UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number: 001-36492
Registrant’s telephone number, including area code: (620) 325-6363
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “emerging growth company” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of November 19, 2024, there were 4,718,308 (after split 50:1) shares of Common Stock, par value $0.001per share, issued and outstanding.
AGEAGLE AERIAL SYSTEMS INC.
TABLE OF CONTENTS
EXPLANATARY NOTE
AgEagle Aerial Systems Inc. (the “Company”, “we”, “us”, and “our”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2023 with the U.S. Securities and Exchange Commission (“SEC”) on April 1, 2024 (the “Original Form 10-K”) and filed quarterly reports on Form 10-Q for the three, six, and nine months ended March 31, 2023, June 30, 2023, and September 30, 2023 on May 15, 2023, August 14, 2023, and November 13, 2023, respectively, (collectively referred to has the “Original 2023 Form 10-Qs”) and filed quarterly reports for the three and six months ended March 31, 2024 and June 30, 2024 on May 15, 2024 and August 14, 2024, respectively, (collectively referred to has the “Original 2024 Form 10-Qs”). Subsequent to the filing of the Original Form 10-K and the Original 2023 and 2024 Form 10-Qs for the year end and interim periods during our fiscal year 2023 and fiscal year 2024, we identified an error that was present in all aforementioned filings.
On November 7, 2024, the audit committee of the Company’s board of directors concluded, after discussion with the Company’s management, that the previously issued consolidated financial statements as of and for the years ended December 31, 2023 and 2022 and the Form 10-Qs for the quarterly periods March 31, 2023, June 30, 2023, September 30, 2023, March 31, 2024 and June 30, 2024 should no longer be relied upon due to the errors discussed below and require restatement.
We plan to file an amendment to the Original Form 10-K, correcting the error present at December 31, 2023 and 2022 and restate all of the quarterly financial information in the Original 2023 Form 10-Qs in the amendment to the Original Form 10-K.
This Form 10-Q restates the quarterly financial statements periods in the Original 2024 Form 10-Qs and their comparative prior periods. See Note 12 included in this Form 10-Q to the accompanying quarterly consolidated financial statements for further details of the correction of the errors and a summary of the impact on the quarterly consolidated financial statements for all periods impacted by the error, which was isolated to the consolidated statements of operations and comprehensive loss.
Background of Restatement
Subsequent to the filing of our Original Form 10-K and Original Form 2024 and 2023 10-Qs, management identified an error in the computation of net loss attributable to common stockholders and total comprehensive loss as presented on our consolidated statements of operations and comprehensive loss included in the Original Form 10-K and Original Form 2024 and 2023 10-Qs. The error in the computation of net loss attributable to common stockholders resulted in an understatement of net loss per common share basic and diluted as presented on our consolidated statements of operations and an overstatement of comprehensive loss for the quarterly periods included in the Original 2024 and Original 2023 Form 10-Qs and the fiscal year ends included in the Original Form 10-K.
The net loss attributable to common stockholders erroneously excluded accrued cumulative dividends on outstanding Series F preferred stock and deemed dividends resulting from the triggering of down round features embedded within outstanding equity-linked financial instruments. Pursuant to ASC 260 Earnings Per Share, income (loss) available to common stockholders shall be computed by deducting dividends accumulated for the period on cumulative preferred stock. Also, the value of the effect of a down round feature shall be recognized in an equity-classified freestanding financial instrument when the down round feature is triggered. That effect shall be treated as a dividend and as an increase to net loss available to common stockholders in computation of earnings per share.
Further, the accrued cumulative dividends and deemed dividends were included as a component of other comprehensive loss. However, pursuant toASC 220 – Income Statement – Reporting Comprehensive Income items required to be reported as direct adjustments to additional paid-in capital and retained earnings are not considered to be components of other comprehensive income (loss).
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2024
(unaudited)
See accompanying notes to these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
For the Three Months Ended
September 30,
Accrued dividends on Series F Preferred Stock
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Par
$0.001
Common Stock
See accompanying notes to condensed consolidated financial statements.
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023
Shares
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
Note 1 – Description of the Business and Basis of Presentation
Description of Business – AgEagle™ Aerial Systems Inc. (“AgEagle” or the “Company”, “we”, “our”), through its wholly-owned subsidiaries, AgEagle Aerial, Inc., DBA MicaSense™, Inc. (“MicaSense”), Measure Global, Inc. (“Measure”), senseFly SA, and senseFly Inc. (collectively “senseFly”), is actively engaged in designing and delivering best-in-class drones, sensors and software that solve important problems for its customers in a wide range of industry verticals, including energy/utilities, infrastructure, agriculture and government.
Founded in 2010, AgEagle was originally formed to pioneer proprietary, professional-grade, fixed-winged drones and aerial imagery-based data collection and analytics solutions for the agriculture industry. Today, the Company is earning distinction as a globally respected market leader offering customer-centric, advanced, autonomous unmanned aerial systems (“UAS”) which drive revenue at the intersection of flight hardware, sensors and software for industries that include agriculture, military/defense, public safety, surveying/mapping and utilities/engineering, among others. AgEagle has also achieved numerous regulatory firsts, including earning governmental approvals for its commercial and tactical drones to fly Beyond Visual Line of Sight (“BVLOS”) and/or Operations Over People in the United States, Canada, Brazil and the European Union and being awarded Blue UAS certification from the Defense Innovation Unit of the U.S. Department of Defense.
The Company is currently headquartered in Wichita, Kansas, where we house our sensor manufacturing operations, and we operate drone distribution and coordinate global customer service operations out of Raleigh, North Carolina. In addition, the Company operates engineering and drone manufacturing operations in Lausanne, Switzerland in support of our international business activities.
Reverse Stock Split - On February 8, 2024, the Company filed a Certificate of Amendment to its Articles of Incorporation, as amended to date effecting a 1-for-20 reverse stock split (the “Reverse Stock Split”) of the Company’s common stock, par value $0.001per share (the “Common Stock”) (the “Reverse Split Amendment”). The Reverse Split Amendment was approved by the Board of the Directors of the Company (the “Board”) and became effective on February 9, 2024. All share and per share data and amounts have been retroactively adjusted as of the earliest period presented in the interim unaudited consolidated financial statements to reflect the effect of the Reverse Stock Split. See also Note 13 Subsequent Events for additional Reverse Stock Split effective October 14, 2024.
Basis of Presentation – The condensed consolidated financial statements of the Company are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in United States of America (“US GAAP”). In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments, for a fair statement of the Company’s consolidated financial position and results of operations for the periods presented. Certain information and disclosures included in the annual consolidated financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to the U.S. Securities and Exchange Commission (“SEC”) rules. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K, as filed with the SEC on April 1, 2024. The Company has identified a computation error of net loss attributable to common stockholders resulting in an understatement of net loss per common share basic and diluted as presented on our consolidated statements of operations and comprehensive loss that is presented in the previously filed 10-K and will be amending the previous filed 10-K. The results for the three and nine-month periods ended September 30, 2024 and 2023, are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future year or periods.
The condensed consolidated financial statements include the accounts of AgEagle and its wholly-owned subsidiaries, AgEagle Aerial, Inc., Measure Global, Inc. and senseFly. All significant intercompany balances and transactions have been eliminated in consolidation.
A description of certain of the Company’s accounting policies and other financial information is included in the Company’s audited consolidated financial statements filed with the SEC on Form 10-K for the year ended December 31, 2023. The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. Such condensed consolidated financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity.
Note 1 – Description of the Business and Basis of Presentation-Continued
Liquidity and Going Concern – In pursuit of the Company’s long-term growth strategy and acquisitions, the Company has sustained continued operating losses. During the nine months ended September 30, 2024, the Company incurred a net loss of $12,705,049 and used cash in operating activities of $4,056,700. As of September 30, 2024, the Company has a working capital deficit of $4,541,048 and an accumulated deficit of $184,995,827. While the Company has historically been successful in raising capital to meet its working capital needs, the ability to continue raising such capital is not guaranteed. There is substantial doubt about the Company’s ability to continue as a going concern as the Company will require additional liquidity to continue its operations and meet its financial obligations for 12 months from the date these condensed consolidated financial statements are issued. The Company is evaluating strategies to obtain the required additional funding for future operations and the restructuring of operations to grow revenues and reduce expenses.
If the Company is unable to generate significant sales growth in the near term and raise additional capital, there is a risk that the Company could default on additional obligations; and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.
Note 2 – Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. Such condensed consolidated financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to US GAAP in all material respects and have been consistently applied in preparing the accompanying condensed consolidated financial statements.
Risks and Uncertainties – Global economic challenges, including 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. The aforementioned risks and their respective impacts on the UAV industry and the Company’s operational and financial performance remains uncertain and outside of the Company’s control. Specifically, because of the aforementioned continuing risks, the Company’s ability to access components and parts needed in order to manufacture its proprietary drones and sensors, and to perform quality testing have been, and continue to be, impacted. If either the Company or any of its third parties in the supply chain for materials used in our manufacturing and assembly processes continue to be adversely impacted, the Company’s supply chain may be disrupted, limiting its ability to manufacture and assemble products.
Use of Estimates – The preparation of condensed consolidated financial statements in conformity with US GAAP 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the reserve for obsolete inventory, valuation of intangible assets, and valuation of goodwill.
Fair Value Measurements and Disclosures – Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement(“ASC 820”), requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.
Note 2 – Summary of Significant Accounting Policies-Continued
The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
For short-term classes of our financial instruments, which include cash, accounts receivable, prepaid expenses, notes receivable, accounts payable and accrued expenses, their carrying amounts approximate fair value due to their short-term nature. The outstanding loan related to the COVID Loans is carried at face value, which approximates fair value. As of September 30, 2024 and December 31, 2023, the Company did not have any financial assets or liabilities measured and recorded at fair value on the Company’s condensed consolidated balance sheets on a recurring basis.
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. At each balance sheet date, the Company evaluates its 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.
Cash Concentrations - The Company maintains its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has significant cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.
Accounts Receivable and Credit Policy – Trade receivables due from customers are uncollateralized customer obligations due under normal and customary trade terms. Trade receivables are stated at the amount billed to the customer. As of September 30, 2024 and December 31, 2023, the Company had an accounts receivable balance of $2,156,425 and $2,057,546, respectively. 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 credit losses based upon an evaluation of the current status of trade receivables, historical experience, and other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for credit losses will change.
Allowance for Credit Losses - We establish allowances for credit losses on accounts receivable, under ASC 326-20-55-37. The adequacy of these allowances is assessed quarterly through consideration of factors such as customer credit ratings, bankruptcy filings, published or estimated credit default rates, age of the receivable, expected loss rates and collateral exposures. Collateral exposure is the excess of the carrying value of a financial asset over the fair value of the related collateral. We determine the creditworthiness of our customers by assigning internal credit ratings based upon publicly available information and information obtained directly from the customers. As of September 30, 2024 and December 31, 2023, the Company had an allowance for credit losses of $0 and $158,689, respectively.
Our net accounts receivable represents amounts billed and due from customers. Based on historical perspective, nearly all of our accounts receivable as of September 30, 2024 would be collected in calendar year 2024 because the majority of our accounts receivable are due from value added resellers (“VARs”) and sovereign governments, including the U.S. Department of Defense. However, under the new guidance, the Company has elected to recognize credit losses based on our collection history and our customers payment terms.
Revenue Recognition – The Company’s revenues are derived primarily through the sales of drones, sensors and related accessories, and software subscriptions. The Company utilized ASC Topic 606 and its related amendments, Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services.
Generally, we recognize revenue when it satisfies its obligation by providing the benefits of the service to the customer, either over time or at a point in time. A performance obligation is satisfied over time if one of the following criteria are met:
Revenue recognition under ASC 606 as described below creates following revenue streams:
The Company recognizes revenue on sales to customers, dealers, and distributors upon satisfaction of performance obligations which occurs once controls transfer to customers, which is when product is shipped or delivered depending on specific shipping terms and, where applicable, a customer acceptance has been obtained. The fee is not considered to be fixed or determinable until all material contingencies related to the sales have been resolved. The Company records revenue in the condensed consolidated statements of operations and comprehensive loss net of any sales and use, value added, or certain excise taxes imposed by governmental authorities on specific sales transactions and net of any discounts, allowances and returns.
Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined price. To the extent the Company’s actual costs vary from the estimates upon which the price was negotiated, it will generate more or less profit or could incur a loss. The Company accounts for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
The Company’s software subscriptions to its platforms, HempOverview and Ground Control, are offered on a subscription basis. These subscription fees are recognized equally over the membership period as the services are provided.
Additionally, customer payments received in advance of the Company completing performance obligations are recorded as contract liabilities. Customer deposits represent customer prepayments and are recognized as revenue when the term of the sale or performance obligation is completed. As of September 30, 2024 and December 31, 2023, contract liabilities represent amounts of $861,411 and $226,316, respectively.
Internal- Use Software Costs – Internal-use software costs are accounted for in accordance with ASC Topic 350-40, Internal-Use Software. The costs incurred in the preliminary stages of development are expensed as research and development costs as incurred. Once an application has reached the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized on a straight-line basis over the estimated useful life of the software (typically three to five years). Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful life of the software. The Company reviews the carrying value for impairment whenever facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. Amortization expense related to capitalized internal-use software development costs is included in general and administrative expenses on the condensed consolidated statements of operations and comprehensive loss.
As of September 30, 2024 and December 31 2023, capitalized software costs for internal-use software related to the Company’s implementation of its enterprise resource planning software, totaled $370,785 and $582,148, respectively, net of accumulated amortization and are included in intangible assets, net on the condensed consolidated balance sheets.
Goodwill and Intangible Assets – The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets from acquired businesses are recognized at fair value on the acquisition date and consist of customer programs, trademarks, customer relationships, technology and other intangible assets. Customer programs include values assigned to major programs of acquired businesses and represent the aggregate value associated with the customer relationships, contracts, technology and trademarks underlying the associated program and are amortized on a straight-line basis over a period of expected cash flows used to measure fair value, which ranges from four to five years.
As of September 30, 2024 and December 31, 2023, the goodwill balance was $7,402,644. The Company tests its goodwill for impairment, at least annually, unless events or changes in circumstances indicate the carrying value of goodwill may be impaired, the Company may look to perform such test sooner versus on an annual basis. Such events or changes in circumstances may include a significant deterioration in overall economic conditions, changes in the business climate of our industry, a decline in the Company’s market capitalization, decline in operating performance indicators, competition, or a reorganization of our business. The Company’s goodwill has been allocated to and is tested for impairment at a level referred to as the business segment. The level at which the Company test goodwill for impairment requires it to determine whether the operations below the business segment constitute a self-sustaining business for which discrete financial information is available and segment management regularly reviews the operating results which is referred to as a reporting unit.
As of September 30, 2024 and December 31, 2023, our intangible assets balance was $2,141,477 and $2,615,281, respectively. Finite-lived intangibles are amortized to expense over the applicable useful lives, ranging from three to ten years, based on the nature of the asset and the underlying pattern of economic benefit as reflected by future net cash inflows. We perform an impairment test of finite-lived intangibles whenever events or changes in circumstances indicate their carrying value may be impaired. If events or changes in circumstances indicate the carrying value of a finite-lived intangible may be impaired, the sum of the undiscounted future cash flows expected to result from the use of the asset group would be compared to the asset group’s carrying value. If the asset group’s carrying amount exceeds the sum of the undiscounted future cash flows, we would determine the fair value of the asset group and record an impairment loss in net earnings.
Foreign Currency – The Company translates assets and liabilities of its foreign subsidiary, senseFly S.A., predominately in Swiss Franc to their U.S. dollar equivalents at exchange rates in effect as of the balance sheet date. Translation adjustments are not included in determining net income but are recorded in accumulated other comprehensive loss on the condensed consolidated balance sheets. The Company translates the condensed consolidated statements of operations and comprehensive loss of its foreign subsidiary at average exchange rates for the applicable period. Foreign currency transaction gains and losses, arising primarily from changes in exchange rates on foreign currency denominated revenues, certain purchases and intercompany transactions are recorded in other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.
Shipping Costs – All shipping costs billed directly to the customer are directly offset to shipping costs resulting in a net expense to the Company, which is included in cost of sales in the accompanying condensed consolidated statements of operations and comprehensive loss. For the three months ended September 30, 2024 and 2023, shipping costs totaled $51,510 and $68,966, respectively, and for the nine months ended shipping cost totaled $211,781 and $191,447, respectively.
Advertising Costs – Advertising costs are charged to operations as incurred and presented in sales and marketing expenses in the condensed consolidated statements of operations and comprehensive loss. For the three months ended September 30, 2024 and 2023, advertising costs were $4,412 and $44,701, respectively; and for the nine month ended were $10,489 and $113,119, respectively.
Loss Per Common Share and Potentially Dilutive Securities – Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus Common Stock, equivalents (if dilutive) related to warrants, options, and convertible instruments. For the three and nine months ended September 30, 2024 and 2023, the Company has excluded all common equivalent shares outstanding for restricted stock units (“RSUs”), warrants and options to purchase Common Stock and convertible instruments from the calculation of diluted net loss per share, because these securities are anti-dilutive for the periods presented. As of September 30, 2024, the Company had 366,229unvested RSUs,8,740,340 warrants, and 2,750options outstanding to purchase shares of Common Stock and 9,162,952 of issuable shares upon the conversion of Series F preferred stock. As of December 31, 2023, the Company had 9,630unvested RSUs, 3,233,546warrants and 125,264options outstanding to purchase shares of Common Stock, and 25,100,000 of issuable shares upon the conversion of Series F preferred stock
Segment Reporting – In accordance with ASC Topic 280, Segment Reporting, the Company identifies operating segments as components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker in making decisions regarding resource allocation and performance assessment. The Company defines the term “chief operating decision maker” to be its chief executive officer.
The Company has determined that it operates in four segments:
New Accounting Pronouncements – In March 2024, the Securities and Exchange Commission (“SEC”) has released a final rule that requires registrants to provide comprehensive climate-related disclosures in their annual reports and registration statements, including those for IPOs, beginning with annual reports for the year ending December 31, 2027, for smaller reporting companies (“SRC”). Registrants must disclose climate-related financial metrics and impacts on their financial estimates and assumptions in a footnote to the audited financial statements. The disclosures will also need to be addressed as part of management’s internal control over financial reporting (“ICFR”) and will be subject to the financial statement and ICFR audit (if applicable) of an independent registered public accounting firm. We are currently evaluating the impacts of the improvements to our disclosure.
In December 2023, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 requires public business entities to disclose, on an annual basis, a rate reconciliation presented in both dollars and percentages. The guidance requires the rate reconciliation to include specific categories and provides further guidance on disaggregation of those categories based on a quantitative threshold equal to 5% or more of the amount determined by multiplying pretax income (loss) from continuing operations by the applicable statutory rate. For entities reconciling to the US statutory rate of 21%, this would generally require disclosing any reconciling items that impact the rate by 1.05% or more. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024 (generally, calendar year 2025) and effective for all other business entities one year later. Entities should adopt this guidance on a prospective basis, though retrospective application is permitted. The adoption of ASU 2023-09 is expected to have a financial statement disclosure impact only and is not expected to have a material impact on the Company’s condensed consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting – Improvements to Reportable Segment Disclosures. The ASU will now require public entities to disclose its significant segment expenses categories and amounts for each reportable segment. Under the ASU, a significant segment expense is an expense that is:
The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024 (calendar year public entity will adopt the ASU in its 2024 Form 10-K). The ASU should be adopted retrospectively unless it’s impracticable to do so. Early adoption of the ASU is permitted, including in an interim period. The adoption of ASU 2023-07 is expected to have a financial statement disclosure impact only and is not expected to have a material impact on the Company’s condensed consolidated financial statements.
Note 3 – Balance Sheets
Accounts Receivable, Net
As of September 30, 2024 and December 31, 2023, accounts receivable, net consist of the following:
Schedule of Accounts Receivable, Net
Inventories, Net
As of September 30, 2024 and December 31, 2023, inventories, net consist of the following:
Schedule of Inventories
Prepaid and Other Current Assets
As of September 30, 2024 and December 31, 2023, prepaid and other current assets consist of the following:
Schedule of Prepaid and Other Current Assets
Note 3 – Balance Sheets-Continued
Property and Equipment, Net
As of September 30, 2024 and December 31, 2023, property and equipment, net consist of the following:
Schedule of Property and Equipment, Net
Useful Life
(Years)
During the three months ended September 30, 2024 and 2023, depreciation expense was $83,315and $93,614respectively, for the nine months ended September 30, 2024 and 2023, depreciation expense was $269,642and $293,538, respectively, which has been included in general and administrative expenses on the accompanying condensed consolidated statements of operations and comprehensive loss.
Intangible Assets, Net
As of September 30, 2024 and December 31, 2023, intangible assets, net, other than goodwill, consist of following:
Schedule of Intangible Assets, Net
As of September 30, 2024, the weighted average remaining amortization period in years is 2.59 years. For the three and nine months ended September 30, 2024 and 2023, amortization expense was $184,656 and $919,774, respectively and $545,906 and $2,734,106, respectively.
For the following years ending, the future amortization expense consists of the following:
Schedule of Intangible Assets Future Amortization Expenses
(rest of year)
2024
Accrued Liabilities
As of September 30, 2024 and December 31, 2023, accrued liabilities consist of the following:
Schedule of Accrued Liabilities
Note 4 – COVID Loans
The Company assumed the obligations for two COVID Loans originally made by the SBA to senseFly S.A. on July 27, 2020 (“senseFly COVID Loans”). As of senseFly Acquisition Date, the fair value of the COVID Loan was $1,440,046 (“senseFly COVID Loans”). For the three and nine months ended September 30, 2024, senseFly S.A. made the required payments on the senseFly COVID Loans, including principal and accrued interest, aggregating approximately $0 and $212,391, respectively. As of September 30, 2024, the Company’s outstanding obligations under the senseFly COVID Loans are $659,827. On August 25, 2023, the Company modified one (1) of its existing agreements to extend the repayment period of the COVID Loan from a maturity date of December 2023 to June 2025. The other COVID loan remains unchanged.
As of September 30, 2024, scheduled principal payments due under the senseFly COVID Loans are as follows:
Schedule of Maturity of SenseFly Covid Loans
Note 5 – Promissory Note and Exchange Agreement
On December 6, 2022, the Company entered into a Securities Purchase Agreement (the “Promissory Note Purchase Agreement”) with an institutional investor, Alpha Capital Anstalt (“Alpha”), which is an existing shareholder of the Company. Pursuant to the terms of the Promissory Note Purchase Agreement, the Company has agreed to issue to the Investor (i) an 8% original issue discount promissory note (the “Note”) in the aggregate principal amount of $3,500,000, and (ii) a common stock purchase warrant (the “Promissory Note Warrant”) to purchase up to 250,000 shares of the Company’s Common Stock (the “Shares”) at an exercise price of $8.80 per share, subject to standard anti-dilution adjustments. The Note is an unsecured obligation of the Company. It has an original issue discount of 4% and bears interest at 8% per annum. The Company received net proceeds of $3,285,000 net of the original issue discount of $140,000 and $75,000 of issuance costs. The Promissory Note Warrant was not exercisable for the first six months after issuance and has a five-year term from the initial exercise date of June 6, 2023.
Beginning June 1, 2023, and on the first business day of each month thereafter, the Company was to pay 1/20th of the original principal amount of the Note plus any accrued but unpaid interest, with any remaining principal plus accrued interest payable in full upon the maturity date of December 31, 2024 or the occurrence of an Event of Default (as defined in the Note).
On August 14, 2023, the Company and Alpha entered into a Note Amendment Agreement due to the Company not making the Monthly Amortization Payments for the months of June – August 2023. Pursuant to the Note Amendment Agreement, the parties agreed to amend the Note as follows:
On September 15, 2023, the Company and Investor entered into a Warrant Exchange Agreement pursuant to which the Company agreed to issue to the Investor 5,000,000 shares of common stock in exchange for the Warrant for no consideration. The Company accounted for the incremental value using the Black-Scholes pricing model of the Promissory Note Warrant modification of $190,500 as an increase in additional paid-in capital and interest expense on the condensed consolidated statements of operations and comprehensive loss.
As result of the default on the payment for September 15, 2023, October 1, 2023 and November 1, 2023, the principal increased by $409,500for a total balance of $4,504,500.
On October 5, 2023, the Company and Alpha entered into a Second Note Amendment Agreement (the “Second Amendment”), which provides for the following:
As of December 15, 2023, the Company was unable to meet its payment obligation as prescribed in the Second Amendment.
On February 8, 2024, the Company and Alpha entered into a Securities Exchange Agreement (the “Exchange Agreement”), pursuant to which the parties agreed to exchange the Note Payable Purchase Agreement, as amended, executed December 2022, for a Convertible Note due January 8, 2025 in the principal amount of $4,849,491(the “Convertible Note”), convertible into Common Stock at the initial conversion price of $2.00per share of Common Stock, subject to adjustment based on the effectiveness of the Company’s Reverse Stock Split which became effective on February 9, 2024. On February 16, 2024, the conversion price was adjusted downward to $1.25pursuant to the terms of the Convertible Note and is subject to adjustment pursuant to dilutive protection terms included in the Convertible Note. The principal amount of the Convertible Note did not change and includes: (i) the initial principal amount of the Original Note of $3,500,000, (ii) the additional $595,000in principal added pursuant to the 1st Amendment, (iii) $192,111in accrued interest at the rate of 8% from December 6, 2022 through August 13, 2023 on the original principal amount of $3,500,000, (iv) $152,880in accrued interest at the rate of 8% from August 14, 2023 through February 8, 2024 on the original principal amount of $4,095,000, and (v) an additional principal amount of $409,500. The Convertible Note accrues interest at 12% per annum versus 8% on the Note Payable Purchase Agreement. The interest rate increased to the lesser of 18% per annum or the maximum rate permitted under applicable law upon an Event of Default as defined under the Convertible Note. Commencing April 1, 2024, and on the first business day of each calendar month thereafter, the Company shall pay $484,949, plus any accrued but unpaid interest, with any remaining principal plus accrued interest payable in full upon the Maturity Date.
Note 5 – Promissory Note and Exchange Agreement- Continued
On February 16, 2024, the Company received a notification from Alpha to convert $100,000 into 79,828 shares of common stock at an exercise price of $1.2527, reducing the principal balance to $4,749,491.
On April 12, 2024, the Company received an Investor Notice from Alpha for the aggregate purchase of 1,050 shares of Series F Convertible Preferred convertible into 1,418,919 shares of Common Stock, in the aggregate, at a conversion price of $0.74 for an aggregate purchase price of $1,050,000, the investor retained $569,091 as a payment to the Promissory Note which consisted of the scheduled principal payment of $484,950 for the month of April and $84,141 of interest, as result, the company received $480,909.
During the three months ended September 30, 2024, the Company recorded interest of $568,549of which $426,454was added to the principal balance due to the Company’s failure to make payments in the third quarter, for the nine months the Company recorded $778,874of interest expense related to the Note Payable Purchase Agreement and Convertible Note in the condensed consolidated statements of operations and comprehensive loss. As of September 30, 2024, there is $108,446of accrued interest included in accrued expenses and the total principal outstanding is $4,850,828.
As of September 30, 2024, scheduled principal payments due under the fourth Amended Note are as follows:
Schedule of Principal Payments Due
On March 6, 2024, the conversion price of the Convertible Debt was reduced from $1.25to $0.60pursuant to dilution protection provisions and due to the reduction in warrant exercise prices to $0.60to induce exercise (see Note 7). The Company recognized interest expense in the amount of $3,488,851 for the incremental value of the conversion feature due to the reduced conversion price. The incremental value was determined using a Black-Scholes pricing model pre and post modification and the following inputs: expected term 0.92 years, risk free rate of 4.83%, volatility of 89.6%, and dividend rate of 0%.
On August 27, 2024, Alpha exercised its Additional Investment Right for the aggregate purchase of 500shares of Series F Convertible Preferred, convertible into 1,238,237shares of Common Stock. The previous conversion price of $0.60was reduced to $0.4038as a result of this reduction the Company recorded interest expense of $609,537 for the incremental value of the conversion feature due to the reduced conversion price. The incremental value was determined using a Black-Scholes pricing model pre and post modification and the following inputs: expected term 0.50 years, risk free rate of 4.34%, volatility of 101.70%, and dividend rate of 0%.
Note 6 – Other Short-Term Loan
On June 21, 2024, the Company entered into an agreement for the purchase and sale of future receipts with a commercial lender pursuant to which the Buyer purchased $1,890,000 of future receipts. The Company recorded the sale of future receipts at the discount price of $1,312,500, for net proceeds of $1,250,000 cash, net of $62,500 origination fee. The Future Receipts Agreement was effective as of June 20, 2024. The Company recorded a debt discount of $640,000 which will be amortized over the life of the loan into interest expense. The purchased amount is remitted in weekly instalments in the amount of $67,500 until the purchased amount has been satisfied. The Company intends to use the proceeds for working capital and general corporate purposes. At the issuance of this agreement the Company agreed the lender to retain $378,000 related to the balance due for the agreement of the purchase and sales of future receipts completed on January 24, 2024, referenced in the paragraph below – from the same lender.
Note 6 – Other Short-Term Loan – Continued
On January 24, 2024, the Company entered into an agreement for the purchase and sale of future receipts (the “Future Receipts Agreement”) with an unrelated commercial lender (the “Buyer”) pursuant to which the Buyer purchased $1,512,000 (“Purchased Amount”) in future receipts of the Company at the discount price of $1,050,000, for net proceeds of $1,000,000 cash, net of $50,000 origination fee. At issuance, the Company recorded a debt discount of $512,000 which will be amortized over the life of the loan into interest expense. The Company is required to repay the Purchased Amount with weekly instalments in the amount of $54,000 until the Purchased Amount has been satisfied. The Company may prepay the Purchased Amount within 30 calendar days by tendering the amount of $1,312,500.
In the event the Company is unable to make timely weekly payments due to a business slow down, or if the full Purchased Amount is never remitted due to bankruptcy or other cessation of operations in the ordinary course of business, and the Company has not breached the Future Receipts Agreement, it would not be an event of default. The Company would not owe anything to Buyer and would not be in breach of or default under this Future Receipts Agreement.
During the three and nine months ended September 30, 2024, the Company recorded $384,000 and $768,000 of amortization related to the debt discount as interest expense related to the purchase and sales of future receipts dated June 20,2024. As of September 30, 2024, the total balance outstanding under the short-term loan is $1,147,500, an unamortized debt discount of $384,000, resulting in a net discounted balance of $763,500.
Schedule of Other Short-Term Loan
Note 7 – Stockholders’ Equity
Common Stock and Warrant Transaction
On February 16, 2024, the Company received a notification from an investor to convert $100,000 of principal outstanding on a Convertible Note (see Note 6) into 79,828 shares of common stock at a conversion price of $1.25.
On March 6, 2024, the Company entered into a warrant exercise agreement with several institutional investors holding warrants issued to such Investors pursuant a securities purchase agreement, dated as of June 5, 2023, in connection with a private placement. The Exercise Agreement provides that for those Investors who exercise their Existing Warrants they will receive a reduction in the Exercise Price to $0.60 per share of Common Stock. The shares of Common Stock issuable upon exercise of the Existing Warrants were registered pursuant to a registration statement on Form S-1 File No. 333-273332 and declared effective on July 27, 2023. The Company received up to $497,701from the exercise of 829,500 warrants converted to 829,500 shares of common stock. The reduction in exercise price (“March 2024 Down Round Trigger”) triggered several anti-dilution protections embedded in outstanding Preferred Series F Convertible Stock and Common Stock Warrants (see below).
Note 7 – Stockholders’ Equity – Continued
On June 5, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”). Pursuant to the terms of the Purchase Agreement, the Company agreed to issue and sell to Investors (i) 836,000 shares of Common Stock (the “Offering Shares”) at $5.00 per share and (ii) warrants to purchase up to 1,254,000shares of common stock (the “Warrants”), exercisable at $7.60 per share (the “Warrant Shares” together with the Warrants and Offering Shares, the “Securities”) and raised gross sales proceeds of $4,180,000. The Warrant is for a term of 5.5 years commencing on the closing date but is not exercisable for the first six months after closing. As a result, pursuant to the Purchase Agreement the Company issued 836,000 shares of Common Stock for proceeds of $3,817,400, net of issuance costs from the offering and warrants to purchase up to 1,254,000 shares of common stock exercisable at $7.60 per share. The Warrants issued did not include any anti-dilution price protections from subsequent equity sales. This Purchase Agreement resulted in the June 2023 Down Round Trigger (see below).
Preferred Series F Convertible Stock
Purchase History
On June 26, 2022, the Company entered into a Securities Purchase Agreement (the “Series F Agreement”) with Alpha. Pursuant to the terms of the Series F Agreement, the Board of Directors of the Company (the “Board”) designated a new series of Preferred Stock, the Series F 5% Preferred Convertible Stock (“Series F”), and authorized the sale and issuance of up to 35,000 shares of Series F.
On March 9, 2023, the Company received an Investor Notice from Alpha to purchase an additional 3,000 shares of Series F Convertible Preferred (the “Additional Series F Preferred”) convertible into 2,381 shares of the Company’s Common Stock per $1,000 Stated Value per share of Series F Preferred Stock, at an initial conversion price of $8.40, post slit per share and associated Common Stock warrant to purchase up to 357,136 shares of Common Stock, post-split, at an initial exercise price of $8.40, post-split (the “Additional Warrant”) for an aggregate purchase price of $3,000,000. The Additional Warrant is exercisable upon issuance and has a three-year term. On March 10, 2023, the Company issued and sold the Additional Series F Preferred and the Additional Warrant. This issuance triggered anti-dilution provisions embedded in Series F and Common Stock warrants outstanding.
On March 6, 2024, in connection with the Assigned Rights, the Company received Investor Notices from Alpha and the Assignees for the aggregate purchase of 1,000 shares of Series F Convertible Preferred convertible into 829,394 shares of Common Stock at an initial conversion price of $1.2057 and warrants to purchase up to 829,394 shares of Common Stock at an initial exercise price of $1.2057 per share for an aggregate purchase price of $1,000,000. The conversion price and exercise price are subject to adjustment based on anti-dilution protection provisions in connection with subsequent equity issuances embedded in the Securities Purchase Agreement. The Warrants were immediately exercisable upon issuance and have a three-year term. The reduction in exercise price (“March 2024 Down Round Trigger”) triggered several anti-dilution protections embedded in outstanding Preferred Series F Convertible Stock (“Series F”) and Common Stock Warrants (“Series F Warrants”) issued with Series F (see below).
On April 12, 2024, the Company received an Investor Notice from Alpha for the aggregate purchase of 1,050 shares of Series F Convertible Preferred convertible into 1,418,919 shares of Common Stock, at a conversion price of $0.74 and 1,418,919 of common stock warrants with an exercise price of $0.74 exercisable for three years for an aggregate purchase price of $1,050,000.
Note 7 – Stockholders’ Equity-Continued
On May 31, 2024, the Company entered into an Assignment Agreement with Alpha pursuant to which, among other things, Alpha transferred and assigned to certain institutional and accredited investors, the rights and obligations to purchase up to $525,000 of Series F Convertible Preferred and accompanying warrants pursuant to the Additional Investment Right provided in the SPA. Also, in connection with the Assigned Rights, the Company received Investor Notices from Alpha and certain of the Assignees for the aggregate purchase of 1,050 shares of Series F Convertible Preferred convertible into 1,632,970 shares of Common Stock at a conversion price of $0.643 and 1,632,970 of common stock warrants with at an exercise price of $0.643 and exercisable for a period of three years for an aggregate purchase price of $1,050,000.
On July 25, 2024, the Company received an Investor Notice from Alpha for the aggregate purchase of 500 shares of Series F Convertible Preferred convertible into 1,079,914 shares of Common Stock, in the aggregate, at a conversion price of $0.463 and warrants to purchase up to 1,079,914shares of Common Stock at an exercise price of $0.463 for an aggregate purchase price of $500,000.
On August 27, 2024, the Company received an Investor Notice from Alpha for the aggregate purchase of 500 shares of Series F Convertible Preferred convertible into 1,238,237 shares of Common Stock, in the aggregate, at a conversion price of $0.4038 and warrants to purchase up to 1,238,237 shares of Common Stock at an exercise price of $0.4038 for an aggregate purchase price of $500,000. The purchase transaction triggered several anti-dilution protections embedded in the outstanding Series F and Series F warrants as the conversion price and exercise price of the Series and Series F Warrants issued in the purchase were less than the conversion and exercise price after the March 2024 Down Round Trigger of $.60 (the “August 2024 Down Round Trigger”). See below for further disclosures of the financial statement impact for these triggers.
Conversions
For the three and nine months ended September 30, 2024, Alpha and other investors converted 1,595 and 6,475 shares of Series F into 3,481,757and 9,350,474 shares of Common Stock, respectively. As a result, for the same periods, the Company recorded $47,879 and $158,862 cumulative dividends, which are included in accrued expenses on the condensed consolidated balance sheets, at the rate per share (as a percentage of the $1,000 stated par value per share of Series F) of 5% per annum, beginning on the first conversation date of June 30, 2022.
During the three and nine months ended September 30, 2023, Alpha converted 750 and 2,588 shares of Series F into 3,000,000 and 7,304,762 shares of Common Stock, respectively. As a result, for the same periods, the Company recorded $49,122 and $170,277 cumulative dividends, respectively, which are included in accrued expenses on the condensed consolidated balance sheets, at the rate per share (as a percentage of the $1,000stated par value per share of Series F) of 5% per annum, beginning on the first conversation date of June 30, 2022.
As of September 30, 2024, there are 3,700 Preferred Series F outstanding.
Down Round Triggers, Anti-dilution, and Deemed Dividends
The reduced warrant exercise price of $0.60on March 6, 2024, the March 2024 Down Round Trigger, triggered anti-dilution protection provisions in connection with subsequent equity issuances embedded in the Series F and Common Stock warrants issued with the Series F. The March 2024 Down Round Trigger resulted in the Company recognizing a deemed dividend on the Series F and Series F Warrants of $5,102,674and $147,030, respectively, and an aggregate deemed dividend of $5,249,704for the incremental fair value to the Series F and the Series F Warrant holders resulting from the reduction in conversion price and exercise price.
On May 31, 2024, the Company entered into an Assignment Agreement with Alpha pursuant to which, among other things, Alpha transferred and assigned to certain institutional and accredited investors, the rights and obligations to purchase up to $525,000 of Series F Convertible Preferred and accompanying warrants pursuant to the Additional Investment Right provided in the SPA. The Assignment Agreement also provides that Alpha will receive a reduction in the Exercise Price (as defined in the Existing Warrants) from $7.60 to $0.60 per share of Common Stock for certain warrants previously issued to Alpha on June 5, 2023. As result, the Company recorded a deemed dividend on the Series F Warrants of $7,751 which represents the difference between fair value of the
Series F Warrants under the original terms before the Down Round Trigger and the fair value of the Series F Warrants after the Down Round Trigger at the reduced exercise price.
The fair value of the Series F Warrants was determined using a Black-Scholes pricing model and the following assumptions: expected life of4 years, volatility of 247.07%, risk free rate of 4.61%, and dividend rate of 0%.
On August 27, 2024, Alpha exercised its Additional Investment Right for the aggregate purchase of 500shares of Series F Convertible Preferred convertible into 1,238,237 shares of Common Stock, in the aggregate, at a conversion price of $0.4038and warrants to purchase up to 1,238,237shares of Common Stock at an exercise price of $0.4038per share for an aggregate purchase price of $500,000. The Assignment Agreement also provides that Alpha will receive a reduction in the Exercise Price (as defined in the Existing Warrants) from $0.60to $0.4038per share of Common Stock for certain warrants previously issued to Alpha on June 5, 2023. As a result, the Company recorded a deemed dividend of $1,450,232.
The August 2024 Down Round Triggered anti-dilution protection provisions in connection with subsequent equity issuances embedded in the Series F and Serries F Warrants and reduced the conversion and exercise price of on outstanding Series F and Series F Warrants from $.60to $.4038. As a result, the Company recognized a deemed dividend of $1,233,686and $216,546on the Series F and Series F Warrants, respectively, an aggregate deemed dividend of $1,450,232for the incremental fair value to the Series F and the Series F Warrant holders resulting from the reduction in conversion price and exercise price.
The fair value of the Series F and Series F Warrants was determined using a Black-Scholes pricing model and the following assumptions: expected life of 1-3years, volatility of 101.70– 119.75%, risk free rate of 3.72- 4.34%, and dividend rate of 0%.
The March 2023 Down Round Triggered anti-dilution protection provisions in connection with subsequent equity issuances embedded in the Series F and Serries F Warrants and reduced the conversion and exercise price of on outstanding Series F and Series F Warrants from $8.80 to $8.40. As a result, the Company recognized an aggregate deemed dividend of $255,976 which has been reflected in stockholders’ equity and increased the net loss available to common stockholders in the earning per share calculation as presented on the accompanying condensed consolidated statements of operations and comprehensive loss.
The March 2023 Down Round Trigger resulted in the Company recognizing a deemed dividend on the Series F and Series F Warrants of $217,750and $38,226, respectively, or aggregate deemed dividend of $255,976, for the incremental value to the Series F and Series F Warrant holders resulting from the reduction in conversion price and exercise price.
The June 2023 Down Round Triggered anti-dilution protection provisions in connection with subsequent equity issuances embedded in the Series F and Serries F Warrants and reduced the conversion and exercise price of any outstanding Series F and Series F Warrants from $8.40 to $5.00. As a result, the Company recognized an aggregate deemed dividend of $4,654,918 which has been reflected in stockholders’ equity and increased the net loss available to common stockholders in the earning per share calculation as presented on the accompanying condensed consolidated statements of operations and comprehensive loss.
The June 2023 Down Round Trigger resulted in the Company recognizing a deemed dividend on the Series F and Series F Warrants of $3,867,095and $787,823, respectively, for the incremental value to the Series F and Series F Warrant holders resulting from the reduction in conversion price and exercise price.
Stock-based Compensation
The Company determines the fair value of awards granted under the 2017 Omnibus Equity Incentive Plan (the “Equity Plan”) based on the fair value of its Common Stock on the date of grant. Stock-based compensation expenses related to grants under the Equity Plan are included in general and administrative expenses on the condensed consolidated statements of operations and comprehensive loss. For the three and nine-months ended September 30, 2024, the Company recorded $16,675 and $63,791, respectively. The stock-based compensation, for the same period during 2023, $142,845 and $1,125,209 were recorded, respectively.
All deemed dividends to the Series F stockholder were recorded as additional paid in capital and an increase to accumulated deficit and as an increase to total net loss attributable to Common Stockholders in computing earnings per share on the condensed consolidated statements of operations and comprehensive loss.
During the three and nine months ended September 30, 2024, the aggregate deemed dividends recognized on these down round triggers were $1,450,232and $6,707,687, respectively. During the three and nine months ended September 30, 2023, the aggregate deemed dividends recognized on these down round triggers were $0 and $4,910,894, respectively.
Pension Costs
senseFly S.A. sponsors a defined benefit pension plan (the “Defined Benefit Plan”) covering all its employees. The Defined Benefit Plan provides benefits in the event of retirement, death or disability, with benefits based on age and salary. The Defined Benefit Plan is funded through contributions paid by senseFly S.A. and its employees, respectively. The Defined Benefit Plan assets are Groupe Mutuel Prévoyance (“GMP”), which invests these plan assets in cash and cash equivalents, equities, bonds, real estate and alternative investments.
The Projected Benefit Obligation (“PBO”) includes in full the accrued liability for the plan death and disability benefits, irrespective of the extent to which these benefits may be reinsured with an insurer. The actuarial valuations are based on the census data as of December 31, 2023, provided by GMP.
The Defined Benefit Plan has a PBO in excess of Defined Benefit Plan assets. For the three and nine months ended September 30, 2024, the amounts recognized in accumulated other comprehensive loss related to the Defined Benefit Plan were $0, compared to ($742) and $43,302, respectively for the same period during 2023.
Restricted Stock Units (“RSUs”)
For the nine months ended September 30, 2024, a summary of RSU activity is as follows:
Summary of RSU Activity
For the nine months ended September 30, 2024, the aggregate fair value of RSU awards at the time of vesting was $131,504.
For the three and nine months ended September 30, 2024, the Company recognized $16,675 and $47,749 of stock compensation expense, respectively, and had approximately $104,809 of unrecognized stock-based compensation expense related to RSUs, which will be amortized over approximately twenty-one months.
For the nine months ended September 30, 2023, a summary of RSU activity is as follows:
For the nine months ended September 30, 2023, the aggregate fair value of RSU awards at the time of vesting was $710,769.
For the three and nine months ended September 30, 2023, the Company recognized $86,905 and $821,321 of stock compensation expense, respectively, and had $72,542 of unrecognized stock-based compensation expense related to RSUs.
Issuance of RSUs to Current Officers and Directors of the Company
For the three and nine months ended September 30, 2024, the Company granted 300,000 RSUs to officers, equal to $95,970 as compensation, which vest over two years.
For the three and nine months ended September 30, 2024, the Company granted 14,000 RSUs and 25,000 RSUs, respectively, equal to $7,560 to the four non-executive directors as quarterly board compensation, which vested immediately.
On September 29, 2023, upon recommendation of the Compensation Committee of the Board (“Compensation Committee”), in lieu of the payment of $15,000 for each Board member or a total of $45,000 as quarterly cash compensation, three (3) non-executive directors each received 4,412, totaling 13,235 RSUs equal to $45,000, which were immediately vested, also in lieu of the issuance of stock options for the purchase of 30,000 shares of common stock, for each of these three (3) non-executive directors received a total of 4,500 in restricted stock awards, which vested immediately for a fair value of $15,300 in the aggregate or $5,100 each.
Stock Options
For the nine months ended September 30, 2024, a summary of the options activity is as follows:
Schedule of Options Activity
As of September 30, 2024, the Company had no unrecognized compensation cost related to stock options.
Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or as of September 30, 2024 (for outstanding options), less the applicable exercise price.
For the three and nine months ended September 30, 2024, the Company recognized $0 and $16,042, respectively of stock compensation expense.
For the nine months ended September 30, 2023, a summary of the options activity is as follows:
For the three and nine months ended September 30, 2023, the Company recognized $55,940 and $303,888, respectively of stock compensation expense and had $100,971 of total unrecognized compensation cost related to stock options, which will be amortized through September 30, 2025.
For the nine months ended September 30, 2024 and 2023, the significant assumptions relating to the valuation of the Company’s stock options granted were as follows:
Schedule of Significant Weighted Average Assumptions
Cancellations of Options
For the nine months ended September 30, 2024 and 2023, as a result of employee terminations and options expirations, stock options aggregating122,514 and 7,230 with fair market values of $2,543,229 and $275,636 were cancelled, respectively. Of the 122,514 stock options cancelled during the nine months ended September 30, 2024, 45,297 were options historically granted to the Board of Directors, these options were cancelled and reissued as RSU’s. Each option cancelled resulted in a subsequent grant of RSU’s with ratio of 2 RSU’s granted for each option cancelled.
Note 8 – Leases
Operating Leases
For the three and nine months ended September 30, 2024 and 2023, operating lease expense payments were $264,854 and $794,561, respectively and $267,745 and $791,558, respectively. Operating lease expense payments are included in general and administrative expenses on the condensed consolidated statements of operations and comprehensive loss.
Note 8 – Leases-Continued
As of September 30, 2024 and December 31, 2023, balance sheet information related to the Company’s operating leases is as follows:
Schedule of Company's Operating Leases
As of September 30, 2024, scheduled future maturities of the Company’s lease liabilities are as follows:
Schedule of Future Maturities Lease Liabilities
As of September 30, 2024 and December 31, 2023, the weighted-average lease-term and discount rate of the Company’s leases are as follows:
Schedule of Weighted Average Lease-term and Discount Rate Leases
For the three months and nine months ended September 30, 2024 and 2023, supplemental cash flow information related to leases is as follows:
Schedule of Cash Flow Supplemental Information
Note 9 – Warrants
As previously disclosed in Note 7, we have issued warrants in connection with the sale and issuance of Series F preferred stock and common stock. We also issued to Dawson James Securities, Inc. (“Dawson”) 136,861 shares of Common Stock at an initial exercise price of $1.51 per share pursuant to an engagement letter executed with Dawson to serve as the sole placement agent for the Company on a reasonable best-efforts basis, in connection with the placement of the March 2024 Preferred Shares and associated Warrants. The warrants issued to Dawson have a five (5) year term and do not include any anti-dilution protection provisions in connection with a subsequent equity issuance, or otherwise.
A summary of activity related to warrants for the periods presented is as follows:
Summary of Activity Related to Warrants
As of September 30, 2024, the intrinsic value of the warrants was nil.
Note 10 – Commitments and Contingencies
Existing Employment and Board Agreements
The Company has various employment agreements with certain of its executive officers and directors that serve as Board members, which it considers normal and in the ordinary course of business.
Except as described below, the Company has no other formal employment agreements with its executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement, or any other termination of its 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 that the Company will enter into formal employment agreements with its executive officers in the future.
Effective as of April 15, 2024, Mr. Grant Begley ceased to serve as the Interim Chief Executive Officer of the Company, and the Company and William (“Bill”) Irby entered into an Executive Employment Agreement (the “Employment Agreement”) setting forth the terms of Bill Irby’s appointment as Chief Executive Officer and Director of the Company effective as of April 15, 2024. As previously announced, Bill Irby had served as President of the Company, since February 12, 2024. Mr. Begley continues as Chairman of the Board of the Company.
Note 10 – Commitments and Contingencies-Continued
Pursuant to the Employment Agreement, Bill Irby will receive an annual base salary of $375,000 per year, subject to annual performance reviews by the Compensation Committee of the Board of Directors (the “Compensation Committee”). In accordance with the 2017 Omnibus Equity Incentive Plan and any related RSU award agreement, and as approved by the Compensation Committee, Mr. Irby will be eligible to receive a sign on bonus of restricted stock units (“RSUs”) with a fair value of up to $60,000 and a sign on performance bonus of RSUs with a fair value of up to $300,000. In addition, Mr. Irby is entitled to receive an annual performance bonus, which will be determined each year by the Compensation Committee. Pursuant to the Employment Agreement, Mr. Irby is also provided with severance benefits in the event of termination without cause.
On March 6, 2024, AgEagle Aerial Systems Inc. entered into a letter agreement with Dawson pursuant to which Dawson has agreed to serve, on an exclusive basis for a period of four months, as the sole placement agent for the Company, in connection with the offering of equity securities and equity-linked securities of the Company, including any restructuring, exercise and/or conversion solicitation and/or renegotiating the terms of any warrants to purchase shares of common stock, par value $0.001 per share and the solicitation of exercise of any additional investment right with respect to Securities of the Company.
Pursuant to the Engagement Agreement, the Company will pay a cash fee equal to $68,862 and issue to Dawson warrants to purchase such number of shares of Common Stock, equal to 10% of the aggregate number of shares of Common Stock issued or issuable in the Offerings. These Placement Agent Warrants will have the same terms as any warrants included in any Offering except that such Placement Agent Warrants will have a five (5) year term, an exercise price equal to 125% of the offering price per share and will not include any anti-dilution protection provisions in connection with a subsequent equity issuance, or otherwise.
Purchase Commitments
The Company routinely places orders for manufacturing services and materials. As of September 30, 2024, the Company had purchase commitments of $2,531,750.
Note 11 – Segment Information
Non-allocated administrative and other expenses are reflected in Corporate. Corporate assets include cash, prepaid expenses, notes receivable, right-of-use assets and other assets.
As of September 30, 2024 and December 31, 2023, and for the three and nine months ended September 30, 2024 and 2023, respectively, information about the Company’s reportable segments consisted of the following:
Goodwill and Assets
Schedule of Goodwill and Assets
Note 11 – Segment Information-Continued
Net Income (Loss)
Schedule of Net (Loss) Income
Revenues by Geographic Area
Schedule of Geographical Revenues
Note 12 – RESTATEMENT
The net loss attributable to common stockholders erroneously excluded accrued cumulative dividends on outstanding Series F preferred stock and deemed dividends resulting from the triggering of down round features embedded within outstanding equity-linked financial instruments. Pursuant to ASC 260 Earnings Per Share, income available to common stockholders shall be computed by deducting dividends accumulated for the period on cumulative preferred stock. Also, the value of the effect of a down round feature shall be recognized in an equity-classified freestanding financial instrument when the down round feature is triggered. That effect shall be treated as a dividend and as a reduction of income available to common stockholders in basic and diluted earnings per share.
Further, the accrued cumulative dividends and deemed dividends were included as a component of other comprehensive loss. However, pursuant to ASC 220 – Income Statement – Reporting Comprehensive Income items required to be reported as direct adjustments to additional paid-in capital and retained earnings are not considered to be components of other comprehensive income (loss).
On November 7, 2024, the audit committee of the Company’s board of directors concluded, after discussion with the Company’s management, that the previously issued consolidated financial statements as of and for the years ended December 31, 2023 and 2022 and the Form 10-Qs for the quarterly periods March 31, 2023, June 30, 2023 and September 30, 2023 should no longer be relied upon due to the errors discussed above and required restatement.
As a result of the restatement matter discussed in our Explanatory Note included in this Form 10-Q, the quarterly financial statements for the periods ended March 31, 2024 and June 30, 2024 are being effectively restated in this current Form 10-Q for the period ended September 30, 2024, as follows:
Impact of the Restatement – March, June, and September 2023 and March and June 2024
Schedule Of Restatement
Note 13 – Subsequent Events
Management has evaluated subsequent events through the date that the Company’s unaudited condensed consolidated financial statements were issued. Based on this evaluation, the Company has determined that no additional subsequent events have occurred, other than those noted below, which require disclosure through the date that these unaudited condensed consolidated financial statements were issued.
Unit Offering
We closed the following Offering on October 1, 2024.
The Company entered into a placement agency agreement (the “Placement Agency Agreement”) with Spartan Capital Securities, LLC (the “Placement Agent”) in connection with the issuance and sale by the Company in a public offering (the “Offering”) of 26,899,996 units (the “Units”), consisting of common units (“Common Units”), each consisting of one share of common stock of the Company, $0.001 par value per share, one Series A warrant (“Series A Warrant”) to purchase one share of common stock and one Series B warrant (“Series B Warrant”) to purchase one share of common stock and pre-funded Units (the “Pre-Funded Units” and together with the Common Units, the “Units”), with each Pre-Funded Unit consisting of one pre-funded warrant (the “Pre-Funded Warrants”) to purchase one share of common stock, one Series A Warrant to purchase one share of common stock and one Series B Warrant to purchase one share of common stock.
Note 13 – Subsequent Events- Continued
The purchase price of each Common Unit was $0.24, and the purchase price of each Pre-Funded Unit was $0.239, less Placement Agent fees and commissions.
The Units have no stand-alone rights and will not be certificated or issued as stand-alone securities. Each Series A Warrant is immediately exercisable on the date of issuance at an exercise price of the public offering price of the Units of $0.24, or pursuant to an alternate cashless exercise option, and expires five years from the closing date of the offering. Each Series B Warrant is immediately exercisable on the date of issuance at an exercise price equal to one hundred percent (100%) of the public offering price of the Units of $0.24 and expires five years from the closing date of the offering.
Under the alternate cashless exercise option of the Series A Warrants, a holder of the Series A Warrant, has the right to receive an aggregate number of shares equal to the product of (x) the aggregate number of shares of common stock that would be issuable upon a cash exercise of the Series A Warrant and (y) 2.0. In addition, the Series A Warrants and Series B Warrants contain a reset of the exercise price to a price equal to the lesser of (i) the then exercise price and (ii) the lowest volume weighted average price for the five trading days immediately preceding and immediately following the date the Company effects a reverse stock split in the future with a proportionate adjustment to the number of shares underlying the Series A Warrants and Series B Warrants. Finally, with certain exceptions, the Series B Warrants provide for an adjustment to the exercise price and number of shares underlying the Series B Warrants upon the Company’s issuance of its common stock or common stock equivalents at a price per share that is less than the exercise price of the Series B Warrant.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 (UNAUDITED
Each Pre-Funded Warrant is immediately exercisable for one share of common stock at an exercise price of $0.001 per share. Subject to limited exceptions, a holder of Pre-Funded Warrants does not have the right to exercise any portion of its Pre-Funded Warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% (or, at the election of the holder, such limit may be increased to up to 9.99%) of the number of shares of common stock outstanding immediately after giving effect to such exercise. The Pre-Funded Warrants may be exercised at any time until all of the Pre-Funded Warrants are exercised in full.
The shares of common stock, the Pre-Funded Warrants, the Series A Warrants and the Series B Warrants and the shares of common stock issuable upon exercise of the Pre-Funded Warrants, the Series A Warrants and the Series B Warrants described above, were offered by the Company pursuant to a Registration Statement on Form S-1 (File No. 333-281897), filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) and declared effective by the SEC on September 30, 2024.
The Company engaged the Placement Agent as the Company’s sole placement agent for the Offering pursuant to the Placement Agency Agreement. Pursuant to the Placement Agency Agreement, the Company agreed to pay the Placement Agent a cash placement fee equal to 8.0% of the gross proceeds of the Offering. The Company also agreed to pay the Placement Agent 0.5% of the gross proceeds received by the Company in the Offering, plus reimbursement of certain expenses and legal fees up to $215,000.
Omnibus Agreement
The Offering required the consent of Alpha Capital Anstalt the holder of the Convertible Note (Note 5) and the primary holder of our issued and outstanding Series F and Series F Warrants.
Pursuant to the Omnibus Agreement, among other things, (i) Alpha consented to the Offering, (ii) Alpha agreed to purchase $3,000,000 of the units in the offering and the Company agreed to apply said $3,000,000 towards the repayment of the Convertible Note balance, (iii) upon such repayment, $2,000,000 in principal will remain outstanding on the Convertible Note which will be paid in six monthly installments consisting of $333,333.33 in principal plus all accrued commencing on October 15, 2024 and continuing on the 15th day of each calendar month until the Convertible Note is paid in full, and (iv) in consideration of Alpha’s consent, the Company will issue to Alpha 1,500 shares of Series F 5% Convertible Preferred Stock with an aggregate stated value of $1,500,000.
Reverse Stock Split
On October 3, 2024, the Board approved a reverse stock split of the Company’s authorized, issued and outstanding shares of common stock, par value $0.001 per share, at a ratio of one (1) share of common stock for every fifty (50) shares of common stock (the “Reverse Stock Split”).The Company filed a Certificate of Change with the Secretary of State of the State of Nevada to effectuate the Reverse Stock Split. The Reverse Stock Split was effective on October 14, 2024.
On October 14, 2024, after the Reverse Stock Split, the outstanding common stock balance became 824,725 from 41,220,458.
Resignation of Directors and Officers
On October 17, 2024, Thomas Gardner, Kelly Anderson and Malcom Frost informed the board of directors (the “Board”) of the Company their decision to resign from the Board and all related Board committees, effectively immediately. Mr. Gardner’s, Mrs. Anderson’s and Mr. Frost’s resignation are not a result of a disagreement or dispute with the Company on any matter regarding its operations, policies or practices.
On October 18, 2024, Mark DiSiena, Chief Financial Officer (“CFO”) of the Company, informed the Company that he intends to resign from his role at the Company, to be effective November 15, 2024 (the “Resignation Date”). Mr. DiSiena is expected to remain with the Company through the Resignation Date to assist in the transition of his responsibilities. Mr. DiSiena’s resignation is not a result of a disagreement or dispute with the Company on any matter regarding its operations, policies or practices.
On October 25, 2024, the Board of the Company appointed Kevin Lowdermilk to serve as an independent director of the Company, effective immediately. Mr. Lowdermilk was also appointed as a member of the Company’s Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee, effective immediately.
On November 1, 2024, the Board of the Company appointed Brent Klavon to serve as an independent director of the Company, effective immediately. Mr. Klavon was also appointed as a member of the Company’s Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee, effective immediately. Mr. Klavon will be chair of the Compensation Committee.
On November 14, 2024, AgEagle Aerial Systems, Inc. (the “Company”) appointed Ms. Adrienne Anderson, age 46, to the positions of Interim Chief Financial Officer and Interim Principal Accounting Officer of the Company, effective immediately.
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in Item 8 of this Form 10-K. This discussion contains forward-looking statements. Please see the explanatory note concerning “Forward-Looking Statements” in Part I of the Annual Report on Form 10-K and Item 1A. Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not materially affected by inflation.
Overview
AgEagle™Aerial Systems Inc. (“AgEagle”, “Company”, “We”, “Our”, “Us”), through its wholly owned subsidiaries, is actively engaged in designing and delivering best-in-class drones, sensors and software that solve important problems for our customers. Founded in 2010, AgEagle was originally formed to pioneer proprietary, professional-grade, fixed-winged drones and aerial imagery-based data collection and analytics solutions for the agriculture industry. AgEagle’s shift and expansion from solely manufacturing fixed-wing farm drones in 2018, to offering what we believe is one of the industry’s best fixed-wing, full-stack drone solutions, culminated in 2021 when we acquired three market-leading companies engaged in producing UAS airframes, sensors and software for commercial and government use. In addition to a robust portfolio of proprietary, connected hardware and software products; an established global network of over 200 UAS resellers; and enterprise customers worldwide; these acquisitions also brought AgEagle a highly valuable workforce comprised largely of experienced engineers and technologists with deep expertise in the fields of robotics, automation, manufacturing and data science. In 2022, we succeeded in integrating all three acquired companies with AgEagle to form one global company focused on taking autonomous flight performance to a higher level for a wider variety of markets, including defense , public safety, and agriculture/commercial customers.
AgEagle has also achieved numerous regulatory firsts, earning governmental approvals for its commercial and tactical drones to fly Beyond Visual Line of Sight (“BVLOS”) and/or Operations Over People (“OOP”) in the United States, Canada, Brazil and the European Union.
AgEagle is led by a proven management team with years of drone industry experience and is currently headquartered in Wichita, Kansas, where we house our business and sensor manufacturing operations; and we operate drone manufacturing operations in Lausanne, Switzerland in support of our international business activities.
We are focused on growing our business, generating cash, and preserve our leadership position by developing new drones, sensors and embedded software and capturing a significant share of the global drone market. In addition, we expect to accelerate our growth and expansion through product development and strategic acquisitions of companies that offer distinct technological and competitive advantages and have defensible high value IP protection in place, if applicable.
Key Growth Strategies
We intend to materially grow our business by leveraging our proprietary, best-in-class, full-stack drone solutions, multi-spectral sensors, industry influence, and deep pool of talent with specialized expertise in robotics, automation, custom manufacturing and data science to achieve greater penetration of the global UAS industry – with near-term emphasis on adding stability and discipline to our operations, and capturing larger market share of the agriculture, defense, public safety, and agriculture/commercial markets. We expect to accomplish this goal by first bringing one four re-defined core values to life in our day-to-day operations and aligning them with our efforts to earn the trust and continued business of our customers and industry partners:
Integrity – this is the foundation for everything we do, even when no one is watching.
Passion – we love what we do each day, creating the energy to overcome challenges.
Competitive Strengths
We believe that the following attributes and capabilities provide us with long-term competitive advantages:
Impact of the Risks and Uncertainties On Our Business Operations
Global economic challenges, including the impact of the war, pandemics, rising inflation and supply-chain disruptions, regulatory investigations adverse labor and capital market conditions could cause economic uncertainty and volatility. The aforementioned risks and their respective impacts on the UAV industry and our operational and financial performance remain uncertain and outside of our control. Specifically, because of the aforementioned continuing risks, our ability to access components and parts needed in order to manufacture its proprietary drones and sensors, and to perform quality testing have been, and continue to be, impacted. If either we or any of our third parties in the supply chain for materials used in our manufacturing and assembly processes continue to be adversely impacted, our supply chain may be further disrupted, limiting its ability to manufacture and assemble products.
Three and Nine Months Ended September 30, 2024 as Compared to Three and Nine Months Ended September 30, 2023
Revenues
For the three months ended September 30, 2024, revenues were $3,284,984 as compared to $3,483,932 for the three months ended September 30, 2023, a decrease of $198,948, or 6%. The decrease of $198,948 was attributable to a decrease of approximately $685,000 revenues due to decreased sensor sales primarily related to expected seasonality, off set by an increase of approximately $520,000 in revenues of theeBee drone products.
For the nine months ended September 30, 2024, revenues were $10,571,969 as compared to $10,819,213 for the nine months ended September 30, 2023, a decrease of $247,244 or 2.3%. The decline in revenues is mainly attributed to the eBee drone products of $217,083 and $75,868 of our SaaS subscription services related to our HempOverview and Ground Control platforms. Offsetting these decreases was an increase in revenues of $45,707 attributable to the revenues derived from our sensor sales, specifically the RedEdge-P andAltum-PT panchromatic sensor series. Our continued innovation has demonstrated growth in our sales leading to strong demand of our products, specifically for our panchromatic sensor series, and the VISION drone product.
Cost of Sales and Gross Profit
For the three months ended September 30, 2024, cost of sales was $1,650,717 as compared to $2,269,858 for the three months ended September 30, 2023, a decrease of $619,141 or 27.3%. For the nine months ended September 30, 2024, gross profit was $1,634,267 as compared to $1,214,074 for the three months ended September 30, 2023, an increase of $420,193, or 34.6%. The primary factors contributing to the decrease in our cost of sales and the increase gross profit margin were due to the historical inventory adjustments and new bill of material system implementation.
For the nine months ended September 30, 2024, cost of sales was $5,428,705 as compared to $6,594,973 for the nine months ended September 30, 2023, a decrease of $1,166,268, or 17.7%. For the nine months ended September 30, 2024, gross profit was $5,143,264 or 49% as compared to $4,224,240 or 39% for the nine months ended September 30, 2023, an increase of $919,024, or 21.8% in actual gross margin. The increase in gross profit margin was a result of our drone products along with significant price reduction in the second and third quarter of 2023 to stimulate market demand and bring us in line specifically with competitive products manufactured in China as our products become older while awaiting the new ebee VISION.
Operating Expenses
For the three months ended September 30, 2024, operating expenses were $3,495,427, as compared to $7,204,187 for the three months ended September 30, 2023, a decrease of $3,708,760, or 51.5%.
For the nine months ended September 30, 2024, operating expenses were $11,938,779, as compared to $19,247,300 for the nine months ended September 30, 2023, a decrease of $7,308,521, or 38.0%.
Operating expenses comprise general and administrative, sales and marketing, and research and development.
General and Administrative Expenses
For the three months ended September 30, 2024, general and administrative expenses were $1,889,733 as compared to $3,357,550 for the three months ended September 30, 2023, a decrease of $1,467,817 or 43.7%. The decrease was primarily related to less stock compensation expense related to terminated employees, and the reduced stock price, less intangible amortization during 2024 due to the impairment recorded on December 31, 2023, less shareholders annual meeting cost, offset by legal fees, accounting and consulting expense.
For the nine months ended September 30, 2024, general and administrative expenses were $6,931,496 as compared to $10,435,834 for the nine months ended September 30, 2023, a decrease of $3,504,338, or 33.6%. The decrease was primarily a result of the reduction in employee payroll related costs due to integration of roles, ERP consulting integration costs, reduction in R&D consultants, less stock compensation costs, less intangible amortization during 2024 due to the impairment recorded on December 31, 2023, less shareholders annual meeting costs offset by an increase in legal, accounting, consulting, and recruitment costs during 2024.
Research and Development
For the three months ended September 30, 2024, research and development expenses were $969,402 as compared to $1,368,394 for the three months ended September 30, 2023, a decrease of $398,992, or 29.2%. The decrease was primarily due to the integration of research and development teams that provide development of our new airframe, sensor and software technologies resulting in a reduction in our consultants and internal headcounts.
For the nine months ended September 30, 2024, research and development expenses were $3,181,638, as compared to $4,320,216 for the nine months ended September 30, 2023, a decrease of $1,138,578, or 26.4%. The decrease was primarily due to the integration of research and development teams that provide development of our new airframe, sensor and software technologies resulting in a reduction in our consultants and internal headcounts.
Sales and Marketing
For the three months ended September 30, 2024, sales and marketing expenses were $636,292 as compared to $978,243 for the three months ended September 30, 2023, a decrease of $341,951, or 35%. The decrease was primarily due to the decrease in travel, integration of sales and marketing teams that lead to a reduction of consulting expenses along with decrease in digital advertising spend as we look to attend in-person trade shows.
For the nine months ended September 30, 2024, sales and marketing expenses were $1,825,645 as compared to $2,911,963 for the nine months ended September 30, 2023, a decrease of $1,086,318, or 37.3%. The decrease was primarily due to the integration of sales and marketing teams, along with a decrease in consulting expenses due to branding and website integration done in prior year along with less trade-shows offset by more in-person demos with our sales and marketing team for the new ebee VISON.
Other Expense, net
For the three months ended September 30, 2024, other expense, net was $1,598,594 as compared to $2,030,015 for the three months ended September 30, 2023, an increase of $431,421.
For the nine months ended September 30, 2024, other expense, net was $5,909,534 as compared to other expense, net of $2,887,150 for the nine months ended September 30, 2023, an increase of $3,022,384. The increase is primarily attributable to the promissory note’s original issue discount of 4% and interest at 8% per annum issued in December 2022 along with the anti-dilution price protections embedded in the convertible note that were triggered during the nine months ended September 30, 2024, we recognized interest expense of $4,098,388 for the incremental fair value of the convertible note conversion feature being reduced from its original conversion price of $0.60 to $0.4038.
Net Loss
For the three months ended September 30, 2024, we incurred a net loss of $3,459,754 as compared to a net loss of $8,020,128 for the three months ended September 30, 2023, a decrease of $4,560,374 or 56.9%., the decrease of the losses are related to the above mentioned reductions of costs related to general and administrative, research and development, and sales and marketing.
For the nine months ended September 30, 2024, the Company incurred a net loss of $12,705,049 as compared to a net loss of $17,910,210 for the nine months ended September 30, 2023, a decrease of $5,205,161, or 29.1%. The overall decrease in net loss was primarily attributable to a decrease in operating costs.
Cash Flows
Nine Months Ended September 30, 2024 as Compared to the Nine Months Ended September 30, 2023
As of September 30, 2024, cash on hand was $265,126, as compared to $819,024 as of December 31, 2023, a decrease of $553,898, or 67.6%.
For the nine months ended September 30, 2024, cash used in operations was $4,056,700 a decrease of $4,772,969 or 54.1%, as compared to cash used of $8,829,669 for the nine months ended September 30, 2023. The decrease in cash used in operating activities was principally driven by the lower operating expenses which included significantly lower inventory purchases and prepayments offset by higher accounts receivables, account payables and accrued expenses.
For the nine months ended September 30, 2024, cash used in investing activities was $96,087, a decrease of $468,029, or 83%, as compared to cash used of $564,116 for the nine months ended September 30, 2023. The decrease is related to the capitalization of the internal software and platform costs incurred during 2023 which did not continue at the same rate in 2024.
For the nine months ended September 30, 2024, cash provided by financing activities was $3,607,482 a decrease of $3,122,866 or 46.4%, as compared to cash provided of $6,730,348 for the nine months ended September 30, 2023. The decrease in cash provided by our financing activities was due to less sales of our Common stock through an at-the-market offering and exercise of warrants in the prior year offset by the sale of Series F Preferred stock.
Liquidity and Capital Resources
As of September 30, 2024, we had a working capital deficit of $4,541,048. For the nine months ended September 30, 2024, we incurred a loss from operations of $6,795,515, a decrease of $8,227,545, or 54.8%, as compared to $15,023,060 for the nine months ended September 30, 2023. While we have historically been successful in raising capital to meet its working capital needs, the ability to continue raising such capital to enable us to continue our growth is not guaranteed. We will require additional liquidity to continue its operations and meet its financial obligations over the next twelve months, there is substantial doubt about our ability to continue as a going concern. We are evaluating strategies to obtain the required additional funding for future operations and the restructuring of operations to grow revenues and reduce expenses.
Off-Balance Sheet Arrangements
On September 30, 2024, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Inflation
During the nine months ended September 30, 2024, inflation has had a negative impact on the unmanned aerial vehicle systems industry, our customers, and our business globally. Specifically, our ability to access components, parts and labor needed to manufacture its proprietary drones and sensors, and to perform quality testing have been, and continue to be, impacted. If either the Company or any of its third parties in the supply chain for materials used in our manufacturing and assembly processes continue to be adversely impacted, our supply chain may be further disrupted, limiting its ability to manufacture and assemble products. We expect inflation and its effects to continue to have a significant negative impact on our business.
Climate Change
Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
New Accounting Pronouncements
In December 2023, FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 requires public business entities to disclose, on an annual basis, a rate reconciliation presented in both dollars and percentages. The guidance requires the rate reconciliation to include specific categories and provides further guidance on disaggregation of those categories based on a quantitative threshold equal to 5% or more of the amount determined by multiplying pretax income (loss) from continuing operations by the applicable statutory rate. For entities reconciling to the US statutory rate of 21%, this would generally require disclosing any reconciling items that impact the rate by 1.05% or more. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024 (generally, calendar year 2025) and effective for all other business entities one year later. Entities should adopt this guidance on a prospective basis, though retrospective application is permitted. The adoption of ASU 2023-09 is expected to have a financial statement disclosure impact only and is not expected to have a material impact on the Company’s consolidated financial statements.
The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024 (calendar year public entity will adopt the ASU in its 2024 Form 10-K). The ASU should be adopted retrospectively unless its impracticable to do so. Early adoption of the ASU is permitted, including in an interim period. The adoption of ASU 2023-07 is expected to have a financial statement disclosure impact only and is not expected to have a material impact on the Company’s consolidated financial statements.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
Evaluation of Disclosure and Control Procedures
The Company’s Chief Executive Officer and the Company’s Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2024 and concluded that the Company’s disclosure controls and procedures are not effective. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated, recorded, processed, summarized and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure to be reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(t) and 15d-15(f) under the Exchange Act, during the nine months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Material Weaknesses over Financial Reporting
During the preparation of our interim condensed consolidated financial statements for the period ended September 30, 2024, management identified a material weakness in our internal controls related to the computation of net loss attributable to common stockholders resulted in an understatement of Earnings Per Share (“EPS). In addition to the EPS computation error, accrued dividends and deemed dividends were included as a component of other comprehensive loss instead of being included in net loss attributable to common stockholders.
During the preparation of our interim condensed consolidated financial statements for the period ended March 31, 2024, we identified a material weakness in our internal controls related to the accounting for a complex debt transaction. Specifically, the controls related to accounting for the modification of the convertible debt agreement. The Company has engaged an external consultant with technical accounting expertise to help with the technical documentation and accounting of significant and unusual transactions.
None.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, and are not required to provide the information under this item.
Not applicable.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.