returns or when expenses are recognized in the tax return prior to the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date when the change in the tax rate was enacted.

 

We routinely assess the reliability of our deferred tax assets.  If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized under accounting standards, the tax asset is reduced by a valuation allowance.  In addition, we routinely assess uncertain tax positions, and accrue for tax positions that are not more-likely-than-not to be sustained upon examination by taxing authorities.

 

Uncertain Tax Positions

 

We follow guidance in Topic 740 of the Codification for its accounting for uncertain tax positions. Topic 740 prescribes guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. To recognize a tax position, we determine whether it is more-likely-than-not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based solely on the technical merits of the position. A tax position that meets the more-likely-than-not threshold is measured to determine the amount of benefit to be recognized in the financial statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.

 

We have no liability for unrecognized tax benefits recorded as of December 31, 2017 and 2016. Accordingly, there is no amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and there is no amount of interest or penalties currently recognized in the consolidated statement of operations or consolidated balance sheet as of December 31, 2017. In addition, we do not believe that there are any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. We recognize related interest and penalties as a component of income tax expense.

 

Tax years open for audit by federal tax authorities as of December 31, 2017 are the years ended December 31, 2014, 2015 and 2016. Tax years ending prior to 2014 are open for audit to the extent that net operating losses generated in those years are being carried forward or utilized in an open year.

 

Fair Value Measurements

 

Accounting guidance establishes a single authoritative definition of fair value based upon the assumptions market participants would use when pricing an asset or liability and creates a fair value hierarchy that prioritizes the information used to develop those assumptions.  Additional disclosures are required, including disclosures of fair value measurements by level within the fair value hierarchy.  We incorporate a credit risk assumption into the measurement of certain assets and liabilities.

 

Cash and Cash Equivalents

 

We consider all highly liquid investment instruments purchased with original maturities of three months or less to be cash equivalents for purposes of the consolidated statements of cash flows and other statements. We maintain cash on deposit, which, can exceeds federally insured limits. We have not experienced any losses on such accounts and believe we are not exposed to any significant credit risk on cash and equivalents.

 

Revenue Recognition

 

Oil and gas revenues are recognized net of royalties when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collection of the revenue is probable. Cash received relating to future revenues is deferred and recognized when all revenue recognition criteria are met.

 

F-8

 

Fixed Assets

 

Property and equipment are recorded at cost.

 

At December 31, 2017, Fixed Assets consisted of furniture and equipment of $773,707 and building and leasehold improvements of $23,069, as well as accumulated depreciation of furniture and fixtures of $597,692 and accumulated depreciation of building and leasehold improvements of $20,969.

 

At December 31, 2016, Fixed Assets consisted of vehicles $355,886, furniture and equipment of $795,563, building and leasehold improvements of $23,069 and gathering and compression systems of $2,720,247, as well as accumulated depreciation of vehicles of $336,083, accumulated depreciation of furniture and fixtures of $532,190, accumulated depreciation of building and leasehold improvements of $17,515 and accumulated depreciation of gathering and compression systems of $931,923. 

  

Depreciation is determined by the use of the straight-line method of accounting using the estimated lives of the assets (3-15 years).  Expenditures for maintenance and repairs are charged to expense.

 

Debt issue costs

 

Debt issuance costs incurred are capitalized and subsequently amortized over the term of the related debt utilizing the straight-line method of amortization over the estimated life of the debt.

 

Oil & Gas Properties and Long-Lived Assets

 

We follow the full cost method of accounting under which all costs associated with property acquisition, exploration and development activities are capitalized. We also capitalize internal costs that can be directly identified with our acquisition, exploration and development activities and do not include costs related to production, general corporate overhead or similar activities.

 

Proved properties are amortized using the units of production method (UOP). Currently we only have operations in the United States of America. The UOP calculation multiplies the percentage of estimated proved reserves produced each quarter by the cost of these reserves. The amortization base in the UOP calculation includes the sum of proved property, net of accumulated depreciation, depletion and amortization (DD&A), estimated future development costs (future costs to access and develop proved reserves) and asset retirement costs, less related salvage value. 

 

The cost of unproved properties are excluded from the amortization calculation until it is determined whether or not proved reserves can be assigned to such properties or until development projects are placed into service. Geological and geophysical costs not associated with specific properties are recorded as proved property immediately. Unproved properties are reviewed for impairment quarterly.

 

Impairment of long-lived assets is recorded when indications of impairment are present. Impairment is indicated when the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying value.  The carrying value of the assets is then reduced to their estimated fair value that is measured based on an estimate of future discounted cash flows.

 

Under the full-cost-method of accounting, the net book value of oil and gas properties, less deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is (a) the present value of future net revenues computed by applying current prices of oil & gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil & gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of 10 percent and assuming continuation of existing economic conditions plus (b) the cost of properties not being amortized plus (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortized less (d) income tax effects related to differences between book and tax basis of properties. Future cash outflows associated with settling accrued retirement obligations are excluded from the calculation. Estimated future cash flows are calculated using end-of-period costs and an un-weighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months held flat for the life of the production, except where prices are defined by contractual arrangements.

 

F-9

 

Any excess of the net book value of proved oil and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as additional DD&A in the statement of operations. The ceiling calculation is performed quarterly. For the year ended December 31, 2016 impairment charges of $8,032,670 were recorded. For the year ended December 31, 2017, no impairment charges were recorded.

 

Proceeds from the sale or disposition of oil and gas properties are accounted for as a reduction to capitalized costs unless a significant portion (greater than 25%) of our reserve quantities are sold, in which case a gain or loss is recognized in income. In 2015, the Company sold its Cherokee project assets located in Eastern Kansas for net proceeds of $2,867,305. At the time of the sale the reserve quantities made up approximately 6.7% of total reserve quantities. Accordingly, the net proceeds reduced the carrying value of our oil and gas properties.

 

On February 10, 2017, the Company and the other Sellers entered into and completed the transactions contemplated by the LSA, described in greater detail in “Note 2 – Going Concern” – “Financing Transactions”.

 

Asset Retirement Obligations

 

The asset retirement obligation relates to the plug and abandonment costs when our wells are no longer useful. We determine the value of the liability by obtaining quotes for this service and estimate the increase we will face in the future. We then discount the future value based on an intrinsic interest rate that is appropriate for us. If costs rise more than what we have expected there could be additional charges in the future, however, we monitor the costs of the abandoned wells and we will adjust this liability if necessary.

 

Major Purchasers

 

For the years ended December 31, 2017, and 2016 we sold our produced crude oil to ARM Energy Management, LLC, Coffeyville Resources Inc., and Sunoco Logistics Inc. on a month-to-month basis and we sold our produced natural gas to United Energy Trading and Western Operating Company.

 

Marketable Securities Available for Sale

 

The Company classifies its marketable equity securities as available-for-sale and they are carried at fair market value at December 31, 2016, the carrying value of this security was $210,990. During 2017 the security was transferred as part of the LSA transaction (described below).

 

Net Income Per Common Share

 

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options and warrants and conversion of convertible debt and preferred stock that are not deemed to be anti-dilutive. The dilutive effect of the outstanding stock options and warrants is computed using the treasury stock method.

 

For the year ended December 31, 2016, diluted net loss per share did not include the effect of 298,664 shares of common stock issuable upon the exercise of outstanding stock options as their effect would be anti-dilutive.

 

Reclassifications

 

Certain reclassifications have been made to prior periods to conform to current presentations.

 

Recent Accounting Pronouncements Adopted by the Company

 

In July 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part 1) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Non-public Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception” (“ASU 2017-11”). Part I relates to the accounting for certain financial instruments with down round features in Subtopic 815-40, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced based on the pricing of future equity offerings. An entity still is required to determine whether instruments would be classified as equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities. ASU 2017-11 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted, including in an interim period. The Company early adopted ASU 2017-11 during the year ended December 31, 2017. The Company had no cumulative effect of the change in accounting principle on the Company’s Consolidated Balance Sheets as of the beginning of 2017.

 

F-10

 

Recent Accounting Pronouncements Applicable to the Company

 

In May 2014, the FASB issued (ASU) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recog