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,
that we can generate sufficient revenue and achieve profitability, we expect to seek to finance future cash needs through equity
or debt financings or corporate collaborations and/or strategic arrangements. We currently have no other commitments or agreements
relating to any of these types of transactions and cannot be certain that additional funding will be available on acceptable terms,
or at all. If we are unable to raise additional capital, we may have to delay, curtail or eliminate commercializing, marketing
and selling one or more of our solutions.
Product development is a long, expensive
and uncertain process.
The development of both
UAV software and hardware is a costly, complex and time-consuming process, and investments in product development often involve
a long wait until a return, if any, can be achieved on such investment. We might face difficulties or delays in the development
process that will result in our inability to timely offer products that satisfy the market, which might allow competing products
to emerge during the development and certification process. We anticipate making significant investments in research and development
relating to our products and services, but such investments are inherently speculative and require substantial capital expenditures.
Any unforeseen technical obstacles and challenges that we encounter in the research and development process could result in delays
in or the abandonment of product commercialization, may substantially increase development costs, and may negatively affect our
results of operations.
Successful technical development of our
products does not guarantee successful commercialization.
Although we have successfully
completed the technical development of our two original UAV systems, as well as the RX-60 and RX-48 systems, and
have developed or acquired several software platforms which we offer for sale or subscription, we may still fail to achieve commercial
success for several reasons, including, among others, the following:
● failure to obtain the required regulatory approvals for their use;
● rapid obsolescence of a product due to new, more advanced technologies;
● prohibitive production costs;
● competing products;
● lack of product innovation;
● unsuccessful distribution and marketing through our sales channels;
● insufficient cooperation from our supply and distribution partners; and
● product development that does not align with or meet customer needs.
Our success in the market
for the products and services we develop will depend largely on our ability to properly demonstrate their capabilities. Upon demonstration,
our solutions may not have the capabilities they were designed to have or that we believed they would have. Furthermore, even if
we do successfully demonstrate our products’ capabilities, potential customers may be more comfortable doing business with a competitor;
or may not feel there is a significant need for the products we develop. As a result, significant revenue from our current and
new product investments may not be achieved for several years, if at all.
We face competition from other companies,
many of which have substantially greater resources.
Our competitors may be
able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications,
past contract performance, geographic presence, price and the availability of key professional personnel. Furthermore, many of
our competitors may be able to utilize their substantially greater resources and economies of scale to develop competing products
and technologies, manufacture in high volumes more efficiently, divert sales away from us by winning broader contracts or hire
away our employees by offering more lucrative compensation packages. Small business competitors may be able to offer more cost
competitive solutions, due to their lower overhead costs. The markets for commercial drones and services are quickly expanding,
and competition is intensifying as additional competitors enter the market and current competitors expand their product offerings.
In order to secure contracts successfully when competing with larger, better financed companies, we may be forced to agree to contractual
terms that provide for lower aggregate payments to us over the life of the contract, which could adversely affect our margins.
Our failure to compete effectively with respect to any of these or other factors could have a material adverse effect on our business,
prospects, financial condition or future operating results.
If we fail to protect our intellectual
property rights, we could lose our ability to compete in the marketplace.
Our intellectual property
and proprietary rights are important to our ability to remain competitive and successful in the development of our products and
to our future growth potential. Patent protection can be limited and not all intellectual property can be patented. We expect to
rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality and non-disclosure agreements
and procedures, non-competition agreements and other contractual provisions to protect our intellectual property, other proprietary
rights and our brand. As we currently do not have any granted patent or copyright protections, we must rely on trade secrets and
nondisclosure agreements, which provide limited protections. Our intellectual property rights may be challenged, invalidated or
circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other
trade secrets by employees or competitors.
Furthermore, our competitors
may independently develop technologies and products that are substantially equivalent or superior to our technologies and products,
which could result in decreased revenues. Litigation may be necessary to enforce our intellectual property rights, which could
result in substantial costs to us and substantial diversion of management’s attention. If we do not adequately protect our intellectual
property, our competitors could use it to enhance their products. Our inability to adequately protect our intellectual property
rights could adversely affect our business and financial condition, and the value of our brand and other intangible assets.
Other companies may claim that we infringe
their intellectual property, which could materially increase our costs and harm our ability to generate future revenue and profit.
We do not believe that
our technologies infringe on the proprietary rights of any third party; however claims of infringement are becoming increasingly
common and third parties may assert infringement claims against us. It may be difficult or impossible to identify, prior to receipt
of notice from a third party, the trade secrets, patent position or other intellectual property rights of a third party, either
in the United States or in foreign jurisdictions. Any such assertion may result in litigation or may require us to obtain a license
for the intellectual property rights of third parties. If we are required to obtain licenses to use any third-party technology,
we would have to pay royalties, which may significantly reduce any profit on our products. In addition, any such litigation could
be expensive and disruptive to its ability to generate revenue or enter into new market opportunities. If any of our products were
found to infringe other parties’ proprietary rights and we are unable to come to terms regarding a license with such parties, we
may be forced to modify our products to make them non-infringing or to cease production of such products altogether.
The nature of our business involves significant
risks and uncertainties that may not be covered by insurance or indemnification.
We have developed and sold
products and services in circumstances where insurance or indemnification may not be available, for example, in connection with
the collection and analysis of various types of information. In addition, our products and services raise questions with respect
to issues of civil liberties, intellectual property, trespass, conversion and similar concepts, which may create legal issues.
Indemnification to cover potential claims or liabilities resulting from the failure of any technologies that we develop or deploy
may be available in certain circumstances but not in others. Currently, the unmanned aerial systems industry lacks a formative
insurance market. We may not be able to maintain insurance to protect against all operational risks and uncertainties that our
customers confront. Substantial claims resulting from an accident, product failure, or personal injury or property liability arising
from our products and services in excess of any indemnity or insurance coverage (or for which indemnity or insurance coverage is
not available or is not obtained) could harm our financial condition, cash flows and operating results. Any accident, even if fully
covered or insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us
to compete effectively.
We may incur substantial product liability
claims relating to our products.
As a manufacturer of UAV
products, and with aircraft and aviation sector companies under increased scrutiny, claims could be brought against us if use or
misuse of one of our UAV products causes, or merely appears to have caused, personal injury or death. In addition, defects in our
products may lead to other potential life, health and property risks. Any claims against us, regardless of their merit, could severely
harm our financial condition, strain our management and other resources. We are unable to predict if we will be able to obtain
or maintain product liability insurance for any products that may be approved for marketing.
One of our contracts related to manufacturing
and assembly of drones for the purpose of package delivery contains performance obligations that require innovative design capabilities,
are technologically complex, require state-of-the-art manufacturing and assembly expertise, or are dependent upon factors not
wholly within our control. Failure to meet these obligations could adversely affect our growth and future prospects. Early termination
of client contracts or contract penalties could adversely affect our revenues.
We design, develop, manufacture
and assemble technologically advanced and innovative UAVs, which are expected to be applied by our first customer for drone-enabled
package delivery in a variety of environments. Problems and delays in development or delivery as a result of issues with respect
to design, technology, licensing and intellectual property rights, labor, inability to achieve learning curve assumptions, manufacturing
materials or components could prevent us from meeting contract requirements. Either we or the customer may generally terminate
a contract as a result of a material uncured breach by the other. If we breach a contract or fail to perform in accordance with
contractual service levels, delivery schedules, performance specifications, or other contractual requirements set forth in our
contracted scope of services, the other party thereto may terminate such contract for default, and we may be required to refund
money previously paid to us by the customer or to pay penalties or other damages. Even if we have not breached, we may deal with
various situations from time to time that may result in the amendment or termination of a contract. These steps can result in significant
current period charges and/or reductions in current or future revenue. Other factors that may affect revenue and future profitability
include inaccurate cost estimates, design issues, unforeseen costs and expenses not covered by insurance or indemnification from
the customer, diversion of management’s focus in responding to unforeseen problems, and loss of follow-on work.
If our subcontractors or suppliers fail
to perform their contractual obligations, our performance and reputation as a contractor and our ability to obtain future business
could suffer.
As a prime contractor,
we often rely upon other companies to perform work we are obligated to perform for our customers. As we secure more work under
certain of our contracts, we expect to require an increasing level of support from subcontractors that provide complementary or
supplementary services to our offers. We are responsible for the work performed by our subcontractors, even though in some cases
we have limited involvement in that work. If one or more of our subcontractors fails to satisfactorily perform the agreed-upon
services on a timely basis or violates contracting policies, laws or regulations, our ability to perform our obligations as a prime
contractor or meet our customers’ requirements may be compromised. In extreme cases, performance or other deficiencies on the part
of our subcontractors could result in a customer terminating our contract for default. A termination for default could expose us
to liability, including liability for the costs of re-procurement, could damage our reputation and could hurt our ability to compete
for future contracts.
For certain of the components included
in our products, there are a limited number of suppliers we can rely upon. If we are unable to obtain these components when needed,
we could experience delays in the manufacturing of our products and our financial results could be adversely affected.
We acquire most of the
components for the manufacture of our products from suppliers and subcontractors. We have not entered into any agreements or arrangements
with any potential suppliers or subcontractors. Suppliers of some of the components may require us to place orders with significant
lead-times to assure supply in accordance with its manufacturing requirements. Our present lack of working capital may cause us
to delay the placement of such orders and may result in delays in supply. Delays in supply may significantly hurt our ability to
fulfill our contractual obligations and may significantly hurt our business and result of operations. In addition, we may not be
able to continue to obtain such components from these suppliers on satisfactory commercial terms. Disruptions of its manufacturing
operations would ensue if we were required to obtain components from alternative sources, which would have an adverse effect on
our business, results of operations and financial condition.
If we are unable to recruit and retain
key management, technical and sales personnel, our business would be negatively affected.
For our business to be
successful, we need to attract and retain highly qualified executive, technical and sales personnel. The failure to recruit additional
key personnel when needed, with specific qualifications, on acceptable terms and with an ability to maintain positive relationships
with our partners, might impede our ability to continue to develop, commercialize and sell our products and services. To the extent
the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting and training costs in order to attract
and retain such employees. The loss of any members of our management team may also delay or impair achievement of our business
objectives and result in business disruptions due to the time needed for their replacements to be recruited and become familiar
with our business. We face competition for qualified personnel from other companies with significantly more resources available
to them and thus may not be able to attract the level of personnel needed for our business to succeed.
If our proposed marketing efforts are
unsuccessful, we may not earn enough revenue to become profitable.
Our future growth depends
on our gaining market acceptance and regular production orders for our products and services. Our marketing plan includes attendance
at trade shows, making private demonstrations, advertising, public relations, promotional materials and advertising campaigns in
print and/or broadcast media. In the event we are not successful in obtaining a significant volume of orders for our products and
services, we will face significant obstacles in expanding our business. We cannot give any assurance that our marketing efforts
will be successful. If they are not, revenue may not be sufficient to cover our fixed costs and we may not become profitable.
Our operating margins may be negatively
impacted by reduction in sales or products sold.
Expectations regarding
future sales and expenses are largely fixed in the short term. We maintain raw materials and finished goods at a volume we feel
is necessary for anticipated distribution and sales. Therefore, we may not be able to reduce costs in a timely manner to compensate
for any unexpected shortfalls between forecasted and actual sales.
We
face a significant risk of failure because we cannot accurately forecast our future revenues and operating results.
The rapidly changing nature
of the markets in which we compete makes it difficult to accurately forecast our revenues and operating results. Furthermore, we
expect our revenues and operating results to fluctuate in the future due to a number of factors, including the following:
● the timing of sales or subscription of our products;
● unexpected delays in introducing new products and services;
● costs related to possible acquisitions of businesses.
Rapid technological changes may adversely
affect the market acceptance of our products and could adversely affect our business, financial condition and results of operations.
The markets in which we
compete are subject to technological changes, introduction of new products, change in customer demands and evolving industry standards.
Our future success will depend upon our ability to keep pace with technological developments and to timely address the increasingly
sophisticated needs of our customers by supporting existing and new technologies and by developing and introducing enhancements
to our current products and services and new products and services. We may not be successful in developing and marketing enhancements
to our products that will respond to technological change, evolving industry standards or customer requirements. In addition, we
may experience difficulties internally or in conjunction with key vendors and partners that could delay or prevent the successful
development, introduction and sale of such enhancements and such enhancements may not adequately meet the requirements of the market
and may not achieve any significant degree of market acceptance. If release dates of our new products or enhancements are delayed
or, if when released, they fail to achieve market acceptance, our business, operating results and financial condition may be adversely
affected.
Failure to obtain necessary regulatory
approvals from the FAA or other governmental agencies, or limitations put on the use of small UAS in response to public privacy
concerns, may prevent us from expanding the sales of our drone solutions to commercial and industrial customers in the United States.
The
regulation of small UAS for commercial use in the United States is undergoing substantial change and the ultimate treatment is
uncertain. In 2006, the FAA issued a clarification of its existing policies stating that in order to engage in commercial use of
small UAS in the U.S. National Airspace System, a public operator must obtain a COA from the FAA or fly in restricted airspace.
The FAA’s COA approval process requires that the public operator certify the airworthiness of the aircraft for its intended purpose,
that a collision with another aircraft or other airspace user is extremely improbable, that the small unmanned aircraft system
complies with appropriate cloud and terrain clearances and that the operator or spotter of the small unmanned aircraft system is
generally within one half-mile laterally and 400 feet vertically of the small unmanned aircraft system while in operation. Furthermore,
the FAA’s clarification of existing policy stated that the rules for radio-controlled hobby aircraft do not apply to public or
commercial use of small UAS.
On
February 14, 2012, the FAA Modernization and Reform Act of 2012 was enacted, establishing various deadlines for the FAA to
allow expanded use of small UAS for both public and commercial applications. On June 21, 2016, the FAA released its final rules
regarding the routine use of certain small UAS (under 55 pounds) in the U.S. National Airspace System pursuant to the act (the
“Part 107 Rules”). The Part 107 Rules, which became effective in August 2016, provided safety regulations for small UAS
conducting non-recreational operations and contain various limitations and restrictions for such operations, including a requirement
that operators keep UAS within visual-line-of-sight and prohibiting flights over unprotected people on the ground who are not directly
participating in the operation of the UAS. On December 28, 2020, the FAA announced final rules requiring remote identification
of drones and allowing operators of small drones to fly over people and at night under certain conditions. We cannot assure you
that any final rules enacted in furtherance of the FAA’s announced proposals will result in the expanded use of our drones and
drone solutions by commercial and industrial entities. In addition, there exists public concern regarding the privacy implications
of U.S. commercial use of small UAS. This concern has included calls to develop explicit written policies and procedures establishing
usage limitations. We cannot assure you that the response from regulatory agencies, customers and privacy advocates to these concerns
will not delay or restrict the adoption of small UAS by the commercial use markets.
Federal, state and tribal government
regulation of domestic hemp cultivation is new and subject to constant change and evolution, and unfavorable developments could
have an adverse effect on our operating results.
Any changes in laws or
regulations relating to domestic hemp cultivation could adversely affect our business, results of operations and our business prospects
for our HempOverview SaaS platform.
Our future results may be affected by
various legal and regulatory proceedings and legal compliance risks, including those involving product liability, antitrust, intellectual
property, environmental, regulations of the FAA, regulations of the USDA and state or tribal departments of agriculture, the U.S.
Foreign Corrupt Practices Act and other anti-bribery, anti-corruption or other matters.
The outcome of any future
legal proceedings may differ from our expectations because the outcomes of litigation, including regulatory matters, are often
difficult to reliably predict. Various factors or developments can lead us to change current estimates of liabilities and related
insurance receivables where applicable; or make such estimates for matters previously not susceptible of reasonable estimates,
such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in
applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a
material adverse effect on our results of operations or cash flows in any particular period. We are not currently involved in or
subject to any such legal or regulatory proceedings, but we cannot guarantee that such proceedings may not occur in the future.
We may pursue additional strategic transactions
in the future, which could be difficult to implement, disrupt our business or change our business profile significantly.
We intend to consider additional
potential strategic transactions, which could involve acquisitions of businesses or assets, joint ventures or investments in businesses,
products or technologies that expand, complement or otherwise relate to our current or future business. We may also consider, from
time to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular
market segments. Should our relationships fail to materialize into significant agreements, or should we fail to work efficiently
with these companies, we may lose sales and marketing opportunities and our business, results of operations and financial condition
could be adversely affected.
These activities, if successful,
create risks such as, among others: (i) the need to integrate and manage the businesses and products acquired with our own business
and products; (ii) additional demands on our resources, systems, procedures and controls; (iii) disruption of our ongoing business;
(iv) potential unknown or unquantifiable liabilities associated with the target company; and (v) diversion of management’s attention
from other business concerns. Moreover, these transactions could involve: (a) substantial investment of funds or financings by
issuance of debt or equity securities; (b) substantial investment with respect to technology transfers and operational integration;
and (c) the acquisition or disposition of product lines or businesses. Also, such activities could result in one-time charges and
expenses and have the potential to either dilute the interests of our existing shareholders or result in the issuance of, or assumption
of debt. Such acquisitions, investments, joint ventures or other business collaborations may involve significant commitments of
financial and other resources. Any such activities may not be successful in generating revenue, income or other returns, and any
resources we committed to such activities will not be available to us for other purposes. Moreover, if we are unable to access
the capital markets on acceptable terms or at all, we may not be able to consummate acquisitions, or may have to do so on the basis
of a less than optimal capital structure. Our inability to take advantage of growth opportunities or address risks associated with
acquisitions or investments in businesses may negatively affect our operating results.
Additionally, any impairment
of goodwill or other intangible assets acquired in an acquisition or in an investment, or charges to earnings associated with any
acquisition or investment activity, may materially reduce our earnings. Future acquisitions or joint ventures may not result in
their anticipated benefits and we may not be able to properly integrate acquired products, technologies or businesses with our
existing products and operations or successfully combine personnel and cultures. Failure to do so could deprive us of the intended
benefits of those acquisitions.
Breaches of network or information technology
security could have an adverse effect on our business.
Cyber-attacks or other
breaches of network or IT security may cause equipment failures or disrupt our systems and operations. We may be subject to attempts
to breach the security of our networks and IT infrastructure through cyber-attack, malware, computer viruses and other means of
unauthorized access. The potential liabilities associated with these events could exceed the insurance coverage we maintain. Our
inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses
or loss of market share to other competitors in the defense electronics market. In addition, a failure to protect the privacy of
customer and employee confidential data against breaches of network or IT security could result in damage to our reputation. To
date, we have not been subject to cyber-attacks or other cyber incidents which, individually or in the aggregate, resulted in a
material adverse effect on our business, operating results and financial condition.
The preparation of our financial statements
involves use of estimates, judgments and assumptions, and our financial statements may be materially affected if our estimates
prove to be inaccurate.
Financial statements prepared
in accordance with generally accepted accounting principles in the United States require the use of estimates, judgments, and assumptions
that affect the reported amounts. Different estimates, judgments, and assumptions reasonably could be used that would have a material
effect on the financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to
period in the future. These estimates, judgments, and assumptions are inherently uncertain, and, if they prove to be wrong, then
we face the risk that charges to income will be required.
Our results could be adversely affected
by natural disasters, public health crises, political crises or other catastrophic events.
Natural disasters, such
as hurricanes, tornadoes, floods, earthquakes and other adverse weather and climate conditions; unforeseen public health crises,
such as pandemics and epidemics; political crises, such as terrorist attacks, war, labor unrest, and other political instability;
or other catastrophic events, such as disasters occurring at our manufacturing facilities, could disrupt our operations or the
operations of one or more of our vendors. In particular, these types of events could impact our product supply chain from or to
the impacted region and could impact our ability to operate. In addition, these types of events could negatively impact consumer
spending in the impacted regions. Disasters occurring at our manufacturing facilities could impact our reputation and our customers’
perception of our brands. To the extent any of these events occur, our operations and financial results could be adversely affected.
Our business may be adversely affected
by the ongoing coronavirus pandemic.
The outbreak of the novel
coronavirus (COVID-19) has evolved into a global pandemic. The coronavirus has spread to many regions of the world, including the
United States. The extent to which COVID-19 impacts our business and operating results will depend on future developments that
are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the
actions to contain the coronavirus or treat its impact, among others.
Should the coronavirus
continue to spread, our business operations could be delayed or interrupted. For instance, we currently utilize third parties to,
among other things, manufacture components and parts for the proprietary and contracted drones we produce, and to perform quality
testing. We also manufacture and assemble products and perform various services at our manufacturing facility. If either we or
any third-parties in the supply chain for materials used in our manufacturing and assembly processes are adversely impacted by
restrictions resulting from the coronavirus pandemic, our supply chain may be disrupted, limiting our ability to manufacture and
assemble products.
The spread of the coronavirus,
which has caused a broad impact globally, including restrictions on travel and quarantine policies put into place by businesses
and governments, may have a material economic effect on our business. While the potential economic impact brought on by and the
duration of the pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant
disruptions of global financial markets, which may reduce our ability to access capital either at all or on favorable terms. In
addition, a recession, depression or other sustained adverse market event resulting from the spread of the coronavirus could materially
and adversely affect our business and the value of our Common Stock.
The ultimate impact of
the current pandemic, or any other health epidemic, is highly uncertain and subject to change. We do not yet know the full extent
of potential delays or impacts on our business or the global economy as a whole. However, these effects could have a material impact
on our operations. We will continue to monitor the situation closely.
Worldwide and domestic economic trends
and financial market conditions, including an economic decline in the agricultural industry, may adversely affect our operating
performance.
We intend to distribute
our products and services in a number of countries and derive revenues from both inside and outside the United States. We expect
our business will be subject to global competition and may be adversely affected by factors in the United States and other countries
that are beyond our control, such as disruptions in financial markets, economic downturns in the form of either contained or widespread
recessionary conditions, elevated unemployment levels, sluggish or uneven recovery, in specific countries or regions, or in the
agricultural industry; social, political or labor conditions in specific countries or regions; natural and other disasters affecting
our operations or our customers and suppliers; or adverse changes in the availability and cost of capital, interest rates, tax
rates, or regulations in the jurisdictions in which we operate. Unfavorable global or regional economic conditions, including an
economic decline in the agricultural industry, could adversely impact our business, liquidity, financial condition and results
of operations.
Our senior management and key employees
are important to our customer relationships and overall business.
We believe that our success
depends in part on the continued contributions of our senior management and key employees. We rely heavily on our executive officers,
senior management and key employees to generate business and execute programs successfully. In addition, the relationships and
reputation that members of our management team and key employees have established and maintain with certain key customers continue
to our ability to maintain good customer relations and to identify new business opportunities. The loss of any of our executive
officers, members of our senior management team or key employees could significantly delay or prevent the achievement of our business
objectives and could materially harm our business and customer relationships and impair our ability to identify and secure new
contracts and otherwise manage our business.
We indemnify our officers and directors
against liability to us and our security holders, and such indemnification could increase our operating costs.
Our bylaws allow us to
indemnify our officers and directors against claims associated with carrying out the duties of their offices. Our bylaws also allow
us to reimburse them for the costs of certain legal defenses. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our officers, directors or control persons, the SEC has advised that such indemnification is against public
policy and is therefore unenforceable.
Risks Associated with Our Capital Stock
The market price of our securities may
be volatile and may fluctuate in a way that is disproportionate to our operating performance.
Our
securities may experience substantial volatility as a result of a number of factors, including, among others:
● sales or potential sales of substantial amounts of our Common Stock;
● announcements about us or about our competitors or new product introductions;
● developments concerning our product manufacturers;
● the loss or unanticipated underperformance of our global distribution channel;
● governmental regulation and legislation;
● variations in our anticipated or actual operating results;
● foreign currency values and fluctuations; and
● overall political and economic conditions.
Many of these factors are
beyond our control. The stock markets have historically experienced substantial price and volume fluctuations. These fluctuations
often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry
factors could reduce the market price of our securities, regardless of our actual operating performance.
We do not intend to pay cash dividends.
As a result, capital appreciation, if any, will be your sole source of gain.
We intend to retain future
earnings, if any, to fund the development and growth of our business. In addition, the terms of existing and future debt agreements
may preclude us from paying dividends. As a result, capital appreciation, if any, from the sale of our Common Stock will be your
sole source of gain for the foreseeable future.
Provisions in our articles of incorporation,
our by-laws and Nevada law might discourage, delay or prevent a change in control of our company or changes in our management and,
therefore, depress the trading price of our Common Stock.
Provisions of our Articles
of Incorporation, our By-Laws and Nevada law may have the effect of deterring unsolicited takeovers or delaying or preventing a
change in control of our Company or changes in our management, including transactions in which our stockholders might otherwise
receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders
to approve transactions that they may deem to be in their best interests. These provisions include:
● the inability of stockholders to call special meetings; and
The existence of the forgoing
provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of
our Common Stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive
a premium for your Common Stock in an acquisition.
We will incur increased costs as a result
of operating as a public reporting company, and our management will be required to devote substantial time to new compliance initiatives.
As a public reporting company,
we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley
Act of 2002 and rules subsequently implemented by the SEC, have imposed various requirements on public companies, including establishment
and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel
will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase
our legal and financial compliance costs and will make some activities more time consuming and costly. For example, we expect that
these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.
We currently have outstanding, and we
may in the future issue, instruments which are convertible into shares of Common Stock, which will result in additional
dilution to our shareholders.
We currently have an outstanding
instrument which is convertible into shares of Common Stock, and we may need to issue similar instruments in the future. In the
event that these convertible instruments are converted into shares of outstanding Common Stock, or that we make additional
issuances of other convertible or exchangeable securities, you could experience additional dilution. Furthermore, we cannot assure
you that we will be able to issue shares or other securities in any other offering at a price per share that is equal to or greater
than the price per share paid by investors or the then current market price.
FINRA sales practice requirements may
limit a stockholder’s ability to buy and sell our securities.
The Financial Industry
Regulatory Authority, Inc. (“FINRA”) has adopted rules that a broker-dealer must have reasonable grounds for believing
that an investment recommended to a customer is suitable for that customer. Prior to recommending speculative low-priced securities
to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial
status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there
is a high probability that speculative low-priced securities will not be suitable for certain customers. FINRA requirements will
likely make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may have the effect
of reducing the level of trading activity in the shares, resulting in fewer broker-dealers may be willing to make a market in our
shares, potentially reducing a stockholder’s ability to resell our securities.
If securities or industry analysts do
not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our
results of operations do not meet their expectations, the price of our securities and trading volume could decline.
The trading market for
our securities will be influenced by the research and reports that industry or securities analysts publish about us or our business.
We do not have any control over these analysts. If one or more of these analyst’s cease coverage of our company or fail to publish
reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading
volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do
not meet their expectations, the price of our securities could decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The Company leases a building
located at 8863 E. 34th Street North, Wichita, Kansas 67226, which serves as our corporate headquarters and manufacturing
facility. The commencement date of the lease was November 1, 2020 and will expire on October 31, 2023, unless sooner terminated
or extended. The aggregate estimated rent payments due over the initial three-year term is $297,000. The landlord may grant the
Company the option to extend the term for an additional 36 months. The aggregate estimated rent payments due over the option term
would be $314,640.
Previously the Company
leased manufacturing space located at 117 South 4th Street, Neodesha, Kansas 66757. This served as our corporate headquarters
and manufacturing facility. The facility was a lease of 4,000 square feet at a cost of $600 per month. This lease was officially
terminated on November 30, 2020.
As
a result of the Agribotix acquisition, the Company assumed a lease for offices in Boulder, Colorado for $2,000 a month. The lease
was officially terminated on November 30, 2020. Due to the COVID-19 pandemic and our intention to protect the health and safety
of our employees, our workforce in Colorado has been working from their respective home offices. Once the nation’s vaccination
program gains greater momentum or herd immunity is achieved, we expect to lease new commercial office space in or around Denver,
Colorado, which may occur later this year.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings
From time to time, we may
become involved in lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
Although we currently maintain liability insurance coverage intended to cover professional liability and certain other claims,
we cannot assure that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us in
the future where the outcomes of such claims are unfavorable to us. Liabilities in excess of our insurance coverage, including
coverage for professional liability and certain other claims, could have a material adverse effect on our business, financial condition
and results of operations.
Lopez
v. AgEagle Aerial Systems, Inc., et al., Case No. 2:21-cv-01810 (C.D. Cal.)
On
February 26, 2021, Shawn Lopez filed a shareholder class action complaint in the U.S. District Court for the Central District of
California seeking unspecified monetary damages for alleged violations of the United States Securities Exchange Act of 1934 during
the period from September 2, 2019 to February 18, 2021 against AgEagle Aerial Systems, Inc. (“AgEagle” or the “Company”), J.
Michael Drozd, Nicole Fernandez-McGovern, Bret Chilcott, and Barrett Mooney (the “Defendants”). The case is captioned
Lopez v. AgEagle Aerial Systems, Inc., et al., Case No. 2:21-cv-01810 (C.D. Cal.)
and was assigned to District Judge Christina A. Snyder and Magistrate Judge Charles F. Eick. Plaintiff’s initial complaint alleges,
among other things, that Defendants purportedly violated the securities laws by making or approving statements that contained allegedly
false representations concerning the Company’s business relationship with an e-commerce company.
Madrid
v. AgEagle Aerial Systems, Inc., et al., Case No. 2:21-cv-01991 (C.D. Cal.)
On
March 4, 2021, Cristian Jesus Merino Madrid filed a shareholder class action complaint in the U.S. District Court for the Central
District of California seeking unspecified monetary damages for alleged violations of the United States Securities Exchange Act
of 1934 during the period from September 2, 2019 to February 18, 2021 against AgEagle Aerial Systems, Inc. (“AgEagle”
or the “Company”), J. Michael Drozd, Nicole
Fernandez-McGovern, Bret Chilcott, and Barrett Mooney (captioned Madrid v. AgEagle Aerial Systems, Inc., et al., Case No. 2:21-cv-01991
(C.D. Cal.)) (the “Defendants”). Plaintiff’s
initial complaint alleges, similar to the Lopez case described above, that Defendants, among other things, purportedly violated
the securities laws by making or approving statements that contained allegedly false representations concerning the Company’s business
relationship with an e-commerce company.
On
March 9, 2021, this case was transferred to District Judge Christina A. Snyder and Magistrate Judge Charles F. Eick as a related
case to Lopez v. AgEagle Aerial Systems, Inc., et al., Case No. 2:21-cv-01810.
Nostrand
and Rickerson v. Mooney et al. (Defendants) andAgEagle Aerial Systems, Inc. (Nominal Defendant), Case No. 3:21-cv-00130
(D. Nev.)
On
March 17, 2021, John Nostrand and Drew Rickerson filed a shareholder derivative complaint on behalf of nominal defendant AgEagle
Aerial Systems, Inc. (“AgEagle” or the “Company”) against Barrett Mooney, Grant Begley, Luisa Ingargolia, Thomas
Gardner, Bret Chilcott, J. Michael Drozd, and Nicole Fernandez-McGovern, seeking unspecified monetary damages and other relief
for the benefit of the Company for alleged breaches of fiduciary duties and violations of the United States Securities Exchange
Act of 1934 for the period September 3, 2019 to the present. Plaintiffs’ complaint alleges, among other things, that Defendants
purportedly breached their fiduciary duties and violated the securities laws by making or approving statements that contained allegedly
false representations concerning the Company’s business relationship with an e-commerce company.
The
Company believes that each of the foregoing complaints are without merit and intends to vigorously defend itself against each
of these claims.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
Our Common Stock is currently
quoted on the NYSE American under the symbol “UAVS.”
The following table sets
forth, for the period indicated, the quarterly high and low closing sales prices per share of our Common Stock for each quarter
during our last two fiscal years, as well as a large portion of our first quarter in 2021, of as reported by the New York Stock
Exchange.
As of March 15, 2021, we
had approximately 338 individual shareholders of record of our Common Stock. We believe that the number of beneficial owners of
our Common Stock is greater than the number of record holders, because a number of shares of our Common Stock is held through brokerage
firms in “street name.”
Dividend Policy
We do not intend to pay
cash dividends to our stockholders in the foreseeable future. We currently intend to retain all of our available funds and future
earnings, if any, to finance the growth and development of our business. Any future determination related to our dividend policy
will be made at the discretion of our Board of Directors and will depend upon, among other factors, our results of operations,
financial condition, capital requirements, contractual restrictions, business prospects and other factors our Board of Directors
may deem relevant.
Equity Compensation Plan
The following table provides
information as of December 31, 2020 about our equity compensation plan and arrangements:
Equity compensation plans not approved by security holders — — —
Recent Sales of Unregistered Securities
None
Purchases of Equity Securities by Issuer
and Its Affiliates
None.
ITEM 6. SELECTED FINANCIAL DATA
This item is not required
for Smaller Reporting Companies.
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 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 this 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 significantly affected by inflation.
Company 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 new 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 Age. TM
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 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