UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For The Quarterly Period Ended June 30, 2021

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

For the transition period from _________ to _________

Commission File Number 001-36492

AGEAGLE AERIAL SYSTEMS INC.

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

Nevada		88-0422242
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

8863 E. 34th Street North
Wichita, Kansas 67226
(Address of principal executive offices, including zip code)

620-325-6363

Registrant’s phone number, including area code

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	UAVS	NYSE American

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

Yes ☒ NO ☐

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

Yes ☒ NO ☐

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

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

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

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

Class		Outstanding at August 17, 2021
Common Stock, $.001 par value		75,145,698

AGEAGLE AERIAL SYSTEMS INC.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS:	3

	Condensed Interim Consolidated Balance Sheets as of June 30, 2021(unaudited) and December 31, 2020	3

	Condensed Interim Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	4

	Condensed Interim Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	5

	Condensed Interim Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 (unaudited)	7

	Notes to Condensed Interim Consolidated Financial Statements	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	40

ITEM 4.	CONTROLS AND PROCEDURES	40

PART II	OTHER INFORMATION	41

ITEM 1.	LEGAL PROCEEDINGS	41

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	42

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	42

ITEM 4.	MINE SAFETY DISCLOSURES	42

ITEM 5.	OTHER INFORMATION	42

ITEM 6	EXHIBITS	43

SIGNATURES		44

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS


	As of
	June 30,			December 31,
ASSETS	2021			2020
	(Unaudited)
CURRENT ASSETS:
Cash	$	39,214,638		$	23,940,333
Accounts receivable, net		814,712			—
Inventories, net		1,030,977			135,647
Prepaid and other current assets		697,974			122,011
Notes receivable		500,000			600,000
Total current assets		42,258,301			24,797,991

Property and equipment, net		404,095			122,589
Right of use asset		1,073,117			257,363
Intangible assets, net		6,210,596			440,527
Goodwill		64,573,288			3,108,000
Other assets		25,000			—
Total assets	$	114,544,397		$	28,726,470

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	1,151,460		$	159,812
Accrued expenses and other liabilities		815,515			1,844,825
Contract liabilities		504,180			2,302
Current portion of liability related to acquisition agreements		5,471,592			—
Current portion of lease liability		246,559			85,895
Current portion of promissory note		—			89,533
Total current liabilities		8,189,306			2,182,367

Long term portion of lease liability		832,117			171,468
Long term portion of promissory note		—			17,906
Long term portion of liability related to acquisition agreements		10,625,000			—
Total liabilities		19,646,423			2,371,741

COMMITMENTS AND CONTINGENCIES (SEE NOTE 11)

STOCKHOLDERS’ EQUITY:
Preferred Stock, $0.001 par value, 25,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2021 and December 31, 2020		—			—
Common Stock, $0.001 par value, 250,000,000 shares authorized, 74,668,560 and 58,636,365 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		74,669			58,636
Additional paid-in capital		123,377,671			47,241,757
Accumulated deficit		(28,554,366	)		(20,945,664	)
Total stockholders’ equity		94,897,974			26,354,729
Total liabilities and stockholders’ equity	$	114,544,397		$	28,726,470

See accompanying notes to these condensed interim consolidated financial statements.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended						For the Six Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
Revenues	$	1,937,364		$	16,325		$	3,638,955		$	407,605
Cost of sales		959,229			15,030			1,658,097			188,633
Gross Profit		978,135			1,295			1,980,858			218,972

Operating Expenses:
General and administrative		4,062,800			721,705			5,681,928			1,161,066
Professional fees		268,987			532,406			1,953,186			703,904
Research and development		907,000			—			1,335,605			—
Sales and marketing		559,833			2,552			791,427			12,643
Total Operating Expenses		5,798,620			1,256,663			9,762,146			1,877,613
Loss from Operations		(4,820,485	)		(1,255,368	)		(7,781,288	)		(1,658,641	)

Other Income (Expense):
Interest (expense) income		6,164			—			9,015			—
Paycheck protection program loan forgiveness		108,532			—			108,532			—
Loss on disposal of fixed assets		(3,712	)		—			(3,712	)		—
Other income, net		31,329			—			58,751			—
Total Other Income (Expense)		142,313			—			172,586			—
Loss Before Income Taxes		(4,678,172	)		(1,255,368	)		(7,608,702	)		(1,658,641	)
Provision for income taxes		—			—			—			—
Net Loss	$	(4,678,172	)	$	(1,255,368	)	$	(7,608,702	)	$	(1,658,641	)

Deemed dividend on Series C Preferred stock and Series D warrants		—			(4,050,838	)		—			(4,050,838	)
Deemed dividend on redemption of Series D Preferred stock		—			(3,763,591	)		—			(3,763,591	)
Deemed dividend on issuance and repurchase of Series E Preferred stock		—			(1,227,120	)		—			(1,227,120	)
Series D Preferred stock dividends		—			(29,333	)		—			(69,778	)

Net Loss Available to Common Stockholders		(4,678,172	)		(10,326,250	)		(7,608,702	)		(10,769,968	)

Net Loss Per Common Share - Basic and Diluted	$	(0.07	)	$	(0.31	)	$	(0.12	)	$	(0.44	)

Weighted Average Number of Shares Outstanding During the Period -- Basic and Diluted		68,338,866			33,192,853			64,795,122			24,394,950

See accompanying notes to these condensed interim consolidated financial statements.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)


	Par $ .0001 Preferred Stock Series C Shares		Preferred Stock Series C Amount		Par $ .0001 Preferred Stock Series D Shares		Preferred Stock Series D Amount			Common Shares		Common Stock Amount		Additional Paid-In Capital		Accumulated Deficit			Total Stockholders’ Equity
Balance at March 31, 2021		—	$	—		—	$	—	—		62,500,815	$	62,501	$	62,344,452	$	(23,876,194	)	$	38,530,759
Sale of Common Stock, net of issuance costs		—		—		—		—			5,271,100		5,271		28,641,890		—			28,647,161
Issuance of Common stock for acquisition of MicaSense		—		—		—		—			540,541		541		2,999,459		—			3,000,000
Issuance of Common stock for acquisition of Measure											5,319,145		5,319		24,369,681		—			24,375,000
Stock issued in exchange for professional services		—		—		—		—			550,000		550		2,906,450		—			2,907,000
Exercise of options		—		—		—		—			130,557		131		34,314		—			34,445
Stock-based compensation expense		—		—		—		—			356,402		356		2,081,425		—			2,081,781
Net Loss		—		—		—		—	—		—		—		—		(4,678,172	)		(4,678,172	)
Balance at June 30, 2021		—	$	—		—	$	—	—		74,668,560	$	74,669	$	123,377,671	$	(28,554,366	)	$	94,897,974

Balance at December 31, 2020		—	$	—		—	$	—	—		58,636,365	$	58,636	$	47,241,757	$	(20,945,664	)	$	26,354,729
Sale of Common Stock, net of issuance costs		—		—		—		—			6,328,314		6,328		34,954,776		—			34,961,104
Sale of Common Stock from exercise of warrants		—		—		—		—			2,516,778		2,517		8,302,851		—			8,305,368
Issuance of Common stock for acquisition of MicaSense		—		—		—		—			540,541		541		2,999,459		—			3,000,000
Issuance of Common stock for acquisition of Measure											5,319,145		5,319		24,369,681		—			24,375,000
Stock issued in exchange for professional services		—		—		—		—			550,000		550		2,906,450		—			2,907,000
Exercise of options		—		—		—		—			406,015		407		75,418		—			75,825
Stock-based compensation expense		—		—		—		—			371,402		371		2,527,279		—			2,527,650
Net Loss		—		—		—		—	—		—		—		—		(7,608,702	)		(7,608,702	)
Balance at June 30, 2021		—	$	—		—	$	—	—		74,668,560	$	74,669	$	123,377,671	$	(28,554,366	)	$	94,897,974

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30,2021 AND 2020

(Unaudited)

	Par $ .0001 Preferred Stock Series C Shares			Preferred Stock Series C Amount			Par $ .0001 Preferred Stock Series D Shares			Preferred Stock Series D Amount			Par $ .0001 Preferred Stock Series E Shares			Preferred Stock Series E Amount			Par $ .0001 Common Shares			Common Stock Amount			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
Balance at March 31, 2020		3,312		$	3			2,000		$	2			—		$	—			15,610,019		$	15,610		$	12,470,994		$	(8,602,058	)	$	3,884,551
Conversion of Series C Preferred stock		(3,312	)		(3	)		—			—			—			—			13,247,984			13,248			(13,245	)		—			—
Conversion of Series D Preferred stock and accrued dividends		—			—			(1,890	)		(2	)		—			—			3,500,000			3,500			200,502			—			204,000
Conversion of Series D warrants		—			—			—			—			—			—			2,947,739			2,948			(2,948	)		—			—
Issuance of Series E Preferred Stock, net of issuance costs		—			—			—			—			1,050			1			—			—			1,009,999			—			1,010,000
Repurchase of Series E Preferred stock		—			—			—			—			(262	)		—			—			—			(1,110,880	)		—			(1,110,880	)
Conversion of Series E Preferred stock		—			—			—			—			(788	)		(1	)		3,152,000			3,152			(3,151	)		—			—
Deemed dividend on Series C Preferred stock and Series D warrants		—			—			—			—			—			—			—			—			4,050,838			(4,050,838	)		—
Deemed dividend on redemption of Series D Preferred stock		—			—			—			—			—			—			—			—			3,763,591			(3,763,591	)		—
Sale of Common stock, net of issuance costs		—			—			—			—			—			—			6,807,400			6,807			12,889,935			—			12,896,742
Sale of Common stock from conversion of pre-paid warrants		—			—			—			—			—			—			3,260,377			3,260			7			—			3,267
Issuance of Common stock for consulting services		—			—			—			—			—			—			250,000			250			297,250			—			297,500
Exercise of options		—			—			—			—			—			—			33,758			34			(34	)		—			—
Stock-based compensation expense		—			—			—			—			—			—			170,000			170			84,752			—			84,922
Net loss		—			—			—			—			—			—			—			—			—			(1,255,368	)		(1,255,368	)
Balance at June 30, 2020		—		$	—			110		$	—			—		$	—			48,979,277		$	48,979		$	33,637,610		$	(17,671,855	)	$	16,014,734

Balance at December 31, 2019		3,501		$	4			2,000		$	2			—		$	—			15,424,394		$	15,424		$	12,456,989		$	(8,198,785	)	$	4,273,634
Purchase of acquisition		—			—			—			—			—			—			(164,375	)		(164	)		164			—			—
Conversion of Series C Preferred stock		(3,501	)		(4	)		—			—			—			—			13,597,984			13,634			(13,594	)		—			—
Conversion of Series D Preferred stock and accrued dividends		—			—			(1,890	)		(2	)		—			—			3,500,000			3,500			160,057			—			163,555
Conversion of Series D warrants		—			—			—			—			—			—			2,947,739			2,948			(2,948	)		—			—
Issuance of Series E Preferred Stock, net of issuance costs		—			—			—			—			1,050			1			—			—			1,009,999			—			1,010,000
Repurchase of Series E Preferred stock		—			—			—			—			(262	)		—			—			—			(1,110,880	)		—			(1,110,880	)
Conversion of Series E Preferred stock		—			—			—			—			(788	)		(1	)		3,152,000			3,152			(3,151	)		—			—
Deemed dividend on Series C Preferred stock and Series D warrants		—			—			—			—			—			—			—			—			4,050,838			(4,050,838	)		—
Deemed dividend on redemption of Series D Preferred stock		—			—			—			—			—			—			—			—			3,763,591			(3,763,591	)		—
Sale of Common stock, net of issuance costs		—			—			—			—			—			—			6,807,400			6,807			12,889,935			—			12,896,742
Sale of Common stock from conversion of pre-paid warrants		—			—			—			—			—			—			3,260,377			3,260			7			—			3,267
Issuance of Common stock for consulting services		—			—			—			—			—			—			250,000			250			297,250			—			297,500
Exercise of options		—			—			—			—			—			—			33,758			34			(34	)		—			—
Stock-based compensation expense		—			—			—			—			—			—			170,000			170			139,387			—			139,557
Net loss		—			—			—			—			—			—			—			—			—			(1,658,641	)		(1,658,641	)
Balance at June 30, 2020		—		$	—			110		$	—			—		$	—			48,979,277		$	48,979		$	33,637,610		$	(17,671,855	)	$	16,014,734

See accompanying notes to these condensed interim consolidated financial statements

AGEAGLE AERIAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended June 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(7,608,702	)	$	(1,658,641	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets		3,712			—
Depreciation and amortization		454,876			84,358
Allowance for bad debts		47,262			—
Stock-based compensation		2,527,650			139,557
Stock issued in exchange for professional services		2,907,000			297,500
Paycheck protection program loan forgiveness		(108,532)			—

Changes in assets and liabilities:
Accounts receivable		(383,059	)		65,833
Inventories		(206,031	)		(241,876	)
Prepaid expenses and other assets		(220,339	)		(47,058	)
Accounts payable		587,482			84,291
Accrued expenses and other liabilities		(1,649,198	)		60,765
Contract liabilities		141,644			504,592
Net cash used in operating activities		(3,506,235	)		(710,679	)

CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of fixed assets		(210,576	)		(6,173	)
Acquisition of MicaSense		(14,536,863	)		—
Acquisition of Measure		(9,445,258	)		—
Platform development costs		(369,060	)		—
Net cash used in investing activities		(24,561,757	)		(6,173	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from promissory note		—			107,439
Issuance of Series E Preferred stock		—			1,010,000
Repurchase of Series E Preferred stock		—			(1,110,880	)
Sales of Common stock, net of issuance cost		34,961,104			12,896,742
Sale of Common stock from exercise of warrants		8,305,368			3,267
Exercise of stock options		75,825			—
Net cash provided by financing activities		43,342,297			12,906,568

Net increase in cash		15,274,305			12,189,716
Cash at the beginning of the year		23,940,333			717,997
Cash at the end of the period	$	39,214,638		$	12,907,713

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest cash paid	$	—		$	—
Income taxes paid	$	—		$	—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Series B, C, D and E preferred stock into Common stock	$	—		$	6,441
Deemed dividends	$	—		$	7,884,207
Liability related to MicaSense Acquisition	$	5,000,000		$	—
Stock consideration for MicaSense Acquisition	$	3,000,000		$	—
Liability related to Measure Acquisition	$	5,471,592		$	—
Stock consideration for Measure Acquisition	$	24,375,000		$	—

See accompanying notes to these condensed interim consolidated financial statements.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

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

(Unaudited)

Note 1 – Description of Business

AgEagle™ Aerial Systems Inc. (“AgEagle” or the “Company”), 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. Today, the Company is earning distinction as a globally respected, industry leader offering best-in-class, full stack drone solutions to a wide range of industries, including energy, construction, agriculture and government. AgEagle is led by a proven management team with years of drone industry experience. Through participation on the U.S. Federal Aviation Administration’s (FAA) Drone Advisory Committee and the FAA’s BEYOND program, AgEagle is helping to establish entirely new rulemaking guidelines and regulations for the future of autonomous flight and the full integration of drones into the U.S. airspace.

In the first half of 2019, the Company introduced HempOverview™, a scalable, responsive and cost-effective Software-as-a-Service (“SaaS”) web- and map-based technology platform to support the operations of domestic industrial hemp programs for state and tribal nation departments of agriculture – a solution that provides users with what the Company believes is the gold standard for regulatory oversight, operational assistance and reporting capabilities for the fast emerging industrial hemp industry.

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

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

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

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

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

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

(Unaudited)

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Consolidation – The condensed interim consolidated financial statements of the Company are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. 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 interim periods presented. Certain information and disclosures included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2020, included in the Company’s annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2021. The results for the three and six months ended June 30, 2021, and 2020 are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future year or period.

The consolidated financial statements include the accounts of AgEagle Aerial Systems Inc. and its wholly-owned subsidiaries AgEagle Aerial, Inc., AgEagle Sensors, Inc., MicaSense, Inc., and Measure Global, Inc., Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed interim consolidated financial statements. Such consolidated financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity.

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

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

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

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

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

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

(Unaudited)

Note 2 – Summary of Significant Accounting Policies – Continued

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

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

●	Level 1: Quoted market prices in active markets for identical assets or liabilities.

●	Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

●	Level 3: Unobservable inputs that are not corroborated by market data.

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

Concentrations – The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Company’s bank balances at times may exceed the FDIC limit. To date, the Company has not experienced any losses on its invested cash.

As of June 30, 2021 and 2020, there was one significant vendor that the Company relied upon to perform certain services for the Company’s technology platforms. This vendor provides services to the Company which can be replaced by alternative vendors should the need arise.

Receivables and Credit Policy – Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Trade receivables are stated at the amount billed to the customer. The Company generally does not charge interest on overdue customer account balances. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices. Accounts receivable at June 30, 2021 and 2020 was $814,712 and $0, respectively.

The Company estimates an allowance for doubtful accounts based upon an evaluation of the current status of receivables, historical experience, and other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. The Company determined that $47,262 on allowance was necessary as of June 30, 2021 and no allowance was necessary as of December 31, 2020.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

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

(Unaudited)

Note 2 – Summary of Significant Accounting Policies – Continued

Inventories – Inventories, which consist of raw materials, finished goods and work-in-process, are stated at the lower of cost or net realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. The Company’s sensor equipment is manufactured by a third-party organization. Cost components include direct materials and direct labor. At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of the inventories is also considered in establishing its valuation. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the respective inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s estimates and expectations. As of June 30, 2021 and December 31, 2020, the Company recorded a provision for obsolescence of $10,000.

Goodwill and Intangible Assets – The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Goodwill is not subject to amortization and is tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable.

Intangible assets from acquired businesses are recognized at fair value on the acquisition date and consist of customer programs, trademarks, customer relationships, technology, and other intangible assets. Customer programs include values assigned to major programs of acquired businesses and represent the aggregate value associated with the customer relationships, contracts, technology and trademarks underlying the associated program and are amortized on a straight-line basis over a period of expected cash flows used to measure fair value, which ranges from two to ten years.

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

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

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

(Unaudited)

Note 2 – Summary of Significant Accounting Policies – Continued

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

The Company generally recognizes revenue on sales to customers, dealers and distributors upon satisfaction of performance obligations which generally occurs once controls transfer to customers, which is when product is shipped or delivered depending on specific shipping terms and, where applicable, a customer acceptance has been obtained. The fee is not considered to be fixed or determinable until all material contingencies related to the sales have been resolved. The Company records revenue in the statements of operations net of any sales, use, value added, or certain excise taxes imposed by governmental authorities on specific sales transactions and net of any discounts, allowances and returns.

Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined price. To the extent the Company’s actual costs vary from the estimates upon which the price was negotiated, it will generate more or less profit or could incur a loss. The Company accounts for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

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 are completed. The balance of contract liabilities as of June 30, 2021, was $504,180 and $2,302 as of December 31, 2020.

The Company’s FarmLens, Atlas and Ground Control platforms are offered on a subscription basis. These subscription fees are recognized ratably over each monthly membership period as the services are provided.

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

Sales concentration information
	Percent of total revenues for the three and six months ended June 30,
Customers	2021			2020
Customer A		—	%		91.8	%

No accounts receivable was due from Customer A as of June 30, 2020 and December 31, 2020, respectively.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

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

(Unaudited)

Note 2 – Summary of Significant Accounting Policies – Continued

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

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

SEC Form 10-Q filed by AgEagle Aerial Systems, Inc.