AgEagle Aerial Systems (UAVS) Risk Factors

The development of both UAVsoftware and hardware is a costly, complex and time-consuming process, and investments in product development often involve a long wait until a return, if any, can be achieved on such investment. We might face difficulties or delays in the development process that will result in our inability to timely offer products that satisfy the market, which might allow competing products to emerge during the development and certification process. We anticipate making significant investments in research and development relating to our products and technology services, but such investments are inherently speculative and require substantialcapitalexpenditures.Any unforeseen technical obstacles and challenges that we encounter in the research and development process could result in delays in or the abandonment of product commercialization, may substantially increase development costs,and may negatively affect our results of operations.

Our intellectual property and proprietary rights are important to our ability to remain competitive and successful in the development of our products and to our future growth potential. Patent protection can be limited and not all intellectual property can be patented. We expect to rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality and non-disclosure agreements and procedures, non-competition agreements and other contractual provisions to protect our intellectual property, other proprietary rights and our brand. We currently only have a limited amount of granted patent or copyright protections, we must rely on trade secrets and nondisclosure agreements, which provide limited protections.As a result, our intellectual property rights may be challenged, invalidated orcircumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees orcompetitors. Furthermore, our competitors may independently develop technologies and products that are substantially equivalent or superior to our technologies and products, which could result in decreased revenues. Litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and substantial diversion of management’s attention. If we do not adequately protect our intellectual property, ourcompetitors could use it to enhance their products. Our inability to adequately protect our intellectual property rights could adversely affect our business and financialcondition,and the value of our brand and other intangible assets.

We believe that our success depends in part on the continued contributions of our senior management and key employees. We rely heavily on our executive officers, senior management and key employees to generate business and execute programs successfully. In addition, the relationships and reputation that members of our management team and key employees have established and maintain with certain key customers continue to our ability to maintain good customer relations and to identify new business opportunities. The loss of any of our executive officers, members of our senior management teamor key employees could significantly delay or prevent the achievement of our business objectives and could materially harm our business and customer relationships and impair our ability to identify and secure new contracts and otherwise manage our business.

We often rely upon othercompanies to performwork we are obligated to performfor ourcustomers.As we secure more work undercertain of ourcontracts, we expect to require an increasing level of support fromsubcontractors that provide complementary or supplementary services to our offers. We are responsible for the work performed by our subcontractors,even though in some cases we have limited involvement in that work. If one or more of our subcontractors fails to satisfactorily performthe agreed-upon services on a timely basis or violates contracting policies, laws or regulations, our ability to perform our obligations as a prime contractor or meet our customers’ requirements may be compromised. In extreme cases, performance or other deficiencies on the part of oursubcontractors could result in a customer terminating ourcontract for default. A termination for default could expose us to liability, including liability for the costs of re-procurement,could damage our reputation and could hurt ourability to compete for future contracts.

As a public reporting company, we incur significant legal, accounting and other expenses not otherwise incurred by a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC, have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financialcontrols and corporate governance practices. Our management and other personnelcontinue to devote a substantialamount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time consuming and costly. For example, we expect that these rules and regulations willcontinue to make it more difficult and more expensive for us to obtain directorand officer liability insurance.

The regulation of small UAS for commercial use in the United States is undergoing substantialchange and the ultimate treatment is uncertain. On February 14, 2012, the FAA Modernization and Reform Act of 2012 was enacted, establishing various deadlines for the FAA to allow expanded use of small UAS for both public and commercial applications. On June 21, 2016, the FAA released its final rules regarding the routine use ofcertain small UAS (under 55 pounds) in the U.S. NationalAirspace Systempursuant to the act (the "Part 107 Rules”). The Part 107 Rules, which became effective in August 2016, provided safety regulations for small UAS conducting non-recreational operations and contain various limitations and restrictions for such operations, including a requirement that operators keep UAS within visual-line-of-sight and prohibiting flights over unprotected people on the ground who are not directly participating in the operation of the UAS. On December 28, 2020, the FAA announced final rules requiring remote identification of drones and allowing operators of small drones to fly over people and at night under certain conditions. We cannot assure you that any final rules enacted in furtherance of the FAA’s announced proposals will result in the expanded use of our drones and drone solutions by commercial and industrial entities. In addition, there exists public concern regarding the privacy implications of U.S. commercial use of small UAS. This concern has included calls to develop explicit written policies and procedures establishing usage limitations. We cannot assure you that the response fromregulatory agencies,customers and privacy advocates to these concerns will not delay or restrict the adoption ofsmallUAS by the commercial use markets. On March 10, 2022, the FAA’s Unmanned Aircraft Systems Beyond Visual Line of Sight Aviation Rulemaking Committee ("ARC”) issued its final report to the FAA. In terms of key recommendations, theARCrecommends that the FAA set an acceptable level of risk (ALR) for UAS that is consistent across all types of operations being performed. The ARC envisions that this approach will allow the FAA to adopt a common and consistent set of regulations and guidance, giving operators the flexibility to meet the ALR through qualitative or quantitative methods, or a hybrid approach. Next, the ARC recommends a series of modifications to the right of way rules in LowAltitude Shielded Areas (within 100’ ofa structure orcritical infrastructure as defined in 42U.S.C. § 5195c)2 and in LowAltitude Non-Shielded Areas (below400’) to accommodate uncrewed aircraft ("UA”) operations. Specifically, the ARCrecommends severalamendments to Right of Way rules to: ? allowautomatic means forsee-and-avoid responsibility; ? give UA right of way in Shielded Areas; ? give UA right of way overcrewed aircraft that are not equipped with ADS-Bor TABS in Non-Shielded LowAltitude Areas; and ? give crewed aircraft that are equipped with ADS-Bor TABS (and broadcasting their position) right of way in Non-Shielded LowAltitude Areas. The ARC also recommends an approach to operator qualification that would extend Part 107, Remote Pilot Certificate with Small UAS Rating, to cover topics associated with Extended Visual Line of Sight (EVLOS) and shielded UAS operations. The recommendation creates a new Remote Pilot certificate rating to cover BVLOS operations beyond the scope of the extended Part 107 rating. The examination for both ratings would consist ofa knowledge test on relevant areas, while practical training and qualifications would be tied to new Remote Air Carrier and Remote Operating certificates, which would be required for most commercial 1-to-many operations. The qualifications would be based on specific UA systems, Use Cases,and operational restrictions. In addition, the ARC recommends that the FAA establish a new BVLOS Rule which includes a process for qualification of UA and UAS, applicable to aircraft up to 800,000 ft-lb of kinetic energy (in accordance with the Operation RiskMatrix). Finally, the ARC recommends that the FAA adopt a non-mandatory regulatory scheme for third party services to be used in support of UAS BVLOS operations. In addition to its recommendations, the ARCidentified certain issues relevant to UAS BVLOS operations that are beyond this ARC’s scope, but which are identified in this report as considerations for futureARCs to address. Similarly, theARCalso identified several issues that are beyond the FAA’s scope ofauthority. However, these recommendations are in the interest of providing a full framework ofactions and policies to promote safe and widespread adoption of UAS BVLOS activities.

We have developed and sold products and services in circumstances where insurance or indemnification may not be available, for example, in connection with the collection and analysis of various types of information. In addition, our products and services raise questions with respect to issues ofcivil liberties, intellectual property, trespass, conversion and similarconcepts, which may create legal issues. Indemnification to cover potentialclaims or liabilities resulting fromthe failure ofany technologies that we develop or deploy may be available in certain circumstances but not in others. Currently, the unmanned aerial systems industry lacks a formative insurance market. We may not be able to maintain insurance to protect against all operational risks and uncertainties that ourcustomers confront. Substantialclaims resulting froman accident, product failure, or personal injury or property liability arising fromour products and services in excess of any indemnity or insurance coverage (or for which indemnity or insurance coverage is not available or is not obtained) could harm our financial condition, cash flows and operating results. Any accident, even if fully covered or insured, could negatively affect our reputation among ourcustomers and the public,and make it more difficult for us to compete effectively.

Expectations regarding future sales and expenses are largely fixed in the short term. We maintain raw materials and finished goods at a volume we feel is necessary for anticipated distribution and sales. Therefore, we may not be able to reduce costs in a timely manner to compensate for any unexpected shortfalls between forecasted and actual sales.

Natural disasters, such as hurricanes, tornadoes, floods, earthquakes and other adverse weather and climate conditions; unforeseen public health crises, such as pandemics and epidemics; politicalcrises, such as terrorist attacks, war, labor unrest,and other political instability; or othercatastrophic events, such as disasters occurring at our manufacturing facilities, could disrupt our operations or the operations of one or more of our vendors. In particular, these types of events could impact our product supply chain from or to the impacted region and could impact our ability to operate. In addition, these types of events could negatively impact consumer spending in the impacted regions. Disasters occurring at our manufacturing facilities could impact our reputation and our customers’ perception of our brands. To the extent any of these events occur, our operations and financial results could be adversely affected. For instance, Russia’s recent military interventions in Ukraine have led to, and may lead to, additional sanctions being levied by the United States, European Union and othercountries against Russia. Russia’s military incursion and the resulting sanctions could adversely affect globalenergy and financialmarkets.Although our business does not have any direct exposure to Russia or the adjoining geographic regions, the extent and duration of the military action, sanctions,and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions caused by Russian military action or resulting sanctions may magnify the impact of other risks described in this section. We cannot predict the progress or outcome of the situation in Ukraine, as the conflict and governmental reactions are rapidly developing and beyond our control. Prolonged unrest, intensified military activities, or more extensive sanctions impacting the region could have a material adverse effect on the global economy, and such effect could in turn have a materialadverse effect on the operations, results of operations, financialcondition, liquidity and business outlook of our business.