UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-SA

☐     SEMIANNUAL REPORT PURSUANT TO REGULATION A

or

☒     SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A

For the fiscal semiannual period ended:

June 30, 2020

British Columbia, Canada

(State or other jurisdiction of incorporation or organization)

N/A

(I.R.S. Employer Identification Number)

2108 St. George Avenue

Saskatoon, SK, S7M 0K7

(Full mailing address of principal executive offices)

1-306-955-9907

(Issuer’s telephone number, including area code)

Item 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Special Report on Form 1-SA (this “Special Report”) contains forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Such forward-looking statements include statements regarding, among others, (a) our growth strategies, (b) our future financing plans, and (c) our anticipated needs for working capital. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “approximate,” “estimate,” “believe,” “intend,” “plan,” “budget,” “could,” “forecast,” “might,” “predict,” “shall” or “project,” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found in this Special Report.

The financial statements included herein should be read in conjunction with the unaudited consolidated financial statements and related notes for the three and six months ended June 30, 2020 and the annual consolidated financial statements and related notes for the year ended December 31, 2019. The Company’s audited consolidated financial statements have been prepared on the "going concern" basis, which presumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.

Forward-looking statements are based on our current expectations and assumptions regarding our business, potential target businesses, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements as a result of various factors, including, without limitation, changes in local, regional, national or global political, economic, business, competitive, market (supply and demand) and regulatory conditions.

We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance. All forward-looking statements speak only as of the date of this Special Report. We undertake no obligation to update any forward-looking statements or other information contained herein.

The consolidated financial statements do not reflect the adjustments, if any, or changes in presentation that may be necessary should the Company not be able to continue on a going concern basis.

All currency amounts in the accompanying financial statements and this management discussion and analysis are in Canadian dollars unless otherwise noted.

In this document, we describe certain income and expense items that are unusual or non-recurring. There are terms not defined by International Financial Reporting Standards (IFRS). Our usage of these terms may vary from the usage adopted by other companies. Specifically, Gross profit, Gross margin and Cash flow from operations are undefined terms by IFRS. We provide this detail so that readers have a better understanding of the significant events and transactions that have had an impact on our results. In addition, reference is made to “gross margin” and “working capital”, which are non-IFRS measures. Management believes that gross margin, defined as revenue less operating expenses, is a useful supplemental measure of operations. Management believes that working capital, defined as current assets less current liabilities, is an indicator of the Corporation’s liquidity and its ability to meet its current obligations. Readers are cautioned that these non-IFRS measures may not be comparable to similar measures used by other companies. Readers are also cautioned not to view these non-IFRS financial measures as an alternative to financial measures calculated in accordance with International Financial Reporting Standards (“IFRS”).

Overview

Draganfly Inc. was incorporated under the laws of British Columbia, Canada on June 1, 2018.Draganfly, Inc., including its wholly-owned subsidiaries, Draganfly Innovations, Draganfly Innovations USA, and Dronelogics. (referred to together as the “Company” or “Draganfly”, unless context indicates otherwise) creates quality, cutting-edge unmanned vehicle systems and software that revolutionize the way people do business. Draganfly has its head office at 2108 St. George Avenue, Saskatoon, SK, S7M 0K7 and its registered office is located at 2300 – 550 Burrard Street, Vancouver, BC, V6C 2B5.

Recognized as being at the forefront of technology for two decades, Draganfly is an award-winning, industry-leading manufacturer, contract engineering, and product development company within the commercial UAV (unmanned aerial vehicles) space, serving the public safety, agriculture, industrial inspections, and mapping and surveying markets. Draganfly is a company driven by passion, ingenuity, and the need to provide efficient solutions and first-class services to its customers around the world with the goal of saving time, money, and lives.

Founded in 1998, Draganfly is recognized as the first commercial multi-rotor manufacturer and has a legacy for its innovation and superior customer service. The company has sold products and services to over 50 countries.

Draganfly can provide its customers with an entire suite of products and services that include: quad-copters, fixed-wing aircrafts, ground based robots, hand held controllers, flight training, and software used for tracking, live streaming, and data collection. The integrated UAV system is equipped for automated take-offs and landings with altitude and return to home functions as well as in-house created survey software. Draganfly’s standard features combined with custom fit camera payloads ranging from multi-spectral, hyper-spectral, LIDAR, thermal, and infrared allows Draganfly to offer a truly unique solution to clients. Draganfly has also partnered with companies such as Waterloo based, Dejero, who provide a live streaming solution that the Company can offer to its customers and share in monthly usage fees.

With 18 fundamental UAV patents in the portfolio, Draganfly will continue to expand and grow their intellectual property docket.

Historically, the main business of the Company was to operate as a manufacturing company offering commercial UAVs directly to its customer base across various industry verticals. The Company has evolved to offer engineering procurement for certain customers in a vertical that is not currently served, such as military applications. The rationale is three-fold: engage in long term contracts that tend to be recurring in nature, gain exposure to an industry that the Company otherwise did not have access to, and leverage our innovation learnings into other products that can be sold in other industries.

Draganfly works with its customers to customize a product or platform from idea research and development (R&D) to completion and testing. A work plan is created with timelines and budget which includes materials, travel, testing, and engineering time. This plan is signed off on by the customer before work begins. To date, the majority of this work is considered proprietary and secret in nature.

With its recent acquisition of Dronelogics, the Company has further broadened its scope to provide non-OEM products along with services that it did not typically offer before.

Management determined in mid-2018 the best course of action to secure additional capital, grow its brand and expand its reach was to secure a public listing on a reputable exchange. On January 31, 2019, the Company and Draganfly Innovations, Inc (“PrivCo”) entered into a Business Combination Agreement (the “BCA”) providing for a three-cornered amalgamation (the “Amalgamation”) among the Company, PrivCo, and a wholly-owned subsidiary of the Company (the “Subco”). As of August 15, 2019, the Amalgamation closed and the Company acquired all of the issued and outstanding common shares of the PrivCo (the “PrivCo Shares”). It was a condition of closing that the Company complete a private placement of 10,000,000 units (a “Unit”) at a price of $0.50 per Unit, with each Unit consisting of one common share, with no par value (each, a “Common Share”) and one Common Share purchase warrant (a “Warrant”). Each Warrant will be exercisable into one Common Share of the resulting issuer at a price of $0.50 for 12 months. The Company completed a private placement of 14,051,499 units raising $7,025,749.50. It is a post-closing covenant of the BCA that the resulting issuer from the Amalgamation obtains a listing for its Common Shares (the “Listing”) on the Canadian Securities Exchange (the “CSE”). The Company has changed its name from Drone Acquisition Corp. to Draganfly Inc. and is the parent company of the wholly-owned subsidiary, Draganfly Innovations Inc., which is the amalgamated company with Subco.

Under the Amalgamation, PrivCo Shares were exchanged for ordinary shares of the Company (“Company Shares”) on the basis of 1.794 Company Shares for each PrivCo Share held resulting in 42,638,356 PrivCo Shares to be issued. Upon completion of the Amalgamation, holders of PrivCo warrants (“PrivCo Warrants”) will be entitled to receive Company Shares in lieu of shares otherwise issuable prior to the effective date of the Amalgamation (the “Effective Date”), adjusted in accordance with the terms of the various agreements and certificates representing the said warrants.

Following the Amalgamation and pursuant to completion of certain conditions precedent, including receipt of all necessary director, shareholder, regulatory and Canadian Stock Exchange (CSE) approvals, the Company was listed on the CSE on November 5, 2019 and the OTCQB Venture Market of the OTC Markets (“OTCQB”) under the symbol “DFLYF” on January 9, 2020.The Company incurred significant listing expenses to complete the process but is well positioned to execute on its business plan.

Additional information relating to the Company may be found at the Company’s website, www.draganfly.com.

Results of Operations For the Three and Six Months Ended June 30, 2020.

2020 Q2 Total Revenues of $926,540 (Canadian dollars) with contract engineering revenue of $192,100 (Canadian dollars).

2019 results showed the Company’s business is now deep rooted in its engineering services. The company’s move to engineering services work was to offset a reduction in manufactured goods due to industry pricing shifts created by Chinese competition, making services an important business. Although, the Company’s products are still well regarded in the industry, the commercial UAV space as a whole has been impacted by lower priced consumer drones that can now offer similar functionality. Through its recent acquisition, some of these lower priced drones are now being sold at the Company. The Company continues to recognize its opportunity of engineering procurement for those customers that either choose not to buy Chinese UAVs or are restricted from doing so due to information sensitivity concerns. Some of the Company’s US customers have been impacted by the COVID-19 pandemic which has materially slowed the Company’s engineering services practice during the quarter. The second quarter of 2020 revenues increased by $636,805 from $289,735 in the second quarter of 2019 to $926,540. Revenue from the sale of goods of $734,440 made up the bulk of the revenues in the second quarter of 2020. Provision of services revenues of $192,100 made up the balance of the revenues.

Gross Margins were down 43.9% in 2020 Q2 compared to 2019 Q2.

The acquisition of Dronelogics that occurred this quarter, produced high product sales, which resulted in higher cost of sales and lower gross margins. In the second quarter of 2020, the Company’s total gross margin was 46.6% vs 83.0% in the same period in 2019, as engineering services which tend to have higher gross margins than hardware sales given lower material costs made up the majority of second quarter 2019.

Strong product sales in the quarter.

Although the Company has an impressive history and deep engineering talent allowing it to outsource in-house capabilities to customers, this quarter’s sales were driven by non-OEM products.

Risks related to operations.

The Company’s UAVs are sold in rapidly evolving markets. The commercial UAV market is in early stages of customer adoption. Accordingly, the Company’s business and future prospects may be difficult to evaluate. The Company cannot accurately predict the extent to which demand for its products and services will increase, if at all. The challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets could impact the Company’s ability to do the following:

Outlook and Guidance

This Outlook and Guidance contains forward-looking statements that the Company does not intend, and does not assume any obligation, to update, except as required by law. The forward-looking information and statements may include:

The Company believes that being listed on the CSE and OTCQB will open up further opportunities to access capital as well as allow it to use its Common Shares as a currency for potential acquisitions. Operationally, having access to more capital will help the Company expand and diversify its engineering services business. Doing this requires more human resources both from a sales and engineering perspective. Further, the Company has a number of innovative ideas for new products that it would like to develop and increase its current product offering to various niche industries that aren’t being served by the dominant player in the UAV space. Finally, the Company has considered offering various other non‑engineering services and it may make more sense to buy an existing industry player than to build out this offering. This isn’t something the Company has to do but it will be opportunistic to learn about potential opportunities in the existing fiscal year and the near future.

Total revenue for the three months ended June 30, 2020 increased by $636,805 or 219.8% as compared to the same period in 2019. The increase in revenue is largely due to the acquisition of Dronelogics, which has added $685,663 of revenue, largely in product sales, since its acquisition, partially offset by a decrease in engineering services due to the downturn caused by COVID-19.

Total revenue for the six months ended June 30, 2020 increased by $985,633 or 225.0% as compared to the same period in 2019. The increase in revenue is largely due to the acquisition of Dronelogics, which has added $685,663 of revenue, largely in product sales, since its acquisition, and includes higher engineering services while the same period last year represented a transition/completion of an existing engineering service contract.

The Company has already started retooling and redesigning its next generation product line to address the ongoing environment as a way to maintain its existing customer base and capture new market share. Engineering service work consists of the design and customization of various UAV type products for the Company’s clients. Further, this service work tends to have higher gross margins than straight product sales. The Company has also introduced customization work as part of their product sales offering.

Gross profit is the difference between the revenue received and the direct cost of that revenue. Gross margin is gross profit divided by revenue and is often presented as a percent.

For the three months ended June 30, 2020, the Company’s Gross Profit increased by $190,759 or 79.3%. As a percentage of sales, gross margin decreased from 83.0% in 2019 to 46.6% in 2020. This is due to the increase in product sales, which has a lower gross margin compared to engineering services.

For the six months ended June 30, 2020 the Company’s Gross Profit increased by $536,010 or 161.2%. As a percentage of sales, gross margin decreased from 75.9% in 2019 to 61.0% in 2020. This is due to the increase in product sales, which has a lower gross margin compared to engineering services.

For the three months ended June 30, 2020, Selling, General, and Administrative expenses in 2020 increased by 388.6%, from $483,013 in 2019 to $2,360,163 in 2020. For the six months ended June 30, 2020, Selling, General, and Administrative expenses in 2020 increased by 385.8, from $823,535 in 2019 to $4,002,431 in 2020. The largest contributor to the increase is marketing and investor relations costs in the office and miscellaneous as well as share-based payments. Some of the other SG&A expenses such as professional fees increased due to increased accounting and legal work in relation to the Dronelogics acquisition.

Research and Development Expenses

Our research and development expenses were $30,938 and $9,827 for the six months ended June 30, 2020 and 2019. Research and development expenses to date consist primarily of manufacturing and study related costs. The Company expects that its operating expenses will increase as it grows its business, including expending substantial resources for research and development and marketing.

For the three months ended June 30, 2020, the Company recorded a comprehensive loss of $982,232 compared to $289,787 in 2019. For the six months ended June 30, 2020, the Company recorded a comprehensive loss of $2,072,526 compared to $629,601 in 2019. The increased loss was due to the increased marketing and investor relations costs and share-based payments partially offset by increased revenues.

Authorized share capital

Unlimited number of Common Shares, without par value.

Issued share capital

During the six months ended June 30, 2020,

During the six months ended June 30, 2019, no Common Shares were issued.

Liquidity and Capital Resources

All currency amounts stated below are in Canadian dollars.

The Company’s liquidity risk is on its loans, accounts payable and accrued liabilities, as it may encounter difficulty discharging its obligations. The Company attempts to mitigate this risk by managing its debt holders as well as ensuring there is capital coming into the Company for its operations. As at June 30, 2020, the Company has working capital of $1,705,798 and $2,037,906 as at December 31, 2019.

The Company considers the items included in capital to include shareholders’ equity. The Company manages its capital structure and makes adjustments to it in light of changes in economic and business conditions, financing environment, and the risk characteristics of the underlying assets. Aside from the regular business operations of managing its liabilities, the Company does not have any contracted or committed capital expenditures as of the date of these financial statements. The Company utilizes its credit card facilities from time to time to make various purchases for their operations. The Company will need to raise additional capital during the next twelve months and beyond to support current operations and planned development. As part of the Company’s capital raise planning, the Company has filed a Regulation A, Tier 2, Offering Statement on Form 1-A with the Securities and Exchange Commission (SEC) which is exempt from registration pursuant to Section 3(b)(2) under the Securities Act of 1933, as amended. The Company’s Regulation A, Tier 2 offering was qualified by the SEC on September 25, 2020.

Management intends to finance operating costs over the next twelve months with cash on hand and with the issuance of securities such as the private placement of Common Shares and convertible debentures. Further, in order to maintain or adjust its capital structure, the Company may issue new shares, new debt, or scale back the size and nature of its operations. The Company is not subject to externally imposed capital requirements. As at June 30, 2020, shareholders’ equity was $3,869,607 and at December 31, 2019, shareholder’s equity was $2,191,353.

While our management plans to generate increased revenues and to continue financing our Company through the issuances of additional equity securities or debt instruments, there can be no assurance that enough revenue or financing will occur to meet our cash needs for the next 12 months. The ability to achieve our projected future operating results is based on several assumptions which involve significant judgments and estimates, which cannot be assured. If we are unable to achieve our projected operating results, our liquidity could be adversely impacted, and we may need to seek additional sources of financing. Our operating results could adversely affect our ability to raise additional capital to fund our operations and there is no assurance that sufficient debt or equity financing will be available, on acceptable terms, or in a timely basis.

Going Concern

Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is contingent upon its ability to raise additional capital as required. During the period from February 24, 1998 (inception) through June 30, 2020, the Company incurred net losses of C$ 30,176,024 of which a C$7,804,859 non-cash listing expense was incurred as part of the amalgamation. Initially, we intend to finance our operations through equity and debt financings.

Capital Expenditures

We do not have any contractual obligations for ongoing capital expenditures at this time.

Off-Balance Sheet Arrangements

The Company has no material undisclosed off-balance sheet arrangements that have or are reasonably likely to have, a current or future effect on our results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources.

Contractual Obligations, Commitments and Contingencies

As of June 30, 2020, and as of the date of this MD&A, and in the normal course of business, the following is a summary of the Company’s material obligations to make future payments, representing contracts, and other commitments that are known and committed.

On December 1, 2019, the Company entered into an amendment for the lease agreement, where the lease was amended with a change in annual payments. As a result of IFRS 16, the right of use asset and lease liability were setup and recorded as follows:

All currency amounts stated below are in Canadian dollars.

Related Party Transactions

Key management personnel include those persons having authority and responsibility for planning, directing and controlling the activities of the Company as a whole. The Company has determined that key management personnel consist of members of the Company's Board of Directors and corporate officers.

Trade payables and accrued liabilities:

On Aug 1, 2019, the Company entered in a business services agreement (the “Agreement”) with Business Instincts Group (“BIG”), a company controlled by Cameron Chell, CEO and director, to provide: corporate development and governance, strategic facilitation and management, general business services, office space, corporate business development video content, website redesign and management, and online visibility management. The costs of all charges are based on the fees set in the Agreement and are settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the six months ended June 30, 2020, the company incurred fees of $113,000 compared to $nil in 2019. As at June 30, 2020, the Company was indebted to this company in the amount of $nil (December 31, 2019 - $nil).

As at June 30, 2020, the Company had $nil (December 31, 2019 – $9,681) payable to related parties outstanding that were included in accounts payable. The balances are unsecured, non-interest bearing, and due on demand.

Key management compensation

Key management includes the Company’s directors and members of the executive management team. Compensation awarded to key management for the six months ended June 30, 2020 and 2019 included:

All currency amounts stated below are in Canadian dollars.

Amalgamation

On January 31, 2019, the Company and Draganfly Innovations entered into the BCA providing for a three-cornered amalgamation among the Company, Draganfly Innovations, and Merger Co. As of August 15, 2019, the Amalgamation closed and the Company acquired, on a one for 1.794 basis, all of the issued and outstanding Common Shares of the Draganfly Innovations (the “Draganfly Innovations Shares”) in exchange for 42,638,356 Common Shares of the Company.

This resulted in a reverse take-over, of the Company, by the shareholders of Draganfly Innovations. At the time of the Amalgamation, the Company did not constitute a business as defined under IFRS 3; therefore, the Amalgamation is accounted under IFRS 2, where the difference between the consideration given to acquire the Company and the net asset value of the Company is recorded as a listing expense to net loss. As Draganfly Innovations is deemed to be the accounting acquirer for accounting purposes, these financial statements present the historical financial information of Draganfly Innovations up to the date of the Amalgamation.

All currency amounts stated below are in Canadian dollars.

The fair value of 10,500,001 issued Common Shares of the Company was estimated to be $0.50 per share using the price of a subscription receipts financing that was completed concurrently.

Prior to the closing of the Amalgamation, Draganfly Innovations issued 2,000,000 Common Shares with a value of $1,000,000 as transaction fees for the Amalgamation to related parties.

The Company assumed 4,000,000 share purchase warrants exercisable at a price of $0.10 per share expiring on February 4, 2021. The fair value of share-purchase warrants was $1,645,193, estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

As at August 15, 2019, the Company received $7,025,750 in proceeds to issue subscription receipts (the “Subscription Receipts”) at a price of $0.50 per Subscription Receipt. Each Subscription Receipt was automatically converted, without payment of additional consideration and without any further action on the part of the holder, into one unit of the Company (a “Unit”) on completion of the Amalgamation and the Company becoming reporting issuer in the Province of Saskatchewan and obtaining conditional approval of a listing of the Common Shares on the CSE (the “Transaction”). Each Unit consists of one Common Share and one warrant. Each warrant will entitle the holder to purchase one Common Share at a price of $0.50 for a period of 12 months following the issuance of warrants. The proceeds of the private placement were released to the Company on November 5, 2019.

Acquisition

On April 30, 2020, the Company closed a share purchase agreement with the shareholders of Dronelogics Systems Inc. (“Dronelogics”), whereby the Company acquired all of the issued and outstanding shares in the capital of Dronelogics, excluding the cinematography division, for a consideration of $2,000,000, plus the amount, if any, by which the estimated closing date working capital exceeds the target closing working capital (the “Transaction”). The consideration was paid $500,000 in cash, subject to a working capital adjustment and 3,225,438 Common Shares in the capital of the Company at a deemed price of $0.50 per share. Dronelogics’ principal activity is the provision of services with unmanned aerial vehicle (“UAV”) and remotely piloted aircraft (“RPA”), together known as drones, sales of drones, repairs and training related to drones in North America.

At the time of the Transaction, the Company determined that Dronelogics constituted a business as defined under IFRS 3, Business Combinations.

In connection with the Transaction, the Company paid fees of $160,000 to certain advisors; consisting of $100,000 by way of 200,000 in shares at a deemed price of $0.50 per share and $60,000 in cash or shares at a deemed price of $0.50 per share. At closing, the Company (i) granted 445,000 incentive stock options to certain employees of Dronelogics pursuant to the Company’s share compensation plan, exercisable at a price equal to closing price of the shares on the CSE on January 31, 2020. The options shall have a term of 10 years and vest in three equal tranches, on the first, second and third anniversaries of the date of grant, and (ii) awarded 375,000 RSUs to certain directors and officers of Dronelogics. RSUs were awarded to certain directors and officers of Dronelogics pursuant to the Company’s share compensation plan. The RSUs shall vest in three equal tranches, on the first, second and third anniversaries of the date of award.

The purchase price allocation (“PPA”) is as follows. The PPA determined at the Transaction date is preliminary and subject to change up to a period of one year from the Acquisition date upon finalization of fair value determination. The Company is in the process of identifying and determining the acquisition date fair value of any identifiable intangible assets acquired.In this provisional PPA, the excess of the consideration paid over the fair value of the identifiable assets (liabilities) acquired has been recognized as goodwill, which primarily consisted of the assembled workforce.

All currency amounts stated below are in Canadian dollars.

Trend Information

In early 2020, there was a global outbreak of COVID-19 (coronavirus), which has had a significant impact on businesses through the restrictions put in place by the Canadian, provincial and municipal governments regarding travel, business operations and isolation/quarantine orders. As a result, global equity markets have experienced significant volatility and weakness. At this time, the outbreak and the related mitigation measures have had the following impacts on the Company’s operations, among others: temporary closure of business locations, supply chain issues, and decrease in sales. These uncertainties arise from the inability to predict the duration of the outbreak, including the duration of travel restrictions, business closures or disruptions, and quarantine/isolation measures that are currently, or may be put, in place by Canada and other countries to fight the virus.

Item 2. Other Information

None.

Item 3. Financial Statements

INDEX TO FINANCIAL STATEMENTS

Draganfly Inc.

Condensed Consolidated Interim Financial Statements - Unaudited

For the Three and Six Months Ended June 30, 2020

(Expressed in Canadian Dollars)

Nature and Continuance of Operations (Note 1)

Subsequent Event (Notes 24)

Approved and authorized for issuance by the Board of Directors on August 21, 2020

The accompanying notes are an integral part of these condensed consolidated interim financial statements.