The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8 of the 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.

AgEagle™ Aerial Systems Inc. ("AgEagle" or the "Company"), through its wholly-owned subsidiaries, is actively engaged in designing and delivering best-in-class drones, sensors and software 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 industry leader offering best-in-class, autonomous UAV systems to a wide range of industry verticals, including energy/utilities, infrastructure, agriculture and government, among others.

The Company'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 AgEagle acquired three market-leading companies engaged in producing UAV 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 nearly 200 UAV 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.

AgEagle is led by a proven management team with years of drone industry experience. In view of AgEagle's participation in the Unmanned Aircraft Systems Beyond Visual Line of Sight Aviation Rulemaking Committee, and its participation in the U.S. Federal Aviation Administration's BEYOND program, AgEagle has played a hands-on role in helping to establish necessary rulemaking guidelines and regulations for the future of autonomous flight and the full integration of drones into the U.S. airspace.

The Company is headquartered in Wichita, Kansas, where it maintains its U.S. manufacturing operations. In addition, AgEagle has business operations in Austin, Texas; Lausanne, Switzerland; Raleigh, North Carolina; Seattle, Washington; and Washington, D.C.

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 UAV 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:

Key components of our growth strategy include the following:

AgEagle believes the following attributes and capabilities provide us with long-term competitive advantages:

Impact of the War in Ukraine and COVID-19 On Our Business Operations

Global economic challenges, including the impact of the war in Ukraine, the COVID-19 pandemic, rising inflation and supply-chain disruptions, adverse labor market conditions could cause economic uncertainty and volatility. During the three months ended June 30, 2022, the COVID-19 pandemic continued to have a significant negative impact on the UAV industry, our customers, and our business globally. The aforementioned risks and their respective impacts on the UAV industry and our operational and financial performance remains uncertain and outside of our control. Specifically, as a result 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 the Company or any of its 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. We expect the pandemic, inflation and supply chain disruptions and its effects to continue to have a significant negative impact on our business for the duration of the pandemic and during the subsequent economic recovery, which could be for an extended period.

For the three and six months ended June 30, 2022, our supply chain was adversely impacted by the pandemic, causing material delays in the delivery of critical supply orders associated with timely fulfilling our obligations to our large ecommerce client. As a consequence, significant inventory purchases were made in 2021 in order to secure the manufacturing of our products in an effort to prevent delays in 2022. This is an on-going situation that we continue to monitor closely.

Three Months and Six Months June 30, 2022 as Compared to Three and Six Months Ended June 30, 2021

For the three months ended June 30, 2022, revenues were $5,287,873 as compared to $1,937,364 for the three months ended June 30, 2021, an increase of $3,350,509, or 172.9%. The increase was attributable to the revenues derived from our ebee drone products acquired in the senseFly Acquisition. Offsetting these increases was a decline in revenues of $70,946 for our SaaS subscription services related to the HempOverview and Ground Control Platforms. The COVID-19 pandemic and its effects continue to have a negative impact on our business due to global supply chain, inflation and adverse labor market conditions, which could be for an extended period of time Although we understand that market conditions impacting supply chain are not predictable at this time, we do believe that our backlog in sales will be resolved by no later than the end of the third quarter 2022.

For the six months ended June 30, 2022, revenues were $9,129,851 as compared to $3,638,955 for the six months ended June 30, 2021, an increase of $5,490,896, or 150.9%. The increase was attributable to the revenues derived from our ebee drone products in the senseFly acquisition and $79,030 of increased sales of our SaaS subscription services related to the HempOverview and Ground Control platforms. Offsetting these increases was a decline in revenues of $363,298 related to our sensor sales, specifically the RedEdgeand Altum™ sensor products. The COVID-19 pandemic and its effects continue to have a negative impact on the business due to supply chain, inflation and adverse labor market conditions, which could be for an extended period of time. Although we understand that market conditions impacting our supply chain are not predictable at this time, we do believe that our backlog in sales will be resolved by no later than the end of the third quarter 2022.

For the three months ended June 30, 2022, cost of sales was $2,737,777 as compared to $959,229 for the three months ended June 30, 2021, an increase of $1,778,548, or 185.4%. The increase in our cost of sales was attributable to our senseFly entity, which was acquired in October 2021, and the effects of supply chain constraints, including shortages in electronic components and inflation caused by higher costs to acquire electronic components, increased labor expenses and freight-in costs.

For the six months ended June 30, 2022, cost of sales was $5,214,863 as compared to $1,658,097 for the six months ended June 30, 2021, an increase of $3,556,766, or 214.5%. The increase in our cost of sales the costs was attributable to our senseFly entity, which was acquired in October 2021, and the effects of supply chain constraints, including shortages in electronic components and inflation caused by higher costs to acquire electronic components, increased labor expenses and higher freight-in costs.

For the three months ended June 30, 2022, gross profit was $2,550,096 as compared to $978,135 for the three months ended June 30, 2021, an increase of $1,571,961, or 160.7%. For the three months ended June 30, 2022, gross profit margin was 48.2% as compared to 50.5% for the three months ended June 30, 2021. The decrease in gross profit margin was a result of our senseFly entity drone sales which has lower margins along with increase in our cost of goods sold for sensor sales.

For the six months ended June 30, 2022, gross profit was $3,914,988 as compared the $1,980,858 for the six months ended June 30, 2021, an increase of $1,934,130, or 97.6%. For the six months ended June 30, 2022, gross profit margin was 42.9% as compared to 54.4% for the six months ended June 30, 2021. The decrease in gross profit margin was a result of our senseFly entity drone sales which has lower margins along with an increase in our cost of goods sold for sensor sales.

For the three months ended June 30, 2022, operating expenses were $7,938,675 as compared to $5,798,620 for the three months ended June 30, 2021, an increase of $2,140,055, or 36.9%. Operating expenses comprise general and administrative, research and development, sales and marketing.

For the six months ended June 30, 2022, operating expenses were $16,785,507, as compared to $9,762,146 for the six months ended June 30, 2021, an increase of $7,023,361, or 71.9%. Operating expenses comprise general and administrative, professional fees, sales and marketing and research and development.

For the three months ended June 30, 2022, general and administrative expenses were $4,437,185 as compared to $4,331,787 for the three months ended June 30, 2021, an increase of $105,398, or 2.4%. The increase was primarily the result of the inclusion of the newly acquired senseFly businesses, along with continued increases in general and administrative costs from our two other 2021 business acquisitions. These costs primarily included lease expenses, payroll-related costs for new and existing employees, amortization of our acquired intangibles, stock-based compensation expenses, and costs incurred in the design and development of our internal use software. The increases were offset by a decrease in professional fees, related mainly to legal and consulting fees.

For the six months ended June 30, 2022, general and administrative expenses were $9,918,564 as compared to $7,635,114 for the six months ended June 30, 2021, an increase of $2,283,450, or 29.9%. The increase was primarily as a result of the inclusion of the newly acquired senseFly businesses, along with continued increases in general and administrative costs from our two other 2021 business acquisitions. These costs primarily included lease expenses, payroll-related costs for new and existing employees, amortization of our acquired intangibles, stock-based compensation expenses and costs incurred for the design and development of our internal use software. These increases were offset by a decrease in professional fees, related mainly to legal and consulting fees.

For the three months ended June 30, 2022, research and development expenses were $2,182,313 as compared to $907,000 for the three months ended June 30, 2021, an increase of $1,275,313, or 140.6%. The increase was primarily due to the addition of senseFly and Measure's research and development teams that provide development of our new airframe and software technologies.

For the six months ended June 30, 2022, research and development expenses were $4,367,237 as compared to $1,335,605 for the six months ended June 30, 2021, an increase of $3,031,632, or 227%. The increase was primarily due to the addition of senseFly and Measure's research and development teams that provide development of our new airframe and software technologies.

For the three months ended June 30, 2022, sales and marketing expenses were $1,319,177 as compared to $559,833 for the three months ended June 30, 2021, an increase of $759,344, or 135.6%. The increase was primarily due to the addition of the senseFly and Measure sales and marketing teams.

For the six months ended June 30, 2022, sales and marketing expenses were $2,499,706 as compared to $791,427 for the six months ended June 30, 2021, an increase of $1,708,279, or 215.8%. The increase was primarily due to the addition of the senseFly and Measure sales and marketing teams.

For the three months ended June 30, 2022, other expense, net was $213,157 as compared to other income, net of $142,313 for the three months ended June 30, 2021. The change was primarily attributable to the net foreign currency transaction losses incurred by senseFly during the three months ended June 30, 2022, offset by the forgiveness of the Company's Paycheck Protection Program Plan loan during the three months ended June 30, 2021.

For the six months ended June 30, 2022, other expense, net was $327,789 as compared to other income, net of $172,586 for the six months ended June 30, 2021. The change was primarily attributable to the net foreign currency transaction losses incurred by senseFly during the six months ended June 30, 2022, offset by the forgiveness of the Company's Paycheck Protection Program Plan loan during the six months ended June 30, 2021.

For the three months ended June 30, 2022, the Company incurred a net loss of $5,601,736 as compared to a net loss of $4,678,172 for the three months ended June 30, 2021, an increase of $923,564, or 19.7%. The increase in net loss was primarily attributable to a decrease in gross profit margins due to supply chain constraints and higher operating costs as a result of the inclusion of a full quarter's expenses of the 2021 Business Acquisitions, offset by the absence of transactional costs incurred for the 2021 Business Acquisitions.

For the six months ended June 30, 2022, the Company incurred a net loss of $13,198,308 as compared to a net loss of $7,608,702 for the six months ended June 30, 2021, an increase of $5,589,606, or 73.5%. The overall increase in net loss was primarily attributable to a decrease in gross profit margins due to supply chain constraints and higher operating costs as a result of the inclusion of the full six- month's expenses of the 2021 Business Acquisitions, offset by the absence of the transactional costs as a result of the 2021 Business Acquisitions. In addition, in order to achieve our long-term growth strategies, additional resources and investments will be required as we continue to address these shifts by developing new technologies, products and services that support prevailing growth opportunities.

Six Months Ended June 30, 2022 as Compared to the Six Months Ended June 30, 2021

As of June 30, 2022, cash on hand was $13,505,593 as compared to $14,590,566 as of December 31, 2021, a decrease of $1,084,973, or 7.4%.

For the six months ended June 30, 2022, cash used in operations was $11,628,089, an increase of $8,121,854, or 231.6%, as compared to cash used of $3,506,235 for the three months ended June 30, 2021. The increase in cash used in operating activities was principally driven by the operating expenses of our 2021 Business Acquisitions, which included higher inventory purchases and prepayments, and accounts payable, offset by deferred revenue resulting in customer backlog for prepayments on future sales.

For the six months ended June 30, 2022, cash used in investing activities was $4,004,092, a decrease of $20,557,665, or 83.7%, as compared to cash used of $24,561,757 for the six months ended June 30, 2021. The decrease in cash used in our investing activities resulted from the business acquisition of MicaSense in the prior year, offset by the increase in capitalized costs associated with the development of the HempOverview and Measure Ground Control platforms and the senseFly business acquisition.

For the six months ended June 30, 2022, cash provided by financing activities was $14,564,841, a decrease of $28,777,456, or 66.4%, as compared to cash provided of $43,342,297 for the six months ended June 30, 2021. The decrease in cash provided by our financing activities was due to less sales of our Common Stock through an at-the-market ("ATM") offering and exercise of warrants in the prior year.

As of June 30, 2022, we had working capital of $8,774,304. For the six months ended June 30, 2022, we incurred a loss from operations of $12,870,519, an increase of $5,089,231, or 65.4%, as compared to a loss from operations of $7,781,288 for the six months ended June 30, 2021. While there can be no guarantees, we believe the cash on hand, in connection with cash generated from revenues, will be sufficient to fund the next twelve months of operations. In addition, we intend to pursue other opportunities of raising capital with outside investors.

On June 26, 2022, the Board of Directors of the Company 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 Company issued to an existing investor 10,000 shares of Series F for an aggregate purchase price and gross proceeds of $10,000,000.

For the six months ended June 30, 2022, we raised $4,583,341 of net proceeds from our ATM offering with co-agents Stifel, Nicolaus & Company, Incorporated and Raymond James & Associates.

On June 30, 2022, 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.

During the three and six months ended June 30, 2022, inflation has had a negative impact on the unmanned aerial vehicle systems industry, our customers, and our business globally. Specifically, our ability to access components and parts needed in order to manufacture our 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 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. In addition, the eventual implications of higher government deficits and debt, tighter monetary policies and potentially higher, long-term interest rates may drive a higher cost of raising capital in the future.

Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

There were certain updates recently issued by the Financial Accounting Standards Board ("FASB"), most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.

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