AgEagle Aerial Systems Inc.

Note 1 –Description of Business

AgEagle™ Aerial Systems Inc. (“AgEagle” or the “Company” or “we”, “our”, or “us”) 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 agriculture, military/defense, public safety, surveying/mapping and utilities/engineering, among others. AgEagle has also achieved numerous regulatory firsts, earning governmental approvals for its commercial and tactical drones to fly Beyond Visual Line of Sight (“BVLOS”) and/or Operations Over People (“OOP”) in the United States, Canada, Brazil and the European Union and being awarded Blue UAS certification from the Defense Innovation Unit of the U.S. Department of Defense.

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 succeeded in integrating all three acquired companies with AgEagle to form one global company focused on taking autonomous flight performance to a higher level.

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; small 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.

In January 2021, AgEagle acquired MicaSense™, Inc. (“MicaSense”). Founded in 2014, MicaSense has been at the forefront of advanced drone sensor development since its founding in 2014, having formed integration partnerships with several leading fixed wing and multi-rotor drone manufacturers. MicaSense’s patented, high precision thermal and multispectral sensors serve the aerial mapping and analytics needs of the agriculture market. MicaSense’s high performance proprietary products have global distribution in over 75 countries.

In April 2021, AgEagle acquired Measure Global, Inc. (“Measure”). Founded in 2020, Measure served a world class customer base, Measure enables its customers to realize the transformative benefits of drone technology through itsGround Control solution. Offered as Software-as-a-Service (“SaaS”),Ground Controlis a cloud-based, plug-and-play operating system that empowers pilots and large enterprises with everything they need to operate drone fleets, fly autonomously, collaborate globally, visualize data, and integrate with existing business systems and processes. In 2024, we made the strategic decision to not renew any SaaS subscriptions. As of December 31, 2024, Measure no longer had operations. We do not anticipate this decision to have a significant effect on the Company’s consolidated financial position or financial results. In 2025, we sold the Measure domain name (see Note 17).

In October 2021, AgEagle acquired senseFly S.A. and concurrent with the acquisition, AgEagle Aerial, Inc. (“AgEagle Aerial”), a wholly owned subsidiary of AgEagle, acquired senseFly Inc. Collectively senseFly S.A. and senseFly, Inc. are referred to as “senseFly”. Founded in 2009, senseFly provides fixed-wing drone solutions for commercial and government markets that simplify the collection and analysis of geospatial data, allowing professionals to make better decisions, faster. senseFly develops and produces a proprietary line ofeBee-branded, high performance, fixed-wing drones which have flown more than one million flights around the world.

Note 1 – Description of Business – Continued

Collectively, MicaSense, Measure and senseFly are referred to as the “2021 Acquired Companies.”

The Company is currently headquartered in Wichita, Kansas, where we house our sensor manufacturing operations, and we operate business and drone manufacturing operations in Raleigh, North Carolina. In addition, the Company operates business and manufacturing operations in Lausanne, Switzerland, in support of our international business activities.

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

On October 3, 2024, the Board approved a reverse stock split of the Company’s authorized, issued and outstanding shares of common stock, par value $0.001 per share, at aratio of one (1) share of common stock for every fifty (50) shares of common stock (the “Reverse Stock Split”). The Company filed a Certificate of Change with the Secretary of State of the State of Nevada to effectuate the Reverse Stock Split. The Reverse Stock Split was effective on October 14, 2024. All share and per share amounts have been retrospectively adjusted for the effect of the Reverse Stock Split.

Note 2 –Summary of Significant Accounting Policies

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. Such consolidated financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“US GAAP”) in all material respects and have been consistently applied in preparing the accompanying consolidated financial statements.

Basis of Presentation and Consolidation - These consolidated financial statements are presented in United States dollars and have been prepared in accordance with US GAAP. The Company’s consolidated financial statements are prepared using the accrual method of accounting. The Company has elected December 31 as its fiscal year end. In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments, for a fair statement of the Company’s consolidated financial position and results of operations for the periods presented.

The consolidated financial statements include the accounts of AgEagle and its wholly owned subsidiaries, AgEagle Aerial, Inc., Measure and senseFly. All significant intercompany balances and transactions have been eliminated in consolidation. As of January 1, 2023, MicaSense ceased to exist as a standalone entity and was merged into AgEagle Aerial Systems, Inc. (AgEagle).

*Liquidity and Going Concern *– In pursuit of the Company’s long-term growth strategy and acquisitions the Company has sustained continued operating losses. During the year ended December 31, 2024, the Company incurred a net loss of $35.0 million and used cash in operating activities of $6.6 million. As of December 31, 2024, the Company has a working capital of $3.1 million. While the Company has historically been successful in raising capital to meet its working capital needs, the ability to continue raising such capital to enable the Company to continue its growth is not guaranteed. Therefore, there is substantial doubt about the Company’s ability to continue as a going concern as the Company will require additional liquidity to continue its operations and meet its financial obligations for twelve months from the date these consolidated financial statements were issued. The Company is evaluating strategies to obtain the required additional funding for future operations and the restructuring of operations to grow revenues and reduce expenses.

If the Company is unable to generate significant sales growth in the near term and raise additional capital, there is a risk that the Company could default on additional obligations; and could be required to discontinue or significantly reduce the scope of its operations if no other means of financing operations are available. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

*Risks and Uncertainties *– Global economic challenges, including the impact of the war in Ukraine, rising inflation supply-chain disruptions, and adverse labor market conditions could cause economic uncertainty and volatility. The aforementioned risks and their respective impacts on the UAV industry and the Company’s operational and financial performance remain uncertain and outside of the Company’s control. Specifically, because of the aforementioned continuing risks, the Company’s ability to access components and parts needed in order to manufacture its proprietary drones and sensors, and to perform quality testing have been, and continue to be, impacted. If either the Company or any of its third parties used in our manufacturing and assembly processes continue to be adversely impacted by these matters, the Company’s supply chain may be disrupted, limiting its ability to manufacture and assemble products. The Company expects inflation and supply-chain disruptions and its effects to continue to have a significant negative impact on its business for an extended period of time.

*Use of Estimates *- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the reserve for obsolete inventory, valuation of intangible assets, fair value of derivative liabilities, and deemed dividends resulting from the triggering of down round provisions and modifications to equity-linked instruments.

*Accumulated Other Comprehensive Income (Loss) –*Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that under US GAAP which are included in accumulated other comprehensive income (loss), a component of equity within the consolidated balance sheets, rather than net loss in the consolidated statements of operations and comprehensive loss. Under existing accounting standards, other comprehensive income (loss) may include, among other things, unrecognized gains and losses on foreign currency translation and prior service credit related to benefit plans.

*Fair Value Measurements and Disclosures *– Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820,Fair Value Measurement (“ASC 820”), requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.

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

For short-term classes of our financial instruments, which include cash, accounts receivable, notes receivable and accounts payable and accrued expenses, and which are not reported at fair value, the carrying amounts approximate fair value due to their short-term nature. The current outstanding loans, including the COVID Loans, are carried at face value, which approximates fair value, due to the government backed security which requires payments. The convertible note is carried at face value and approximates fair value due to its prevailing interest rate.

Cash Concentrations -The Company maintains its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has significant cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.

*Accounts Receivable and Credit Policy –*Trade receivables due from customers are uncollateralized customer obligations due under normal and customary trade terms. Trade receivables are stated at the amount billed to the customer. As of December 31, 2024, 2023 and 2022, the Company had an accounts receivable balance of $1.4 million, $2.1 million and $2.2 million, respectively. In addition, as of December 31, 2024, 2023 and 2022, the Company had an allowance for credit losses balance of $0.02 million, $0.2 million and $0.5 million, respectively. The Company generally does not charge interest on overdue customer account balances. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices. The Company estimates an allowance for credit losses based upon an evaluation of the current status of trade receivables, historical experience, and other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for credit losses will change.

*Allowance for Credit Losses *- We establish allowances for credit losses on accounts receivable, under ASC 326-20-55-37. The adequacy of these allowances is assessed quarterly through consideration of factors such as customer credit ratings, age of the receivable, expected loss rates and general economic conditions.

A summary of activity related to our allowance for credit losses during the years ended December 31, 2024 and 2023 is summarized below:

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

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

In accordance with ASC Topic 350-40,Software - Internal-Use Software, the Company capitalizes certain direct costs of developing internal-use software that are incurred in the application development stage, when developing or obtaining software for internal-use. Once an application has reached the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized on a straight-line basis over the estimated useful life of the software (typically three* tofive years**). Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful life of the software. The Company reviews the carrying value for impairment whenever facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. Amortization expense related to capitalized internal-use software development costs is included in general and administrative expenses on the consolidated statements of operations and comprehensive loss. As of December 31, 2024 and 2023, capitalized software development costs for internal-use software, net of accumulated amortization, totaled $273,094** and $582,148**, respectively, relate to the Company’s implementation of its enterprise resource planning software. Internal-use software costs are included in intangibles, net on the consolidated balance sheets.*

Finite-lived intangible assets are evaluated for impairment periodically, or whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable in accordance with ASC Topic 360-10-15,Impairment or Disposal of Long-Lived Assets (“ASC 360-10-15”). In evaluating intangible assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition in accordance with ASC 360-10-15. To the extent that estimated future undiscounted net cash flows are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value.

Asset recoverability is an area involving management judgment, requiring assessment as to whether the carrying values of assets are supported by their undiscounted future cash flows. In estimating future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, operating expenses, and terminal growth rates. For the year ended December 31, 2024, the Company reviewed the indicators for impairment and concluded that no impairment of its finite-lived intangible assets existed. For the year ended December 31, 2023, the Company conducted an analysis of the intangibles, which indicated that the fair value was less than the current value, resulting in an impairment to our reporting units in the amount of $5,899,307.

Goodwill – The assets and liabilities of acquired businesses are recorded in accordance with ASC 805. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Goodwill is not subject to amortization and is tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable.

During the fourth quarter of 2024 and 2023, respectively, and in accordance with ASC Topic 350,Intangibles – Goodwill and Other*,*the Company performed its annual goodwill impairment test using a quantitative approach by comparing the carrying value of the reporting unit, including goodwill, to its fair value. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, a goodwill impairment loss is recognized in an amount equal to that excess. The Company estimates the fair value of each reporting unit using both a discounted cash flow (“DCF”) (Level 3 input) analysis and market approach. Under the DCF analysis, determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, discount rates and relevant comparable public company earnings multiples and relevant trading multiples. The cash flows employed in the DCF analysis are based on estimates of future sales, earnings and cash flows after considering factors such as general market conditions, existing firm orders, expected future orders, changes in working capital, long term business plans and recent operating performance. The DCF analysis used a discount rate of 19%. The market approach entails using valuation metrics from companies that have been traded publicly, which are considered to be rightly similar to the subject entity. In most situations, direct comparability is hard to attain since a majority of public companies are not only larger but also more dissimilar to the subject so both metrics are used to find the most reasonable valuation.

Derivative Liabilities -The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and FASB ASC Topic 815,Derivatives and Hedging (“ASC 815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. The Series A and Series B Warrants issued in the Company’s October 2024 Offering (see Note 9) are recognized as derivative liabilities in accordance with ASC 815 due to the contractual terms resulting in variability in the warrants ultimate settlement. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the carrying value of the instruments to fair value at each reporting period for so long as they are outstanding. We have classified the derivative warrant liabilities as a long-term liability as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities.

Revenue Recognition – Most of the Company’s revenues are derived primarily through the sales of drones, sensors and related accessories, and software subscriptions. The Company utilized ASC Topic 606 and the related amendments,Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services.

Generally, we recognize revenue when it satisfies its obligation by providing the benefits of the service to the customer, either over time or at a point in time. A performance obligation is satisfied over time if one of the following criteria are met:

Revenue recognition under ASC 606 as described below creates the following revenue streams:

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

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

Additionally, customer payments received in advance of the Company completing performance obligations are recorded as contract liabilities. As of December 31, 2024, we have approximately $148,000 of advanced customer payments presented as contract liabilities. Contract liabilities are short term in nature and are expected to be recognized in the next fiscal year. During the year ended December 31, 2024, we recognized approximately $226,000 of revenue that was deferred as a contract liability as of December 31, 2023. Customer deposits represent customer prepayments and are recognized as revenue when the term of the sale or performance obligation is completed.

Provision for Warranty Expense - The Company provides warranties against defects in materials and workmanship of its drone systems for specified periods of time. For the years ended December 31, 2024 and 2023, drones and sensors sold are covered by the warranty for a period of up to one year from the date of sale by the Company. Estimated warranty expenses are recorded as an accrued expenses in the consolidated balance sheets with a corresponding provision to cost of sales in the consolidated statements of operations and comprehensive loss. This estimate is recognized concurrent with the recognition of revenue on the sale to a customer. The Company reserve for warranty expense is based on its historical experience and management’s expectation of future conditions, taking into consideration the location and type of customer and the type of drone, which directly correlate to the materials and components under warranty, the duration of the warranty period, and the logistical costs to service the warranty. An increase in warranty claims or in the costs associated with servicing those claims would likely result in an increase in the reserve and a decrease in gross profit.

*Shipping Costs ***–**All shipping costs billed directly to the customer are directly offset to shipping costs resulting in a net expense to the Company, which is included in cost of sales in the accompanying consolidated statements of operations and comprehensive loss. For the years ended December 31, 2024 and 2023, shipping costs were $0.25 million and $0.26 million, respectively.

*Advertising Costs *– Advertising costs are charged to operations as incurred. For the years ended December 31, 2024, and 2023, advertising costs, included in sales and marketing expenses in the consolidated statements of operations and comprehensive loss, were $0.01 million and $0.10 million, respectively.

*Research and Development *– For the years ended December 31, 2024 and 2023, research and development expenses were $4.0 million and $5.5 million, respectively. Research and development costs are expensed as incurred and are included in the accompanying consolidated statements of operations and comprehensive loss.

Customer Concentrations - As of December 31, 2024 and 2023, we generated over 10% of our consolidated revenues from one significant customer.

*Defined Benefit Plan -*The Company estimates liabilities and expenses for its defined benefit plan. Estimated amounts are based on historical information, current information, and estimates regarding future events and circumstances. Significant assumptions used in the valuation of these benefit plan liabilities include the expected return on plan assets, discount rate, and rate of increase in compensation levels.

Loss Per Common Share – Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus Common Stock, par value $0.001 (“Common Stock”) equivalents (if dilutive) related to warrants, options, and convertible instruments.

Potentially Dilutive Securities – The Company has excluded all common equivalent shares outstanding for unvested restricted stock, warrants and options to purchase Common Stock from the calculation of diluted net loss per share, because all such securities are anti-dilutive for the periods presented. As of December 31, 2024, the Company had 3,850 unvested restricted stock units, and 56 options outstanding to purchase shares of Common Stock. The Company had an additional 317,664 common stock warrants from Series F,331,192 from Series A (assumes alternate cashless exercise), and 4,462,716 from Series B,5,935 of Series F Stock convertible into 4,856,492 shares of common stock. As of December 31, 2023, the Company had 193 unvested restricted stock units,64,671 common stock warrants,2,505 options outstanding to purchase shares of Common Stock and Series F Preferred Stock convertible into 60,750 shares of Common Stock.

*Leases ***–**The Company accounts for its operating leases in accordance with ASC Topic 842,Leases, which requires that lessees recognize a right-of-use asset and a lease liability for virtually all their leases with lease terms of more than twelve months. Consistent with current US GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

Right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease terms at the commencement dates. The Company uses its incremental borrowing rates as the discount rate for its leases, which is equal to the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The incremental borrowing rate for all existing leases as of the opening balance sheet date was based upon the remaining terms of the leases; the incremental borrowing rate for all new or amended leases is based upon the lease terms. The lease terms for all the Company’s leases include the contractually obligated period of the leases, plus any additional periods covered by options to extend the leases that the Company is reasonably certain to exercise at lease commencement.

Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The components of a lease are split into three categories: lease components, non-lease components and non-components; however, the Company has elected to combine lease and non-lease components into a single component. Operating lease expense is recognized on a straight-line basis over the lease term and is included in general and administrative expense on the consolidated statement of operations and comprehensive loss. Variable lease payments are expensed as incurred.

Income Taxes **–**The Company accounts for income taxes in accordance with ASC Topic 740,Accounting for Income Taxes, which requires an asset and liability approach for accounting for income taxes. The Company evaluates its tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual is necessary for uncertain tax positions. The Company will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. All income tax returns not filed more than three years ago are subject to federal and state tax examinations by tax authorities.

Stock-Based Compensation Awards – The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10,Compensation – Stock Compensation*,*which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made to employees and directors. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. The estimated fair value is then expensed over the requisite service period of the award, which is generally the vesting period. Stock-based compensation expenses are presented in the consolidated statements of operations and comprehensive loss within general and administrative expenses. The Company recognizes forfeitures at the time they occur.

The Black-Scholes option-pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future.

Segment Reporting – In accordance with ASC Topic 280,Segment Reporting (“ASC 280”), the Company identifies operating segments as components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker in making decisions regarding resource allocation and performance assessment. The Company defines the term “chief operating decision maker” to be its chief executive officer.

The Company has determined that operates in three segments:

Contingencies - In the ordinary course of business, the Company is subject to loss contingencies that cover a range of matters. An estimated loss from a loss contingency, such as a legal proceeding or claim, is accrued if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, the Company evaluates, among other factors, the degree of probability and the ability to reasonably estimate the amount of any such loss.

Recently Issued and Adopted Accounting Pronouncements

In December 2023, FASB issued ASU 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 requires public business entities to disclose, on an annual basis, a rate reconciliation presented in both dollars and percentages. The guidance requires the rate reconciliation to include specific categories and provides further guidance on disaggregation of those categories based on a quantitative threshold equal to 5% or more of the amount determined by multiplying pretax income (loss) from continuing operations by the applicable statutory rate. For entities reconciling to the US statutory rate of 21%, this would generally require disclosing any reconciling items that impact the rate by 1.05% or more. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024 (generally, calendar year 2025) and effective for all other business entities one year later. Entities should adopt this guidance on a prospective basis, though retrospective application is permitted. The adoption of ASU 2023-09 is expected to have a financial statement disclosure impact only and is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07,Segment Reporting – Improvements to Reportable Segment Disclosures. The ASU will now require public entities to disclose its significant segment expenses categories and amounts for each reportable segment. Under the ASU, a significant segment expense is an expense that is:

The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024 (calendar year public entity will adopt the ASU in its 2024 Form 10-K). The ASU should be adopted retrospectively unless it’s impracticable to do so. Effective January 1, 2024, we adopted ASU 2023-07 and evaluated the application of ASU 2023-07 to these consolidated financial statements. We have included expanded disclosures in Note 16 to provide further information regarding the measure of our three operating segment’s gross profit and significant segment expenses as required by ASU 2023-07.

Recently Issued Accounting Pronouncements Not Yet Adopted

ASU 2024-03,Disaggregation of Income Statement Expenses (“DISE”). In November 2024, the FASB issued a new accounting standard to improve the disclosures about an entity’s expenses and address requests from investors for more detailed information about the types of expenses included in commonly presented expense captions. The new standard is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with retrospective application permitted. The Company is evaluating the disclosure requirements related to the new standard and its impact on our consolidated financial statements.

Other recent accounting pronouncements issued by FASB did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

Note 3 -Balance Sheet Accounts

Accounts Receivable, Net

As of December 31, 2024 and 2023, accounts receivable, net consist of the following:

Customer Concentration

Customers comprising more than 10% of the Company’s total revenue are summarized below:

Inventories, Net

As of December 31, 2024 and 2023, inventories, net consist of the following:

Note 3 - Balance Sheet Accounts– Continued

Property and Equipment, Net

Property and Equipment is recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to five years. Expenses for maintenance and repairs are charged to expenses as incurred.

As of December 31, 2024 and 2023, property and equipment, net consist of the following:

For the years ended December 31, 2024 and 2023, depreciation expense is classified within the consolidated statements of operations and comprehensive loss as follows:

Accrued Liabilities

As of December 31, 2024 and 2023, accrued liabilities consist of the following:

Note 4 –Intangible Assets, Net

As of December 31, 2024, intangible assets, net, other than goodwill, consist of following:

As of December 31, 2024, the gross carrying intangible assets, accumulated amortization, impairments, and net book value, consist of following:

As of December 31, 2023, intangible assets, net, other than goodwill, consist of following:

Note 4 – Intangible Assets, Net- Continued

As of December 31, 2023, the gross carrying intangible assets, accumulated amortization, impairments, and net book value, consist of following:

As of December 31, 2024 and 2023, the weighted average remaining amortization period in years was 2.30 and 3.42 years, respectively. Amortization expense for the years ended December 31, 2024 and 2023 was $731,079 and $3,554,678, respectively. For the year, ended December 31, 2024 and 2023, amortization expense of $0 and $720,635 related to the platform development costs were included as part of the cost of goods sold, respectively.

For the year ended December 31, 2024, the Company reviewed the indicators for impairment and concluded that no impairment of its finite-lived intangible assets existed. The annual intangible impairment conducted during the fourth quarter of 2023 indicated that the fair value of the SaaS and Drones reporting units were less than carrying value. Accordingly, the Company recorded an impairment charge to SaaS and Drones units for $2,398,618 and $3,500,689, respectively, which was included in “Impairment” on the accompanying consolidated statements of operations and comprehensive loss.

For the following years ending, the future amortization expenses consist of the following:

Note 5 –Goodwill

Goodwill represents the difference between the purchase price and the estimated fair value of net assets acquired, when accounted for by the acquisition method of accounting. As of December 31, 2024, the goodwill balance relates to business acquisitions completed in 2021.

The annual impairment assessment conducted during the fourth quarter of 2024 indicated that the fair value of the Company’s Sensor reporting unit was less than the carrying value. The impairment assessment of the Sensor reporting unit considered the lower than forecasted sales and profitability along with declining markets conditions, declining stock price and changes in our technologies. Accordingly, the Company recorded an impairment charge of $2,943,000. The annual impairment assessment conducted during the third and fourth quarter of 2023 indicated that the fair value of the SaaS and the Sensor reporting units were less than the carrying value. The impairment assessment of the SaaS and the Company’s Sensor reporting units was considered lower than forecasted sales and profitability along with declining markets conditions, declining stock price and changes in our technologies. Accordingly, the Company recorded an impairment charge to SaaS and Sensor for $4,206,515 and $11,570,252, respectively, during the year ended December 31, 2023.

As of December 31, 2024 and 2023, the change in the carrying value of goodwill for our operating segments (as defined in Note 16) is listed below:

Note 6 –COVID Loan

In connection with the senseFly Acquisition, the Company assumed the obligations for two COVID Loans originally made by the SBA to senseFly S.A. on July 27, 2020 (“senseFly COVID Loans”). As of the senseFly Acquisition Date, the fair value of the COVID Loan was $1,440,046 (“senseFly COVID Loans”). For the years ended December 31, 2024 and 2023, senseFly S.A. made the required payments on the senseFly COVID Loans, including principal and accrued interest, aggregating approximately $318,793 and $91,856, respectively. As of December 31, 2024, the Company’s outstanding obligations under the senseFly COVID Loans are $511,853. On August 25, 2023, the Company modified one (1) of its existing agreements to extend the repayment period of the COVID Loan from a maturity date of December 2023 to June 2025. The other COVID loan remains unchanged.

As of December 31, 2024, scheduled principal payments due under the senseFly COVID Loans are as follows:

Note 7 –Promissory Note and Convertible Note

On December 6, 2022, the Company entered into a Securities Purchase Agreement (the “Promissory Note Purchase Agreement”) with an institutional Alpha Capital Anstalt (“Alpha”) which has an existing shareholder of the Company. Pursuant to the terms of the Promissory Note Purchase Agreement, the Company has agreed to issue to Alpha (i) an 8% original issue discount promissory note (the “Note”) in the aggregate principal amount of $3,500,000, and (ii) a common stock purchase warrant (the “Promissory Note Warrant”) to purchase up to 5,000 shares of the Company’s Common Stock (the “Shares”) at an initial exercise price of $440.00 per share, subject to standard anti-dilution adjustments. The Note was an unsecured obligation of the Company. It had an original issue discount of 4% and bore interest at 8% per annum. The Company received net proceeds of $3,285,000 net of the original issue discount of $140,000 and $75,000 of issuance costs. As disclosed below, this Note was exchanged for a Convertible Note in February 2024.

The Company determined the estimated fair value of the common stock warrants issued with the Note to be $1,847,200 using a Black-Scholes pricing model. In accordance with ASC470-20, Debt, the Company recorded a discount of $1,182,349 on the Note based on the relative fair value of the warrants and total proceeds. At Note issuance, the Company recorded a total discount on the debt of $1,397,350 comprised of the relative fair value of the warrants, the original issue discount, and the issuance costs. The aggregate discount was being amortized into interest expense over the approximate two-year term of the Note.

Pursuant to the original terms of the Note beginning June 1, 2023, and on the first business day of each month thereafter, the Company shall pay 1/20 th of the original principal amount of the Note plus any accrued but unpaid interest, with any remaining principal plus accrued interest payable in full upon the maturity date of December 31, 2024 or the occurrence of an Event of Default (as defined in the Note). Prior to February 2024, the Company and the Alpha entered into a series of Note Amendment Agreements as the Company was not able to make the agreed upon monthly payments. A summary of these amendments is as follows:

On August 14, 2023, the Company and Alpha entered into a Note Amendment Agreement and the parties agreed to amend the Note as follows:

On October 5, 2023, the Company and Alpha entered into a Second Note Amendment Agreement (the “Second Amendment”), which provided for the following:

Note 7 – Promissory Note and Convertible Note- Continued

The Note Amendment Agreement and the Second Amendment resulted in a debt extinguishment due to the modified terms of the Note being substantially different than the original terms primarily due to the substantial aggregate increase in principal of $1,004,500. In accordance with ASC 470-50-40-2, the Company recorded a loss on debt extinguishment of $1,933,368 which is presented on the consolidated statements of operations and comprehensive loss for the difference between the reacquisition price of the debt, of $4,504,500 and the net carrying amount of the extinguished debt of $2,571,133 comprised of $3,500,000 of principal less $928,867 of unamortized debt discounts and issuance costs on the original debt.

Further, on September 15, 2023, the Company and Alpha entered into a Warrant Exchange Agreement pursuant to which the Company agreed to issue to the Alpha 5,000 shares of common stock in exchange for the Warrant for no consideration. The Company accounted for the incremental value of the Promissory Note Warrant modification of $190,500 as an increase in additional paid-in capital and interest expense on the consolidated statements of operations and comprehensive loss. The incremental value was computed using a Black-Scholes pricing model pre and post modification and the following inputs: stock price $190.00, exercise price $440.00 (pre modification) and $0 (post modification), volatility of 129%, and discount rate of 4.45%.

During the year ended December 31, 2023, the Company recognized $412,188 of interest expense related to the amortization of the discounts prior to the debt extinguishment which has been included in interest expense on the consolidated statements of operations and comprehensive loss. As of December 31, 2023, the unamortized discount was $0.

On February 8, 2024, the Company and Alpha entered into a Securities Exchange Agreement (the “Exchange Agreement”), pursuant to which the parties agreed to exchange the Note for a Convertible Note due January 8, 2025 (“Maturity Date”) in the principal amount of $4,849,491 (the “Convertible Note”), convertible into Common Stock at the initial conversion price of $100.00 per share of Common Stock, subject to adjustment based on the effectiveness of the Company’s Reverse Stock Split which became effective on February 9, 2024. On February 16, 2024, the conversion price was adjusted downward to $62.64 pursuant to the terms of the Convertible Note and is subject to adjustment pursuant to dilutive protection terms included in the Convertible Note. The conversion price was adjusted downward several times during the year due to down round trigger events that occurred (see below).

The principal amount of the Convertible Note did not change and includes: (i) the initial principal amount of the Original Note of $3,500,000, (ii) the additional $595,000 in principal added pursuant to the 1 st Amendment, (iii) $192,111 in accrued interest at the rate of 8% from December 6, 2022 through August 13, 2023 on the original principal amount of $3,500,000, (iv) $152,880 in accrued interest at the rate of 8% from August 14, 2023 through February 8, 2024 on the original principal amount of $4,095,000, and (v) an additional principal amount of $409,500. The Convertible Note accrues interest at 12% per annum versus 8% on the Note Payable Purchase Agreement. The interest rate will increase to the lesser of 18% per annum or the maximum rate permitted under applicable law upon an Event of Default as defined under the Convertible Note. Commencing April 1, 2024, and on the first business day of each calendar month thereafter, the Company shall pay $484,949, plus any accrued but unpaid interest, with any remaining principal plus accrued interest payable in full upon the Maturity Date.

On February 16, 2024, the Company received a notification from Alpha to convert $100,000 into 1,597 shares of common stock at an exercise price of $62.64, reducing the principal balance to $4,749,491.

On April 12, 2024, the Company received an investor notice for the aggregate purchase of 1,050 shares of Series F Convertible Preferred convertible into 28,378 shares of Common Stock, in the aggregate, at a conversion price of $37.00 for an aggregate purchase price of $1,050,000, Alpha retained $569,091 as a payment on the Promissory Note which consisted of the scheduled principal payment of $484,950 for the month of April and $84,141 of interest, as result, the Company received $480,909.

The Company was not able to make the Amortization Payments required in the third quarter of 2024. Therefore $426,454 of accrued interest was added to principal due to this failure.

Note 7 – Promissory Note and Convertible Note- Continued

Pursuant to the Omnibus Agreement executed between the Company and Alpha in connection with the October 2024 Offering (see Note 9), Alpha agreed to purchase $3,000,000 of the units in the offering and the Company agreed to apply said $3,000,000 towards the repayment of the Convertible Note balance. Upon such repayment, $2,000,000 remained outstanding on the Convertible Note to be paid in six monthly installments consisting of $333,333 in principle plus all accrued interest commencing on October 15, 2024 and continuing on the 15th day of each calendar month until the Convertible Note is paid in full. The Company remitted the October and November 2024 monthly payments and the December 2024 payment was waived by the lender. As of December 31, 2024, the principal outstanding is $1,333,333 which is due March 2025.

During the year ended December 31, 2024, the Company recorded $884,769 of interest expense related to the Note in the consolidated statements of operations and comprehensive loss, and as of December 31, 2024, there is $47,123 of accrued interest included in accrued liabilities on the consolidated balance sheet.

Convertible Note Conversion Price Adjustments

On March 6, 2024, the conversion price of the Convertible Note was reduced from $62.50 to $30.00 pursuant to down round provisions triggered and due to the reduction in warrant exercise prices to $30.00 to induce exercise (see Note 9). The Company recognized interest expense in the amount of $3,488,851 for the incremental value of the conversion feature due to the reduced conversion price. The incremental value was determined using a Black-Scholes pricing model pre and post modification and the following inputs: expected term 0.92 years, risk free rate of 4.83%, volatility of 89.6%, and dividend rate of 0%.

On August 27, 2024, the Investor purchased 500 shares of Series F Convertible Preferred Stock and Series F Warrants, both convertible into 24,765 shares of Common Stock at an initial conversion and exercise price of $20.19. Therefore, the conversion price of the Convertible Note was reduced from $23.15 to $20.19. The Company recognized interest expense of $609,537 for the incremental value of the conversion feature due to the reduced conversion price. The incremental value was determined using a Black-Scholes pricing model pre and post modification and the following inputs: expected term 0.50 years, risk free rate of 4.34%, volatility of 101.70%, and dividend rate of 0%.

In October 2024, the conversion price of the Convertible Note was reduced twice (i) from $20.19 to $4.00 due to the effective price paid in the October 2024 Offering triggering the down round provision and (ii) from $4.00 to $1.10 due to an agreed upon modification to the conversion price due to the Share Combination Event that occurred on October 14, 2024 (see Note 9). The Company recognized interest expense of $2,252,833 for the incremental value of the conversion feature due to the reduced conversion price from the October 2024 Offering (see Note 9) to $4. The modification was deemed to be a debt extinguishment due to the conversion price reduction being substantive. The incremental value of $1,572,512 has been presented on the statement of operations and comprehensive as a loss on debt extinguishment.

The October 2024 incremental values above were determined using a Black-Scholes pricing model pre and post modification and the following inputs: expected term 0.50 years, risk free rates ranging from 3.96% -4.24%, volatilities of 130.57% –144.88%, and dividend rate of 0%.

Note 8 –Fair Value Measurements

In connection with the October 2024 Offering, we sold units comprised of common stock, Series A Warrants and a Series B Warrants (collectively referred to as the “Warrants”) (see Note 9). The Series A and B Warrants were deemed to be derivative liabilities due to variability in the ultimate settlement of the Series A and B Warrants caused by various settlement provisions embedded within the Warrants. Therefore, these Warrants meet the definition of a derivative liability requiring the Warrants to be reported at fair value upon issuance and subsequently at each reporting period.

The following tables present information about the Company’s derivative liabilities that are measured at fair value on a recurring basis as of December 31, 2024 and October 1, 2024 (Issuance) and indicate the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair value:

The fair value of the warrants was determined using a Black-Scholes pricing model and the following assumptions:

As of December 31, 2024 and Issuance, the Company measured the Warrants using significant unobservable inputs that are based on little or no verifiable market data, which is Level 3 in the fair value hierarchy, resulting in a fair value estimate of approximately $13.1 million. Inherent in a Black Scholes options pricing model are assumptions related to expected share-price volatility, expected term, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock based on historical volatility. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates remaining at zero. The probability of a capital raise below the Warrants’ current exercise price is a significant unobservable input based on management’s estimate factoring in the Company’s capital needs and the Company’s stock price, which is volatile. Fluctuations to this estimate could significantly impact the fair value.

Note 8 – Fair Value Measurements- Continued

The initial fair value of the warrant liabilities of $19,494,000 exceeded the net proceeds received in the October 2024 Offering (see Note 9). Therefore, we recognized a loss in equity financing of $15,305,761 comprised of the following:

During the year ended December 31, 2024, we recognized a fair value gain on the warrant liabilities of $3,094,000 for the change in fair value between issuance and year end. A reconciliation of the warrant liabilities is below:

Note 9 –Equity

Capital Stock Issuances

Preferred Series F Convertible Stock

On June 26, 2022 (the “Series F Closing Date”), the Company entered into a Securities Purchase Agreement (the “Series F Agreement”) with Alpha. Pursuant to the terms of the Series F Agreement, the Board of Directors of the Company (the “Board”) designated a new series of Preferred Stock, the Series F 5% Preferred Convertible Stock (“Series F”), and authorized the sale and issuance of up to 35,000 shares of Series F. The sale of Series F includes 100% warrant coverage (“Series F Warrants”). The Series F Warrants are not exercisable for the first six months after its issuance and have a three-year term from its exercise date. The initial conversion and exercise price of the Series F and the Series F Warrants are based on the volume weighted average market price for the four days prior to the issuance of the Series F and Serries F Warrants. Conversion and exercise prices are subject to downward adjustment for any equity instrument or equity-linked instrument sold or granted at an effective price per share that is lower than the initial conversion and exercise price (“Down Round Provision”). See Note 11 for warrant related disclosures.

On the Series F Closing Date, the Company issued to Alpha 10,000 shares of Series F, initially convertible into 16,129 shares of Common Stock at $620 per share, subject to adjustment for subsequent equity sales, and a warrant to purchase 16,129 shares of Common Stock at $960 per shares and received net proceeds of $9,920,000. As of December 31, 2024, the Series F issued on the Series F Closing Date have all been converted into shares of common stock. The warrant to purchase 16,129 shares of common stock remains outstanding at an exercise price of $1.10 after several down round provision triggers (see below).

Additional Investment Right

Alpha has the right, subject to certain conditions, including shareholder approval, to purchase up to $25,000,000 of additional shares of Series F and Series F Warrants (collectively, the “Series F Option”). The Series F Option will be available for an initial period of eighteen months, extended through June 1, 2026 (see Note 17). The Series F and Series F Warrants shall be identical to the initial purchase, except the conversion and exercise price shall be adjusted to the volume weighted average price for three trading days prior to the date that Alpha gives notice to the Company of its intent to exercise the Series F Option.

Since the Series F Closing Date, the Company has sold and issued Series F and Series F Warrants to Alpha or Investors that Alpha has assigned the Additional Investment Rights for cash proceeds through the exercise of their Series F Option. A summary of the Series F activity during the years ended December 31, 2024 and 2023 is as follows:

During the year ended December 31, 2024, an aggregate of 269,583 Series F Warrants were issued with the sale and issuance of the Series F with initial exercise prices ranging from $20.19 and $60.29, subject to adjustment for subsequent equity sales or equity issuances below the initial exercise price.

During the years ended December 31, 2024 and 2023, a total of 6,490 and 4,638 Series F were converted into a total of 200,645 and 27,805 shares of common stock, respectively. As of December 31, 2024 and 2023, accrued dividends on the Series F total $746,666 and $512,227 which are included in accrued expenses on the consolidated balance sheets, at the rate per share (as a percentage of the $1,000 stated par value per share of Series F) of 5% per annum, beginning on the first purchase date of June 30, 2022. As of December 31, 2024, a total of 13,800 Series F shares remain issuable on the Series F Option.

Common Stock and Warrant Transaction

2023 Issuances

On June 5, 2023, the Company entered into a Securities Purchase Agreement (the “June 2023 Purchase Agreement”) with certain accredited investors, including Alpha (the “Investors”). Pursuant to the terms of the Purchase Agreement, the Company agreed to issue and sell to Investors (i)16,720 shares of Common Stock (the “Offering Shares”) at $250.00 per share and (ii) warrants to purchase up to 25,080 shares of common stock (the “Warrants”), exercisable at $380.00 per share and raised gross sales proceeds of $4,180,000. The Warrant is for a term of 5.5 years commencing on the closing date but is not exercisable for the first six months after closing. As a result, pursuant to the June 2023 Purchase Agreement the Company issued 16,720 shares of Common Stock for proceeds of $3,817,400, net of issuance costs from the offering and warrants to purchase up to 25,080 shares of common stock exercisable at $380.00 per share. The Offering Shares and Warrants triggered down round provisions embedded in outstanding Series F and Series F Warrants (the “June 2023 Down Round Trigger”).

For twelve (12) months following the closing date of the Purchase Agreement, in the event the Company or any of its subsidiaries proposes to offer and sell shares of Common Stock or common stock equivalents (the “Offered Securities”) to investors primarily for capital raising purposes (each, a “Future Offering”), the Investors shall have the right, but not the obligation, to participate in each such Future Offering in an amount of up to 50% in the aggregate of the Offered Securities.

The Offering Shares were issued pursuant to a prospectus supplement and was filed with the Securities and Exchange Commission (the “Commission”) on June 7, 2023, and the prospectus included in the Company’s Registration Statement on Form S-3 (Registration No. 333-252801), which was filed with the Commission on April 23, 2021, and was declared effective on May 6, 2021. The Warrants were issued in a concurrent private placement under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and have not been registered under the Securities Act, or applicable state securities laws.

The Warrants were issued on the date of closing. The exercise price of the Warrants and the number of Warrant Shares issuable upon the exercise thereof will be subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization, or similar transaction, as described in the Warrants, but has no anti-dilution protection or down round provisions. The Warrants will be exercisable on a “cashless” basis only in the event there is no effective registration statement registering, or the prospectus contained therein is not available for the sale of the Warrant Shares. The Warrants contain a beneficial ownership limitation, such that none of such Warrants may be exercised, if, at the time of such exercise, the holder would become the beneficial owner of more than 4.99% or 9.99%, as determined by the Investor, of the Company’s outstanding shares of Common Stock following the exercise of such Warrant.

Pursuant to the terms of the Purchase Agreement, the Company filed a registration statement on Form S-1 Registration No. 333-273332), which was declared effective on July 27, 2023, providing for the resale by the Investors of the Warrant Shares issuable upon exercise of the Warrants.

2024 Issuances

On February 16, 2024, the Company received a notification from the holder of the Convertible Note to convert $100,000 of principal outstanding on a Convertible Note (see Note 7) into 1,597 shares of common stock at a conversion price of $62.62.

On March 6, 2024, the Company entered into a warrant exercise agreement with several institutional investors holding warrants issued to such investors pursuant to a securities purchase agreement, dated as of June 5, 2023, in connection with a private placement. The warrant exercise agreement provides that for those Investors who exercise their existing warrants they will receive a reduction in the exercise price to $30 per share of Common Stock. The shares of Common Stock issuable upon exercise of the existing warrants were registered pursuant to a registration statement on Form S-1 File No. 333-273332 and declared effective on July 27, 2023. The Company received up to $497,701 from the exercise of 16,590 warrants converted to 16,590 shares of common stock. The reduction in exercise price (“March 2024 Down Round Trigger”) triggered down round provisions embedded in the outstanding Series F and Series F Warrants (see below).

October 2024 Unit Offering

We closed the following Offering on October 1, 2024.

The Company entered into a placement agency agreement (the “Placement Agency Agreement”) with Spartan Capital Securities, LLC (the “Placement Agent”) in connection with the issuance and sale by the Company in a public offering (the “Offering”) of 538,000 units (the “Units”), consisting of common units (“Common Units”), each consisting of one share of common stock of the Company, $0.001 par value per share, one Series A warrant (“Series A Warrant”) to purchase one share of common stock and one Series B warrant (“Series B Warrant”) to purchase one share of common stock and pre-funded Units (the “Pre-Funded Units” and together with the Common Units, the “Units”), with each Pre-Funded Unit consisting of one pre-funded warrant (the “Pre-Funded Warrants”) to purchase one share of common stock, one Series A Warrant to purchase one share of common stock and one Series B Warrant to purchase one share of common stock.

The purchase price of each Common Unit was $12.00, and the purchase price of each Pre-Funded Unit was $11.95, less Placement Agent fees and commissions.

The Units have no stand-alone rights and will not be certificated or issued as stand-alone securities. Each Series A Warrant is immediately exercisable on the date of issuance at an exercise price of the public offering price of the Units of $12, or pursuant to an alternate cashless exercise option, and expires five years from the closing date of the Offering. Each Series B Warrant is immediately exercisable on the date of issuance at an exercise price of $25 and expires five years from the closing date of the offering.

Under the alternate cashless exercise option of the Series A Warrants, a holder of the Series A Warrant, has the right to receive an aggregate number of shares equal to the product of (x) the aggregate number of shares of common stock that would be issuable upon a cash exercise of the Series A Warrant and (y) 2.0. In addition, the Series A Warrants and Series B Warrants contain a reset of the exercise price to a price equal to the lesser of (i) the then exercise price and (ii) the lowest volume weighted average price for the five trading days immediately preceding and immediately following the date the Company effects a reverse stock split in the future with a proportionate adjustment to the number of shares underlying the Series A Warrants and Series B Warrants so that the aggregate exercise price remains constant in such an event (the “Share Combination Event”). Finally, with certain exceptions, the Series B Warrants provide for a down round adjustment to the exercise price and number of shares underlying the Series B Warrants upon the Company’s issuance of its common stock or common stock equivalents at a price per share that is less than the exercise price of the Series B Warrant.

Each Pre-Funded Warrant is immediately exercisable for one share of common stock at an exercise price of $0.001 per share. Subject to limited exceptions, a holder of Pre-Funded Warrants does not have the right to exercise any portion of its Pre-Funded Warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% (or, at the election of the holder, such limit may be increased to up to 9.99%) of the number of shares of common stock outstanding immediately after giving effect to such exercise. The Pre-Funded Warrants may be exercised at any time until all of the Pre-Funded Warrants are exercised in full.

The shares of common stock, the Pre-Funded Warrants, the Series A Warrants and the Series B Warrants and the shares of common stock issuable upon exercise of the Pre-Funded Warrants, the Series A Warrants and the Series B Warrants described above, were offered by the Company pursuant to a Registration Statement on Form S-1 (File No. 333-281897), filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) and declared effective by the SEC on September 30, 2024.

Upon completing the October 2024 Offering, the Company issued 538,000 shares of common stock,538,000 Series A and 538,000 Series B warrants and received gross proceeds of $6,466,500 and paid issuance related costs for placement agent fees and legal fees totaling $778,261 resulting in net proceeds of $5,688,239 from the October 2024 Offering.

Reverse Stock Split and Share Combination Event

On October 3, 2024, the Board approved a reverse stock split of the Company’s authorized, issued and outstanding shares of common stock, par value $0.001 per share, at aratio of one (1) share of common stock for every fifty (50) shares of common stock (the “Reverse Stock Split”). The Company filed a Certificate of Change with the Secretary of State of the State of Nevada to effectuate the Reverse Stock Split. The Reverse Stock Split was effective on October 14, 2024.

As a result of the Reverse Stock Split, the Share Combination Event embedded in the Series A and B warrants were triggered resulting in the exercise price of the Series A and B Warrants adjusting down to the lowest volume weighted average price for the five trading days immediately preceding and immediately following the effective date of the Reverse Stock Split. This resulted in the exercise prices in the Series A and B Warrants adjusting down from $12 and $25, respectively, to $1.9445 and the issuance of 2,782,133 of Series A and 6,378,944 of Series B to keep the aggregate exercise price constant. The Share Combination Event triggered down round provisions embedded within Series F, Series F warrants and a Convertible Note (the “Share Combination Event Down Round Trigger”) (see below – Down Round Triggers and Deemed Dividends).

Omnibus Agreement

The October 2024 Offering required the consent of Alpha, the holder of the Convertible Note (Note 7) and the primary holder of our issued and outstanding Series F and Series F Warrants.

Pursuant to the Omnibus Agreement, among other things, Alpha consented to the October 2024 Offering and agreed to purchase $3,000,000 of the units in the offering and the Company agreed to apply said $3,000,000 towards the repayment of the Convertible Note balance. The Company issued to Alpha 1,500 shares of Series F 5% Convertible Preferred Stock with an aggregate stated value of $1,500,000 as consideration for entering into the Omnibus Agreement. The estimated fair value of the Series F of $1,500,000 has been treated as an equity issuance cost and have been reflected in the loss on equity issuance on the consolidated statements of operations and comprehensive loss (see below).

Loss on the October 2024 Offering

As more fully disclosed in Note 8, the Series A and B Warrants were determined to meet the definition of derivative liabilities due to the variability embedded in the instruments due to multiple settlement scenarios which precludes the Series A and B Warrants from being equity classified. Pursuant to ASC 815-40-35-4, liability classified contracts are initially and subsequently measured at fair value. Changes in fair value are presented on the statements of operations and comprehensive loss within the other income (expense).

At issuance, the fair value of the Series A and B Warrants was determined to be an aggregate of $19,494,000. As noted above, the net proceeds received in the October 2024 Offering was $5,688,239. Therefore, the fair value of the warrants upon issuance exceeds the net proceeds. In such cases, a loss is recognized for the excess fair value of the derivative liabilities over the net proceeds received in the offering. Therefore, we have reflected such an excess of $15,305,761, inclusive of the $1,500,000 estimated fair value of the Series F issued to Alpha for their consent, as a loss on equity financing on the consolidated statements of operations and comprehensive loss.

Down Round Triggers and Deemed Dividends

We have several outstanding equity-linked instruments that include down round provisions in which the conversion or exercise price is adjusted down upon the Company’s issuance of its common stock or common stock equivalents at a price per share that is less than the conversion or exercise price of the equity-linked instruments. As of December 31, 2024, these equity-linked instruments include the Series F, Series F Warrants, Convertible Note and Series B Warrants. The down round provisions included in these equity-linked instruments have been triggered several times.

Upon a down round provision being triggered, we compute the incremental value provided to the holder for the reduction in conversion or exercise price using a Black-Scholes model to determine the fair value of the equity-linked instruments prior to and after the down round provision trigger. The incremental value is recorded within stockholders’ equity (deficit) as a deemed dividend and reduced from net loss available to common stockholders in our computation of earnings per share.

During the years ended December 31, 2024 and 2023, we used the following assumptions in the Black-Scholes model used to compute the incremental value:

During the year ended December 31, 2024, the following transactions resulted in down round triggers:

The March 2024 Down Round Trigger disclosed above resulted in the reduction of the conversion and exercise prices to $30.00.

On August 27, 2024, the Company issued 500 shares of Series F Convertible Preferred convertible into 24,765 shares of Common Stock, in the aggregate, at a conversion price of $20.19 and warrants to purchase up to 24,765 shares of Common Stock at an exercise price of $20.19 for an aggregate purchase price of $500,000 (the “August 2024 Down Round Trigger”).

The October 2024 Offering resulted in an effective price per share of $4.00 which resulted in another down round trigger as the effective price per share in the October 2024 Offering was lower than the previous $20.19 (the “October 2024 Down Round Trigger”).

The Share Combination Event Down Round Trigger resulted in the modification of the conversion and exercise prices of the Series F, Series F Warrants and Convertible Debt being reduced to $1.10 based on an acknowledgement and price reset executed between the Company and Alpha in connection with the Share Combination Event resulting in the reduction of the effective price per share paid in the October 2024 Offering.

Below is a summary of the deemed dividends resulting from various down round triggers that occurred during the year ended December 31, 2024:

During the year ended December 31, 2023, the following transactions resulted in down round triggers:

On March 9, 2023, the Company issued 3,000 shares of Series F Convertible Preferred convertible into 7,143 shares of Common Stock, in the aggregate, at an initial conversion price of $420 and warrants to purchase up to 7,143 shares of Common Stock at an initial exercise price of $420 for aggregate proceeds of $3,000,000. The transaction triggered several down round provisions embedded in the outstanding Series F and Series F warrants as the conversion price and exercise price of the Series and Series F Warrants issued in the purchase were less than the conversion and exercise price after the March 2024 Down Round Trigger of $30 (the “March 2023 Down Round Trigger”).

The June 2023 Down Round Trigger discussed above.

On November 15, 2023, the Company issued 1,850 shares of Preferred Stock pursuant to an Assignment, Waiver and Amendment Agreement (the “Assignment Agreement”) with the Investor pursuant to which, among other things, (i) the Investor transferred and assigned to certain institutional and accredited investors (the “Assignees” or “Investors”), the rights and obligations to purchase up to $1,850,000 of Preferred Stock pursuant to the Additional Investment Right provided in the Original Purchase Agreement (the “Assigned Rights”), (ii) the Original Purchase Agreement was amended so that the Assignees are party thereto and have the same rights and obligations thereunder as the Investor to the extent of the Assigned Rights, (iii) the time period during which the Investor can provide an investor notice was extended from August 3, 2024 until February 3, 2025; and (iv) the Investor and the Company agreed to a onetime waiver of the Minimum Subscription Requirement to allow exercise of the Assigned Rights.

Pursuant to the Assignment Agreement, the Company issued 1,850 shares of Preferred Stock convertible into convertible into 14,835 shares of Common Stock at an initial conversion price of $124.70 per share and warrants to purchase up to 14,835 shares of our Common Stock an exercise price of $124.70 exercisable upon issuance for three years. The Assignment Agreement triggered down round provisions embedded in outstanding Series F and Series F Warrants (the “November 2023 Down Round Trigger”).

The below is a summary of the deemed dividends resulting from various down round triggers that occurred during the year ended December 31, 2023:

Stock-Based Compensation

The Company determines the fair value of awards granted under the Equity Plan based on the fair value of its Common Stock on the date of grant. Stock-based compensation expenses related to grants under the Equity Plan are included in general and administrative expenses on the consolidated statements of operations and comprehensive loss.

2017 Omnibus Equity Incentive Plan

On March 26, 2018, the 2017 Omnibus Equity Incentive Plan (the “Equity Plan”) became effective. Under the Equity Plan, the Company may grant equity-based and other incentive awards to officers, employees, and directors of, and consultants and advisers to, the Company. The purpose of the Equity Plan is to help the Company attract, motivate, and retain such persons and thereby enhance shareholder value. The Equity Plan shall continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which it is adopted by the Board (except as to awards outstanding on that date). The Board in its discretion may terminate the Equity Plan at any time with respect to any shares for which awards have not theretofore been granted; provided, however, that the Equity Plan’s termination shall not materially and adversely impair the rights of a holder, without the consent of the holder, with respect to any award previously granted. As of December 31, 2024,15,000 shares of common stock have been reserved for issuance under the Equity Plan which was approved at the Annual Shareholders’ Meeting held on November 14, 2023.

The Company determines the fair value of awards granted under the Equity Plan on the date of grant.

Stock-based compensation expenses related to grants under the Equity Plan are included in general and administrative expenses on the consolidated statements of operations and comprehensive loss.

Restricted Stock Units(“RSUs”)

For the year ended December 31, 2024, a summary of RSU activity is as follows:

For the year ended December 31, 2024, the aggregate fair value of RSUs at the time of grant was $131,606 based on the market price of our common stock.

As of December 31, 2024, the Company had $40,969 of unrecognized stock-based compensation expense related to RSUs, which will be amortized over approximately eighteen months. During the year ended December 31, 2024, the Company recognized $80,606 of stock compensation related to restricted stock units.

For the year ended December 31, 2023, a summary of RSU activity is as follows:

For the year ended December 31, 2023, the aggregate fair value of RSUs at the time of vesting was $839,247.

As of December 31, 2023, the Company had $39,280 of unrecognized stock-based compensation expense related to RSUs, which was amortized over approximately eleven months. During the year ended December 31, 2023, the Company recognized $975,282 of stock compensation related to restricted stock units.

Issuance of RSUs to Current Officers and Directors of the Company

For the year ended December 31, 2024, the Company granted 6,000 RSUs to officers, equal to $95,970 as compensation, which vest over two years.

For the year ended December 31, 2024, the Company granted 500 RSUs equal to $7,560 to the four non-executive directors as quarterly board compensation, which vested immediately.

On December 29, 2023, upon recommendation of the Compensation Committee of the Board (“Compensation Committee”), in lieu of the payment of $55,133 for the three Board members as quarterly cash compensation, three (3) non-executive directors received 551 RSUs equal to $55,133, which were immediately vested, also in lieu of the issuance of stock options for the purchase of 30 shares of common stock, for each of these three (3) non-executive directors received a total of 90 in restricted stock awards, which vested immediately for a fair value of $9,000 in the aggregate or $3,000 each.

On December 22, 2023, the Company granted its former chief commercial officer 580 RSUs as part of the resignation agreement. Mr. O’Sullivan’s termination was effective December 8, 2023.

On September 29, 2023, upon recommendation of the Compensation Committee, in lieu of the payment of $15,000 for each Board member or a total of $45,000 as quarterly cash compensation, three (3) non-executive directors each received 88, totaling 265 RSUs equal to $45,000, which were immediately vested, also in lieu of the issuance of stock options for the purchase of 30 shares of common stock, for each of these three (3) non-executive directors received a total of 90 in restricted stock awards, which vested immediately for a fair value of $15,300 in the aggregate or $5,100 each.

On May 11, 2023, upon recommendation of the Compensation Committee, the Board granted to the officers of the Company in connection with the 2022 executive compensation plan 969 RSUs, which vested immediately.

On March 29, 2023, upon recommendation of the Compensation Committee, the Board granted to the officers of the Company in connection with the 2022 executive compensation plan 640 RSUs, which vested immediately.

For the year ended December 31, 2023, the Company recognized stock-based compensation expense of $828,130, based upon the market price of its Common Stock between $100.00 and $420.00 per share on the date of grant of these RSUs.

Stock Options

For the year ended December 31, 2024, a summary of the options activity is as follows:

For the year ended December 31, 2023, a summary of the options activity is as follows:

As of December 31, 2024, the Company hadno unrecognized compensation cost related to stock options.

As of December 31, 2023, the Company has $37,409 of total unrecognized compensation cost related to stock options, which was amortized over approximately twenty-eight months.

During the years ended December 31, 2024 and 2023, the Company recognized $0 and $330,047 of stock compensation related to stock options, respectively.

The Company uses the Black-Scholes valuation model to estimate the fair market value of the stock options at the grant date as of December 31, 2024.

For the years ended December 31, 2024 and 2023, the significant weighted average assumptions relating to the valuation of the Company’s stock options granted were as follows:

Issuances of Options to Officers and Directors

On September 30, 2023, the Company issued to officers options to purchase 50 shares of Common Stock at an exercise price of $170.00 per share, which vests over a period of two years from the date of grant and expires on September 29, 2028. The Company determined the fair market value of these unvested options to be $3,750. For the year ended December 31, 2023, the Company recognized stock-based compensation expense of $234, based upon the fair value market price of $80.00.

On June 30, 2023, the Company issued to directors and officers options to purchase 125 shares of Common Stock at an exercise price of $230.00 per share, which vests over a period of two years from the date of grant and expires on June 29, 2028. The Company determined the fair market value of these unvested options to be $13,000. For the year ended December 31, 2023, the Company recognized stock-based compensation expense of $2,945, based upon the fair value market price of $100.00.

On March 31, 2023, the Company issued to directors and officers options to purchase 150 shares of Common Stock at an exercise price of $450.00 per share, which vests over a period of two years from the date of grant, and expires on March 30, 2028. The Company determined the fair market value of these unvested options to be $31,350. For the year ended December 31, 2023, the Company recognized stock-based compensation expense of $11,158, based upon the fair value market price of $210.00.

Cancellations of Options

During the year ended December 31, 2024,2,449 options were cancelled with a grant-date fair value $2,554,225 due to employee terminations. During the year ended December 31, 2023, as a result of employee terminations and options expirations, stock options aggregating 381, with estimated values of approximately $378,869, were cancelled.

Note 10 –Retirement Plans

Defined Benefit Plan

senseFly S.A. sponsors a defined benefit pension plan (the “Defined Benefit Plan”) covering all its employees. The Defined Benefit Plan provides benefits in the event of retirement, death or disability, with benefits based on age and salary. The Defined Benefit Plan is funded through contributions paid by senseFly S.A. and its employees, respectively. The Defined Benefit Plan assets are Groupe Mutuel Prévoyance (“GMP”), which invests these plan assets in cash and cash equivalents, equities, bonds, real estate and alternative investments.

The Projected Benefit Obligation (“PBO”) includes in full the accrued liability for the plan death and disability benefits, irrespective of the extent to which these benefits may be reinsured with an insurer. The actuarial valuations are based on the census data as of December 31, 2024, provided by GMP.

The Company recognizes the overfunded or underfunded status of the Defined Benefit Plan as an asset or liability in its consolidated balance sheets and recognizes changes in the funded status of the Defined Benefit Plan in the year in which the changes occur through accumulated other comprehensive income or loss. The Defined Benefit Plan’s assets and benefit obligations are remeasured as of December 31 each year.

The net periodic benefit cost of the Defined Benefit Plan for the period from January 1, 2024 through December 31, 2024 was as follows:

The PBO is the present value of benefits earned to date by plan participants, including the effect of assumed future salary increases. The changes in the projected benefit obligation for the period from January 1, 2024 through December 31, 2024 were as follows:

For the period from January 1, 2024 through December 31, 2024, the change in fair value of the Pension Plan assets was as follows:

Note 10 – Retirement Plans- Continued

senseFly S.A.’s investment objectives are to ensure that the assets of its Defined Benefit Plan are invested to provide an optimal rate of investment return on the total investment portfolio, consistent with the assumption of a reasonable risk level, and to ensure that pension funds are available to meet the plans’ benefit obligations as they become due. senseFly S.A. believes that a well-diversified investment portfolio will result in the highest attainable investment return with an acceptable level of overall risk. Investment strategies and allocation decisions are also governed by applicable governmental regulatory agencies. senseFly’s investment strategy with respect to the Defined Benefit Plan is to invest in accordance with the following allocation:32.6% in equities,36.3% in bonds,17.3% in real estate,9.4% in alternative investments and 4.4% in cash and cash equivalents.

The following table presents the fair value of the Defined Benefit Plan assets by major categories and by levels within the fair value hierarchy as of December 31, 2024:

The following tables present the fair value of the Defined Benefit Plan assets by major categories and by levels within the fair value hierarchy as of December 31, 2023:

The following table shows the unfunded status of the Defined Benefit Plan, defined as plan assets less the projected benefit obligation as of December 31, 2024:

Note 10 – Retirement Plans- Continued

As of December 31, 2024 and 2023, the underfunded status is included in defined plan obligation on the consolidated balance sheets.

The Defined Benefit Plan has a PBO in excess of Defined Benefit Plan assets. For the period from January 1, 2024 through December 31, 2024, the amounts recognized in accumulated other comprehensive income (loss) related to the defined benefit plan were as follows:

The net prior service credit included in accumulated other comprehensive income (loss) as of December 31, 2024, is expected to be recognized as a component of net periodic benefit cost during the year ending December 31, 2025.

The actuarial assumptions for the Defined Benefit Plan were as follows:

The following table shows expected benefit payments from the Defined Benefit Plan for the next five fiscal years and the aggregate five years thereafter:

Defined Contribution Plan

The Company sponsors the AgEagle Aerial Systems 401(k) Plan (the “401(k) Plan”) that covers substantially all eligible employees in the United States. The Company matches contributions made by eligible employees, subject to certain percentage limits of the employees’ earnings. For the years ended December 31, 2024 and 2023, the Company’s employer contribution to the 401(k) Plan totaled $97,845 and $77,240, respectively.

Note 11 –Warrants

Warrants Issued

As disclosed in Note 9, the Series F Agreement with Alpha includes 100% warrant coverage. Therefore, anytime we receive an investor notice to purchase Series F Convertible Preferred Stock, we also issue Series F Warrants. The exercise price on all Series F Warrants outstanding on October 22, 2024, the date of the Share Combination Event, were reduced to $1.10.

Additionally, on March 6, 2024 and November 24, 2023, pursuant to an engagement letter entered with a sole placement agent, the Company issued 2,737 and 1,484 common stock warrants to the placement agent, in connection with the sale of Series F and Series F Warrants, respectively. The warrants have an initial exercise price of $75.50 and $124.70, respectively, per share are exercisable forfive years from the date of issuance and do not include any anti-dilution protection provisions in connection with a subsequent equity issuance, or otherwise.

On June 5, 2023, the Company issued warrants to purchase 25,080 shares of common stock at an exercise price of $380.00 per share in connection with the June 2023 Purchase Agreement executed (see Note 9 for further disclosures). On March 6, 2024, the exercise price of these warrants was reduced to $30.00 to induce exercise by interested Investors. The exercise price reduction resulted in the exercise of 16,590 warrants and the receipt of gross proceeds of $497,701. On May 31, 2024, the Company agreed to reduce the exercise price on the warrants remaining outstanding issued in June 2023 to $30.00 (see incremental value for modification above).

The warrants exercise price and warrants shares issuable issued to the placement agent and on June 5, 2023 will be subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Warrants, but has no anti-dilution protection provisions. The Warrants will be exercisable on a “cashless” basis only in the event there is no effective registration statement registering, or the prospectus contained therein is not available for the sale of the Warrant Shares.

All the Warrants contain a beneficial ownership limitation, such that none of such Warrants may be exercised, if, at the time of such exercise, the holder would become the beneficial owner of more than 4.99% or 9.99%, as determined by the holder, of the Company’s outstanding shares of Common Stock following the exercise of such Warrant (the “Beneficial Ownership Limitation”).

As disclosed in Notes 8 and 9 above, we issued Series A and B Warrants in the October 2024 Offering that were deemed to be derivative liabilities. As of December 31, 2024, the fair value of the Series A and B Warrants has been classified and presented within long-term liabilities.

Note 11 – Warrants- Continued

A summary of activity related to warrants, classified within stockholders’ equity (deficit) for the years presented is as follows:

A summary of activity related to the Series A and B warrants, classified as liabilities, for the year ended December 31, 2024 is as follows:

Note 12 –Leases

The Company has an operating lease in Wichita, Kansas, which serves as its corporate offices. The lease commencement date was November 1, 2023, and will expire on October 31, 2025, unless sooner terminated or extended. The estimated cash rent payments due through the expiration of this operating lease total $146,674.

As a result of the MicaSense Acquisition, the Company assumed an operating lease for office space in Seattle, Washington, that expires in January 2026 with a 3% per year increase, and two months of abated rent for December 2020 and January 2021. The estimated cash rent payments due through the expiration of this operating lease total approximately $246,396. Starting late 2022, the Company engaged in consolidating its business and manufacturing operations from multiple offices to two centralized locations in Wichita, Kansas and Lausanne, Switzerland. In May 2023, the Company executed a sublease agreement for their facility located in Seattle, Washington; however, the Company remains the primary obligor under the original lease.

As a result of the senseFly Acquisition, the Company assumed the operating leases for office spaces in Raleigh, North Carolina and Lausanne, Switzerland. The operating lease in Raleigh expired in July 2023 and the operating lease in Lausanne was set to expire in April 2023. The Company was required to notify the landlord of its intention to not renew the lease in March 2022. The Company neglected to provide such notification, therefore, a five year renewal option was automatically triggered in March 2022. The Lausanne lease is now set to expire in April 2028. The estimated cash rent payments due through the expiration of this operating lease total approximately $2,408,227.

Note 12 – Leases – Continued

As of December 31, 2024 and 2023, balance sheet information related to the Company’s operating leases is as follows:

For the years ended December 31, 2024 and 2023, operating lease expense payments were $1,054,116 and $1,039,685, respectively, and are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.

As of December 31, 2024, scheduled future maturities of the Company’s lease liabilities are as follows:

As of December 31, 2024 and 2023, the weighted average lease-term and discount rate of the Company’s leases are as follows:

For the years ended December 31, 2024 and 2023, supplemental cash flow information related to leases is as follows:

Note 13 –Commitments and Contingencies

Legal Matters

We note that in the ordinary course of business that we may be the subject of, or party to, various pending or threatened legal actions which could result in a material adverse outcome for which the related damages may not be estimable. We do not believe any legal action would have a significant impact on the financials other than the matter disclosed above. However, there is inherent uncertainty regarding such matters.

Purchase Commitments

The Company routinely places orders for manufacturing services and materials. As of December 31, 2024, the Company had purchase commitments of approximately $1,723,399. These purchase commitments are expected to be realized during the year ending December 31, 2025. As of December 31, 2023, the Company had purchase commitments of $1,387,303 which were realized during the year ending December 31, 2024.

Note 14 –Related Party Transactions

The following reflects the related party transactions during the years ended December 31, 2024 and 2023, respectively:

One of the Company’s former directors, Mr. Thomas Gardner, is one of the principals of NeuEon, Inc., which provides services to the Company as the Chief Technology Officer. For the years ended December 31, 2024 and 2023, the expenses related to services provided by NeuEon, Inc. to the Company were $0 and $42,500, respectively. These expenses are included within the general and administrative expenses in the Company’s consolidated statements of operations and comprehensive loss.

**Note 15 –Income Taxes **

Prior to April 15, 2015, AgEagle Aerial Inc. was treated as a disregarded entity for income tax purposes. Income taxes, if any, were the responsibility of the sole member. Effective April 22, 2015, the Company elected to be classified as a corporation for income tax purposes. On March 26, 2018, the Company’s predecessor company, EnerJex Resources, Inc. (“EnerJex”), 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 wholly owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems Inc., a then privately held company (“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. AgEagle Sub changed its name initially to “Eagle Aerial, Inc. and then to” AgEagle Aerial, Inc. Following the Merger, AgEagle Aerial Inc. became a wholly owned subsidiary of AgEagle Aerial Systems, Inc., and the group files a consolidated U.S. federal income tax return as well as income tax returns in various states.

As of December 31, 2024 and 2023, the total of all net deferred tax assets was $20,169,952 and $18,331,594 respectively. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined. Because of the uncertainty surrounding the realization of the deferred tax assets the Company has established a valuation allowance of $19,672,250 and $17,794,764 as of December 31, 2024 and 2023, respectively. The change in the valuation allowance during the years ended December 31, 2024 and 2023 was $1,877,486 and $6,624,099, respectively.

Note 15 – Income Taxes - Continued

As of December 31, 2024, the Company has a federal and state net operating loss carryforward of approximately $61,117,035 and $26,659,210, respectively. Of those balances, the Company has $6,296,936 of federal net operating losses expiring in 2035-2037 and the remaining amounts have no expiration. The Company has a foreign net operating loss carryforward of $36,139,319 which expire in 2028-2030. The Company has state net operating carryforwards of $7,213,814 which expire between 2024-2041, and the remaining amounts have no expiration.

As of December 31, 2023, the Company has a federal and state net operating loss carryforward of approximately $55,288,195 and $20,863,524, respectively. Of those balances, the Company has $6,296,936 of federal net operating losses expiring in 2035-2037 and the remaining amounts have no expiration. The Company has a foreign net operating loss carryforward of $32,403,001 which expire in 2028-2029. The Company has state net operating carryforwards of $15,181,695 which expire between 2024-2041, and the remaining amounts have no expiration.

The timing and manner in which we can utilize our net operating loss carryforward and future income tax deductions in any year may be limited by provisions of the Internal Revenue Code regarding the change in ownership of corporations. Such limitations may have an impact on the ultimate realization of our carryforwards and future tax deductions. Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation’s ability to utilize net operating losses if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by us at the time of the change that are recognized in the five-year period after the change. The Company has not conducted a formal ownership change analysis as required under Section 382; however, we intend to do so if we anticipate recognizing tax benefits associated with the net operating loss carryforwards.

As of December 31, 2024, the Company determined it is more likely than not that it will not realize our temporary deductible differences and net operating loss carryforwards, and as such, has provided a full valuation allowance on our net deferred tax asset.

During the years ended December 31, 2024 and 2023, the Company did not recognize any uncertain tax positions, interest or penalty expense related to income taxes. AgEagle files U.S. federal and state income tax returns, as required by law. The federal return generally has a three-year statute of limitations, and most states have a four-year statute of limitations; however, the taxing authorities can review the tax year in which the net operating loss was generated when the loss is utilized on a tax return. We currently do not have any open income tax audits. The Company is open to federal and state examination on the 2020 through 2022 income tax returns filed.

Note 15 – Income Taxes - Continued

For the years ended December 31, 2024 and 2023, a reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company’s effective rate is as follows:

As of December 31, 2024 and 2023, the temporary differences, tax credits and carryforwards that gave rise to the following deferred tax assets (liabilities):

Note 15 – Income Taxes- Continued

The Company’s provision is primarily driven by the full valuation allowance in 2024 and 2023.

The provision for income taxes consisted of the following for the years ended December 31, 2024 and 2023:

The Company’s loss before provision for incomes taxes consisted of the following amounts:

Note 16 –Segment Information

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly provided to the Chief Operating Decision Maker (CODM) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is the Company’s CODM. The CODM reviews financial information presented by operating segment in making operating decisions, allocating resources, and evaluating financial performance.

The Company conducts the business through the following three operating segments: Drones, Sensors and SaaS.

The accounting policies of the operating segments are the same as those described in Note 2. Non-allocated administrative and other expenses are reflected in Corporate. Corporate assets include cash, prepaid expenses, notes receivable, right of use asset and other assets.

As of December 31, 2024 and 2023 and for the years then ended, operating information about the Company’s reportable segments consisted of the following:

Goodwill and Assets

Note 16 – Segment Information- Continued

Net (Loss) Income

Other segment expenses are primarily comprised of software and IT related subscriptions, rent, insurance, listing fees to be public, and other general and administrative costs.

Revenues by Geographic Area

Note 17 –Subsequent Events

On February 7, 2025, the Company entered into a Funding Agreement with Alpha Capital Anstalt to provide quarterly financing to the Company for the next twelve months, with such amounts and timing of funding to be agreed to by the parties.

In consideration for Alpha’s commitment to additional funding, the Company has agreed to extend the period in which Alpha can exercise its Additional Investment Right by extending the termination date of December 31, 2025 to June 1, 2026 and grant Alpha certain registration rights related to the Series F Convertible Preferred it currently holds and will receive upon further exercises of its Additional Investment Right. The Company has agreed to use its best efforts to register 5,500,000 shares of common stock underlying the Series F Convertible Preferred stock.

On February 7, 2025, Alpha exercised its Additional Investment Right for the aggregate purchase of 1,000 shares of Series F Convertible Preferred convertible into 450,390 shares of Common Stock, in the aggregate, at a conversion price of $2.2203 and warrants to purchase up to 450,390 shares of Common Stock at an exercise price of $2.2203 per share for an aggregate purchase price of $1,000,000. The Warrants will be immediately exercisable upon issuance and have a three-year term.

On March 17, 2025, Alpha exercised its Additional Investment Right for the aggregate purchase of 500 shares of Series F Convertible Preferred convertible into 415,420 shares of Common Stock, in the aggregate, at a conversion price of $1.2036 and warrants to purchase up to 415,420 shares of Common Stock at an exercise price of $1.2036 per share for an aggregate purchase price of $500,000. The Warrants will be immediately exercisable upon issuance and have a three-year term.

On February 4, 2025, the Company entered into an asset purchase agreement for the sale of the Measure domain name and received cash proceeds of $250,000.

As of March 31, 2025, Alpha has converted 2,410 shares of Preferred Stock Series F into 2,190,909 shares of Common Stock, post reverse split. In addition, Alpha converted $770,000 worth of principle of the Promissory Note into 700,000 shares of Common Stock, at a conversion price of $1.10 post reverse split.