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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Consolidation – These consolidated financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States. The Company’s consolidated financial statements are prepared using the accrual method of accounting. The Company has elected a December 31 fiscal year end.

The consolidated financial statements include the accounts of AgEagle Aerial Systems Inc. and its wholly owned subsidiaries AgEagle Aerial, Inc., EnerJex Kansas, Inc., Black Sable Energy LLC and Black Raven Energy, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying interim unaudited condensed consolidated financial statements have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information, which included condensed consolidated financial statements of the Company and its wholly owned subsidiaries as of June 30, 2019. Accordingly, the condensed consolidated financial statements do not include all the information and notes necessary for a comprehensive presentation of the financial position and results of operations and should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2018 and included in the Form 10-K filed with the SEC on March 27, 2019. It is management’s opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year ending December 31, 2019.

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. Such consolidated financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“US GAAP”) in all material respects and have been consistently applied in preparing the accompanying consolidated financial statements.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for bad debt warranty costs, obsolete inventory, valuation of stock issued for services and stock options, valuation and estimated useful life of intangible assets and the valuation of deferred tax assets.

Fair Value of Financial Instruments – Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash, accounts receivable, convertible debt, promissory notes, accounts payable and accrued expenses, approximates their recorded values due to their short-term maturities.

Cash and Cash Equivalents – Cash and cash equivalents includes any highly liquid investments with an original maturity of three months or less. The Company held no cash equivalents as of June 30, 2019 or December 31, 2018. The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 Our bank balances at time may exceed the FDIC limit. To date, the Company has not experienced any losses on its invested cash.

Receivables and Credit Policy – Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Terms with our distributor allow for payment terms of 45 days from the invoice date. Trade receivables are stated at the amount billed to the customer. The Company generally does not charge interest on overdue customer account balances. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

The Company estimates an allowance for doubtful accounts based upon an evaluation of the current status of receivables, historical experience and other factors, as necessary. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. The Company determined that no allowance was necessary as of June 30, 2019 and December 31, 2018.

Inventories – Inventories, which consist of raw materials, finished goods and work-in-process, are stated at the lower of cost or net realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of the inventories is also considered in establishing its valuation. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the respective inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s estimates and expectations. As of June 30, 2019 and December 31, 2018, the Company had recorded a provision for obsolescence of 8,769 and $10,369, respectively.

Goodwill – Goodwill is recognized for the excess of cost of an acquired entity over the amounts assigned to the assets acquired and liabilities assumed in a business combination. The Company’s goodwill relates to an acquisition that occurred in August 2018. Goodwill is not amortized but evaluated for recoverability if events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable or at least annually. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform a two-step impairment test. If we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment, which is the first step of the two-step impairment test. In the two-step impairment test, we measure the recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill, to the estimated fair value of the reporting unit. As of June 30, 2019, there have been no events or changes in circumstances that indicate that it is more likely than not that a goodwill impairment has occurred since the assessment date of August 2018.

Intangible Assets – Acquired in Business Combinations – The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of each acquired business to our respective net tangible and intangible assets. Acquired intangible assets include customer relationships, technology, noncompete agreements and trade names. The Company uses valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions and estimates including projected revenue, gross margins, operating costs, growth rates, useful lives and discount rates. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed.

Long-Lived Assets – The Company reviews its long-lived assets and certain identifiable intangible assets held and used for impairment whenever events or changes in circumstances indicate that their carrying value of such assets may not be recoverable. If the estimated undiscounted cash flows that are expected to result from the use of the assets is less than the carrying amount of the assets, an impairment loss is recorded equal to the excess of the carrying amount of the fair value of the assets less costs to sell. There were no impairment losses recorded by the Company during the six-month period ending June 30, 2019 or 2018.

Business Combinations – The Company recognizes, with certain exceptions, 100% of the fair value of assets acquired, liabilities assumed, and non-controlling interests when the acquisition constitutes a change in control of the acquired entity. Shares issued in consideration for a business combination, contingent consideration arrangements and pre-acquisition loss and gain contingencies are all measured and recorded at their acquisition-date fair value. Subsequent changes to the fair value of contingent consideration arrangements are generally reflected in earnings. Any in-process research and development assets acquired are capitalized as of the acquisition date. Acquisition-related transaction costs are expensed as incurred. The operating results of entities acquired are included in the accompanying consolidated statements of operations from the date of acquisition.

Revenue Recognition and Concentration - The Company generally recognizes revenue on sales to customers, dealers and distributors upon satisfaction of our performance obligations and/or when the goods are shipped and control transfers to our customers. Revenue mainly reflects the consideration we expect to receive in exchange for our products and a small amount for performance of services. The Company generally ships using FOB Shipping Point terms. The Company assesses collectability based on the creditworthiness of the customer as determined by evaluations and the customer’s payment history. Additionally, customers are required to place a deposit or pay upon shipping for each UAV ordered.

As a result of the Agribotix acquisition, the Company now has an additional product line which is the sale of subscription services for use of the FarmLens™ platform to process aerial imaging. These subscription fees are recognized ratably over each monthly membership period as the services are provided.

Sales concentration information for customers comprising more than 10% of the Company’s total net sales is summarized below:

	Percent of total sales for six months ended June 30,
Customers	2019			2018
Customer A		67.4	%		—
Customer B		24.2	%		—
Customer C		—			17.2	%
Customer D		—			15.1	%
Customer E		—			13.1	%
Customer F		—			10.6	%
Customer G		—			10.1	%

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

	For six months ended June 30,
Type	2019		2018
Product Sales	$	49,801	$	53,707
Subscription Sales		16,368		—
Total	$	66,169	$	53,707

Vendor Concentration - As of June 30, 2019, there was one significant vendor upon which the Company relied to perform stitching in its FarmLens platform. This vendor provided services to the Company which can be replaced by alternative vendors should the need arise.

Shipping Costs - Shipping costs for the three and six months ended June 30, 2019 and 2018 totaled $273 and $1,031, respectively, and $2,548 and $1,597, which is included in cost of goods sold on the statement of operations.

Earnings Per Share - Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding plus Common Stock equivalents (if dilutive) related to warrants, options and convertible instruments.

Potentially Dilutive Securities - The Company has excluded all common equivalent shares outstanding for warrants, options and convertible instruments to purchase Common Stock from the calculation of diluted net loss per share because all such securities are antidilutive for the periods presented. As of June 30, 2019, the Company had 4,531,924 warrants and 2,025,720 options to purchase Common Stock, and 3,636 shares of Series C Preferred Stock, which may be converted into 6,733,333 shares of Common Stock. As of June 30, 2018, the Company had 828,221 warrants and 1,453,379 options to purchase Common Stock, and 6,257 shares of Preferred Series C shares which were convertible into 4,086,391 of Common Stock.

Income Taxes - The Company accounts for income taxes in accordance with FASB (Financial Accounting Standards Board) ASC Topic 740, Accounting for Income Taxes. This topic requires an asset and liability approach for accounting for income taxes. The Company evaluates its tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual is necessary for uncertain tax positions. The Company will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. All income tax returns not filed more than three years ago are subject to federal and state tax examinations by tax authorities.

Share-Based Compensation Awards - The value the Company assigns to the options that are issued is based on the fair market value as calculated by the Black-Scholes pricing model. To perform a calculation of the value of our options, we determine an estimate of the volatility of our stock. We need to estimate volatility because there has not been enough trading of our stock to determine an appropriate measure of volatility. We believe our estimate of volatility is reasonable, and we review the assumptions used to determine this whenever we issue a new equity instruments. If we have a material error in our estimate of the volatility of our stock, our expenses could be understated or overstated. All share-based awards are expensed on a straight-line basis over the vesting period of the options.

Recent Accounting Pronouncements - In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial statements. The Company’s adoption of ASU No. 2016-01 effective January 1, 2019 did not have a material impact on the consolidated financial statements.

In February 2016, FASB issued Account Standards Update 2016-02 – Leases (Topic 842) intended to improve financial reporting of leasing transactions whereby lessees will need to recognize a right-of-use asset and a lease liability for virtually all their leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP — which requires only capital leases to be recognized on the balance sheet — the new ASU will require both types of leases to be recognized on the balance sheet. The Company adopted this ASU on January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations—Clarifying the definition of a business (Topic 805). This ASU clarifies the definition of a business with the objective of providing a more robust framework to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company’s adoption of ASU No. 2017-01 effective May 1, 2018 did not have a material impact on the consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718). This ASU reduces the diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change in terms or conditions of a share-based payment award. The Company’s adoption of ASU No. 2017-09 effective May 1, 2018 did not have a material impact on its consolidated financial statements.

Other recent accounting pronouncements issued by FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.