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Promissory Note and Convertible Note

12 Months Ended

Dec. 31, 2024

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 ASC 470-20, 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:

	(i)	defer payment of the Monthly Amortization Payments for June 2023, July 2023 and August 2023 in the aggregate amount of $525,000 (the “Deferred Payments”), and the September Monthly Amortization Payment, in the amount of $175,000, until September 15, 2023. The Company was not able to make the September 15, 2023 payment; and

	(ii)	increase the principal amount of the Note by $595,000.

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

	(i)	the Deferred Payments were extended from September 15, 2023 to December 15, 2023; As of December 15, 2023, the Company was unable to meet its payment obligation as prescribed in the Second Amendment.

	(ii)	the Amortization Payments (defined in the Note) scheduled for September 15, 2023, October 1, 2023, and November 1, 2023, were deferred and made part of the Amortization Payments commencing in January 2024; and

	(iii)	50% of any net proceeds above $2,000,000 from any equity financing between the date of the Second Amendment and December 15, 2023, were to be used to prepay the Note. The Second Amendment also partially waived the Event of Default in Section 3 (a)(vii) of the Note as a result of the resignation of a majority of the officers listed therein.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023

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.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023

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%.

AGEAGLE AERIAL SYSTEMS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023