10-K
1
uavs_10k20.htm
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-K
(Mark
One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2020
OR
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _______ to ________
Commission
file number: 001-36492
AGEAGLE
AERIAL SYSTEMS INC.
(Exact
name of registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (620) 325-6363
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, par value $0.001 per share UAVS NYSE American LLC
Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 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 ☒
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
The
aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal
quarter was $61,203,282.
As
of March 31, 2021, there were 62,485,815 shares of Common Stock, par value $0.001 per share, issued and outstanding.
AGEAGLE AERIAL SYSTEMS INC.
TABLE
OF CONTENTS
PART I 4
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 16
ITEM 1B. UNRESOLVED STAFF COMMENTS 26
ITEM 2. PROPERTIES 26
ITEM 3. LEGAL PROCEEDINGS 26
ITEM 4. MINE SAFETY DISCLOSURES 27
ITEM 6. SELECTED FINANCIAL DATA 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38
ITEM 9A. CONTROLS AND PROCEDURES 39
ITEM 9B. OTHER INFORMATION 39
PART III 40
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 40
ITEM 11. EXECUTIVE COMPENSATION 45
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 55
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES 56
INDEX TO FINANCIAL STATEMENTS F-1
PART I
This report may contain
forward-looking statements within the meaning of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended, or the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements
are based on our management’s beliefs and assumptions and on information currently available to our management and involve risks
and uncertainties. Forward-looking statements include statements regarding our plans, strategies, objectives, expectations and
intentions, which are subject to change at any time at our discretion. Forward-looking statements include our assessment, from
time to time of our competitive position, the industry environment, potential growth opportunities, the effects of regulation and
events outside of our control, such as natural disasters, wars or health epidemics. Forward-looking statements include all statements
that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,”
“estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “potential,”
“predicts,” “projects,” “should,” “will,” “would” or similar expressions.
Forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
We discuss many of these risks in greater detail in “Risk Factors.” Given these uncertainties, you should not place undue
reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions
only as of the date of this report. You should read this report and the documents that we reference in this report and have filed
as exhibits to the report completely and with the understanding that our actual future results may be materially different from
what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update
the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information
becomes available in the future.
ITEM 1. BUSINESS
Overview
AgEagleTM
Aerial Systems Inc. (“AgEagle,” “the Company,” “us,” “we,” “our”) produces, supports
and operates technologically advanced drone systems and solutions for the fast-emerging unmanned aerial vehicle (UAV) industry.
We are engaged in delivering the metrics, tools and strategies necessary to invent and implement drone-enabled solutions that solve
important problems for our valued customers. With our founding premise rooted in high performance, next-level thinking, and technological
innovation, AgEagle is intent on ensuring that standards for quality U.S. manufacturing and the provision of precision-crafted,
purpose-built drone systems and solutions are delivered to empower our customers to thrive and prosper in The Drone AgeTM.
Founded
in 2010, AgEagle was originally formed to pioneer proprietary, professional-grade, fixed-wing drones and aerial imagery-based data
collection and analytics solutions for the agriculture industry. In addition to selling our innovative drones to the precision
and sustainable farming markets, AgEagle’s innovative data collection and analytics solutions have processed more than two million
acres of crops, analyzing data from over 50 countries and 53 difference crop types, and creating more than 11,000 crop reports
for its users. AgEagle remains intent on earning distinction as a trusted partner to clients seeking to adopt and support productive
agricultural approaches to improve farming practices which currently limit the impact on our natural resources, reduce reliance
on inputs and materially increase crop yields and profits.
In the first half of 2019,
the Company introduced HempOverview, a scalable, responsive and cost-effective Software-as-a-Solution (“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.
Over the past decade, the
broader drone market has continued to evolve and expand. As a result, economic and productivity benefits made possible by drones
is fueling global demand for high quality, safe and reliable drone systems and solutions for commercial applications well beyond
agriculture. In response, AgEagle is now leveraging our technological expertise and drone engineering and manufacturing experience
to penetrate new, high growth market sectors; namely, drone package delivery, public safety/security, large venue decontamination
and infrastructure/inspection, among other high growth market opportunities.
AgEagle’s key growth objectives
are centered on three primary areas of focus:
We
intend to grow our business by preserving a leadership position in our core Ag Solutions business; providing quality contract manufacturing,
assembly and testing services; and innovating new customer-focused drone systems and solutions to capture significant share of
the broader commercial drone market. In addition, we expect to accelerate our growth and expansion through strategic acquisitions
of drone-related companies offering distinct technological and competitive advantages and have defensible IP protection in place,
if applicable.
Ag Solutions
According
to a report published in August 2020 by industry research firm Markets and Markets (Agriculture Drones Market with COVID-19
Impact Analysis, by Application (Precision Farming, Livestock Monitoring), Offering, Farming Environment, Farm Produce, Component
and Geography – Global Forecast to 2025), the agriculture drones market is expected to grow from $1.2 billion in 2020
to $5.7 billion by 2025 at a CAGR of 35.9% over the forecasted period. The report covered drone hardware, software and services
and included AgEagle as one of the key market players.
Drone Leasing
In addition to UAV sales,
AgEagle also offers a drone leasing program, alleviating farmers and agribusinesses from significant upfront costs associated with
purchasing a drone, while also relieving them from ongoing drone maintenance and support requirements. Additionally, the program
provides the option of engaging a trained AgEagle pilot to operate the drone and manage the entire image collection process, creating
a truly turnkey aerial imagery capture solution for the Company’s customers.
FarmLensTM Platform
In 2018, we acquired FarmLens,
a subscription cloud analytics service that processes data, primarily collected with a drone, such as those produced by AgEagle,
and makes such data actionable by farmers and agronomists. Our user-friendly FarmLens solution can easily and quickly stitch
virtually thousands of high-resolution, multispectral images together to produce detailed prescription maps for everything from
disease and pest infestations to weather impact and improper irrigation – all before these issues can be detected by the
naked eye and at materially lower costs than satellite imagery or manned aircraft flyovers.
Used as a PC-based system
or on any mobile device, FarmLens helps users save time and eliminates technological hassles and costly computing requirements.
The FarmLens platform has benefitted us and our shareholders by allowing us to develop important vertically integrated products
and services with our drone-enabled software technologies. FarmLens is currently sold by AgEagle as a subscription service
and offered either standalone or in a bundle with drone platforms manufactured by leading drone providers like AgEagle, DJI and
senseFly. The FarmLens platform extends AgEagle’s reach as a business through key industry partnerships.
HempOverview Platform
Domestic Hemp Production and Prevailing
Regulatory Changes
With the passing of the
2018 Farm Bill in December 2018, industrial hemp is now recognized as an agricultural commodity, such as corn, wheat, or soybeans.
More specifically, the
2018 Farm Bill authorizes state departments of agriculture, including agencies representing the District of Columbia, the Commonwealth
of Puerto Rico and any other territory or possession of the United States, and Indian tribal governments, to submit plans to the
USDA applying for primary regulatory authority over the production of hemp in their respective state or tribal territory. For more
information on state and tribal nation plan submission, please visit https://www.ams.usda.gov/rules-regulations/hemp/state-and-tribal-plan-review.
As of February 12, 2021,
23 states and 40 tribal nations have had their hemp production plans approved by the USDA, and 20 states will continue to operate
their hemp production plans in accordance with the 2014 pilot guidelines issued by the National Institute of Food and Agriculture,
which handles the extramural research aspects of industrial hemp cultivation.
Market Opportunity in U.S. Industrial
Hemp and Hemp-Derived CBD
After
a tumultuous first two years of legal hemp farming in the United States, many market participants are anticipating that the 2021
planting season will take on a more settled character, bringing some routine and less confusion to growing, harvesting and marketing
efforts. In its January 2021 report titled Hemp 2021: Industry Insiders Offer Projections for the Year, Hemp Benchmark noted
that some industry leaders believe this year could be a strong one for hemp as the crop becomes more integrated into the workings
of America’s agriculture sector.
In
its February 2020 market forecast report (https://www.grandviewresearch.com/press-release/global-industrial-
hemp-market), Grand View Research stated that the global industrial hemp market
will reach $15.26 billion by 2027, up from $5.33 billion in 2020. According to the report, an increased focus on selecting
low-THC hemp varieties, using developed cultivation and processing equipment, providing technical support for growers, and
establishing contracts with farmers, all play significant roles in achieving major market share. Grand View expects that
increased awareness of the dietary advantages of hemp oil and growing demand for hemp-derived CBD from the cosmetics and
personal care industries will help fuel market growth, along with the introduction of conducive regulations for the
cultivation and use of hemp-based CBD products in the United States over the forecast period.
HempOverview
As one of the agriculture
industry’s leading pioneers of advanced aerial-image-based data collection and analytics solutions, AgEagle is intent on leveraging
our expertise to champion the use of proven, advanced web- and map-based technologies as a means to streamline and ultimately standardize
hemp cultivation in the United States. Growers need to be registered/permitted; crops need to be monitored and inspected; and enforcement
operations must be established to ensure compliance with state and federal mandates. Through the introduction of HempOverview,
we believe that AgEagle represents the first agriculture technology company to bring to market an advanced agtech solution that
is designed to meet the unique complexities and vigorous oversight, compliance and enforcement demands of the emerging American
hemp industry and the unique needs and demands of its key stakeholders.
HempOverview is
comprised of four modules:
In November 2019, AgEagle
announced that the Florida Department of Agriculture and Consumer Services chose the HempOverview solution to manage its
online application submission and registration process for hemp growers and their farms and hemp fields in the State of Florida
for the years 2020, 2021 and 2022. Subsequent to the end of 2020, the Company announced that the Iowa Department of Agriculture
and Land Stewardship also licensed the HempOverview platform to manage the state’s online registration, payment processing,
comprehensive data collection and compliance oversight for the 2021, 2022 and 2023 planting seasons.
HempOverview has
also been created to support hemp processors who contract with growers, helping to ensure profitable production on existing contracted
acres while maintaining governmental compliance in a changing regulatory landscape. More specifically, HempOverview supports
full, cloud-based mobile- and desktop-based software application and enables users to:
HempOverview focuses
on simultaneously collecting data, analyzing field-related problems, and providing readily accessible analysis and reporting for
achieving and sustaining end-to-end visibility and best management practices for the growing industrial and CBD hemp supply chain.
Drone Manufacturing
Our Proprietary Fixed-Wing Drones
The Company’s first commercially
available product was the AgEagle Classic, which was followed shortly thereafter by the RAPID System. As we improved
and evolved our product, we launched the RX-60 and subsequently our current UAV product, the RX-48. The success AgEagle
has achieved with its legacy products, which the Company believes has carried over into the continued improvement of the RX-60
and RX-48, stems from AgEagle’s ability to invent and deliver advanced solutions utilizing its proprietary technologies
and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently.
The Company’s core technological
capabilities, developed over five years of research and innovation, include a lightweight laminated shell that allows the UAV platform
to perform under challenging flying conditions, a camera with a Near Infrared (NIR) filter, a rugged foot launcher (RX-60), and
high-end software that automates drone flights and provides geo-referenced data. AgEagle’s products were designed for busy agriculture
professionals who do not have the time to process images on their computers, which some of its competitors require. The software
can automatically take pictures from the camera, stitch the photos together through the cloud, and deliver a geo-referenced, high
quality aerial map to the user’s desktop or tablet device using specialty precision agriculture software such as SST Software,
SMS Software or most other agricultural software solutions. The result is a prescription or zone map that can then be used in a
field computer that is typically found in a sprayer or applicator designed to drive through fields to precisely apply the amount
of nutrients or chemicals required to continue or restore the production of healthy crops. The Company’s management believes that
these characteristics make its UAVs well suited for providing a complete aerial view of a farmer’s field to help precisely identify
crop health and field conditions faster than any other method available.
Relocation
to Wichita
In
November 2020, AgEagle relocated its headquarters and drone manufacturing and assembly operations from Neodesha, Kansas to
Wichita, Kansas, widely known as the “Air Capital of the World.” Home to several of the world’s great aviation
brands, Wichita was ranked by Brookings Institution (source: https://www.brookings.edu/wp-content/
uploads/2016/07/Wichita-2.pdf) as having the #1 skilled workforce in the nation, providing us with direct access to world
class engineering and aeronautical talent. In addition, the decision to move to Wichita was further buoyed by the region’s
low-cost real estate advantages and high quality of life for our workforce.
Our
newly leased 12,000 square foot facility provides AgEagle with ample capacity to materially scale our contract manufacturing business,
while also providing the space necessary to house our administrative offices, design and engineering teams and testing operations.
Demand
for Drones “Made in America”
For
the past several years, security experts have expressed concerns that UAVs made in China or other adversarial countries could
be used to spy on U.S. interest by exfiltration of data back to the country of origin. In fact, in May 2019, the U.S.
Department of Homeland Security warned in an alert that drones are a potential risk to an organization’s information.
Data
released by Drone Industry Insights in late 2019 revealed that China-based Da Jiang Innovations (DJI) accounted for about 70%
of all drone sales worldwide – and up to 80% of the U.S. market (Source: https://droneii.com/product/chinese-
drone-market-report). Citing the threat of Chinese manufacturers, the U.S. General Services Administration (GSA)
announced in January 2021 that it will no longer include drones in its suite of offerings as of February 1, 2021 (Source: https://interact.gsa.gov/blog/removal-drones-gsa-multiple-award-schedule-contracts).
The Department of Justice also recently banned the use of agency grants to purchase drones and other unmanned aerial systems
from foreign groups; and the federal government is not likely to stop these limited policy bans. Congress has already taken
steps to check DJI’s ability to operate in the U.S. and it is considering more. It effectively cemented the Defense
Department’s ban into law in the National Defense Authorization Act for 2020. Congress has also considered broader bans, such
as the draft American Security Drone Act, which would bar any federal agency from acquiring Chinese drones or drones made
with Chinese components; and would also codify the different policy prohibitions on using federal grant money to buy Chinese
drones and components – an aspect of the law clearly aimed at curbing use of the technology at the state and local
levels.
AgEagle believes that these
measures to ban China-manufactured drones and components has and will continue to fuel demand for “Made in America” drones
and components, creating a significant opportunity for U.S.-based drone manufacturers, like AgEagle. Consequently, it is our intention
to establish best industry practices and define quality standards for manufacturing, assembly, design/engineering and testing of
drones, drone subcomponents and related drone equipment in our Wichita facility.
We will pursue a lean and
efficient production strategy across our business, focusing on rapid prototyping, supply chain management, integration, quality
and final acceptance testing. We will work to optimize our own proprietary and customers’ designs to meet scalable manufacturing
requirements, mission capabilities and equipment specifications. Within this framework, we expect to develop products with feedback
and input from manufacturing, quality, supply chain managers, key suppliers, logistics personnel and our customers. We will incorporate
this input into product designs in an effort to maximize efficiencies and quality of our products, while minimizing time to market.
As a result, we believe that we will achieve a reduction in time required to move a product from its design phase to full scale
production deliveries while achieving high reliability, quality, and safety yields.
It is noteworthy to add
that we have forged strong relationships with key suppliers in the U.S. and in U.S.-allied countries based on their ability to
meet our needs and delivery timelines. We will continue to expand upon our suppliers’ expertise to improve our existing products
and develop new solutions. In 2020, we experienced some supply chain delays due primarily to logistical issues relating to COVID-19
shutdown mandates. Unfortunately, we do anticipate encountering potential delays in 2021.
Contract Manufacturing for Commercial
Drone Package Delivery
Over the past year, there
has been a surge of prominent companies, including Alphabet (Google), FedEx, Intel, Qualcomm, Amazon, Target, Walmart, Alibaba,
UPS, 7-Eleven, Uber and many others, actively developing commercial drone delivery service initiatives as part of their long-term
strategic plans. These companies intend to leverage the latest in UAV technologies to deliver food, consumer products, medicines,
and other types of lightweight freight direct to consumers and businesses in the fastest, most cost efficient and environmentally
responsible manner possible – a practical alternative to costly auto transport. It is believed that AgEagle’s proven expertise
in manufacturing rugged, reliable and professional grade UAVs makes the Company a logical partner for designing, manufacturing
and testing drone platforms in this fast growing package delivery market.
In 2020, AgEagle’s annual
revenue was mostly derived from contracted manufacturing work completed for a major ecommerce company, which engaged the Company
to manufacture and assemble UAVs designed to meet the critical specifications for drones that are meant to carry goods in urban
and suburban areas along with ground support equipment used for the testing and refining of client’s commercial drone small delivery
vehicles, systems and operations currently in development. This customer chose to team with AgEagle due in large measure to our
proven expertise in drone design and innovation.
In October 2020, we expanded
our contract manufacturing customer base to include Valqari, with which we entered into a two-year agreement, exclusive in North
America, to produce Valqari’s patented Drone Delivery Station. This station is the only solution that has solved the “last
inch” logistic problems associated with drone deliveries and allows for an entirely automated and safe drone package delivery.
We believe that effective solutions for ground support, like Valqari’s Drone Delivery Station, will prove to be a vital, fundamental
component of the new drone delivery ecosystem, helping to ensure the promising potential of mainstream drone package delivery is
fully realized.
With plans to expand our
in-house business development team in 2021, we are actively engaged in identifying and pursuing additional opportunities for AgEagle
to develop and strengthen our customer base and/or strategic business partnerships and materially ramp annual revenue generation
from our design and engineering, contract manufacturing, assembly and testing services.
Drone Solutions
Market Opportunities
In October 2020, Gartner
projected that worldwide shipments of enterprise drones will total 526,000 units, an increase of 50% from 2019. Moreover, the world’s
leading research and advisory company also forecasts that global shipments will reach 1.3 million units by 2023. The report, titled
Forecast Analysis: IoT Enterprise Drone Shipments, Worldwide,” states, “In the short term, most use cases will be based
around surveillance and monitoring due to the technical complexity of other applications. In 2020, the second and third use cases
by drone shipments will be fire services monitoring and insurance investigation.” Gartner further believes that adoption of
drones in the retail sector for package delivery will rise rapidly after 2023. “The regulatory restrictions and logistical
challenges coordinating flight paths, managing airspace over densely populated areas and managing various payloads means that retail,
overall, is a longer-term opportunity for drones.” (Source: https://www.gartner.com/en/newsroom/press-releases/2019-12-04-gartner-forecasts-global-iot-enterprise-drone-shipmen).
Emerging commercial drone
markets covered in the Gartner report include:
● Insurance Investigation ● Rail Infrastructure management
● Fire Services Monitoring ● Gas (Smart Grid)
● Road Toll and Traffic Management ● Building Structure Monitoring
● Construction Monitoring ● Outdoor Surveillance
● Oil and Gas Extraction ● Smart Roads
● Retail Fulfillment (Drone Package Delivery) ● Livestock Management
● Precision Crop Farming ● Agricultural Equipment Tracking
● Airport Drone Management ● Mine Operation
● Pipeline Monitoring ● Security Guard Equipment
● Electricity (Smart Grid) ● Connected Ship Management
● Water (Smart Grid) ● Port Management
● Film, TV and Journalism Drone Filming ● Electricity Grid-Scale Generation
● Police Evidence Gathering
Drone Industry Insights
noted in its June 2020 report, “The Drone Market Size 2020-2025: 5 Key Takeaways,” that the energy sector is
the largest industry on the commercial drone market in 2020 and will continue to be so in 2025. However, the transportation and
warehousing industry (transportation of packages and passengers, warehousing and storage of goods and support activities related
to modes of transportation for inspection and maintenance of infrastructure) will continue to be the fastest growing. While agriculture
and construction currently follow energy as the top industries in the drone market, the growth of the transport sector will mean
that by 2025, it will be the second largest industry in the market. Looking at the dollars, Drone Industry Insights predicts that
the commercial drone solutions market will grow from $22.5 billion in 2020 to $42.8 billion by 2025.
Proprietary, Turnkey, End-to-End Drone Solutions
The use of commercial
drones has seen its utility amplified worldwide with the spread of the global COVID-19 pandemic. Emerging applications in
drone package delivery, decontamination, infrastructure inspection, security and public safety, insurance and
telecommunications have given rise to demand from commercial and industrial enterprises and government agencies for quality,
turnkey solutions that tackle and solve specific mission critical challenges. AgEagle believes that we have the necessary
industry experience, engineering and manufacturing resources, expertise and skilled workforce to deliver these solutions in a
cost-efficient, highly scalable manner. Through purpose-built pilot projects that we are currently leading or may elect to
lead or partner on in the near future, we intend to perpetuate our legacy as an industry pioneer; inventing, producing,
supporting and commercializing turnkey drone solutions platforms.
BEYOND Program- Integrating UAVs into
National Airspace
In November 2020, AgEagle
was selected as an industry partner in the next phase of the U.S. Department of Transportation’s (US DOT) Unmanned Aircraft System
Integration Pilot Program (IPP), known as the BEYOND program. The original IPP was launched through a Presidential Memorandum in
October 2017 with nine regional participants. The IPP participants and their industry partners used innovative strategies to craft
successful safety cases to operate drones under the Federal Aviation Administration’s (FAA) existing regulations. On October 30,
2020, the US DOT announced that the three-year IPP successfully concluded on October 25, 2020. In the release, U.S. Chief Technology
Officer Michael Kratsios noted, “The IPP propelled the American drone industry forward, allowing for unprecedented expansions
in testing and operations through innovative private-public partnerships across the country. Now, the BEYOND program will build
upon this success, tackling the next big challenges facing drone integration.”
Eight of the nine state,
local and tribal governments that participated in the original program signed new agreements with the FAA to participate in the
BEYOND program, including the Kansas Department of Transportation (KDOT). AgEagle was selected by KDOT to serve as an industry
partner in the BEYOND program to help solve key challenges including:
We believe that once the
FAA ultimately determines and approves final regulations allowing for integration of commercial UAVs flown beyond visual line of
sight (BVLOS) into the U.S. airspace, the promising growth of drone delivery solutions is sure to take flight; and there has been
positive developments in this regard.
While it is our intention
to continue identifying, pursuing and winning contract design, manufacturing, assembly and testing of drone delivery platforms
with key industry partners, it is also our intention to design, develop and bring to market our own proprietary, end-to-end drone
solutions. Participating in the BEYOND program will empower AgEagle to lead select pilot projects in key areas of interest to us
– particularly in drone delivery.
Key Growth Strategies
We
intend to grow our business by achieving greater market penetration of the growing precision agriculture marketplace; by promoting
our new service targeting the sustainable agriculture marketplace for the 2021 growing season; and by creating new, easier to use
and higher value products that position AgEagle as a leading innovator and trusted solutions provider in high growth markets where
advanced aerial imaging and data capture and analytics technologies can be used to achieve specific business and sustainability
objectives. Currently, our management is actively exploring new vertical expansion opportunities in other industries outside of
agriculture and its related areas, including drone-enabled package delivery. In addition to drone
package deliveries, we believe that our solutions and services may also be well suited for use in decontamination, mapping and
surveying, mining/resource exploration, insurance, inspection and infrastructure/asset inspection, among other industrial applications.
Key components of our
growth strategy include the following:
Competitive Strengths
AgEagle believes the following
attributes and capabilities provide us with long-term competitive advantages:
Government Regulation
UAV Regulation
AgEagle’s
proprietary drones are subject to regulations of the FAA. On June 21, 2016, the FAA announced it had finalized the first operational
rules for routine commercial use of small UAS, which for purposes of the regulations are unmanned aircraft weighing less than 55
pounds that are conducting non-hobbyist operations. UAS operators-for-hire will have to pass a written test and be vetted by the
TSA, but no longer need to be airplane pilots as current law requires. The rules went into effect on August 20, 2016. For
additional insight into these initial regulations created for commercial UAS operations, please see https://www.faa.gov/news/press_releases/news_story.cfm?newsId=20515.
Recent
Regulatory Updates
In
September 2020, the FAA announced its policy for the type certification of certain UAS as a special class of aircraft. The 14 CFR
part 21 rule contains the FAA’s procedural requirements for airworthiness and type certification for small drones. The new policy
is directed towards UAS operations currently not covered by the existing Part 107 rule, for example beyond visual line of sight
(BVLOS) and flights over people. For details regarding the new policy, please go to https://www.federalregister.gov/documents/2020/09/18/2020-17882/type-certification-of-certain-unmanned-aircraft-systems.
On December 28, 2020, the
FAA announced final rules for drones that will require Remote Identification (Remote ID) of drones and allow operators of small
drones to fly over people and at night under certain conditions. In the related press release (https://www.faa.gov/news/press_releases/news_story.cfm?newsId=25541),
U.S. Secretary of Transportation Elaine Chao stated, “These final rules carefully address safety, security and privacy concerns
while advancing opportunities for innovation and utilization of drone technology.”
The Remote
ID rule applies to all operators of drones that require FAA registration. There are three ways to comply with the operational
requirements:
The Operations
Over People and at Night rule applies to Part 107 operators. The ability to fly over people and moving vehicles varies
depending on the level of risk a small drone operation presents to people on the ground. Operations are permitted based on four
categories, which can be found in the executive summary accompanying
the rule. Additionally, this rule allows for operations at night under certain conditions. For additional information regarding
these and other FAA rules relating to UAS operations, please visit www.faa.gov.
Domestic Hemp Cultivation Regulation
The 2018 Farm Bill
directed the United States Department of Agriculture (“USDA”) to establish a national regulatory framework for hemp production
in the United States. The USDA established the U.S. Domestic Hemp Production Program through an interim final rule outlining provisions
for the USDA to approve plans submitted by States and Indian Tribes for the domestic production of hemp. It also established a
Federal plan for producers in States or territories of Indian tribes that do not have their own USDA-approved plan. The program
includes provisions for maintaining information on the land where hemp is produced, testing the levels of delta-9 tetrahydrocannabinol,
disposing of plants not meeting necessary requirements, licensing requirements and ensuring compliance with the requirements of
the Rule. For more information on state and tribal nation plan submission, please visit https://www.ams.usda.gov/rules-regulations/hemp/state-and-tribal-plan-review.
As of February 12, 2021,
23 states and 40 tribal nations have had their hemp production plans approved by the USDA, and 20 states will continue to operate
their hemp production plans in accordance with the 2014 pilot guidelines issued by the National Institute of Food and Agriculture,
which handles the extramural research aspects of industrial hemp cultivation.
AgEagle has developed HempOverview
to provide users with a gold industry standard for fully complying with federal, state and tribal regulations associated with hemp
cultivation.
Manufacturing
As of today, we manufacture
and assemble all our proprietary and customers’ drone systems and solutions at our manufacturing facility in Wichita, Kansas.
Suppliers
In 2020, we maintained
strong relationships established with companies that provide many of the parts and services necessary to construct our advanced
fixed wing drones, such as Botlink and MicaSense. On January 26, 2021, , the Company and AgEagle Sensor
Systems, Inc., a wholly-owned subsidiary of the Company (the “Buyer”), entered into a stock purchase agreement (the “MicaSense
Purchase Agreement”) with Parrot Drones S.A.S. and Justin B. McAllister (the “Sellers”) pursuant to which the Buyer
agreed to acquire 100% of the issued and outstanding capital stock of MicaSense, Inc. (“MicaSense”) from the Sellers.The transaction closed on January 27, 2021. MicaSense manufactures and sells drone sensors for vegetation
mapping and other drone applications. As our Company grows, we expect to pursue additional supplier relationships from which
we can source less costly and better supplies to stay ahead of the needs of the market.
Our flight planning and
photo stitching software is provided by Pix4D and flight planning is QGroundControl, an open-source application. We have worked
closely with software partners to optimize their software to work with our platform. We consider our relationships with Pix4D to
be good; however, a loss of this relationship would have a short-term adverse effect on our product offerings and results of operations,
as we look to an alternative provider for our photo stitching software.
Revenue Mix
The table below reflects
our revenue for the years indicated by product mix:
For the Year Ended December 31,
Research and Development
Research and development
activities are part of our business and we follow a disciplined approach to investing our resources to create new drone technologies
and solutions. A fundamental part of this approach is a well-defined screening process that helps us identify commercial opportunities
that support current desired technological capabilities in the markets we serve. Our research includes the expansion of our wing
products, providing for developing a portfolio of UAVs, ongoing software development, as well as other technological solutions
to problems to which our existing and prospective customers must confront.
Risks Relating to Our Business
Our business is subject
to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” found in Item 1A
within this Annual Report on Form 10-K. Some of these risks include, but are not limited to, risks associated with:
● our need for additional funding;
● our ability to protect our intellectual property rights;
● rapid technological changes in the industry;
Recent Developments
MicaSense Acquisition
On January 26, 2021, the
Company entered into the MicaSense Purchase Agreement, whereby the Buyer agreed to acquire 100% of the issued and outstanding capital
stock of MicaSense from the Sellers. The transaction closed on January 27, 2021. MicaSense manufactures and sells drone sensors
for vegetation mapping and other drone applications. The aggregate purchase price for the shares of MicaSense is $23,000,000, less
the amount of MicaSense’s debt and subject to a customary working capital adjustment. The consideration is also subject to a $4,750,000
holdback to cover any post-closing indemnification claims and to satisfy any purchase price adjustments. The holdback is scheduled
to be released in two equal installments, less any amounts paid or reserved for outstanding indemnity claims, on March 31, 2022
and March 31, 2023 in accordance with the terms of the MicaSense Purchase Agreement.
A portion of the consideration
is comprised of shares of Common Stock of the Company, par value $0.001Common Stock, having an aggregate value of $3,000,000 based
on a volume weighted average trading price of the Common Stock over a ten consecutive trading day period prior to the date of issuance
of the shares of Common Stock to the Sellers (the “Shares”). The Shares are issuable 90 days after the closing date of
the transaction. Pursuant to the terms of the MicaSense Purchase Agreement, dated as of January 26, 2021, and a Registration Rights
Agreement, dated as of January 27, 2021, the Company has agreed to file a Form S-3 Registration Statement (the “Registration
Statement”) covering the resale of the Shares with the Securities and Exchange Commission (the “SEC”) no later than
ten days following the date the Shares are issued to the Sellers. The Company shall use its best efforts to cause the Registration
Statement to be declared effective as soon as possible after the filing date, but in any event no later than 90 days after the
filing date, and shall use its best efforts to keep the Registration Statement effective and in compliance with the provisions
of the Securities Act (including by preparing and filing with the SEC such amendments, including post-effective amendments, and
supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary) until all Shares
and other securities covered by such Registration Statement have been disposed of. The Sellers are required to reimburse the Company
up to $50,000 for reasonable legal fees and expenses incurred by the Company in connection with such registration.
The MicaSense Purchase
Agreement contains certain customary representations, warranties and covenants, including representations and warranties by the
Sellers with respect to MicaSense’s business, operations and financial condition. The MicaSense Purchase Agreement also includes
post-closing covenants relating to the confidentiality and employee non-solicitation obligations of the Sellers, and the agreement
of the Sellers not to compete with certain aspects of the business of MicaSense following the closing of the transaction. The completion
of the transactions contemplated by the MicaSense Purchase Agreement is subject to customary closing conditions, including, among
others: (i) the absence of a material adverse effect on MicaSense, (ii) the delivery by the parties of certain ancillary documents,
including the Registration Rights Agreement, and (iii) the execution by a key employee of MicaSense of an employment agreement.
Subject to certain limitations, each of the parties will be indemnified for damages resulting from third party claims and breaches
of the parties’ respective representations, warranties, and covenants in the MicaSense Purchase Agreement.
Organizational History
On March 26, 2018, our
predecessor company, EnerJex Resources, Inc. (“EnerJex”), a Nevada company, consummated the transactions contemplated
by the Agreement and Plan of Merger (the “Merger Agreement”), dated October 19, 2017, pursuant to which AgEagle Merger
Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems Inc., a privately
held company organized under the laws of the state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as a wholly-owned
subsidiary of EnerJex (the “Merger”). In connection with the Merger, EnerJex changed its name to AgEagle Aerial Systems
Inc. (the “Company, “we,” “our,” or “us”) and AgEagle Sub changed its name initially to “Eagle
Aerial, Inc. and then to” AgEagle Aerial, Inc. Prior to this merger all of the EnerJex operations were conducted through EnerJex
Kansas, Inc., Black Sable Energy, LLC, a Texas limited liability company (“Black Sable”) and Black Raven Energy, Inc.
a Nevada corporation (“Black Raven”). Its leasehold interests were held in its wholly-owned subsidiaries Black Sable,
Working Interest, LLC, EnerJex Kansas and Black Raven. As of December 31, 2020, the Company continues with the wholly-owned subsidiaries
AgEagle Aerial, Inc. and Enerjex Kansas, Inc.
Our Headquarters
Our principal executive
offices are located at 8863 E. 34th Street North, Wichita, Kansas 67226 and our telephone number is 620-325-6363. Our
website address is www.ageagle.com. The information contained on, or that can be accessed through, our website is not a part of
this Annual Report. We have included our website address in this Annual Report solely as an inactive textual reference.
Employees
As of December 31, 2020,
we employed 10 full-time and 1 part-time employees.
Intellectual Property
We currently have registered
trademarks on the AgEagle,FarmLens and The Drone Age names. In 2021, we plan to apply for registered trademark
protection on the AgEagle revised logo and to file provisional patents on certain aspects of our current and future technology.
We consider our UAV manufacturing process to be a trade secret and have non-disclosure agreements with current employees to protect
those and other trade secrets held by the Company.
Where You Can Find Additional Information
The Company is subject
to the reporting requirements under the Exchange Act. The Company files with, or furnishes to, the SEC quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports and will furnish its proxy statement. These filings are available
free of charge on the Company’s website, wwwageagle.com, shortly after they are filed with, or furnished to, the SEC. The SEC maintains
an Internet website, www.sec.gov, which contains reports and information statements and other information regarding issuers.
ITEM 1A. RISK FACTORS
The risk factors discussed
below could cause our actual results to differ materially from those expressed in any forward-looking statements. Although we have
attempted to list comprehensively these important factors, we caution you that other factors may in the future prove to be important
in affecting our results of operations. New factors emerge from time to time and it is not possible for us to predict all of these
factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in any forward-looking statement.
The risks described below
set forth what we believe to be the most material risks associated with the purchase of our Common Stock. Before you invest in
our Common Stock, you should carefully consider these risk factors, as well as the other information contained in this prospectus.
Risks Related to Our Business and the Industries
We Serve
We operate in evolving markets, which
makes it difficult to evaluate our business and future prospects.
AgEagle’s drone systems
and solutions are and will be sold in new and rapidly evolving markets. The commercial UAV industry is in the early stages of customer
adoption and the FAA’s definition of regulations relating to the integration of commercial drones into the U.S. airspace is still
ill-defined but advancing. Accordingly, our business and future prospects may be difficult to evaluate. We cannot accurately predict
the extent to which demand for our drone systems and solutions will increase, if at all. The challenges, risks and uncertainties
frequently encountered by companies in rapidly evolving markets could impact our ability to do the following:
● Generate sufficient revenue to achieve sustainable profitability;
● Acquire and maintain market share;
● Achieve or manage growth in our business operations;
● Renew contracts;
● Access additional capital when required and on reasonable terms.
If we fail to address these
and other challenges, risks and uncertainties successfully, our business, results of operations and financial condition would be
materially harmed.
We have a history of operating losses
and expect to incur significant additional operating expenses.
Through our wholly-owned
subsidiary, AgEagle Aerial, Inc., we have been operating for approximately ten years. However, AgEagle Aerial, Inc. has only been
in the UAV business for half of that time and just begun to operate in the hemp industry. We are currently in the business development
stage and have limited commercial sales of our products and, accordingly, we cannot guarantee that we will become profitable. Moreover,
even if we achieve profitability, given the competitive and evolving nature of the industries in which we operate, we may be unable
to sustain or increase profitability and failure to do so would adversely affect its business, including our ability to raise additional
funds.
We
will need additional funding and may be unable to raise capital when needed, which would force us to delay, curtail or eliminate
one or more of our research and development programs or commercialization efforts.
Our operations have consumed
substantial amounts of cash since inception. We expect to continue to spend substantial amounts on product and software development.
We will require additional funds to support our continued research and development activities, as well as the costs of commercializing,
marketing and selling any new products and/or services resulting from those activities.
Until such time, if ever,