AgEagle Aerial Systems Inc.

Previous wording

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in Item 8 of this Form 10-K. This discussion contains forward-looking statements. Please see the explanatory note concerning“Forward-Looking Statements”* in Part I of the Annual Report on Form 10-K and Item 1A. Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not materially affected by inflation.*

Current wording

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements. Please see the explanatory note concerning“Forward-Looking Statements”* in Part I of the Annual Report on Form 10-K and Item 1A. Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not materially affected by inflation.*

Previous wording

AgEagle™ Aerial Systems Inc. (“AgEagle” or the “Company”, “we”, “our” or “us”), through its wholly owned subsidiaries, is actively engaged in designing and delivering best-in-class drones and sensors that solve important problems for our customers. Founded in 2010, AgEagle was originally formed to pioneer proprietary, professional-grade, fixed-winged drones and aerial imagery-based data collection and analytics solutions for the agriculture industry. Today, the Company is earning distinction as a globally respected market leader offering customer-centric, advanced, autonomous uncrewed aerial systems (“UAS”) which drive revenue at the intersection of flight hardware, sensors and software for industries that include military/defense, public safety, surveying/mapping, agriculture, and utilities/engineering, among others. AgEagle has also achieved numerous regulatory firsts, including earning governmental approvals for its commercial and tactical drones to fly Beyond Visual Line of Sight (“BVLOS”) and/or Operations Over People (“OOP”) in the United States, Canada, Brazil and the European Union and being awarded Blue UAS certification from the Defense Innovation Unit of the U.S. Department of Defense ("DoD").

Current wording

AgEagle™ Aerial Systems Inc. (“AgEagle” or the “Company”, “we”, “our” or “us”), through its wholly owned subsidiaries, is actively engaged in designing and delivering best-in-class drones and sensors that solve important problems for our customers. Founded in 2010, AgEagle was originally formed to pioneer proprietary, professional-grade, fixed-winged drones and aerial imagery-based data collection and analytics solutions for the agriculture industry. Today, the Company is earning distinction as a globally respected market leader offering customer-centric, advanced, autonomous uncrewed aerial systems (“UAS”) which drive revenue at the intersection of flight hardware, sensors and software for industries that include military/defense, public safety, surveying/mapping, agriculture, and utilities/engineering, among others. AgEagle has also achieved numerous regulatory firsts, including earning governmental approvals for its commercial and tactical drones to fly Beyond Visual Line of Sight (“BVLOS”) and/or Operations Over People (“OOP”) in the United States, Canada, Brazil and the European Union and being awarded Blue UAS certification from the Defense Innovation Unit of the U.S. Department of War ("DoW").

Previous wording

AgEagle’s shift and expansion from solely manufacturing fixed-wing farm drones in 2018, to offering what the Company believes is one of the industry’s best fixed-wing, full-stack drone solutions, culminated in 2021 when the Company acquired three market-leading companies engaged in producing UAS airframes, sensors and software for commercial and government use. In addition to a robust portfolio of proprietary, connected hardware and software products, an established global network of over 200 UAS resellers, and enterprise customers worldwide, these acquisitions also brought AgEagle a highly valuable workforce comprised largely of experienced engineers and technologists with deep expertise in the fields of robotics, automation, manufacturing and data science. In 2022, the Company successfully integrated all three acquired companies with AgEagle to form one global company focused on taking autonomous flight performance to a higher level.

Current wording

AgEagle’s shift and expansion from solely manufacturing fixed-wing farm drones in 2018, to offering what the Company believes is one of the industry’s best fixed-wing, full-stack drone solutions, culminated in 2021 when the Company acquired three market-leading companies engaged in producing UAS airframes, sensors and software for commercial and government use. In addition to a robust portfolio of proprietary, connected hardware and software products; an established global network of over 165 UAS resellers; and enterprise customers worldwide; these acquisitions also brought AgEagle a highly valuable workforce comprised largely of experienced engineers and technologists with deep expertise in the fields of robotics, automation, manufacturing and data science. In 2022, the Company succeeded in integrating all three acquired companies with AgEagle to form one global company focused on taking autonomous flight performance to a higher level.

Previous wording

Our core technological capabilities include robotics and robotics systems autonomy; advanced thermal and multispectral sensor design and development; embedded software and firmware; lightweight airframes; small UAS (“UAS”) design, integration and operations; power electronics, controls and systems integration; fixed wing flight; flight management software; data capture and analytics; human-machine interface development and integrated mission solutions.

Current wording

Our core technological capabilities include robotics and robotics systems autonomy; advanced thermal and multispectral sensor design and development; embedded software and firmware; secure wireless digital communications and networks; lightweight airframes; UAS design, integration and operations; power electronics and propulsion systems; controls and systems integration; fixed wing flight; flight management software; data capture and analytics; human-machine interface development and integrated mission solutions.

Previous wording

The Company is currently headquartered in Wichita, Kansas, where we house our sensor manufacturing operations, and we manufacture drones in Lausanne, Switzerland. We also operate a distribution and service center for our drone products in Raleigh, North Carolina. which supports our international business activities.

Current wording

The Company is currently headquartered in Allen, Texas where we house our sensor manufacturing operations, and we manufacture drones in Lausanne, Switzerland. We also operate a distribution and service center for our drone products in Raleigh, North Carolina. which supports our international business activities.

Previous wording

Global economic challenges, including the impact of the war, pandemics, rising inflation and supply-chain disruptions, regulatory investigations adverse labor and capital market conditions could cause economic uncertainty and volatility. The aforementioned risks and their respective impacts on the UAV industry and our operational and financial performance remain uncertain and outside of our control. Specifically, because of the aforementioned continuing risks, our ability to access components and parts needed in order to manufacture its proprietary drones and sensors, and to perform quality testing have been, and continue to be, impacted. If either we or any of our third parties in the supply chain for materials used in our manufacturing and assembly processes continue to be adversely impacted, our supply chain may be further disrupted, limiting its ability to manufacture and assemble products.

Current wording

Global economic challenges, including the impact of wars, pandemics, rising inflation and supply-chain disruptions, regulatory investigations, and adverse labor and capital market conditions could cause economic uncertainty and volatility. The aforementioned risks and their respective impacts on the UAV industry and our operational and financial performance remain uncertain and outside of our control. Specifically, because of the aforementioned continuing risks, our ability to access components and parts needed in order to manufacture its proprietary drones and sensors, and to perform quality testing have been, and continue to be, impacted. If either we or any of our third parties in the supply chain for materials used in our manufacturing and assembly processes continue to be adversely impacted, our supply chain may be further disrupted, limiting our ability to manufacture and assemble products.

Previous wording

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these condensed consolidated financial statements require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates include the reserve for obsolete inventory, stock options and consideration, valuation of intangible assets, fair value of derivative liabilities, and deemed dividends resulting from the triggering of down round provisions and modifications to equity-linked instruments.

Current wording

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates include the reserve for obsolete inventory, stock options and consideration, valuation of intangible assets, fair value of derivative liabilities, and deemed dividends resulting from the triggering of down round provisions and modifications to equity-linked instruments.

Previous wording

We believe the following critical accounting estimates affect the more significant judgments and estimates used in preparing our consolidated financial statements. Please see Note 2 to our consolidated financial statements, which are included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report, for our Summary of Significant Accounting Policies. There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements.

Current wording

We believe the following critical accounting estimates affect the more significant judgments and estimates used in preparing our condensed consolidated financial statements. Please see Note 2 to our condensed consolidated financial statements, which are included in this Quarterly Report on Form 10-Q. There have been no material changes made to the critical accounting estimates during the periods presented in the condensed consolidated financial statements.

Previous wording

Three and Nine Months Ended September 30, 2025 as Compared to Three and Nine Months Ended September 30, 2024

Current wording

Three Months Ended March 31, 2026 as Compared to Three Months Ended March 31, 2025

Previous wording

For the three months ended September 30, 2025, revenues were $1,970,209 as compared to $3,284,984 for the three months ended September 30, 2024, a decrease of $1,314,775, or 40.0%. The decreaseof $1,314,775 was attributable to a decrease of $1,088,434 in revenues from our drone product related to the timing of national contracts and additional time each contract takes to close, a decrease of $157,904 in the sensor revenues due to sales mix and product repricing and$68,437 decrease in our SaaS revenue due to us not renewing software subscriptions and ceasing the operations of this segment.

Current wording

For the three months ended March 31, 2026, revenues were $1,401,207 as compared to $3,649,410 for the three months ended March 31, 2025, a decrease of $2,248,203, or 61.6%. The decreaseof $2,248,203 was attributable to a decrease of $1,591,882 in revenues from our drone products related to the timing of national contracts and additional time each contract takes to close. The federal government shutdown in the United States along with delayed approved defense funding bills, also contributed to the decrease in drone revenue. A decrease of $656,321 in the sensor revenues was due to sales mix, product repricing, and international growing seasons.

Previous wording

For the three months ended September 30, 2025, cost of sales was $1,211,232 as compared to $1,650,717 for the three months ended September 30, 2024, a decrease of $439,485 or 26.6%. For the three months ended September 30, 2025, gross profit was $758,977 as compared to $1,634,267 for the three months ended September 30, 2024, a decrease of $$875,290, or 53.6%. The primary factors contributing to the decrease in our cost of sales and gross profit margin was due to the total mix of our product sales during the current period which had higher margin drone sales than the previous period.

Current wording

For the three months ended March 31, 2026, cost of sales was $816,278 as compared to $1,515,592 for the three months ended March 31, 2025, a decrease of $699,314 or 46.1%. For the three months ended March 31, 2026, gross profit was $584,929 as compared to $2,133,818 for the three months ended March 31, 2025, a decrease of $1,548,889, or 72.6%. The primary factors contributing to the decrease in our cost of sales and gross profit margin were reduced revenue and fixed costs, salaries and rent that were not offset by revenue.

Previous wording

For the three months ended September 30, 2025, general and administrative expenses were $2,229,820 as compared to $1,889,733 for the three months ended September 30, 2024, an increase of $340,087, or 18.0%. The increase was primarily related to professional fees, legal fees, and accounting expenses, offset by less amortization expense during 2025 due to impairment charges recorded during the year ended December 31, 2024

Current wording

For the three months ended March 31, 2026, general and administrative expenses were $2,754,030 as compared to $1,972,811 for the three months ended March 31, 2025, representing an increase of $781,219, or 39.6%. The increase was primarily attributable to higher compensation expenses related to the hiring of additional employees, relocation costs, and increased professional fees, including legal and accounting expenses. These increases were partially offset by lower amortization expense in 2026, primarily due to impairment charges recorded during the year ended December 31, 2025.

Previous wording

For the three months ended September 30, 2025, research and development expenses were $1,012,354 as compared to $969,402 for the three months ended September 30, 2024, an increase of $42,952, or 4.4%. The increase was primarily due to the Company reinvesting in research and development staff.

Current wording

For the three months ended March 31, 2026, research and development expenses were $1,763,142 as compared to $736,411 for the three months ended March 31, 2025, an increase of $1,026,731, or 139.4%. The increase was primarily attributable to the engagement of consultants to improve our sensors and release new products. The Company also hired additional employees for its engineering team for the further development of its drone products, resulting in higher salary expenses.

Previous wording

For the three months ended September 30, 2025, sales and marketing expenses were $671,579 as compared to $636,292 for the three months ended September 30, 2024, an increase of $35,287, or 5.5%. The increase was primarily due to the increase in headcount in this department and increased travel of our sales and marketing team.

Current wording

For the three months ended March 31, 2026, sales and marketing expenses were $1,165,829 as compared to $427,141 for the three months ended March 31, 2025, an increase of $738,688, or 172.9%. The increase was primarily attributable to higher department headcount, increased public relations expenses, and greater travel activity by our sales and marketing team.

Previous wording

For the three months ended September 30, 2025, we generated a net loss of $2,615,163 as compared to a net loss of $3,459,754 for the three months ended September 30, 2024, a decrease of $844,591 or 24.4%. The decrease in our net loss is primarily attributable to the above-mentioned changes in our cost of sales, general and administrative, research and development, sales and marketing, and other net income (expense).

Current wording

For the three months ended March 31, 2026, we generated a net income of $1,420,362 as compared to a net income of $7,060,039 for the three months ended March 31, 2025, a decrease of $5,639,677 or 79.9%. The decrease in our net loss is primarily attributable to the above-mentioned changes in our cost of sales, general and administrative, research and development, sales and marketing, and other net income (expense).

Previous wording

Nine Months Ended September 30, 2025 as Compared to the Nine Months Ended September 30, 2024

Current wording

Three Months Ended March 31, 2026 as Compared to the Three Months Ended March 31, 2025

Previous wording

As of September 30, 2025, cash on hand was $16,628,558, as compared to $3,613,996 as of December 31, 2024, an increase of $13,014,562 or 360.0%.

Current wording

As of March 31, 2026, cash on hand was $26,911,440, as compared to $ 29,858,655 as of December 31, 2025, a decrease of $2,947,215 or 9.9%.

Previous wording

For the nine months ended September 30, 2025, cash used in operations was $7,335,102, an increase of $3,278,402 or 80.8%, as compared to cash used of $4,056,700 for the nine months ended September 30, 2024. The increase in cash used in operating activities was principally driven by the reduction in our net loss, after adjusting for non-cash operating activities, due to reductions in operating expenses and an increase in gross profit margins, as discussed above, offset by an increase in operating cash flows from changes in operating assets and liabilities, primarily the reduction of outstanding accounts payable. All of which resulted in an increase in cash used in operating activities.

Current wording

For the three months ended March 31, 2026, cash used in operations was $2,360,255, an increase of $1,065,699 or 82.3%, as compared to cash used of $1,294,556 for the three months ended March 31, 2025. The increase in cash used in operating activities was principally driven by the reduction in our net income, after adjusting for non-cash operating activities, due to increases in operating expenses related to consulting, salary expense and the opening of the Texas facility, partially offset by an increase in operating cash flows from changes in operating assets and liabilities, primarily the reduction of outstanding accounts payable. All of which resulted in an increase in cash used in operating activities.

Previous wording

For the nine months ended September 30, 2025, cash used in investing activities was $38,338, a decrease of $57,749, or 60.1%, as compared to cash used of $96,087 for the nine months ended September 30, 2024. The decrease is related to fewer purchases of property and equipment and internal software and platform costs in 2025 compared to 2024.

Current wording

For the three months ended March 31, 2026, cash used in investing activities was $3,356,982, an increase of $3,346,558, or 32104.4%, as compared to cash used of $10,424 for the three months ended March 31, 2025. The increase is related to fewer purchases of property and equipment and $3,000,000 used in the investment in marketable securities.

Previous wording

For the nine months ended September 30, 2025, cash provided by financing activities was $20,384,464, an increase of $16,776,982 or 465.1%, as compared to cash provided of $3,607,482 for the nine months ended September 30, 2024. The increase in cash provided by our financing activities was due to an increase in net proceeds from the exercise of Series B warrants and issuance of Series F preferred stock and warrants, offset by less net proceeds from short-term loans and other short-term loans during 2025 as compared to 2024.

Current wording

For the three months ended March 31, 2026, cash provided by financing activities was $2,690,596, an increase of $1,255,693 or 87.5%, as compared to cash provided of $1,434,903 for the three months ended March 31, 2025. The increase in cash provided by our financing activities was due to an increase in net proceeds from the exercise of Series F Warrants, issuance of Series F and Series F Warrants, sales of Series G offset by dividend payments.

Previous wording

As of September 30, 2025, we had a working capital of $21,321,682 and cash on hand of $16,628,558. For the nine months ended September 30, 2025, we incurred a loss from operations of $6,224,947, a decrease of $ 570,568, or 8.4%, as compared to $6,795,515 for the nine months ended September 30, 2024. During the nine months ended September 30, 2025, we used cash in our operating activities of $7,335,102. As of September 30, 2025, we have sufficient cash on hand to meet our financial obligations for the next twelve months.

Current wording

As of March 31, 2026, we had a working capital of $39,104,590 and cash on hand of $26,911,440. For the three months ended March 31, 2026, we incurred a loss from operations of $5,098,072, an increase of $4,095,527, or 408.5%, as compared to $1,002,545 for the three months ended March 31, 2025. During the three months ended March 31, 2026, we used cash in our operating activities of $2,360,255. As of March 31, 2026, we have sufficient cash on hand to meet our financial obligations for the next twelve months.

Previous wording

On September 30, 2025, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Current wording

On March 31, 2026, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.