Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

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

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

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

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

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

Key Growth Strategies

We intend to materially grow our business by leveraging our proprietary, best-in-class, full-stack drone solutions, industry influence and deep pool of talent with specialized expertise in robotics, automation, custom manufacturing and data science to achieve greater penetration of the global UAS industry - with near-term emphasis on capturing larger market share of the agriculture, energy/utilities, infrastructure and government/military verticals. We expect to accomplish this goal by first bringing three core values to life in our day-to-day operations and aligning them with our efforts to earn the trust and continued business of our customers and industry partners:

	●	Innovation - Committed to driving forward with positive change, our team is committed to innovate in technology, strategies, and cross-department initiatives.
	●	Passion - This fuels our obsession with excellence, our desire to try the difficult things and tackle big problems, and our commitment to meet our customers' needs - and then surpass them.
	●	Integrity - This is not optional or situational at AgEagle - it is the foundation for everything we do, even when no one is watching.
		Key components of our growth strategy include the following:
	●	Establish centers of excellence with respective expertise in UAS software, sensors and airframes. These centers of excellence cross pollinate ideas, industry insights and skill sets to yield intelligent autonomous solutions that fully leverage AgEagle's experienced team's specialized knowledge and know-how in robotics, automation, custom manufacturing and data science.
	●	Deliver new and innovative solutions. AgEagle's research and development efforts are critical building blocks of the Company, and we intend to continue investing in our own innovations, pioneering new and enhanced products and solutions that enable us to satisfy our customers - both in response to and in anticipation of their needs. AgEagle believes that by investing in research and development, the Company can be a leader in delivering innovative autonomous robotics systems and solutions that address market needs beyond our current target markets, enabling us to create new opportunities for growth.
	●	Foster our entrepreneurial culture and continue to attract, develop and retain highly skilled personnel. AgEagle's company culture encourages innovation and entrepreneurialism, which helps attract and retain highly skilled professionals. We believe this culture is key to nurture the design and development of the innovative, highly technical system solutions that give us our competitive advantage.
	●	Growth through acquisition. Through successful execution of our growth-through-acquisition strategies, we intend to acquire technologically advanced UAS companies and intellectual property that complement and strengthen our value proposition to the market. We believe that by investing in complementary acquisitions, we can accelerate our revenue growth and deliver a broader array of innovative autonomous flight systems and solutions that address specialized market needs.

Competitive Strengths

		AgEagle believes the following attributes and capabilities provide us with long-term competitive advantages:
	●	Proprietary technologies, in-house capabilities and industry experience - We believe our decade of experience in commercial UAS design and engineering; in-house manufacturing, assembly and testing capabilities; and advanced technology development skills et serve to differentiate AgEagle in the marketplace. In fact, approximately 70% of our Company's global workforce is comprised of engineers and data scientists with deep experience and expertise in robotics, automation, custom manufacturing, and data analytics. In addition, AgEagle is committed to meeting and exceeding quality and safety standards for manufacturing, assembly, design and engineering and testing of drones, drone subcomponents and related drone equipment in our U.S. and Swiss-based manufacturing operations, and we were recommended to receive the ISO 9001 international certification for our Quality Management System in June 2025.

	●	In December 2022, we unveiled our new eBee™ VISION, a small, fixed-wing UAS designed to provide real-time, enhanced situational awareness for critical intelligence, surveillance and reconnaissance missions; to produce and deliver eBee™ VISION fixed-wing drones and customized command and control software that proves compatible and is in full compliance with the DoD Robotic and Autonomous System-Air Interoperability Profile . In addition, three branches of European military forces have accepted delivery of eBee VISION drones in 2023. In support of its sales and pre-order efforts, AgEagle's team has been engaged in numerous live demonstrations and intensive training sessions with officials from government and military agencies across the world seeking to leverage the power of eBee VISION in their respective drone operations. In July 2023 alone, we completed a comprehensive training session with our first European military customers, who were confirmed as eBee VISION operators and qualified trainers of new users. These new customers confirmed with AgEagle's technical teams that all operational capabilities of the eBee VISION continue to meet and exceed performance benchmarks in scouting, surveillance, usability, fast deployment and flight time, among other use case criteria specified by the international military community. We have also been working in close collaboration with our network of valued added reselling partners in France, United Kingdom, Poland, Italy and Spain, among other countries, to conduct live demonstrations and technical exchanges with prospective new customers, with emphasis on showcasing use of eBee VISION UAS for public safety and first responder missions, border patrol and a wide range of commercial applications.
	●	In May 2023, we released the new RedEdge-P™ dual high resolution and RGB composite drone sensor, representing yet another AgEagle technological advancement in aerial imaging cameras, seamlessly integrating the power and performance of the RedEdge-P and the new RedEdge-P blue cameras in a single solution. The RedEdge-P dual doubles analytical capabilities with the benefit of a single camera workflow. Its coastal blue band - the first of its kind in the market - was specifically designed for vegetation analysis of water bodies; environmental monitoring; water management; habitat monitoring, protection and restoration; and vegetation species and weeds identification, including differentiating and counting plants, trees, invasive species and weeds.

	●	We offer market-tested drones, sensors and software solutions that have earned the longstanding trust and fidelity of customers worldwide - Through successful execution of our acquisition integration strategy in 2021, AgEagle is now delivering a unified line of industry trusted drones, sensors and software that have been vigorously tested and consistently proven across multiple industry verticals and use cases. For instance, our line of eBee fixed wing drones have flown more than one million flights over the past decade serving customers spanning surveying and mapping; engineering and construction; military/defense; mining, quarries and aggregates; agriculture humanitarian aid and environmental monitoring, to name just a few. Featured in over 100 research publications globally, advanced sensor innovations developed and commercialized by AgEagle have served to forge new industry standards for high performance, high resolution, thermal and multispectral imaging for commercial drone applications in agriculture, plant research, land management and forestry. In addition, we have championed the development of end-to-end software solutions which power autonomous flight and deliver actionable, contextual data and analytics for numerous Fortune 500 companies, government agencies and a wide range of businesses in agriculture, energy and utilities, construction and other industry sectors.
	●	AgEagle was awarded a Multiple Award Schedule ("MAS") Contract by the U.S. federal government's General Services Administration ("GSA") - In April 2023, the centralized procurement arm of the federal government, the GSA, awarded us with a five-year MAS contract. The GSA Schedule Contract is a highly coveted award in the government contracting space and is the result of a rigorous proposal process involving the demonstration of products and services in-demand by government agencies, and the negotiation of their prices, qualifications, terms and conditions. Contractors selling through the GSA Contract are carefully vetted and must have a proven track record in the industry. We believe that this will serve to advance our efforts to achieve deeper penetration of the government sector over the next five years.

	●	Our eBee TAC™ UAS has been approved by the Defense Innovation Unit (DIU) for procurement by the Department of Defense - We believe that the eBee TAC is ideally positioned to become an in-demand, mission critical tool for the U.S. military, government and civil agencies and our allies worldwide; and expect that this will prove to be a major growth catalyst for our Company and positively impact our financial performance in the years ahead. eBee TAC is available for purchase by U.S. government agencies and all branches of the military on GSA Schedule Contract #47QTCA18D003G, supplied by Hexagon US Federal and partner Tough Stump Technologies as a standalone solution or as part of the Aerial Reconnaissance Tactical Edge Mapping Imagery System. Tough Stump Technologies is actively engaged in training military ground forces based in the U.S. and in Central Europe on the use of eBee TAC for mid-range tactical mapping and reconnaissance missions.
	●	Our eBee™ X series of fixed wing UAS, including the eBee X, eBee Geo and eBee TAC, are the first and only drones on the market to comply with Category 3 of the sUAS Over People rules published by the Federal Aviation Administration. It is another important testament of our commitment to providing best-in-class solutions to our commercial customers, and we believe it will serve as a key driver in the growth of eBee utilization in the United States.
	●	Our eBee X series of drones are the world's first UAS in its class to receive design verification for BVLOS and OOP from European Union Aviation Safety Agency ("EASA"). The EASA design verification report ("DVR") demonstrates that the eBee X meets the highest possible quality and ground risk safety standards and, thanks to its lightweight design, effects of ground impact are reduced. As such, drone operators conducting advanced drone operations in 27 European Member States, Iceland, Liechtenstein, Norway, and Switzerland can obtain the HIGH or MEDIUM robustness levels of the M2 mitigation without additional verification from EASA.Regulatory constraints relating to limitations of BVLOS and OOP have continued to be a gating factor to widespread adoption of commercial drone technologies across a wide range of industry sectors worldwide. Being the first company to receive this DVR from EASA for M2 mitigation is a milestone for AgEagle and our industry in the European Union and will be key to fueling growth of our international customer base.

	●	In August 2022, we announced that the eBee X, eBee GEO and eBee AG were the first commercial drones to be designated with the C2 class identification label in accordance with EASA regulations. As of August 22, 2022, drone operators flying C2 labeled eBees are able to conduct missions in the "Open Category" with all the advantages that this entails. The C2 certification allows the eBee X series, with correct labelling, to fly at a horizontal distance of 30 meters from uninvolved people. By contrast, heavy drones like VTOLs or quadcopters must maintain a distance of 150 meters from people and any residential, commercial, industrial and recreational areas, limiting their operational capabilities to remote zones.
	●	In early October 2023, the eBee X series of drones were designated with the C6 class identification label in accordance with European Union regulations. As of January 1, 2024, drone operators of C6-labeled eBees are able to conduct BVLOS operations with airspace observers over a controlled ground area in a sparsely populated environment throughout Europe. Operators simply need to submit a required declaration with their applicable National Aviation Authority indicating whether they intend to fly missions in accordance with the European Standard Scenario- ("STS-") 01 or STS-02. The inclusion of the C6 marking alongside our C2-labeled eBee drones will significantly enhance the market advantages for our European customers. It grants access to areas and operational modes restricted to drones weighing over 4 kilograms, all without the requirement for formal permissions or regulatory waivers.

	●	Our global reseller network currently has more than 200 drone solutions providers in 75+ countries - By leveraging our relationships with the specialty retailers that comprise our global reseller network, AgEagle benefits from enhanced brand-building, lower customer acquisition costs and increased reach, revenues and geographic and vertical market penetration. With the integration of our 2021 strategic acquisitions, we can now leverage our collective reseller network to accelerate our revenue growth by educating and encouraging our partners to market AgEagle's full suite of airframes, sensors and software as bundled solutions in lieu of marketing only previously siloed products or product lines to end users.
	●	In late 2022, we partnered with government contractor Darley to expand the market reach of AgEagle's high performance fixed wing drones and sensors to the U.S. first responder and tactical defense markets. Distinguished as one of the nation's longest standing government contracting organizations, Darley is expected to become a key contributor to AgEagle's success in delivering best-in-class UAS solutions to a wide range of state and federal agencies. Providing our best-in-class autonomous flight solutions for public safety applications through trusted resellers like Darley represents an entirely new market opportunity for AgEagle and one we intend to vigorously pursue in the coming year.

Impact of the Risks and Uncertainties On Our Business Operations

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

Critical Accounting Estimates

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

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

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

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

Revenues

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

For the nine months ended September 30, 2025, revenues were $9,817,180 as compared to $10,571,969 for the nine months ended September 30, 2024, a decrease of $754,789, or 7.1%. The decrease of $754,789 was offset by an increase of $1,384,448 in revenues from our drone products offset by a decrease of $1,867,916 revenues due to declining sensor sales related to expected seasonality and reduced investment in sales and marketing in this operating segment in 2025, additionally revenues decreased in 2025 due to the Company ceasing operations for the SaaS software subscriptions for this segment resulting in a decrease of $271,321.

Cost of Sales and Gross Profit

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

For the nine months ended September 30, 2025, cost of sales was $4,584,507 compared to $5,428,705 the nine months ended September 30, 2024, a decrease of $844,198 or 15.6%. For the nine months ended September 30, 2025, gross profit was $5,232,673 as compared to $5,143,264 for the nine months ended September 30, 2024, an increase of $89,409, or 1.7%. The primary factors contributing to the decrease in our cost of sales and the increase in gross profit margin were due to the total mix of our product sales during the current period which had higher margin drone sales than the previous period.

General and Administrative Expenses

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

For the nine months ended September 30, 2025, general and administrative expenses were $6,736,799 as compared to $6,931,496 for the nine months ended September 30, 2024, a decrease of $194,697, or 2.8%. The decrease was primarily related to depreciation expense and less intangible amortization during 2025 due to impairment charges recorded during the year ended December 31, 2024

Research and Development

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

For the nine months ended September 30, 2025, research and development expenses were $2,559,755 as compared to $3,181,638 for the nine months ended September 30, 2024, a decrease of $621,883, or 19.5%. The decrease was primarily due to the integration of research and development teams for our new airframe, sensor, and software technologies, resulting in a reduction in our consultants and internal headcounts.

Sales and Marketing

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

For the nine months ended September 30, 2025, sales and marketing expenses were $2,161,066 as compared to $1,825,645 for the nine months ended September 30, 2024, an increase of $335,421, or 18.4%. The increase was primarily due to the increase in headcount in this department and increased travel of our sales and marketing team associated with anticipated growing demand in the defense space, as we anticipate, consistent with plans announced by the U.S. government accelerated purchases of Group 1 drones.

Other Income (Expense), net

For the three months ended September 30, 2025, other income, was $539,613 as compared to other expenses, of $1,598,594 for the three months ended September 30, 2024, a decrease of other expenses of $2,138,207. The decrease was primarily attributable to a decrease in interest expense and debt discount due to a reduction in our principal balance on our outstanding convertible note of $1,560,736. Lastly, $744,357 for an employee retention tax credit refund we received.

For the nine months ended September 30, 2025, other income, net was $9,389,447 as compared to other expenses, net of $5,909,534 for the nine months ended September 30, 2024 of a decrease in other expenses of $ 15,298,981. The decrease is primarily attributable to a gain on change in fair value of our outstanding warrant liabilities of $8,511,000 that were issued in October 2024 in an offering, decrease in interest expense due to reduction in our principal balance on our outstanding convertible note and interest expense for the nine months ended September 30, 2024 included $3.7 million due a substantial modification to the conversion price on a convertible debt note. Lastly, other income increased due to the sale of our Measure domain name for $250,000 and $1,197,734 for an employee retention tax credit refund received for the nine months ended September 30, 2025 compared to other expenses of $5,909,534 for the nine months ended September 30, 2024.

Net Income (Loss)

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

For the nine months ended September 30, 2025, we generated net income of $3,164,500 as compared to a net loss of $12,705,049 for the nine months ended September 30, 2024, an increase in net income of $15,869,549 or 124.9%. The increase in our net income is primarily attributable to the gain on change in fair value of our outstanding warrant liabilities and the above-mentioned changes in our cost of sales, general and administrative, research and development, and sales and marketing.

Cash Flows

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

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

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

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

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

Liquidity, Capital Resources and Going Concern

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

Off-Balance Sheet Arrangements

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