As filed with the Securities and Exchange Commission
on July 21, 2021
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-10
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
DRAGANFLY INC.
(Exact name of Registrant as specified in its charter)
Not applicable
(Translation of Registrant’s name into English (if applicable))
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British Columbia
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3721
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N/A
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(Province or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number
(if applicable))
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(I.R.S. Employer Identification
Number (if applicable))
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2108 St. George Avenue
Saskatoon, Saskatchewan, S7M 0K7, Canada
Telephone: (800) 979 9794
(Address and telephone number of Registrant’s
principal executive offices)
C T Corporation System
1015 15th Street N.W., Suite 1000
Washington, D.C., 20005
Telephone: (202)
572-3133
(Name, address (including zip code) and telephone
number (including area code)
of agent for service in the United States)
Copies to:
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Denis Silva
DLA Piper (Canada) LLP
Suite 2800, Park Place
666 Burrard St.
Vancouver, British Columbia V6C 2Z7
Canada
Telephone: (604) 643-2950
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Thomas M. Rose
Shona C Smith
Troutman Pepper Hamilton
Sanders LLP
401 9th Street, N.W., Suite
1000
Washington, DC 20004
United States
Telephone: (757) 687-7715
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Paul Sun
Draganfly Inc.
2108 St. George Avenue
Saskatoon, Saskatchewan, S7M 0K7
Canada
Telephone: (800) 979-9794
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Andrew Stewart
Clark Wilson LLP
900-885 West Georgia Street
Vancouver, British Columbia, V6C 3H1
Canada
Telephone: (604) 891-7700
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Approximate date of commencement of proposed
sale of the securities to the public:
From time to time after the effective date of
this Registration Statement.
Province of Saskatchewan, Canada
(Principal jurisdiction regulating this offering
(if applicable))
It is proposed that this filing shall become effective
(check appropriate box)
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A.
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upon filing with the Commission, pursuant to Rule
467(a) (if in connection with an offering being made contemporaneously in the United States and Canada).
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B.
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x
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at some future date (check appropriate box below)
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1.
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pursuant to Rule 467(b) on (date) at (time) (designate a time not sooner than 7 calendar days after filing).
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2.
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¨
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pursuant to Rule 467(b) on (date) at (time) (designate a time 7 calendar days or sooner after filing) because the securities regulatory authority in the review jurisdiction has issued a receipt or notification of clearance on (date).
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3.
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pursuant to Rule 467(b) as soon as practicable after notification of the Commission by the Registrant or the Canadian securities regulatory authority of the review jurisdiction that a receipt or notification of clearance has been issued with respect hereto.
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4.
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x
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after the filing of the next amendment to this Form (if preliminary material is being filed).
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If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to the home jurisdiction’s
shelf prospectus offering procedures, check the following box. x
CALCULATION OF REGISTRATION FEE
Title of each class of
securities to be registered
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Amount to be
registered(1)
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Proposed maximum
aggregate
offering price(2)
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Amount of
registration Fee
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Common Shares
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Total
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US$157,109,191
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US$157,109,191
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$17,141
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(1)
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There
are being registered under this Registration Statement such indeterminate number of common shares (“Common Shares”) in the
capital of the Registrant in one or more series or issuances up to an aggregate total offering price of up to CDN$200,000,000 (US$157,109,191, based on the average exchange rate of the Bank of Canada on July 20, 2021 of U.S.$1.00 = CDN$1.273). If, as a result of stock splits,
stock dividends or similar transactions, the number of securities purported to be registered on this Registration Statement changes,
the provisions of Rule 416 shall apply to this Registration Statement. The proposed maximum offering price per Common Share will be determined,
from time to time, by the Registrant in connection with the sale of the Common Shares under this Registration Statement. Prices, when
determined, may be in U.S. dollars or the equivalent thereof in Canadian dollars.
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(2)
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Estimated
solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the United States Securities Act
of 1933, as amended.
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The Registrant hereby amends
this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registration Statement shall
become effective as provided in Rule 467 under the Securities Act or on such date as the U.S. Securities and Exchange Commission (the
“Commission”), acting pursuant to Section 8(a) of the Act, may determine.
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
No securities regulatory authority
has expressed an opinion about these securities and it is an offence to claim otherwise. This prospectus supplement,
together with the short form base shelf prospectus dated July 14, 2021, to which it relates, as amended or supplemented, and each document
incorporated or deemed to be incorporated by reference in this prospectus supplement and in the short form base shelf prospectus
dated July 14, 2021 to which it relates, constitutes a public offering of these securities only in those jurisdictions where
they may be lawfully offered for sale and therein only by persons permitted to sell such securities. See ”Underwriting.”
Information has been incorporated
by reference in this prospectus supplement and in the short form base shelf prospectus dated July 14, 2021 to which it relates,
from documents filed with securities commissions or similar authorities in Canada. Copies of the documents incorporated
herein by reference may be obtained on request without charge from the Corporate Secretary of Draganfly Inc. at 2108 St. George Avenue,
Saskatoon, Saskatchewan, S7M 0K7, telephone 1-800-979-9794, and are also available electronically at www.sedar.com.
The information contained
in this preliminary prospectus supplement is not complete and may be changed. A registration statement related to these securities has
been filed with the United States Securities and Exchange Commission. These securities may not be sold until the registration statement
filed with the United States Securities and Exchange Commission is effective. This preliminary prospectus supplement is not an offer
to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
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PRELIMINARY PROSPECTUS SUPPLEMENT
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SUBJECT TO COMPLETION
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DATED JULY
21, 2021
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(To the Short Form Base Shelf Prospectus Dated
July 14, 2021)
US$
Common Shares
Draganfly Inc.
This firm commitment offering (the
“Offering”) is the initial public offering of common shares (the “Common Shares”) of
Draganfly Inc. (the “Company”, “Draganfly”, “we”,
“us” or “our”) in the United States. This prospectus supplement
(this “Prospectus Supplement”), together with the accompanying short form base shelf prospectus dated
July 14, 2021 (the “Shelf Prospectus”), qualifies the distribution of ♦ Common Shares (the
“Offered Shares”) at a public offering price of US$ ♦per Offered Share (the “Offering
Price”).
Currently, the issued and outstanding Common Shares
are listed and posted for trading on the Canadian Securities Exchange (the “CSE”) under the symbol “DFLY”,
on the Frankfurt Stock Exchange (the “FSE”) under the trading Symbol “3UB” and on the OTCQB Venture Market
of the OTC Markets (the “OTCQB”) under the symbol “DFLYF”. We have applied to list our Common Shares
(including the Offered Shares being distributed hereunder) on the Nasdaq Capital Market (the “NASDAQ”) under the symbol
“DPRO”. Listing on the NASDAQ is subject to the fulfillment of all of the listing requirements of the NASDAQ. In order to
meet NASDAQ’s minimum stock price requirement, we must effect a consolidation (or reverse split) of our Common Shares (the “Consolidation”)
on a one-for-five basis. Unless otherwise noted and other than in our financial statements in this registration statement and the
notes thereto, the share and per share information in this Prospectus Supplement reflects a proposed Consolidation of the outstanding
Common Shares at an assumed one (1)-for-five (5) basis, which is anticipated to occur prior to or concurrent with the pricing of the Offering.
On July 20, 2021, the last trading day prior
to the date of this Prospectus Supplement, the closing price of the Common Shares on the CSE was C$1.42, or US$1.12 (based on the
daily exchange rate for the U.S. dollar in terms of Canadian dollars, as quoted by the Bank of Canada, of $1.00 = C$1.2730).
In connection with the listing of the Common Shares on the NASDAQ, we have applied to change our symbol on the CSE to “DPRO”
to align with our symbol on the NASDAQ. The change of our symbol on the CSE is subject to our fulfillment of all of the relevant
listing requirements of the CSE.
We are an “emerging growth company”
as defined in the U.S. Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), and as
such, we have elected to comply with certain reduced U.S. public company reporting requirements.
An investment in the Offered Shares is highly
speculative and involves significant risks that should be considered before purchasing any Offered Shares. Prospective investors
should carefully review and consider the “Risk Factors” section beginning on page S-11 of this Prospectus Supplement
and the ”Cautionary Note Regarding Forward-Looking Statements” section beginning on page S-25 of this
Prospectus Supplement, as well as the similarly titled sections included in the Shelf Prospectus and in the documents incorporated
by reference herein and therein.
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Per Share
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Total
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Public offering price(1)
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US$♦
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US$♦
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Underwriting discounts and commissions(2)(3)
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US$♦
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US$♦
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Proceeds to Draganfly before expenses
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US$♦
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US$♦
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(1)
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The Offering Price was determined by arm’s length negotiations between us and the Underwriter (as
defined below).
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(2)
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Pursuant to the Underwriting Agreement (as defined below) by and between us and the Underwriter (as defined
below), we have agreed to pay underwriting discounts and commissions in cash to the Underwriter equal to 7% of the aggregate gross
proceeds of the Offering. In addition, the Underwriter will receive such number of compensation warrants (the “Underwriter’s
Warrants”) as is equal to 5% of the aggregate number of Offered Shares sold in in this Offering (including an over-allotment option
to purchase additional Common Shares representing up to 15% of the Offered Shares sold in the Offering (the “Over-Allotment Option”).
The Underwriter’s Warrants will be exercisable at price equal to 125% of the Offering Price per Offered Share sold in this Offering.
The Underwriter’s Warrants are exercisable at any time and from time to time, in whole or in part, during the two and one-half year
period commencing six months following the effective date of the Registration Statement (as defined below) related to this Offering.
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(3)
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Underwriting discounts and commissions do not include a non-accountable expense allowance equal to 1%
of the initial public offering price per Common Share payable to the Underwriter (as defined below). See “Underwriting”
for a description of the compensation payable to the Underwriter.
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We have granted a 45-day option to the Underwriter
to purchase up to 15% additional common shares to cover over-allotments, if any.
The Offering is expected to close on or about
, 2021 (the “Closing Date”), but in any event shall close no later than , 2021. The Offered Shares will be delivered
through the facilities of the Depository Trust Company (“DTC”), by way of instant deposit of the Offered Shares
under the book-based system of registration, to be registered to DTC or its nominee, and deposited with DTC or its nominee. No
certificates evidencing the Offered Shares will be issued to purchasers of the Offered Shares. Purchasers of the Offered Shares
will receive only a customer confirmation from the Underwriter or other registered dealer from or through whom a beneficial interest
in the Offered Shares is purchased. See “Underwriting.”
The Underwriter expects to deliver the shares
to purchasers on or about , 2021.
ThinkEquity
a division of Fordham Financial Management,
Inc.
The date of this Prospectus Supplement is July
21, 2021
This Offering is being made by a Canadian issuer
using disclosure documents prepared in accordance with Canadian securities laws. The Offering is being made in the United States only
pursuant to the Company’s registration statement on Form F-10 (the “Registration Statement”) filed with the United
States Securities and Exchange Commission (the “SEC”) of which this Prospectus Supplement and the Shelf Prospectus
form a part. The Offered Shares offered hereby are not being offered for sale to the public in Canada under this Prospectus Supplement
and the Shelf Prospectus.
ThinkEquity, a division of Fordham Financial
Management, Inc. (the “Underwriter”), as principal, conditionally offer ♦ Offered Shares of Draganfly,
subject to prior sale, if, as and when issued by us and accepted by the Underwriter in accordance with the conditions
contained in the Underwriting Agreement by and among us and the Underwriter, and referred to under
“Underwriting” and subject to approval of certain Canadian legal matters on our behalf by DLA Piper (Canada) LLP,
certain U.S. legal matters on our behalf by Troutman Pepper Hamilton Sanders LLP, and certain Canadian and U.S. legal matters
on behalf of the Underwriter by Clark Wilson LLP.
We are permitted under a
multijurisdictional disclosure system (the “MJDS”) adopted by the securities regulatory authorities in Canada and
the United States to prepare this Prospectus Supplement and the Shelf Prospectus in accordance with Canadian disclosure
requirements, which are different from those of the United States. We prepare our financial statements in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board
(“IFRS’), and such financial statements are subject to Canadian auditing and auditor independence
standards. As a result, such financial statements may not be comparable to the financial statements of U.S.
companies.
Certain legal matters related to this Offering
are being passed upon on the Company’s behalf by DLA Piper (Canada) LLP with respect to Canadian legal matters and by Troutman Pepper
Hamilton Sanders LLP with respect to U.S. legal matters. Clark Wilson LLP is representing the Underwriter with respect to Canadian and
U.S. legal matters.
Prospective investors should be aware that
the acquisition, holding or disposition of the Offered Shares may have tax consequences both in Canada and the United States. Such
consequences for investors who are resident in, or citizens of, the United States may not be fully described in this Prospectus
Supplement or the accompanying Shelf Prospectus. You should consult and rely on your own tax advisors with respect to your own
particular circumstances. See “Certain U.S. Federal Income Tax Considerations” and “Certain Canadian Federal
Income Tax Considerations for United States Residents.”
The enforcement by investors of civil liabilities
under United States federal securities laws may be affected adversely by the fact that we are organized under the laws of British Columbia,
Canada, that most of our officers and directors are resident outside the United States, that many of the experts named in this Prospectus
Supplement may be resident outside the United States, and that most of our assets and the assets of said persons are located outside of
the United States. See “Risk Factors — Risks Related to this Offering and Ownership of Our Common Shares —
United States investors may not be able to obtain enforcement of civil liabilities against us.”
Andrew Hill Card Jr., John M. Mitnick and John
Bagocius, each a director or officer of the Company, reside outside of Canada and have appointed DLA Piper (Canada) LLP, 2800 Park
Place, 666 Burrard St, Vancouver, British Columbia, V6C 2Z7, Canada for service of process in Canada. You are advised that it may
not be possible to enforce judgements obtained in Canada against any person that resides outside of Canada, even if such person has appointed
an agent for service of process.
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE OFFERED SHARES OR PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS SUPPLEMENT OR THE SHELF PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company’s head office is located at
2108 St. George Avenue, Saskatoon, Saskatchewan, S7M 0K7, and the registered office is located at Suite 2800, Park Place, 666 Burrard
Street, Vancouver, British Columbia, V6C 2Z7.
Attached to this Prospectus Supplement is the
Shelf Prospectus dated July 14, 2021. The Shelf Prospectus forms an integral part of this Prospectus Supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
aBOUT
THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part
is this Prospectus Supplement, which describes the terms of the Offering and adds to and updates information contained in the accompanying
Shelf Prospectus and the documents incorporated by reference therein. The second part is the Shelf Prospectus, which gives more
general information, some of which may not apply to the Offering. This Prospectus Supplement is deemed to be incorporated
by reference into the Shelf Prospectus solely for the purpose of this Offering.
Before you invest in any Offered Shares, you should
carefully read this Prospectus Supplement, the accompanying Shelf Prospectus and all information incorporated by reference herein
and therein. These documents contain information you should consider when making your investment decision. This Prospectus Supplement
may add, update or change information contained in the accompanying Shelf Prospectus or any of the documents incorporated by reference
herein or therein. To the extent that any statement in this Prospectus Supplement is inconsistent with the statements made in the
accompanying Shelf Prospectus, or any documents incorporated by reference herein or therein filed prior to the date of this Prospectus
Supplement, the statements made in this Prospectus Supplement will be deemed to modify or supersede those made in the accompanying
Shelf Prospectus and such documents incorporated by reference herein or therein.
Neither we nor the Underwriter for the Offering
have authorized anyone to provide investors with any information other than that contained or incorporated by reference in this
Prospectus Supplement, the accompanying Shelf Prospectus or any free writing prospectus prepared by us or on our behalf. Neither
we nor the Underwriter take any responsibility for, or provide any assurance as to the reliability of, any other information
that others may provide you. The Offered Shares are not being offered in any jurisdiction where the offer or sale is not permitted.
Readers should not assume that the information
contained or incorporated by reference in this Prospectus Supplement and the accompanying Shelf Prospectus is accurate as of any
date other than the date of this Prospectus Supplement and the accompanying Shelf Prospectus or the respective dates of the documents
incorporated by reference herein or therein, unless otherwise noted herein or as required by law. It should be assumed that
the information appearing in this Prospectus Supplement, the accompanying Shelf Prospectus and the documents incorporated by reference
herein and therein are accurate only as of their respective dates. Our business, financial condition, results of operations and
prospects may have changed since those dates.
This Prospectus Supplement should not be used
by anyone for any purpose other than in connection with the Offering. We do not undertake to update the information contained or
incorporated by reference herein or in the Shelf Prospectus, except as required by applicable securities laws. Information contained
on, or otherwise accessible through, our website is not be deemed to be a part of this Prospectus Supplement or the accompanying
Shelf Prospectus and such information is not incorporated by reference herein or therein.
The Company prepares and reports its consolidated
financial statements in accordance with IFRS. However, this Prospectus Supplement and the documents incorporated by reference herein may
make reference to certain non-IFRS measures including key performance indicators used by management. These measures are not recognized
measures under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to
similar measures presented by other companies. Rather, these measures are provided as additional information to complement those
IFRS measures by providing further understanding of the Company’s results of operations from management’s perspective.
Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of the Company’s financial
information reported under IFRS. The Company uses non-IFRS measures including “gross margins” and “working capital”
which may be calculated differently by other companies. These non-IFRS measures and metrics are used to provide investors with
supplemental measures of the Company’s operating performance and liquidity and thus highlight trends in the Company’s
business that may not otherwise be apparent when relying solely on IFRS measures. For definitions and reconciliations of
these non-IFRS measures to the relevant reported measures, please see the “Non-GAAP Measures and Additional
GAAP Measures” section of the Company’s latest management’s discussion and analysis incorporated by reference
herein.
On March 11, 2021, the Company’s Board of
Directors approved the Consolidation on a ratio of one (1) post-consolidation Common Share for up to a maximum of every six (6) pre-consolidation
Common Shares, with any one director or officer being authorized to determine the final ratio and effective date in connection with the
Consolidation. The purpose of the Consolidation is to meet the NASDAQ’s minimum stock price requirement. Unless otherwise noted,
the share and per share information in this Prospectus Supplement reflects, other than in our financial statements and the notes thereto,
a proposed Consolidation of the outstanding Common Shares of the Company at an assumed one (1) for five (5) basis, which is anticipated
to occur prior to or concurrent with the pricing of the Offering.
In this Prospectus Supplement and the Shelf
Prospectus, and in the documents incorporated by reference herein and therein, unless otherwise indicated, all dollar amounts and
references to “$” or “C$” are to the lawful currency of Canada and references to “US$” or
“U.S. dollars” are to the lawful currency of the United States. This Prospectus Supplement and the Shelf Prospectus and
the documents incorporated by reference herein and therein may contain translations of some Canadian dollar amounts into U.S.
dollars solely for your convenience. See “Currency Presentation and Exchange Rate Information”.
This Prospectus Supplement does not constitute,
and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy, any securities offered by this
Prospectus Supplement by any person in any jurisdiction in which it is unlawful for such person to make such an offer or solicitation.
MARKET
AND INDUSTRY DATA
Market and industry data presented throughout
this Prospectus Supplement, the accompanying Shelf Prospectus and the documents incorporated by reference herein or therein was
obtained from third-party sources and industry reports, including from publications, websites and other publicly available information,
as well as industry and other data prepared by us or on our behalf on the basis of our knowledge of the markets in which we
operate, including information provided by suppliers, partners, customers and other industry participants.
We believe that the market and economic data presented
throughout this Prospectus Supplement, the accompanying Shelf Prospectus and the documents incorporated by reference herein or
therein is accurate and, with respect to data prepared by us or on our behalf, that our estimates and assumptions are currently
appropriate and reasonable, but there can be no assurance as to the accuracy or completeness thereof. The accuracy and completeness
of the market and economic data presented throughout this Prospectus Supplement, the accompanying Shelf Prospectus and the documents
incorporated by reference herein or therein are not guaranteed and neither we nor the Underwriter makes any representation as to
the accuracy of such data. Actual outcomes may vary materially from those forecast in such reports or publications, and the prospect
for material variation can be expected to increase as the length of the forecast period increases. Although we believe them
to be reliable, neither we nor the Underwriter has independently verified any of the data from third-party sources referred to
in this Prospectus Supplement, the accompanying Shelf Prospectus and/or the documents incorporated by reference herein or therein,
analyzed or verified the underlying studies or surveys relied upon or referred to by such sources, or ascertained the underlying
market, economic and other assumptions relied upon by such sources. Market and economic data are subject to variations and cannot
be verified due to limits on the availability and reliability of data inputs, the voluntary nature of the data gathering process
and other limitations and uncertainties inherent in any statistical survey. In addition, certain of these publications, studies
and reports were published before the global COVID-19 pandemic and therefore do not reflect any impact of the COVID-19 pandemic
on any specific market or globally.
Prospectus
Summary
This
summary highlights selected information contained elsewhere in this Prospectus Supplement. This summary does not contain all the information
that you should consider before deciding to invest in the Offered Shares. You should read the entire Prospectus Supplement, the Shelf
Prospectus, including the documents incorporated by reference herein and therein, carefully, including “Risk Factors” beginning
on page S-10 in this Prospectus Supplement and our financial statements and notes to those financial statements before making an investment
decision.
Overview
We are a product development, services and solutions
company serving the unmanned aerial vehicle (“UAV”) or drone market. We sell to various market verticals including
the education, agriculture, public safety, mining, construction, inspection, and mapping and surveying markets. We provide
sustainable, custom and “Off-the-shelf” hardware, services, and solutions to companies and government agencies. Our
mission is to deliver products that provide vital information to our customers with the hopes of saving time, money and lives.
Our business is conducted through three wholly-owned
subsidiaries: (i) Draganfly Innovations, Inc.; (ii) Draganfly Innovations USA, Inc.; and (iii) Dronelogics Systems, Inc. Draganfly Innovations,
Inc. and Draganfly Innovations USA, Inc. provide engineering services and manufacturing of UAV or drones, remotely piloted aircraft systems
and software to the commercial and private markets. Dronelogics is a solutions integrator for custom robotics, hardware and software that
provides a wide scope of services including sales, training, rentals, maintenance, flying and data processing services.
Products and Services
We provide our 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. In addition, Draganfly has launched a health/telehealth
platform. The initial focus of the platform is a COVID-19 screening set of technologies that remotely detects a number of key COVID-19
respiratory symptoms. The Company is also offering sanitary spraying services to indoor and outdoor public gathering spaces such as sport
stadiums and fields to provide additional protection against the spread of contagious viruses such as COVID-19.
Quadcopters and
Multi-rotors.
We are one of the longest-running manufacturers
of quadcopters and multirotor drones in the world. Our products include:
Draganflyer Commander – a high-endurance,
electric, autonomous quadcopter drone built on Draganfly’s patented carbon fiber folding airframe with interchangeable payloads
for a variety of missions requiring high resolution imagery, including surveying, 3D mapping, industrial inspection, search and
rescue, and high-endurance public safety applications.
Draganflyer X4-P – semi-autonomous
quadcopter with 18-minute flight time ideal for medium projects.
QuantixTM Mapper – exclusive to Draganfly
through its partnership with AeroVironment, it is a fully-automated drone that is designed for mapping.
Tango2 – a high endurance, dual battery,
small unmanned aircraft system (“sUAS”) capable of carrying a wide array of payload systems. The aircraft utilizes
the Draganfly intelligent power management system to extend flight time while increasing safety. This sUAS is ideal for agricultural
monitoring and research, mapping, surveying, environmental monitoring, and search and rescue.
Universal Control
System
The Draganfly Universal Control System is a complete,
handheld ground control system that is built to integrate with other software and hardware systems. The Draganfly Universal Control
System is designed to provide precise control over sUAS helicopters, fixed-wing, and ground-based robots. Draganfly software provides
sophisticated flight planning, automated takeoff, grid following, waypoints, landing, data collection, and video downlink.
Software
The Draganfly Surveyor drone flight planning
software is an intuitive, easy to use, application that enables customers to quickly plan, fly, and process meaningful data.
Based on the project, camera type, optics, and altitude, the drone software determines the appropriate camera shutter
interval, aircraft speed, and flight plan to capture the optimum required photo overlap to generate 2D and 3D maps and
models. The Draganfly Surveyor directly integrates with Pix4Dmapper for survey-grade results and can be used alongside other
third-party photogrammetry programs.
Vital Intelligence
Draganfly installs standalone, mobile and airborne
health assessment systems at locations such as universities, hotels, casinos, family entertainment complexes, shopping centers,
and other high-traffic locations. These systems effectively measure social distancing and visitors’ vital signs like temperature,
cough, and respiratory rate to identify high-risk visitors. Vital Intelligence is a data platform that turns an existing camera
into a touchless symptom detection system, measuring vital signs and social distancing. Draganfly integrates this technology into
a variety of platforms and camera systems including smartphones and laptops – both on the ground and in the air – to
assess people coming into and traveling throughout a facility.
Draganfly Services
Custom Engineering. We are a contract engineering
partner for government agencies, enterprise organizations, academic institutions, and businesses of all sizes. The Draganfly team’s
truest capabilities are actualized during the engineering process as hardware designers, software designers, engineers, project
managers, and vertical-specific experts come together to build custom drone solutions for its partners. Draganfly’s end-to-end
engineering services include:
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Hardware design: Component, product, and system design.
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Software design: Custom software and interface design.
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Development: Including integration with third party platforms, PixX4D, Pixhawk, Ardupilot, DJI
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Modeling: 3D design and modeling of mechanical components.
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·
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ITAR equipment management: Approved handling, integration of ITAR, and Controlled Goods technologies.
|
|
|
·
|
Support: Testing, training, documentation, and repairs.
|
Training
Draganfly offers custom-designed training packages
that are tailored to specific operations and use cases. The Company also offers basic training for new UAV owners, up to advanced
classes for users who understand the fundamentals and are looking for new ways to increase flight efficiency or comply with federal
regulations.
Flight Services
Draganfly has a team of qualified pilots that
conduct flights on behalf of its customers. The team specializes in working with emergency services including police, fire, and
search and rescue personnel. Draganfly also supports industrial applications, utility and power companies, environmental and agricultural
entities and others.
Varigard Spraying
Services
Draganfly operates in partnership with Varigard
LLC, a leader in natural and organic disinfectants, to administer a sanitization spraying service in large public venues by misting
a surface spray across the entire venue in four to six hours.
Market Opportunity
Drones have rapidly evolved from their military
origin to commercial and civil government applications from security to farming. The increased automation of drones provides additional
value to existing workflows, triggering more widespread adoption. A global shift to sustainable and eco-friendly options has further
increased demand for drone usage. Lastly, regulatory amendments are anticipated to have an ongoing impact on the drone industry.
According to Drone Industry Insights, the commercial and private drone market could grow from $22.5 billion in 2020
to $42.8 billion in 2025, representing compound annual growth rate (“CAGR”) of 13.8%.
Drone application methods are being used by a
variety of industries today. The most active segments are mapping, surveying, inspection, filming/photography, dispensing/spraying,
warehousing, monitoring/detection, and delivery. These applications are being used today by the civil government, educational facilities,
agricultural, construction, health care, real estate, energy, transportation, insurance, security, and scientific industries for
public safety, data collection and profit. According to Drone Industry Insights, the fastest growing drone application method will
be delivery and is forecasted at 28.6% CAGR over the next five years.1
It is widely believed over 100,000 new jobs will be created in the drone market by 2025. However, regulatory hurdles and intense
industry scrutiny need to be addressed.
Our existing products are configured to meet the
needs of multiple industries. We continue to add new customers in different market verticals. We are actively designing and developing
new products and services to meet increased customer demands.
Growth Strategy
Draganfly markets its products and services as
a drone solution platform that enables customer to do things not easily done before and to collect data not easily available before.
Draganfly provides solutions to our customers utilizing drones and adjunct technologies. Sensors, software, artificial intelligence
(“AI”) and more all make up this ability to provide solutions that only a company with end-to-end capabilities
can provide. Draganfly grows by dealing with the decision makers in organizations who generally have budget control and/or P&L
responsibility. Draganfly will continue to develop specific solutions and intellectual property (“IP”) for industry
verticals by working directly with customers. Draganfly will also peruse an acquisition strategy focused on adding additional capabilities
to its platform that strengthen its value proposition of being able to provide new and total solutions that other drone companies
cannot. Draganfly is focused on growth through developing new products, expanding its customer base, and pursuing accretive acquisition
opportunities, both within and outside North America, in new markets that complement its existing portfolio.
Sales and Marketing
Draganfly plans to expand it sales and market
capabilities in three key areas. First, Draganfly intends to implement a sales force that has the ability to build relationships
and sell specifically designed solutions into industry verticals. This sales force will be specialized into segments that sell
either direct or into a channel dependant on the specific product or service solution being provided. Draganfly plans to expand
business development personnel that can work with specific industries to envision and develop new product lines and services not
yet contemplated by our customers. Second, Draganfly plans to drive greater market awareness of the Draganfly Brand via public
relations as well as an expanded marketing pushing via specific sponsorships of events that complement and highlight the Draganfly
technology. i.e. sporting events where Draganfly’s Vital Intelligence Technology is used to provide health screening for
spectators and/or staff; or, where Draganfly’s Varigard 20hr + spraying solution via drones is used to disinfect and coat
the stadium from pathogens. Third, Draganfly plans targeted marketing and advertising via tradeshows/conferences which are virtual
or physical (“post COVID”) as well as target digital advertising campaigns used to generate inbound inquires for specific
products, services or solution opportunities. Upon completion of this Offering, as part of implementing its growth strategy, Draganfly
plans to increase its sales and marketing teams, to attend trade shows and conferences to raise brand awareness and forge business relationships,
and to sponsor specific events that complement its technology.
Customers
Key customers are customers looking to gain strategic
advantage in particular markets via the use of drones and drone technology. These are often large organizations with a specific
problem that they are currently solving in an expensive manner which usually means the use of teams of people or expensive personnel.
By designing solutions and providing everything from design to manufacturing to sensor development and even giving recognition
on patents of IP development (not with commercial interest) to providing the services and housing the data, we develop customer
relationships that are very “sticky”. It is estimated that a variety of fortune 5000 companies will be utilizing drone
or drone related technologies over the next 10 years and beyond with the next 3 years being crucial in establishing market share
of which Draganfly is ideally positioned to execute on.
Impact of COVID-19
Pandemic
The COVID-19 pandemic has unexpectedly
benefited the drone industry by expanding acceptance of drones as a practical, valuable means of providing essential and socially
useful services to help prevent the outbreak and escalation of pandemics, in areas such as delivery services, infrastructure
support, and medical services. More specifically, Draganfly has developed Vital Intelligence technology, a data platform that
transforms an existing camera, on a drone or otherwise, into a touchless symptom detection system that measures vital signs and
social distance. This technology is now serving many different uses, and is being tested and considered for application in disaster
recovery, vaccine delivery, military uses, and first responder situations, where a drone’s detection of vital signs or of
infections conditions and pathogens could be critically beneficial.
1 See
Global Drone Market Report 2020-2025
When the global COVID-19 pandemic broke out in
early 2020, we responded quickly to ensure the health of our employees and to support our customers. We mobilized resources and
established protocols that allowed us to adapt to the shifting environment, including:
|
|
·
|
putting in place measures to safeguard our employees by enabling work-from-home policies, systems, and
tools, which we believe we were able to adapt to and implement quickly;
|
|
|
·
|
focusing on the operational integrity of our business, by identifying operational efficiencies and actively
managing short and long-term expenses; and
|
|
|
·
|
increasing our revenue from manufacturing and accelerating the development of new product features that
we believed customers would find especially useful in the shifting environment.
|
We continue to actively manage our preparedness
plans and response activities to align with recommendations of the health and government authorities in the locations in which
we operate. The COVID-19 pandemic is an unprecedented global challenge and it has placed every company and business in uncharted
territory. While we are not immune to these challenging times, we believe that we can continue to provide products to our existing
customers and expand our customer base given the benefits that drone technology offers in the context of COVID-19.
Draganfly’s business, financial condition,
results of operations, cash flows, access to capital, cost of borrowing, and/or access to liquidity may, in particular, and without limitation,
be adversely impacted as a result of the ongoing pandemic as a result of:
|
|
·
|
the shut-down of facilities or the delay or suspension of customer contracts due to workforce disruption
or labour shortages caused by workers becoming infected with COVID-19, or government or health authority mandated restrictions on travel
by workers or closure of facilities or worksites;
|
|
|
·
|
suppliers and third-party vendors experiencing similar workforce disruption or being ordered to cease
operations;
|
|
|
·
|
reduced cash flows resulting in less funds from operations being available to fund research and development
initiatives;
|
|
|
·
|
counterparties being unable to fulfill their contractual obligations on a timely basis or at all;
|
|
|
·
|
the inability to deliver products to customers or otherwise get products to market caused by border restrictions;
and
|
|
|
·
|
the ability to obtain additional capital including, but not limited to, debt and equity financing being
adversely impacted as a result of unpredictable financial markets and/or a change in market fundamentals.
|
Looking ahead, the full impact of the COVID-19
pandemic on our customers (potentially including cash conservation measures) and consequently on our business, are unknown and
highly unpredictable and will depend on future developments in Canada, United States and globally, including the development and widespread
availability of efficient and accurate testing options, and effective treatment options or vaccines. Our past results may not be
indicative of our future performance and historical trends in our financial performance may differ materially from future performance.
Notwithstanding the continually evolving impacts of the COVID-19 pandemic, particularly the medium and long-term economic effects,
we believe that our business is well positioned given the rare opportunity that our industry has to be at the forefront of response through
these unprecedented times.
Recent Developments
On December 2, 2020, the Company completed an
initial closing of its Regulation A+ offering of units of the Company (the “Regulation A+ Offering”). The Company
issued 2,556,496 units at price of US$0.47 per unit for gross proceeds in the amount of US$1,201,553 in the first closing.
Each unit is comprised of one Common Share and one Common Share purchase warrant, with each warrant entitling the holder to acquire
one Common Share at a price of US$0.71 per Common Share for a period of two years from the date of issuance.
On January 6, 2021, the Company
announced the awarding of a new patent for a vertical take-off and landing cargo delivery drone with variable center of gravity.
On January 21, 2021, the Company announced that
it had been selected to provide engineering and development services for a drone-based air support defense system for Integrated
Launcher Solutions Inc. (“ILS”). The Company entered into a memorandum of understanding with ILS with the objective
to create the terms and conditions surrounding a project management and development agreement for the production of ILS’s
multi-launching air support defence system.
On March 2, 2021, the Company announced that it
will be the exclusive supplier of drones to Woz ED’s drone program across its national K-12 curriculum with the expected
deployment of approximately 3000 drones in 2021. The Company entered into a memorandum of understanding with
Woz ED with the objective to create the terms and conditions surrounding a business agreement. The memorandum of understanding automatically
terminates after 60 days; however, the Company anticipates entering into a definitive agreement with Woz ED during the third quarter of
2021.
On March 9, 2021, the Company announced that it
had completed the final closing of the Regulation A+ Offering. The Company issued 32,443,457 units at price of US$0.47 per unit
for gross proceeds in the amount of approximately US$15.3 million in the final closing for total aggregate gross proceeds of US$16.45
million.
On March 9, 2021, the Company
also announced that it has entered into an asset purchase agreement with Vital Intelligence Inc. (“Vital”) to
purchase all the assets of Vital in consideration for: (a) a cash payment of $500,000 with $50,000 paid upon execution of the asset
purchase agreement, $200,000 to be paid at closing and $250,000 to be paid on the six-month anniversary date of closing; and (b)
6,000,000 units of the Company with each unit being comprised of one common share of the Company and one common share purchase
warrant. Each warrant will entitle the holder to acquire one common share for a period of 24 months following closing at an exercise
price of $2.67 per common share and the Company will be able to accelerate the expiry date of the warrants after one year in the
event the underlying common shares have a value of at least 30% greater than the exercise price of the warrants. The units will
be held in escrow following closing with 1,500,000 units being released at closing and the remainder to be released upon
the Company reaching certain revenue milestones received from the purchased assets. The Company completed the acquisition on March
25, 2021.
On March 23, 2021, the Company
announced that it signed a services deal to deploy EagleEye™ AI flight services with Windfall Geotek Inc. Windfall Geotek Inc. contractually
agreed to have Draganfly provide $1,000,000 in flight services over the course of the next year with $500,000 already directly funded
and allocated.
On May 13, 2021, the Company announced that it
entered into a definitive agreement with Coldchain Technology Services, LLC (“Coldchain”) to develop, deploy
and operate solutions for the delivery of medical supplies, medicine, and vaccines. The definitive agreement provides for phase
one of a planned five-phase roll-out for the comprehensive development, deployment, and operation of a medical drone delivery service
as well as the development of a solution for the timely delivery of medical supplies, medicine, and vaccines. Phase one will also
include working with various regulatory bodies, including the Federal Aviation Administration, to obtain licenses and approvals
for initial non-commercial beta test delivery routes. Phase one has a value of US$125,000, to be executed over a maximum
of ten months and the parties have agreed to negotiate an extension to the definitive agreement for phase two prior to the expiry
of phase one. Under phase two, Coldchain will commit to purchasing no less than US$625,000 in equipment and services from Draganfly.
On May 19, 2021, the Company announced that it
signed a contract with ILS for the development, prototyping, and eventual production of a non-lethal 40 mm multi-launching
systems that can be mounted and deployed from drones, drone systems, robots, robotic systems, and other stationary platforms
or similar systems. As part of the contract, Draganfly has provided ILS with strategic vendor financing of US$150,000 to assist
in the development of the project and in consideration ILS has granted Draganfly a worldwide royalty equal to 8% of the gross revenue
received from the project for a period of five years from earlier of the repayment date or maturity date of the loan. The loan
is secured against the intellectual property related to the project.
The
Offering
|
Common Shares offered
Offering Price
|
Common Shares
US$♦
per Offered Share
|
|
Common Shares Outstanding Immediately after the Offering
|
Common Shares (or ♦ Common Shares
if the Underwriter exercises the Over-Allotment Option in full)
|
Underwriters’ Over-Allotment
Option
|
We have granted to the Underwriter the Over-Allotment Option, exercisable for
a period of 45 days after the date of this Prospectus Supplement, to purchase up to an additional ♦
Common Shares, representing fifteen percent (15%) of the Offered Shares sold in the Offering.
|
|
Use of Proceeds
|
We intend to use the net proceeds from the Offering, together with existing cash, for general corporate purposes, including to fund ongoing operations, to fund growth initiatives and/or for working capital requirements including the continuing development and marketing of the Company’s core products, operational excellence initiatives, potential acquisitions and research and development. See “Use of Proceeds” in this Prospectus Supplement.
|
|
Risk Factors
|
See “Risk Factors” beginning on page S-11 of this Prospectus Supplement and in the documents incorporated by reference in this Prospectus Supplement for a discussion of factors you should consider carefully before deciding to invest in our common shares.
|
|
Proposed NASDAQ symbol
|
We have applied to have our Common Shares listed on the NASDAQ under the symbol “DPRO”.
|
|
CSE symbol change
Consolidation
|
We have applied to change our symbol on the CSE
to “DPRO” to align with our proposed symbol on the NASDAQ. The change of our symbol on the CSE is subject to our fulfillment
of all of the listing requirements of the CSE.
On March 11, 2021, the Company’s Board of
Directors approved the Consolidation on a ratio of one (1) post-consolidation Common Share for up to a maximum of every six (6) pre-consolidation
Common Shares, with any one director or officer being authorized to determine the final ratio and effective date in connection with the
Consolidation. We intend to effectuate the Consolidation in a ratio of one (1) for five (5) basis prior to the closing of the Offering,
and potentially prior to the pricing of the Offering. Unless otherwise stated, the share and per share information in this Prospectus
Supplement reflects, other than in our financial statements and the notes thereto, a proposed Consolidation of the outstanding Common
Shares of the Company at an assumed one (1)-for-five (5) basis, which is anticipated to occur prior to or concurrent with the pricing
of the Offering.
|
The number of Common Shares to be
outstanding after the Offering is ♦ and is computed on the basis of 27,045,887
Common Shares outstanding as July 20, 2021, and gives effect to our planned Consolidation at an assumed ratio of 1-to-5, but
does not include, as of that date:
|
|
·
|
855,167 Common Shares issuable upon the exercise of outstanding 855,167 stock options as
of March 31, 2021, with a weighted-average exercise price of C$3.35 per share, under our share compensation plan;
|
|
|
·
|
637,669 Common Shares issuable upon the vesting and redemption of 637,669 restricted share units
as of March 31, 2021 under our share compensation plan;
|
|
|
·
|
8,702,491 Common Shares issuable on exercise of outstanding warrants as of March 31, 2021, with a weighted-average
exercise price of C$4.85 per share; and
|
|
|
·
|
2,001,399 additional Common Shares reserved for future issuance under our share compensation plan.
|
Except as described in the AIF (as defined herein)
and as outlined under “Prior Sales”, there have been no material changes in the share and loan capital of the Company,
on a consolidated basis, since March 31, 2021 other than the one-for-five share Consolidation. See “Description of Capital Structure
— Share Consolidation” in this Prospectus Supplement.
Unless otherwise indicated, information contained
in this Prospectus Supplement assumes or reflects no exercise of the Over-Allotment Option, no exercise of outstanding stock options
and no vesting and settlement of restricted share units.
SUMMARY
CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth a summary of our
consolidated financial information as of December 31, 2020 and 2019 and for the fiscal years ended December
31, 2020 and 2019 and as of March 31, 2021 and for the three months ended March 31, 2021 and 2020. The summary financial
information included in this section is not intended to replace the financial statements and related notes incorporated
by reference into this Prospectus Supplement and the Shelf Prospectus. You should read the following summary consolidated
financial information in conjunction with, and it is qualified in its entirety by reference to, our historical consolidated
financial information and other information incorporated by reference in this Prospectus Supplement and the Shelf Prospectus,
including our audited consolidated financial statements for the fiscal years ended 2020 and 2019, our unaudited condensed
interim consolidated financial statements as of March 31, 2021 for the three months ended March 31, 2021 and our management’s
discussion and analysis of the financial conditions and results of operations of the Company for the financial year ended December 31,
2020 and the interim financial period ended March 31, 2021 each incorporated by reference into this Prospectus Supplement and the
Shelf Prospectus.
This summary consolidated financial information
is derived from our audited consolidated financial statements as of December 31, 2020 and 2019 and for the fiscal years
ended December 31, 2020 and 2019 and our unaudited condensed interim consolidated financial statements as of March
31, 2021 for the three months ended March 31, 2021, which are incorporated by reference into this Prospectus Supplement
and the Shelf Prospectus and are presented in Canadian dollars. The historical results set forth below are not necessarily
indicative of the results to be expected in future periods and our results for three months ended March 31, 2021 are not
necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021 or any other interim
periods or any future period. Our consolidated financial statements have been prepared in accordance with IFRS.
Selected Annual and Quarterly
Financial Information
|
|
|
Quarter
Ended March 31,
2021
|
|
|
Quarter
Ended March 31
2020
|
|
|
Year
Ended December 31,
2020
|
|
|
Year
Ended
December 31,
2019
|
|
|
Year
Ended
December 31,
2018
|
|
|
Total Revenue
|
|
$
|
1,539,736
|
|
|
$
|
497,057
|
|
|
$
|
4,363,511
|
|
|
$
|
1,380,427
|
|
|
$
|
1,387,013
|
|
|
Cost of sales from sales of
goods
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,460,891
|
)
|
|
|
(206,783
|
)
|
|
|
-
|
|
|
Cost of sales from services
|
|
|
-
|
|
|
|
-
|
|
|
|
(143,200
|
)
|
|
|
(12,017
|
)
|
|
|
-
|
|
|
Cost of Sales
|
|
|
(1,024,729
|
)
|
|
|
(59,786
|
)
|
|
|
(2,603,911
|
)
|
|
|
(218,800
|
)
|
|
|
(452,399
|
)
|
|
Gross Profit
|
|
|
515,007
|
|
|
|
437,271
|
|
|
|
1,759,600
|
|
|
|
1,161,627
|
|
|
|
934,614
|
|
|
Operating Expenses
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Amortization
|
|
|
13,694
|
|
|
|
882
|
|
|
|
43,518
|
|
|
|
8,386
|
|
|
|
15,534
|
|
|
Depreciation
|
|
|
35,302
|
|
|
|
14,153
|
|
|
|
109,108
|
|
|
|
41,250
|
|
|
|
22,521
|
|
|
Director fees
|
|
|
86,691
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Office and miscellaneous
|
|
|
2,339,401
|
|
|
|
650,297
|
|
|
|
3,427,853
|
|
|
|
2,127,632
|
|
|
|
328,292
|
|
|
Professional fees
|
|
|
868,479
|
|
|
|
92,425
|
|
|
|
1,762,594
|
|
|
|
524,101
|
|
|
|
131,028
|
|
|
Research and development
|
|
|
15,048
|
|
|
|
3,969
|
|
|
|
567,999
|
|
|
|
16,883
|
|
|
|
16,158
|
|
|
Share-based compensation
|
|
|
1,049,866
|
|
|
|
519,384
|
|
|
|
2,668,464
|
|
|
|
761,559
|
|
|
|
-
|
|
|
Travel
|
|
|
28,758
|
|
|
|
7,620
|
|
|
|
25,617
|
|
|
|
30,896
|
|
|
|
17,817
|
|
|
Wages and salaries
|
|
|
402,361
|
|
|
|
366,503
|
|
|
|
1,649,329
|
|
|
|
989,083
|
|
|
|
984,179
|
|
|
|
|
|
(4,839,600
|
)
|
|
|
(1,655,233
|
)
|
|
|
(10,254,482
|
)
|
|
|
(4,499,790
|
)
|
|
|
(1,515,529
|
)
|
|
Other Income (Expense)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Change in fair value of derivative
liability
|
|
|
(41,019,172
|
)
|
|
|
-
|
|
|
|
(748,634
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Finance and other costs
|
|
|
(6,405
|
)
|
|
|
(4,006
|
)
|
|
|
(23,117
|
)
|
|
|
(171,905
|
)
|
|
|
(145,271
|
)
|
|
Foreign exchange gain (loss)
|
|
|
145,095
|
|
|
|
50,845
|
|
|
|
(87,104
|
)
|
|
|
5,803
|
|
|
|
2,971
|
|
|
Gain on disposal of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,651
|
|
|
|
-
|
|
|
Net gains and losses on settlement
of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,879
|
)
|
|
|
198,976
|
|
|
|
-
|
|
|
Gain on forgiveness of trades
payable
|
|
|
-
|
|
|
|
|
|
|
|
127,711
|
|
|
|
-
|
|
|
|
-
|
|
|
Listing expense
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
(7,804,859
|
)
|
|
|
-
|
|
|
Loss on write-off loan receivable
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
(13,560
|
)
|
|
|
-
|
|
|
Income from government assistance
|
|
|
20,706
|
|
|
|
67,493
|
|
|
|
21,090
|
|
|
|
-
|
|
|
|
-
|
|
|
Other income
|
|
|
(16,708
|
)
|
|
|
(478
|
)
|
|
|
1,197,465
|
|
|
|
-
|
|
|
|
8,130
|
|
|
Unrealized investment gain
|
|
|
277,143
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scientific research and development
credit
|
|
|
-
|
|
|
|
-
|
|
|
|
30,537
|
|
|
|
-
|
|
|
|
113,356
|
|
|
Net Loss
|
|
$
|
(44,923,934
|
)
|
|
$
|
(1,104,108
|
)
|
|
$
|
(8,015,813
|
)
|
|
$
|
(11,095,057
|
)
|
|
$
|
(601,729
|
)
|
|
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange translation
|
|
|
9,287
|
|
|
|
13,814
|
|
|
|
104
|
|
|
|
-
|
|
|
|
-
|
|
|
Comprehensive Loss
|
|
|
(44,914,647
|
)
|
|
|
(1,090,294
|
)
|
|
|
(8,015,709
|
)
|
|
|
(11,095,057
|
)
|
|
|
-
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.48
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.02
|
)
|
|
Diluted
|
|
$
|
(0.48
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.02
|
)
|
|
Weighted average number of common shares outstanding
- Basic
|
|
|
93,426,279
|
|
|
|
70,178,481
|
|
|
|
77,092,696
|
|
|
|
47,647,977
|
|
|
|
39,344,881
|
|
|
Weighted average number of common shares outstanding
- Diluted
|
|
|
93,426,279
|
|
|
|
70,178,481
|
|
|
|
77,092,696
|
|
|
|
47,647,977
|
|
|
|
39,344,881
|
|
Consolidated Statement
of Financial Position
|
|
|
Quarter
Ended
March 31, 2021
|
|
|
Quarter
Ended
March 31 2020
|
|
|
Year
Ended
December 31 2020
|
|
|
Year
Ended
December 31, 2019
|
|
|
Year
Ended
December 31, 2018
|
|
|
Current Assets
|
|
|
23,693,430
|
|
|
|
2,638,186
|
|
|
|
4,361,848
|
|
|
|
2,975,263
|
|
|
|
284,173
|
|
|
Total assets
|
|
$
|
45,055,832
|
|
|
$
|
2,869,671
|
|
|
$
|
7,100,567
|
|
|
$
|
3,221,783
|
|
|
$
|
504,825
|
|
|
Working capital
|
|
|
(20,834,520
|
)
|
|
|
1,869,377
|
|
|
|
1,214,371
|
|
|
|
2,037,906
|
|
|
|
(4,353,261
|
)
|
|
Current Liabilities
|
|
|
44,527,950
|
|
|
|
763,809
|
|
|
|
3,147,477
|
|
|
|
937,357
|
|
|
|
4,637,434
|
|
|
Total Liabilities
|
|
$
|
44,674,347
|
|
|
$
|
850,148
|
|
|
$
|
3,252,362
|
|
|
$
|
1,030,430
|
|
|
$
|
4,637,434
|
|
|
Total Shareholder's equity (deficiency)
|
|
|
381,485
|
|
|
|
2,019,523
|
|
|
|
3,848,205
|
|
|
|
2,191,353
|
|
|
|
(4,132,609
|
)
|
|
Number of shares outstanding
|
|
$
|
134,144,435
|
|
|
$
|
72,781,413
|
|
|
$
|
86,093,362
|
|
|
$
|
69,670,613
|
|
|
$
|
21,932,454
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
45,055,832
|
|
|
$
|
2,869,671
|
|
|
$
|
7,100,567
|
|
|
$
|
3,221,783
|
|
|
$
|
504,825
|
|
The net loss and comprehensive loss for the three
months ended March 31, 2021 include a change in fair value of derivative liability for USD warrants of C$41,019,172 and would otherwise
be C$3,904,762 and C$3,895,475, respectively. The working capital deficit as at March 31, 2021 includes a derivative liability for USD
warrants of C$41,019,172 and would otherwise be a working capital of C$20,184,652.
CAPITALIZATION
The following table sets forth our capitalization
as of March 31, 2021:
|
|
·
|
on an actual basis; and
|
|
|
·
|
on
an as adjusted basis to reflect proposed reverse share split of the outstanding common shares
of the Company at an assumed 1-to-5 ratio, and the issuance and sale by us
of 4,464,285 common shares at a post split price of US$5.60 per share (based on
the closing price of the Common Shares on the CSE on July 20, 2021 of C$1.42, or US$1.12
(based on the daily exchange rate for the U.S. dollar in terms of Canadian dollars, as quoted
by the Bank of Canada, of $1.00 = C$1.2730)), before deducting the underwriting discounts
and commissions and estimated offering expenses payable by us.
|
You should consider this table in conjunction
with "Use of Proceeds" below as well as our unaudited condensed interim consolidated financial statements as of March
31, 2021 for the three months ended March 31, 2021 and our management’s discussion and analysis of the financial conditions
and results of operations of the Company for the interim financial period ended March 31, 2021 each incorporated by reference
into this Prospectus Supplement and the Shelf Prospectus.
|
|
|
As of March 31, 2021
|
|
|
|
|
Unaudited,
Actual
|
|
|
Unstated, Pro Forma
As Adjusted(1)
|
|
|
Cash and cash equivalents
|
|
$
|
21,067,923
|
|
|
$
|
50,346,923
|
|
|
Shareholders' Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
Share Capital (Common Shares, - 134,144,435 issued and outstanding pre-split shares as of March 31, 2021, and 31,293,172 issued and outstanding post-split shares and issuance of sale of 4,464,285 common shares at US$5.60 per share, as adjusted
|
|
|
75,459,911
|
|
|
|
104,738,911
|
|
|
Equity reserve
|
|
|
5,955,327
|
|
|
|
5,955,327
|
|
|
Accumulated deficit
|
|
|
(81,320,287)
|
|
|
|
(81,320,287)
|
|
|
Unrealized gain on investments available for sale
|
|
|
277,143
|
|
|
|
277,143
|
|
|
Accumulated other comprehensive loss
|
|
|
9,391
|
|
|
|
9,391
|
|
|
Total Shareholders’ Equity
|
|
$
|
381,485
|
|
|
$
|
29,660,485
|
|
Note:
|
|
(1)
|
After deducting the underwriting discounts and commissions of
8% but before the estimated offering expenses payable by us and assumes a US$25,000,000 offering at an exchange rate of $1.2730.
|
RISK
FACTORS
An investment in the Offered Shares is highly
speculative and involves significant risks. In addition to the other information contained in this Prospectus Supplement, the
Shelf Prospectus and the documents incorporated by reference herein and therein, you should review and carefully consider the risks
described herein, in the accompanying Shelf Prospectus under the heading “Risk Factors” and in the AIF incorporated
by reference under the heading “Risk Factors” before purchasing any of the Offered Shares distributed under this Prospectus
Supplement. The risks described herein, in the Shelf Prospectus and the documents incorporated by reference herein and therein
are not the only risk factors facing us and should not be considered exhaustive. Additional risks and uncertainties not currently
known to us, or that we currently consider immaterial, may also materially and adversely affect our business, operations and condition,
financial or otherwise.
Risks Related to the Company,
its Business and Industry
The Company has
a history of losses.
The Company has incurred net losses since its
inception. The Company cannot assure that it can become profitable or avoid net losses in the future or that there will be any earnings
or revenues in any future quarterly or other periods. The Company expects that its operating expenses will increase as it grows its business,
including expending substantial resources for research, development and marketing. As a result, any decrease or delay in generating revenues
could result in material operating losses.
A shareholder’s
holding in the Company may be diluted if the Company issues additional Common Shares or other securities in the future.
The Company may issue additional
Common Shares or other securities in the future, which may dilute a shareholder’s holding in the Company. The Company’s
articles permit the issuance of an unlimited number of Common Shares, and shareholders have no pre-emptive rights in connection
with further issuances of any securities. The directors of the Company have the discretion to determine if an issuance
of Common Shares or other securities is warranted, the price at which any such securities are issued and the other terms
of issue of Common Shares or securities. In addition, the Company’s may issue additional Common Shares upon the exercise
of incentive stock options to acquire Common Shares under its share compensation plan, which will result in further dilution
to shareholders. In addition, the issuance of Common Shares or other securities in any potential future acquisitions, if
any, may also result in further dilution to shareholder interests.
The Company expects
to incur substantial research and development costs and devote significant resources to identifying and commercializing new products
and services, which could significantly reduce its profitability and may never result in revenue to the Company.
The Company’s future growth depends
on penetrating new markets, adapting existing products to new applications, and introducing new products and services that achieve
market acceptance. The Company plans to incur substantial research and development costs as part of its efforts to design, develop
and commercialize new products and services and enhance its existing products. The Company believes that there are significant
opportunities in a number of business areas. Because the Company accounts for research and development costs as operating expenses,
these expenditures will adversely affect its earnings in the future. Further, the Company’s research and development programs
may not produce successful results, and its new products and services may not achieve market acceptance, create any additional
revenue or become profitable, which could materially harm the Company’s business, prospects, financial results and liquidity.
The Company’s
adoption of new business models could fail to produce any financial returns.
Forecasting the Company’s revenues
and profitability for new business models is inherently uncertain and volatile. The Company’s actual revenues and profits
for its business models may be significantly less than the Company’s forecasts. Additionally, the new business models could
fail for one or more of the Company’s products and/or services, resulting in the loss of Company’s investment in the
development and infrastructure needed to support the new business models, and the opportunity cost of diverting management and
financial resources away from more successful businesses.
The Company will
be affected by operational risks and may not be adequately insured for certain risks.
The Company will be affected by a
number of operational risks and the Company may not be adequately insured for certain risks, including: labour disputes;
catastrophic accidents; fires; blockades or other acts of social activism; changes in the regulatory environment; impact of
non-compliance with laws and regulations; natural phenomena, such as inclement weather conditions, floods, earthquakes and
ground movements. There is no assurance that the foregoing risks and hazards will not result in damage to, or destruction of,
the Company’s technologies, personal injury or death, environmental damage, adverse impacts on the Company’s
operation, costs, monetary losses, potential legal liability and adverse governmental action, any of which could have an
adverse impact on the Company’s future cash flows, earnings and financial condition. Also, the Company may be subject
to or affected by liability or sustain loss for certain risks and hazards against which the Company cannot insure or which
the Company may elect not to insure because of the cost. This lack of insurance coverage could have an adverse impact
on the Company’s future cash flows, earnings, results of operations and financial condition.
The Company operates
in evolving markets, which makes it difficult to evaluate the Company’s business and future prospects.
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:
|
|
·
|
generate sufficient revenue to reach and maintain profitability;
|
|
|
·
|
acquire and maintain market share;
|
|
|
·
|
achieve or manage growth in operations;
|
|
|
·
|
develop and renew contracts;
|
|
|
·
|
attract and retain additional engineers and other highly-qualified personnel;
|
|
|
·
|
successfully develop and commercially market new products;
|
|
|
·
|
adapt to new or changing policies and spending priorities of governments and government agencies; and
|
|
|
·
|
access additional capital when required and on reasonable terms.
|
If the Company fails to address these and other
challenges, risks and uncertainties successfully, its business, results of operations and financial condition would be materially
harmed.
The Company operates
in a competitive market.
The Company faces competition and new competitors
will continue to emerge throughout the world. Services offered by the Company’s competitors may take a larger share of consumer
spending than anticipated, which could cause revenue generated from the Company’s products and services to fall below expectations.
It is expected that competition in these markets will intensify. Some of the other publicly traded companies we may compete with include
Alpine 4 Tech, Inc., Aerovironment Inc., EHang Holdings Limited, AgEagle, Drone Delivery Canada, Inc., and Red Cat Holdings, Inc.
If competitors of the Company develop and market
more successful products or services, offer competitive products or services at lower price points, or if the Company does not produce
consistently high-quality and well-received products and services, revenues, margins, and profitability of the Company will decline.
The Company’s ability to compete effectively
will depend on, among other things, the Company’s pricing of services and equipment, quality of customer service, development of
new and enhanced products and services in response to customer demands and changing technology, reach and quality of sales and distribution
channels and capital resources. Competition could lead to a reduction in the rate at which the Company adds new customers, a decrease
in the size of the Company’s market share and a decline in its customers. Examples include but are not limited to competition from
other companies in the UAV industry.
In addition, the Company could face increased
competition should there be an award of additional licenses in jurisdictions in which the Company operates in.
The markets in which
the Company competes are characterized by rapid technological change, which requires the Company to develop new products and product
enhancements, and could render the Company’s existing products obsolete.
Continuing
technological changes in the market for the Company’s products could make its products less competitive or obsolete, either
generally or for particular applications. The Company’s future success will depend upon its ability to develop and introduce
a variety of new capabilities and enhancements to its existing product and service offerings, as well as introduce a variety of
new product offerings, to address the changing needs of the markets in which it offers products. Delays in introducing new products
and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products or enhancements
at competitive prices may cause existing and potential customers to purchase the Company’s competitors’ products.
If the Company is unable to devote adequate resources
to develop new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements on
a timely basis, its products could lose market share, its revenue and profits could decline, and the Company could experience operating
losses.
Failure to obtain
necessary regulatory approvals from Transport Canada or other governmental agencies, or limitations put on the use of small UAV
in response to public privacy concerns, may prevent the Company from expanding sales of its small UAV to non-military customers
in Canada.
Transport Canada is responsible for establishing,
managing, and developing safety and security standards and regulations for civil aviation in Canada, and includes unmanned civil
aviation (drones). Civil operations include law enforcement, scientific research, or use by private sector companies
for commercial purposes. The Canadian Aviation Regulations (“CARs”) govern civil aviation safety and security
in Canada, and by extension govern operation of drones in Canada to an acceptable level of safety.
While Transport Canada has been a leader in the
development of regulations for the commercial use of remotely piloted aircraft systems (“RPAS”), and continues
to move forward rapidly with its regulatory development, it has acknowledged the challenge of regulations keeping pace with the
rapid development in technology and the growing demand for commercial RPAS use, particularly in the beyond visual line-of-sight
environment. In 2012, the Canadian Aviation Regulation Advisory Council UAS working group released its Phase 2 report which outlined
a proposed set of revision to the CARs to permit Beyond Visual Line of Sight (“BVLOS”) operations. This report
was the basis for the recently released Notice of Proposed Amendment (“NPA”) by Transport Canada on lower risk
beyond visual line-of-sight.
Failure to obtain necessary regulatory approvals
from Transport Canada or other governmental agencies, including the granting of certain Special Flight Operations Certificates
(“SFOCs”), or limitations put on the use of RPAS in response to public safety concerns, may prevent the Company
from testing or operating its aircraft and/or expanding its sales which could have an adverse impact on the Company’s business,
prospects, results of operations and financial condition.
There are risks
associated with the regulatory regime and permitting requirements of the Company’s business.
A significant portion of the Company’s
business is based on the operation of RPAS. The operation of RPAS poses a risk or hazard to airspace users as well as personnel
on the ground. As the RPAS industry is rapidly developing, the regulatory environment for RPAS is constantly evolving to
keep pace. As such, whenever a policy change with respect to operating regulations occurs, there is a risk that the Company
could find itself to be in non-compliance with these new regulations. While the Company endeavours to take all necessary
action to reduce the risks associated with the operations of RPAS and to remain well-informed and up-to-date on any addendums
and changes to the applicable regulations, there is no assurance that an incident involving an RPAS or the Company’s
non-compliance would not create a significant current or future liability for the company.
The regulation of RPAS operations within the Canadian
Domestic Airspace (“CDA”) is still evolving and is expected to continue to change with the proliferation
of RPAS, advancements in technology, and standardization within the industry. Changes to the regulatory regime may be disruptive
and result in the Company needing to adopt significant changes in its operations and policies, which may be costly and time-consuming,
and may materially adversely affect the Company’s ability to manufacture and make delivery of its products and services
in a timely fashion.
The Company’s business and research and
development activities are subject to oversight by Transport Canada, the federal institution responsible for transportation
policies and programs, including the rules in the CARs. Currently, Transport Canada requires that any non-recreational operators
of RPAS have a SFOC. The Company’s ability to develop, test, demonstrate, and sell products and services depends
on its ability to acquire and maintain a valid SFOC.
In addition, there exists public concern
regarding the privacy implications of Canadian commercial and law enforcement use of small UAV. This concern has included
calls to develop explicit written policies and procedures establishing UAV usage limitations. There is no assurance that
the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the
adoption of small UAV by prospective non-military customers.
The Company may
be subject to the risks associated with future acquisitions.
As part of the Company’s overall business
strategy, the Company may pursue select strategic acquisitions that would provide additional product or service offerings, additional
industry expertise, and a stronger industry presence in both existing and new jurisdictions. Any such future acquisitions, if completed,
may expose the Company to additional potential risks, including risks associated with: (a) the integration of new operations, services
and personnel; (b) unforeseen or hidden liabilities; (c) the diversion of resources from the Company’s existing business and technology;
(d) potential inability to generate sufficient revenue to offset new costs; (e) the expenses of acquisitions; or (f) the potential loss
of or harm to relationships with both employees and existing users resulting from its integration of new businesses. In addition, any
proposed acquisitions may be subject to regulatory approval.
The
Company’s inability to retain management and key employees could impair the future success of the Company.
The Company’s future success depends substantially
on the continued services of its executive officers and its key development personnel. If one or more of its executive officers or key
development personnel were unable or unwilling to continue in their present positions, the Company might not be able to replace them easily
or at all. In addition, if any of its executive officers or key employees joins a competitor or forms a competing company, the Company
may lose experience, know-how, key professionals and staff members as well as business partners. These executive officers and key employees
could develop drone technologies that could compete with and take customers and market share away from the Company.
A significant growth
in the number of personnel would place a strain upon the Company’s management and resources.
The Company may experience a period of significant
growth in the number of personnel that could place a strain upon its management systems and resources. The Company’s future will
depend in part on the ability of its officers and other key employees to implement and improve financial and management controls, reporting
systems and procedures on a timely basis and to expand, train, motivate and manage its workforce. The Company’s current and planned
personnel, systems, procedures and controls may be inadequate to support its future operations.
The Company faces
uncertainty and adverse changes in the economy.
Adverse changes in the economy could negatively
impact the Company’s business. Future economic distress may result in a decrease in demand for the Company’s products,
which could have a material adverse impact on the Company’s operating results and financial condition. Uncertainty and adverse
changes in the economy could also increase costs associated with developing and publishing products, increase the cost and decrease
the availability of sources of financing, and increase the Company’s exposure to material losses from bad debts, any of which
could have a material adverse impact on the financial condition and operating results of the Company.
The COVID-19
pandemic could negatively affect our business, operations and future financial performance.
At the beginning of the year 2020 the outbreak
of the novel strain of coronavirus, specifically identified as COVID-19, resulted in governments worldwide enacting emergency measures
to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods
and physical distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity
markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary
and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown
at this time, as is the efficacy of the government and central bank interventions.
Due to the worldwide COVID-19 outbreak, material
uncertainties may come into existence that could materially and adversely affect the business of the Company. The Company cannot
accurately predict the future impact COVID-19 may have on, among others, the: (i) global oil prices, (ii) demand for drone delivery
services, (iii) severity and the length of potential measures taken by governments to manage the spread of the virus and their
effect on labour availability and supply lines, (iv) availability of essential supplies, (v) purchasing power of the Canadian dollar,
or (vi) ability of the Company to obtain necessary financing. Despite global vaccination efforts, it is not possible to reliably
estimate the length and severity of these developments and the impact on the financial results and condition of the Company in
the future.
The COVID-19 outbreak
or similar global health crises could affect the Company’s ability to access sources of capital.
The extent to which COVID-19 could impact
the Company’s operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain and cannot
be predicted. Negative financial results, uncertainties in the market, and a tightening of credit markets, caused by COVID-19,
or a recession, could have a material adverse effect on the Company’s liquidity and ability to obtain financing in the future.
COVID-19 or similar
pandemics could adversely impact the Company’s business and/or its ability to complete reporting obligations.
If a pandemic, epidemic, or outbreak of an infectious
disease including the recent outbreak off respiratory illness caused by a novel coronavirus such as COVID-19 or other public
health crisis were to affect the Company’s facilities, staff, accountants or advisors, our business could be adversely
and materially affected. Such a pandemic could result in mandatory social distancing, travel bans, and quarantine
restrictions, and this may limit access to the Company’s employees and professional advisors. These factors may hamper
the Company’s efforts to comply with it filing obligations with the CSE or as required under Canadian Securities Laws.
The
Company may be subject to the risks associated with foreign operations in other countries.
The Company’s primary revenues are expected
to be achieved in Canada and the US. However, the Company may expand to markets outside of North America and become subject to risks normally
associated with conducting business in other countries. As a result of such expansion, the Company may be subject to the legal, political,
social and regulatory requirements and economic conditions of foreign jurisdictions. The Company cannot predict government positions on
such matters as foreign investment, intellectual property rights or taxation. A change in government positions on these issues could adversely
affect the Company’s business.
If the Company expands its business to foreign
markets, it will need to respond to rapid changes in market conditions, including differing legal, regulatory, economic, social and political
conditions in these countries. If the Company is not able to develop and implement policies and strategies that are effective in each
location in which it does business, then the Company’s business, prospects, results of operations and financial condition could
be materially and adversely affected.
There are tax risks
the Company may be subject to in carrying on business in Canada.
The Company is a resident of Canada for purposes
of the Income Tax Act (Canada) (the “Tax Act”). Since the Company is operating in a new and developing
industry there is a risk that foreign governments may look to increase their tax revenues or levy additional taxes to level
the playing field for perceived disadvantages to traditional brick and mortar businesses. There is no guarantee that governments
will not impose such additional adverse taxes in the future.
If critical components
or raw materials used to manufacture the Company’s products become scarce or unavailable, then the Company may incur delays
in manufacturing and delivery of its products, which could damage its business.
The Company obtains hardware components,
various subsystems and systems from a limited group of suppliers. The Company does not have long-term agreements with any of these
suppliers that obligate it to continue to sell components, subsystems, systems or products to the Company. The Company’s
reliance on these suppliers involves significant risks and uncertainties, including whether its suppliers will provide an adequate
supply of required components, subsystems, or systems of sufficient quality, will increase prices for the components, subsystems
or systems and will perform their obligations on a timely basis.
In addition, certain raw materials and
components used in the manufacture of the Company’s products are periodically subject to supply shortages, and its business
is subject to the risk of price increases and periodic delays in delivery. Similarly, the market for electronic components is subject
to cyclical reductions in supply. If the Company is unable to obtain components from third-party suppliers in the quantities and
of the quality that it requires, on a timely basis and at acceptable prices, then it may not be able to deliver its products on
a timely or cost-effective basis to its customers, which could cause customers to terminate their contracts with the Company, increase
the Company’s costs and seriously harm its business, results of operations and financial condition. Moreover, if any of the
Company’s suppliers become financially unstable, then it may have to find new suppliers. It may take several months to locate
alternative suppliers, if required, or to redesign the Company’s products to accommodate components from different suppliers.
The Company may experience significant delays in manufacturing and shipping its products to customers and incur additional development,
manufacturing and other costs to establish alternative sources of supply if the Company loses any of these sources or is required
to redesign its products. The Company cannot predict if it will be able to obtain replacement components within the time frames
that it requires at an affordable cost, if at all.
Natural outdoor
elements such as wind and precipitation may have a material adverse effect on the use and effectiveness of the Company’s
products.
The Company’s business will involve the
operation and flying of UAVs, a technology based product used outside. As such, the business is subject to various risks inherent
in a technology-based businesses operated in outdoor conditions, including faulty parts, break-downs and crashes. Although the
Company anticipates the use of its UAVs in good climactic conditions and that adequate flying conditions will be monitored by trained
personnel, there can be no assurance that unpredictable natural outdoor elements will not have a material adverse effect on the
use and effectiveness of its products.
The Company’s
products may be subject to the recall or return.
Manufacturers and distributors of products
are sometimes subject to the recall or return of their products for a variety of reasons, including product defects,
safety concerns, packaging issues and inadequate or inaccurate labeling disclosure. If any of the Company’s
equipment were to be recalled due to an alleged product defect, safety concern or for any other reason, the Company
could be required to incur unexpected expenses of the recall and any legal proceedings that might arise in connection
with the recall. The Company may lose a significant amount of sales and may not be able to replace those sales
at an acceptable margin or at all. In addition, a product recall may require significant management time and
attention. Additionally, product recalls may lead to increased scrutiny of the Company’s operations by Transport
Canada or other regulatory agencies, requiring further management time and attention and potential legal fees, costs
and other expenses.
If
the Company releases defective products or services, its operating results could suffer.
Products and services designed and released
by the Company involve extremely complex software programs, and are difficult to develop and distribute. While the Company
has quality controls in place to detect and prevent defects in its products and services before they are released, these
quality controls are subject to human error, overriding, and reasonable resource constraints. Therefore, these quality controls
and preventative measures may not be effective in detecting and preventing defects in the Company’s products and services
before they have been released into the marketplace. In such an event, the Company could be required, or decide voluntarily,
to suspend the availability of the product or services, which could significantly harm its business and operating results.
The Company’s
products and services are complex and could have unknown defects or errors, which may give rise to legal claims against the Company,
diminish its brand or divert its resources from other purposes.
The Company’s UAVs rely on complex avionics,
sensors, user-friendly interfaces and tightly integrated, electromechanical designs to accomplish their missions. Despite testing,
the Company’s products have contained defects and errors and may in the future contain defects, errors or performance problems
when first introduced, when new versions or enhancements are released, or even after these products have been used by the Company’s
customers for a period of time. These problems could result in expensive and time-consuming design modifications or warranty
charges, delays in the introduction of new products or enhancements, significant increases in the Company’s service and maintenance
costs, exposure to liability for damages, damaged customer relationships and harm to the Company’s reputation, any of which
could materially harm the Company’s results of operations and ability to achieve market acceptance. In addition, increased
development and warranty costs could be substantial and could significantly reduce the Company’s operating margins.
The existence of any defects, errors, or
failures in the Company’s products or the misuse of the Company’s products could also lead to product liability claims
or lawsuits against it. A defect, error or failure in one of the Company’s UAV could result in injury, death or property
damage and significantly damage the Company’s reputation and support for its UAV in general. The Company anticipates this
risk will grow as its UAV begins to be used in Canadian domestic airspace and urban areas. The Company’s UAV test systems
also have the potential to cause injury, death or property damage in the event that they are misused, malfunction or fail to operate
properly due to unknown defects or errors.
Although the Company maintains insurance
policies, it cannot provide any assurance that this insurance will be adequate to protect the Company from all material judgments
and expenses related to potential future claims or that these levels of insurance will be available in the future at economical
prices or at all. A successful product liability claim could result in substantial cost to us. Even if the Company is fully insured
as it relates to a particular claim, the claim could nevertheless diminish the Company’s brand and divert management’s
attention and resources, which could have a negative impact on the Company’s business, financial condition and results of
operations.
Shortfalls in available
external research and development funding could adversely affect the Company.
The Company depends on its research and
development activities to develop the core technologies used in its UAV products and for the development of the Company’s
future products. A portion of the Company’s research and development activities can depend on funding by commercial companies
and the Canadian government. Canadian government and commercial spending levels can be impacted by a number of variables, including
general economic conditions, specific companies’ financial performance and competition for Canadian government funding
with other Canadian government-sponsored programs in the budget formulation and appropriation processes. Moreover, the Canadian,
federal and provincial governments provide energy rebates and incentives to commercial companies, which directly impact the amount
of research and development that companies appropriate for energy systems. To the extent that these energy rebates and incentives
are reduced or eliminated, company funding for research and development could be reduced. Any reductions in available research
and development funding could harm the Company’s business, financial condition and operating results.
The Company could
be prohibited from shipping its products to certain countries if it is unable to obtain Canadian government authorization regarding
the export of its products, or if current or future export laws limit or otherwise restrict the Company’s business.
The Company must comply with Canadian
federal and provincial laws regulating the export of its products. In some cases, explicit authorization from the Canadian
government is needed to export its products. The export regulations and the governing policies applicable to the
Company’s business are subject to change. The Company cannot provide assurance that such export authorizations will be
available for its products in the future. Compliance with these laws has not significantly limited the Company’s
operations or sales in the recent past, but could significantly limit them in the future. Non-compliance with applicable
export regulations could potentially expose the Company to fines, penalties and sanctions. If the Company cannot obtain
required government approvals under applicable regulations, the Company may not be able to sell its products in certain
international jurisdictions, which could adversely affect the Company’s financial condition and results of
operations.
Negative consumer
perception regarding the Company’s products could have a material adverse effect on the demand for the Company’s products
and the business, results of operations, financial condition and cash flows of the Company.
The Company believes the UAV industry is highly
dependent upon consumer perception regarding the safety, efficacy, and quality of the UAV used. Consumer perception of these products
can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention, and
other publicity regarding the use of UAV. There can be no assurance that future scientific research, findings, regulatory proceedings,
litigation, media attention, or other research findings or publicity will be favourable to the UAV market. Future research reports,
findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favourable than, or
that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for the Company’s
products and the business, results of operations, financial condition and cash flows of the Company. The dependence upon
consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention
or other publicity, whether or not accurate or with merit, could have a material adverse effect on the Company, the demand for
the Company’s products, and the business, results of operations, financial condition and cash flows of the Company. Further,
adverse publicity reports or other media attention regarding the safety, the efficacy, and quality of UAV based surveys in general,
or the Company’s products specifically, could have a material adverse effect.
If the Company fails
to successfully promote its product brand, this could have a material adverse effect on the Company’s business,
prospects, financial condition and results of operations.
The Company believes that brand recognition is
an important factor to its success. If the Company fails to promote its brands successfully, or if the expenses of doing
so are disproportionate to any increased net sales it achieves, it would have a material adverse effect on the Company’s
business, prospects, financial condition and results of operations. This will depend largely on the Company’s ability
to maintain trust, be a technology leader, and continue to provide high-quality and secure technologies, products
and services. Any negative publicity about the Company or its industry, the quality and reliability of the Company’s technologies,
products and services, the Company’s risk management processes, changes to the Company’s technologies, products
and services, its ability to effectively manage and resolve customer complaints, its privacy and security practices, litigation,
regulatory activity, and the experience of sellers and buyers with the Company’s products or services, could adversely affect the
Company’s reputation and the confidence in and use of the Company’s technologies, products and services. Harm
to the Company’s brand can arise from many sources, including; failure by the Company or its partners to satisfy expectations
of service and quality; inadequate protection of sensitive information; compliance failures and claims; litigation and other
claims; employee misconduct; and misconduct by the Company’s partners, service providers, or other counterparties.
If the Company does not successfully maintain a strong and trusted brand, its business could be materially and adversely affected.
The Company may
be subject to electronic communication security risks.
A significant potential vulnerability of electronic
communications is the security of transmission of confidential information over public networks. Anyone who is able to circumvent the
Company’s security measures could misappropriate proprietary information or cause interruptions in its operations. The Company may
be required to expend capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches.
The Company’s
business could be adversely affected if its consumer protection and data privacy practices are not perceived as adequate or there
are breaches of its security measures or unintended disclosures of its consumer data.
The rate of privacy law-making is accelerating
globally and interpretation and application of consumer protection and data privacy laws in Canada, the United States, Europe and
elsewhere are often uncertain, contradictory and in flux. As business practices are being challenged by regulators, private litigants,
and consumer protection agencies around the world, it is possible that these laws may be interpreted and applied in a manner that
is inconsistent with the Company’s data and/or consumer protection practices. If so, this could result in increased litigation
government or court-imposed fines, judgments or orders requiring that the Company change its practices, which could have an adverse
effect on its business and reputation. Complying with these various laws could cause the Company to incur substantial costs or
require it to change its business practices in a manner adverse to its business.
The Company
relies on its business partners, and they may be given access to sensitive and proprietary information in order to provide services
and support to the Company’s teams.
The Company relies on various business
partners, including third-party service providers, vendors, licensing partners, development partners, and licensees, among others,
in some areas of the Company’s business. In some cases, these third parties are given access to sensitive and proprietary
information in order to provide services and support to the Company’s teams. These third parties may misappropriate the Company’s
information and engage in unauthorized use of it. The failure of these third parties to provide adequate services and technologies,
or the failure of the third parties to adequately maintain or update their services and technologies, could result in a disruption
to the Company’s business operations. Further, disruptions in the financial markets and economic downturns may adversely
affect the Company’s business partners and they may not be able to continue honoring their obligations to the Company. Alternative
arrangements and services may not be available to the Company on commercially reasonable terms or the Company may experience business
interruptions upon a transition to an alternative partner or vendor. If the Company loses one or more significant business partners,
the Company’s business could be harmed.
If the Company fails
to protect, or incur significant costs in defending, its intellectual property and other proprietary rights, the Company’s
business, financial condition, and results of operations could be materially harmed.
The Company’s success depends, in
large part, on its ability to protect its intellectual property and other proprietary rights. The Company relies primarily on patents,
trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions,
to protect the Company’s intellectual property and other proprietary rights. However, a portion of the Company’s technology
is not patented, and the Company may be unable or may not seek to obtain patent protection for this technology. Moreover, existing
Canadian legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer
only limited protection, may not provide the Company with any competitive advantages, and may be challenged by third parties.
The laws of countries other than Canada may be even less protective of intellectual property rights. Accordingly, despite its efforts,
the Company may be unable to prevent third parties from infringing upon or misappropriating its intellectual property or otherwise
gaining access to the Company’s technology. Unauthorized third parties may try to copy or reverse engineer the Company’s
products or portions of its products or otherwise obtain and use the Company’s intellectual property. Moreover, many of the
Company’s employees have access to the Company’s trade secrets and other intellectual property. If one or more of these
employees leave to work for one of the Company’s competitors, then they may disseminate this proprietary information, which
may as a result damage the Company’s competitive position. If the Company fails to protect its intellectual property and
other proprietary rights, then the Company’s business, results of operations or financial condition could be materially harmed.
From time to time, the Company may have to initiate lawsuits to protect its intellectual property and other proprietary rights.
Pursuing these claims is time consuming and expensive and could adversely impact the Company’s results of operations.
In addition, affirmatively defending the
Company’s intellectual property rights and investigating whether the Company is pursuing a product or service development
that may violate the rights of others may entail significant expense. Any of the Company’s intellectual property rights may
be challenged by others or invalidated through administrative processes or litigation. If the Company resorts to legal proceedings
to enforce its intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary
rights of others, then the proceedings could result in significant expense to the Company and divert the attention and efforts
of the Company’s management and technical employees, even if the Company prevails.
Obtaining and maintaining
the Company’s patent protection depends on compliance with various procedural, document submission, fee payment, and other
requirements imposed by governmental patent agencies, and its patent protection could be reduced or eliminated for non-compliance
with these requirements.
The Canadian Intellectual Property
Office (“CIPO”) and various foreign national or international patent agencies require compliance with a number
of procedural, documentary, fee payment, and other similar provisions during the patent application process. Periodic maintenance
fees on any issued patent are due to be paid to the CIPO and various foreign national or international patent agencies in several
stages over the lifetime of the patent. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other
means in accordance with the applicable rules, there are situations in which non-compliance can result in abandonment or lapse
of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance
events that could result in abandonment or lapse of patent rights include, but are not limited to, failure to timely file national
and regional stage patent applications based on the Company’s international patent application, failure to respond to official
actions within prescribed time limits, non-payment of fees, and failure to properly legalize and submit formal documents. If the
Company fails to maintain the patents and patent applications covering its product candidates, its competitors might be able to
enter the market, which would have a material adverse effect on the Company’s business.
While a patent may be granted by a national
patent office, there is no guarantee that the granted patent is valid. Options exist to challenge the validity of a patent
which, depending upon the jurisdiction, may include re-examination, opposition proceedings before the patent office, and/or
invalidation proceedings before the relevant court. Patent validity may also be the subject of a counterclaim to an
allegation of patent infringement.
Pending patent applications may be challenged
by third parties in protest or similar proceedings. Third parties can typically submit prior art material to patentability for
review by the patent examiner. Regarding Patent Cooperation Treaty applications, a positive opinion regarding patentability issued
by the International Searching Authority does not guarantee allowance of a national application derived from the Patent Cooperation
Treaty application. The coverage claimed in a patent application can be significantly reduced before the patent is issued, and
the patent’s scope can be modified after issuance. It is also possible that the scope of claims granted may vary from jurisdiction
to jurisdiction.
The grant of a patent does not have any bearing
on whether the invention described in the patent application would infringe the rights of earlier filed patents. It is possible
to both obtain patent protection for an invention and yet still infringe the rights of an earlier granted patent.
The Company may
be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming and limit
the Company’s ability to use certain technologies in the future.
The Company may become subject to claims
that its technologies infringe upon the intellectual property or other proprietary rights of third parties. Any claims, with or
without merit, could be time-consuming and expensive, and could divert the Company’s management’s attention away from
the execution of its business plan. Moreover, any settlement or adverse judgment resulting from these claims could require the
Company to pay substantial amounts or obtain a license to continue to use the disputed technology, or otherwise restrict or prohibit
the Company’s use of the technology. The Company cannot assure that it would be able to obtain a license from the third party
asserting the claim on commercially reasonable terms, if at all, that the Company would be able to develop alternative technology
on a timely basis, if at all, or that the Company would be able to obtain a license to use a suitable alternative technology to
permit the Company to continue offering, and the Company’s customers to continue using, the Company’s affected product.
An adverse determination also could prevent the Company from offering its products to others. Infringement claims asserted against
the Company may have a material adverse effect on its business, results of operations or financial condition.
The Company
may not be able to protect its intellectual property rights throughout the world.
Filing, prosecuting, and defending patents
on all of the Company’s product candidates throughout the world would be prohibitively expensive. Therefore, the Company
has filed applications and/or obtained patents only in key markets including the United States and Canada. Competitors may use
the Company’s technologies in jurisdictions where it has not obtained patent protection to develop their own products and
their products may compete with products of the Company.
The Company’s
senior management team has limited experience managing a public company, and regulatory compliance may divert its attention from
the day to day management of its business.
The individuals who now constitute the
Company’s senior management team have relatively limited experience managing a publicly traded company and limited experience
complying with the increasingly complex laws pertaining to public companies compared to senior management of other publicly traded
companies. The Company’s senior management team may not successfully or efficiently manage its transition as a recently listed
public company subject to significant regulatory oversight and reporting obligations under Canadian Securities Laws. In particular,
these new obligations will require substantial attention from the Company’s senior management and could divert their attention
away from the day to day management of its business.
The Company may
experience adverse effects on its reported results of operations as a result of adopting new accounting standards or interpretations.
The Company’s implementation
of and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely affect
its reported financial position or operating results or cause unanticipated fluctuations in our reported operating results in future
periods.
Failure to
adhere to the Company’s financial reporting obligations and other public company requirements could adversely affect the
market price of the Common Shares.
Upon receiving a final receipt for
the non-offering final prospectus dated October 23, 2019, the Company became subject to reporting and other
obligations under applicable Canadian Securities Laws, including National Instrument 52-109 – Certification of
Disclosure in Issuers’ Annual and Interim Filings, and the rules of any stock exchange on which the
Common Shares are listed. These reporting and other obligations will place significant demands on the Company’s
management, administrative, operational and accounting resources. If the Company is unable to meet such demands in a
timely and effective manner, its ability to comply with its financial reporting obligations and other rules applicable
to reporting issuers could be impaired. Moreover, any failure to maintain effective internal controls could cause the
Company to fail to satisfy its reporting obligations or result in material misstatements in its financial statements.
If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results
could be materially adversely affected which could also cause investors to lose confidence in its reported financial
information, which could result in a reduction in the trading price of the Common Shares.
In addition, the Company does not expect that
its disclosure controls and procedures and internal controls over financial reporting will prevent all errors or fraud.
A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within
an organization are detected. The inherent limitations include the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts
of certain persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations
in a control system, misstatements due to errors or fraud may occur and may not be detected in a timely manner or at
all.
Changes in
accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could
significantly affect the Company’s reported financial results or financial condition.
Generally accepted accounting principles
and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that
are relevant to the Company’s business, including but not limited to revenue recognition, impairment of goodwill and intangible
assets, inventory, income taxes and litigation, are highly complex and involve many subjective assumptions, estimates and judgments.
Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly
change the Company’s reported financial performance or financial condition in accordance with generally accepted accounting
principles.
If the Company
is required to write down goodwill and other intangible assets, the Company’s financial condition and results could be negatively
affected.
Goodwill impairment arises when there is
deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of the goodwill dips below its
book value. The Company is required to review its goodwill for impairment at least annually. Events that may trigger goodwill impairment
include deterioration in economic conditions, increased competition, loss of key personnel, and regulatory action. Should any of
these occur, an impairment of goodwill relating to the acquisition of Dronelogics Systems Inc. could have a negative effect on
the assets of the Company.
From time to time,
the Company may become involved in legal proceedings, which could adversely affect the Company.
The Company may, from time to time in the
future, become subject to legal proceedings, claims, litigation and government investigations or inquiries, which could be expensive,
lengthy, and disruptive to normal business operations. In addition, the outcome of any legal proceedings, claims, litigation, investigations
or inquiries may be difficult to predict and could have a material adverse effect on the Company’s business, operating results,
or financial condition.
The Company’s
directors and officers may have conflicts of interest in conducting their duties.
Because directors and officers of the Company
are or may become directors or officers of other reporting companies or have significant shareholdings in other technology companies,
the directors and officers of the Company may have conflicts of interest in conducting their duties. The Company and its directors
and officers will attempt to minimize such conflicts. In the event that such a conflict of interest arises at a meeting of the
directors of the Company, a director who has such a conflict will abstain from voting for or against a particular matter in which
the director has the conflict. In appropriate cases, the Company will establish a special committee of independent directors to
review a particular matter in which several directors, or officers, may have a conflict. In determining whether or not the Company
will participate in a particular program and the interest therein to be acquired by it, the directors will primarily consider
the potential benefits to the Company, the degree of risk to which the Company may be exposed and its financial position at that
time. Other than as indicated, the Company has no other procedures or mechanisms to deal with conflicts of interest.
Executive officers and directors may have rights
to indemnification from the Company, including pursuant to directors’ and officers’ liability insurance policies, that
will survive termination of their agreements.
We have no operating experience as a publicly
traded company in the U.S.
We have no operating experience as a publicly
traded company in the U.S. Although the individuals who now constitute our management team have experience managing a publicly-traded
company, there is no assurance that the past experience of our management team will be sufficient to operate our company as a publicly
traded company in the United States, including timely compliance with the disclosure requirements of the SEC. Following the completion
of this offering, we will be required to develop and implement internal control systems and procedures in order to satisfy the periodic
and current reporting requirements under applicable SEC regulations and comply with the Nasdaq listing standards. These requirements will
place significant strain on our management team, infrastructure and other resources. In addition, our management team may not be able
to successfully or efficiently manage our company as a U.S. public reporting company that is subject to significant regulatory oversight
and reporting obligations.
Risks Related to this Offering,
the Consolidation and Ownership of Our Common Shares
An investment in
the Offered Shares may result in the loss of an investor’s entire investment.
An investment in the Offered Shares is speculative
and may result in the loss of an investor’s entire investment. Only potential investors who are experienced in high risk
investments and who can afford to lose their entire investment should consider an investment in our Common Shares.
The market price
of our Common Shares may be volatile, and you could lose all or part of your investment.
The trading price of our Common Shares has in
the past been subject to wide fluctuations and may also be subject to fluctuation in the future. The COVID-19 pandemic has resulted
in significant volatility in global equity markets, including to the price of our Common Shares, in recent months. This may make
it more difficult for investors to resell our Common Shares when they want at prices that they find attractive. Fluctuations in
our Common Share price may be caused by events unrelated to our operating performance and beyond our control. Factors that
may contribute to fluctuations include, but are not limited to:
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revenue or results of operations in any quarter failing to meet the expectations, published or otherwise,
of the investment community;
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actual or anticipated changes or fluctuations in our results of operations;
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announcements by us or our competitors of new products or new or terminated significant contracts, commercial
relationships or capital commitments;
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rumors and market speculation involving us or other companies in our industry;
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changes in our executive management team or the composition of our Board of Directors;
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fluctuations in the share prices of other companies in the technology and emerging growth sectors;
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general market conditions, for instance, as recently affected by the COVID-19 pandemic;
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actual or anticipated developments in our business or our competitors’ businesses or the competitive
landscape generally;
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litigation involving us, our industry or both, or investigations by regulators into our operations or
those of competitors;
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announced or completed acquisitions of businesses or technologies by us or our competitors;
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new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
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shareholder activism and related publicity;
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foreign exchange rates; and
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other risk factors as set out in this Prospectus Supplement and in the documents incorporated by reference
into this Prospectus Supplement.
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If the market price of our Common Shares drops
significantly, shareholders could institute securities class action lawsuits against us, regardless of the merits of such claims.
Such a lawsuit could cause us to incur substantial costs and could divert the time and attention of our management and other resources
from our business. This could harm our business, results of operations and financial condition.
Subsequent offerings
will result in dilution to our shareholders.
We may sell additional equity securities in subsequent
offerings (including through the sale of securities convertible into equity securities) and may issue additional equity securities
to finance operations, acquisitions or other projects. We cannot predict the size of future issuances of equity securities or the
size and terms of future issuances of debt instruments or other securities convertible into equity securities or the effect, if
any, that future issuances and sales of our securities will have on the market price of our Common Shares. Any transaction involving
the issuance of previously authorized but unissued Common Shares, or securities convertible into Common Shares, would result in
dilution, and possibly substantial dilution, to securityholders.
Our Board of Directors has the authority to authorize
certain offers and sales of additional securities without the vote of, or prior notice to, our shareholders. Such additional issuances
may involve the issuance of a significant number of our Common Shares at prices less than the current market price for the Common
Shares.
There is no guarantee
that an active trading market for our Common Shares will be maintained on the CSE and/or the NASDAQ. Investors may not be able
to sell their Common Shares quickly or at the latest market price if the trading in our Common Shares is not active.
Our Common Shares are currently listed on the
CSE, but prior to this Offering were not listed on any U.S. stock exchange or quoted on any U.S. quotation system other than the
OTCQB. Accordingly, prior to this Offering, there has been a limited public market in the United States for our Common Shares. The initial
U.S. public offering price for the Offered Shares may bear no relationship to the price at which our Offered Shares will trade
upon and following the completion of this Offering. Our shareholders may be unable to sell significant quantities of Common Shares
into the public trading markets without a significant reduction in the price of their Common Shares, or at all. Although we have
applied to list our Common Shares on the NASDAQ, listing will be subject to Draganfly fulfilling all of the listing requirements
of the NASDAQ and an active trading market for our shares may never develop or be sustained in the United States following this
Offering. There can be no assurance that there will be sufficient liquidity of our Common Shares on the trading market, and that
we will continue to meet the listing requirements of the CSE, the NASDAQ or any other public listing exchange. The lack of an active
market may impair your ability to sell your Offered Shares at the time you wish to sell them or at a price that you consider
reasonable.
Even if the Consolidation achieves the requisite
increase in the market price of our Common Shares for listing of our securities on NASDAQ, we cannot assure you that we will be able to
continue to comply with the minimum bid price requirement of NASDAQ.
Even if the Consolidation achieves the requisite
increase in the market price of our Common Shares to be in compliance with the minimum bid price for listing of our securities on the
NASDAQ, there can be no assurance that the market price of our Common Shares following the Consolidation will remain at the level required
for continuing compliance with that requirement. It is not uncommon for the market price of a company’s common stock to decline
in the period following a Consolidation. If the market price of our Common Shares declines following the effectuation of the Consolidation,
the percentage decline may be greater than would occur in the absence of a Consolidation. In any event, other factors unrelated to the
number of shares of our Common Shares outstanding, such as negative financial or operational results, could adversely affect the market
price of our Common Shares and jeopardize our ability to meet or maintain the NASDAQ’s minimum bid price requirement.
Future issuances
of equity securities by us or sales by our existing shareholders may cause the price of our Common Shares to fall.
The market price of our Common Shares could decline
as a result of issuances of securities or sales by our existing shareholders in the market, including by our directors, executive
officers and significant shareholders, or the perception that these sales could occur. Sales of our Common Shares by shareholders
might also make it more difficult for us to sell Common Shares at a time and price that we deem appropriate. We also expect to
issue Common Shares in the future. Future issuances of Common Shares, or the perception that such issuances are likely to
occur, could affect the prevailing trading prices of the Common Shares.
We will have broad
discretion in the use of the net proceeds of this Offering and may not use them to effectively manage our business.
We will have broad discretion over the use of
the net proceeds from this Offering. Because of the number and variability of factors that will determine our use of such proceeds,
our ultimate use might vary substantially from our planned use. Investors may not agree with how we allocate or spend the proceeds
from this Offering. We may pursue acquisitions, collaborations or other strategic transactions that do not result in an increase
in the market value of the Common Shares and may result in losses.
We may never pay
dividends over the foreseeable future.
Investors should not rely on an investment in
Draganfly’s Common Shares to provide dividend income. The Company does not anticipate that it will pay any cash dividends
to holders of its Common Shares in the foreseeable future. Instead, the Company plans to retain any earnings to maintain and expand
its operations. In addition, any future debt financing arrangement may contain terms prohibiting or limiting the amount
of dividends that may be declared or paid on its Common Shares. Accordingly, investors must rely on sales of their Common Shares
after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors
seeking cash dividends should not purchase the Company’s Common Shares.
The Company may
be classified as a “passive foreign investment company” for U.S. federal income tax purposes, which would subject U.S. investors
that hold the Company’s Common Shares to potentially significant adverse U.S. federal income tax consequences.
If the Company is classified as a passive foreign
investment company (“PFIC”) for U.S. federal income tax purposes in any taxable year, U.S. investors holding the Company’s
Common Shares generally will be subject, in that taxable year and all subsequent taxable years (whether or not the Company continued to
be a PFIC), to certain adverse US federal income tax consequences. The Company will be classified as a PFIC in respect of any taxable
year in which, after taking into account its income and gross assets (including the income and assets of 25% or more owned subsidiaries),
either (i) 75% or more of its gross income consists of certain types of “passive income” or (ii) 50% or more of the
average quarterly value of its assets is attributable to “passive assets” (assets that produce or are held for the production
of passive income). Based upon the current and expected composition of the Company’s income and assets, the Company believes that
it was not a PFIC for the taxable year ended December 31, 2020 and expects that it will not be a PFIC for the current taxable year. Nevertheless,
because the Company’s PFIC status must be determined annually with respect to each taxable year and will depend on the composition
and character of the Company’s assets and income, including the Company’s use of proceeds from offerings pursuant to this
Prospectus, and the value of the Company’s assets (which may be determined, in part, by reference to the market value of Common
Shares, which may be volatile) over the course of such taxable year, the Company may be a PFIC in any taxable year. The determination
of whether the Company will be or become a PFIC may also depend, in part, on how, and how quickly, the Company uses its liquid assets
and the cash raised in an offering. If the Company determines not to deploy significant amounts of cash for active purposes, the Company’s
risk of being a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status
is a factual determination made annually after the close of each taxable year, there can be no assurance that the Company will not be
a PFIC for any future taxable year. In addition, it is possible that the U.S. Internal Revenue Service may challenge the Company’s
classification of certain income and assets as non-passive, which may result in the Company being or becoming a PFIC in the current or
subsequent years.
If the Company is a PFIC for any year during a
U.S. holder’s holding period, then such U.S. holder generally will be required to treat any gain realized upon a disposition of
Common Shares, or any “excess distribution” received on its Common Shares, as ordinary income, and to pay an interest charge
on a portion of such gain or distribution, unless the U.S. holder makes a timely and effective “qualified electing fund” election
(“QEF Election”) or a “mark-to-market” election with respect to its Common Shares. A U.S. holder who makes
a QEF Election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any
year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. holders should
be aware that there can be no assurance that the Company will satisfy the record keeping requirements that apply to a QEF, or that the
Company will supply U.S. holders with information that such U.S. holders require to report under the QEF Election rules, in the event
that the Company is a PFIC and a U.S. holder wishes to make a QEF Election. Thus, U.S. holders may not be able to make a QEF Election
with respect to their Common Shares. A U.S. holder who makes a mark-to-market election generally must include as ordinary income each
year the excess of the fair market value of the Common Shares over the taxpayer’s basis therein. Each U.S. holder should consult
its own tax advisors regarding the PFIC rules and the U.S. federal income tax consequences of the acquisition, ownership, and disposition
of Common Shares.
United States investors
may not be able to obtain enforcement of civil liabilities against us.
The Company is incorporated under the laws
of British Columbia, Canada, and its principal executive offices are located in Canada. Most of the Company’s directors and officers
and most of the experts named in this Prospectus Supplement reside outside of the United States and all or a substantial portion of the
Company’s assets and the assets of these persons are located outside the United States. Consequently, it may not be possible for
an investor to effect service of process within the United States on the Company or those persons. Furthermore, it may not be possible
for an investor to enforce judgments obtained in United States courts based upon the civil liability provisions of United States federal
securities laws or other laws of the United States against those persons or the Company. There is doubt as to the enforceability, in original
actions in Canadian courts, of liabilities based upon United States federal securities laws and as to the enforceability in Canadian courts
of judgments of United States courts obtained in actions based upon the civil liability provisions of the United States federal securities
laws. Therefore, it may not be possible to enforce those actions against the Company, certain of the Company’s directors and officers
or the experts named in this Prospectus Supplement
We are an emerging
growth company and intend to take advantage of reduced disclosure requirements applicable to emerging growth companies, which could
make our Common Shares less attractive to investors.
We are an “emerging growth
company” as defined in the JOBS Act. We will remain an emerging growth company until the earliest to occur of (i) the
last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (ii) December 31, 2026 (the
last day of the fiscal year ending after the fifth anniversary of the date of the completion of the first sales of its common
equity pursuant to an effective registration statement under the United States Securities Act of 1933, as amended (the
“Securities Act”)); (iii) the date on which we have issued more than $1.0 billion in non-convertible debt
securities during the prior three-year period; or (iv) the date we qualify as a “large accelerated filer” under
the rules of the SEC, which means the market value of our Common Shares held by non-affiliates exceeds $700 million as of the
last business day of its most recently completed second fiscal quarter after we have been a reporting company in the United
States for at least 12 months. For so long as we remain an emerging growth company, we are permitted to and intend to
rely upon exemptions from certain disclosure requirements that are applicable to other public companies that are not
emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of
Section 404 (“Section 404”) of the Sarbanes-Oxley Act (2002), as amended (the “Sarbanes-Oxley
Act”).
We may take advantage of some, but not all, of
the available exemptions available to emerging growth companies. We cannot predict whether investors will find our Common Shares
less attractive if we rely on these exemptions. If some investors find our Common Shares less attractive as a result, there may
be a less active trading market for our Common Shares and the price of our Common Shares may be more volatile.
We will incur increased
costs as a result of operating as a public company in the United States and our management will be required to devote substantial
time to new compliance initiatives.
As a U.S. public company, particularly if or when
we are no longer an “emerging growth company” as defined under the JOBS Act we will incur significant legal, accounting
and other expenses, in addition to those we currently incur as a Canadian public company, that we did not incur prior to being
listed in the United States. In addition, the Sarbanes-Oxley Act, and rules implemented by the SEC and the NASDAQ impose various
other requirements on public companies, and we will need to spend time and resources to ensure compliance with our reporting
obligations in both Canada and the United States.
For example, pursuant to Section 404, we will
be required to furnish a report by our management on our internal control over financial reporting (“ICFR”),
which, if or when we are no longer an emerging growth company, must be accompanied by an attestation report on ICFR issued by our
independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will document
and evaluate our ICFR, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources,
potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our ICFR, continue
steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement
a continuous reporting and improvement process for ICFR. Despite our efforts, there is a risk that neither we nor our independent
registered public accounting firm will be able to conclude within the prescribed timeframe that our ICFR is effective as required
by Section 404. This could result in a determination that there are one or more material weaknesses in our ICFR, which could cause
an adverse reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial
statements.
In addition, becoming a public company in the
United States will increase legal and financial compliance as well as regulatory costs, such as additional NASDAQ fees, and will
make some of our public company obligations more time consuming. We intend to invest resources to comply with evolving laws, regulations
and standards in both Canada and the United States, and this investment may result in increased general and administrative expenses
and increased diversion of management’s time and attention from revenue-generating activities to compliance activities. If
our efforts to comply with public company laws, regulations and standards in the United States are insufficient, regulatory authorities
may initiate legal proceedings against us and our business may be harmed.
We also expect that being a public company in
the United States and complying with applicable rules and regulations will make it more expensive for us to obtain sufficient levels
of director and officer liability insurance coverage. This factor could also make it more difficult for us to attract and retain
qualified executive officers and members of our Board of Directors.
As a foreign private
issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit the information
publicly available to our U.S. shareholders.
We currently qualify as a “foreign
private issuer” under applicable U.S. federal securities laws and, therefore, are not required to comply with all of
the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. As a result, we do
not file the same reports that a U.S. domestic issuer would file with the SEC, although we will be required to file
with or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian
securities laws. In addition, our officers, directors and principal shareholders are exempt from the reporting and
“short swing” profit recovery provisions of Section 16 of the Exchange Act. Therefore, our shareholders may not
know on as timely a basis when our officers, directors and principal shareholders purchase or sell our securities as the
reporting periods under the corresponding Canadian insider reporting requirements are longer. In addition, as a foreign
private issuer, we are exempt from the proxy rules under the Exchange Act. We are also exempt from Regulation FD, which
prohibits issuers from making selective disclosures of material non-public information. While we expect to comply with the
corresponding requirements relating to proxy statements and disclosure of material non-public information under Canadian
securities laws, these requirements differ from those under the Exchange Act and Regulation FD and shareholders should not
expect to receive in every case the same information at the same time as such information is provided by U.S. domestic
issuers.
In addition, as a foreign private issuer, we have
the option to follow certain Canadian corporate governance practices, except to the extent that such laws would be contrary to
U.S. federal securities laws and NASDAQ listing rules and provided that we disclose the requirements we are not following and describe
the Canadian practices we follow instead. We plan to rely on this exemption in part. As a result, our shareholders may not have
the same protections afforded to shareholders of U.S. domestic issuers that are subject to all U.S. corporate governance
requirements.
At some point in the future, we may cease to qualify
as a foreign private issuer. If we cease to qualify, we will be subject to the same reporting requirements and corporate governance
requirements as a U.S. domestic issuer, which may increase our costs of being a public company in the United States.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Shelf
Prospectus and the documents incorporated by reference herein contain certain “forward-looking statements” and “forward-looking
information” within the meaning of applicable securities legislation (collectively, “forward-looking statements”).
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs,
expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking
statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,”
“expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,”
“potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate”
and other similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements
include all matters that are not historical facts. Forward-looking statements in this Prospectus Supplement, the Shelf Prospectus and
the documents incorporated by reference herein and therein include, but are not limited to, statements with respect to:
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the intentions, plans and future actions of the
Company;
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statements relating to the business and future
activities of the Company;
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anticipated developments in operations of the
Company;
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market position, ability to compete and future
financial or operating performance of the Company;
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the timing and amount of funding required to
execute the Company’s business plans;
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the effect on the Company of any changes to existing
or new legislation or policy or government regulation;
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the availability of labour;
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requirements for additional capital;
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goals, strategies and future growth;
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the adequacy of financial resources;
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expectations regarding revenues, expenses
and anticipated cash needs; and
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the impact of the COVID-19 pandemic on
the business and operations of the Company.
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Forward-looking statements are not guarantees
of future performance, actions or developments and are based on expectations, assumptions and other factors that management currently
believes are relevant, reasonable and appropriate in the circumstances. The material expectations, assumptions, and other factors
used in developing the forward-looking statements set out in this Prospectus Supplement, the accompanying Shelf Prospectus
and the documents incorporated by reference herein and therein include or relate to the following:
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the Company’s ability to implement its growth strategies;
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the Company’s competitive advantages;
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the development of new products and services;
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the Company’s ability to obtain and maintain financing on acceptable terms;
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the impact of competition;
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changes in laws, rules and regulations;
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the Company’s ability to maintain and renew required licences;
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the Company’s ability to maintain good business relationships with its customers, distributors,
suppliers and other strategic partners;
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the Company’s ability to protect intellectual property;
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the Company’s ability to manage and integrate acquisitions;
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the Company’s ability to retain key personnel; and
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the absence of material adverse changes in the industry or Canadian or global economy, including as a
result of the COVID-19 pandemic.
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Although our management believes that the forward-looking
statements herein or incorporated herein by reference are reasonable, actual results could be substantially different due to the
risks and uncertainties associated with and inherent in our business, including the following risks:
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we have a history of losses;
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shareholder’s holdings maybe diluted if the Company issues additional Common Shares or other securities
in the future;
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we incur substantial research and development cost and may have reduced profitability as a result;
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new business models could fail to produce any financial returns;
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we are affected by operational risks;
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we operate in evolving markets and we may have difficulty in evaluating future prospects;
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risks related to competition in the industry;
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our markets are prone to rapid technological change and there are risks relating to the evolving nature
of the market for our products;
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risks related to regulatory approvals and permitting requirements;
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we may fail to obtain or maintain required regulatory approvals;
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risks associated with acquisitions;
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we are reliant on our key personnel;
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risks related to uncertainty and adverse changes in the economy;
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risks related to the COVID-19 pandemic and its impact on us;
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risks associated with foreign operations in other countries;
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our estimates of market opportunity and market and revenue growth may be inaccurate or we may fail
to grow at our estimated rates;
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tax risks associated with carrying on business in Canada;
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we rely on critical components and raw materials to manufacture our products and if they become unavailable
or scarce, there could be delays in and manufacturing and delivery of our products;
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risks inherent for technology-based businesses operated in outdoor conditions;
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we may be subject to product liability claims;
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risks related to shortfalls in available research and development funding;
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risks related to shipping products outside of Canada and approvals required for exporting;
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risks related to economic and political uncertainty;
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risks related to consumer perception of our products;
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risks associated with any failure by us to successfully promote and protect our product brands;
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we could suffer security breaches and the other risks associated with data security and hacking;
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our business could be adversely affected if its consumer protection and data privacy practices are breached;
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we are reliant on business partners;
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our business may suffer if we cannot continue to protect our intellectual property rights;
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we may be unable to obtain patent or other proprietary or statutory protection for new or improved technologies
or products;
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we may be subject to litigation from time-to-time;
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risks related to conflicts of interest of our directors and officers;
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risks related to the limited experience of the management team;
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changes in laws, regulations, and guidelines
relating to the Company’s business, including tax and accounting requirements;
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adverse impacts on the Company’s reported
results of operations as a result of adopting new accounting standards or interpretations;
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changes in accounting standards and subjective
assumptions, estimates and judgments by management related to complex accounting matters;
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investors may lose their entire investment in the Offered Shares;
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the price of the Common Shares may be subject to wide fluctuations;
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investors will experience immediate and substantial dilution;
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investors will experience dilution upon subsequent offerings;
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an active trading market for the Common Shares may not be sustained;
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the price of our Common Shares may fall or fail to be sustained;
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we have discretion over the net proceeds from the Offering;
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we may decrease or not continue paying dividends;
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we, or our non-U.S. subsidiaries, may constitute CFCs for tax purposes;
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we may be a PFIC for tax purposes;
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the enforcement by investors of civil liabilities under the United States federal or state securities
laws against us and our directors and officers may be difficult;
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the liquidity of the Common Shares may be limited;
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investors may experience dilution resulting from future Common Share issuances by us, including as
a result of the exercise of outstanding stock options or the settlement of our share units;
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we will incur increased costs and obligations operating as a public company in the United States;
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there may be more limited public information available to U.S. shareholders given our current status as
a foreign private issuer; and
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the risk factors described under “Risk Factors” in this Prospectus Supplement.
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Additional material risks and uncertainties applicable
to the forward-looking statements set out in this Prospectus Supplement, the accompanying Shelf Prospectus and the documents incorporated
by reference herein and therein include, without limitation, unforeseen events, developments, or factors causing any of the aforesaid
expectations, assumptions, and other factors ultimately to be inaccurate or irrelevant. Many of these factors are beyond our control.
All forward-looking statements set out in this Prospectus Supplement, the accompanying Shelf Prospectus and the documents incorporated
by reference herein and therein are expressly qualified in their entirety by these cautionary statements. The forward-looking statements
set out in this Prospectus Supplement, the accompanying Shelf Prospectus and the documents incorporated by reference herein
and therein are made as at the date hereof or thereof, as applicable, and we undertake no obligation to update publicly or to revise
any of the forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required
by applicable securities laws.
CURRENCY
PRESENTATION AND EXCHANGE RATE INFORMATION
The annual consolidated financial statements of
the Company incorporated by reference in this Prospectus Supplement have been prepared in accordance with IFRS and are reported in Canadian
dollars, and the audit of such financial statements are subject to Canadian auditing and auditor independence standards.
In this Prospectus Supplement, unless otherwise
indicated, all dollar amounts and references to “C$” or “$” are to Canadian dollars, and references to “US$”
are to U.S. dollars.
The following table sets out, for the period indicated,
certain exchange rates based upon the average rate published by the Bank of Canada during the respective periods. The rates are set out
as United States dollars per $1.00.
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Three Months Ended March 31, 2021
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Fiscal Year Ended December 31, 2020
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Fiscal Year Ended December 31, 2019
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Low
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US$
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0.7917
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US$
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0.6869
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US$
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0.7353
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High
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US$
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0.8306
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US$
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0.7863
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US$
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0.7699
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Average
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US$
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0.8121
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US$
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0.6898
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US$
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0.7537
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On July 20, 2021, the daily exchange rate for
the U.S. dollar in terms of Canadian dollars, as quoted by the Bank of Canada, was $1.00 = C$1.2730.
USE
OF PROCEEDS
We estimate that the net proceeds to us from
the sale of Offered Shares in this Offering will be approximately US$♦, after
deducting underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds from the Offering,
together with existing cash, for general corporate purposes, including to fund ongoing operations, to fund growth initiatives and/or
for working capital requirements including the continuing development and marketing of the Company’s core products, potential acquisitions
and research and development.
The Company incurred operating losses
and negative operating cash flow for the fiscal year ended December 31, 2020 and for the three months ended March 30, 2021. To the
extent that the Company has negative operating cash flows in future periods, it may need to deploy a portion of the net proceeds
from the Offering and/or its existing working capital to fund such negative cash flow. See “Risk Factors” in this
Prospectus Supplement. While the Company intends to utilize the net proceeds from Offering as set forth in this Prospectus
Supplement, there may be circumstances where for sound business reasons a reallocation of funds may be necessary. Management will
have significant discretion and flexibility in applying the net proceeds from the Offering. See “Risk Factors” in
this Prospectus Supplement.
Dividend
Policy
We do not anticipate that we will declare or pay
dividends in the foreseeable future on our Common Shares. Instead, we anticipate that all of our earnings will be used for the operation
and growth of our business. Any future determination to declare cash dividends would be subject to the discretion of our Board of Directors
and would depend upon various factors, including our results of operations, financial condition and liquidity requirements, restrictions
that may be imposed by applicable law and our contracts and other factors deemed relevant by our Board of Directors.
CONSOLIDATED
CAPITALIZATION
Except as described in the AIF and as outlined
under “Prior Sales”, there have been no material changes in the share and loan capital of the Company, on a consolidated
basis, since March 31, 2021 other than the one-for-five share proposed Consolidation which is anticipated to occur prior to or concurrent
with the pricing of the Offering. See “Description of Capital Structure — Share Consolidation” in this
Prospectus Supplement. As a result of the Offering, the shareholder’s equity of the Company will increase by the amount of
the net proceeds of the Offering and the number of issued and outstanding Common Shares will increase by the number of Offered Shares
actually distributed under the Offering.
DESCRIPTION
OF the Business
The following description about us is, in some
instances, derived from selected information about us contained in the documents incorporated by reference into this Prospectus
Supplement or the accompanying Shelf Prospectus. This description does not contain all of the information about us and our business
that you should consider before investing in the Offered Shares. You should carefully read the entire Prospectus Supplement and
the Shelf Prospectus, including the section entitled “Risk Factors” herein and therein, as well as the documents incorporated
by reference into this Prospectus Supplement and the Shelf Prospectus, before making an investment decision.
Overview
The Company is a manufacturer, contract engineering,
and product development company within the UAVs space, serving the public safety, agriculture, industrial inspections, and mapping
and surveying markets. We provide sustainable, custom and “off-the-shelf” hardware, services, and solutions
to companies and government agencies. Our mission is to deliver products that provide vital information our customers with the
hopes of saving time, money and lives.
Corporate Structure
Name, Address and Incorporation
The Company was incorporated as Drone Acquisition
Corp. under the Business Corporations Act (British Columbia) (the “BCBCA”) on June 1, 2018 for the purpose
of reorganizing and recapitalizing the business of Draganfly Innovations Inc. (“Former Draganfly”). Effective July
17, 2019, the Company amended its articles to remove various classes of authorized but unissued preferred shares and replace
them with only one class of preferred shares (the “Preferred Shares”). Effective August 15, 2019, the Company
changed its name to “Draganfly Inc.” On August 22, 2019, the Company amended its articles to re-designate its Class
A Common Shares as Common Shares.
The Company’s head office is located at
2108 St. George Avenue, Saskatoon, Saskatchewan S7M 0K7, and the registered office is located at Suite 2800, Park Place, 666 Burrard
Street, Vancouver, British Columbia V6C 2Z7.
Intercorporate Relationships
The following chart shows the Company’s
subsidiaries:
General Development of
the Business of the Company
Founded in 1998, we believe that Former Draganfly,
is recognized as one of the first commercial multi-rotor manufacturers and has a legacy for its innovation and superior customer service.
Zenon Dragan is the founder of Former Draganfly, and is a recognized leading expert on UAV.
Former Draganfly introduced its first systems
in 1999 and since evolved and shaped the UAV industry. The Company's aircraft are widely used by public safety agencies worldwide and
we believe that we were one of the first UAV to receive a FAA Certificate of Authorization the fall of 2009 with the Mesa
County Colorado Sheriff's Office. In 2013, the Royal Canadian Mounted Police flew one of the Company's drones to locate and save the life
of an accident victim. We believe that Draganfly aircraft have achieved many industry firsts, including:
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one of the first public safety UAV to shoot aerial photos documenting a manned aircraft accident in an
urban area;
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one of the first UAV operated by a public safety organization flown at night to locate and save a life;
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one of the first UAV helicopter to be granted a county wide U.S. FAA Certificate of Authorization;
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named as a test platform at one of the U.S. FAA's certified test sites;
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one of the first to have a drone included in the Smithsonian National Air and Space Museum; and
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four of the first six compliance certifications for its products issued by Transport Canada.
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Recent Developments
On December 2, 2020, the Company completed an
initial closing of its Regulation A+ Offering. The Company issued 2,556,496 units at price of 0.47 per unit for gross proceeds
in the amount of $1,201,553 in the first closing. Each unit is comprised of one Common Share and one Common Share purchase
warrant, with each warrant entitling the holder to acquire one Common Share at a price of US$0.71 per Common Share for a period
of two years from the date of issuance.
On
December 22, 2020, the Company announced that it had been selected by Coldchain to immediately develop and provide flight services of
a robust vaccine delivery payload for use in critical regions for drone delivery of the COVID-19 vaccine.
On January 6, 2021, the Company
announced the awarding of a new patent for a vertical take-off and landing cargo delivery drone with variable center of gravity.
On January 21, 2021, the Company announced that
it had been selected to provide engineering and development services for a drone-based air support defense system for ILS. The
Company entered into a memorandum of understanding with ILS with the objective to create the terms and conditions surrounding a
project management and development agreement for the production of ILS’s multi-launching air support defence system.
On March 2, 2021, the Company announced that it
will be the exclusive supplier of drones to Woz ED’s drone program across its national K-12 curriculum with the expected
deployment of approximately 3000 drones in 2021. The Company entered into a memorandum of understanding with
Woz ED with the objective to create the terms and conditions surrounding a business agreement. The memorandum of understanding automatically
terminates after 60 days; however, the Company anticipates entering into a definitive agreement with Woz ED during the third quarter of
2021.
On March 9, 2021, the Company announced that it
had completed the final closing of the Regulation A+ Offering. The Company issued 32,443,457 units at price of US$0.47 per unit
for gross proceeds in the amount of approximately $15.3 million in the final closing for total aggregate gross proceeds of $16.45
million.
On March 9, 2021, the Company
also announced that it has entered into an asset purchase agreement with Vital to purchase all the assets of Vital in consideration
for: (a) a cash payment of $500,000 with $50,000 paid upon execution of the asset purchase agreement, $200,000 to be paid
at closing and $250,000 to be paid on the six-month anniversary date of closing; and (b) 6,000,000 units of the Company with each
unit being comprised of one common share of the Company and one common share purchase warrant. Each warrant will entitle the holder
to acquire one common share for a period of 24 months following closing at an exercise price of $2.67 per common share and the
Company will be able to accelerate the expiry date of the warrants after one year in the event the underlying common shares
have a value of at least 30% greater than the exercise price of the warrants. The units will be held in escrow following closing
with 1,500,000 units being released at closing and the remainder to be released upon the Company reaching certain revenue milestones
received from the purchased assets. The Company completed the acquisition on March 25, 2021.
On March 23, 2021, the Company
announced that it signed a services deal to deploy EagleEye™ AI flight services with Windfall Geotek Inc. Windfall Geotek Inc. contractually
agreed to have Draganfly provide $1,000,000 in flight services over the course of the next year with $500,000 already directly funded
and allocated.
On May 13, 2021, the Company announced that it
entered into a definitive agreement with Coldchain to develop, deploy and operate solutions for the delivery of medical supplies,
medicine, and vaccines. The definitive agreement provides for phase one of a planned five-phase roll-out for the comprehensive
development, deployment, and operation of a medical drone delivery service as well as the development of a solution for
the timely delivery of medical supplies, medicine, and vaccines. Phase one will also include working with various regulatory bodies,
including the Federal Aviation Administration, to obtain licenses and approvals for initial non-commercial beta test delivery routes.
Phase one has a value of $125,000, to be executed over a maximum of ten months and the parties have agreed to negotiate an extension
to the definitive agreement for phase two prior to the expiry of phase one. Under phase two, Coldchain will commit to purchasing
no less than $625,000 in equipment and services from Draganfly.
On May 19, 2021, the Company announced that it
signed a contract with ILS for the development, prototyping, and eventual production of a non-lethal 40 mm multi-launching
systems that can be mounted and deployed from drones, drone systems, robots, robotic systems, and other stationary platforms
or similar systems. As part of the contract, Draganfly has provided ILS with strategic vendor financing of US$150,000 to assist
in the development of the project and in consideration ILS has granted Draganfly a worldwide royalty equal to 8% of the gross revenue
received from the project for a period of five years from earlier of the repayment date or maturity date of the loan. The loan
is secured against the intellectual property related to the project.
Drone Industry Overview
Drones or UAV have rapidly evolved from a military
origin to commercial and civil government applications from security to farming. The increased automation of drones provides additional
value to existing workflows, triggering more widespread adoption. A global shift to sustainable and eco-friendly options
has further increased demand for drone usage. Lastly, regulatory amendments are anticipated to have an ongoing impact on the drone
industry. According to Drone Industry Insights, the commercial and private drone market could grow from US$22.5 billion in 2020
to US$42.8 billion in 2025, representing CAGR of 13.8%.
Drone applications are being utilized in multiple
industries on a global basis. A portion of manned military aircraft (“MMA”) created the drone industry as a
safe, inexpensive option. Defense will remain the largest market over the foreseeable future. However, the mobile phone industry
created an affordable technology stack for drones. The ability to carry a camera enabled many people to utilize the platforms for
media production and beyond. That demand initiated in the consumer market and has migrated along with technological advancements
into the growth of commercial drone industry.
The major segments of the drone market are drone
hardware, software and services. Drone hardware are the physical goods, including drone platforms, aerial mobility platforms and
components and systems. The software segment includes flight planning, navigation and computer vision, unmanned traffic management
(“UTM”), fleet operations, ecosystems, networks and software development kits (“SDKs”). The services
aid the drone hardware and software manufacturers. They include drone service providers (“DSPs”), system
integrators, pilot training providers, retailers and marketplaces, coalitions and organizations, drone test sites, insurance providers
and university/ educational facilities.
Drone application methods are being used by
a variety of industries today. There are approximately eight methods that are garnering the most attention: mapping,
surveying, inspection, filming/photography, dispensing/spraying, warehousing, monitoring/detection, and delivery. These
applications are being used today by the civil government, educational facilities, agricultural, construction, health
care, real estate, energy, transportation, insurance, security, and scientific industries. According the Drone Industry
Insights, the fastest growing drone application method will be delivery and is forecasted at 28.6% CAGR over the next five
years2; however, this will not happen
without intense industry scrutiny and regulation.
2 See Global Drone Market Report 2020-2025
Products and Services
The Company 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. In addition, Draganfly has launched
a health/telehealth platform. The initial focus of the platform is a COVID-19 screening set of technologies that remotely detects a number
of key COVID-19 respiratory symptoms. The Company is also offering sanitary spraying services to indoor and outdoor public gathering spaces
such as sport stadiums and fields to provide additional protection against the spread of contagious viruses such as COVID-19.
Product sales and engineering services accounted
for 71% and 29%, respectively, of revenues of Draganfly for the financial year ended December 31, 2020. The bulk of engineering
service work is for one large US based customer that subcontracts to Draganfly. The customer’s clients tend to be
the U.S. government and military.
Draganfly Products
Quadcopters
and Multirotors
The Company is among the longest-running
manufacturers of quadcopters and multirotor drones in the world. Draganfly’s quadcopters and multirotor drones include the following:
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Draganflyer Commander – a high-endurance, electric, autonomous quadcopter drone built on
Draganfly’s patented carbon fiber folding airframe with interchangeable payloads for a variety of missions requiring
high resolution imagery, including surveying, 3D mapping, industrial inspection, search and rescue, and high-endurance public safety
applications.
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Draganflyer X4-P – semi-autonomous quadcopter with 18 minute flight time ideal for medium
projects.
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Quantix™ Mapper – exclusive to Draganfly through its partnership with AeroVironment,
it is a fully-automated drone that is designed for mapping.
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Tango2 – a high endurance, dual battery, sUAS capable of carrying a wide array of payload
systems. The aircraft utilizes the Draganfly intelligent power management system to extend flight time while increasing
safety. This sUAS is ideal for agricultural monitoring and research, mapping, surveying, environmental monitoring, and search and
rescue.
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Universal Control System
The Draganfly Universal Control System is a complete,
handheld ground control system that is built to integrate with other software and hardware systems. The Draganfly Universal Control
System is designed to provide precise control over sUAS helicopters, fixed-wing, and ground-based robots. Draganfly software
provides sophisticated flight planning, automated takeoff, grid following, waypoints, landing, data collection, and video downlink.
Software
The Draganfly Surveyor drone flight planning software
is an intuitive, easy to use, application that enables customers to quickly plan, fly, and process meaningful data. Based on the
project, camera type, optics, and altitude, the drone software determines the appropriate camera shutter interval, aircraft speed,
and flight plan to capture the optimum required photo overlap to generate 2D and 3D maps and models. The Draganfly Surveyor directly
integrates with Pix4Dmapper for survey-grade results and can be used alongside other third party photogrammetry programs.
Vital Intelligence
Draganfly installs standalone and airborne
health assessment systems at locations such as universities, hotels, casinos, family entertainment complexes, shopping
centers, and other high-traffic locations. These systems effectively measure social distancing and visitors’ vital
signs like temperature, cough, and respiratory rate to identify high-risk visitors. Vital Intelligence is a data platform
that turns an existing camera into a touchless symptom detection system, measuring vital signs and social distancing.
Draganfly integrates this technology into a variety of platforms and camera systems – both on the ground and in the air
– to assess people coming into and traveling throughout a facility.
Draganfly Services
Custom Engineering
Draganfly is a contract engineering partner for
government agencies, enterprise organizations, academic institutions, and businesses of all sizes. The Draganfly team’s truest
capabilities are actualized during the engineering process as hardware designers, software designers, engineers, project managers,
and vertical-specific experts come together to build custom drone solutions for its partners. Draganfly’s end-to-end
engineering services include:
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Hardware design: Component, product, and system design.
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Software design: Custom software and interface design.
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Development: Including integration with third party platforms, PixX4D, Pixhawk, Ardupilot, DJI and
more.
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Modeling: 3D design and modeling of mechanical components.
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ITAR equipment management: Approved handling and integration of ITAR, and Controlled Goods technologies.
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Support: Testing, training, documentation, and repairs.
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Training
Draganfly offers custom-designed training packages
that are tailored to specific operations and use cases. The Company also offers basic training for new UAV owners, up to advanced
classes for users who understand the fundamentals and are looking for new ways to increase flight efficiency or comply with
federal regulations.
Flight Services
Draganfly has a team of qualified pilots that
conduct flights on behalf of its customers. The team specializes in working with emergency services including police, fire, and
search and rescue personnel. Draganfly also supports industrial applications, utility and power companies, environmental and agricultural
entities and others.
Varigard Spraying Services
Draganfly operates in partnership with Varigard
LLC, a leader in natural and organic disinfectants, to administer a sanitization spraying service in large public venues by misting
a surface spray across the entire venue in four to six hours.
Principal Markets
Draganfly has more than 20 years of experience
designing and manufacturing professional drones for military, public safety, energy, agriculture, and insurance. Draganfly has
sold products and services to a number of countries but predominantly focuses on the North American market given its geographical location.
Military and Government
Military and government contractors partner with
Draganfly to improve personnel and infrastructure safety. Draganfly works with partners to design and manufacture custom airframes,
design and develop payloads, and manage complex flight operations. Draganfly team members hold advanced pilot certificates
and are approved to fly in controlled airspace and at airports. Since the Company’s development team is cleared by Canada’s
Controlled Goods Program, the team is permitted to handle ITAR equipment and technologies, and the Company’s facilities are
built to protect those technologies and ensure they are only handled by approved personnel.
Public Safety
In 2013, the Draganflyer was the first drone to
save a human life. Years later, the Company is still a leader in using drone technology to keep the public safe. Draganfly works
with its partners to identify unknowns, such as substances, spills, packages, and chemicals while not putting human lives at risk.
Draganfly builds aerial and ground systems with custom payloads and sensors to scan scenes, survey public events, locate
objects, and clear debris faster and more safely than on-the-ground manpower. The Company also empowers its partners to maximize
existing infrastructures via custom API integrations that ensure Draganfly’s technology enhances their safety systems.
Environmental and Energy
Draganfly offers a suite of commercial UAV solutions
for energy companies and those servicing the energy market, like surveyors and consultants. Draganfly equips energy companies with
the hardware and software they need to optimize existing operations, improve safety, and respond after a natural disaster.
Partners can use Draganfly hardware and 3D modeling software to remotely inspect sites that would put human lives at risk. They
also conduct environmental monitoring with Draganfly’s sample collection solutions, assessing water and ground pollution,
gas composition, infrastructure, and other environments.
Agriculture
Draganfly works with its partners to collect high-quality
data, using multi- and hyper-spectral imaging, 3D modeling, and a suite of sophisticated sensor technology that assesses environmental
factors. Seed companies use Draganfly technology to optimize growth season, measuring seed trial results throughout the
research and development process. Farmers can use Draganfly flight and data collection services to monitor hectares of land year-round,
assessing factors like fertilizer efficiency, weed production, and more.
Insurance
Insurance companies can use Draganfly technology
for pre-damage baseline and post-event damage assessments of infrastructure to reduce risk when dealing with natural disasters
and other catastrophic events. Property owners, insurers, and reinsurers can leverage Draganfly’s flight, data collection,
and assessment services to increase accuracy and speed when inspecting a site.
Operations
Canadian Operations
Draganfly Innovation Inc.’s products are
manufactured at its machine shop within its leased head office based in Saskatoon, Saskatchewan, Canada. Draganfly Innovations
Inc. operates the fully operational facility located at 2108 St. George Avenue, Saskatoon, SK S7M 0K7. This facility is to be used
only for the purposes of Draganfly Innovations Inc. operating its business of design, development, production, distribution,
sale and/or licensing of drones or robots, or such other use as permitted by the landlord from time to time.
Dronelogics Services Inc.’s services are
provided through its leased space located at Unit 319, 2999 Underhill Avenue, Burnaby, British Columbia.
United States
Operations
The Company, through its wholly-owned subsidiary,
Draganfly Innovations USA Inc., has a management office in Raleigh, North Carolina that currently conducts business in the
state of North Carolina in the United States.
Competitive Conditions
Although Draganfly is acknowledged as the pioneer
that we believe was the first to develop the commercial multi rotor helicopter, there are now many drone hardware companies
in the world. As technology has improved and costs for hardware and software have come down, the line between consumer and commercial
drones has blurred. Historically, Draganfly has serviced early adopters in the public safety industry. At this stage of
the commercial drone adoption curve, the average public safety organization (local, regional, and even federal law enforcement,
for example), are quite budget conscious. Hence, these organizations tend to use lower cost drones that have become quite sophisticated
that can accomplish most of their use cases. The dominant company in the industry is DJI, the Chinese drone company that is
reputed to own over 70% of the consumer and now commercial drone market. The majority of DJI’s drones are geared towards
broad applications involving the masses. Draganfly has moved away from competing directly with DJI and has chosen to serve niche
markets outside of where DJI tends to be. There are also some organizations that tend to be US based that either prefer or are
mandated to not use foreign drones such as those produced by DJI. Some of these organizations are sensitive to their work being
exposed to that of overseas governments which has at least for the time being, created a niche market for players such as Draganfly.
The combined shift away from foreign made drones (national security issues) and regulatory improvements by the FAA (Federal Aviation Administration)
in respect of drone usage is driving industry demand. As Draganfly has evolved to move with the industry trends, the Company now
uses DJI drones as part of some of its customization and engineering services work. Draganfly has also moved into innovative
engineering procurement which is very specialized. As the drone industry matures, this may bring more competitors to this space or
the Company’s customers may choose to develop the in-house expertise to do the work that they currently outsource
to Draganfly. However, it is the Company’s view that there will be a growing customer base that will require very specialized
work that only a handful of companies can do.
The market remains highly competitive. Private
equity continues to significantly capitalize drone start-ups at industry high valuations. The publicly-traded companies in the drone segment
trade at different valuations, with a steep discount to private-equity backed ventures. Some of the other publicly traded companies we
may compete with include Alpine 4 Tech, Inc., Aerovironment Inc., EHang Holdings Limited, AgEagle, Drone Delivery Canada, Inc., and Red
Cat Holdings, Inc.
Regulatory Framework
A new regulatory framework relating to the use
of drones in Canada was published by Transport Canada in January 2019 and came into effect on June 1, 2019. The changes,
published in the Canadian Aviation Regulations (“CARs”), Part IX, introduce new rules based on the weight
of the RPA and the intended operation. This framework creates three broad categories of RPAS: (i) small RPAS in limited
(low risk) operations (“Small RPAS Basic”); (ii) small RPAS in advanced (complex) operations (“Small
RPAS Advanced”); and (iii) all other RPA operations that fall outside (i) and (ii) above. These regulations focus
on foundational issues such as aircraft marking and registration, pilot knowledge and certification, airworthiness
of the aircraft, and flight rules.
Small RPAS Basic are defined as RPAS weighing
between 250 grams and 25 kilograms and operated in rural and unpopulated areas. These RPAS will require identification markings,
including name, address and contact information of the owner and pilot of the RPA. Pilots must be at least 14 years of age
and must hold a valid Basic RPA licence that is specific to small drones. Additional restrictions are imposed that
include that the RPA cannot operate: (i) within approximately 30 meters of people or open-air assemblies of people, (ii)
above 400 feet, (iii) within approximately 1.85 kilometers of heliports or (iv) within approximately 5.5 kilometers of airports.
These regulations require the RPA to always be operated within visual line-of-sight.
Small RPAS Advanced are defined as RPAS weighing
between 250 grams and 25 kilograms and operated in urban and/or populated areas. These RPAS will require identification,
marking and registration with Transport Canada as well as meeting specified design standards acceptable to Transport
Canada. The RPA will be assigned a unique identification/registration number issued by Transport Canada. Pilots must
be at least 16 years of age and must hold a valid Advanced RPAS licence that is specific to small drones. Approval for operation
must be granted by Air Traffic Control when operating in controlled airspace or near controlled aerodromes. A set of flight
rules must be followed at all times for these more complex operations. Restrictions, including distances from people,
are determined based on the safety certification of the RPA being operated. The RPA must always be operated within
visual line-of-sight.
The current legislation utilizes a similar Special
Flight Operations Certificate (“SFOC”) application process, as the previous regulations, to approve any
operations that do not fit within the regulatory regime set out above, such as operating beyond visual-line-of-sight. For
those wishing to operate outside of the regulatory framework set out in CARs, part IX, there will be a variety of SFOC
application processes tailored to the nature and use of the RPA. The more complex and risky the proposed operation,
the more thorough and detailed the SFOC application process.
Those operators requiring an SFOC must apply to
the Transport Canada Civil Aviation Regional Office at least 30 working days prior to the date of the proposed RPAS operation.
Transport Canada has wide discretion in reviewing and approving SFOC applications; however, to date the Company has
never been refused an SFOC for which it has applied. The purpose of the SFOC application review is to ensure that the
proposed operation is safe and associated risks have been adequately mitigated by the Company.
In April 2020, Transport Canada published a
Notice of Proposed Amendment (“NPA”) as the first step in the publication of new regulations for
beyond visual line-of-sight operations. The NPA provided a synopsis of the high-level policies Transport Canada is
proposing to support beyond visual line-of-sight operations in lower risk environments such as remote and isolated
areas. These new regulations will also provide clear direction and guidance on the use of heavier aircraft
(up to 650 kilograms), operations at higher altitudes than currently permitted in CARs, Part IX, and will
set the foundation for an operator certification program. Once published, these regulations will permit routine
beyond visual-line-of-sight operations without the need for the Company to request specific permission for each
operation, as is currently required with the current SFOC process. The first draft of these regulations were expected
to be published in Canada Gazette in Spring of 2021; however, as at the date of this Prospectus Supplement, the first draft has not
been published.
The Company is currently fully compliant with
all current regulatory requirements and has applied for, and received Transport Canada approval for several SFOCs.
Components
The Company obtains hardware components, various
subsystems and systems, and raw materials from a limited group of suppliers. The Company does not have long-term agreements with
any of these suppliers that obligate such suppliers to continue to sell components, subsystems, systems or products to the
Company. The Company’s reliance on these suppliers involves significant risks and uncertainties, including whether suppliers
will provide an adequate supply of required raw materials, components, subsystems, or systems of sufficient quality, will increase
prices for the raw materials, components, subsystems or systems, and will perform their obligations on a timely basis. See “Risk
Factors”.
Intangible Properties
Intangibles such as patents, software, specific
technology know-how, and applications expertise all have a significant effect on the Company’s business. The Company has
been focused on developing proprietary technology which meets or exceeds anticipated Canadian government requirements relating
to drone delivery. By virtue of being one of the first commercial UAV companies in the industry, the Company’s subsidiary,
Draganfly Innovations Inc., holds commercial patents.
The Company has the following patents and patents
pending in the application stage in its portfolio and intends to continue to expand and grow its intellectual property portfolio:
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Title
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Country
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Application
No.
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Issue
Date
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Patent
No.
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Status
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Multi Rotor UAV With Compact
Folding Rotor Arms
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Canada
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2,917,434
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4/23/2019
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2,917,434
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Issued
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Unmanned Rotary Wing Aircraft With Compact
Folding Rotor Arms
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Canada
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2,876,630
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N/A
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N/A
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Pending
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Vehicle with Aerial and Ground Mobility
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Canada
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2,787,279
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10/22/2013
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2,787,279
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Issued
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Vertical Takeoff and Landing Unmanned
Aircraft System
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Canada
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2,935,793
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1/15/2021
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2,935,793
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Issued
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Wheel with Folding Segments
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Canada
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2,787,075
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|
10/29/2013
|
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2,787,075
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|
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|
Issued
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Action Camera System for Unmanned Aerial
Vehicle
|
|
United States
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|
15/707,752
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|
1/22/2019
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10,187,580
|
|
|
|
Issued
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Action Camera System for Unmanned Aerial
Vehicle
|
|
United States
|
|
14/533,995
|
|
9/19/2017
|
|
|
9,769,387
|
|
|
|
Issued
|
|
|
Cascade Recognition for Personal Tracking
via Unmanned Aerial Vehicle (UAV)
|
|
United States
|
|
14/642,370
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|
7/18/2017
|
|
|
9,710,709
|
|
|
|
Issued
|
|
|
Cascade Recognition for Personal Tracking
via Unmanned Aerial Vehicle (UAV)
|
|
United States
|
|
15/651,672
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|
2/13/2018
|
|
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9,892,322
|
|
|
|
Issued
|
|
|
Cascade Recognition for Personal Tracking
via Unmanned Aerial Vehicle (UAV)
|
|
United States
|
|
15/894,292
|
|
10/8/2019
|
|
|
10,438,062
|
|
|
|
Issued
|
|
|
Dual Rotor Helicopter with Tilted Rotational
Axes
|
|
United States
|
|
12/458,608
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|
11/8/2011
|
|
|
8,052,081
|
|
|
|
Issued
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Helicopter with Folding Rotor Arms
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|
United States
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|
13/200,825
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|
10/23/2012
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8,292,215
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|
|
|
Issued
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Multi Rotor UAV With Compact Folding
Rotor Arms
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United States
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14/994,080
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7/31/2018
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10,035,581
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|
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|
Issued
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Pixel Based Image Tracking System For
Unmanned Aerial Vehicle (UAV) Action Camera System
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United States
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15/256,193
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10/10/2017
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9,785,147
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|
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|
Issued
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Pixel Based Image Tracking
System for Unmanned Aerial Vehicle (UAV) Action Camera System
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United States
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14/825,956
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9/13/2016
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9,442,485
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|
Issued
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Real Time Noise Reduction System for
Dynamic Motor Frequencies Aboard an Unmanned Aerial Vehicle (UAV)
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United States
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14/642,496
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11/8/2016
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9,489,937
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Issued
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System and Method for Adaptive Y Axis
Power Usage and Non Linear Battery Usage for Unmanned Aerial Vehicle Equipped with Action Camera System
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|
United States
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14/825,914
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12/6/2016
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9,511,878
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|
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|
Issued
|
|
|
Tandem Wing Aircraft System with Shrouded
Propeller
|
|
United States
|
|
15/584,815
|
|
8/13/2019
|
|
|
10,377,488
|
|
|
|
Issued
|
|
|
Vehicle with Aerial and Ground Mobility
|
|
United States
|
|
14/641,468
|
|
3/21/2017
|
|
|
9,598,171
|
|
|
|
Issued
|
|
|
Vehicle with Aerial and Ground Mobility
|
|
United States
|
|
13/846,074
|
|
3/31/2015
|
|
|
8,991,740
|
|
|
|
Issued
|
|
|
Vertical Take Off And Landing (VTOL)
Aircraft Having Variable Center Of Gravity
|
|
United States
|
|
15/706,158
|
|
10/20/2020
|
|
|
10,807,707
|
|
|
|
Issued
|
|
|
Vertical Takeoff and Landing Unmanned
Aircraft System
|
|
United States
|
|
15/164,718
|
|
8/28/2018
|
|
|
10,059,442
|
|
|
|
Issued
|
|
|
Visually Intelligent Camera Device with
Peripheral Control Outputs
|
|
United States
|
|
14/939,369
|
|
8/6/2019
|
|
|
10,375,359
|
|
|
|
Issued
|
|
|
Wheel with Folding Segments
|
|
United States
|
|
13/739,419
|
|
6/17/2014
|
|
|
8,753,155
|
|
|
|
Issued
|
|
The Company also has the following registered
trademarks and pending applications:
|
Description
|
|
Name/Title
|
|
Official No.
|
|
|
Governmental Entity
|
|
Trademark Application (Status: Filed)
|
|
DRAGANFLY
|
|
|
1,972,336
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLYER EXPLORE
|
|
|
TMA1,025,742
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLYER APEX
|
|
|
TMA1,025,624
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLYER COMMANDER
|
|
|
TMA1,008,809
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFUEL
|
|
|
TMA997,118
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLY INNOVATIONS
|
|
|
TMA908,564
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLYER
|
|
|
TMA906,939
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLY & DESIGN
|
|
|
TMA905,935
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLY
|
|
|
TMA1,071,582
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLY
|
|
|
TMA1,069,670
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLYER GUARDIAN
|
|
|
TMA904,883
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANVIEW
|
|
|
TMA886,217
|
|
|
CIPO
|
|
Registered Trademark
|
|
DRAGANFLYER APEX
|
|
|
6248237
|
|
|
USPTO
|
|
Registered Trademark
|
|
DRAGANFLY
|
|
|
6373176
|
|
|
USPTO
|
|
Registered Trademark
|
|
DRAGANFLYER COMMANDER
|
|
|
5760146
|
|
|
USPTO
|
|
Registered Trademark
|
|
DRAGANFUEL
|
|
|
5563360
|
|
|
USPTO
|
|
Registered Trademark
|
|
DRAGANFLY INNOVATIONS
|
|
|
5130969
|
|
|
USPTO
|
|
Registered Trademark
|
|
DRAGANFLYER
|
|
|
4920316
|
|
|
USPTO
|
|
Registered Trademark
|
|
DRAGANFLY & Design
|
|
|
5130970
|
|
|
USPTO
|
|
Registered Trademark
|
|
DRAGANFLYER GUARDIAN
|
|
|
4995725
|
|
|
USPTO
|
|
Registered Trademark
|
|
DRAGANVIEW
|
|
|
4920317
|
|
|
USPTO
|
|
Trademark Application3
|
|
DRAGANFLY
|
|
|
88488410
|
|
|
USPTO
|
3 The US
application is suspended pending registration of the Canadian mark
Market Opportunity
Drones have rapidly evolved from their military
origin to commercial and civil government applications from security to farming. The increased automation of drones provides additional
value to existing workflows, triggering more widespread adoption. A global shift to sustainable and eco-friendly options has further
increased demand for drone usage. Lastly, regulatory amendments are anticipated to have an ongoing impact on the drone industry.
According to Drone Industry Insights, the commercial and private drone market could grow from $22.5 billion in 2020
to $42.8 billion in 2025, representing CAGR of 13.8%.
Drone application methods are being used by a
variety of industries today. The most active segments are Mapping, Surveying, Inspection, Filming/photography, dispensing/spraying,
warehousing, monitoring/detection, and delivery. These applications are being used today by the civil government, educational facilities,
agricultural, construction, health care, real estate, energy, transportation, insurance, security, and scientific industries for
public safety, data collection and profit. According the Drone Industry Insights, the fastest growing drone application method
will be delivery and is forecasted at 28.6% CAGR over the next five years.3
It is widely believed over 100,000 new jobs will be created in the drone market by 2025. However, regulatory hurdles and intense
industry scrutiny need to be addressed.
Our existing products are configured to meet the
needs of multiple industries. We continue to add new customers in different market verticals. We are actively designing and developing
new products and services to meet increased customer demands.
Growth Strategy
Draganfly markets its products and services as
a drone solution platform that enables customer to do things not easily done before and to collect data not easily available before.
Draganfly provides solutions to our customers utilizing drones and adjunct technologies. Sensors, software, AI and more all make
up this ability to provide solutions that only a company with end-to-end capabilities can provide. Draganfly grows by dealing with
the decision makers in organizations who generally have budget control and/or P&L responsibility. Draganfly will continue
to develop specific solutions and IP for industry verticals by working directly with customers. Draganfly will also pursue an acquisition
strategy focused on adding additional capabilities to its platform that strengthen its value proposition of being able to provide
new and total solutions that other drone companies cannot. Draganfly is focused on growth through developing new products, expanding its
customer base, and pursuing accretive acquisition opportunities, both within and outside North America, in new markets that complement
its existing portfolio.
Sales and Marketing
Draganfly plans to expand it sales and market
capabilities in three key areas. First, Draganfly intends to implement a sales force that has the ability to build relationships
and sell specifically designed solutions into industry verticals. This sales force will be specialized into segments that sell
either direct or into a channel dependant on the specific product or service solution being provided. Draganfly plans to expand
business development personnel that can work with specific industries to envision and develop new product lines and services not
yet contemplated by our customers. Second, Draganfly plans to drive greater market awareness of the Draganfly Brand via public
relations as well as an expanded marketing pushing via specific sponsorships of events that complement and highlight the Draganfly
technology. i.e. sporting events where Draganfly’s Vital Intelligence Technology is used to provide health screening for
spectators and/or staff; or, where Draganfly’s Varigard 20hr + spraying solution via drones is used to disinfect and coat
the stadium from pathogens. Third, Draganfly plans targeted marketing and advertising via tradeshows/conferences which are virtual
or physical (“post COVID”) as well as target digital advertising campaigns used to generate inbound inquires for specific
products, services or solution opportunities. Upon completion of this Offering, as part of implementing its growth strategy, Draganfly
plans to increase its sales and marketing teams, to attend trade shows and conferences to raise brand awareness and forge business relationships,
and to sponsor specific events that complement its technology.
3 See Global Drone Market Report 2020-2025
Customers
Key customers are customers looking to gain strategic
advantage in particular markets via the use of drones and drone technology. These are often large organization with a specific
problem that they are currently solving in an expensive manner which usually means the use of teams of people or expensive personnel.
By designing solution and providing everything from design to manufacturing to sensor development and even giving recognition on
patents of IP development (not with commercial interest) to providing the services and housing the data we develop customer
relationships that are very “sticky”. It is estimated that a variety of fortune 5000 companies will be utilizing drone
or drone related technologies over the next 10 years and beyond with the next 3 years being crucial in establishing market share
of which Draganfly is ideally positioned to execute on.
Specialized Skill
and Knowledge
There is a specialized skill required for the
development, operations, maintenance, sales and marketing of the Company’s technology. The Company’s current staff
possesses the necessary skills and knowledge required for the Company’s business; however, additional employees may be added
to staff as needed. All operational staff hold the appropriate licences and certificate as mandated by Transport Canada.
Changes to Contracts
During the year ended December 31, 2019, the Company
derived 81% of its revenues from one custom engineering customer; however, as a result of the COVID-19 pandemic, this customer
reduced a number of its projects and the Company ceased to receive orders after the first quarter of the year ended December
31, 2020. The Company may receive orders from this customer in the future; however, there is no assurance that any future
orders will be received. No aspect of Draganfly’s business is anticipated to be affected in the current financial year by
renegotiation or termination of any contract.
Employees/Consultants
As at July 21, 2021, the Company had 22 employees
and three full-time and part-time consultants whose services were, and continue to be, used on a regular basis for day-to-day
operations.
DIRECTORS
AND OFFICERS
As at the date hereof, the Board is comprised
of seven individuals. The following table sets forth the names and municipalities of residence of the current directors and executive
officers of the Company, their respective positions and offices with the Company and the date first appointed or elected as a director
and/or officer and their principal occupation(s) within the past five years.
Name, Occupation and Security
Holding
Name
and Municipality
of Residence
|
Position Held
and Date Appointed
|
Principal Occupation within the past five years
|
Cameron Chell
Bowen Island, British Columbia, Canada
|
Chief Executive Officer,
Chairman and a Director
(August 14, 2019)
|
Chairman and Chief Executive Officer of the Company since August 2019; co-founder of Business Instincts Group Inc., a Calgary-based Venture Creation Firm, since 2009; co-founder of Cold Bore Technologies Inc. from February 2013 to present; Chairman and founder of TraxOne Inc. from September 2016 to present; a director and an advisor to KodakCoin from May 2017 to present; Chairman and co-founder of CurrencyWorks Inc. from November 2017 to present; director and co-founder of Slyce Inc. from January 2012 to January 2017. Chairman and Chief Executive Officer of the Company since August 2019; and Chief Executive Officer and co-founder at Business Instincts Group Inc., a Calgary-based Venture Creation Firm, since 2009.
|
Name
and Municipality
of Residence
|
Position Held
and Date Appointed
|
Principal Occupation within the past five years
|
Scott Larson(1)
Burnaby, British Columbia, Canada
|
President (July 3, 2020) and a Director
(August 14, 2019)
|
President of the Company since July 2020; former Chief Executive Officer of Kater Technologies, a Vancouver-based mobility as a service (MaaS) company building out an integrated intermodal transportation platform incorporating public transportation, buses, taxis and ride hailing vehicles into a single service, from January 2019 to March 2020; former Chief Executive Officer of Helios Wire, a satellite company building out a space-enabled IoT/M2M network, from 2016 to 2019; and former Chief Executive Officer and founder of UrtheCast Corp. from 2010 to 2015.
|
Olen Aasen(1)(2)
Vancouver, British Columbia, Canada
|
Director
(August 14, 2019)
|
General Counsel at King & Bay West Management Corp. since February 2011.
|
Andrew Hill Card Jr. (2)
Jaffrey, New Hampshire, United States
|
Director
(November 7, 2019)
|
Interim Chief Executive Officer of the George & Barbara Bush Foundation since June 2020; Chairman of the National Endowment for Democracy (NED), a non-profit organization dedicated to the growth and strengthening of democratic institutions around the world, since January 2018; and President of Franklin Pierce University in New Hampshire from January 2015 through July 2016.
|
Justin Hannewyk
Vancouver, British Columbia, Canada
|
Director
(April 30, 2020)
|
President of Dronelogics, a wholly-owned subsidiary of the Company, since 2009; President of Candrone from January 2009 to present; and an independent consultant to enterprise clients with respect to the integration of drones for over 10 years.
|
John M. Mitnick(1)(2)
McLean, Virginia, United States
|
Director
(June 18, 2020)
|
Member of Board of Directors of Valaurum, Inc., March 2016 to February 2018 and since October 2019; General Counsel of the U.S. Department of Homeland Security from February 2018 to September 2019; and Senior Vice President, General Counsel, and Secretary of The Heritage Foundation from March 2014 to February 2018.
|
Denis Silva
Vancouver, British Columbia, Canada
|
Director
(August 14, 2019)
|
Corporate and securities partner with the law firm DLA Piper (Canada) LLP since July 2020; and partner at the law firm Gowling WLG (Canada) LLP from 2015 to 2020.
|
Paul Sun
Oakville, Ontario, Canada
|
Chief Financial Officer and Corporate Secretary
(August 14, 2019)
|
Chief Financial Officer of the Company since August 2019; Chief Financial Officer of Former Draganfly since July 2015; and Managing Director, Institutional Equity Sales at Beacon Securities Limited from January 2013 to December 2014.
|
John Bagocius
Jupiter, Florida, United States
|
Senior Vice President, Sales
(July 14, 2020)
|
Senior Vice President, Sales of the Company since July 2020; VP of Sales for the Public Safety & Commercial UAS groups for FLIR Systems from January 2019 to March 2020; VP of Sales, North America Public Safety & Commercial UAS Solutions for Aeryon Labs Inc. from June 2017 until December 2018; and various leadership positions in Sales, Product Management, and Business Development for Crossmatch Technologies from June 2000 to June 2017.
|
Notes:
|
|
(1)
|
Member of the Audit Committee effective following the Nasdaq listing.
|
|
|
(2)
|
Member of the Nominating and Corporate Governance Committee effective following the Nasdaq listing.
|
As at the date hereof, prior to the Consolidation
the directors and senior officers of Draganfly, as a group, beneficially own or control, directly or indirectly, 7,725,810 Common Shares
or 5.7% of the issued and outstanding Common Shares.
The directors listed above will hold office until
the next annual meeting of the Company or until their successors are elected or appointed.
Corporate Cease Trade Orders,
Bankruptcies, Penalties or Sanctions
To the knowledge of management, no director or
executive officer as at the date hereof, is or was within 10 years before the date hereof, a director, chief executive officer or chief
financial officer of any company (including Draganfly), that (a) was subject to an order that was issued while the director or executive
officer was acting in the capacity as director, chief executive officer or chief financial officer, or (b) was subject to an order that
was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which
resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial
officer. For the purposes hereof, “order” means (a) a cease trade order, (b) an order similar to a cease trade order, or (c)
an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more
than 30 consecutive days.
To the knowledge of management, other than as
disclosed herein, no director or executive officer of Draganfly, or a shareholder holding a sufficient number of securities of Draganfly
to affect materially the control of the company (a) is, as at the date hereof, or has been within the 10 years before the date hereof,
a director or executive officer of any company (including Draganfly) that, while that person was acting in that capacity, or within a
year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or
insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager
or trustee appointed to hold its assets, or (b) has, within the 10 years before the date hereof, become bankrupt, made a proposal under
any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with
creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder.
By Order of the Supreme Court of Newfoundland
and Labrador dated June 17, 2020, Deloitte Restructuring Inc. was appointed as the receiver and manager of all current and future
assets, undertakings, and properties of the Kami Mine Limited Partnership, Kami General Partner Limited, and Alderon Iron Ore Corp.
The receivership was initiated by a secured creditor of the Kami Mine Limited Partnership after its failure to refinance the secured
debt due to the COVID-19 pandemic. Mr. Aasen was Corporate Secretary of Alderon Iron Ore Corp. and Secretary and Director
of Kami General Partner Limited until April 28, 2020.
Penalties or Sanctions
No director, executive officer or shareholder
holding a sufficient number of securities of Draganfly to materially affect the control of the Company has been subject to: (i) any penalties
or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement
agreement with a securities regulatory authority; or (ii) any other penalties or sanctions imposed by a court or regulatory body that
would likely be considered important to a reasonable investor in making an investment decision.
Conflicts of Interest
There are potential conflicts of interest to which
the directors and officers of Draganfly will be subject to in connection with the operations of Draganfly. In particular, certain of the
directors and officers of Draganfly are involved in managerial or director positions with other companies whose operations may, from time
to time, be in direct competition with those of Draganfly or with entities which may, from time to time, provide financing to, or make
equity investments in, competitors of Draganfly.
In accordance with the applicable corporate and
securities legislation, directors who have a material interest or any person who is a party to a material contract or a proposed material
contract with Draganfly are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any
resolution to approve the contract. In addition, the directors are required to act honestly and in good faith with a view to the best
interests of Draganfly. Certain of the directors and each of the executive officers of Draganfly have either other employment or other
business or time restrictions placed on them and accordingly, these directors of Draganfly will only be able to devote part of their time
to the affairs of Draganfly. To the extent that conflicts of interest arise, such conflicts will be resolved in accordance with the provisions
of the applicable corporate law.
UNDERWRITING
ThinkEquity, a division of Fordham Financial
Management, Inc. is acting as the Underwriter of this Offering. We have entered into an underwriting agreement dated ♦,
2021 (the “Underwriting Agreement”) with the Underwriter. Subject to the terms and conditions of the Underwriting
Agreement, we have agreed to sell to the Underwriter, on the Closing Date, the number of Offered Shares listed next to its name below
at the Offering Price, less the underwriting discounts and commissions set forth on the cover page of this Prospectus Supplement and
below in the section entitled “Discounts”, Commissions and Expenses”, against delivery of the Offered Shares.
|
Underwriter
|
|
|
Number
of
Offered Shares
|
|
|
ThinkEquity, a division of Fordham Financial Management, Inc.
|
|
|
♦
|
|
|
Total
|
|
|
♦
|
|
The Underwriter is offering the Offered Shares
subject to its acceptance of the Offered Shares from us and subject to prior sale. The Underwriting Agreement provides that the obligations
of the Underwriter to pay for and accept delivery of the Offered Shares offered by this Prospectus Supplement are subject to the approval
of certain legal matters by their legal counsel and to certain other conditions. The Underwriter is obligated to take and pay for all
of the Offered Shares offered by this Prospectus Supplement if any Offered Shares are taken, other than the Offered Shares covered by
the Over-Allotment Option to purchase additional Common Shares described below.
The Underwriter proposes to offer the Offered
Shares to the public at the Offering Price set forth on the cover page of this Prospectus Supplement. In addition, the Underwriter may
offer some of the Offered Shares to other securities dealers at the Offering Price less a concession not in excess of US$♦
per Offered Share.
Over-Allotment Option to
Purchase Additional Common Shares
We have granted to the Underwriter the Over-Allotment
Option, exercisable in whole or in part in the sole discretion of the Underwriter, for up to 45 days after the date of this Prospectus
Supplement, to purchase up to an additional ♦ Common Shares (the “Over-Allotment Shares”),
representing fifteen percent (15%) of the Offered Shares sold in the Offering. The purchase price to be paid per Over-Allotment Share
shall be equal to the Offering Price of one Offered Share, less the underwriting discounts. If this Over-Allotment Option is exercised
in full, the total price to the public will be US$♦ and the total net proceeds, before expenses,
to us will be US$♦.
This Prospectus Supplement and the Shelf Prospectus
also qualify the grant of the Over-Allotment Option and the distribution of the Over-Allotment Shares upon exercise of the Over-Allotment
Option. Any purchaser who acquires Over-Allotment Shares forming part of the over-allotment position of the Underwriter pursuant to the
Over-Allotment Option acquires such securities under this Prospectus Supplement and the Shelf Prospectus, regardless of whether the over-allotment
position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases.
The Offered Shares will be offered in the United
States pursuant to the MJDS, and subject to applicable law, certain jurisdictions outside of the United States through the Underwriter
either directly or through its broker-dealer affiliates or agents, as applicable, in accordance with the Underwriting Agreement. The Underwriter
is acting as Underwriter to us only in respect of the offer, sale and distribution of the Offered Shares in the United States.
Discounts, Commissions
and Expenses
The following table shows the Offering Price,
underwriting discounts and commissions and proceeds, before expenses, to us. The information assumes either no exercise or full exercise
by the Underwriter of the Over-Allotment Option.
|
|
|
Per Common
Share
|
|
Total with no Over-Allotment
|
|
Total with Over-Allotment
|
|
Public Offering price
|
|
US$ ♦
|
|
US$ ♦
|
|
US$ ♦
|
|
|
|
|
|
|
|
|
|
Underwriting discounts and commissions (7.0%)
|
|
US$ ♦
|
|
US$ ♦
|
|
US$ ♦
|
|
|
|
|
|
|
|
|
|
Proceeds, before expenses, to us
|
|
US$ ♦
|
|
US$ ♦
|
|
US$ ♦
|
We have agreed to pay a non-accountable expense
allowance equal to 1.0% of the Offering Price to the Underwriter. We have also agreed to pay certain expenses of the Underwriter in connection
with this Offering, including: (a) all filing fees and communication expenses associated with the review of this Offering by the Financial
Industry Regulatory Authority, Inc. (“FINRA”); (b) fees, expenses and disbursements relating to background checks
of our officers and directors, in an amount not to exceed US$15,000; (c) fees, expenses and disbursements relating to the registration,
qualification or exemption of securities offered under the securities laws of such states and foreign jurisdictions designated by the
Underwriter to a maximum of US$♦; (d) fees and expenses of the Underwriter’s legal counsel,
not to exceed US$125,000 (e) US$29,500 for fees and expenses for the Underwriter’s use of book-building, prospectus tracking and
compliance software for this Offering; (g) fees and expenses for data services and communications expenses; (f) the costs associated
with bound volumes of the public Offering materials as well as commemorative mementos and lucite tombstones, each of which the Company
or its designee will provide within a reasonable time after the closing in such quantities as the Underwriter may reasonably request,
in an amount not to exceed US$3,000; and (g) up to US$15,000 of the Underwriter’s actual accountable road show expenses for the
Offering. We have paid a $50,000 advance (the “Advance”) to the Underwriter which shall be applied against actual
out-of-pocket accountable expenses and such advance shall be reimbursed to us to the extent any portion is not actually incurred in compliance
with FINRA Rule 5110(f)(2)(C) in the event of the termination of the Offering. We estimate that the total expenses of the Offering payable
by us, not including underwriting discounts and commissions and non-accountable expense allowance, will be approximately US$♦.
Underwriter’s Warrants
Upon closing of this Offering, we have agreed
to issue to the Underwriter or its designees Underwriter’s Warrants to purchase such number of Common Shares equal to 5% of the
aggregate number of Offered Shares sold in this Offering (including the Over-Allotment Option). The Underwriter’s Warrants will
be exercisable at price equal to 125% of the Offering Price per Offered Share sold in this Offering. The Underwriter’s Warrants
are exercisable at any time and from time to time, in whole or in part, during the two and one-half year period commencing six months
following the effective date of the Registration Statement related to this Offering. This Prospectus Supplement and the Shelf Prospectus
also qualify the grant of the Underwriter’s Warrants and the distribution of the Common Shares upon exercise of the Underwriter’s
Warrants.
The Underwriter’s Warrants and Common Shares
issuable upon the exercise of the Underwriter’s Warrants, have been deemed compensation by the Financial Industry Regulatory Authority,
or FINRA, and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The Underwriter, or permitted assignees
under such rule, may not sell, transfer, assign, pledge, or hypothecate the Underwriter’s Warrants or the Common Shares underlying
the Underwriter’s Warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result
in the effective economic disposition of the Underwriter’s Warrants or the underlying Common Shares for a period of 180 days from
the effective date of the Registration Statement.
Right of First Refusal
Until twelve months from the Closing Date of
this Offering, the Underwriter will have, subject to certain exceptions, an irrevocable right of first refusal to act as sole
investment banker, sole book-runner and/or sole placement agent, at the Underwriter’s discretion, for each and every future
U.S. public and private equity and debt offering, including all equity linked financings, during such twelve month period for us, or
any successor to or any subsidiary of us, on terms customary for the Underwriter. The Underwriter will have the sole right to
determine whether or not any other broker-dealer shall have the right to participate in any such offering and the economic terms of
any such participation. We also granted the Underwriter a right of first refusal, for a period of twelve months from the
consummation of this Offering, to act as the Company’s exclusive financial advisor (other than in connection with an M&A transaction where such engagement does not include an offering component), if the Company retains a financial
advisor.
Lock-Up Agreements
Each of our directors and officers have agreed
for a period of six months after the date of the Underwriting Agreement, and we have agreed for a period of at least six-months after
the date of the Underwriting Agreement, without the prior written consent of the Underwriter, not to directly or indirectly (subject to
limited exceptions):
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issue (in the case of us), offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of our capital stock, including, but not limited to our common shares and warrants, or any securities convertible
into or exercisable or exchangeable for shares of our capital stock; or
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file or cause the filing of any registration statement under the Securities Act with respect to any shares
of our capital stock, including, but not limited to our common shares and warrants, or any securities convertible into or exercisable
or exchangeable for shares of our capital stock; or
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in the case of us, complete any Offering of our debt securities, other than entering into a line of credit
with a traditional bank; or
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enter into any swap or other agreement, arrangement, hedge or derivatives transaction that transfers to
another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of our common shares or warrants or
other capital stock or any securities convertible into or exercisable or exchangeable for our common shares or other capital stock, whether any
transaction described in any of the foregoing bullet points is to be settled by delivery of our common shares, warrants or other capital
stock, other securities, in cash or otherwise, or publicly announce an intention to do any of the foregoing.
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Stabilization
In connection with this Offering, the Underwriter
may purchase and sell our Common Shares in the open market. These transactions may include short sales in accordance with Regulation M
under the Exchange Act, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale
by the Underwriter of a greater number of Common Shares than they are required to purchase in this Offering. “Covered” short
sales are sales made in an amount not greater than the Underwriter’s option to purchase additional Common Shares in this Offering.
The Underwriter may close out any covered short
position by either exercising their Over-Allotment Option to purchase additional Common Shares or purchasing Common Shares in the open
market. In determining the source of Common Shares to close out the covered short position, the Underwriter will consider, among other
things, the price of Common Shares available for purchase in the open market as compared to the price at which they may purchase additional
Common Shares pursuant to the option granted to them. “Naked” short sales are any sales in excess of such option. The Underwriter
must close out any naked short position by purchasing Common Shares in the open market. A naked short position is more likely to be created
if the Underwriter are concerned that there may be downward pressure on the price of the Common Shares in the open market after pricing
that could adversely affect investors who purchase in this Offering. Stabilizing transactions consist of various bids for, or purchases
of, Common Shares made by the Underwriter in the open market prior to the completion of this Offering.
The Underwriter may also impose a penalty bid.
This occurs when a particular Underwriter repays to the Underwriter a portion of the underwriting discount received by it because the
Underwriter have repurchased Common Shares sold by, or for the account of, such Underwriter in stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the Underwriter for their own accounts, may have the effect of preventing or retarding a decline
in the market price of the Common Shares, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect
the market price of the Common Shares. As a result, the price of the Common Shares may be higher than the price that otherwise might exist
in the open market. If these activities are commenced, they are required to be conducted in accordance with applicable laws and regulations,
and they may be discontinued at any time. These transactions may be effected on the Nasdaq, the over-the-counter market or otherwise.
Passive Market Making
In connection with this Offering, the Underwriter
and selling group members may engage in passive market making transactions in our Common Shares on the Nasdaq Capital Market in accordance
with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the Common Shares
and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the
highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, then
that bid must then be lowered when specified purchase limits are exceeded.
Indemnification
We have agreed to indemnify the Underwriter against
liabilities relating to this Offering arising under the Securities Act and the Exchange Act, liabilities arising from breaches of some
or all of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the Underwriter
may be required to make for these liabilities.
Discretionary Accounts
The Underwriter does not intend to confirm sales
of the securities offered hereby to any accounts over which it has discretionary authority.
Electronic Offer, Sale
and Distribution of Securities
A Prospectus Supplement in electronic format
may be made available on the websites maintained by the Underwriter or selling group members. The Underwriter may agree to allocate
a number of securities to selling group members for sale to its online brokerage account holders. Internet distributions will be
allocated by the Underwriter and selling group members that will make internet distributions on the same basis as other allocations.
Other than the Prospectus Supplement in electronic format, the information on these websites is not part of, nor incorporated by
reference into, this Prospectus Supplement or the Registration Statement of which this Prospectus Supplement forms a part, has not
been approved or endorsed by us, and should not be relied upon by investors.
Other Relationships
From time to time, the Underwriter and/or its
affiliates have provided, and may in the future provide, various investment banking and other financial services for us for which services
they have received and, may in the future receive, customary fees. In the course of their businesses, the Underwriter and its affiliates
may actively trade our securities or loans for their own account or for the accounts of customers, and, accordingly, the Underwriter and
its affiliates may at any time hold long or short positions in such securities or loans.
Listing
Our Common Shares are currently listed and posted
for trading on the CSE under the symbol “DFLY”. Our Common Shares have been approved for listing on the NASDAQ under
the symbol “DPRO.” In connection with the listing of the Common Shares on the NASDAQ, we have applied to change our
symbol on the CSE to “DPRO” to align with our symbol on the NASDAQ. The change of our symbol on the CSE is subject
to our fulfillment all of the relevant requirements of the CSE.
Offer restrictions outside
the United States
The Common Shares offered by this Prospectus Supplement
may not be offered or sold, directly or indirectly, nor may this Prospectus Supplement or any other offering material or advertisements
in connection with the offer and sale of any such Common Shares be distributed or published in any jurisdiction other than the United
States, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons
into whose possession this Prospectus Supplement comes are advised to inform themselves about and to observe any restrictions relating
to the Offering and the distribution of this Prospectus Supplement. This Prospectus Supplement does not constitute an offer to sell or
a solicitation of an offer to buy any Common Shares offered by this Prospectus Supplement in any jurisdiction in which such an offer or
a solicitation is unlawful.
Australia
This Prospectus Supplement is not a disclosure
document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission
and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act.
Accordingly, (i) the offer of the Common Shares under this Prospectus Supplement is only made to persons to whom it is lawful to offer
the Common Shares without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section
708 of the Australian Corporations Act, (ii) this Prospectus Supplement is made available in Australia only to those persons as set forth
in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents
that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees
not to sell or offer for sale within Australia any of the Common Shares sold to the offeree within 12 months after its transfer to the
offeree under this Prospectus Supplement.
China
The information in this document does not constitute
a public offer of the Common Shares, whether by way of sale or subscription, in the People’s Republic of China (excluding, for purposes
of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The Common Shares may not
be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly to “qualified domestic institutional
investors”.
European Economic Area—Belgium,
Germany, Luxembourg and Netherlands
The information in this document has been prepared
on the basis that all offers of Common Shares will be made pursuant to an exemption under the Directive 2003/71/EC (“Prospectus
Directive”), as implemented in Member States of the European Economic Area (each, a “Relevant Member State”), from the
requirement to produce a prospectus for offers of Common Shares.
An offer to the public of Common Shares has not
been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive
as implemented in that Relevant Member State:
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to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized
or regulated, whose corporate purpose is solely to invest in securities;
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to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal
year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements)
and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements);
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to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article
2(1)(e) of the Prospectus Directive) subject to obtaining the prior consent of the Company or any underwriter for any such offer; or
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in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such
offer of securities shall result in a requirement for the publication by the Company of a prospectus pursuant to Article 3 of the Prospectus
Directive.
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France
This document is not being distributed in the
context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article
L.411-1 of the French Monetary and Financial Code (Code Monétaire et Financier) and Articles 211-1 et seq. of the General
Regulation of the French Autorité des marchés financiers (“AMF”). The Common Shares have not been
offered or sold and will not be offered or sold, directly or indirectly, to the public in France.
This document and any other offering material
relating to the Common Shares have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be
distributed or caused to distributed, directly or indirectly, to the public in France.
Such offers, sales and distributions have been
and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined
in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D.744-1, D.754-1 ;and D.764-1 of the French Monetary and
Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs)
acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1; and D.764-1
of the French Monetary and Financial Code and any implementing regulation.
Pursuant to Article 211-3 of the General Regulation
of the AMF, investors in France are informed that the Common Shares cannot be distributed (directly or indirectly) to the public by the
investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial
Code.
Ireland
The information in this document does not constitute
a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority
as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish
Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The Common Shares have not been offered
or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified
investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified
investors.
Israel
The Common Shares offered by this Prospectus Supplement
have not been approved or disapproved by the Israeli Securities Authority (the ISA), nor have such Common Shares been registered for sale
in Israel. The Common Shares may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a
prospectus. The ISA has not issued permits, approvals or licenses in connection with the Offering or publishing the Prospectus Supplement;
nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality
of the Common Shares being offered. Any resale in Israel, directly or indirectly, to the public of the Common Shares offered by this Prospectus
Supplement is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and
regulations.
Italy
The offering of the Common Shares in the
Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le
Società e la Borsa, or “CONSOB”) pursuant to the Italian securities legislation and, accordingly, no offering
material relating to the Common Shares may be distributed in Italy and such Common Shares may not be offered or sold in Italy in a
public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”),
other than:
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to Italian qualified investors, as defined in Article 100 of Decree no.58 by reference to Article 34-ter
of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 1197l”) as amended (“Qualified Investors”); and
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in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree
No. 58 and Article 34-ter of Regulation No. 11971 as amended.
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Any offer, sale or delivery of the Common Shares
or distribution of any offer document relating to the Common Shares in Italy (excluding placements where a Qualified Investor solicits
an offer from the issuer) under the paragraphs above must be:
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made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy
in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October
2007 and any other applicable laws; and
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in compliance with all relevant Italian securities, tax and exchange controls and any other applicable
laws.
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Any subsequent distribution of the Common Shares
in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation
No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such Common
Shares being declared null and void and in the liability of the entity transferring the Common Shares for any damages suffered by the
investors.
Japan
The Common Shares have not been and will not be
registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the “FIEL”)
pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional
Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly,
the Common Shares may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other
than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires Common Shares may not resell them to any person
in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of Common Shares is conditional upon the execution
of an agreement to that effect.
Portugal
This document is not being distributed in the
context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the
meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The Common Shares have
not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other
offering material relating to the Common Shares have not been, and will not be, submitted to the Portuguese Securities Market Commission
(Comissăo do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused
to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a
public offer under the Portuguese Securities Code. Such offers, sales and distributions of the Common Shares in Portugal are limited to
persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this
document and they may not distribute it or the information contained in it to any other person.
Sweden
This document has not been, and will not be, registered
with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available,
nor may the Common Shares be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under
the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any
offering of securities in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments
Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other
person.
Switzerland
The Common Shares may not be publicly
offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or
regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance
prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses
under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in
Switzerland. Neither this document nor any other offering material relating to the Common Shares may be publicly distributed or
otherwise made publicly available in Switzerland.
Neither this document nor any other offering material
relating to the Common Shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document
will not be filed with, and the offer of Common Shares will not be supervised by, the Swiss Financial Market Supervisory Authority (FINMA).
This document is personal to the recipient only
and not for general circulation in Switzerland.
United Arab Emirates
Neither this document nor the Common Shares have
been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates or any other governmental authority
in the United Arab Emirates, nor has the Company received authorization or licensing from the Central Bank of the United Arab Emirates
or any other governmental authority in the United Arab Emirates to market or sell the Common Shares within the United Arab Emirates. This
document does not constitute and may not be used for the purpose of an offer or invitation. No services relating to the Common Shares,
including the receipt of applications and/or the allotment or redemption of such shares, may be rendered within the United Arab Emirates
by the Company.
No offer or invitation to subscribe for Common
Shares is valid or permitted in the Dubai International Financial Centre.
United Kingdom
Neither the information in this document nor any
other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no
prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (“FSMA”) has
been published or is intended to be published in respect of the Common Shares. This document is issued on a confidential basis to “qualified
investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the Common Shares may not be offered or sold
in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require
the publication of a prospectus pursuant to section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole
or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.
Any invitation or inducement to engage in investment
activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the Common Shares has only been communicated
or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which
section 21(1) of FSMA does not apply to the Company.
In the United Kingdom, this document is being
distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within
Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”),
(ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations,
etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together “relevant persons”). The investments
to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engaged in only with,
relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
DESCRIPTION
OF SECURITIES
The following describes the material terms of
the Company’s share capital. See “Description of the Share Capital of the Corporation” in the Shelf Prospectus and the
documents incorporated by reference in this Prospectus Supplement, including in the AIF in the section entitled “Description of
Capital Structure”.
Our authorized share capital consists of an unlimited
number of Common Shares of which 135,229,434 were issued and outstanding as of July 20, 2021 and an unlimited number of Preferred Shares,
issuable in series, none of which were issued and outstanding as of July 20, 2021.
Share Consolidation
On March 11, 2021, the Company’s Board
of Directors approved the Consolidation on a ratio of one (1) post-consolidation Common Share for up to a maximum of every six (6)
pre-consolidation Common Shares, with any one director or officer being authorized to determine the final ratio and effective date
in connection with the Consolidation. We intend to effectuate the Consolidation in a ratio of one (1) for five (5) basis prior to or
concurrent with the pricing of the Offering.
Common Shares
Each Common Share entitles the holder to
receive notice of and attend all meetings of the shareholders. Each Common Share carries the right to one vote. The holders of
Common Shares are entitled to receive any dividends declared by the Company in respect of the Common Shares at such time and in
such amount as may be determined by the Board, in its discretion. In the event of the liquidation, dissolution, or winding up of
the Company, whether voluntary or involuntary, holders of Common Shares are also entitled to participate, rateably, in the distribution
of the assets of the Company, subject to the rights of the holders of any other class of shares ranking in priority to the Common
Shares.
Preferred Shares
The Preferred Shares may be issuable in series
and the directors may, from time to time before the issue of any Preferred Shares of any particular series, define and attach
special rights, privileges, restrictions, and conditions to the Preferred Shares of any series, including voting rights, entitlement
to dividends, and redemption, conversion, and exchange rights. In the event of the liquidation, dissolution, or winding up of the
Company, whether voluntary or involuntary, holders of Preferred Shares will rank on a parity with holders of the Preferred Shares
of every other series and be entitled to preference over the Common Shares and over any other shares of the Company ranking junior
to the Preferred Shares.
CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material
U.S. federal income tax consequences relating to the ownership and disposition of Common Shares by U.S. Holders (as defined below).
This discussion applies to U.S. Holders that purchase Common Shares pursuant to this Offering and hold such Common Shares as capital
assets (generally, property held for investment). This discussion is based on the Code, U.S. Treasury regulations promulgated thereunder
and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change,
possibly with retroactive effect. This discussion does not address all of the U.S. federal income tax consequences that may be
relevant to specific U.S. Holders in light of their particular circumstances or to U.S. Holders subject to special treatment under
U.S. federal income tax law (such as certain financial institutions, banks, insurance companies, broker-dealers and traders in
securities or other persons that generally mark their securities to market for U.S. federal income tax purposes, tax-exempt entities
or government organizations, retirement plans, regulated investment companies, real estate investment trusts, certain former citizens
or residents of the United States, persons who hold Common Shares as part of a “straddle,” “hedge,” “conversion
transaction,” “synthetic security” or integrated investment, persons required to accelerate the recognition of any item
of gross income with respect to the Common Shares as a result of such income being recognized on an applicable financial statement, persons
that have a “functional currency” other than the U.S. dollar, persons that own directly, indirectly or through attribution
10% or more of the voting power or value of our shares, corporations that accumulate earnings to avoid U.S. federal income tax,
partnerships and other pass-through entities (or arrangements treated as a partnership for U.S. federal income tax purposes), and
investors in such pass-through entities). This discussion does not address any U.S. state or local or non-U.S. tax consequences
or any U.S. federal estate, gift or alternative minimum tax consequences.
As used in this discussion, the term “U.S.
Holder” means a beneficial owner of Common Shares that is, for U.S. federal income tax purposes, (1) an individual who
is a citizen or resident of the United States, (2) a corporation (or entity treated as a corporation for U.S. federal income
tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia, (3)
an estate the income of which is subject to U.S. federal income tax regardless of its source or (4) a trust (x) with respect to
which a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons
have the authority to control all of its substantial decisions or (y) that has elected under applicable U.S. Treasury regulations
to be treated as a domestic trust for U.S. federal income tax purposes.
If an entity or arrangement treated as a partnership
for U.S. federal income tax purposes holds Common Shares, the U.S. federal income tax consequences relating to an investment in
the Common Shares will depend in part upon the status and activities of such entity or arrangement and the particular partner.
Any such entity or arrangement should consult its own tax advisor regarding the U.S. federal income tax consequences applicable
to it and its partners of the purchase, ownership and disposition of Common Shares.
Persons considering an investment in Common
Shares should consult their own tax advisors as to the particular tax consequences applicable to them relating to the purchase,
ownership and disposition of Common Shares, including the applicability of U.S. federal, state and local tax laws and non-U.S.
tax laws.
Passive Foreign Investment
Company Consequences
In general, a corporation organized outside the
United States will be treated as a PFIC, for any taxable year in which either (1) at least 75% of its gross income is “passive
income”, or (2) on average at least 50% of its assets, determined on a quarterly basis, are assets that produce passive income
or are held for the production of passive income. Passive income for this purpose generally includes, among other things, dividends,
interest, royalties, rents, and gains from the sale or exchange of property that gives rise to passive income. Assets that produce
or are held for the production of passive income generally include cash, even if held as working capital or raised in a
public offering, marketable securities, and other assets that may produce passive income. Generally, in determining whether a non-U.S.
corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly,
at least a 25% interest (by value) is taken into account.
Based upon the current and expected composition
of our income and assets, we believe that we were not a PFIC for the taxable year ended December 31, 2020 and expect that we will not
be a PFIC for the current taxable year. Nevertheless, because our PFIC status must be determined annually with respect to each taxable
year and will depend on the composition and character of our assets and income, including our use of proceeds from the Offering pursuant
to this Prospectus Supplement, and the value of our assets (which may be determined, in part, by reference to the market value of Common
Shares, which may be volatile) over the course of such taxable year, we may be a PFIC in any taxable year. The determination of whether
we will be or become a PFIC may also depend, in part, on how, and how quickly, we use our liquid assets and the cash raised in the Offering.
If we determine not to deploy significant amounts of cash for active purposes, our risk of being a PFIC may substantially increase. Because
there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close
of each taxable year, there can be no assurance that we will not be a PFIC for any future taxable year. In addition, it is possible that
the U.S. Internal Revenue Service may challenge our classification of certain income and assets as non-passive, which may result in us
being or becoming a PFIC in the current or subsequent years.
If we are a PFIC in any taxable year during which
a U.S. Holder owns Common Shares, the U.S. Holder could be liable for additional taxes and interest charges under the “PFIC
excess distribution regime” upon (1) a distribution paid during a taxable year that is greater than 125% of the average annual
distributions paid in the three preceding taxable years, or, if shorter, the U.S. Holder’s holding period for the Common
Shares, and (2) any gain recognized on a sale, exchange or other disposition, including a pledge, of the Common Shares, whether
or not we continue to be a PFIC. Under the PFIC excess distribution regime, the tax on such distribution or gain would be
determined by allocating the distribution or gain ratably over the U.S. Holder’s holding period for Common Shares. The amount
allocated to the current taxable year (i.e., the year in which the distribution occurs or the gain is recognized) and any year
prior to the first taxable year in which we are a PFIC will be taxed as ordinary income earned in the current taxable year. The
amount allocated to other taxable years will be taxed at the highest marginal rates in effect for individuals or corporations,
as applicable, to ordinary income for each such taxable year, and an interest charge, generally applicable to underpayments of
tax, will be added to the tax.
If we are a PFIC for any year during which a U.S.
Holder holds Common Shares, we must generally continue to be treated as a PFIC by that holder for all succeeding years during which
the U.S. Holder holds the Common Shares, unless (i) we cease to meet the requirements for PFIC status and the U.S. Holder makes
a “deemed sale” election with respect to the Common Shares or for the period immediately preceding our cessation in
meeting the tests described above the Common Shares were subject to a mark-to-market election or (ii) the U.S. Holder makes a timely and
effective “qualified electing fund” election (“QEF Election”) with respect to all taxable years during
such U.S. Holder’s holding period in which the we are a PFIC. If the election is made, the U.S. Holder will be deemed to sell the
Common Shares it holds at their fair market value on the last day of the last taxable year in which we qualified as a PFIC,
and any gain recognized from such deemed sale would be taxed under the PFIC excess distribution regime. After the deemed sale election,
the U.S. Holder’s Common Shares would not be treated as shares of a PFIC unless we subsequently become a PFIC.
If we are a PFIC for any taxable year during which
a U.S. Holder holds Common Shares and one of our non-U.S. corporate subsidiaries is also a PFIC (i.e., a lower-tier PFIC), such
U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC and would be taxed
under the PFIC excess distribution regime on distributions by the lower-tier PFIC and on gain from the disposition of shares of
the lower-tier PFIC even though such U.S. Holder would not receive the proceeds of those distributions or dispositions.
Each U.S. Holder is advised to consult its tax advisors regarding the application of the PFIC rules to our non-U.S. subsidiaries.
If we are a PFIC, a U.S. Holder will not be
subject to tax under the PFIC excess distribution regime on distributions or gain recognized on Common Shares if such U.S.
Holder makes a valid “mark-to-market” election for our Common Shares. A mark-to-market election is available to a
U.S. Holder only for “marketable stock”. Our Common Shares will be marketable stock as long as they remain listed
on the OTCQB or become listed on the NASDAQ and are regularly traded, other than in de minimis quantities, on at least 15
days during each calendar quarter. If a mark-to-market election is in effect, a U.S. Holder generally would take into
account, as ordinary income each year, the excess of the fair market value of Common Shares held at the end of such taxable
year over the adjusted tax basis of such Common Shares. The U.S. Holder would also take into account, as an ordinary loss
each year, the excess of the adjusted tax basis of such Common Shares over their fair market value at the end of the
taxable year, but only to the extent of the excess of amounts previously included in income over ordinary losses
deducted as a result of the mark-to-market election. The U.S. Holder’s tax basis in Common Shares would be
adjusted to reflect any income or loss recognized as a result of the mark-to-market election. Any gain from a sale, exchange
or other disposition of Common Shares in any taxable year in which we are a PFIC would be treated as ordinary income and any
loss from such sale, exchange or other disposition would be treated first as ordinary loss (to the extent of any net
mark-to-market gains previously included in income) and thereafter as capital loss.
A mark-to-market election will not apply to Common
Shares for any taxable year during which we are not a PFIC, but will remain in effect with respect to any subsequent taxable year
in which we become a PFIC. Such election will not apply to any non-U.S. subsidiaries that we may organize or acquire in the future.
Accordingly, a U.S. Holder may continue to be subject to tax under the PFIC excess distribution regime with respect to any lower-tier
PFICs that we may organize or acquire in the future notwithstanding the U.S. Holder’s mark-to-market election for the Common
Shares.
A U.S. Holder who makes a QEF Election generally
must report on a current basis its share of our net capital gain and ordinary earnings for any year in which were are a PFIC, whether
or not we distribute any amounts to our shareholders. However, U.S. holders should be aware that there can be no assurance that we will
satisfy the record keeping requirements that apply to a QEF, or that we will supply U.S. holders with information that such U.S. holders
require to report under the QEF election rules, in the event that the Company is a PFIC and a U.S. holder wishes to make a QEF election.
Each U.S. person that is an investor of a PFIC
is generally required to file an annual information return on IRS Form 8621 containing such information as the U.S. Treasury Department
may require. The failure to file IRS Form 8621 could result in the imposition of penalties and the extension of the statute of
limitations with respect to U.S. federal income tax.
The U.S. federal income tax rules relating
to PFICs are very complex. Prospective U.S. investors are strongly urged to consult their own tax advisors with respect to the
impact of PFIC status on the purchase, ownership and disposition of Common Shares, the consequences to them of an investment in
a PFIC, any elections available with respect to the Common Shares and the IRS information reporting obligations with respect to
the purchase, ownership and disposition of Common Shares of a PFIC.
Distributions
Subject to the discussion above under “—
Passive Foreign Investment Company Consequences,” a U.S. Holder that receives a distribution with respect to Common Shares
generally will be required to include the gross amount of such distribution (before reduction for any Canadian withholding taxes
withheld therefrom) in gross income as a dividend when actually or constructively received to the extent of the U.S. Holder’s
pro rata share of our current and/or accumulated earnings and profits (as determined under U.S. federal income tax principles).
To the extent a distribution received by a U.S. Holder is not a dividend because it exceeds the U.S. Holder’s pro rata share
of our current and accumulated earnings and profits, it will be treated first as a tax-free return of capital and reduce (but not
below zero) the adjusted tax basis of the U.S. Holder’s Common Shares. To the extent the distribution exceeds the adjusted
tax basis of the U.S. Holder’s Common Shares, the remainder will be taxed as capital gain. Because we may not account for
our earnings and profits in accordance with U.S. federal income tax principles, U.S. Holders should expect all distributions to
be reported to them as dividends. Distributions on Common Shares that are treated as dividends generally will constitute income
from sources outside the United States for foreign tax credit purposes and generally will constitute passive category income. Such
dividends will not be eligible for the “dividends received” deduction generally allowed to corporate shareholders with
respect to dividends received from U.S. corporations.
Dividends paid by a “qualified foreign corporation”
are eligible for taxation in the case of non-corporate U.S. Holders at a reduced long-term capital gains rate rather than the marginal
tax rates generally applicable to ordinary income provided that certain requirements are met. Each non-corporate U.S. Holder is
advised to consult its tax advisors regarding the availability of the reduced tax rate on dividends with regard to its particular
circumstances.
A non-U.S. corporation (other than a
corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year)
generally will be considered to be a qualified foreign corporation (a) if it is eligible for the benefits of a
comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is
satisfactory for purposes of this provision and which includes an exchange of information provision, or (b) with respect to
any dividend it pays on Common Shares that are readily tradable on an established securities market in the United States. We
believe that we qualify as a resident of Canada for purposes of, and are eligible for the benefits of, the U.S.-Canada
Treaty, which the IRS has determined is satisfactory for purposes of the qualified dividend rules and that it includes an
exchange of information provision, although there can be no assurance in this regard. Further, our Common Shares will
generally be considered to be readily tradable on an established securities market in the United States if they remain
listed on the OTCQB, or become listed on the NASDAQ, as we intend the Common Shares to be. Therefore, subject to the
discussion above under ”— Passive Foreign Investment Company Consequences”, if the U.S.
Treaty is applicable, or if the Common Shares are readily tradable on an established securities market in the United States,
dividends paid on Common Shares will generally be “qualified dividend income” in the hands of non-corporate U.S.
Holders, provided that certain conditions are met, including conditions relating to holding period and the absence of certain
risk reduction transactions.
Sale, Exchange or Other
Disposition of Common Shares
Subject to the discussion above under “—
Passive Foreign Investment Company Consequences,” a U.S. Holder generally will recognize capital gain or loss for U.S.
federal income tax purposes upon the sale, exchange or other disposition of Common Shares in an amount equal to the difference,
if any, between the amount realized (i.e., the amount of cash plus the fair market value of any property received) on the sale,
exchange or other disposition and such U.S. Holder’s adjusted tax basis in the Common Shares. Such capital gain or loss generally
will be long-term capital gain taxable at a reduced rate for non-corporate U.S. Holders or long-term capital loss if, on
the date of sale, exchange or other disposition, the Common Shares were held by the U.S. Holder for more than one year. Any capital
gain of a non-corporate U.S. Holder that is not long-term capital gain is taxed at ordinary income rates. The deductibility of
capital losses is subject to limitations. Any gain or loss recognized by a U.S. Holder from the sale or other disposition of
Common Shares will generally be gain or loss from sources within the United States for U.S. foreign tax credit purposes.
Medicare Tax
Certain U.S. Holders that are individuals, estates
or trusts and whose income exceeds certain thresholds generally are subject to a 3.8% Medicare tax on all or a portion of their
net investment income, which may include their gross dividend income and net gains from the disposition of Common Shares. If you
are a U.S. person that is an individual, estate or trust, you are encouraged to consult your tax advisors regarding the applicability
of this Medicare tax to your income and gains in respect of your investment in Common Shares.
Information Reporting and
Backup Withholding
U.S. Holders may be required to file certain U.S.
information reporting returns with the IRS with respect to an investment in Common Shares, including, among others, IRS Form 8938
(Statement of Specified Foreign Financial Assets). As described above under “Passive Foreign Investment Company Consequences”,
each U.S. Holder who is a shareholder of a PFIC must file an annual report containing certain information. U.S. Holders paying
more than US$100,000 for Common Shares may be required to file IRS Form 926 (Return by a U.S. Transferor of Property to a Foreign
Corporation) reporting this payment. Substantial penalties may be imposed upon a U.S. Holder that fails to comply with the required
information reporting.
Dividends on and proceeds from the sale or other
disposition of Common Shares may be reported to the IRS unless the U.S. Holder establishes a basis for exemption. Backup withholding
may apply to amounts subject to reporting if the holder (1) fails to provide an accurate U.S. taxpayer identification number or otherwise
establish a basis for exemption, or (2) is described in certain other categories of persons. However, U.S. Holders that are corporations
generally are excluded from these information reporting and backup withholding tax rules. Backup withholding is not an additional
tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a U.S. Holder’s
U.S. federal income tax liability if the required information is furnished by the U.S. Holder on a timely basis to the IRS.
U.S. Holders should consult their own tax advisors
regarding the backup withholding tax and information reporting rules.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT
ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES TO IT OF AN INVESTMENT IN COMMON SHARES IN LIGHT OF THE INVESTOR’S
OWN CIRCUMSTANCES.
Certain
Canadian Federal Income Tax Considerations For United States Residents
The following is, at the date of this
Prospectus Supplement, a summary of certain Canadian federal income tax considerations generally applicable to the holding
and disposition of Common Shares acquired by a holder who, at all relevant times, (a) for the purposes of the Tax Act (i) is
not resident, or deemed to be resident, in Canada, (ii) deals at “arm’s length” with the Company and the
Underwriter, and is not “affiliated” with either the Company or the Underwriter (each as defined in the Tax Act),
(iii) holds Common Shares as capital property, (iv) does not use or hold Common Shares in the course of carrying on, or
otherwise in connection with, a business carried on or deemed to be carried on in Canada and (v) is not an insurer that
carries on an insurance business in Canada and elsewhere or “authorized foreign bank” (as defined in the
Tax Act), or other holder of special status, and (b) for the purposes of the Canada-U.S. Tax Convention (1980)
(the ”Tax Treaty”), is a resident of the United States, has never been a resident of Canada, does not
have and has not had, at any time, a “permanent establishment” (as defined in the Tax Treaty) of any kind in Canada, and
otherwise qualifies for the full benefits of the Tax Treaty. Holders who meet all the criteria in clauses (a) and (b) above
are referred to herein as “United States Holders”, and this summary only addresses such United States
Holders.
This summary does not deal with special situations,
such as the particular circumstances of traders or dealers, tax exempt entities, insurers or financial institutions, or other holders
of special status or in special circumstances. Such holders, and all other holders who do not meet the criteria in clauses (a)
and (b) above, should consult their own tax advisors.
This summary is based on the current provisions
of the Tax Act, the regulations thereunder (the “Regulations”), the current provisions of the Tax Treaty (each
as in force as of the date of this Prospectus Supplement) and the Company’s understanding of the administrative policies
and assessing practices of the Canada Revenue Agency (the “CRA”) published in writing prior to the date hereof.
This summary takes into account all specific proposals to amend the Tax Act and Regulations publicly announced by or on behalf
of the Minister of Finance (Canada) prior to the date hereof (the “Proposed Amendments”) and assumes
that such Proposed Amendments will be enacted in the form proposed. However, such Proposed Amendments might not be enacted
in the form proposed, or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative
policies or assessing practices, whether by legislative, governmental or judicial decision or action, nor does it take into account
tax laws of any province or territory of Canada or of any other jurisdiction outside Canada, which may differ significantly from
those discussed in this summary.
For the purposes of the Tax Act, all amounts relating
to the acquisition, holding or disposition of Common Shares must generally be expressed in Canadian dollars. Amounts denominated
in United States currency generally must be converted into Canadian dollars using a rate of exchange that is acceptable
to the CRA.
This summary is of a general nature only and
is not intended to be, nor should it be construed to be, legal or tax advice to any particular United States Holder, and no representation
with respect to the Canadian federal income tax consequences to any particular United States Holder or prospective United States
Holder is made. This summary is not exhaustive of all Canadian federal income tax considerations. Accordingly, all prospective
purchasers (including United States Holders as defined above) should consult with their own tax advisors for advice with respect
to their own particular circumstances.
Withholding Tax on Dividends
Amounts paid or credited or deemed to be paid
or credited as, on account or in lieu of payment of, or in satisfaction of, dividends on Common Shares to a United States Holder
will be subject to Canadian withholding tax. Under the Tax Act, the rate of withholding is 25% of the gross amount of the dividend.
Under the Tax Treaty, the rate of withholding on any such dividend beneficially owned by a United States Holder is generally reduced
to 15%, or 5% if the United States Holder is a company that owns, directly or indirectly, at least 10% of the voting stock of the Company.
Dispositions of Common
Shares
A United States Holder generally will not be subject
to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a Common Share, nor
will a capital loss arising therefrom be recognized under the Tax Act, unless such Common Share constitutes “taxable Canadian
property” (as defined in the Tax Act) of the United States Holder and the gain is not exempt from tax pursuant to the terms
of the Tax Treaty.
Provided the Common Shares are listed on a “designated
stock exchange” (as defined in the Tax Act) (which currently includes the NASDAQ and CSE) and are so listed at the time of
disposition, the Common Shares generally will not constitute “taxable Canadian property” of a United States Holder
at that time unless, at any time during the 60-month period immediately preceding the disposition, the following two conditions
are met concurrently: (i) 25% or more of the issued shares of any class or series of shares of the Company were owned by or belonged
to one or any combination of (a) the United States Holder, (b) persons with whom the United States Holder did not deal at “arm’s
length” (within the meaning of the Tax Act), and (c) partnerships in which the United States Holder or a person described
in (b) holds a membership interest directly or indirectly through one or more partnerships; and (ii) more than 50% of the fair
market value of the Common Shares was derived directly or indirectly from one or any combination of (a) real or immovable
property situated in Canada, (b) “Canadian resource properties” (as defined in the Tax Act), (c) “timber
resource properties” (as defined in the Tax Act), or (d) options in respect of, interests in, or, for civil law purposes,
a right in, the foregoing property, whether or not such property exists. Notwithstanding the foregoing, a Common Share may be deemed
to be “taxable Canadian property” in certain other circumstances. United States Holders should consult their own tax
advisors as to whether their Common Shares will constitute “taxable Canadian property”.
United States Holders who may hold Common Shares
as “taxable Canadian property” should consult their own tax advisors with respect to the application of Canadian capital
gains taxation, any potential relief under the Tax Treaty, and special compliance procedures under the Tax Act, none of which is
described in this summary.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE CANADIAN OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON SHARES,
INCLUDING, IN PARTICULAR, THE EFFECT OF ANY NON-U.S., STATE OR LOCAL TAXES.
PRIOR
SALES
The following tables summarize the details of
the Common Shares and any securities convertible or exchangeable for Common Shares issued by us during the 12-month period prior
to the date of this Prospectus Supplement.
Common Shares
|
Date of Issuance
|
|
|
Issuance/ Exercise Price per
Common Share(10)
|
|
|
Number of Common Shares(10)
|
|
|
Reason for Issuance
|
|
|
February 18, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
120,000
|
|
|
|
Note 1
|
|
|
February 25, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
100,000
|
|
|
|
Note 1
|
|
|
March 6, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
1,051,600
|
|
|
|
Note 1
|
|
|
March 20, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
365,000
|
|
|
|
Note 1
|
|
|
March 26, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
1,474,200
|
|
|
|
Note 1
|
|
|
April 8, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
609,200
|
|
|
|
Note 1
|
|
|
April 16, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
630,000
|
|
|
|
Note 1
|
|
|
April 30, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
3,225,438
|
|
|
|
Note 2
|
|
|
May 27, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
60,000
|
|
|
|
Note 1
|
|
|
June 23, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
228,000
|
|
|
|
Note 1
|
|
|
July 3, 2020
|
|
|
C$
|
|
0.52
|
|
|
|
961,538
|
|
|
|
Note 3
|
|
|
July 16, 2020
|
|
|
C$
|
|
0.55
|
|
|
|
555,409
|
|
|
|
Note 4
|
|
|
September 21, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
10,000
|
|
|
|
Note 1
|
|
|
October 7, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
11,000
|
|
|
|
Note 1
|
|
|
October 21, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
3,189,875
|
|
|
|
Note 1
|
|
|
November 3, 2020
|
|
|
|
|
N/A
|
|
|
|
35,586
|
|
|
|
Note 5
|
|
|
November 30, 2020
|
|
|
US$
|
|
0.47
|
|
|
|
2,556,496
|
|
|
|
Note 6
|
|
|
December 4, 2020
|
|
|
|
|
N/A
|
|
|
|
10,202
|
|
|
|
Note 5
|
|
|
December 8, 2020
|
|
|
|
|
N/A
|
|
|
|
13,234
|
|
|
|
Note 5
|
|
|
December 15, 2020
|
|
|
|
|
N/A
|
|
|
|
940.970
|
|
|
|
Note 5
|
|
|
December 22, 2020
|
|
|
C$
|
|
0.50
|
|
|
|
75,000
|
|
|
|
Note 1
|
|
|
January 4, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
7,500
|
|
|
|
Note 1
|
|
|
January 5, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
300,000
|
|
|
|
Note 1
|
|
|
January 11, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
2,260,124
|
|
|
|
Note 1
|
|
|
January 11, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
200,000
|
|
|
|
Note 7
|
|
|
January 13, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
250,000
|
|
|
|
Note 1
|
|
|
January 14, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
1,255,000
|
|
|
|
Note 1
|
|
|
January 14, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
266,666
|
|
|
|
Note 7
|
|
|
January 15, 2021
|
|
|
C$
|
|
0.43
|
|
|
|
62,500
|
|
|
|
Note 7
|
|
|
January 18, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
225,000
|
|
|
|
Note 1
|
|
|
January 19, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
788,331
|
|
|
|
Note 7
|
|
|
January 25, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
1,987,500
|
|
|
|
Note 1
|
|
|
January 25, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
41,667
|
|
|
|
Note 7
|
|
|
January 26, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
710,000
|
|
|
|
Note 1
|
|
|
January 27, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
5,000
|
|
|
|
Note 1
|
|
|
February 1, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
83,333
|
|
|
|
Note 7
|
|
|
February 1, 2021
|
|
|
C$
|
|
0.77
|
|
|
|
50,000
|
|
|
|
Note 7
|
|
|
February 2, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
166,666
|
|
|
|
Note 7
|
|
|
February 5, 2021
|
|
|
US$
|
|
0.47
|
|
|
|
6,671,992
|
|
|
|
Note 6
|
|
|
February 8, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
75,000
|
|
|
|
Note 8
|
|
|
February 16, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
200,000
|
|
|
|
Note 7
|
|
|
March 5, 2021
|
|
|
US$
|
|
0.47
|
|
|
|
25,771,465
|
|
|
|
Note 6
|
|
|
March 17, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
15,000
|
|
|
|
Note 1
|
|
|
March 18, 2021
|
|
|
|
|
N/A
|
|
|
|
176,168
|
|
|
|
Note 5
|
|
|
March 23, 2021
|
|
|
|
|
N/A
|
|
|
|
448,830
|
|
|
|
Note 5
|
|
|
March 25, 2021
|
|
|
C$
|
|
2.67
|
|
|
|
6,000,000
|
|
|
|
Note 9
|
|
|
April 13, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
8,000,000
|
|
|
|
Note 1
|
|
|
April 29, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
87,500
|
|
|
|
Note 1
|
|
|
April 30, 2021
|
|
|
|
|
N/A
|
|
|
|
124,999
|
|
|
|
Note 5
|
|
|
May 14, 2021
|
|
|
C$
|
|
0.50
|
|
|
|
10,000
|
|
|
|
Note 7
|
|
Notes:
|
|
(1)
|
Issued pursuant to an exercise of warrants.
|
|
|
(2)
|
Issued in connection with the Company’s acquisition of Dronelogics Systems Inc.
|
|
|
(3)
|
Issued pursuant to a non-brokered private placement of Common Shares.
|
|
|
(4)
|
Issued pursuant to a shares-for-debt transaction.
|
|
|
(5)
|
Issued pursuant to the vesting of restricted share units under the Company’s share compensation
plan.
|
|
|
(6)
|
Issued pursuant to the Company’s Regulation A+ Offering of units.
|
|
|
(7)
|
Issued pursuant to the exercise of stock options under the Company’s share compensation plan.
|
|
|
(8)
|
Issued in connection with an investor relations agreement.
|
|
|
(9)
|
Issued to Vital in connection with the asset purchase agreement between the Company and Vital.
|
|
|
(10)
|
The issue price/exercise price and number of Common Shares does not reflect the Consolidation.
|
Stock Options, Restricted
Share Units and Warrants
|
Date of Issuance
|
|
Security
|
|
Exercise Price or Market
Price per Security(4)
|
|
|
Number of Securities(4)
|
|
April 30, 2020
|
|
Stock Options(1)
|
|
C$
|
0.50
|
|
|
445,000
|
|
April 30, 2020
|
|
Stock Options(1)
|
|
C$
|
0.77
|
|
|
600,000
|
|
April 30, 2020
|
|
Restricted Share Units(1)
|
|
|
N/A
|
|
|
375,000
|
|
July 3, 2020
|
|
Stock Options(1)
|
|
C$
|
0.64
|
|
|
1,000,000
|
|
November 24, 2020
|
|
Stock Options(1)
|
|
C$
|
0.50
|
|
|
165,000
|
|
November 24, 2020
|
|
Restricted Share Units(1)
|
|
|
N/A
|
|
|
865,000
|
|
November 30, 2020
|
|
Warrants(2)
|
|
US$
|
0.71
|
|
|
2,556,496
|
|
December 11, 2020
|
|
Stock Options(1)
|
|
C$
|
0.43
|
|
|
250,000
|
|
February 5, 2021
|
|
Warrants(2)
|
|
US$
|
0.71
|
|
|
6,671,992
|
|
February 1, 2021
|
|
Stock Options(1)
|
|
C$
|
2.64
|
|
|
150,000
|
|
March 5, 2021
|
|
Warrants(2)
|
|
US$
|
0.71
|
|
|
25,771,465
|
|
March 11, 2021
|
|
Stock Options(1)
|
|
C$
|
2.78
|
|
|
50,000
|
|
March 11, 2021
|
|
Restricted Share Units(1)
|
|
|
N/A
|
|
|
740,000
|
|
March 25, 2021
|
|
Warrants(3)
|
|
C$
|
2.67
|
|
|
6,000,000
|
|
April 27,2021
|
|
Stock Options(1)
|
|
C$
|
2.03
|
|
|
910,000
|
|
April 27, 2021
|
|
Restricted Share Units(1)
|
|
|
N/A
|
|
|
50,000
|
Notes:
|
|
(1)
|
Issued pursuant to the share compensation plan of the Company.
|
|
|
(2)
|
Issued pursuant to the Company’s Regulation A+ Offering of units. Each warrant entitles the holder
to acquire one Common Share at a price of US$0.71 per Common Share for a period of two years from the date of issuance.
|
|
|
(3)
|
Issued to Vital in connection with the asset purchase agreement between Vital and Company.
|
|
|
(4)
|
The exercise price and number of securities does not reflect the Consolidation.
|
TRADING
PRICE AND VOLUME
The Common Shares are listed and posted for trading
on the CSE under the symbol “DFLY”, on the FSE under the symbol “3UB” and on the OTCQB under the symbol
“DFLYF”. In connection with this Offering, we have applied to change our symbol on the CSE to “DPRO”. The
following table sets forth, for the periods indicated, the high and low sale prices per Common Share and the total monthly trading
volumes during the 12 months preceding the date of this Prospectus Supplement.
|
Month
|
|
High (C$)(1)
|
|
|
Low (C$)(1)
|
|
|
Volume(1)
|
|
|
March 2020
|
|
|
0.94
|
|
|
|
0.51
|
|
|
|
2,211,638
|
|
|
April 2020
|
|
|
1.00
|
|
|
|
0.65
|
|
|
|
4,788,090
|
|
|
May 2020
|
|
|
0.84
|
|
|
|
0.61
|
|
|
|
3,507,431
|
|
|
June 2020
|
|
|
0.78
|
|
|
|
0.57
|
|
|
|
3,256,891
|
|
|
July 2020
|
|
|
0.69
|
|
|
|
0.58
|
|
|
|
1,877,623
|
|
|
August 2020
|
|
|
0.62
|
|
|
|
0.44
|
|
|
|
1,644,167
|
|
|
September 2020
|
|
|
1.00
|
|
|
|
0.53
|
|
|
|
3,241,425
|
|
|
October 2020
|
|
|
0.65
|
|
|
|
0.52
|
|
|
|
1,787,844
|
|
|
November 2020
|
|
|
0.59
|
|
|
|
0.46
|
|
|
|
2,430,663
|
|
|
December 2020
|
|
|
0.90
|
|
|
|
0.40
|
|
|
|
13,739,095
|
|
|
January 2021
|
|
|
4.05
|
|
|
|
0.77
|
|
|
|
57,004,303
|
|
|
February 2021
|
|
|
4.25
|
|
|
|
2.13
|
|
|
|
19,737,329
|
|
|
March 2021
|
|
|
2.99
|
|
|
|
1.80
|
|
|
|
7,126,997
|
|
|
April 2021
|
|
|
2.48
|
|
|
|
1.37
|
|
|
|
4,962,527
|
|
|
May 2021
|
|
|
2.11
|
|
|
|
1.46
|
|
|
|
4,383,044
|
|
|
June 2021
|
|
|
2.08
|
|
|
|
1.59
|
|
|
|
3,819,700
|
|
|
July 2021 (through and including July 15, 2021)
|
|
|
1.90
|
|
|
|
1.31
|
|
|
|
2,343,500
|
|
Note:
|
|
(1)
|
The high and low sale prices per Common Share and the total monthly trading volume is pre-Consolidation.
|
On July 20, 2021, the last complete trading day
prior to the date of this Prospectus Supplement, the closing price of the Common Shares on the CSE was C$1.42, or US$1.12 (based
on the daily exchange rate for the U.S. dollar in terms of Canadian dollars, as quoted by the Bank of Canada, of $1.00 = C$1.2730).
LEGAL
MATTERS
Certain legal matters relating to the Offered
Shares offered by this Prospectus Supplement will be passed upon for us by (i) DLA Piper Canada (LLP) with respect to matters of
Canadian law and (ii) Troutman Pepper Hamilton Sanders LLP with respect to matters of United States law. In addition, certain
legal matters in connection with the Offering will be passed upon for the Underwriter by Clark Wilson LLP with respect to matters
of Canadian law and United States law. The partners, counsel and associates of each of DLA Piper Canada (LLP) and Clark Wilson
LLP, respectively as a group, beneficially own directly and indirectly, less than 1% of the outstanding Common Shares.
EXPERTS
The financial statements incorporated by reference
in this Prospectus Supplement have been audited by Dale Matheson Carr-Hilton Labonte LLP, an independent registered public accounting
firm, as stated in their report incorporated by reference herein. Such financial statements are incorporated by reference in reliance
upon the report of such firm given upon their authority as experts in accounting and auditing.
AUDITOR,
TRANSFER AGENT AND REGISTRAR
Our auditors are Dale Matheson Carr-Hilton Labonte
LLP, Chartered Professional Accountants, located at 1500-1700, 1140 W Pender Street, Vancouver, BC V6E 4G1. Dale Matheson
Carr-Hilton Labonte LLP is independent with respect to the Company within the meaning of the Securities Act and the applicable
rules and regulations adopted by the SEC and the Public Company Accounting Oversight Board (United States) and within the
meaning of the rules of professional conduct of the Chartered Professional Accountants of British Columbia.
Our transfer agent and registrar for our Common
Shares in Canada and the United States is Endeavour Trust Corporation at its principal offices in Vancouver, British Columbia,
and Albany, New York, respectively.
STATUTORY
RIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in certain of the provinces
and territories of Canada provides purchasers with the right to withdraw from an agreement to purchase securities. This right may
be exercised within two business days after receipt or deemed receipt of a prospectus or a prospectus supplement relating to the
securities purchased by a purchaser and any amendments thereto. In several of the provinces, the securities legislation further
provides a purchaser with remedies for rescission or, in some jurisdictions, revision of the price or damages if the prospectus
or a prospectus supplement relating to the securities purchased by a purchaser and any amendments thereto contain a misrepresentation
or is not delivered to the purchaser, provided that the remedies for rescission or revision of the price or damages are exercised
by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory.
The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory
for the particulars of these rights or consult with a legal advisor.
ENFORCEABILITY
OF CERTAIN CIVIL LIABILITIES
We are a corporation existing under the BCBCA,
most of our directors and officers are residents of Canada or other jurisdictions outside the United States, many of the experts named
in this Prospectus Supplement are resident outside the United States, and most or all of our assets and the assets of such persons are
located outside the United States. We have appointed an agent for service of process in the United States (as set forth below), but it
may be difficult for holders of our Common Shares who reside in the United States to effect service within the United States upon those
directors, officers and experts who are not residents of the United States. It may also be difficult for holders of our Common Shares
who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon our civil
liability and the civil liability of our directors, officers and experts under the U.S. federal securities laws.
We filed with the SEC concurrently with our Registration
Statement of which this Prospectus Supplement and the Shelf Prospectus form a part, an appointment of agent for service of process on
Form F-X. Under the Form F-X, we appointed CT Corporation System as our agent for service of process in the United States in connection
with any investigation or administrative proceeding conducted by the SEC, and any civil suit or action brought against or involving us
in a United States court arising out of or related to or concerning the offering of the Offered Shares under this Prospectus Supplement.
DOCUMENTS
INCORPORATED BY REFERENCE
This Prospectus Supplement is deemed to be
incorporated by reference into the accompanying Shelf Prospectus solely for the purposes of the Offering. Other documents are also
incorporated, or are deemed to be incorporated, by reference into the accompanying Shelf Prospectus and reference should be made
to the accompanying Shelf Prospectus for full particulars thereof.
Information has been incorporated by reference
in this Prospectus Supplement from documents filed with the securities commissions or similar authorities in British Columbia,
Saskatchewan and Ontario. Copies of the documents incorporated herein by reference may be obtained on request without charge
from our Corporate Secretary at, 2108 St. George Avenue, Saskatoon, Saskatchewan S7M 0K7, telephone (Telephone 1-800-979-9794) or by accessing
the disclosure documents through the Internet on SEDAR at www.sedar.com. Documents filed with, or furnished to, the SEC are available
through EDGAR, at www.sec.gov. Our filings through SEDAR and EDGAR are not incorporated by reference in this Prospectus
Supplement except as specifically set out herein.
The following documents, filed by us with securities
commissions or similar regulatory authorities in each of the provinces of British Columbia, Saskatchewan and Ontario, which have
also been filed with, or furnished to, the SEC are specifically incorporated by reference into, and form an integral part of, this
Prospectus Supplement and the accompanying Shelf Prospectus:
|
|
·
|
the annual information form (the “AIF”) of the Company for the financial year ended
December 31, 2020, dated June 28, 2021;
|
|
|
·
|
the audited consolidated financial statements of the Company for the years ended December 31, 2020 and
December 31, 2019, together with the notes thereto and the auditor’s report thereon;
|
|
|
·
|
management’s discussion and analysis of the financial condition and results of operations of the
Company for the financial year ended December 31, 2020;
|
|
|
·
|
the condensed consolidated interim financial statements of the Company for the three months ended March
31, 2021;
|
|
|
·
|
management’s discussion and analysis of the financial condition and results of operations of the
Company for the three months ended March 31, 2021; and
|
|
|
·
|
the management information circular of the Company dated May 10, 2021 with respect to the annual general
meeting of shareholders held on June 23, 2021.
|
Any documents of the type described in Section
11.1 of Form 44-101F1 Short Form Prospectuses filed by us with a securities commission or similar authority in any province or
territory of Canada, subsequent to the date of this Prospectus Supplement and prior to the termination of this Offering, will be
deemed to be incorporated by reference into this Prospectus Supplement and the accompanying Shelf Prospectus for the purposes
of the Offering.
In addition, to the extent that any document or
information incorporated by reference into this Prospectus Supplement is included in any report on Form 6-K, Form 40-F or Form 20-F (or
any respective successor form) that is filed with or furnished to the SEC after the date of this Prospectus Supplement, such document
or information shall be deemed to be incorporated by reference as an exhibit to the Registration Statement of which this Prospectus Supplement
and the Shelf Prospectus form a part. In addition, the Company may incorporate by reference into the Registration Statement of
which this Prospectus Supplement and the Shelf Prospectus form a part, other information from documents that the Company will file
with or furnish to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act, if and to the extent expressly provided therein.
Any statement contained in this Prospectus
Supplement, in the accompanying Shelf Prospectus or in any document incorporated or deemed to be incorporated by reference herein
or therein will be deemed to be modified or superseded for purposes of this Prospectus Supplement or the accompanying Shelf Prospectus
to the extent that a statement contained herein, in the accompanying Shelf Prospectus or in any other subsequently filed
document that is or is deemed to be incorporated by reference herein or in the accompanying Shelf Prospectus modifies or supersedes
such prior statement. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include
any other information set forth in the document that it modifies or supersedes. The making of a modifying or superseding
statement is not to be deemed an admission for any purposes that the modified or superseded statement, when made, constituted
a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated
or that is necessary to make a statement not misleading in light of the circumstances in which it was made. Any statement so modified
or superseded will not be deemed, except as so modified or superseded, to constitute a part of this Prospectus Supplement or the
accompanying Shelf Prospectus.
References to our website in any documents that
are incorporated by reference into this Prospectus Supplement and the Shelf Prospectus do not incorporate by reference the information
on such website into this Prospectus Supplement or the Shelf Prospectus, and we disclaim any such incorporation by reference.
DOCUMENTS
FILED AS PART OF THE REGISTRATION STATEMENT
The following documents have been or will be filed
with the SEC as part of the Registration Statement of which this Prospectus Supplement and the Shelf Prospectus form a part: (i) the documents
listed under “Documents Incorporated by Reference” in this Prospectus Supplement; (ii) the form of the Underwriting
Agreement; (iii) the consent of Dale Matheson Carr-Hilton Labonte LLP; (iv) the consent of DLA Piper (Canada) LL; and (v) the powers
of attorney from our directors and officers, as applicable, pursuant to which amendments to the Registration Statement may be signed.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed with the SEC under the Securities
Act the Registration Statement relating to the Offered Shares being offered hereby and of which this Prospectus Supplement and the Shelf
Prospectus form a part. This Prospectus Supplement and the Shelf Prospectus do not contain all of the information set forth in such Registration
Statement, as to which reference is made for further information. Upon effectiveness of such Registration Statement, we will become subject
to the informational requirements of the Exchange Act and in accordance therewith will be required to file reports and other information
with the SEC. Under the MJDS adopted by the United States and Canada, we may prepare such reports and other information in accordance
with the disclosure requirements of Canada, which requirements are different from those of the United States. Prospective investors may
read any document we file or furnish to the SEC, including those documents that are incorporated by reference in this Prospectus Supplement,
which are filed as exhibits to the Registration Statement, at the SEC’s website at http://www.sec.gov.
We are not currently subject to the informational
requirements of the Exchange Act. Upon completion of this Offering, we will be subject to the information reporting requirements of the
Exchange Act, and under those requirements will file reports with or furnish reports to the SEC. Those other reports or other information
may be inspected without charge at the locations described above. As a foreign private issuer, we will be exempt from the rules under
the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will
be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will provide, to each person to whom this Prospectus
Supplement is delivered, without charge, upon request to our Corporate Secretary at 2108 St. George Avenue, Saskatoon, Saskatchewan
S7M 0K7, telephone (Telephone 1-800-979-9794), copies of the documents incorporated by reference into this Prospectus Supplement and
the Shelf Prospectus.
¨
COMMON SHARES
PROSPECTUS
SUPPLEMENT
ThinkEquity
a division of
Fordham Financial Management, Inc.
July
21, 2021
Through and including
, 2021 (the 25th day after the date of this offering),
all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
This
short form prospectus is a base shelf prospectus. This preliminary short form base shelf prospectus has been filed under legislation
in each of the provinces of British Columbia, Ontario and Saskatchewan that permits certain information about these securities to be
determined after this short form base shelf prospectus has become final and that permits the omission from this short form base shelf
prospectus of that information. The legislation requires the delivery to purchasers of a prospectus supplement containing the omitted
information within a specified period of time after agreeing to purchase any of these securities.
No securities
regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This short form
base shelf prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered
for sale and therein only by persons permitted to sell such securities.
Information
has been incorporated by reference in this short form base shelf prospectus from documents filed with securities commissions or
similar authorities in Canada. Copies of the documents incorporated herein by reference may be obtained on request
without charge from the Corporate Secretary of Draganfly Inc. at 2108 St. George Avenue, Saskatoon, Saskatchewan, S7M 0K7, telephone
1-800-979-9794, and are also available electronically at www.sedar.com.
|
New Issue
|
July 14, 2021
|
SHORT
FORM BASE SHELF PROSPECTUS
DRAGANFLY INC.
$200,000,000
COMMON SHARES
PREFERRED SHARES
WARRANTS
SUBSCRIPTION
RECEIPTS
UNITS
This short form
base shelf prospectus (the “Prospectus”) relates to the offering for sale by Draganfly Inc. (the “Company”
or “Draganfly”) from time to time, during the 25-month period that this Prospectus, including any amendments
hereto, remains valid, of up to $200,000,000 (or the equivalent in other currencies based on the applicable exchange rate at the
time of the offering) in the aggregate of: (i) common shares (“Common Shares”) in the capital of the Company;
(ii) preferred shares of the Company of any series (“Preferred Shares”); (iii) warrants (“Warrants”)
to purchase other Securities (as defined below); (iv) subscription receipts (“Subscription Receipts”) convertible
into other Securities; and (v) units (“Units”) comprised of one or more of any of the other Securities,
or any combination of such Securities (the Common Shares, Warrants, Subscription Receipts and Units are collectively referred
to herein as the ”Securities”). The Securities may be offered in amounts, at prices and on terms to
be determined based on market conditions at the time of sale and set forth in an accompanying prospectus supplement (each, a ”Prospectus
Supplement”). In addition, the Securities may be offered and issued in consideration for the acquisition of other businesses,
assets or securities by the Company or one of its subsidiaries. The consideration for any such acquisition may consist of the
Securities separately, a combination of Securities or any combination of, among other things, Securities, cash and assumption
of liabilities.
All shelf information
permitted under applicable laws to be omitted from this Prospectus will be contained in one or more Prospectus Supplements that
will be delivered to purchasers together with this Prospectus except in cases where an exemption from such delivery has been obtained.
Each Prospectus Supplement will be incorporated by reference into this Prospectus for the purposes of securities legislation as
of the date of the Prospectus Supplement and only for the purposes of the distribution of the Securities to which the Prospectus
Supplement pertains.
The specific
terms of any Securities offered will be described in the applicable Prospectus Supplement including, where applicable: (i) in
the case of Common Shares, the number of Common Shares offered, the offering price, whether the Common Shares are being
offered for cash, and any other terms specific to the Common Shares offered; (ii) in the case of Preferred Shares, the
designation of the particular class and, if applicable, series, the number of shares offered, the offering price, the
currency, dividend rate, if any, and any other terms specific to the Preferred Shares being offered; (iii) in the case
of Warrants, the number of Warrants being offered, the offering price, the designation, number and terms of the other
Securities purchasable upon exercise of the Warrants, and any procedures that will result in the adjustment of those
numbers, the exercise price, the dates and periods of exercise, whether the Warrants are being offered for cash, and
any other terms specific to the Warrants offered; (iv) in the case of Subscription Receipts, the number of Subscription
Receipts being offered, the offering price, the terms, conditions and procedures for the conversion of the
Subscription Receipts into other Securities, the designation, number and terms of such other Securities, whether the
Subscription Receipts are being offered for cash, and any other terms specific to the Subscription Receipts offered; and (v)
in the case of Units, the number of Units being offered, the offering price, the number and terms of the Securities
comprising the Units, whether the Units are being offered for cash, and any other terms specific to the Units offered. A
Prospectus Supplement relating to a particular offering of Securities may include terms pertaining to the Securities being
offered thereunder that are not within the terms and parameters described in this Prospectus. Where required by
statute, regulation or policy, and where the Securities are offered in currencies other than Canadian dollars,
appropriate disclosure of foreign exchange rates applicable to the Securities will be included in the Prospectus
Supplement describing the Securities.
Prospective investors
should be aware that the purchase of any Securities may have tax consequences that may not be fully described in this Prospectus
or in any Prospectus Supplement, and should carefully review the tax discussion, if any, in the applicable Prospectus Supplement
and in any event consult with their own tax advisers before purchasing any of the Securities.
No underwriter
or agent has been involved in the preparation of this Prospectus or performed any review of the contents of this Prospectus.
The Company may
offer and sell the Securities to or through underwriters or dealers purchasing as principals, and may also sell directly to one
or more purchasers or through agents or pursuant to applicable statutory exemptions. See “Plan of Distribution”.
The Prospectus Supplement relating to a particular offering of Securities will identify each underwriter, dealer or agent, as
the case may be, engaged by the Company in connection with the offering and sale of the Securities, and will set forth the terms
of the offering of such Securities, including, to the extent applicable, any fees, discounts or any other compensation
payable to underwriters, dealers or agents in connection with the offering, the method of distribution of the Securities, the
initial issue price (in the event that the offering is a fixed price distribution), the proceeds that the Company will, or expects
to receive and any other material terms of the plan of distribution.
The Securities
may be sold from time to time in one or more transactions at a fixed price or prices or at non-fixed prices. If offered on a non-fixed
price basis, the Securities may be offered at market prices prevailing at the time of sale, at prices determined by reference
to the prevailing price of a specified security in a specified market or at prices to be negotiated with purchasers, in which
case the compensation payable to an underwriter, dealer or agent in connection with any such sale will be decreased by
the amount, if any, by which the aggregate price paid for Securities by the purchasers is less than the gross proceeds paid by
the underwriter, dealer or agent to the Company. The price at which the Securities will be offered and sold may vary from purchaser
to purchaser and during the period of distribution.
In connection with
any offering of Securities, other than an “at-the-market distribution” (as defined under applicable Canadian securities
legislation), unless otherwise specified in a Prospectus Supplement, the underwriters, dealers or agents, as the case may be,
may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the Securities at a level
other than those which otherwise might prevail on the open market. Such transactions may be commenced, interrupted or discontinued
at any time. A purchaser who acquires Securities forming part of the underwriters’, dealers’ or agents’ over-allocation
position acquires those Securities under this Prospectus and the Prospectus Supplement relating to the particular offering of
Securities, regardless of whether the over-allocation position is ultimately filled through the exercise of the over-allotment
option or secondary market purchases. See ”Plan of Distribution”. No underwriter or dealer involved
in an “at-the-market distribution” under this Prospectus, no affiliate of such an underwriter or dealer and no person
or company acting jointly or in concert with such underwriter or dealer will over-allot Securities in connection with such distribution
or effect any other transactions that are intended to stabilize or maintain the market price of the Securities.
The issued and
outstanding Common Shares are listed and posted for trading on the Canadian Securities Exchange (the “CSE”)
under the symbol “DFLY”, on the Frankfurt Stock Exchange (the “FSE”) under the trading Symbol “3UB”
and on the OTCQB Venture Market of the OTC Markets (the “OTCQB”) under the symbol “DFLYF”.
Unless otherwise
specified in the applicable Prospectus Supplement, each series or issue of Securities (other than Common Shares) will not be listed
on any securities exchange. Accordingly, there is currently no market through which the Securities (other than Common Shares)
may be sold and purchasers may not be able to resell such Securities purchased under this Prospectus. This may affect the
pricing of such Securities in the secondary market, the transparency and availability of trading prices, the liquidity of such
Securities and the extent of issuer regulation. See “Risk Factors”.
An investment
in the Securities of the Company is highly speculative and involves a high degree of risk. Readers should carefully review and
evaluate the risk factors contained in this Prospectus, the applicable Prospectus Supplement and in the documents incorporated
by reference herein before purchasing any Securities. See “Forward-Looking Information” and “Risk
Factors”.
The Company
is not making an offer of the Securities in any jurisdiction where such offer is not permitted.
Andrew Hill Card
Jr., John M. Mitnick and John Bagocius, each a director or officer of the Company, reside outside of Canada and have appointed
DLA Piper (Canada) LLP, 2800 Park Place, 666 Burrard St, Vancouver, British Columbia, V6C 2Z7, Canada for service of process
in Canada. See “Agent for Service of Process”.
Unless otherwise
specified in a Prospectus Supplement relating to any Securities offered, certain legal matters in connection with the offering
of Securities may be passed upon on behalf of Draganfly by DLA Piper (Canada) LLP as to legal matters relating to Canadian law
and, if governed by United States law, by Troutman Pepper Hamilton Sanders LLP as to matters relating to United States law.
The Company’s
head office is located at 2108 St. George Avenue, Saskatoon, Saskatchewan, S7M 0K7, and the registered office is located at Suite
2800, Park Place, 666 Burrard Street, Vancouver, British Columbia, V6C 2Z7.
TABLE
OF CONTENTS
ABOUT
THIS PROSPECTUS
You should rely only on the information contained
or incorporated by reference in this Prospectus and any applicable Prospectus Supplement of which this Prospectus will
form a part. We have not authorized anyone to provide you with different or additional information. If anyone provides you with
different or additional information, you should not rely on it. We are not making an offer to sell or seeking an offer to buy
the securities offered pursuant to this Prospectus in any jurisdiction where the offer or sale is not permitted. You should
assume that the information contained in this Prospectus and any applicable Prospectus Supplement is accurate only as of the
date on the front of such document and that information contained in any document incorporated by reference is accurate only
as of the date of that document, regardless of the time of delivery of this Prospectus or any applicable Prospectus Supplement
or of any sale of our Securities pursuant thereto. Our business, financial condition, results of operations and prospects may have
changed since those dates.
Market data and
certain industry forecasts used in this Prospectus and any applicable Prospectus Supplement, and the documents incorporated
by reference in this Prospectus and any applicable Prospectus Supplement, were obtained from market research, publicly
available information and industry publications. We believe that these sources are generally reliable, but the accuracy
and completeness of this information is not guaranteed. We have not independently verified such information, and we do
not make any representation as to the accuracy of such information.
The Company prepares
and reports its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”).
However, this Prospectus and the documents incorporated by reference herein may make reference to certain non-IFRS measures including
key performance indicators used by management. These measures are not recognized measures under IFRS and do not
have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented
by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by
providing further understanding of the Company’s results of operations from management’s perspective. Accordingly,
these measures should not be considered in isolation nor as a substitute for analysis of the Company’s financial
information reported under IFRS. The Company uses non-IFRS measures including “gross margins” and “working
capital” which may be calculated differently by other companies. These non-IFRS measures and metrics are used to
provide investors with supplemental measures of the Company’s operating performance and liquidity and thus highlight
trends in the Company’s business that may not otherwise be apparent when relying solely on IFRS measures. For definitions
and reconciliations of these non-IFRS measures to the relevant reported measures, please see the “Non-GAAP
Measures and Additional GAAP Measures” section of the Company’s latest management’s discussion and analysis
incorporated by reference herein.
In this prospectus
and in any prospectus supplement, unless the context otherwise requires, references to ”we”, “us”,
”our” or similar terms, as well as references to the “Company” or “Draganfly”, refer
to Draganfly Inc. together, where context requires, with our subsidiaries.
CURRENCY
PRESENTATION AND EXCHANGE RATE INFORMATION
Unless otherwise
noted herein and in the documents incorporated by reference, all dollar amounts refer to lawful currency of Canada. All references
to “US$” or “U.S. dollars” are to the currency of the United States. On July 13,
2021, the Bank of Canada daily average rate of exchange was US$1.00 = C$0.7991 or C$1.00 = US$1.2514.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus
and the documents incorporated by reference herein contain certain “forward-looking statements” and “forward-looking
information” within the meaning of applicable Canadian securities legislation (collectively, “forward-looking statements”).
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current
beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions.
Forward-looking statements can be identified by words such as “anticipate,” “believe,” ”envision,”
“estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,”
“target,” “potential,” “will,” “would,” ”could,” “should,”
“continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain
these identifying words. These forward-looking statements include all matters that are not historical facts. Forward-looking statements
in this Prospectus, any Prospectus Supplement or the documents incorporated by reference herein and therein include, but are not
limited to, statements with respect to:
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the
intentions, plans and future actions of the Company;
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statements
relating to the business and future activities of the Company;
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anticipated
developments in operations of the Company;
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market
position, ability to compete and future financial or operating performance of the
Company;
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the
timing and amount of funding required to execute the Company’s business plans;
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capital
expenditures;
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the
effect on the Company of any changes to existing or new legislation or policy or government
regulation;
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the
availability of labour;
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requirements
for additional capital;
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goals,
strategies and future growth;
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the
adequacy of financial resources;
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expectations
regarding revenues, expenses and anticipated cash needs; and
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the
impact of the COVID-19 pandemic on the business and operations of the Company.
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Although we base
the forward-looking statements contained in this Prospectus on assumptions that we believe are reasonable, we caution you that
actual results and developments (including our results of operations, financial condition and liquidity, and the development of
the industry in which we operate) may differ materially from those made in or suggested by the forward-looking statements contained
in this Prospectus. In addition, even if results and developments are consistent with the forward-looking statements contained
in this Prospectus, those results and developments may not be indicative of results or developments in subsequent periods. Certain
assumptions made in preparing the forward-looking statements contained in this Prospectus include:
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the
Company’s ability to implement its growth strategies;
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the
Company’s competitive advantages;
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the
development of new products and services;
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the
Company’s ability to obtain and maintain financing on acceptable terms;
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the
impact of competition;
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changes
in laws, rules and regulations;
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the
Company’s ability to maintain and renew required licences;
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the
Company’s ability to maintain good business relationships with its customers, distributors,
suppliers and other strategic partners;
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the
Company’s ability to protect intellectual property;
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the
Company’s ability to manage and integrate acquisitions;
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the
Company’s ability to retain key personnel; and
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the
absence of material adverse changes in the industry or Canadian or global economy, including
as a result of the COVID-19 pandemic.
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By their nature,
forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may
or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described
or referenced in the “Risk Factors” section and elsewhere in this Prospectus and the documents incorporated by reference
herein. These factors should not be construed as exhaustive and should be read with the other cautionary statements in this Prospectus.
Although we have attempted to identify important risk factors, there may be other risk factors not presently known to us
or that we presently believe are not material that could also cause actual results and developments to differ materially from
those made in or suggested by the forward-looking statements contained in this Prospectus. If any of the these risks materialize,
or if any of the above assumptions underlying forward-looking statements prove incorrect, actual results and developments may
differ materially from those made in or suggested by the forward-looking statements contained in this Prospectus.
Given these risks
and uncertainties, you are cautioned not to place substantial weight or undue reliance on these forward-looking statements when
making an investment decision. Any forward-looking statement that we make in this Prospectus speaks only as of the date of this
Prospectus, and, except as required by law, we undertake no obligation to update any forward-looking statements or to publicly
announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results
for current and any prior periods are not intended to express any future trends or indications of future performance, unless
specifically expressed as such, and should only be viewed as historical data.
DOCUMENTS
INCORPORATED BY REFERENCE
Information
has been incorporated by reference in this Prospectus from documents filed with the securities commissions or similar authorities
in Canada.
Copies of the documents
incorporated herein by reference may be obtained on request without charge from the Corporate Secretary of the Company,
at 2108 St. George Avenue, Saskatoon, Saskatchewan S7M 0K7, telephone (Telephone 1-800-979-9794) or by accessing the disclosure
documents through the Internet on the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”)
at www.sedar.com.
The following documents,
filed with the securities commissions or similar regulatory authorities in certain provinces and territories of Canada
are specifically incorporated by reference into, and form an integral part of, this Prospectus:
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the
annual information form (the “AIF”) of the Company for the financial year
ended December 31, 2020, dated June 28, 2021;
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the
audited consolidated financial statements of the Company for the years ended December 31,
2020 and December 31, 2019, together with the notes thereto and the auditor’s
report thereon;
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management’s
discussion and analysis of the financial condition and results of operations of the Company
for the financial year ended December 31, 2020;
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the
condensed consolidated interim financial statements of the Company for the three months ended
March 31, 2021;
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management’s
discussion and analysis of the financial condition and results of operations of the Company
for the three months ended March 31, 2021; and
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the
management information circular of the Company dated May 10, 2021 with respect to the annual
general meeting of shareholders held on June 23, 2021.
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Any documents of
the type described in Section 11.1 of Form 44-101F1 - Short Form Prospectuses filed by the Company with a securities
commission or similar authority in any province or territory of Canada subsequent to the date of this Prospectus and prior
to the expiry of this Prospectus, or the completion of the issuance of securities pursuant hereto, will be deemed to be
incorporated by reference into this Prospectus.
A Prospectus Supplement
containing the specific terms of any offering of our Securities will be delivered to purchasers of our Securities together
with this Prospectus and will be deemed to be incorporated by reference in this Prospectus as of the date of the Prospectus Supplement
and only for the purposes of the offering of our Securities to which that Prospectus Supplement pertains.
Any statement
contained in this Prospectus or in a document incorporated or deemed to be incorporated by reference in this Prospectus
will be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein,
in any Prospectus Supplement hereto or in any other subsequently filed document that also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. The modifying or superseding statement need not state that it
has modified or superseded a prior statement or include any other information set forth in the document that it modifies
or supersedes. The making of a modifying or superseding statement is not to be deemed an admission for any purposes that
the modified or superseded statement, when made, constituted a misrepresentation, an untrue statement of a material
fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not
misleading in light of the circumstances in which it was made. Any statement so modified or superseded will not be
deemed, except as so modified or superseded, to constitute a part of this Prospectus.
Any template version
of any “marketing materials” (as such term is defined in National Instrument 44-101 - Short Form Prospectus
Distributions) filed after the date of a Prospectus Supplement and before the termination of the distribution of the
Securities offered pursuant to such Prospectus Supplement (together with this Prospectus) is deemed to be incorporated
by reference in such Prospectus Supplement.
Upon our filing
of a new annual information form and the related annual financial statements and management’s discussion and analysis
with applicable securities regulatory authorities during the currency of this Prospectus, the previous annual information
form, the previous annual financial statements and management’s discussion and analysis and all interim financial
statements, supplemental information, material change reports and information circulars filed prior to the commencement
of our financial year in which the new annual information form is filed will be deemed no longer to be incorporated into
this Prospectus for purposes of future offers and sales of our securities under this Prospectus. Upon interim consolidated
financial statements and the accompanying management’s discussion and analysis being filed by us with the applicable
securities regulatory authorities during the duration of this Prospectus, all interim consolidated financial statements
and the accompanying management’s discussion and analysis filed prior to the new interim consolidated financial statements
shall be deemed no longer to be incorporated into this Prospectus for purposes of future offers and sales of securities
under this Prospectus.
References to our
website in any documents that are incorporated by reference into this Prospectus do not incorporate by reference the information
on such website into this Prospectus, and we disclaim any such incorporation by reference.
The Company has
not provided or otherwise authorized any other person to provide investors with information other than as contained or incorporated
by reference in this Prospectus or any Prospectus Supplement. If an investor is provided with different or inconsistent information,
such investor should not rely on it.
THE
COMPANY
The Company is
a manufacturer, contract engineering, and product development company within the unmanned aerial vehicles space, serving
the public safety, agriculture, industrial inspections, and mapping and surveying markets. The Company is 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. Further information regarding the business of the Company or its operations
can be found in the AIF and the materials incorporated by reference into this Prospectus. See “Documents Incorporated
by Reference”.
USE
OF PROCEEDS
Unless we otherwise
indicate in a Prospectus Supplement relating to a particular offering, we currently intend to use the net proceeds from
the sale of any Securities pursuant to this Prospectus for general corporate and working capital requirements, including
to fund ongoing operations, growth initiatives and/or working capital requirements, to repay indebtedness outstanding from
time to time (if any), to complete one or more future acquisitions of companies, businesses, technologies, intellectual
property and/or other assets or for other corporate purposes, all as set forth in the Prospectus Supplement relating to
the offering of the Securities.
More detailed information
regarding the use of proceeds from the sale of Securities, including any determinable milestones at the applicable time,
will be described in a Prospectus Supplement. Management of the Company will retain broad discretion in allocating the net proceeds
of any offering of Securities by the Company under this Prospectus and the Company’s actual use of the net proceeds will
vary depending on the availability and suitability of investment opportunities and its operating and capital needs from time to
time. All expenses relating to an offering of Securities and any compensation paid to underwriters, dealers or agents, as the
case may be, will be paid out of the proceeds from the sale of Securities, unless otherwise stated in the applicable Prospectus
Supplement, provided that certain expenses in any secondary offering may be paid by the Company. See “Risk Factors -
Discretion in the Use of Proceeds”.
The Company may,
from time to time, issue securities (including Securities) other than pursuant to this Prospectus.
CONSOLIDATED
CAPITALIZATION
Since March 31,
2021, the date of the Company’s most recently filed financial statements, and other than as disclosed in the AIF, there
have been no material changes to the Company’s share and loan capitalization on a consolidated basis. The applicable Prospectus
Supplement will describe any material change, and the effect of such material change, on the share and loan capitalization of
the Company that will result from the issuance of Securities pursuant to such Prospectus Supplement.
PRIOR
SALES
Information in
respect of prior sales of the Common Shares or other Securities distributed under this Prospectus and for securities that are
convertible or exchangeable into the Common Shares or such other Securities within the previous 12-month period will be provided,
as required, in a Prospectus Supplement with respect to the issuance of the Common Shares or other Securities pursuant to such
Prospectus Supplement.
TRADING
PRICE AND VOLUME
The Common Shares
are listed and posted for trading on the CSE under the symbol “DFLY”, on the FSE under the symbol “3UB”
and on the OTCQB under the symbol “DFLYF”. Draganfly has applied to list the Common Shares on the Nasdaq Capital
Market (the ”Nasdaq”) under the symbol “DPRO”. Listing will be subject to Draganfly fulfilling
all the listing requirements of the Nasdaq, and there can be no assurance that the Common Shares will be accepted for listing
on the Nasdaq.
Trading price and
volume information for the Company’s securities will be provided as required for all of our Common Shares, as applicable,
in each Prospectus Supplement to this Prospectus.
DESCRIPTION
OF THE SHARE CAPITAL OF THE COMPANY
The following describes
the material terms of the Company’s share capital. The following description may not be complete and is subject to, and
qualified in its entirety by reference to, the terms and provisions of our notice of articles and articles, as amended.
Our authorized share capital consists of an unlimited
number of Common Shares of which 135,229,434 were issued and outstanding as of July 13, 2021 and an unlimited number of Preferred
Shares, issuable in series, none of which were issued and outstanding as of July 13, 2021.
Common Shares
Each Common Share
entitles the holder to receive notice of and attend all meetings of the shareholders. Each Common Share carries the right
to one vote. The holders of Common Shares are entitled to receive any dividends declared by the Company in respect of the
Common Shares at such time and in such amount as may be determined by the Board, in its discretion. In the event of the
liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, holders of Common Shares are
also entitled to participate, rateably, in the distribution of the assets of the Company, subject to the rights of the holders
of any other class of shares ranking in priority to the Common Shares.
Dividend Policy
We have not paid
any dividends to date on the Common Shares. While the Company is not restricted from paying dividends other than pursuant to certain
solvency tests prescribed under the Business Corporations Act (British Columbia), we intend to retain our earnings, if
any, to finance the growth and development of our business. Accordingly, we do not currently expect to pay any dividends
on our Common Shares in the near future.
Preferred Shares
The Preferred Shares
may be issuable in series and the directors may, from time to time before the issue of any Preferred Shares of any particular
series, define and attach special rights, privileges, restrictions, and conditions to the Preferred Shares of any series,
including voting rights, entitlement to dividends, and redemption, conversion, and exchange rights. In the event of the
liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, holders of Preferred Shares will
rank on a parity with holders of the Preferred Shares of every other series and be entitled to preference over the Common
Shares and over any other shares of the Company ranking junior to the Preferred Shares.
DESCRIPTION
OF WARRANTS
The Company may
issue additional Warrants, separately or together, with Common Shares, Preferred Shares, Subscription Receipts or Units or any
combination thereof, as the case may be. The Warrants would be issued under a separate warrant agreement or indenture. The specific
terms and provisions that will apply to any Warrants that may be offered by us pursuant to this Prospectus will be set forth in
the applicable Prospectus Supplement. This description will include, where applicable:
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the
aggregate number of Warrants offered;
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the
price or prices, if any, at which the Warrants will be issued;
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the
currency at which the Warrants will be offered and in which the exercise price under the
Warrants may be payable;
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upon
exercise of the Warrant, the events or conditions under which the amount of Securities may
be subject to adjustment;
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the
date on which the right to exercise such Warrants shall commence and the date on which such
right shall expire;
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if
applicable, the identity of the Warrant agent;
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whether
the Warrants will be listed on any securities exchange;
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certain
material United States and Canadian federal income tax consequences of owning the Warrants;
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whether
the Warrants will be issued with any other Securities and, if so, the amount and terms of
these Securities;
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any
minimum or maximum subscription amount;
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whether
the Warrants are to be issued in registered form, “book-entry only” form, non-certificated
inventory system form, bearer form or in the form of temporary or permanent global
securities and the basis of exchange, transfer and ownership thereof;
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any
material risk factors relating to such Warrants and the Securities to be issued upon exercise
of the Warrants;
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any
other rights, privileges, restrictions and conditions attaching to the Warrants and the Securities
to be issued upon exercise of the Warrants; and
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any
other material terms or conditions of the Warrants and the Securities to be issued upon exercise
of the Warrants.
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The terms and provisions
of any Warrants offered under a Prospectus Supplement may differ from the terms described above, and may not be subject to or
contain any or all of the terms described above.
Prior to the exercise of any Warrants, holders
of such Warrants will not have any of the rights of holders of the Securities purchasable upon such exercise, including the right
to receive payments of dividends or the right to vote such underlying securities.
DESCRIPTION
OF SUBSCRIPTION RECEIPTS
As of the date of this Prospectus, the Company
has no Subscription Receipts outstanding. The Company may issue Subscription Receipts, separately or together, with Common Shares,
Preferred Shares, Warrants or Units or any combination thereof, as the case may be. The particular terms and provisions of the
Subscription Receipts as may be offered pursuant to this Prospectus will be set forth in the applicable Prospectus Supplement
pertaining to such offering of Subscription Receipts, and the extent to which the general terms and provisions described below
may apply to such Subscription Receipts will be described in the applicable Prospectus Supplement.
The Subscription Receipts may be issued under
a subscription receipt agreement. The applicable Prospectus Supplement will include details of the subscription receipt agreement,
if any, governing the Subscription Receipts being offered. The Company will file a copy of the subscription receipt agreement,
if any, relating to an offering of Subscription Receipts with the relevant securities regulatory authorities in Canada after
it has been entered into by the Company.
The specific terms and provisions that will apply
to any Subscription Receipts that may be offered by us pursuant to this Prospectus will be set forth in the applicable Prospectus
Supplement. This description will include, where applicable:
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the aggregate number of Subscription Receipts offered;
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the price or prices, if any, at which the Subscription Receipts will be issued;
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the manner of determining the offering price(s);
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the currency at which the Subscription Receipts will be offered and whether the price is payable in installments;
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the Securities into which the Subscription Receipts may be exchanged;
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conditions to the exchange of Subscription Receipts into other Securities and the consequences of such
conditions not being satisfied;
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the number of Securities that may be issued upon the exchange of each Subscription Receipt and the
price per Security or the aggregate principal amount and the events or conditions under which the amount of Securities may be subject
to adjustment;
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the dates or periods during which the Subscription Receipts may be exchanged;
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the circumstances, if any, which will cause the Subscription Receipts to be deemed to be automatically
exchanged;
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provisions applicable to any escrow of the gross or net proceeds from the sale of the Subscription Receipts
plus any interest or income earned thereon, and for the release of such proceeds from such escrow;
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if applicable, the identity of the Subscription Receipt agent;
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whether the Subscription Receipts will be listed on any securities exchange;
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certain material United States and Canadian federal income tax consequences of owning the Subscription
Receipts;
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whether the Subscription Receipts will be issued with any other Securities and, if so, the amount and
terms of these Securities;
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any minimum or maximum subscription amount;
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whether the Subscription Receipts are to be issued in registered form, “book-entry only” form,
noncertificated inventory system form, bearer form or in the form of temporary or permanent global securities and the basis
of exchange, transfer and ownership thereof;
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any material risk factors relating to such Subscription Receipts and the Securities to be issued upon
exchange of the Subscription Receipts;
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any other rights, privileges, restrictions and conditions attaching to the Subscription Receipts and the
Securities to be issued upon exchange of the Subscription Receipts; and
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any other material terms or conditions of the Subscription Receipts and the Securities to be issued upon
exchange of the Subscription Receipts.
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The terms and provisions of any Subscription Receipts
offered under a Prospectus Supplement may differ from the terms described above, and may not be subject to or contain any or all
of the terms described above.
Prior to the exchange of any Subscription Receipts,
holders of such Subscription Receipts will not have any of the rights of holders of the Securities for which the Subscription Receipts
may be exchanged, including the right to receive payments of dividends or the right to vote such underlying securities.
DESCRIPTION
OF UNITS
As of the date of this Prospectus, the Company
has no Units outstanding. The Company may issue Units, separately or together, with Common Shares, Preferred Shares, Warrants or
Subscription Receipts or any combination thereof, as the case may be. Each Unit would be issued so that the holder of the Unit
is also the holder of each Security comprising the Unit. Thus, the holder of a Unit will have the rights and obligations
of a holder of each applicable Security. The specific terms and provisions that will apply to any Units that may be offered by
us pursuant to this Prospectus will be set forth in the applicable Prospectus Supplement. This description will include, where
applicable:
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the aggregate number of Units offered;
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the price or prices, if any, at which the Units will be issued;
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the manner of determining the offering price(s);
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the currency at which the Units will be offered;
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the Securities comprising the Units;
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whether the Units will be issued with any other Securities and, if so, the amount and terms of these Securities;
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any minimum or maximum subscription amount;
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whether the Units and the Securities comprising the Units are to be issued in registered form, ”book-entry
only” form, non-certificated inventory system form, bearer form or in the form of temporary or permanent global securities
and the basis of exchange, transfer and ownership thereof;
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any material risk factors relating to such Units or the Securities comprising the Units;
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certain material United States and Canadian federal income tax consequences of owning the Units;
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any other rights, privileges, restrictions and conditions attaching to the Units or the Securities comprising
the Units; and
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any other material terms or conditions of the Units or the Securities comprising the Units, including
whether and under what circumstances the Securities comprising the Units may be held or transferred separately.
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The terms and provisions of any Units offered
under a Prospectus Supplement may differ from the terms described above, and may not be subject to or contain any or all of the
terms described above.
PLAN
OF DISTRIBUTION
The Company may from time to time during the 25-month
period that this Prospectus, including any amendments hereto, remains valid, offer for sale and issue up to an aggregate of $200,000,000
in Securities hereunder.
The Company may offer and sell the Securities
to or through underwriters or dealers purchasing as principals, and may also sell directly to one or more purchasers or through
agents or pursuant to applicable statutory exemptions. The Prospectus Supplement relating to a particular offering of Securities
will identify each underwriter, dealer or agent, as the case may be, engaged by the Company in connection with the offering
and sale of the Securities, and will set forth the terms of the offering of such Securities, including, to the extent applicable,
any fees, discounts or any other compensation payable to underwriters, dealers or agents in connection with the offering, the method
of distribution of the Securities, the initial issue price, the proceeds that the Company will receive and any other material terms
of the plan of distribution. Any initial offering price and discounts, concessions or commissions allowed or re-allowed or paid
to dealers may be changed from time to time.
In addition, the Securities may be offered and
issued in consideration for the acquisition of other businesses, assets or securities by the Company or one of its subsidiaries.
The consideration for any such acquisition may consist of the Securities separately, a combination of Securities or any combination
of, among other things, Securities, cash and assumption of liabilities.
The Securities may be sold from time to time in
one or more transactions at a fixed price or prices or at prices which may be changed or at market prices prevailing at the time
of sale, at prices related to such prevailing prices or at negotiated prices, including sales in transactions that are deemed to
be “at-the-market distributions” as defined in National Instrument 44-102 - Shelf Distributions of the Canadian
Securities Administrators, including sales made directly on the CSE or other existing trading markets for the Common Shares.
The price at which the Securities will be offered and sold may vary from purchaser to purchaser and during the period of distribution.
In connection with the sale of the Securities,
underwriters, dealers or agents may receive compensation from the Company or from other parties, including in the form of underwriters’,
dealers’ or agents’ fees, commissions or concessions. Underwriters, dealers and agents that participate in the distribution
of the Securities may be deemed to be underwriters for the purposes of applicable Canadian securities legislation and any
such compensation received by them from the Company and any profit on the resale of the Securities by them may be deemed to be
underwriting commissions.
In connection with any offering of Securities,
except as otherwise set out in a Prospectus Supplement relating to a particular offering of Securities and other than in relation
to an “at-the-market” distribution, the underwriters, dealers or agents, as the case may be, may over-allot or effect
transactions intended to fix, stabilize, maintain or otherwise affect the market price of the Securities at a level other than
those which otherwise might prevail on the open market. Such transactions may be commenced, interrupted or discontinued
at any time.
Underwriters, dealers or agents who participate
in the distribution of the Securities may be entitled, under agreements to be entered into with the Company, to indemnification
by the Company against certain liabilities, including liabilities under Canadian securities legislation and the United States Securities
Act of 1933, as amended, or to contribution with respect to payments which such underwriters, dealers or agents may
be required to make in respect thereof. Such underwriters, dealers and agents may be customers of, engage in transactions with,
or perform services for, the Company in the ordinary course of business.
Unless otherwise specified in the applicable Prospectus
Supplement, each series or issue of Securities (other than Common Shares) will be a new issue of Securities with no established
trading market. Accordingly, there is currently no market through which the Securities (other than Common Shares) may be sold
and purchasers may not be able to resell such Securities purchased under this Prospectus. This may affect the pricing of such Securities
in the secondary market, the transparency and availability of trading prices, the liquidity of such Securities and the extent of
issuer regulation. See “Risk Factors”.
CERTAIN
CANADIAN AND UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Owning any of the Securities may subject holders
to tax consequences. The applicable Prospectus Supplement may describe certain Canadian federal income tax consequences to an initial
investor who is a resident of Canada or a non-resident of Canada of acquiring, owning and disposing of any of the Securities
offered thereunder. The applicable Prospectus Supplement may also describe certain United States federal income tax consequences
of the acquisition, ownership and disposition of any of the Securities offered thereunder by an initial investor who is a U.S.
Person (within the meaning of the U.S. Internal Revenue Code of 1986, as amended). Prospective investors should consult their own
tax advisers prior to deciding to purchase any of the Securities.
RISK
FACTORS
Before deciding to invest in any Securities, prospective
investors of the Securities should consider carefully the risk factors and the other information contained and incorporated by
reference in this Prospectus and the applicable Prospectus Supplement relating to a specific offering of Securities before purchasing
the Securities, including those risks identified and discussed under the heading “Risk Factors” in the AIF,
which is incorporated by reference herein. See “Documents Incorporated by Reference”.
An investment in the Securities offered hereunder
is highly speculative and involves a high degree of risk. The risks and uncertainties described or incorporated by reference
herein are not the only ones the Company may face. Additional risks and uncertainties, including those that the Company is unaware
of or that are currently deemed immaterial, may also become important factors that affect the Company and its business.
If any such risks actually occur, the Company’s business, financial condition and results of operations could be materially
adversely affected.
Prospective investors should carefully consider
the risks below and in the AIF and the other information elsewhere in this Prospectus and the applicable Prospectus Supplement
and consult with their professional advisers to assess any investment in the Company.
The Company has a history of losses.
The Company’s business has incurred losses
since its inception. Although the Company expects to become profitable, there is no guarantee that will happen, and the Company
may never become profitable. The Company currently has a negative operating cash flow and may continue to have a negative operating
cash flow for the foreseeable future. To date, the Company has not generated any revenues and a large portion of the Company’s
expenses are fixed, including expenses related to facilities, equipment, contractual commitments and personnel. As a result, the
Company expects for its net losses from operations to improve. The Company’s ability to generate additional revenues and
potential to become profitable will depend largely on its ability to manufacture and market its products and services. There can
be no assurance that any such events will occur or that the Company will ever become profitable. Even if the Company does
achieve profitability, the Company cannot predict the level of such profitability. If the Company sustains losses over an extended
period of time, the Company may be unable to continue its business.
Subsequent offerings will result in dilution
to our shareholders.
The Company may sell additional Common Shares
or other securities that are convertible or exchangeable into Common Shares in subsequent offerings or may issue additional Common
Shares or other securities to finance future acquisitions. The Company cannot predict the size or nature of future sales or issuances
of securities or the effect, if any, that such future sales and issuances will have on the market price of the Common Shares.
Sales or issuances of substantial numbers of Common Shares or other securities that are convertible or exchangeable into Common
Shares, or the perception that such sales or issuances could occur, may adversely affect prevailing market prices of the Common
Shares. With any additional sale or issuance of Common Shares or other securities that are convertible or exchangeable into Common
Shares, investors will suffer dilution to their voting power and economic interest in the Company. Furthermore, to the extent
that holders of the Company’s stock options or other convertible securities convert or exercise their securities and sell
the Common Shares they receive, the trading price of the Common Shares may decrease due to the additional amount of Common Shares
available in the market.
An investment in the Securities is not guaranteed
and may result in the loss of an investor’s entire investment.
There is no guarantee that any investment in the
Securities will earn any positive return in the short term or long term. Any investment in the Securities is highly speculative
and involves a high degree of risk and should be undertaken only by investors whose financial resources are sufficient to enable
them to assume such risks and who have no need for immediate liquidity in their investment. An investment in the Securities is
appropriate only for investors who have the capacity to absorb a loss of some or all of their investment.
We will have broad discretion in the use of
the net proceeds from the sale of Securities and may not use them to effectively manage our business.
Management of the Company will have broad discretion
with respect to the application of net proceeds received by the Company from the sale of Securities under this Prospectus or a
future Prospectus Supplement and may spend such proceeds in ways that do not improve the Company’s results of operations
or enhance the value of the Common Shares or its other securities issued and outstanding from time to time. Any failure by management
to apply these funds effectively could result in financial losses that could have a material adverse effect on the Company’s
business or cause the price of the issued and outstanding securities of the Company to decline.
The market price of our Common Shares may be
volatile, and you could lose all or part of your investment.
The market price of the Common Shares may be volatile
and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control. This volatility
may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations
in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or
investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions
or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, along
with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares.
Financial markets have historically at times experienced
significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and
have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly,
the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects
have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed
to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price
and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations
could be adversely impacted and the trading price of the Common Shares may be materially adversely affected.
There is no guarantee that an active trading
market for our Common Shares will be maintained on the CSE, OTCQB and/or the NASDAQ. Investors may not be able to sell their Common
Shares quickly or at the latest market price if the trading in our Common Shares is not active.
There is currently no market through which
the Securities, other than the Common Shares, may be sold and, unless otherwise specified in the applicable Prospectus
Supplement, none of the Warrants, Subscription Receipts or Units will be listed on any securities or stock exchange or any
automated dealer quotation system. As a consequence, purchasers may not be able to resell Warrants, Subscription Receipts or
Units purchased under this Prospectus or any Prospectus Supplement. This may affect the pricing of the Securities,
other than the Common Shares, in the secondary market, the transparency and availability of trading prices, the liquidity of
these securities and the extent of issuer regulation. There can be no assurance that an active trading market for the
Securities, other than the Common Shares, will ever develop or, if developed, that any such market, including for the Common
Shares, will be sustained.
The Common Shares are currently listed in Canada
on the CSE, but are not currently listed on any United States securities exchange other than the OTCQB, so there has been a limited
public market in the United States for the Common Shares. While Draganfly has applied to list the Common Shares on the Nasdaq,
listing will be subject to Draganfly fulfilling all the listing requirements of the Nasdaq. Moreover, as liquidity and trading
patterns of securities listed on the CSE may be substantially different from those of securities listed on a securities exchange
in the United States, historical trading prices may not be indicative of the prices at which the Common Shares may trade in the
future if and when they are listed on the Nasdaq. There is no assurance that the Common Shares will be listed on the Nasdaq or,
if such a listing is obtained, that an active trading market for the Common Shares will develop or be sustained in the United States
following the listing. If an active market for the Common Shares does not develop, it may be difficult for United States
shareholders to sell their Common Shares without depressing the market price for such shares, or at all.
Shareholders of the Company may be unable to sell
significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common
Shares, or at all. There can be no assurance that there will be sufficient liquidity of the Common Shares on the trading market,
or that the Company will continue to meet the listing requirements of the CSE or achieve or maintain listing on the Nasdaq
or any other public listing exchange.
United States investors may not be able to obtain
enforcement of civil liabilities against us.
The Company is incorporated under the laws
of British Columbia, Canada, and its principal executive offices are located in Canada. Most of the Company’s directors and
officers and most of the experts named in this prospectus reside outside of the United States and all or a substantial portion
of the Company’s assets and the assets of these persons are located outside the United States. Consequently, it may
not be possible for an investor to effect service of process within the United States on the Company or those persons. Furthermore,
it may not be possible for an investor to enforce judgments obtained in United States courts based upon the civil liability provisions
of United States federal securities laws or other laws of the United States against those persons or the Company. There is doubt
as to the enforceability, in original actions in Canadian courts, of liabilities based upon United States federal securities
laws and as to the enforceability in Canadian courts of judgments of United States courts obtained in actions based upon the civil
liability provisions of the United States federal securities laws. Therefore, it may not be possible to enforce those actions against
the Company, certain of the Company’s directors and officers or the experts named in this prospectus.
The Company may be classified as a “passive
foreign investment company” for U.S. federal income tax purposes, which would subject U.S. investors that hold the Company’s
Common Shares to potentially significant adverse U.S. federal income tax consequences.
If the Company is classified as a passive foreign
investment company (“PFIC”) for U.S. federal income tax purposes in any taxable year, U.S. investors holding
the Company’s Common Shares generally will be subject, in that taxable year and all subsequent taxable years (whether or
not the Company continued to be a PFIC), to certain adverse US federal income tax consequences. The Company will be classified
as a PFIC in respect of any taxable year in which, after taking into account its income and gross assets (including the income
and assets of 25% or more owned subsidiaries), either (i) 75% or more of its gross income consists of certain types of “passive
income” or (ii) 50% or more of the average quarterly value of its assets is attributable to “passive assets”
(assets that produce or are held for the production of passive income). Based upon the current and expected composition of the
Company’s income and assets, the Company believes that it was not a PFIC for the taxable year ended December 31, 2020 and
expects that it will not be a PFIC for the current taxable year. Nevertheless, because the Company’s PFIC status must be
determined annually with respect to each taxable year and will depend on the composition and character of the Company’s
assets and income, including the Company’s use of proceeds from offerings pursuant to this Prospectus, and the value of the
Company’s assets (which may be determined, in part, by reference to the market value of Common Shares, which may be volatile)
over the course of such taxable year, the Company may be a PFIC in any taxable year. The determination of whether the Company will
be or become a PFIC may also depend, in part, on how, and how quickly, the Company uses its liquid assets and the cash raised
in an offering. If the Company determines not to deploy significant amounts of cash for active purposes, the Company’s risk
of being a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status
is a factual determination made annually after the close of each taxable year, there can be no assurance that the Company will
not be a PFIC for any future taxable year. In addition, it is possible that the U.S. Internal Revenue Service may challenge the
Company’s classification of certain income and assets as non-passive, which may result in the Company being or becoming
a PFIC in the current or subsequent years.
If the Company is a PFIC for any year during
a U.S. holder’s holding period, then such U.S. holder generally will be required to treat any gain realized upon a
disposition of Common Shares, or any “excess distribution” received on its Common Shares, as ordinary income, and
to pay an interest charge on a portion of such gain or distribution, unless the U.S. holder makes a timely and effective
“qualified electing fund” election (“QEF Election”) or a “mark-to-market” election
with respect to its Common Shares. A U.S. holder who makes a QEF Election generally must report on a current basis its share
of the Company’s net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the
Company distributes any amounts to its shareholders. However, U.S. holders should be aware that there can be no
assurance that the Company will satisfy the record keeping requirements that apply to a QEF, or that the Company will supply
U.S. holders with information that such U.S. holders require to report under the QEF Election rules, in the event that the
Company is a PFIC and a U.S. holder wishes to make a QEF Election. Thus, U.S. holders may not be able to make a QEF Election
with respect to their Common Shares. A U.S. holder who makes a mark-to-market election generally must include as ordinary
income each year the excess of the fair market value of the Common Shares over the taxpayer’s basis therein. Each U.S.
holder should consult its own tax advisors regarding the PFIC rules and the U.S. federal income tax consequences of
the acquisition, ownership, and disposition of Common Shares.
INTERESTS
OF EXPERTS
The following persons or companies are named
as having prepared or certified a report, valuation, statement or opinion in this Prospectus, either directly or in a document
incorporated herein by reference, and whose profession or business gives authority to the report, valuation, statement or opinion
made by the expert.
Dale Matheson Carr-Hilton Labonte LLP is the auditor of the Company and has confirmed that they
are independent of the Company within the meaning of the Rules of Professional Conduct of the Institute of Chartered Professional
Accountants.
LEGAL
MATTERS
Unless otherwise specified in a Prospectus Supplement
relating to any Securities offered, certain legal matters in connection with the offering of Securities may be passed upon on behalf
of Draganfly by DLA Piper (Canada) LLP as to legal matters relating to Canadian law and, if governed by United States law, by Troutman
Pepper Hamilton Sanders LLP as to matters relating to United States law. As at the date hereof, the partners and associates of
DLA Piper (Canada) LLP, beneficially own, directly or indirectly, less than 1% of the outstanding Shares.
In addition, certain legal matters in connection
with any offering of Securities will be passed upon for any underwriters, dealers or agents by counsel to be designated at the
time of the offering by such underwriters, dealers or agents, as the case may be.
AUDITORS,
REGISTRAR AND TRANSFER AGENT
Our auditors are Dale Matheson Carr-Hilton Labonte
LLP, Chartered Professional Accountants, located at 1500-1700, 1140 W Pender Street, Vancouver, BC V6E 4G1. Dale Matheson
Carr-Hilton Labonte LLP is independent with respect to the Company within the meaning of the Rules of Professional Conduct of the
Chartered Professional Accountants.
The transfer agent and registrar for our Common
Shares is Endeavour Trust Corporation at its principal office in Vancouver, British Columbia.
AGENT
FOR SERVICE OF PROCESS
Certain directors and officers of the Company
reside outside of Canada. As a result of the persons named below residing outside of Canada, each of them has appointed
the following agent for service of process:
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Name of Person
or Company
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Name and
Address of Agent
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Andrew Hill Card Jr., John M. Mitnick and John Bagocius
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DLA Piper (Canada) LLP, 2800 Park Place, 666 Burrard St, Vancouver, British Columbia, Canada V6C 2Z7
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Purchasers are advised that it may not be possible
for investors to enforce judgments obtained in Canada against any such person, even though they have each appointed an agent
for service of process.
STATUTORY
RIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in certain of the
provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities. This right may
only be exercised within two business days after receipt or deemed receipt of a prospectus or a prospectus supplement
relating to the securities purchased by a purchaser and any amendments thereto. In several of the provinces, the securities
legislation further provides the purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or
damages if the prospectus or a prospectus supplement relating to the securities purchased by a purchaser and any
amendments thereto contain a misrepresentation or is not delivered to the purchaser, provided that such remedies for
rescission, revisions of the price or damages are exercised by the purchaser within the time limit prescribed by the
securities legislation of the purchaser’s province. A purchaser should refer to any applicable provisions of the
securities legislation of the purchaser’s province for the particulars of these rights or consult with a legal
advisor.
In addition, original purchasers of convertible,
exchangeable or exercisable Securities (unless the Securities are reasonably regarded by the Company as incidental to the applicable
offering as a whole) will have a contractual right of rescission against the Company in respect of the conversion, exchange or
exercise of the convertible, exchangeable or exercisable Security. The contractual right of rescission will be further described
in any applicable Prospectus Supplement, but will, in general, entitle such original purchasers to receive the amount paid for
the applicable convertible, exchangeable or exercisable Security (and any additional amount paid upon conversion, exchange or exercise)
upon surrender of the underlying Securities acquired thereby, in the event that this Prospectus (as supplemented or amended) contains
a misrepresentation, provided that: (i) the conversion, exchange or exercise takes place within 180 days of the date of
the purchase of the convertible, exchangeable or exercisable Security under this Prospectus; and (ii) the right of rescission is
exercised within 180 days of the date of the purchase of the convertible, exchangeable or exercisable Security under this Prospectus.
In an offering of convertible, exchangeable or
exercisable Preferred Shares, Subscription Receipts or Warrants, investors are cautioned that the statutory right of action for
damages for a misrepresentation contained in the Prospectus is limited, in certain provincial securities legislation, to the price
at which convertible, exchangeable or exercisable Preferred Shares, Subscription Receipts or Warrants are offered to the
public under the prospectus offering. This means that, under the securities legislation of certain provinces, if the purchaser
pays additional amounts upon the conversion, exchange or exercise of the Security, those amounts may not be recoverable under the
statutory right of action for damages that applies in those provinces. The purchaser should refer to any applicable provisions
of the securities legislation of the purchaser’s province for the particulars of this right of action for damages or consult
with a legal advisor.
PART II
INFORMATION NOT REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
Indemnification of Directors and Officers
Under the Business Corporations Act (British Columbia)
(the “BCBCA”), the Registrant may indemnify a present or former director or officer of the Registrant or another individual
who acts or acted at the Registrant’s request as a director or officer, or an individual acting in a similar capacity, of another
entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred
by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved
because of that association with the Registrant or other entity. The Registrant may not indemnify such an individual unless the individual
acted honestly and in good faith with a view to the best interests of the Registrant, or, as the case may be, to the best interests of
the other entity for which the individual acted as a director or officer or in a similar capacity at the Registrant’s request and
in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable
grounds for believing that the individual’s conduct was lawful. With approval of a court and subject to the sentence above, the
Registrant may indemnify such individuals in respect of an action by or on behalf of the Registrant or other entity to procure a judgment
in its favor, to which the individual is made a party because of the individual’s association with the Registrant or other entity
as described above. The Registrant may advance moneys to an individual described above for the costs, charges and expenses of a proceeding
described above; however, the individual shall repay the moneys if the individual does not fulfill the conditions set out above in the
second sentence under this heading. The aforementioned individuals are entitled to indemnification from the Registrant in respect of all
costs, charges and expenses reasonably incurred by the individual in connection with the defense of any civil, criminal, administrative,
investigative or other proceeding to which the individual’s association with the Registrant or other entity as described above if
the individual was not judged by the court or other competent authority to have committed any fault or omitted to do anything that the
individual described above ought to have done provided the individual fulfills the conditions set out above in the second sentence under
this heading.
The articles of the Registrant provide that, subject
to the BCBCA, the Registrant must indemnify a director, former director or alternate director of the Registrant and his or her heirs and
legal personal representatives against all eligible penalties to which such person is or may be liable, and the Registrant must, after
the final disposition of an eligible proceeding, pay the expenses actually and reasonably incurred by such person in respect of that proceeding.
Each director and alternate director is deemed to have contracted with the Registrant on the terms of this indemnity. In addition, the
articles of the Registrant provide that, subject to any restrictions in the BCBCA, the Registrant may indemnify any person. Furthermore,
The Registrant may purchase and maintain insurance for the benefit of any person (or his or her heirs or legal personal representatives)
who: (1) is or was a director, alternate director, officer, employee or agent of the Registrant; (2) is or was a director, alternate director,
officer, employee or agent of a corporation at a time when the corporation is or was an affiliate of the Registrant; (3) at the request
of the Registrant, is or was a director, alternate director, officer, employee or agent of a corporation or of a partnership, trust, joint
venture or other unincorporated entity; (4) at the request of the Registrant, holds or held a position equivalent to that of a director,
alternate director or officer of a partnership, trust, joint venture or other unincorporated entity; against any liability incurred by
him or her as such director, alternate director, officer, employee or agent or person who holds or held such equivalent position.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended, may be permitted to directors, officers or persons controlling the Registrant pursuant to
the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission (the “Commission”)
such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is therefore unenforceable.
EXHIBITS
Exhibit
Number
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Description
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4.1*
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The Annual Information Form of the Company for the financial year ended December 31, 2020, dated June 28, 2021.
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4.2*
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The audited consolidated financial statements of the Company for the years ended December 31, 2020 and December 31, 2019, together with the notes thereto and the auditor’s report thereon.
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4.3*
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Management’s discussion and analysis of the financial condition and results of operations of the Company for the financial year ended December 31, 2020.
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4.4*
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The condensed consolidated interim financial statements of the Company for the three months ended March 31, 2021.
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4.5*
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Management’s discussion and analysis of the financial condition and results of operations of the Company for the three months ended March 31, 2021.
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4.6*
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The management information circular of the Company dated May 10, 2021 with respect to the annual general meeting of shareholders held on June 23, 2021.
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5.1*
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Consent of Dale Matheson Carr-Hilton Labonte LLP.
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6.1*
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Powers of Attorney (included on the signature page of this Registration Statement).
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* Filed herewith.
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
The Registrant undertakes
to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly,
when requested to do so by the Commission staff, information relating to the securities registered pursuant to Form F-10 or to transactions
in said securities.
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Item 2.
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Consent to Service of Process
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(a) At the time of filing this Form
F-10, the Registrant shall file with the Commission a written irrevocable consent and power of attorney on Form F-X.
(b) Any change to the name or address
of the agent for service of the Registrant or the trustee shall be communicated promptly to the Commission by amendment to Form F-X referencing
the file number of the relevant registration statement.
SIGNATURES
Pursuant to the requirements
of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form F-10 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bowen Island, Country of Canada on July 21, 2021.
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DRAGANFLY INC.
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By:
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/s/ Cameron Chell
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Name: Cameron Chell
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Title: Chief Executive Officer
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POWER OF ATTORNEY
Each person whose signature
appears below constitutes and appoints Cameron Chell and Paul Sun, or either of them, his or her true and lawful attorneys-in-fact and
agents, each of whom may act alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration Statement, including post-effective amendments to this Registration
Statement, and any related registration statements necessary to register additional securities, and to file the same, with all exhibits
thereto, and other documents and in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents, and each
of them full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he or she might or could do in person, and hereby ratifies and confirms all his or her said attorneys-in-fact and agents
or any of them or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
This Power of Attorney
may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument.
Pursuant to the requirements
of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates
indicated.
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Signature
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Title
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Date
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/s/ Cameron Chell
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Chief Executive Officer and Director
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July 21, 2021
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Cameron Chell
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(principal executive officer)
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/s/ Paul Sun
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Chief Financial Officer
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July 21, 2021
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Paul Sun
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(principal financial and accounting officer)
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/s/ Olen
Aasen
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Director
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July 21, 2021
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Olen Aasen
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/s/ Andrew Hill Card, Jr.
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Director
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July 21, 2021
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Andrew Hill Card, Jr.
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/s/ Justin Hannewyk
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Director
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July 21, 2021
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Justin Hannewyk
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/s/ Scott Larson
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Director
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July 21, 2021
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Scott Larson
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/s/ John M. Mitnick
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Director
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July 21, 2021
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John M. Mitnick
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/s/ Denis Silva
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Director
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July 21, 2021
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Denis Silva
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AUTHORIZED REPRESENTATIVE
Pursuant to the requirements
of Section 6(a) of the Securities Act of 1933, the undersigned has signed this Registration Statement, solely in the capacity of the duly
authorized representative of Draganfly Inc. in the United States, on July 21, 2021.
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PUGLISI & ASSOCIATES
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By:
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/s/ Donald J. Puglisi
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Name: Donald J. Puglisi
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Title: Managing Director
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Exhibit 4.1
ANNUAL
INFORMATION FORM
FOR
THE FINANCIAL YEAR ENDED
DECEMBER 31, 2020
June
28, 2021
TABLE OF CONTENTS
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ADVISORIES
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1
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GLOSSARY
OF TERMS
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4
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CORPORATE
STRUCTURE
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6
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GENERAL
DEVELOPMENT OF THE BUSINESS OF THE COMPANY
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6
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ThE
ONGOING BUSINESS OF THE COMPANY
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10
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RISK
FACTORS
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19
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DESCRIPTION
OF CAPITAL STRUCTURE
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33
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Market
for Securities
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33
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ESCROWED
SECURITIES
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34
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DIVIDENDS
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34
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DIRECTORS
AND OFFICERS
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35
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AUDIT
COMMITTEE
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39
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Legal
Proceedings AND Regulatory actions
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40
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INTERESTS
OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
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41
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AUDITOR,
TRANSFER AGENT AND REGISTRAR
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41
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MATERIAL
CONTRACTS
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41
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INTERESTS
OF EXPERTS
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41
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ADDITIONAL
INFORMATION
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42
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SCHEDULE
A – AUDIT COMMITTEE CHARTER
ADVISORIES
In this Annual Information Form ("AIF"),
unless otherwise specified or if the context otherwise requires, references to "we", "us", "our", "its",
"the Company" or "Draganfly" mean Draganfly Inc. The information in this AIF is stated as at December 31, 2020 unless
otherwise indicated. For additional information and details, readers are referred to the audited consolidated financial statements for
the year ended December 31, 2020 and notes that follow, as well as the accompanying annual Management's Discussion and Analysis ("MD&A"),
which are available on the Canadian Securities Administrator's SEDAR System at www.sedar.com.
Cautionary Statement Regarding
Forward-Looking Information and Statements
This AIF contains forward-looking information
and statements (collectively, "forward-looking statements"). These forward-looking statements relate to Draganfly's
current expectations, estimates and projections as to future events or Draganfly's future performance and are provided to allow readers
a better understanding of Draganfly's business and prospects and may not be suitable for other purposes. All statements, other than statements
of historical fact, may be considered forward-looking statements. Forward-looking statements are often, but not always, identified by
the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect",
"may", "will", "project", "predict", "potential", "targeting", "intend",
"could", "might", "should", "believe" and similar expressions. Forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated
in, or suggested by, such forward-looking statements. Draganfly believes the expectations reflected in the forward-looking statements
included in this AIF are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking
statements should not be unduly relied upon. These statements speak only as of the date of this AIF and are expressly qualified, in their
entirety, by this cautionary statement. Draganfly assumes no obligation to revise or update these statements except as required pursuant
to applicable securities laws.
In particular, this AIF contains forward-looking
statements pertaining to the following:
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·
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the
intentions, plans and future actions of the Company;
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·
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statements
relating to the business and future activities of the Company;
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·
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anticipated
developments in operations of the Company;
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·
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market
position, ability to compete and future financial or operating performance of the
Company;
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the
timing and amount of funding required to execute the Company's business plans;
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the
effect on the Company of any changes to existing or new legislation or policy or government
regulation;
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the
availability of labour;
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requirements
for additional capital;
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goals,
strategies and future growth;
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the
adequacy of financial resources;
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expectations
regarding revenues, expenses and anticipated cash needs; and
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the
impact of the COVID-19 pandemic on the business and operations of the Company.
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With respect to forward-looking statements contained
in this AIF, the Company has made assumptions regarding, among other things:
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the
Company's ability to implement its growth strategies;
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the
Company's competitive advantages;
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the
development of new products and services;
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the
Company's ability to obtain and maintain financing on acceptable terms;
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the
impact of competition;
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changes
in laws, rules and regulations;
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the
Company's ability to maintain and renew required licences;
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Draganfly Inc. | Annual Information
Form Page 1
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the
Company's ability to maintain good business relationships with its customers, distributors,
suppliers and other strategic partners;
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the
Company's ability to protect intellectual property;
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the
Company's ability to manage and integrate acquisitions;
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the
Company's ability to retain key personnel; and
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the
absence of material adverse changes in the industry or Canadian or global economy, including
as a result of the COVID-19 pandemic.
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The Company's actual results could differ materially
from those anticipated in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this AIF:
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failure
to obtain or maintain required regulatory approvals;
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regulatory
regime the Company operates in;
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risk
associated with acquisitions;
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reliance
on management and key employees;
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changes
in laws, regulations, and guidelines relating to the Company's business, including tax and
accounting requirements;
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competition
in the industry;
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uncertainty
and adverse changes in the economy;
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market
price of the Common Shares may not be high enough to create positive return for current investors;
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no
prior market for the Common Shares;
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high
level of price and volume volatility in the capital markets;
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no
dividends for the foreseeable future;
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risks
associated with foreign operations in other countries
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dilution
as a result of future sale of Common Shares;
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evolving
market and difficulty of evaluation future prospects;
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·
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rapid
technological change in the industry;
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·
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exposure
to information systems security threats
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·
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having
defective products;
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·
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possibility
of data breaches and inadequacy of consumer protection and data privacy policies;
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·
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increased
research and development costs and reduced profitability as a result;
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·
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lack
of outside funding available for research and development;
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·
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shipping
products outside of Canada and approvals required for exporting;
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·
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reliance
on business partners;
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·
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conflict
of interests of the Company's directors and officers;
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·
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failure
to protect and maintain and the consequential loss of intellectual property rights;
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·
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adverse
impacts on the Company's reported results of operations as a result of adopting new accounting
standards or interpretations;
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·
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changes
in accounting standards and subjective assumptions, estimates and judgments by management
related to complex accounting matters; and
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·
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the
other factors considered under "Risk Factors" in this AIF and other filings
made by the Company with Canadian securities authorities.
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The Company has included the above summary of
assumptions and risks related to forward-looking statements contained in this AIF in order to provide investors with a more complete
perspective on the Company's current and future operations and such information may not be appropriate for other purposes.
Additional information on these and other
factors is available in the reports filed by the Company with Canadian securities regulators and available on SEDAR (as defined herein).
The forward-looking statements and information contained in this AIF are made as of the date hereof.
Draganfly Inc. | Annual Information
Form Page 2
Readers are cautioned that the preparation
of financial statements in accordance with generally accepted accounting principles in Canada requires management to make certain judgments
and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates may change, having either
a negative or positive effect on net earnings as further information becomes available and as the economic environment changes. The information
contained in this AIF, including the documents incorporated by reference herein, identifies additional factors that could affect the
operating results and performance of the Company. Readers are encouraged to carefully consider such factors.
Readers are also cautioned against placing
undue reliance on forward-looking statements, which are given as of the date expressed in this AIF, or the MD&A disclosure incorporated
by reference herein, and not to use future-oriented information or financial outlooks for anything other than their intended purpose.
The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The Company undertakes
no obligation to publicly update or revise any forward-looking statements in this AIF or the MD&A or other disclosure incorporated
by reference herein, whether as a result of new information, future events or otherwise, except as required by law.
Non-IFRS Measures
The Company prepares and reports its consolidated
financial statements in accordance with IFRS (as defined herein). However, this AIF may make reference to certain non-IFRS measures including
key performance indicators used by management. These measures are not recognized measures under IFRS and do not have a
standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies.
Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding
of the Company's results of operations from management's perspective. Accordingly, these measures should not be considered in
isolation nor as a substitute for analysis of the Company's financial information reported under IFRS. The Company uses
non-IFRS measures including "gross margins" and "working capital" which may be calculated differently by other
companies. These non-IFRS measures and metrics are used to provide investors with supplemental measures of the Company's operating
performance and liquidity and thus highlight trends in the Company's business that may not otherwise be apparent when relying
solely on IFRS measures. The Company also believes that securities analysts, investors and other interested parties frequently
use non-IFRS measures in the evaluation of companies in similar industries. Management also uses non-IFRS measures and metrics
in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts
and to determine components of executive compensation. For definitions and reconciliations of these non-IFRS measures to the relevant
reported measures, please see the "Non-GAAP Measures and Additional GAAP Measures" section of the
MD&A. A copy of the MD&A can be accessed under the Company's profile on SEDAR at www.sedar.com.
Market, Independent Third
Party and Industry Data
Unless otherwise indicated, the Company has obtained
the market and industry data contained in this AIF from its internal research, management's estimates and third-party public information
and other industry publications. While the Company believes such internal research, management's estimates and third-party public information
is reliable, such internal research and management's estimates have not been verified by any independent sources and the Company has
not verified any third party public information. While the Company is not aware of any misstatements regarding the market and industry
data contained in this AIF, such data involves risks and uncertainties and are subject to change based on various factors, including
those described under "Cautionary Statement Regarding Forward-Looking Information and Statements" and "Risk
Factors".
Monetary References
Except as otherwise indicated, all dollar amounts
in this AIF are expressed in Canadian dollars and references to $ are to Canadian dollars. References to US$ are to United States
dollars.
Draganfly Inc. | Annual Information
Form Page 3
GLOSSARY
OF TERMS
In this AIF, unless otherwise indicated or the
context otherwise requires, the following terms shall have the indicated meanings. Words importing the singular include the plural and
vice versa and words importing any gender include all genders. A reference to an agreement means the agreement as it may be amended,
supplemented or restated from time to time.
"affiliate" or "associate"
when used to indicate a relationship with a person or company, has the meaning set forth in the Securities Act (British Columbia),
as amended, including the regulations promulgated thereunder;
"Amalgamation" has the meaning
set out under the heading "General Development of the Business of the Company – Three Year History – Financial year
ended December 31, 2019";
"BCBCA" means the Business
Corporations Act (British Columbia), as amended, including the regulations promulgated thereunder;
"Board of Directors" or "Board"
means the board of directors of the Company, as constituted from time to time, including, where applicable, any committee thereof;
"Canadian Securities Laws" means
the securities legislation and regulations, and the instruments, policies, rules, orders, codes, notices and interpretation notes, of
the securities regulation authorities of any applicable jurisdiction, or jurisdictions collectively, in Canada, as well as of the applicable
stock exchanges (including the CSE);
"CAGR" means compound
annual growth rate;
"CARs" has the meaning set out
under the heading "The Ongoing Business of the Company – Regulatory Framework";
"CIPO" means the Canadian Intellectual
Property Office;
"Combination Agreement" has
the meaning set out under the heading "General Development of the Business of the Company – Three Year History –
Financial year ended December 31, 2019";
"Common Shares" means the common
shares without par value in the capital of the Company;
"Company" or "Draganfly"
means Draganfly Inc.;
"CSE" means the Canadian Securities
Exchange;
"DAC" has the meaning set out
under the heading "Corporate Structure – Name, Address and Incorporation";
"Draganfly Innovations" means
Draganfly Innovations Inc., a wholly-owned subsidiary of the Company;
"Draganfly Innovations USA"
means Draganfly Innovations USA Inc., a wholly-owned subsidiary of the Company;
"Dronelogics" means Dronelogics
Systems Inc., a wholly-owned subsidiary of the Company;
"Effective Date" means the effective
date of this AIF, being June 28, 2021;
"FAA" means Federal Aviation
Administration;
Draganfly Inc. | Annual Information
Form Page 4
"Former Draganfly" has the meaning
set out under the heading "Corporate Structure – Name, Address and Incorporation";
"Former Draganfly Shares" has
the meaning set out under the heading "General Development of the Business of the Company – Three Year History –
Financial year ended December 31, 2019";
"IFRS" means International
Financial Reporting Standards as issued by the International Accounting Standards Board, as adopted by the Canadian Accounting
Standards Board;
"Going Public Transaction" has
the meaning set out under the heading "General Development of the Business of the Company – Three Year History –
Financial year ended December 31, 2019";
"Global UAV Subsidiaries" has
the meaning set out under the heading "General Development of the Business of the Company – Three Year History –
January 1, 2020 to the Effective Date";
"ITAR" means International Traffic
in Arms Regulations;
"NI 51-102" means National
Instrument 51-102 – Continuous Disclosure Obligations of the Canadian Securities Administrators;
"NI 52-110" means National
Instrument 52-110 – Audit Committees of the Canadian Securities Administrators;
"NPA" has the meaning set out
under the heading "The Ongoing Business of the Company – Regulatory Framework";
"OTCQB" means the middle tier
of the United States Over-the-Counter market;
"Preferred Shares" has the meaning
set out under the heading "Corporate Structure – Name, Address and Incorporation";
"Regulation A+ Offering" has
the meaning set out under the heading "General Development of the Business of the Company – Three Year History –
Financial year ended December 31, 2019";
"Subscription Receipts" has
the meaning set out under the heading "General Development of the Business of the Company – Three Year History –
Financial year ended December 31, 2019";
"Subscription Receipt Offering"
has the meaning set out under the heading "General Development of the Business of the Company – Three Year History –
Financial year ended December 31, 2019";
"RPAS" means remotely piloted
aircraft systems;
"SEDAR" means the System for
Electronic Document Analysis and Retrieval;
"SFOC" has the meaning set out
under the heading "The Ongoing Business of the Company – Regulatory Framework";
"Small RPAS Advanced" has the
meaning set out under the heading "The Ongoing Business of the Company – Regulatory Framework";
"Small RPAS Basic" has the meaning
set out under the heading "The Ongoing Business of the Company – Regulatory Framework";
"sUAS" means small unmanned
aircraft systems;
Draganfly Inc. | Annual Information
Form Page 5
"Subco" has the meaning set
out under the heading "General Development of the Business of the Company – Three Year History – Financial year ended
December 31, 2019";
"UAV" means unmanned
aerial vehicles;
"USPTO" means United States
Patent and Trademark Office; and
"UVS" means unmanned vehicle
systems.
CORPORATE
STRUCTURE
Name, Address and Incorporation
The Company was incorporated as Drone
Acquisition Corp. ("DAC") under the BCBCA on June 1, 2018 for the purpose of reorganizing and recapitalizing the business
of Draganfly Innovations Inc. ("Former Draganfly"). Effective July 17, 2019, the Company amended its articles
to remove various classes of authorized but unissued preferred shares and replace them with only one class of preferred shares
(the "Preferred Shares"). Effective August 15, 2019, the Company changed its name to "Draganfly Inc." On August
22, 2019, the Company amended its articles to re-designate its Class A Common Shares as Common Shares.
The Company's head office is located at 2108
St. George Avenue, Saskatoon, Saskatchewan S7M 0K7, and the registered office is located at Suite 2800, Park Place, 666 Burrard Street,
Vancouver, British Columbia V6C 2Z7.
Intercorporate Relationships
The following chart shows the Company's subsidiaries
as at the Effective Date:
GENERAL
DEVELOPMENT OF THE BUSINESS OF THE COMPANY
Founded in 1998, Former Draganfly is recognized
as one of the first commercial multi-rotor manufacturers and has a legacy for its innovation and superior customer service. Zenon Dragan
is the founder of Former Draganfly, and is a recognized leading expert on UAV.
Former Draganfly introduced its first systems
in 1999 and since evolved and shaped the UAV industry. The company's aircraft are widely used by public safety agencies worldwide and
were one of the first UAV to receive a FAA Certificate of Authorization the fall of 2009 with the Mesa County Colorado Sheriff's
Office. In 2012, the Royal Canadian Mounted Police flew one of the company's drones to locate and save the life of an accident victim.
Draganfly aircraft have achieved many industry firsts, including:
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·
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first public safety UAV to shoot aerial photos documenting a manned aircraft accident in an urban area;
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·
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first
UAV operated by a public safety organization flown at night to locate and save a life;
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Draganfly Inc. | Annual Information
Form Page 6
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·
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first
UAV helicopter to be granted a county wide U.S. FAA Certificate of Authorization;
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·
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named
as a test platform at one of the U.S. FAA's certified test sites; and
|
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|
·
|
four
of the first six compliance certifications for its products issued by Transport Canada.
|
Three Year History
A detailed description on the significant developments
of the business of the Company over the last three completed financial years is set out below.
Financial year ended
December 31, 2018
The Company was incorporated under the BCBCA
on June 1, 2018 for the purpose of reorganizing and recapitalizing the business of Former Draganfly.
Prior to Closing of the Going Public Transaction
(as defined herein), the Company had not conducted any material business since incorporation other than pursuing interests under
a letter of intent with Former Draganfly and entering into the Combination Agreement. The sole business of the Company from the date
of its incorporation until executing the Combination Agreement (as defined herein) was to identify and evaluate opportunities
for the acquisition of an interest in suitable drone businesses and, once identified and evaluated, to negotiate an acquisition
subject to applicable corporate and securities laws, so as to complete a transaction. Until the completion of the Going Public
Transaction, the Company did not have a business, business operations or any material assets other than cash.
Financial year ended
December 31, 2019
On August 15, 2019, DAC, its wholly-owned subsidiary
1187607 B.C. Ltd. ("Subco") and Former Draganfly completed a business combination transaction (the "Going Public
Transaction") pursuant to a business combination agreement dated January 31, 2019 among the Company, Subco and Former
Draganfly (the "Combination Agreement") whereby: (i) Former Draganfly completed settlement of certain
overdue debt in the aggregate of $2,779,726; (ii) Former Draganfly continued to British Columbia (being the corporate law jurisdiction
of the Company and Subco; (iii) Subco amalgamated (the "Amalgamation") with Former Draganfly to form the amalgamated
wholly-owned subsidiary of the Company, Draganfly Innovations Inc.; and (iv) the Company changed its name to "Draganfly Inc."
Under the Amalgamation, holders of common shares
of Former Draganfly ("Former Draganfly Shares") (other than dissenting shareholders) received 1.794 Common Shares
for each Former Draganfly Share held by such Former Draganfly shareholder. Consequently, the Company owns 100% of Draganfly Innovations
and the Former Draganfly shareholders became shareholders of the Company.
The Company completed a non-brokered
private placement offering on May 22, 2019 and August 6, 2019 (the "Subscription Receipt Offering") of securities raising
aggregate gross proceeds of $7,025,749.50 through the issuance of 14,051,499 subscription receipts of the Company ("Subscription
Receipts") at a price of $0.50 per Subscription Receipt. The Subscription Receipt Offering was required in order to satisfy
closing conditions of the Going Public Transaction. Each subscription receipt automatically converted, without payment of additional
consideration and without any further action on the part of the holder, into one unit of the Company upon the completion of the
Going Public Transaction and the listing of the Common Shares on the CSE. Each unit consisted of one Common Share and one transferable
Common Share purchase warrant. Each warrant entitled the holder to purchase one Common Share at a price of $0.50 for a
period 12 months following the issuance of the warrants.
The Company completed the listing of its
Common Shares for trading on the CSE under the symbol "DFLY" on November 5, 2019.
Draganfly Inc. | Annual Information
Form Page 7
The Board and the Company's senior management
were reconstituted in conjunction with the completion of the Going Public Transaction to consists of four directors, Cameron Chell,
Denis Silva, Scott Larson and Olen Aasen, and Cameron Chell as Chairman and CEO and Paul Sun as CFO and Corporate Secretary.
On November 7, 2019, the Company announced that
Andrew Hill Card Jr. was appointed to the Board.
On November 15, 2019, the Company completed the
listing of its Common Shares for trading on the Frankfurt Stock Exchange under the trading symbol "3U8".
Financial year ended
December 31, 2020
On January 9, 2020, the Company completed the
listing of its Common Shares for trading on the OTCQB Venture Market of the OTC Markets under the symbol "DFLYF".
On March 26, 2020, the Company announced that
it had been selected as the exclusive global systems integrator for a project with Vital Intelligence Inc., a healthcare data services
and deep learning company in conjunction with the University of South Australia, using technology developed with help from the Australian
Department of Defence Science and Technology Group.
On April 30, 2020, the Company completed the
acquisition of all of the shares of Dronelogics Systems Inc. for a purchase price of $2,000,0000 paid by way of a cash payment of $500,000
and 3,225,438 Common Shares at a deemed price of $0.50 per Common Share. In connection with the acquisition, Justin Hannewyk, President
of Dronelogics, was appointed to the Board.
On June 18, 2020, the Company announced
that John M. Mitnick was appointed to the Board.
On July 3, 2020, the Company announced that Scott
Larson, a director of the Company, was appointed President of the Company.
On July 6, 2020, Draganfly completed a non-brokered
private placement of 961,538 Common Shares at a price of $0.52 per Common Share for gross proceeds of $500,000.
On July 16, 2020, Draganfly completed a shares
for debt transaction for payment of a third party strategic vendor's invoices. Draganfly issued an aggregate of 555,409 Common Shares
at a deemed price of $0.55 per Common Share to settle $305,475.03 of outstanding debt.
On November 10, 2020, the Company announced that
its wholly-owned subsidiary Dronelogics, entered into lease agreements with the wholly-owned subsidiaries of Global UAV Technologies,
Pioneer Arial Surveys Ltd. and High Eye Aerial Imaging Inc. (the "Global UAV Subsidiaries"), pursuant to which Dronelogics
will lease all of the assets of the Global UAV Subsidiaries with an exclusive option to purchase the assets at any time during the term
of the lease agreements. Pursuant to the lease agreements, Dronelogics paid an initial deposit of $50,000 upon signing and will pay four
quarterly lease payments to each of the Global UAV Subsidiaries for an aggregate amount of $31,500 per quarter (for a total amount of
$126,000 during the term of the lease agreements). In the event the Company exercises the option, it is required to pay the remainder
of the lease payments outstanding as well as $220,000 in Common Shares based on a 30 day volume weighted average price per Common Share
following the execution of the lease agreements, for aggregate consideration of $396,000. On January
28, 2021, the Company notified the Global UAV Subsidiaries that it would be terminating the lease agreements and no longer
pursuing this transaction.
On December 2, 2020, the Company announced that
it had completed an initial closing of its Regulation A+ offering of units of the Company (the "Regulation A+ Offering").
The Company issued 2,556,496 units at price of US$0.47 per unit for gross proceeds in the amount of US$1,201,553 in the first closing.
Each unit is comprised of one Common Share and one Common Share purchase warrant, with each warrant entitling the holder to acquire one
Common Share at a price of US$0.71 per Common Share until November 30, 2022. The Common Shares and Warrants issued in connection with
the offering are subject to a nine month hold period which will expire on August 30, 2021.
Draganfly Inc. | Annual Information
Form Page 8
On December 22, 2020, the Company announced that
it had been selected by Coldchain Technology Services, LLC ("Coldchain") to immediately develop and provide flight services
of a robust vaccine delivery payload for use in critical regions for drone delivery of the COVID-19 vaccine.
January 1, 2021 to the Effective Date
On January 6, 2021, the Company announced the
awarding of a new patent for a vertical take-off and landing (VTOL) cargo delivery drone with variable center of gravity.
On January 21, 2021, the Company announced that
it had been selected to provide engineering and development services for a drone-based air support defense system for Integrated Launcher
Solutions Inc. ("ILS"). The Company entered into a memorandum of understanding with ILS with the objective to create
the terms and conditions surrounding a project management and development agreement for the production of ILS's multi-launching air support
defence system.
On March 2, 2021, the Company announced that
it will be the exclusive supplier of drones to Woz ED's drone program across its national K-12 curriculum with the expected deployment
of approximately 3000 drones in 2021. The Company entered into a memorandum of understanding with Woz ED with the
objective to create the terms and conditions surrounding a business agreement. The memorandum of understanding automatically terminates
after 60 days; however, the Company anticipates entering into a definitive agreement with Woz ED during the third quarter of 2021.
On March 9, 2021, the Company announced that
it had completed the final closing of the Regulation A+ Offering. The Company issued 32,443,457 units at price of US$0.47 per unit for
gross proceeds in the amount of approximately US$15.3 million in the final closing. Each unit is comprised of one Common Share and one
Common Share purchase warrant, with each warrant entitling the holder to acquire one Common Share at a price of US$0.71 per Common Share
for a period of two years from the date of issuance. The Common Shares and Warrants issued in connection with the offering are subject
to a nine month hold period.
On March 9, 2021, the Company also announced
that it has entered into an asset purchase agreement with Vital Intelligence Inc. (“Vital”) to purchase all the assets
of Vital in consideration for: (a) a cash payment of $500,000 with $50,000 paid upon execution of the asset purchase agreement, $200,000
to be paid at closing and $250,000 to be paid on the six-month anniversary date of closing; and (b) 6,000,000 units of the Company with
each unit being comprised of one common share of the Company and one common share purchase warrant. Each warrant will entitle the holder
to acquire one common share for a period of 24 months following closing at an exercise price of $2.67 per common share and the Company
will be able to accelerate the expiry date of the warrants after one year in the event the underlying common shares have a value of at
least 30% greater than the exercise price of the warrants. The units will be held in escrow following closing with 1,500,000 units being
released at closing and the remainder to be released upon the Company reaching certain revenue milestones received from the purchased
assets. The Company completed the acquisition on March 25, 2021.
On March 23, 2021, the Company announced that
it signed a services deal to deploy EagleEye™ AI flight services with Windfall Geotek Inc. Windfall Geotek Inc. contractually agreed
to have Draganfly provide $1,000,000 in flight services over the course of the next year with $500,000 already directly funded and allocated.
Draganfly Inc. | Annual Information
Form Page 9
On May 13, 2021, the Company announced that it
entered into a definitive agreement with Coldchain to develop, deploy and operate solutions for the delivery of medical supplies, medicine,
and vaccines. The definitive agreement provides for phase one of a planned five-phase roll-out for the comprehensive development, deployment,
and operation of a medical drone delivery service as well as the development of a solution for the timely delivery of medical supplies,
medicine, and vaccines. Phase one will also include working with various regulatory bodies, including the FAA, to obtain licenses and
approvals for initial non-commercial beta test delivery routes. Phase one has a value of US$125,000, to be executed over a maximum of
10 months and the parties have agreed to negotiate an extension to the definitive agreement for phase two prior to the expiry of phase
one. Under phase two, Coldchain will commit to purchasing no less than US$625,000 in equipment and services from Draganfly.
On May 19, 2021, the Company announced that it
signed a contract with ILS for the development, prototyping, and eventual production of a non-lethal 40 mm multi-launching
systems that can be mounted and deployed from drones, drone systems, robots, robotic systems, and other stationary platforms or
similar systems. As part of the contract, Draganfly has provided ILS with strategic vendor financing of US$150,000 to assist in the development
of the project and in consideration ILS has granted Draganfly a worldwide royalty equal to 8% of the gross revenue received from the
project for a period of five years from earlier of the repayment date or maturity date of the loan. The loan is secured against the intellectual
property related to the project.
Significant Acquisitions
During 2020
Draganfly did not complete any significant acquisitions
during its most recently completed financial year for which disclosure is required under Part 8 of NI 51-102.
ThE
ONGOING BUSINESS OF THE COMPANY
General
The Company is an award-winning, industry-leading
manufacturer, contract engineering, and product development company within the UAV space, serving the public safety, agriculture,
industrial inspections, and mapping and surveying markets. The Company is 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.
The business of the Company is conducted through
three wholly-owned subsidiaries: (a) Draganfly Innovations Inc.; (b) Draganfly Innovations USA Inc.; and (c) Dronelogics Systems
Inc.
The business of Draganfly Innovations and Draganfly
Innovations USA is the provision of engineering services and manufacture of commercial UAV, RPAS, and UVS and software,
serving the public safety, agriculture, industrial inspections, and mapping and surveying markets.
Dronelogics is a solutions integrator
for custom robotics, hardware and software that provides a wide scope of services including sales, training, rentals, maintenance,
flying and data processing services.
Drone Industry Overview
Drones or UAV have rapidly evolved from a military
origin to commercial and civil government applications from security to farming. The increased automation of drones provides additional
value to existing workflows, triggering more widespread adoption. A global shift to sustainable and eco-friendly options has further
increased demand for drone usage. Lastly, regulatory amendments are anticipated to have an ongoing impact on the drone industry. According
to Drone Industry Insights, the commercial and private drone market could grow from US$22.5 billion in 2020 to US$42.8 billion in 2025,
representing CAGR of 13.8%.
Draganfly Inc. | Annual Information
Form Page 10
Drone applications are being utilized in multiple
industries on a global basis. A portion of manned military aircraft (MMA) created the drone industry as a safe, inexpensive option. Defense
will remain the largest market over the foreseeable future. However, the mobile phone industry created an affordable technology stack
for drones. The ability to carry a camera enabled many people to utilize the platforms for media production and beyond. That demand initiated
in the consumer market and has migrated along with technological advancements into the growth of commercial drone industry.
The major segments of the drone market are drone
hardware, software and services. Drone hardware are the physical goods, including drone platforms, aerial mobility platforms and components
and systems. The software segment includes flight planning, navigation and computer vision, unmanned traffic management (UTM), fleet
operations, ecosystems, networks and software development kits (SDKs). The services aid the drone hardware and software manufacturers.
They include drone service providers (DSPs), system integrators, pilot training providers, retailers and marketplaces, coalitions and
organizations, drone test sites, insurance providers and university/ educational facilities.
Drone application methods are being used by a
variety of industries today. There are approximately eight methods that are garnering the most attention: mapping, surveying, inspection,
filming/photography, dispensing/spraying, warehousing, monitoring/detection, and delivery. These applications are being used today by
the civil government, educational facilities, agricultural, construction, health care, real estate, energy, transportation, insurance,
security, and scientific industries. According the Drone Industry Insights, the fastest growing drone application method will be delivery
and is forecasted at 28.6% CAGR over the next five years; however, this will not happen without intense industry scrutiny and regulation.
Products and Services
The Company 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.
Product sales and engineering services accounted
for 71% and 29%, respectively, of revenues of Draganfly for the financial year ended December 31, 2020. The bulk of engineering service
work is for one large US based customer that subcontracts to Draganfly. The customer's clients tend to be the U.S. government
and military.
Draganfly Products
Quadcopters and Multirotors
The Company is the longest-running manufacturer
of quadcopters and multirotor drones in the world. Draganfly's quadcopters and multirotor drones include the following:
|
|
·
|
Draganflyer
Commander – a high-endurance, electric, autonomous quadcopter drone built on Draganfly's
patented carbon fiber folding airframe with interchangeable payloads for a variety of missions
requiring high resolution imagery, including surveying, 3D mapping, industrial inspection,
search and rescue, and high-endurance public safety applications.
|
|
|
·
|
Draganflyer
X4-P – semi-autonomous quadcopter with 18 minute flight time ideal for medium projects.
|
|
|
·
|
Quantix™
Mapper – exclusive to Draganfly through its partnership with AeroVironment, it
is a fully-automated drone that is designed for mapping.
|
|
|
·
|
Tango2 – a high endurance, dual battery, sUAS capable of carrying a wide array of payload
systems. The aircraft utilizes the Draganfly intelligent power management system to extend flight time while increasing safety. This
sUAS is ideal for agricultural monitoring and research, mapping, surveying, environmental monitoring, and search and rescue.
|
Draganfly Inc. | Annual Information
Form Page 11
Universal Control System
The Draganfly Universal Control System is a complete,
handheld ground control system that is built to integrate with other software and hardware systems. The Draganfly Universal Control System
is designed to provide precise control over sUAS helicopters, fixed-wing, and ground-based robots. Draganfly software provides sophisticated
flight planning, automated takeoff, grid following, waypoints, landing, data collection, and video downlink.
Software
The Draganfly Surveyor drone flight planning
software is an intuitive, easy to use, application that enables customers to quickly plan, fly, and process meaningful data. Based on
the project, camera type, optics, and altitude, the drone software determines the appropriate camera shutter interval, aircraft speed,
and flight plan to capture the optimum required photo overlap to generate 2D and 3D maps and models. The Draganfly Surveyor directly
integrates with Pix4Dmapper for survey-grade results and can be used alongside other third party photogrammetry programs.
Vital Intelligence
Draganfly operates in partnership with Vital
Intelligence Inc. to install standalone and airborne health assessment systems at locations such as universities, hotels, casinos, family
entertainment complexes, shopping centers, and other high-traffic locations. These systems effectively measure social distancing and
visitors' vital signs like temperature, cough, and respiratory rate to identify high-risk visitors. Vital Intelligence is a data platform
that turns an existing camera into a touchless symptom detection system, measuring vital signs and social distancing. Draganfly integrates
this technology into a variety of platforms and camera systems – both on the ground and in the air – to assess people coming
into and traveling throughout a facility.
Draganfly Services
Custom Engineering
Draganfly is a contract engineering partner for
government agencies, enterprise organizations, academic institutions, and businesses of all sizes. The Draganfly team's truest capabilities
are actualized during the engineering process as hardware designers, software designers, engineers, project managers, and vertical-specific
experts come together to build custom drone solutions for its partners. Draganfly's end-to-end engineering services include:
|
|
·
|
Hardware
design: Component, product, and system design.
|
|
|
·
|
Software
design: Custom software and interface design.
|
|
|
·
|
Development:
Including integration with third party platforms, PixX4D, Pixhawk, Ardupilot, DJI and
more.
|
|
|
·
|
Modeling:
3D design and modeling of mechanical components.
|
|
|
·
|
ITAR
equipment management: Approved handling and integration of ITAR, and Controlled Goods technologies.
|
|
|
·
|
Support:
Testing, training, documentation, and repairs.
|
Draganfly Inc. | Annual Information
Form Page 12
Training
Draganfly offers custom-designed training packages
that are tailored to specific operations and use cases. The Company also offers basic training for new UAV owners, up to advanced classes
for users who understand the fundamentals and are looking for new ways to increase flight efficiency or comply with federal regulations.
Flight Services
Draganfly has a team of qualified pilots that
conduct flights on behalf of its customers. The team specializes in working with emergency services including police, fire, and search
and rescue personnel. Draganfly also supports industrial applications, utility and power companies, environmental and agricultural entities
and others.
Varigard Spraying Services
Draganfly operates in partnership with Varigard
LLC, a leader in natural and organic disinfectants, to administer a sanitization spraying service in large public venues by misting a
surface spray across the entire venue in four to six hours.
Principal Markets
Draganfly has more than 20 years of experience
designing and manufacturing professional drones for military, public safety, energy, agriculture, and insurance. Draganfly has sold products
and services to over 50 countries but predominantly focuses on the North American market given its geographical location.
Military and Government
Military and government contractors partner with
Draganfly to improve personnel and infrastructure safety. Draganfly works with partners to design and manufacture custom airframes, design
and develop payloads, and manage complex flight operations. Draganfly team members hold advanced pilot certificates and are approved
to fly in controlled airspace and at airports. Since the Company's development team is cleared by Canada's Controlled Goods Program,
the team is permitted to handle ITAR equipment and technologies, and the Company's facilities are built to protect those technologies
and ensure they are only handled by approved personnel.
Public Safety
In 2013, the Draganflyer was the first drone
to save a human life. Years later, the Company is still a leader in using drone technology to keep the public safe. Draganfly works with
its partners to identify unknowns, such as substances, spills, packages, and chemicals while not putting human lives at risk.
Draganfly builds aerial and ground systems with custom payloads and sensors to scan scenes, survey public events, locate objects, and
clear debris faster and more safely than on-the-ground manpower. The Company also empowers its partners to maximize existing infrastructures
via custom API integrations that ensure Draganfly's technology enhances their safety systems.
Environmental and Energy
Draganfly offers a suite of commercial UAV solutions
for energy companies and those servicing the energy market, like surveyors and consultants. Draganfly equips energy companies with the
hardware and software they need to optimize existing operations, improve safety, and respond after a natural disaster. Partners can use
Draganfly hardware and 3D modeling software to remotely inspect sites that would put human lives at risk. They also conduct environmental
monitoring with Draganfly's sample collection solutions, assessing water and ground pollution, gas composition, infrastructure, and other
environments.
Draganfly Inc. | Annual Information
Form Page 13
Agriculture
Draganfly works with its partners to collect
high-quality data, using multi- and hyper-spectral imaging, 3D modeling, and a suite of sophisticated sensor technology that assesses
environmental factors. Seed companies use Draganfly technology to optimize growth season, measuring seed trial results throughout the
research and development process. Farmers can use Draganfly flight and data collection services to monitor hectares of land year-round,
assessing factors like fertilizer efficiency, weed production, and more.
Insurance
Insurance companies can use Draganfly technology
for pre-damage baseline and post-event damage assessments of infrastructure to reduce risk when dealing with natural disasters and other
catastrophic events. Property owners, insurers, and reinsurers can leverage Draganfly's flight, data collection, and assessment services
to increase accuracy and speed when inspecting a site.
Operations
Canadian Operations
Draganfly Innovations' products are manufactured
at its machine shop within its leased head office based in Saskatoon, Saskatchewan, Canada. Draganfly Innovations operates the fully
operational facility located at 2108 St. George Avenue, Saskatoon, SK S7M 0K7. This facility is to be used only for the purposes of Draganfly
Innovations operating its business of design, development, production, distribution, sale and/or licensing of drones or robots, or such
other use as permitted by the landlord from time to time.
Dronelogic's services are provided through its
leased space located at Unit 319, 2999 Underhill Avenue, Burnaby, British Columbia.
United States Operations
The Company, through its wholly-owned
subsidiary, Draganfly Innovations USA, has a management office in Raleigh, North Carolina that currently conducts business in
the state of North Carolina in the United States.
Competitive Conditions
Although Draganfly is acknowledged as the pioneer
that first developed the commercial multi rotor helicopter, there are now many drone hardware companies in the World. As technology
has improved and costs for hardware and software have come down, the line between consumer and commercial drones has blurred.
Historically, Draganfly has serviced early adopters in the public safety industry. At this stage of the commercial drone adoption
curve, the average public safety organization (local, regional, and even federal law enforcement, for example), are quite budget
conscious. Hence, these organizations tend to use lower cost drones that have become quite sophisticated that can accomplish most
of their use cases. The dominant company in the industry is DJI, the Chinese drone company that is reputed to own over 70% of
the consumer and now commercial drone market. The majority of DJI's drones are geared towards broad applications involving the
masses. Draganfly has moved away from competing directly with DJI and has chosen to serve niche markets outside of where DJI tends
to be. There are also some organizations that tend to be US based that either prefer or are mandated to not use foreign drones
such as those produced by DJI. Some of these organizations are sensitive to their work being exposed to that of overseas governments
which has at least for the time being, created a niche market for players such as Draganfly. As Draganfly has evolved to move
with the industry trends, the Company now uses DJI drones as part of some of its customization and engineering services work.
Draganfly has also moved into innovative engineering procurement which is very specialized and is currently not aware of any Canadian
and US companies focusing on this industry or its existing customers. As the drone industry matures, this may bring more competitors
to this space or the Company's customers may choose to develop the in-house expertise to do the work that they currently outsource
to Draganfly. However, it is the Company's view that there will be a growing customer base that will require very specialized
work that only a handful of companies can do.
Draganfly Inc. | Annual Information Form
Page 14
Regulatory Framework
A new regulatory framework relating to the use
of drones in Canada was published by Transport Canada in January 2019 and came into effect on June 1, 2019. The changes, published
in the Canadian Aviation Regulations ("CARs"), Part IX, introduce new rules based on the weight of the RPA and
the intended operation. This framework creates three broad categories of RPAS: (i) small RPAS in limited (low risk) operations
("Small RPAS Basic"); (ii) small RPAS in advanced (complex) operations ("Small RPAS Advanced");
and (iii) all other RPA operations that fall outside (i) and (ii) above. These regulations focus on foundational issues such
as aircraft marking and registration, pilot knowledge and certification, airworthiness of the aircraft, and flight rules.
Small RPAS Basic are defined as RPAS weighing
between 250 grams and 25 kilograms and operated in rural and unpopulated areas. These RPAS will require identification markings,
including name, address and contact information of the owner and pilot of the RPA. Pilots must be at least 14 years of age
and must hold a valid Basic RPA licence that is specific to small drones. Additional restrictions are imposed that include that
the RPA cannot operate: (i) within approximately 30 meters of people or open-air assemblies of people, (ii) above 400 feet, (iii)
within approximately 1.85 kilometers of heliports or (iv) within approximately 5.5 kilometers of airports. These regulations require
the RPA to always be operated within visual line-of-sight.
Small RPAS Advanced are defined as RPAS weighing
between 250 grams and 25 kilograms and operated in urban and/or populated areas. These RPAS will require identification, marking
and registration with Transport Canada as well as meeting specified design standards acceptable to Transport Canada. The
RPA will be assigned a unique identification/registration number issued by Transport Canada. Pilots must be at least 16 years
of age and must hold a valid Advanced RPAS licence that is specific to small drones. Approval for operation must be granted by
Air Traffic Control when operating in controlled airspace or near controlled aerodromes. A set of flight rules must be followed
at all times for these more complex operations. Restrictions, including distances from people, are determined based on the safety
certification of the RPA being operated. The RPA must always be operated within visual line-of-sight.
The current legislation utilizes a similar Special
Flight Operations Certificate ("SFOC") application process, as the previous regulations, to approve any operations
that do not fit within the regulatory regime set out above, such as operating beyond visual-line-of-sight. For those wishing to
operate outside of the regulatory framework set out in CARs, part IX, there will be a variety of SFOC application processes tailored
to the nature and use of the RPA. The more complex and risky the proposed operation, the more thorough and detailed the SFOC application
process.
Those operators requiring an SFOC must apply
to the Transport Canada Civil Aviation Regional Office at least 30 working days prior to the date of the proposed RPAS operation.
Transport Canada has wide discretion in reviewing and approving SFOC applications; however, to date the Company has never
been refused an SFOC for which it has applied. The purpose of the SFOC application review is to ensure that the proposed operation
is safe and associated risks have been adequately mitigated by the Company.
In April 2020, Transport Canada published a
Notice of Proposed Amendment ("NPA") as the first step in the publication of new regulations for beyond
visual line-of-sight operations. The NPA provided a synopsis of the high-level policies Transport Canada is proposing to
support beyond visual line-of-sight operations in lower risk environments such as remote and isolated areas. These new
regulations will also provide clear direction and guidance on the use of heavier aircraft (up to 650 kilograms),
operations at higher altitudes than currently permitted in CARs, Part IX, and will set the foundation for an operator
certification program. Once published, these regulations will permit routine beyond visual-line-of-sight operations without
the need for the Company to request specific permission for each operation, as is currently required with the current SFOC
process. The first draft of these regulations were expected to be published in Canada Gazette in Spring of
2021; however, as at the Effective Date the first draft has not been published.
Draganfly Inc. | Annual Information Form Page
15
The Company is currently fully compliant with
all current regulatory requirements and has applied for, and received Transport Canada approval for several SFOCs.
Components
The Company obtains hardware components, various
subsystems and systems, and raw materials from a limited group of suppliers. The Company does not have long-term agreements with any
of these suppliers that obligate such suppliers to continue to sell components, subsystems, systems or products to the Company. The Company's
reliance on these suppliers involves significant risks and uncertainties, including whether suppliers will provide an adequate supply
of required raw materials, components, subsystems, or systems of sufficient quality, will increase prices for the raw materials, components,
subsystems or systems, and will perform their obligations on a timely basis. See "Risk Factors".
Intangible Properties
Intangibles such as patents, software, specific
technology know-how, and applications expertise all have a significant effect on the Company's business. At present, drone delivery technology
cannot be purchased as an off-the-shelf solution; therefore, the Company has been focused on developing proprietary technology which
meets or exceeds anticipated Canadian government requirements. By virtue of being the first commercial UAV company in the industry,
the Company's subsidiary, Draganfly Innovations, holds valuable commercial patents.
As at the Effective Date, the Company has the
following patents and patents pending in the application stage in its portfolio and intends to continue to expand and grow its intellectual
property portfolio:
|
Title
|
Country
|
Application
No.
|
Issue
Date
|
Patent
No.
|
Status
|
|
Multi
Rotor UAV With Compact Folding
Rotor Arms
|
Canada
|
2,917,434
|
4/23/2019
|
2,917,434
|
Issued
|
|
Unmanned
Rotary Wing Aircraft With
Compact Folding Rotor Arms
|
Canada
|
2,876,630
|
N/A
|
N/A
|
Pending
|
|
Vehicle
with Aerial and Ground Mobility
|
Canada
|
2,787,279
|
10/22/2013
|
2,787,279
|
Issued
|
|
Vertical
Takeoff and Landing Unmanned
Aircraft System
|
Canada
|
2,935,793
|
N/A
|
N/A
|
Issued
|
|
Wheel
with Folding Segments
|
Canada
|
2,787,075
|
10/29/2013
|
2,787,075
|
Issued
|
|
Action
Camera System for Unmanned Aerial
Vehicle
|
United
States
|
15/707,752
|
1/22/2019
|
10,187,580
|
Issued
|
|
Action
Camera System for Unmanned Aerial
Vehicle
|
United
States
|
14/533,995
|
9/19/2017
|
9,769,387
|
Issued
|
|
Cascade
Recognition for Personal Tracking via Unmanned Aerial Vehicle (UAV)
|
United
States
|
14/642,370
|
7/18/2017
|
9,710,709
|
Issued
|
|
Cascade
Recognition for Personal Tracking via Unmanned Aerial Vehicle (UAV)
|
United
States
|
15/651,672
|
2/13/2018
|
9,892,322
|
Issued
|
Draganfly Inc. | Annual Information Form
Page 16
|
Cascade
Recognition for Personal Tracking via Unmanned Aerial Vehicle (UAV)
|
United
States
|
15/894,292
|
10/8/2019
|
10,438,062
|
Issued
|
|
Dual
Rotor Helicopter with Tilted Rotational Axes
|
United
States
|
12/458,608
|
11/8/2011
|
8,052,081
|
Issued
|
|
Helicopter
with Folding Rotor Arms
|
United
States
|
13/200,825
|
10/23/2012
|
8,292,215
|
Issued
|
|
Multi
Rotor UAV With Compact Folding Rotor Arms
|
United
States
|
14/994,080
|
7/31/2018
|
10,035,581
|
Issued
|
|
Pixel
Based Image Tracking System For Unmanned Aerial Vehicle (UAV) Action Camera System
|
United
States
|
15/256,193
|
10/10/2017
|
9,785,147
|
Issued
|
|
Pixel
Based Image Tracking System for Unmanned Aerlal Vehicle (UAV) Action Camera System
|
United
States
|
14/825,956
|
9/13/2016
|
9,442,485
|
Issued
|
|
Real
Time Noise Reduction System for Dynamic Motor Frequencies Aboard an Unmanned Aerial Vehicle (UAV)
|
United
States
|
14/642,496
|
11/8/2016
|
9,489,937
|
Issued
|
|
System
and Method for Adaptive Y Axis Power Usage and Non Linear Battery Usage for Unmanned Aerial Vehicle Equipped with Action Camera System
|
United
States
|
14/825,914
|
12/6/2016
|
9,511,878
|
Issued
|
|
Tandem
Wing Aircraft System with Shrouded Propeller
|
United
States
|
15/584,815
|
8/13/2019
|
10,377,488
|
Issued
|
|
Vehicle
with Aerial and Ground Mobility
|
United
States
|
14/641,468
|
3/21/2017
|
9,598,171
|
Issued
|
|
Vehicle
with Aerial and Ground Mobility
|
United
States
|
13/846,074
|
3/31/2015
|
8,991,740
|
Issued
|
|
Vertical
Take Off And Landing (VTOL) Aircraft Having Variable Center Of Gravity
|
United
States
|
15/706,158
|
10/20/2020
|
10,807,707
|
Issued
|
|
Vertical
Takeoff and Landing Unmanned Aircraft System
|
United
States
|
15/164,718
|
8/28/2018
|
10,059,442
|
Issued
|
|
Visually
Intelligent Camera Device with Peripheral Control Outputs
|
United
States
|
14/939,369
|
8/6/2019
|
10,375,359
|
Issued
|
|
Wheel
with Folding Segments
|
United
States
|
13/739,419
|
6/17/2014
|
8,753,155
|
Issued
|
As at the Effective Date, the Company also has
the following registered trademarks and pending applications:
|
Description
|
Name/Title
|
Official
No.
|
Governmental
Entity
|
|
Trademark
Application (Status: Filed)
|
DRAGANFLY
|
1,972,336
|
CIPO
|
|
Registered
Trademark
|
DRAGANFLYER
EXPLORE
|
TMA1,025,742
|
CIPO
|
Draganfly Inc. | Annual Information Form
Page 17
|
Registered
Trademark
|
DRAGANFLYER
APEX
|
TMA1,025,624
|
CIPO
|
|
Registered
Trademark
|
DRAGANFLYER
COMMANDER
|
TMA1,008,809
|
CIPO
|
|
Registered
Trademark
|
DRAGANFUEL
|
TMA997,118
|
CIPO
|
|
Registered
Trademark
|
DRAGANFLY
INNOVATIONS
|
TMA908,564
|
CIPO
|
|
Registered
Trademark
|
DRAGANFLYER
|
TMA906,939
|
CIPO
|
|
Registered
Trademark
|
DRAGANFLY
& DESIGN
|
TMA905,935
|
CIPO
|
|
Registered
Trademark
|
DRAGANFLY
|
TMA1,071,582
|
CIPO
|
|
Registered
Trademark
|
DRAGANFLY
|
TMA1,069,670
|
CIPO
|
|
Registered
Trademark
|
DRAGANFLYER
GUARDIAN
|
TMA904,883
|
CIPO
|
|
Registered
Trademark
|
DRAGANVIEW
|
TMA886,217
|
CIPO
|
|
Trademark
Application (Status: Application Accepted, Published for Opposition)
|
DRAGANFLYER
APEX
|
86750092
|
USPTO
|
|
Trademark
Application (Status: Application Accepted, Under Examination)
|
DRAGANFLY
|
86648412
|
USPTO
|
|
Registered
Trademark
|
DRAGANFLYER
COMMANDER
|
5760146
|
USPTO
|
|
Registered
Trademark
|
DRAGANFUEL
|
5563360
|
USPTO
|
|
Registered
Trademark
|
DRAGANFLY
INNOVATIONS
|
5130969
|
USPTO
|
|
Registered
Trademark
|
DRAGANFLYER
|
4920316
|
USPTO
|
|
Registered
Trademark
|
DRAGANFLY
& Design
|
5130970
|
USPTO
|
|
Registered
Trademark
|
DRAGANFLYER
GUARDIAN
|
4995725
|
USPTO
|
|
Registered
Trademark
|
DRAGANVIEW
|
4920317
|
USPTO
|
|
Trademark
Application (Status: Application Accepted, Under Examination)
|
DRAGANFLY
|
88488410
|
USPTO
|
Specialized Skill and Knowledge
There is a specialized skill required for the
development, operations, maintenance, sales and marketing of the Company's technology. The Company's current staff possesses the necessary
skills and knowledge required for the Company's business; however, additional employees may be added to staff as needed. All operational
staff hold the appropriate licences and certificate as mandated by Transport Canada.
Changes to Contracts
During the year ended December 31, 2019, the
Company derived 81% of its revenues from one custom engineering customer; however, as a result of the COVID pandemic, this customer reduced
a number of its projects and the Company ceased to receive orders after the first quarter of the year ended December 31, 2020.
The Company may receive orders from this customer in the future; however, there is no assurance that any future orders will be
received. No aspect of Draganfly's business is anticipated to be affected in the current financial year by renegotiation or termination
of any contract.
Draganfly Inc. | Annual Information Form
Page 18
Employees/Consultants
As at December 31, 2020 and as of the Effective
Date, the Company had 22 employees and three full-time and part-time consultants whose services were, and continue to be, used on a regular
basis for day-to-day operations.
Reorganizations
On August 15, 2019, the Company completed the
Going Public Transaction. See "General Development of the Business of the Company – Three Year History – Financial
year ended December 31, 2019".
RISK
FACTORS
The following specific factors could materially
adversely affect the Company and should be considered when deciding whether to make an investment in the Company. The risks and
uncertainties described in this AIF and the information incorporated by reference herein are those the Company currently believes
to be material, but they are not the only ones the Company will face. If any of the following risks, or any other risks and uncertainties
that the Company has not identified or that it currently considers not to be material, actually occur or become material risks,
the Company's business, prospects, financial condition, results of operations and cash flows, and consequently the price of the
Common Shares could be materially and adversely affected. In all these cases, the trading price of the Company's securities could
decline, and prospective investors could lose all or part of their investment.
Investors should carefully consider the risk
factors set out below and consider all other information contained herein and in the Company's other public filings before making
an investment decision.
Any reference to "the Company" or "Draganfly"
in the risk factors refers to the Company and its subsidiaries together on a consolidated basis.
Risks Related to the Company,
its Business and Industry
The Company
has a history of losses.
The Company has incurred net losses from the
inception of its business until the Effective Date. The Company cannot assure that it can become profitable or avoid net losses in the
future or that there will be any earnings or revenues in any future quarterly or other periods. The Company expects that its operating
expenses will increase as it grows its business, including expending substantial resources for research, development and marketing. As
a result, any decrease or delay in generating revenues could result in material operating losses.
A shareholder's holding in the Company
may be diluted if the Company issues additional Common Shares or other securities in the future.
The Company may issue additional
Common Shares or other securities in the future, which may dilute a shareholder's holding in the Company. The Company's
articles permit the issuance of an unlimited number of Common Shares, and shareholders have no pre-emptive rights in connection
with further issuances of any securities. The directors of the Company have the discretion to determine if an issuance
of Common Shares or other securities is warranted, the price at which any such securities are issued and the other terms
of issue of Common Shares or securities. In addition, the Company's may issue additional Common Shares upon the exercise of incentive
stock options to acquire Common Shares under its share compensation plan, which will result in further dilution to shareholders.
In addition, the issuance of Common Shares or other securities in any potential future acquisitions, if any, may also result
in further dilution to shareholder interests.
Draganfly Inc. | Annual Information Form
Page 19
The Company expects to incur substantial
research and development costs and devote significant resources to identifying and commercializing new products and services,
which could significantly reduce its profitability and may never result in revenue to the Company.
The Company's future growth depends on
penetrating new markets, adapting existing products to new applications, and introducing new products and services that achieve
market acceptance. The Company plans to incur substantial research and development costs as part of its efforts to design, develop
and commercialize new products and services and enhance its existing products. The Company believes that there are significant
opportunities in a number of business areas. Because the Company accounts for research and development costs as operating expenses,
these expenditures will adversely affect its earnings in the future. Further, the Company's research and development programs
may not produce successful results, and its new products and services may not achieve market acceptance, create any additional
revenue or become profitable, which could materially harm the Company's business, prospects, financial results and liquidity.
The Company's adoption of new business
models could fail to produce any financial returns.
Forecasting the Company's revenues and
profitability for new business models is inherently uncertain and volatile. The Company's actual revenues and profits for its
business models may be significantly less than the Company's forecasts. Additionally, the new business models could fail for one
or more of the Company's products and/or services, resulting in the loss of Company's investment in the development and infrastructure
needed to support the new business models, and the opportunity cost of diverting management and financial resources away from
more successful businesses.
The Company will be affected by operational
risks and may not be adequately insured for certain risks.
The Company will be affected by a number
of operational risks and the Company may not be adequately insured for certain risks, including: labour disputes; catastrophic
accidents; fires; blockades or other acts of social activism; changes in the regulatory environment; impact of non-compliance
with laws and regulations; natural phenomena, such as inclement weather conditions, floods, earthquakes and ground movements.
There is no assurance that the foregoing risks and hazards will not result in damage to, or destruction of, the Company's technologies,
personal injury or death, environmental damage, adverse impacts on the Company's operation, costs, monetary losses, potential
legal liability and adverse governmental action, any of which could have an adverse impact on the Company's future cash flows,
earnings and financial condition. Also, the Company may be subject to or affected by liability or sustain loss for certain risks
and hazards against which the Company cannot insure or which the Company may elect not to insure because of the cost. This lack
of insurance coverage could have an adverse impact on the Company's future cash flows, earnings, results of operations and financial
condition.
The
Company operates in evolving markets, which makes it difficult to evaluate the Company's business and future prospects.
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:
|
|
·
|
generate
sufficient revenue to reach and maintain profitability;
|
|
|
·
|
acquire
and maintain market share;
|
|
|
·
|
achieve
or manage growth in operations;
|
|
|
·
|
develop
and renew contracts;
|
|
|
·
|
attract
and retain additional engineers and other highly-qualified personnel;
|
|
|
·
|
successfully
develop and commercially market new products;
|
Draganfly Inc. | Annual Information Form
Page 20
|
|
·
|
adapt
to new or changing policies and spending priorities of governments and government agencies;
and
|
|
|
·
|
access
additional capital when required and on reasonable terms.
|
If the Company fails to address these and other
challenges, risks and uncertainties successfully, its business, results of operations and financial condition would be materially
harmed.
The Company operates
in a competitive market.
The Company faces competition and new competitors
will continue to emerge throughout the world. Services offered by the Company's competitors may take a larger share of consumer spending
than anticipated, which could cause revenue generated from the Company's products and services to fall below expectations. It is expected
that competition in these markets will intensify.
If competitors of the Company develop and market
more successful products or services, offer competitive products or services at lower price points, or if the Company does not produce
consistently high-quality and well-received products and services, revenues, margins, and profitability of the Company will decline.
The Company's ability to compete effectively
will depend on, among other things, the Company's pricing of services and equipment, quality of customer service, development of new
and enhanced products and services in response to customer demands and changing technology, reach and quality of sales and distribution
channels and capital resources. Competition could lead to a reduction in the rate at which the Company adds new customers, a decrease
in the size of the Company's market share and a decline in its customers. Examples include but are not limited to competition from other
companies in the UAV industry.
In addition, the Company could face increased
competition should there be an award of additional licenses in jurisdictions in which the Company operates in.
The markets in which the Company competes
are characterized by rapid technological change, which requires the Company to develop new products and product enhancements,
and could render the Company's existing products obsolete.
Continuing technological changes in the
market for the Company's products could make its products less competitive or obsolete, either generally or for particular applications.
The Company's future success will depend upon its ability to develop and introduce a variety of new capabilities and enhancements
to its existing product and service offerings, as well as introduce a variety of new product offerings, to address the changing
needs of the markets in which it offers products. Delays in introducing new products and enhancements, the failure to choose correctly
among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing
and potential customers to purchase the Company's competitors' products.
If the Company is unable to devote adequate resources
to develop new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements
on a timely basis, its products could lose market share, its revenue and profits could decline, and the Company could experience
operating losses.
Failure to obtain necessary regulatory
approvals from Transport Canada or other governmental agencies, or limitations put on the use of small UAV in response to public
privacy concerns, may prevent the Company from expanding sales of its small UAV to non-military customers in Canada.
Transport Canada is responsible for establishing,
managing, and developing safety and security standards and regulations for civil aviation in Canada, and includes unmanned civil
aviation (drones). Civil operations include law enforcement, scientific research, or use by private sector companies
for commercial purposes. The Canadian Aviation Regulations (CARs) govern civil aviation safety and security in Canada, and by
extension govern operation of drones in Canada to an acceptable level of safety.
Draganfly Inc. | Annual Information Form
Page 21
While Transport Canada has been a leader in the
development of regulations for the commercial use of RPAS, and continues to move forward rapidly with its regulatory development,
it has acknowledged the challenge of regulations keeping pace with the rapid development in technology and the growing
demand for commercial RPAS use, particularly in the beyond visual line-of-sight environment. In 2012, the Canadian Aviation Regulation
Advisory Council UAS working group released its Phase 2 report which outlined a proposed set of revision to the CARs to
permit Beyond Visual Line of Sight (BVLOS) operations. This report was the basis for the recently released NPA on lower risk beyond
visual line-of-sight.
Failure to obtain necessary regulatory approvals
from Transport Canada or other governmental agencies, including the granting of certain SFOCs, or limitations put on the use of
RPAS in response to public safety concerns, may prevent the Company from testing or operating its aircraft and/or expanding
its sales which could have an adverse impact on the Company's business, prospects, results of operations and financial condition.
There are risks associated
with the regulatory regime and permitting requirements of the Company's Business.
A significant portion of the Company's
business is based on the operation of RPAS. The operation of RPAS poses a risk or hazard to airspace users as well as personnel
on the ground. As the RPAS industry is rapidly developing, the regulatory environment for RPAS is constantly evolving to
keep pace. As such, whenever a policy change with respect to operating regulations occurs, there is a risk that the Company
could find itself to be in non-compliance with these new regulations. While the Company endeavours to take all necessary
action to reduce the risks associated with the operations of RPAS and to remain well-informed and up-to-date on any addendums
and changes to the applicable regulations, there is no assurance that an incident involving an RPAS or the Company's non-compliance
would not create a significant current or future liability for the company.
The regulation of RPAS operations within the
Canadian domestic airspace is still evolving and is expected to continue to change with the proliferation of RPAS, advancements
in technology, and standardization within the industry. Changes to the regulatory regime may be disruptive and result in
the Company needing to adopt significant changes in its operations and policies, which may be costly and time-consuming,
and may materially adversely affect the Company's ability to manufacture and make delivery of its products and services
in a timely fashion.
The Company's business and research and development
activities are subject to oversight by Transport Canada, the federal institution responsible for transportation policies
and programs, including the rules in the CARs. Currently, Transport Canada requires that any non-recreational operators of RPAS
have a SFOC. The Company's ability to develop, test, demonstrate, and sell products and services depends on its
ability to acquire and maintain a valid SFOC.
In addition, there exists public concern
regarding the privacy implications of Canadian commercial and law enforcement use of small UAV. This concern has included
calls to develop explicit written policies and procedures establishing UAV usage limitations. There is no assurance that
the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the
adoption of small UAV by prospective non-military customers.
The Company may be
subject to the risks associated with future acquisitions.
As part of the Company's overall business strategy,
the Company may pursue select strategic acquisitions that would provide additional product or service offerings, additional industry
expertise, and a stronger industry presence in both existing and new jurisdictions. Any such future acquisitions, if completed, may expose
the Company to additional potential risks, including risks associated with: (a) the integration of new operations, services and personnel;
(b) unforeseen or hidden liabilities; (c) the diversion of resources from the Company's existing business and technology; (d) potential
inability to generate sufficient revenue to offset new costs; (e) the expenses of acquisitions; or (f) the potential loss of or harm
to relationships with both employees and existing users resulting from its integration of new businesses. In addition, any proposed acquisitions
may be subject to regulatory approval.
Draganfly Inc. | Annual Information Form
Page 22
The Company's inability to retain
management and key employees could impair the future success of the Company.
The Company's future success depends substantially
on the continued services of its executive officers and its key development personnel. If one or more of its executive officers or key
development personnel were unable or unwilling to continue in their present positions, the Company might not be able to replace them
easily or at all. In addition, if any of its executive officers or key employees joins a competitor or forms a competing company, the
Company may lose experience, know-how, key professionals and staff members as well as business partners. These executive officers and
key employees could develop drone technologies that could compete with and take customers and market share away from the Company.
A significant growth
in the number of personnel would place a strain upon the Company's management and resources.
The Company may experience a period of significant
growth in the number of personnel that could place a strain upon its management systems and resources. The Company's future will depend
in part on the ability of its officers and other key employees to implement and improve financial and management controls, reporting
systems and procedures on a timely basis and to expand, train, motivate and manage its workforce. The Company's current and planned personnel,
systems, procedures and controls may be inadequate to support its future operations.
The Company faces
uncertainty and adverse changes in the economy.
Adverse changes in the economy could negatively
impact the Company's business. Future economic distress may result in a decrease in demand for the Company's products, which could
have a material adverse impact on the Company's operating results and financial condition. Uncertainty and adverse changes in
the economy could also increase costs associated with developing and publishing products, increase the cost and decrease the availability
of sources of financing, and increase the Company's exposure to material losses from bad debts, any of which could have
a material adverse impact on the financial condition and operating results of the Company.
COVID-19
At the beginning of the year 2020 the outbreak
of the novel strain of coronavirus, specifically identified as COVID-19, resulted in governments worldwide enacting emergency
measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine
periods and physical distancing, have caused material disruption to businesses globally resulting in an economic slowdown.
Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant
monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak
is unknown at this time, as is the efficacy of the government and central bank interventions.
Due to the worldwide COVID-19 outbreak, material
uncertainties may come into existence that could materially and adversely affect the business of the Company. The Company cannot
accurately predict the future impact COVID-19 may have on, among others, the: (i) global oil prices, (ii) demand for drone delivery
services, (iii) severity and the length of potential measures taken by governments to manage the spread of the virus and their
effect on labour availability and supply lines, (iv) availability of essential supplies, (v) purchasing power of the Canadian
dollar, or (vi) ability of the Company to obtain necessary financing. Despite global vaccination efforts, it is not possible to
reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company
in the future.
Draganfly Inc. | Annual Information Form
Page 23
The COVID-19 outbreak
or similar global health crises could affect the Company's ability to access sources of capital.
The extent to which COVID-19 could impact
the Company's operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain and cannot
be predicted. Negative financial results, uncertainties in the market, and a tightening of credit markets, caused by COVID-19,
or a recession, could have a material adverse effect on the Company's liquidity and ability to obtain financing in the future.
COVID-19 or similar
pandemics could adversely impact the Company's business and/or its ability to complete reporting obligations.
If a pandemic, epidemic, or outbreak of an infectious
disease including the recent outbreak off respiratory illness caused by a novel coronavirus such as COVID-19 or other public
health crisis were to affect the Company's facilities, staff, accountants or advisors, our business could be adversely
and materially affected. Such a pandemic could result in mandatory social distancing, travel bans, and quarantine
restrictions, and this may limit access to the Company's employees and professional advisors. These factors may hamper
the Company's efforts to comply with it filing obligations with the CSE or as required under Canadian Securities Laws.
The Company may be subject
to the risks associated with foreign operations in other countries.
The Company's primary revenues are expected to
be achieved in Canada and the US. However, the Company may expand to markets outside of North America and become subject to risks normally
associated with conducting business in other countries. As a result of such expansion, the Company may be subject to the legal, political,
social and regulatory requirements and economic conditions of foreign jurisdictions. The Company cannot predict government positions
on such matters as foreign investment, intellectual property rights or taxation. A change in government positions on these issues could
adversely affect the Company's business.
If the Company expands its business to foreign
markets, it will need to respond to rapid changes in market conditions, including differing legal, regulatory, economic, social and political
conditions in these countries. If the Company is not able to develop and implement policies and strategies that are effective in each
location in which it does business, then the Company's business, prospects, results of operations and financial condition could be materially
and adversely affected.
There are tax risks
the Company may be subject to in carrying on business in Canada.
The Company is considered to have been carrying
on business in Canada for purposes of the Income Tax Act (Canada). Since the Company is operating in a new and developing
industry there is a risk that foreign governments may look to increase their tax revenues or levy additional taxes to level the
playing field for perceived disadvantages to traditional brick and mortar businesses. There is no guarantee that governments
will not impose such additional adverse taxes in the future.
If critical components
or raw materials used to manufacture the Company's products become scarce or unavailable, then the Company may incur delays in
manufacturing and delivery of its products, which could damage its business.
The Company obtains hardware components,
various subsystems and systems from a limited group of suppliers. The Company does not have long-term agreements with any of these
suppliers that obligate it to continue to sell components, subsystems, systems or products to the Company. The Company's reliance
on these suppliers involves significant risks and uncertainties, including whether its suppliers will provide an adequate supply
of required components, subsystems, or systems of sufficient quality, will increase prices for the components, subsystems
or systems and will perform their obligations on a timely basis.
Draganfly Inc. | Annual Information Form
Page 24
In addition, certain raw materials and
components used in the manufacture of the Company's products are periodically subject to supply shortages, and its business is
subject to the risk of price increases and periodic delays in delivery. Similarly, the market for electronic components is subject
to cyclical reductions in supply. If the Company is unable to obtain components from third-party suppliers in the quantities and
of the quality that it requires, on a timely basis and at acceptable prices, then it may not be able to deliver its products on
a timely or cost-effective basis to its customers, which could cause customers to terminate their contracts with the Company,
increase the Company's costs and seriously harm its business, results of operations and financial condition. Moreover,
if any of the Company's suppliers become financially unstable, then it may have to find new suppliers. It may take several months
to locate alternative suppliers, if required, or to redesign the Company's products to accommodate components from different suppliers.
The Company may experience significant delays in manufacturing and shipping its products to customers and incur additional development,
manufacturing and other costs to establish alternative sources of supply if the Company loses any of these sources or is required
to redesign its products. The Company cannot predict if it will be able to obtain replacement components within the time frames
that it requires at an affordable cost, if at all.
Natural outdoor elements such as wind and
precipitation may have a material adverse effect on the use and effectiveness of the Company's products.
The Company's business will involve the operation
and flying of UAVs, a technology based product used outside. As such, the business is subject to various risks inherent in a technology-based
businesses operated in outdoor conditions, including faulty parts, break-downs and crashes. Although the Company anticipates
the use of its UAVs in good climactic conditions and that adequate flying conditions will be monitored by trained personnel, there
can be no assurance that unpredictable natural outdoor elements will not have a material adverse effect on the use and effectiveness
of its products.
The Company's products may be subject to
the recall or return.
Manufacturers and distributors of products are
sometimes subject to the recall or return of their products for a variety of reasons, including product defects, safety
concerns, packaging issues and inadequate or inaccurate labeling disclosure. If any of the Company's equipment were to
be recalled due to an alleged product defect, safety concern or for any other reason, the Company could be required to
incur unexpected expenses of the recall and any legal proceedings that might arise in connection with the recall.
The Company may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or
at all. In addition, a product recall may require significant management time and attention. Additionally, product recalls
may lead to increased scrutiny of the Company's operations by Transport Canada or other regulatory agencies, requiring
further management time and attention and potential legal fees, costs and other expenses.
If the Company releases defective
products or services, its operating results could suffer.
Products and services designed and released
by the Company involve extremely complex software programs, and are difficult to develop and distribute. While the Company
has quality controls in place to detect and prevent defects in its products and services before they are released, these
quality controls are subject to human error, overriding, and reasonable resource constraints. Therefore, these quality
controls and preventative measures may not be effective in detecting and preventing defects in the Company's products
and services before they have been released into the marketplace. In such an event, the Company could be required, or decide
voluntarily, to suspend the availability of the product or services, which could significantly harm its business and operating
results.
Draganfly Inc. | Annual Information Form
Page 25
The Company's products and services
are complex and could have unknown defects or errors, which may give rise to legal claims against the Company, diminish its brand
or divert its resources from other purposes.
The Company's UAVs rely on complex avionics,
sensors, user-friendly interfaces and tightly integrated, electromechanical designs to accomplish their missions. Despite testing,
the Company's products have contained defects and errors and may in the future contain defects, errors or performance problems
when first introduced, when new versions or enhancements are released, or even after these products have been used by the Company's
customers for a period of time. These problems could result in expensive and time-consuming design modifications or warranty
charges, delays in the introduction of new products or enhancements, significant increases in the Company's service and maintenance
costs, exposure to liability for damages, damaged customer relationships and harm to the Company's reputation, any of which could
materially harm the Company's results of operations and ability to achieve market acceptance. In addition, increased development
and warranty costs could be substantial and could significantly reduce the Company's operating margins.
The existence of any defects, errors,
or failures in the Company's products or the misuse of the Company's products could also lead to product liability claims or lawsuits
against it. A defect, error or failure in one of the Company's UAV could result in injury, death or property damage and significantly
damage the Company's reputation and support for its UAV in general. The Company anticipates this risk will grow as its UAV begins
to be used in Canadian domestic airspace and urban areas. The Company's UAV test systems also have the potential to cause
injury, death or property damage in the event that they are misused, malfunction or fail to operate properly due to unknown defects
or errors.
Although the Company maintains insurance
policies, it cannot provide any assurance that this insurance will be adequate to protect the Company from all material judgments
and expenses related to potential future claims or that these levels of insurance will be available in the future at economical
prices or at all. A successful product liability claim could result in substantial cost to us. Even if the Company is fully insured
as it relates to a particular claim, the claim could nevertheless diminish the Company's brand and divert management's attention
and resources, which could have a negative impact on the Company's business, financial condition and results of operations.
Shortfalls in available
external research and development funding could adversely affect the Company.
The Company depends on its research and
development activities to develop the core technologies used in its UAV products and for the development of the Company's future
products. A portion of the Company's research and development activities can depend on funding by commercial companies and the
Canadian government. Canadian government and commercial spending levels can be impacted by a number of variables, including general
economic conditions, specific companies' financial performance and competition for Canadian government funding with other
Canadian government-sponsored programs in the budget formulation and appropriation processes. Moreover, the Canadian, federal
and provincial governments provide energy rebates and incentives to commercial companies, which directly impact the amount of
research and development that companies appropriate for energy systems. To the extent that these energy rebates and incentives
are reduced or eliminated, company funding for research and development could be reduced. Any reductions in available research
and development funding could harm the Company's business, financial condition and operating results.
The Company could
be prohibited from shipping its products to certain countries if it is unable to obtain Canadian government authorization regarding
the export of its products, or if current or future export laws limit or otherwise restrict the Company's business.
The Company must comply with Canadian federal
and provincial laws regulating the export of its products. In some cases, explicit authorization from the Canadian government
is needed to export its products. The export regulations and the governing policies applicable to the Company's business are subject
to change. The Company cannot provide assurance that such export authorizations will be available for its products in the future.
Compliance with these laws has not significantly limited the Company's operations or sales in the recent past, but could
significantly limit them in the future. Non-compliance with applicable export regulations could potentially expose the Company
to fines, penalties and sanctions. If the Company cannot obtain required government approvals under applicable regulations, the
Company may not be able to sell its products in certain international jurisdictions, which could adversely affect the Company's
financial condition and results of operations.
Draganfly Inc. | Annual Information Form
Page 26
Negative consumer perception regarding
the Company's products could have a material adverse effect on the demand for the Company's products and the business,
results of operations, financial condition and cash flows of the Company.
The Company believes the UAV industry is highly
dependent upon consumer perception regarding the safety, efficacy, and quality of the UAV used. Consumer perception of these products
can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention, and
other publicity regarding the use of UAV. There can be no assurance that future scientific research, findings, regulatory proceedings,
litigation, media attention, or other research findings or publicity will be favourable to the UAV market. Future research reports,
findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favourable than, or
that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for the Company's
products and the business, results of operations, financial condition and cash flows of the Company. The dependence upon
consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention
or other publicity, whether or not accurate or with merit, could have a material adverse effect on the Company, the demand for
the Company's products, and the business, results of operations, financial condition and cash flows of the Company. Further, adverse
publicity reports or other media attention regarding the safety, the efficacy, and quality of UAV based surveys in general, or
the Company's products specifically, could have a material adverse effect.
If the Company fails to successfully
promote its product brand, this could have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
The Company believes that brand recognition is
an important factor to its success. If the Company fails to promote its brands successfully, or if the expenses of doing
so are disproportionate to any increased net sales it achieves, it would have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. This will depend largely on the Company's ability to
maintain trust, be a technology leader, and continue to provide high-quality and secure technologies, products
and services. Any negative publicity about the Company or its industry, the quality and reliability of the Company's technologies, products
and services, the Company's risk management processes, changes to the Company's technologies, products and services, its
ability to effectively manage and resolve customer complaints, its privacy and security practices, litigation, regulatory
activity, and the experience of sellers and buyers with the Company's products or services, could adversely affect the Company's reputation
and the confidence in and use of the Company's technologies, products and services. Harm to the Company's brand can arise
from many sources, including; failure by the Company or its partners to satisfy expectations of service and quality; inadequate
protection of sensitive information; compliance failures and claims; litigation and other claims; employee misconduct;
and misconduct by the Company's partners, service providers, or other counterparties. If the Company does not successfully
maintain a strong and trusted brand, its business could be materially and adversely affected.
The Company may be subject to electronic
communication security risks.
A significant potential vulnerability of electronic
communications is the security of transmission of confidential information over public networks. Anyone who is able to circumvent the
Company's security measures could misappropriate proprietary information or cause interruptions in its operations. The Company may be
required to expend capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches.
The Company's business
could be adversely affected if its consumer protection and data privacy practices are not perceived as adequate or there are breaches
of its security measures or unintended disclosures of its consumer data.
The rate of privacy law-making is accelerating
globally and interpretation and application of consumer protection and data privacy laws in Canada, the United States, Europe
and elsewhere are often uncertain, contradictory and in flux. As business practices are being challenged by regulators, private
litigants, and consumer protection agencies around the world, it is possible that these laws may be interpreted and applied in
a manner that is inconsistent with the Company's data and/or consumer protection practices. If so, this could result in increased
litigation government or court imposed fines, judgments or orders requiring that the Company change its practices, which could
have an adverse effect on its business and reputation. Complying with these various laws could cause the Company to incur substantial
costs or require it to change its business practices in a manner adverse to its business.
Draganfly Inc. | Annual Information Form
Page 27
The Company relies on its business
partners, and they may be given access to sensitive and proprietary information in order to provide services and support to the
Company's teams.
The Company relies on various business
partners, including third-party service providers, vendors, licensing partners, development partners, and licensees, among others,
in some areas of the Company's business. In some cases, these third parties are given access to sensitive and proprietary information
in order to provide services and support to the Company's teams. These third parties may misappropriate the Company's information
and engage in unauthorized use of it. The failure of these third parties to provide adequate services and technologies, or the
failure of the third parties to adequately maintain or update their services and technologies, could result in a disruption to
the Company's business operations. Further, disruptions in the financial markets and economic downturns may adversely affect
the Company's business partners and they may not be able to continue honoring their obligations to the Company. Alternative arrangements
and services may not be available to the Company on commercially reasonable terms or the Company may experience business interruptions
upon a transition to an alternative partner or vendor. If the Company loses one or more significant business partners, the Company's
business could be harmed.
If the Company fails
to protect, or incur significant costs in defending, its intellectual property and other proprietary rights, the Company's business,
financial condition, and results of operations could be materially harmed.
The Company's success depends, in large
part, on its ability to protect its intellectual property and other proprietary rights. The Company relies primarily on patents,
trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions,
to protect the Company's intellectual property and other proprietary rights. However, a portion of the Company's technology is
not patented, and the Company may be unable or may not seek to obtain patent protection for this technology. Moreover, existing
Canadian legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer
only limited protection, may not provide the Company with any competitive advantages, and may be challenged by third parties.
The laws of countries other than Canada may be even less protective of intellectual property rights. Accordingly, despite its
efforts, the Company may be unable to prevent third parties from infringing upon or misappropriating its intellectual property
or otherwise gaining access to the Company's technology. Unauthorized third parties may try to copy or reverse engineer the Company's
products or portions of its products or otherwise obtain and use the Company's intellectual property. Moreover, many of the Company's
employees have access to the Company's trade secrets and other intellectual property. If one or more of these employees leave
to work for one of the Company's competitors, then they may disseminate this proprietary information, which may as a result damage
the Company's competitive position. If the Company fails to protect its intellectual property and other proprietary rights, then
the Company's business, results of operations or financial condition could be materially harmed. From time to time, the Company
may have to initiate lawsuits to protect its intellectual property and other proprietary rights. Pursuing these claims is time
consuming and expensive and could adversely impact the Company's results of operations.
In addition, affirmatively defending the
Company's intellectual property rights and investigating whether the Company is pursuing a product or service development that
may violate the rights of others may entail significant expense. Any of the Company's intellectual property rights may be challenged
by others or invalidated through administrative processes or litigation. If the Company resorts to legal proceedings to enforce
its intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights
of others, then the proceedings could result in significant expense to the Company and divert the attention and efforts of the
Company's management and technical employees, even if the Company prevails.
Draganfly Inc. | Annual Information Form
Page 28
Obtaining and maintaining
the Company's patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements
imposed by governmental patent agencies, and its patent protection could be reduced or eliminated for non-compliance with these
requirements.
The CIPO and various foreign national
or international patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions
during the patent application process. Periodic maintenance fees on any issued patent are due to be paid to the CIPO and various
foreign national or international patent agencies in several stages over the lifetime of the patent. While an inadvertent lapse
can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations
in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete
loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of patent
rights include, but are not limited to, failure to timely file national and regional stage patent applications based on the Company's
international patent application, failure to respond to official actions within prescribed time limits, non-payment of fees, and
failure to properly legalize and submit formal documents. If the Company fails to maintain the patents and patent applications
covering its product candidates, its competitors might be able to enter the market, which would have a material adverse effect
on the Company's business.
While a patent may be granted by a national patent
office, there is no guarantee that the granted patent is valid. Options exist to challenge the validity of a patent which, depending
upon the jurisdiction, may include re-examination, opposition proceedings before the patent office, and/or invalidation proceedings
before the relevant court. Patent validity may also be the subject of a counterclaim to an allegation of patent infringement.
Pending patent applications may be challenged
by third parties in protest or similar proceedings. Third parties can typically submit prior art material to patentability for
review by the patent examiner. Regarding Patent Cooperation Treaty applications, a positive opinion regarding patentability issued
by the International Searching Authority does not guarantee allowance of a national application derived from the Patent Cooperation
Treaty application. The coverage claimed in a patent application can be significantly reduced before the patent is issued, and
the patent's scope can be modified after issuance. It is also possible that the scope of claims granted may vary from jurisdiction
to jurisdiction.
The grant of a patent does not have any bearing
on whether the invention described in the patent application would infringe the rights of earlier filed patents. It is possible
to both obtain patent protection for an invention and yet still infringe the rights of an earlier granted patent.
The Company may be
sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming and limit the
Company's ability to use certain technologies in the future.
The Company may become subject to claims
that its technologies infringe upon the intellectual property or other proprietary rights of third parties. Any claims, with or
without merit, could be time-consuming and expensive, and could divert the Company's management's attention away from the execution
of its business plan. Moreover, any settlement or adverse judgment resulting from these claims could require the Company to pay
substantial amounts or obtain a license to continue to use the disputed technology, or otherwise restrict or prohibit the Company's
use of the technology. The Company cannot assure that it would be able to obtain a license from the third party asserting the
claim on commercially reasonable terms, if at all, that the Company would be able to develop alternative technology on a timely
basis, if at all, or that the Company would be able to obtain a license to use a suitable alternative technology to permit the
Company to continue offering, and the Company's customers to continue using, the Company's affected product. An adverse determination
also could prevent the Company from offering its products to others. Infringement claims asserted against the Company may have
a material adverse effect on its business, results of operations or financial condition.
Draganfly Inc. | Annual Information Form Page
29
The Company
may not be able to protect its intellectual property rights throughout the world.
Filing, prosecuting, and defending patents
on all of the Company's product candidates throughout the world would be prohibitively expensive. Therefore, the Company has filed
applications and/or obtained patents only in key markets including the United States and Canada. Competitors may use the Company's
technologies in jurisdictions where it has not obtained patent protection to develop their own products and their products may
compete with products of the Company.
The Company's senior management team has
limited experience managing a public company, and regulatory compliance may divert its attention from the day to day management
of its business.
The individuals who now constitute the
Company's senior management team have relatively limited experience managing a publicly traded company and limited experience
complying with the increasingly complex laws pertaining to public companies compared to senior management of other publicly traded
companies. The Company's senior management team may not successfully or efficiently manage its transition as a recently listed
public company subject to significant regulatory oversight and reporting obligations under Canadian Securities Laws. In particular,
these new obligations will require substantial attention from the Company's senior management and could divert their attention
away from the day to day management of its business.
The Company may experience adverse effects
on its reported results of operations as a result of adopting new accounting standards or interpretations.
The Company's implementation of
and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely affect its
reported financial position or operating results or cause unanticipated fluctuations in our reported operating results in future
periods.
Failure
to adhere to the Company's financial reporting obligations and other public company requirements could adversely affect the market
price of the Common Shares.
Upon receiving a final receipt for the
non-offering final prospectus dated October 23, 2019, the Company became subject to reporting and other obligations under
applicable Canadian Securities Laws, including National Instrument 52-109 – Certification of Disclosure in Issuers' Annual
and Interim Filings, and the rules of any stock exchange on which the Common Shares are listed. These reporting and
other obligations will place significant demands on the Company's management, administrative, operational and accounting
resources. If the Company is unable to meet such demands in a timely and effective manner, its ability to comply with its
financial reporting obligations and other rules applicable to reporting issuers could be impaired. Moreover, any failure
to maintain effective internal controls could cause the Company to fail to satisfy its reporting obligations or result
in material misstatements in its financial statements. If the Company cannot provide reliable financial reports or prevent
fraud, its reputation and operating results could be materially adversely affected which could also cause investors to
lose confidence in its reported financial information, which could result in a reduction in the trading price of the Common
Shares.
In addition, the Company does not expect that
its disclosure controls and procedures and internal controls over financial reporting will prevent all errors or fraud.
A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that
the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all control issues within an organization
are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of certain
persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations
in a control system, misstatements due to errors or fraud may occur and may not be detected in a timely manner or at
all.
Draganfly Inc. | Annual Information Form Page
30
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters
could significantly affect the Company's reported financial results or financial condition.
Generally accepted accounting principles
and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that
are relevant to the Company's business, including but not limited to revenue recognition, impairment of goodwill and intangible
assets, inventory, income taxes and litigation, are highly complex and involve many subjective assumptions, estimates and judgments.
Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly
change the Company's reported financial performance or financial condition in accordance with generally accepted accounting principles.
If the Company is
required to write down goodwill and other intangible assets, the Company's financial condition and results could be negatively
affected.
Goodwill impairment arises when there
is deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of the goodwill dips below
its book value. The Company is required to review its goodwill for impairment at least annually. Events that may trigger goodwill
impairment include deterioration in economic conditions, increased competition, loss of key personnel, and regulatory action.
Should any of these occur, an impairment of goodwill relating to the acquisition of Dronelogics could have a negative effect on
the assets of the Company.
From time to time,
the Company may become involved in legal proceedings, which could adversely affect the Company.
The Company may, from time to time in
the future, become subject to legal proceedings, claims, litigation and government investigations or inquiries, which could be
expensive, lengthy, and disruptive to normal business operations. In addition, the outcome of any legal proceedings, claims, litigation,
investigations or inquiries may be difficult to predict and could have a material adverse effect on the Company's business, operating
results, or financial condition.
The Company's directors
and officers may have conflicts of interest in conducting their duties.
Because directors and officers of the Company
are or may become directors or officers of other reporting companies or have significant shareholdings in other technology companies,
the directors and officers of the Company may have conflicts of interest in conducting their duties. The Company and its directors
and officers will attempt to minimize such conflicts. In the event that such a conflict of interest arises at a meeting of the
directors of the Company, a director who has such a conflict will abstain from voting for or against a particular matter in which
the director has the conflict. In appropriate cases, the Company will establish a special committee of independent directors to
review a particular matter in which several directors, or officers, may have a conflict. In determining whether or not the Company
will participate in a particular program and the interest therein to be acquired by it, the directors will primarily consider
the potential benefits to the Company, the degree of risk to which the Company may be exposed and its financial position at that
time. Other than as indicated, the Company has no other procedures or mechanisms to deal with conflicts of interest.
Executive officers and directors may have rights
to indemnification from the Company, including pursuant to directors' and officers' liability insurance policies, that will survive
termination of their agreements.
Forward-Looking Statements
and Information May Prove Inaccurate
Shareholders and prospective investors are cautioned
not to place undue reliance on the Company's forward-looking statements. By their nature, forward-looking statements involve numerous
assumptions, known and unknown risk and uncertainties, of both a general and specific nature, that could cause actual results to differ
materially from those suggested by the forward-looking statements or contribute to the possibility that predictions, forecasts or projections
will prove to be materially inaccurate. Additional information on the risks, assumptions and uncertainties related to forward-looking
statements and information are found under the heading "Cautionary Statement Regarding Forward-Looking Information and Statements"
in this AIF.
Draganfly Inc. | Annual Information Form Page
31
Risks Related to the Securities of the Company
There is no assurance that resale of the
Company's Common Shares will result in a positive return for existing investors.
The Common Shares are currently publicly
traded on the CSE, the OTCQB and the Frankfurt Stock Exchange. There can be no assurance that the publicly-traded market
price of the Common Shares will be high enough to create a positive return for any investors. Further, there can be no
assurance that the Common Shares will be sufficiently liquid so as to permit investors to sell any of their position in the Company
without adversely affecting the stock price. In such event, the probability of any resale of the Common Shares would be
significantly diminished. As well, the continued operation of the Company will be dependent upon its ability to procure
additional financing in the short term and to generate operating revenues in the longer term. There can be no assurance
that any such financing can be obtained or that any revenues can be generated. If the Company is unable to obtain such
additional financing or generate sufficient revenues, investors may be unable to sell their Common Shares and any investment
in the Company may be lost.
The market for securities has experienced
a high level of price and volume volatility and market prices are subject to wide fluctuations.
In recent years, the securities markets
in the United States and Canada have experienced a high level of price and volume volatility, and the market prices of
securities of many companies have experienced wide fluctuations in price which have not necessarily been related to the
operating performance, underlying asset values or prospects of such companies. There can be no assurance that continuing
fluctuations in price will not occur. It may be anticipated that any quoted market for the Common Shares will be
subject to market trends generally, notwithstanding any potential success of the Company in creating revenues, cash flows
or earnings. The value of the Common Shares will be affected by such volatility. An active public market for the
Common Shares may never develop or otherwise be sustained. If an active public market for the Common Shares does not develop or,
if one develops but it is not sustained, the liquidity of a shareholder's investment in the Common Shares may be very limited
and the share price may decline.
The Company has not paid any dividends
to date.
To date, the Company has not paid any
dividends on its outstanding shares. Any decision to pay dividends on the shares of the Company will be made by the Board
on the basis of its earnings, financial requirements and other conditions.
Global financial conditions have been volatile
and in some cases the access to capital markets has been restricted.
Current global financial conditions have been
subject to increased volatility and in some cases the access to financial markets has been restricted. These factors may impact
the ability of the Company to obtain equity or debt financing in the future and, if obtained, on terms favourable to the Company.
If these levels of volatility and market instability continue, the Company's operations could be adversely impacted and
the value and the price of the Common Shares could continue to be adversely affected.
Draganfly Inc. | Annual Information Form Page
32
DESCRIPTION
OF CAPITAL STRUCTURE
Common Shares
The Company's authorized share structure consists
of: (i) an unlimited number of Common Shares; and (ii) an unlimited number of Preferred Shares, issuable in series.
As of the date hereof, 135,166,934 Common Shares
are issued and outstanding (86,093,361 as at December 31, 2020). Each Common Share entitles the holder to receive notice of and
attend all meetings of the shareholders. Each Common Share carries the right to one vote. The holders of Common Shares are entitled
to receive any dividends declared by the Company in respect of the Common Shares at such time and in such amount as may be determined
by the Board, in its discretion. In the event of the liquidation, dissolution, or winding up of the Company, whether voluntary
or involuntary, holders of Common Shares are also entitled to participate, rateably, in the distribution of the assets of the
Company, subject to the rights of the holders of any other class of shares ranking in priority to the Common Shares.
As of the date hereof, nil Preferred Shares are
issued and outstanding (nil as at December 31, 2020). The Preferred Shares may be issuable in series and the directors may, from
time to time before the issue of any Preferred Shares of any particular series, define and attach special rights, privileges,
restrictions, and conditions to the Preferred Shares of any series, including voting rights, entitlement to dividends, and redemption,
conversion, and exchange rights. In the event of the liquidation, dissolution, or winding up of the Company, whether voluntary
or involuntary, holders of Preferred Shares will rank on a parity with holders of the Preferred Shares of every other series and
be entitled to preference over the Common Shares and over any other shares of the Company ranking junior to the Preferred Shares.
Market
for Securities
Trading Price and Volume
of Common Shares
The Common Shares are listed and posted for trading
on the CSE under the symbol "DFLY". The following table sets forth the price range (high and low prices) in Canadian dollars
of the Common Shares and volume traded on the CSE, for the periods indicated.
|
2020
|
|
|
|
|
January
|
0.75
|
0.52
|
1,124,846
|
|
February
|
1.15
|
0.73
|
3,053,583
|
|
March
|
0.94
|
0.51
|
2,211,638
|
|
April
|
1.00
|
0.65
|
4,788,090
|
|
May
|
0.84
|
0.61
|
3,507,431
|
|
June
|
0.78
|
0.57
|
3,256,891
|
|
July
|
0.69
|
0.58
|
1,877,623
|
|
August
|
0.62
|
0.44
|
1,644,167
|
|
September
|
1.00
|
0.53
|
3,241,425
|
|
October
|
0.65
|
0.52
|
1,787,844
|
|
November
|
0.59
|
0.46
|
2,430,663
|
|
December
|
0.90
|
0.40
|
13,739,095
|
|
2021
|
|
|
|
|
January
|
4.05
|
0.77
|
57,004,303
|
|
February
|
4.25
|
2.13
|
19,737,329
|
|
March
|
2.99
|
1.80
|
7,126,997
|
|
April
|
2.48
|
1.37
|
4,962,527
|
|
May
|
2.11
|
1.46
|
4,383,044
|
|
June
1 - 28
|
2.08
|
1.59
|
3,436,383
|
Draganfly Inc. | Annual Information Form Page
33
Prior Sales
The following table summarizes the issuances
of unlisted securities for the year ended December 31, 2020:
|
Date
of Issuance
|
Securities
|
Number
of Common
Shares Issued/Issuable
or Aggregate Amount
|
Exercise
Price per
Security
($)
|
|
April
30, 2020
|
Stock
Options(1)
|
445,000
|
0.50
|
|
April
30, 2020
|
Stock
Options(1)
|
600,000
|
0.77
|
|
July
3, 2020
|
Stock
Options(1)
|
1,000,000
|
0.64
|
|
November
24, 2020
|
Stock
Options(1)
|
165,000
|
0.50
|
|
November
24, 2020
|
Restricted
Share Units(1)
|
865,000
|
N/A
|
|
November
30, 2020
|
Warrants(2)
|
2,556,496
|
US$0.71
|
|
December
11, 2020
|
Stock
Options(1)
|
250,000
|
0.43
|
Notes:
|
(1)
|
Issued pursuant to the share compensation plan of the Company.
|
|
(2)
|
Issued pursuant to the Regulation A+ Offering.
|
ESCROWED
SECURITIES
The following table summarizes the Company's
securities that remain in escrow or subject to restrictions on transfer as of the Effective Date:
|
Designation
of Class
|
Number
of securities held in
escrow or that are subject to
contractual restriction on
transfer
|
Percentage
of Class(3)
|
|
Common
Shares
|
3,018,904(1)
|
2.2%
|
|
Common
Shares
|
21,609,560(2)
|
16.4%
|
Notes:
|
(1)
|
In connection with the listing of the Common Shares for trading on
the CSE, an aggregate of 6,708,671 Common Shares were deposited in escrow with TSX Trust Company (Endeavor Trust Corporation
subsequently replaced TSX Trust Company as escrow agent). 10% of such Common Shares were released from escrow on the date the Common
Shares were listed on the CSE, and 15% will be release from escrow every six months thereafter, subject to acceleration provisions
provided for in National Policy 46-201 – Escrow for Initial Public Offerings.
|
|
(2)
|
Pursuant to the
terms of the Combination Agreement, certain shareholders of Former Draganfly and the Company
agreed to voluntary trading restrictions on their Common Shares for a period of three years
with 5% of such Common Shares released on the date of listing of the Common Shares on the
CSE and then 15% released every six months thereafter until month 36 when the remaining 20%
will be released.
|
|
(3)
|
Percentages
based on 135,166,934 Common Shares issued and outstanding as of the Effective
Date.
|
DIVIDENDS
The Company has not declared or paid a dividend.
Other than the requirements of the BCBCA, there are no restrictions on the Company that would prevent it from paying a dividend.
However, as of the Effective Date, the Board of Directors intends to retain any future earnings (when available) for reinvestment in
the Company's business, and therefore, it has no current intention to declare or pay dividends on the Common Shares in
the foreseeable future. Any future determination to pay dividends on the Common Shares will be at the sole discretion of the Board
of Directors after considering a variety of factors and conditions existing from time to time including its earnings, financial
condition and other relevant factors.
Draganfly Inc. | Annual Information Form Page
34
DIRECTORS
AND OFFICERS
As at the date hereof, the Board is comprised
of seven individuals. The following table sets forth the names and municipalities of residence of the current directors and executive
officers of the Company, their respective positions and offices with the Company and the date first appointed or elected as a director
and/or officer and their principal occupation(s) within the past five years.
Name, Occupation and Security
Holding
Name
and Municipality
of Residence
|
Position
Held
and Date Appointed
|
Principal
Occupation within the past five years
|
Cameron
Chell
Bowen Island, British Columbia, Canada
|
Chief
Executive Officer, Chairman and a Director
(August 14, 2019)
|
Chairman
and Chief Executive Officer of the Company since August 2019; co-founder
of Business Instincts Group Inc., a Calgary-based Venture Creation
Firm, since 2009; co-founder of Cold Bore Technologies Inc. from February
2013 to present; Chairman and founder of TraxOne Inc. from September
2016 to present; a director and an advisor to KodakCoin from May 2017
to present; Chairman and co-founder of CurrencyWorks Inc. from November
2017 to present; director and co-founder of Slyce Inc. from January 2012 to
January 2017.
|
Scott
Larson(1)(2)
Burnaby, British Columbia, Canada
|
President
(July 3, 2020) and a Director
(August 14, 2019)
|
President
of the Company since July 2020; former Chief Executive Officer of Kater Technologies,
a Vancouver-based mobility as a service (MaaS) company building out an integrated
intermodal transportation platform incorporating public transportation, buses,
taxis and ride hailing vehicles into a single service, from January 2019 to
March 2020; former Chief Executive Officer of Helios Wire, a satellite
company building out a space-enabled IoT/M2M network, from 2016 to 2019; and
former Chief Executive Officer and founder of UrtheCast Corp. from 2010 to
2015.
|
Olen
Aasen(1)(2)
Vancouver, British Columbia, Canada
|
Director
(August 14, 2019)
|
General
Counsel at King & Bay West Management Corp. since February 2011.
|
Andrew
Hill Card Jr.
Jaffrey, New Hampshire, United States
|
Director
(November 7, 2019)
|
Interim
Chief Executive Officer of the George & Barbara Bush Foundation since June
2020; Chairman of the National Endowment for Democracy (NED),
a non-profit organization dedicated to the growth and strengthening of
democratic institutions around the world, since January 2018; and President
of Franklin Pierce University in New Hampshire from January 2015
through July 2016.
|
Justin
Hannewyk
Vancouver, British Columbia, Canada
|
Director
(April 30, 2020)
|
President
of Dronelogics, a wholly-owned subsidiary of the Company, since 2009; President of Candrone from January
2009 to present; and an independent consultant to enterprise clients with respect to the integration of drones
for over 10 years.
|
John
M. Mitnick
McLean, Virginia, United States
|
Director
(June 18, 2020)
|
Member
of Board of Directors of Valaurum, Inc., March 2016 to February 2018 and since October 2019; General
Counsel of the U.S. Department of Homeland Security from February 2018 to September 2019; and Senior Vice
President, General Counsel, and Secretary of The Heritage Foundation from March 2014 to February 2018.
|
Draganfly Inc. | Annual Information Form Page
35
Name
and Municipality
of Residence
|
Position
Held
and Date Appointed
|
Principal
Occupation within the past five years
|
Denis Silva(1)(2)
Vancouver, British Columbia, Canada
|
Director
(August 14, 2019)
|
Corporate
and securities partner with the law firm DLA Piper (Canada) LLP since July 2020; and partner at
the law firm Gowling WLG (Canada) LLP from 2015 to 2020.
|
Paul
Sun
Oakville, Ontario, Canada
|
Chief
Financial Officer and Corporate Secretary
(August 14, 2019)
|
Chief
Financial Officer of the Company since August 2019; Chief Financial Officer of Former Draganfly
since July 2015; and Managing Director, Institutional Equity Sales at Beacon Securities
Limited from January 2013 to December 2014.
|
John
Bagocius
Jupiter, Florida, United States
|
Senior Vice President, Sales
(July 14, 2020)
|
Senior
Vice President, Sales of the Company since July 2020; VP of Sales for the Public Safety & Commercial UAS groups for FLIR
Systems from January 2019 to March 2020; VP of Sales, North America Public Safety & Commercial UAS Solutions for Aeryon Labs
Inc. from June 2017 until December 2018; and various leadership positions in Sales, Product Management, and Business Development
for Crossmatch Technologies from June 2000 to June 2017.
|
Notes:
|
|
(1)
|
Member
of the Audit Committee.
|
|
|
(2)
|
Member
of the Nominating and Corporate Governance Committee.
|
As at the Effective Date, the directors and senior
officers of Draganfly, as a group, beneficially own or control, directly or indirectly, 7,725,810 Common Shares or 5.7% of the issued
and outstanding Common Shares.
The directors listed above will hold office until
the next annual meeting of the Company or until their successors are elected or appointed.
Corporate Cease Trade
Orders, Bankruptcies, Penalties or Sanctions
To the knowledge of management, no director or
executive officer as at the date hereof, is or was within 10 years before the date hereof, a director, chief executive officer or chief
financial officer of any company (including Draganfly), that (a) was subject to an order that was issued while the director or executive
officer was acting in the capacity as director, chief executive officer or chief financial officer, or (b) was subject to an order that
was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which
resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial
officer. For the purposes hereof, "order" means (a) a cease trade order, (b) an order similar to a cease trade order, or (c)
an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more
than 30 consecutive days.
To the knowledge of management, other than as
disclosed herein, no director or executive officer of Draganfly, or a shareholder holding a sufficient number of securities of Draganfly
to affect materially the control of the company (a) is, as at the date hereof, or has been within the 10 years before the date hereof,
a director or executive officer of any company (including Draganfly) that, while that person was acting in that capacity, or within a
year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or
insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager
or trustee appointed to hold its assets, or (b) has, within the 10 years before the date hereof, become bankrupt, made a proposal under
any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with
creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder.
Draganfly Inc. | Annual Information Form Page
36
By Order of the Supreme Court of Newfoundland
and Labrador dated June 17, 2020, Deloitte Restructuring Inc. was appointed as the receiver and manager of all current and future
assets, undertakings, and properties of the Kami Mine Limited Partnership, Kami General Partner Limited, and Alderon Iron Ore
Corp. The receivership was initiated by a secured creditor of the Kami Mine Limited Partnership after its failure to refinance
the secured debt due to the COVID-19 pandemic. Mr. Aasen was Corporate Secretary of Alderon Iron Ore Corp. and Secretary and Director
of Kami General Partner Limited until April 28, 2020.
Penalties or Sanctions
Other than as disclosed herein, no director,
executive officer or shareholder holding a sufficient number of securities of Draganfly to materially affect the control of the Company
has been subject to: (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory
authority or has entered into a settlement agreement with a securities regulatory authority; or (ii) any other penalties or sanctions
imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.
Pursuant to a settlement agreement (the "Settlement
Agreement") dated November 6, 1998 that Cameron Chell, Chief Executive Officer, Chairman and a director of the Company, signed
with the Alberta Stock Exchange (the "ASE"), Mr. Chell agreed to the following sanctions:
|
|
·
|
prohibition
against ASE Approval (as defined in the General By-law of the ASE) in any capacity for a
period of five years commencing November 6, 1998;
|
|
|
·
|
a
fine in the sum of $25,000;
|
|
|
·
|
strict
supervision for a period of two years following re-registration in any capacity; and
|
|
|
·
|
close
supervision for a period of one year following the period of strict supervision described
above.
|
The matters respecting the Settlement Agreement
are as set forth in an ASE Notice to Members dated November 12, 1998, which provides that:
|
|
·
|
representations
were made by the promoter of a company to one of Mr. Chell's clients that he would only be
permitted to purchase securities in the initial public offering of that company if he would
agree to purchase additional securities in the secondary market following the listing on
the ASE and, in or around March or April, 1996, Mr. Chell disclosed confidential information
to the promoter of that company concerning a client's account with respect to a cheque returned
NSF to Mr. Chell's employer;
|
|
|
·
|
the
investment objectives for two of Mr. Chell's clients were amended without prior knowledge
or consent of such clients and purchases and sales of securities were subsequently executed
in the accounts of such clients which were unsuitable for the clients given the stated investment
objectives for the accounts prior to the amendment of such investment objectives;
|
|
|
·
|
Mr.
Chell executed a total of 21 transactions in the accounts of two of Mr. Chell's clients without
prior knowledge or authorization of such clients;
|
|
|
·
|
the
signature on the new client account form for one of Mr. Chell's clients, which purported
to be that of the client was not in fact the signature of the client nor did such client
have any knowledge of any changes made to the investment objectives for his account(s);
|
|
|
•
|
on or about June 10, 1996, the address for the account
of one of Mr. Chell's clients was changed to Mr. Chell's local post office box address without such client's knowledge and while
the client was resident in Ontario. As a result, during the period of June 10 to and including September, 1996, the client did not
receive any trade confirmations or accounts statements with respect to her accounts with Mr. Chell;
|
Draganfly Inc. | Annual Information Form
Page 37
|
|
·
|
on
or about March 19, 1996, Mr. Chell permitted one of his clients to acquire approximately
4% of the total initial public offering by a company, contrary to the rules of the ASE;
|
|
|
·
|
on
or about October 19, 1996, Mr. Chell purchased securities of a company in the account of
one of his clients without disclosing the involvement of his brother as president of that
company;
|
|
|
·
|
on
or about June 23, 1996, the private placement questionnaire and undertaking completed in
connection with the purchase by one of Mr. Chell's clients and filed with the ASE disclosed
that Mr. Chell's client was a resident of Alberta when in fact such client was a resident
of Ontario. Mr. Chell knew or ought to have known that it contained a misstatement of fact
in that regard;
|
|
|
·
|
during
the period of the summer, 1996 to and including May 1997, Mr. Chell's day to day involvement
as the president and chairman of Coffee.Com Interactive Café Corp. ("Coffee.Com")
as well as being a shareholder was not disclosed to Mr. Chell's employer;
|
|
|
·
|
further,
Mr. Chell purchased securities offerings via private placement by Coffee.Com for certain
of his clients without fully disclosing his involvement with that company to such clients;
|
|
|
·
|
on
or about March 18 and June 19, 1996, Mr. Chell executed purchase of securities for Ontario
residents. At the time of such purchases, Mr. Chell knew or ought to have known that he was
not registered in the province of Ontario;
|
|
|
·
|
during
the summer of 1996, Mr. Chell represented to the ASE that certain purchasers of securities
offered via private placement were close friends and business associates when he knew or
ought to have known that such representations were untrue; and
|
|
|
·
|
during
the period of June 19, 1996 and to and including May 1, 1997, Mr. Chell failed to obtain
the prior approval of his employer for advertisements and sales literature distributed by
Mr. Chell regarding Coffee.Com.
|
Conflicts of Interest
There are potential conflicts of interest to
which the directors and officers of Draganfly will be subject to in connection with the operations of Draganfly. In particular, certain
of the directors and officers of Draganfly are involved in managerial or director positions with other companies whose operations may,
from time to time, be in direct competition with those of Draganfly or with entities which may, from time to time, provide financing
to, or make equity investments in, competitors of Draganfly.
In accordance with the applicable corporate and
securities legislation, directors who have a material interest or any person who is a party to a material contract or a proposed material
contract with Draganfly are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any
resolution to approve the contract. In addition, the directors are required to act honestly and in good faith with a view to the best
interests of Draganfly. Certain of the directors and each of the executive officers of Draganfly have either other employment or other
business or time restrictions placed on them and accordingly, these directors of Draganfly will only be able to devote part of their
time to the affairs of Draganfly. To the extent that conflicts of interest arise, such conflicts will be resolved in accordance with
the provisions of the applicable corporate law.
Draganfly Inc. | Annual Information Form Page
38
AUDIT
COMMITTEE
Audit Committee Charter
The full text of the Company's Audit Committee
Charter is included as Schedule A to the AIF.
Audit Committee Composition
The following are the members of the Audit Committee as at the date
hereof:
|
Scott
Laron (Chair)
|
Not
Independent(1)
|
Financially
Literate(1)
|
|
Olen
Aasen
|
Independent(1)
|
Financially
Literate(1)
|
|
Denis
Silva
|
Not
Independent(1)
|
Financially
Literate(1)
|
Note:
(1) As
defined by NI 52-110.
Relevant Education and
Experience
Scott Larson
Mr. Larson brings over 20 years of combined corporate
finance, technology development and entrepreneurial experience to the Board. Formerly CEO of Kater, a Vancouver-based mobility
as a service (MaaS) company building out an integrated intermodal transportation platform incorporating public transportation,
buses, taxis and ride haling vehicles into a single service. Previously, Mr. Larson has been CEO and co-founder of Helios Wire,
a satellite company building out a space-enabled IoT/M2M network, and was CEO/Co-Founder of UrtheCast. Mr. Larson helped scale
the company from its inception, taking it public on the Toronto Stock Exchange, raising $200 million, and leading the company
to 250 employees over five years with seven offices around the world.
Olen Aasen
Mr. Aasen is a corporate and securities lawyer
with more than 15 years of experience in corporate, securities and regulatory matters. He has been the Corporate Secretary, General
Counsel or Vice President, Legal at various Canadian and U.S. listed companies. Mr. Aasen obtained a J.D. from the University
of British Columbia in 2006 and was called to the British Columbia Bar in 2007. Mr. Aasen was also appointed to the 2016
Legal 500 GC Powerlist for Canada.
Denis Silva
Mr.
Silva is a corporate and securities partner with 12 years of experience in corporate, securities, mining and regulatory legal experience
and has acted for a wide variety of companies listed on Canadian and US exchanges, with a focus on technology and mining. Mr. Silva holds
a BA from the University of British Columbia, MPA from Queen's University and LLB from University of Windsor.
Each member of the Audit Committee has:
|
|
·
|
an
understanding of the accounting principles used by the Company to prepare its financial statements,
and the ability to assess the general application of those principles in connection with
estimates, accruals and reserves;
|
|
|
·
|
experience
with analyzing or evaluating financial statements that present a breadth and level of complexity
of accounting issues that are generally comparable to the breadth and complexity of issues
that can reasonably be expected to be raised by the Company's financial statements, or experience
actively supervising individuals engaged in such activities; and
|
|
|
·
|
an
understanding of internal controls and procedures for financial reporting.
|
Draganfly
Inc. | Annual Information Form Page 39
Audit Committee Oversight
At no time since the commencement of the Company's
financial year ended December 31, 2020, was a recommendation of the Committee to nominate or compensate an external auditor not adopted
by the Board of Directors.
Reliance on Certain Exemptions
At no time since the commencement of the Company's
financial year ended December 31, 2020, has the Company relied on any exemption from NI 52-110, including Section 2.4 of NI 52-110 (De
Minimis Non-Audit Services), or an exemption granted under Part 8 of NI 52-110.
The Company has relied upon the exemption provided
by section 6.1 of NI 52-110 which exempts venture issuers from the requirement to comply with the restrictions on the composition of
its audit committee.
Pre-Approval Policies
and Procedures
The Audit Committee is authorized by the Board
to review the performance of the Company's external auditors and approve in advance provision of services other than auditing and to
consider the independence of the external auditors, including reviewing the range of services provided in the context of all consulting
services bought by the Company. The Audit Committee is authorized to approve any non-audit services or additional work which the Chairman
of the Audit Committee deems as necessary who will notify the other members of the Audit Committee of such non-audit or additional work.
External Auditor Service
Fees
The aggregate fees billed by the Company's external
auditors in each of the last two fiscal years for audit fees are as follows:
|
Financial
Year Ending
|
Audit
Fees(1)
($)
|
Audit
Related Fees(2)
($)
|
Tax
Fees(3)
($)
|
All
Other Fees(4)
($)
|
|
2020
|
94,000
|
8,925
|
4,000
|
-
|
|
2019
|
46,000
|
--
|
2,500
|
--
|
Notes:
|
|
(1)
|
"Audit Fees" include fees
necessary to perform the annual audit and quarterly reviews of our financial statements.
Audit Fees include fees for review of tax provisions and for accounting consultations on
matters reflected in the financial statements. Audit Fees also include audit or other attest
services required by legislation or regulation, such as comfort letters, consents, reviews
of securities filings and statutory audits.
|
|
|
(2)
|
"Audit-Related Fees" for
assurance and related services that are reasonably related to the performance of the audit
or review of the Company's financial statements and are not reported as audit fees. The services
provided in this category include due diligence assistance, accounting consultations on proposed
transactions, and consultation on International Financial Reporting Standards conversion.
|
|
|
(3)
|
"Tax Fees" include fees for
all tax services other than those included in "Audit Fees" and "Audit-Related
Fees". This category includes fees for tax compliance, tax planning and tax advice.
|
|
|
(4)
|
"All Other Fees" includes
all fees other than those reported as Audit Fees, Audit-Related Fees or Tax Fees.
|
Legal
Proceedings AND Regulatory actions
Draganfly is not, and has not been at any time
within the most recently completed financial year, a party to any legal proceedings, nor is or was Draganfly's property the subject of
any legal proceedings, known or contemplated, that involves a claim for damages exclusive of interest and costs that met or exceeded
10% of the Company's current assets.
Further, there have not been any (a) penalties
or sanctions imposed against the Company by a court relating to securities legislation or by a securities regulatory authority during
the year ended December 31, 2020, (b) any other penalties or sanctions imposed by a court or regulatory body against the Company that
would likely be considered important to a reasonable investor in making an investment decision, or (c) settlement agreements entered
into by the Company before a court relating to securities legislation or with a securities regulatory authority during the year ended
December 31, 2020.
Draganfly Inc. | Annual Information Form Page
40
INTERESTS
OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Other than as set forth herein, or as previously
disclosed, the Company is not aware of any material interests, direct or indirect, by way of beneficial ownership of securities
or otherwise, of any director or executive officer or any shareholder holding more than 10% of the Common Shares or any associate
or affiliate of any of the foregoing in any transaction within the three most recently completed financial years or during the
current financial year or any proposed or ongoing transaction of the Company which has or will materially affect the Company.
AUDITOR,
TRANSFER AGENT AND REGISTRAR
The auditors of the Company are Dale Matheson
Carr-Hilton Labonte LLP, Chartered Professional Accountants, 1500-1700, 1140 W Pender Street, Vancouver, BC V6E 4G1.
Endeavor Trust Corporation is the transfer agent
and registrar for the Common Shares at its principal office in Vancouver, British Columbia.
MATERIAL
CONTRACTS
There are no material contracts entered into
by Draganfly within the most recently completed financial year, or before the most recently completed financial year but which
are still in effect, other than contracts entered into in the ordinary course of business.
INTERESTS
OF EXPERTS
There is no person or company whose profession
or business gives authority to a statement made by such person or company and who is named as having prepared or certified a statement,
report or valuation described or included in a filing, or referred to in a filing, made under NI 51-102 by the Company during, or
related to, the Company's most recently completed financial year other than Dale Matheson Carr-Hilton Labonte LLP, the Company's auditors.
Dale Matheson Carr-Hilton Labonte LLP are the
auditors of the Company and have confirmed that they are independent with respect to the Company within the meaning of the relevant rules
and related interpretations prescribed by the relevant bodies in Canada and any applicable legislation or regulations.
Denis Silva, a director of the Company, is a
lawyer at DLA Piper (Canada) LLP, which law firm provides legal services to the Company. As of the date hereof, the associates and partners
of DLA Piper (Canada) LLP, as a group, beneficially own, directly or indirectly, less than 1% of the outstanding Common Shares.
Draganfly Inc. | Annual Information Form
Page 41
ADDITIONAL
INFORMATION
Additional information relating to the Company
may be found on SEDAR at www.SEDAR.com.
Additional information, including directors'
and officers' remuneration and indebtedness, principal holders of Draganfly's securities and securities authorized for issuance
under equity compensation plans, where applicable, will be contained in Draganfly's information circular for the next annual
meeting of shareholders that involves the election of directors and additional information as provided in Draganfly's comparative
financial statements for its most recently completed financial year. Draganfly will provide this information to any person, upon
request made to the Chief Financial Officer of Draganfly at 2108 St. George Avenue Saskatoon, Saskatchewan S7M 0K7. The
documents will also be located on SEDAR at www.sedar.com.
Additional financial information is provided
in the Company's comparative financial statements and management's discussion and analysis for the period ended December 31, 2020,
which are also available on SEDAR.
Draganfly Inc. | Annual Information Form Page
42
SCHEDULE A
DRAGANFLY INC.
AUDIT COMMITTEE CHARTER
PURPOSE
Senior management of Draganfly Inc. (the “Company”),
as overseen by its Board of Directors (the “Board”), has primary responsibility for the Company’s
financial reporting, accounting systems and internal controls. The Audit Committee (the “Committee”) is a standing
committee of the Board established for the purposes of overseeing:
|
|
(a)
|
the quality and integrity of the Company’s financial and accounting
reporting processes, audits of the financial statements of the Company, and internal accounting and financial control systems of the Company;
|
|
|
(b)
|
the external auditor’s qualifications and independence;
|
|
|
(c)
|
management's responsibility for assessing the effectiveness of internal controls;
and
|
|
|
(d)
|
the Company’s compliance with legal and regulatory requirements in
connection with financial and accounting matters.
|
COMPOSITION AND OPERATION
|
1.
|
The Committee shall be composed of at least three
members, each of whom:
|
|
|
(a)
|
must be an “Independent Director”
(as defined in the Definitions section of this Charter), taking into account the rules and regulations of any securities regulatory authorities
and/or stock exchanges that may be applicable to the Company;
|
|
|
(b)
|
must not accept any consulting, advisory, or
other compensatory fee from the Company (or any subsidiary) other than for board or committee service;
|
|
|
(c)
|
must not be an “Affiliated Person”
(as defined in the Definitions section of this Charter) of the Company or any of its subsidiaries;
|
|
|
(d)
|
must not have participated in the preparation
of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years; and
|
|
|
(e)
|
must be Financially Literate.
|
In addition, at least
one member will be a “Committee Financial Expert” (as defined in the Definitions section of this Charter).
The foregoing requirements
are subject to any exemptions, exceptions, cure periods or phase-in accommodations that may be available to the Company under applicable
securities laws and stock exchange rules.
|
2.
|
The members of the Committee shall be appointed
by the Board to serve one-year terms and are permitted to serve an unlimited number of consecutive terms.
|
|
3.
|
The Committee shall appoint a chair (the “Chair”)
from among its members who shall be an independent director. If the Chair is not present at any meeting of the Committee, one of the other
Committee members present at the meeting shall be chosen to preside at the meeting.
|
|
4.
|
The Committee will make every effort to meet
at least four times per year and each member is entitled to request that an additional meeting be called, which will be held within two
weeks of the request for such meeting. A quorum at meetings of the Committee shall be two members present in person or by telephone. The
Committee may also act by unanimous written consent of its members as described under the heading “Authority” in this
Charter.
|
|
5.
|
The external auditor may request the Chair to
call a meeting of the Committee to consider any matter that the auditor believes should be brought to the attention of the directors or
the shareholders of the Company. In addition to the external auditor, each committee chair, members of board, as well as the Chief Executive
Officer (“CEO”) and the Chief Financial Officer (“CFO”) shall be entitled to request the Chair to
call a meeting, which meeting shall be held within two weeks of the request.
|
|
6.
|
Notice of the time and place of every meeting
shall be given in writing or by email communication to each member of the Committee at least 24 hours prior to the time fixed for
such meeting.
|
|
7.
|
The Committee shall fix its own procedure at
meetings, keep records of its proceedings and provide a verbal report to the Board routinely at the next regularly scheduled Board meeting
and shall provide copies of finalized minutes of meetings to the Corporate Secretary to be kept with the official minute books of the
Company.
|
|
8.
|
The Committee will review and approve its minutes
of meetings and copies will be made available to the external auditor or its members as requested.
|
|
9.
|
In camera sessions will be scheduled for each
regularly scheduled quarterly Committee meeting, and as needed from time to time.
|
|
10.
|
On an ad-hoc basis, the Committee may also meet
separately with the Chief Executive Officer and the Chief Financial Officer and such other members of management as they may deem necessary.
|
RESPONSIBILITIES AND DUTIES
Overall Committee:
To fulfill its responsibilities and duties the
Committee will:
|
|
(a)
|
review this Charter periodically, but at least
once per annum, and recommend to the Board any necessary amendments;
|
|
|
(b)
|
review and, where necessary, recommend revisions
to the Company’s disclosure in the Company’s public disclosures and securities filings (including its Management Information
Circular) regarding Committee’s composition and responsibilities and how they are discharged;
|
|
|
(c)
|
assist the Board in the discharge of its responsibilities
relating to the quality, acceptability and integrity of the Company’s accounting policies and principles, reporting practices and
internal controls;
|
|
|
(d)
|
review and recommend approval by the Board of
all significant and material financial disclosure documents to be released by the Company, including but not limited to, quarterly and
annual financial statements and management discussion and analysis, annual reports, Form 40-F, annual information forms, and prospectuses
containing material information of a financial nature; and
|
|
|
(e)
|
oversee the relationship and maintain a direct
line of communication with the Company’s internal and external auditors and assess their respective performance.
|
Public Filings, Policies and Procedures:
The Committee is responsible for:
|
|
(a)
|
ensuring adequate procedures are in place for
the review of the Company’s disclosure of financial information extracted or derived from the Company’s financial statements
and periodically assess the Company’s disclosure controls and procedures, and management’s evaluation thereof, to ensure that
financial information is recorded, processed, summarized and reported within the time periods required by law;
|
|
|
(b)
|
reviewing disclosures made to the Committee by
the CEO and the CFO during their certification process for any significant deficiencies in the design or operation of internal controls
or material weakness therein and any fraud involving management or other employees who have a significant role in internal controls; and
|
|
|
(c)
|
reviewing with management and the external auditor
any correspondence with securities regulators or other regulatory or government agencies which raise material issues regarding the Company’s
financial reporting or accounting policies.
|
External Auditors
The responsibilities and duties of the Committee
as they relate to the external auditor are to:
|
|
(a)
|
consider and make recommendations to the Board
with respect to the appointment, compensation, and retention of the external auditor to be nominated for appointment by shareholders at
each annual general meeting of the Company;
|
|
|
(b)
|
review the performance of the external auditor
and, where appropriate, recommend to the Board the removal of the external auditor;
|
|
|
(c)
|
confirm the independence and effectiveness of
the external auditor, which will require receipt from the external auditor of a formal written statement delineating all relationships
between the auditor and the Company and any other factors that might affect the independence of the auditor;
|
|
|
(d)
|
oversee the work of the external auditor generally,
and review and report to the Board on the planning and results of external audit work, including:
|
|
|
(i)
|
the external auditor’s engagement letter
or other reports of the auditor;
|
|
|
(ii)
|
the reasonableness of the estimated fees and
other compensation to be paid to the external auditor;
|
|
|
(iii)
|
the form and content of the quarterly and annual
audit report, which should include, inter alia:
|
(A)
a summary of the Company’s internal controls and procedures;
(B)
any material issues raised in the most recent meeting of the Committee; and
(C)
any other related audit, review or attestation services performed for the Company by the external auditors.
|
|
(e)
|
actively engage in dialogue with the external
auditor with respect to any disclosed relationships or services that may affect the independence and objectivity of the external auditor
and take, or recommend the Board take, appropriate actions to oversee the independence of the external auditor;
|
|
|
(f)
|
monitor the relationship between management and
the external auditor and resolve any disagreements between them regarding financial reporting; and
|
|
|
(g)
|
engage the external auditor in discussions regarding
any amendments to critical accounting policies and practices; alternative treatments of financial information within generally accepted
accounting principles related to material items that have been discussed with management, including any potential ramifications and the
preferred treatment by the independent auditor; and lastly, written communication between management and the independent auditor, including
but not limited to, the management letter and schedule of adjusted differences.
|
Internal Controls and Financial Reporting
The Committee will:
|
|
(a)
|
obtain reasonable assurance from discussions
with (and/or reports from) management, and reports from the external auditors that the Company’s financial and accounting systems
are reliable and that the prescribed internal controls are operating effectively;
|
|
|
(b)
|
in consultation with the external auditor, the
CEO, the CFO, and where necessary, other members of management, review the integrity of the Company’s financial reporting process
and the internal control structure;
|
|
|
(c)
|
review the acceptability of the Company’s
accounting principles and direct the auditors’ examinations to particular areas of question or concern, as required;
|
|
|
(d)
|
request the auditors to undertake special examinations
(e.g., review compliance with conflict of interest policies) when it deems necessary;
|
|
|
(e)
|
together with management, review control weaknesses
identified by the external and internal auditors;
|
|
|
(f)
|
review the appointments of the CFO and other
key financial executives; and
|
|
|
(g)
|
during the annual audit process, consider if
any significant matters regarding the Company’s internal controls and procedures over financial reporting, including any significant
deficiencies or material weaknesses in their design or operation, need to be discussed with the external auditor, and review whether internal
control recommendations made by the auditor have been implemented by management.
|
Ethical and Legal Compliance
The responsibilities and duties of the Committee
as they relate to compliance and risk management are to:
|
|
(a)
|
obtain reasonable assurances as to the integrity
of the CEO and other senior management and that the CEO and other senior management strive to create a culture of integrity throughout
the Company;
|
|
|
(b)
|
review the adequacy, appropriateness and effectiveness
of the Company’s policies and business practices which impact on the integrity, financial and otherwise, of the Company, including
those relating to hedging, insurance, accounting, information services and systems and financial controls, and management reporting;
|
|
|
(c)
|
receive a report from management on tax issues
and planning, including compliance with the Company’s source deduction obligations and other remittances under applicable tax or
other legislation;
|
|
|
(d)
|
review annually the adequacy and quality of the
Company’s financial and accounting staffing, including the need for and scope of internal audit reviews (if any);
|
|
|
(e)
|
establish procedures for a) the receipt, retention
and treatment of complaints received by the Company regarding accounting, internal controls, or auditing matters; and b) the confidential,
anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.
|
|
|
(f)
|
review any complaints and concerns received regarding
accounting, internal controls, or auditing matters or with respect to the Company’s Code of Ethical Conduct, and the investigation
and resolution thereof, and provide all relevant information relating to such complaints and concerns to the Nominating and Governance
Committee;
|
|
|
(g)
|
review and monitor the Company’s compliance
with applicable legal and regulatory requirements related to financial reporting and disclosure;
|
|
|
(h)
|
review all “related party transactions”
(as such term is defined under applicable securities laws and stock exchange rules) for any potential conflicts of interest; and
|
|
|
(i)
|
carry the responsibility for reviewing reports from management, external auditors with respect to
the Company’s compliance with the laws and regulations having a material impact on financial reporting and disclosure,
including: tax and financial reporting laws and regulations; legal withholding requirements; environmental; and any other laws and
regulations which expose directors to liability.
|
AUTHORITY
|
|
1.
|
The Committee shall have the authority to:
|
|
|
(a)
|
engage independent counsel and other advisors
as it determines necessary to carry out its duties;
|
|
|
(b)
|
set and pay the compensation for the external
auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company;
|
|
|
(c)
|
set and pay the compensation for any independent
counsel and other advisors employed by the Committee;
|
|
|
(d)
|
incur ordinary administrative expenses that are
necessary or appropriate in carrying out its duties; and
|
|
|
(e)
|
communicate directly with the external auditors.
|
|
|
2.
|
The Committee shall have the power, authority
and discretion delegated to it by the Board which shall not include the power to change the membership of or fill vacancies in the Committee.
|
|
|
3.
|
A resolution approved in writing by the members
of the Committee shall be valid and effective as if it had been passed at a duly called meeting. Such resolution shall be filed with the
minutes of the proceedings of the Committee and shall be effective on the date stated thereon or on the latest date stated in any counterpart.
|
|
|
4.
|
The Board shall have the power at any time to
revoke or override the authority given to or acts done by the Committee except as to acts done before such revocation or act of overriding
and to terminate the appointment or change the membership of the Committee or fill vacancies in it as it shall see fit.
|
|
|
5.
|
The Committee shall have unrestricted and unfettered
access to all Company personnel and documents and shall be provided with the resources necessary to carry out its responsibilities.
|
|
|
6.
|
At the invitation of the Chair, one or more officers
or employees of the Company may, and if required by the Committee, shall attend a meeting of the Committee.
|
|
|
7.
|
The Committee shall have the authority to obtain
advice and assistance from outside legal, accounting or financials advisors in its sole discretion.
|
DEFINITIONS
Capitalized terms used in this Charter and not
otherwise defined have the meaning attributed to them below:
“Affiliated Person” means an
“affiliate” of, or a person “affiliated” with, a specified person, which is a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.
“Committee Financial Expert”
means a person who has the following attributes:
|
|
(a)
|
past employment experience in finance or accounting;
|
|
|
(b)
|
requisite professional certification in accounting;
or
|
|
|
(c)
|
or any other comparable experience or background
which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial
officer or other senior officer with financial oversight responsibilities.
|
“Executive Officer” means the
Company’s president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the
controller), any vice-president of the Company in charge of a principal business unit, division or function (such as sales, administration
or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions
for the Company.
“Family Member” means a person's
spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other
than domestic employees) who shares such person's home.
“Financially Literate” means
the ability to read and understand a set of fundamental financial statements, including the Company’s balance sheet, income statement,
and cash flow statement, that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth
and complexity of the issues that can reasonably be expected to be raised in the Company’s financial statements.
“Independent Director” means
a director that is “independent” as the term is defined in both National Instrument 52-110 - Audit Committees (“NI
52-110”) and Nasdaq Rule 5605(a)(2), as each may be amended from time to time, and being a person other than an Executive Officer
or employee of the Company or any other individual having a relationship which, in the opinion of the Company's board of directors, would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not
be considered independent:
|
|
(a)
|
a director who is, or at any time during the
past three years was, employed by the Company;
|
|
|
(b)
|
a director who accepted or who has a Family Member
who accepted any compensation from the Company in excess of $120,000 during any period of twelve consecutive months within the three years
preceding the determination of independence, other than the following:
|
|
|
(i)
|
compensation for board or board committee service;
|
|
|
(ii)
|
compensation paid to a Family Member who is an
employee (other than an Executive Officer) of the Company; or
|
|
|
(iii)
|
benefits under a tax-qualified retirement plan,
or non-discretionary compensation.
|
Provided, however, that in addition to the requirements contained
in this paragraph (B), audit committee members are also subject to additional, more stringent requirements under Rule 5605(c)(2).
|
|
(c)
|
a director who is a Family Member of an individual
who is, or at any time during the past three years was, employed by the Company as an Executive Officer;
|
|
|
(d)
|
a director who is, or has a Family Member who
is, a partner in, or a controlling Shareholder or an Executive Officer of, any organization to which the Company made, or from which the
Company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient's
consolidated gross revenues for that year, or $200,000, whichever is more, other than the following:
|
|
|
(i)
|
payments arising solely from investments in the
Company's securities; or
|
|
|
(ii)
|
payments under non-discretionary charitable contribution
matching programs.
|
|
|
(e)
|
a director of the Company who is, or has a Family
Member who is, employed as an Executive Officer of another entity where at any time during the past three years any of the Executive Officers
of the Company serve on the compensation committee of such other entity; or
|
|
|
(f)
|
a director who is, or has a Family Member who
is, a current partner of the Company's outside auditor, or was a partner or employee of the Company's outside auditor who worked on the
Company's audit at any time during any of the past three years.
|
Adopted by the Board on August 19, 2019, and amended Updated and Approved,
2021.
Exhibit 4.2
Draganfly Inc. (formerly Drone Acquisition Corp.)
Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
(Expressed in Canadian Dollars)
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Draganfly Inc. (formerly
Drone Acquisition Corp.)
Opinion
We have audited the consolidated financial statements
of Draganfly Inc. (formerly Drone Acquisition Corp.) (the “Company”), which comprise the consolidated statements of financial
position as at December 31, 2020 and 2019, and the consolidated statements of comprehensive loss, changes in shareholders’ equity
and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting
policies (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements
present fairly, in all material respects, the financial position of the Company as at December 31, 2020 and 2019, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian
generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.
Other Information
Management is responsible for the other information.
The other information comprises the information included in Management’s Discussion and Analysis.
Our opinion on the financial statements does not
cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial
statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information
is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.
Responsibilities of Management and Those
Charged with Governance for the Financial Statements
Management is responsible for the preparation
and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, management
is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations,
or has no realistic alternative but to do so.
Those charged with governance are responsible
for overseeing the Company's financial reporting process.
Auditor's Responsibilities for the Audit
of the Financial Statements
Our objectives are to obtain reasonable assurance
about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted
in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally
accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
|
|
·
|
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate
to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
|
|
|
·
|
Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control.
|
|
|
·
|
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
|
|
|
·
|
Conclude on the appropriateness of management’s use of the going concern basis of accounting and
based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant
doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Company to cease to continue as a going concern.
|
|
|
·
|
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures,
and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
|
We communicate with those charged with governance
regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance
with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships
and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting
in this independent auditor's report is David J. Goertz.
DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Vancouver, BC
April 16, 2021
Draganfly Inc. (formerly Drone Acquisition Corp.)
Consolidated Statements of Financial Position
Expressed in Canadian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
As at
|
|
Notes
|
|
2020
|
|
|
2019
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
5
|
|
$
|
1,982,416
|
|
|
$
|
2,429,375
|
|
|
Accounts receivable
|
|
6
|
|
|
810,791
|
|
|
|
224,695
|
|
|
Inventory
|
|
7
|
|
|
1,233,619
|
|
|
|
48,563
|
|
|
Prepaid expenses and deposits
|
|
8
|
|
|
335,022
|
|
|
|
272,630
|
|
|
|
|
|
|
|
4,361,848
|
|
|
|
2,975,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
4,10
|
|
|
2,166,563
|
|
|
|
-
|
|
|
Equipment
|
|
9
|
|
|
153,870
|
|
|
|
115,141
|
|
|
Intangible assets
|
|
10
|
|
|
273,867
|
|
|
|
1,385
|
|
|
Right of use asset
|
|
11
|
|
|
144,419
|
|
|
|
129,994
|
|
|
TOTAL ASSETS
|
|
|
|
$
|
7,100,567
|
|
|
$
|
3,221,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables and accrued liabilities
|
|
13,22
|
|
$
|
1,857,177
|
|
|
$
|
894,357
|
|
|
Customer deposits
|
|
14
|
|
|
385,449
|
|
|
|
-
|
|
|
Loans
|
|
16
|
|
|
62,978
|
|
|
|
-
|
|
|
Liability for outstanding USD warrants
|
|
17
|
|
|
748,634
|
|
|
|
-
|
|
|
Lease liability
|
|
12
|
|
|
93,239
|
|
|
|
43,000
|
|
|
|
|
|
|
|
3,147,477
|
|
|
|
937,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income
|
|
16
|
|
|
5,062
|
|
|
|
-
|
|
|
Lease liability
|
|
12
|
|
|
64,885
|
|
|
|
93,073
|
|
|
Loans
|
|
16
|
|
|
34,938
|
|
|
|
-
|
|
|
TOTAL LIABILITIES
|
|
|
|
|
3,252,362
|
|
|
|
1,030,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
17
|
|
|
36,943,304
|
|
|
|
27,786,517
|
|
|
Equity reserve
|
|
17
|
|
|
3,024,007
|
|
|
|
2,508,233
|
|
|
Accumulated deficit
|
|
|
|
|
(36,119,210
|
)
|
|
|
(28,103,397
|
)
|
|
Accumulated other comprehensive loss
|
|
|
|
|
104
|
|
|
|
-
|
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
|
|
3,848,205
|
|
|
|
2,191,353
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
$
|
7,100,567
|
|
|
$
|
3,221,783
|
|
Nature of continuance and operations (Note 1)
Subsequent events (Note 28)
Approved and authorized for issuance by the Board
of Directors on April 16, 2021.
|
“Scott Larson”
|
|
“Cameron Chell”
|
|
Director
|
|
Director
|
The accompanying notes are an integral part of these consolidated financial statements.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Consolidated Statements of Comprehensive Loss
Expressed in Canadian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
Note
|
|
2020
|
|
|
2019
|
|
|
Revenue from sales of goods
|
|
18
|
|
$
|
3,087,223
|
|
|
$
|
248,939
|
|
|
Revenue from services
|
|
18
|
|
|
1,276,288
|
|
|
|
1,131,488
|
|
|
TOTAL REVENUE
|
|
|
|
|
4,363,511
|
|
|
|
1,380,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales from sales of goods
|
|
7
|
|
|
(2,460,891
|
)
|
|
|
(206,783
|
)
|
|
Cost of sales from services
|
|
|
|
|
(143,020
|
)
|
|
|
(12,017
|
)
|
|
COST OF SALES
|
|
|
|
|
(2,603,911
|
)
|
|
|
(218,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
|
|
1,759,600
|
|
|
|
1,161,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
10
|
|
$
|
43,518
|
|
|
$
|
8,386
|
|
|
Depreciation
|
|
9,11
|
|
|
109,108
|
|
|
|
41,250
|
|
|
Office and miscellaneous
|
|
19
|
|
|
3,427,853
|
|
|
|
2,127,632
|
|
|
Professional fees
|
|
|
|
|
1,762,594
|
|
|
|
524,101
|
|
|
Research and development
|
|
|
|
|
567,999
|
|
|
|
16,883
|
|
|
Share-based compensation
|
|
17
|
|
|
2,668,464
|
|
|
|
761,559
|
|
|
Travel
|
|
|
|
|
25,617
|
|
|
|
30,896
|
|
|
Wages and salaries
|
|
|
|
|
1,649,329
|
|
|
|
989,083
|
|
|
|
|
|
|
|
(10,254,482
|
)
|
|
|
(4,499,790
|
)
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liability
|
|
17
|
|
|
(748,634
|
)
|
|
|
-
|
|
|
Finance and other costs
|
|
24
|
|
|
(23,117
|
)
|
|
|
(171,905
|
)
|
|
Foreign exchange gain (loss)
|
|
|
|
|
(87,104
|
)
|
|
|
5,803
|
|
|
Gain on disposal of assets
|
|
9
|
|
|
-
|
|
|
|
28,651
|
|
|
Net gains and losses on settlement of debt
|
|
13,17
|
|
|
(38,879
|
)
|
|
|
198,976
|
|
|
Gain on forgiveness of trades payable
|
|
13
|
|
|
127,711
|
|
|
|
-
|
|
|
Listing expense
|
|
3
|
|
|
-
|
|
|
|
(7,804,859
|
)
|
|
Loss on write-off loan receivable
|
|
|
|
|
-
|
|
|
|
(13,560
|
)
|
|
Income from government assistance
|
|
16
|
|
|
21,090
|
|
|
|
-
|
|
|
Other income
|
|
25
|
|
|
1,197,465
|
|
|
|
-
|
|
|
Scientific research and development credit
|
|
|
|
|
30,537
|
|
|
|
-
|
|
|
NET LOSS
|
|
|
|
|
(8,015,813
|
)
|
|
|
(11,095,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange translation
|
|
|
|
|
104
|
|
|
|
-
|
|
|
COMPREHENSIVE LOSS
|
|
|
|
$
|
(8,015,709
|
)
|
|
$
|
(11,095,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.23
|
)
|
|
Diluted
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.23
|
)
|
|
Weighted average number of common shares outstanding – Basic
|
|
|
|
|
77,092,696
|
|
|
|
47,647,977
|
|
|
Weighted average number of common shares outstanding – Diluted
|
|
|
|
|
77,092,696
|
|
|
|
47,647,977
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Consolidated Statements of Changes in Shareholders’ Equity
Expressed in Canadian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Share Capital
|
|
|
Equity
Reserve
|
|
|
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
Shareholders’
Equity
|
|
|
Balance at December 31, 2018
|
|
|
39,346,807
|
|
|
$
|
12,561,342
|
|
|
$
|
882,180
|
|
|
$
|
(17,576,131
|
)
|
|
$
|
-
|
|
|
$
|
(4,132,609
|
)
|
|
Shares issued for settlement of notes payable
|
|
|
1,291,549
|
|
|
|
645,775
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
645,775
|
|
|
Shares issued as transactions fees
|
|
|
2,000,000
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
Recapitalization of Draganfly Inc.
|
|
|
10,500,001
|
|
|
|
5,250,001
|
|
|
|
1,645,193
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,895,194
|
|
|
Shares issued of settlement of trades payable
|
|
|
45,325
|
|
|
|
22,662
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,662
|
|
|
Shares issued for settlement of convertible debentures and accrued interest
|
|
|
2,118,492
|
|
|
|
1,059,246
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,059,246
|
|
|
Shares issued for exercise of warrants
|
|
|
316,940
|
|
|
|
221,741
|
|
|
|
(212,908
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
8,833
|
|
|
Reclassification of unexercised conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
(567,791
|
)
|
|
|
567,791
|
|
|
|
-
|
|
|
|
-
|
|
|
Shares and warrants issued on private placement
|
|
|
14,051,499
|
|
|
|
7,025,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,025,750
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
761,559
|
|
|
|
-
|
|
|
|
-
|
|
|
|
761,559
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,095,057
|
)
|
|
|
-
|
|
|
|
(11,095,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
69,670,613
|
|
|
|
27,786,517
|
|
|
|
2,508,233
|
|
|
|
(28,103,397
|
)
|
|
|
-
|
|
|
|
2,191,353
|
|
|
Shares issued for exercise of warrants
|
|
|
7,923,875
|
|
|
|
4,007,130
|
|
|
|
(1,645,193
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,361,937
|
|
|
Shares issued for acquisition
|
|
|
3,225,438
|
|
|
|
2,178,961
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,178,961
|
|
|
Shares issued as finder’s fees
|
|
|
200,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
Shares issued for debt settlement
|
|
|
555,409
|
|
|
|
344,354
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
344,354
|
|
|
Shares issued for financing
|
|
|
3,518,034
|
|
|
|
2,018,845
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,018,845
|
|
|
Shares issued for exercise of RSUs
|
|
|
999,992
|
|
|
|
507,497
|
|
|
|
(507,497
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Share-based payments
|
|
|
-
|
|
|
|
-
|
|
|
|
2,668,464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,668,464
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,015,813
|
)
|
|
|
-
|
|
|
|
(8,015,813
|
)
|
|
Translation of foreign operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
86,093,361
|
|
|
|
36,943,304
|
|
|
|
3,024,007
|
|
|
|
(36,119,210
|
)
|
|
|
104
|
|
|
|
3,848,205
|
|
The purpose of the Equity Reserve is to record the fair values of equity-based
financial instruments until exercised, cancelled, or forfeited.
The accompanying notes are an integral part of these consolidated financial statements.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Consolidated Statements of Cash Flows
Expressed in Canadian Dollars
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,015,813
|
)
|
|
$
|
(11,095,057
|
)
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
43,518
|
|
|
|
8,386
|
|
|
Depreciation
|
|
|
109,108
|
|
|
|
41,250
|
|
|
Change in fair value of derivative liability
|
|
|
748,634
|
|
|
|
-
|
|
|
Finance and other costs
|
|
|
23,117
|
|
|
|
171,905
|
|
|
Net gains and losses on settlement of debt
|
|
|
38,879
|
|
|
|
(198,976
|
)
|
|
Gain on forgiveness of trades payable
|
|
|
(127,711
|
)
|
|
|
-
|
|
|
Gain on disposal of assets
|
|
|
-
|
|
|
|
(28,651
|
)
|
|
Income from government assistance
|
|
|
(21,090
|
)
|
|
|
-
|
|
|
Expense of non-financial asset
|
|
|
-
|
|
|
|
15,389
|
|
|
Listing expense
|
|
|
-
|
|
|
|
7,804,859
|
|
|
Share-based compensation
|
|
|
2,668,464
|
|
|
|
761,559
|
|
|
|
|
|
(4,532,894
|
)
|
|
|
(2,519,336
|
)
|
|
Net changes in non-cash working capital items:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,481,944
|
)
|
|
|
(126,799
|
)
|
|
Inventory
|
|
|
(555,371
|
)
|
|
|
12,622
|
|
|
Prepaid expenses
|
|
|
31,605
|
|
|
|
(249,325
|
)
|
|
Trade payables and accrued liabilities
|
|
|
1,261,066
|
|
|
|
(1,005,121
|
)
|
|
Customer deposits
|
|
|
139,490
|
|
|
|
-
|
|
|
Loans
|
|
|
(5,062
|
)
|
|
|
-
|
|
|
Deferred income
|
|
|
5,062
|
|
|
|
-
|
|
|
Funds used in operations activities
|
|
|
(5,138,048
|
)
|
|
|
(3,887,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of cash received
|
|
|
(457,407
|
)
|
|
|
28,538
|
|
|
Purchase of equipment
|
|
|
(23,888
|
)
|
|
|
(87,785
|
)
|
|
Disposal of equipment
|
|
|
-
|
|
|
|
31,500
|
|
|
Proceeds received from sale of investment
|
|
|
997,714
|
|
|
|
-
|
|
|
Funds provided by (used in) investing activities
|
|
|
516,419
|
|
|
|
(27,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares for financing
|
|
|
2,018,845
|
|
|
|
6,534,583
|
|
|
Proceeds from issuance of common shares for warrants exercised
|
|
|
2,361,937
|
|
|
|
-
|
|
|
Repayment of convertible debentures
|
|
|
-
|
|
|
|
(486,131
|
)
|
|
Proceeds from issuance of notes payable
|
|
|
-
|
|
|
|
1,137,978
|
|
|
Repayment of notes payable
|
|
|
(60,000
|
)
|
|
|
(882,770
|
)
|
|
Proceeds from issuance of loans
|
|
|
129,310
|
|
|
|
-
|
|
|
Repayment of loans
|
|
|
(192,084
|
)
|
|
|
-
|
|
|
Repayment of lease liability
|
|
|
(83,442
|
)
|
|
|
(38,000
|
)
|
|
Funds provided by financing activities
|
|
|
4,597,830
|
|
|
|
6,265,660
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash
|
|
|
104
|
|
|
|
(22,366
|
)
|
|
Change in cash
|
|
|
(447,063
|
)
|
|
|
2,349,954
|
|
|
Cash, beginning
|
|
|
2,429,375
|
|
|
|
101,787
|
|
|
Cash, ending
|
|
$
|
1,982,416
|
|
|
$
|
2,429,375
|
|
Supplemental
cash flow disclosure (Note 26)
The accompanying notes are an integral part of these consolidated financial statements.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
1.
NATURE AND CONTINUANCE OF OPERATIONS
Draganfly Inc. (formerly Drone Acquisition
Corp.) (the “Company”) was incorporated by articles of incorporation dated June 1, 2018 under the Business Corporations Act
(British Columbia). The Company’s shares began trading on the Canadian Securities Exchange (the “CSE”) under the symbol
“DFLY”.
The Company’s head office is
located at 2108 St. George Avenue, Saskatoon, SK, S7M 0K7 and its registered office is located at 2800 – 666 Burrard Street, Vancouver,
BC, V6C 2Z7.
On August 15, 2019, the Company and
1187607 B.C. Ltd. (“Merger Co.”), a wholly-owned subsidiary of the Company, completed a Business Combination Agreement (the
“BCA”) with Draganfly Innovations Inc. (“Draganfly Innovations”) (the “Amalgamation”). Under the Amalgamation,
shareholders of Draganfly Innovations received 1.794 fully paid and non-assessable common shares in the authorized share structure of
the Company for each Draganfly Innovations share. Consequently, the Company owns 100% of Draganfly Innovations and the Draganfly Innovations
shareholders became shareholders of the Company. Draganfly is an operational business of developing and manufacturing multi-rotor helicopters,
industrial aerial video systems and civilian small unmanned aerial systems or vehicles. Pursuant to the Amalgamation the Company changed
its name to “Draganfly Inc.”.
The recent outbreak of the coronavirus, also known
as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus
continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. These measures,
which include the implementation of travel bans, self-imposed quarantine periods, and social distancing, have caused material disruption
to business globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments
and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.
There are significant uncertainties with respect
to future developments and impact to the Company related to the COVID-19 pandemic, including the duration, severity, and scope of the
outbreak and the measures taken by governments and businesses to contain the pandemic. While the impact of COVID-19 is expected to be
temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations cannot be reasonably estimated
at this time. At the date of these financial statements, 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.
The extent to which these events may impact the Company’s business activities will depend on future developments, such ass the ultimate
geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions
taken in Canada and other countries to contain and treat the disease. With COVID-19 being an ongoing issue, the Company has prepared its
employees at its Saskatchewan and British Columbia facilities to be able to work from home. The Company also applied to the various
federal government relief initiatives. Although the Company’s major custom engineering customer temporarily closed that part
of its business, the Company believes it will start up again. Further, the Company has entered into a distribution agreement to be the
exclusive provider of one of their products which has helped offset custom engineering work from that customer. Aside from the
acquisition of Dronelogics and being opportunistic on other partnerships or acquisitions, the Company expanded its products/services
offered to include health/telehealth applications relating to COVID-19, as a way to deal with the impacts of COVID-19. However,
these ongoing events are highly uncertain and as such, the Company cannot determine the ultimate financial impacts at this time. Any deterioration
in the current situation could have an adverse impact on our business, results of operations, financial position, and cash flows in 2021.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2.
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION
Statement of Compliance
These consolidated financial statements
have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”) and interpretations issued by the International Reporting Interpretation Committee (“IFRIC”).
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies
have been consistently applied to all years presented, unless otherwise stated.
These consolidated financial statements
were authorized for issue by the Board of Directors on April 16, 2021.
Basis of preparation
The consolidated financial statements
of the Company have been prepared on a historical cost basis, modified where applicable. In addition, the consolidated financial statements
have been prepared using the accrual basis of accounting except for cash flow information.
Certain comparative figures have been
reclassified to conform to the current year’s presentation.
Basis of consolidation
Each subsidiary is fully consolidated from the
date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control
ceases.
The consolidated financial statements include
the accounts and results of operations of the Company and its wholly owned subsidiaries listed in the following table:
|
Name of Subsidiary
|
Place of Incorporation
|
Ownership Interest
|
|
Draganfly Innovations Inc.
|
Canada
|
100%
|
|
Draganfly Innovations USA, Inc.
|
US
|
100%
|
|
Dronelogics Systems Inc.
|
Canada
|
100%
|
All intercompany balances and transactions were
eliminated on consolidation.
Significant estimates and assumptions
The preparation of financial statements
in accordance with IFRS requires the Company to use judgment in applying its accounting policies and make estimates and assumptions about
reported amounts at the date of the consolidated financial statements and in the future. The Company’s management reviews these
estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events
that are believed to be reasonable under the circumstances. Revisions to estimates are adjusted for prospectively in the period in which
the estimates are revised.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2.
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)
Share-based payments
The cost of share-based payment transactions
with directors, officers and employees are measured by reference to the fair value of the equity instruments. Estimating fair value for
share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions
of the grant. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model
including the expected life, volatility, risk-free interest rate, expected forfeiture rate and dividend yield of the stock option.
Income taxes
Provisions for income taxes are made
using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews
the adequacy of these income tax provisions at the end of each reporting period. However, it is possible that at some future date an additional
liability could result from audits by tax authorities. Where the final outcome of these tax-related matters is different from the amounts
that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. Deferred
tax assets are recognized when it is determined that the company is likely to recognize their recovery from the generation of taxable
income.
Inventory
Inventory is valued at the lower of
cost and net realizable value. Net realizable value is determined with reference to the estimated selling price. The Company estimates
selling price based upon assumptions about future demand and current and anticipated retail market conditions.
Contingencies
The assessment of contingencies involves
the exercise of significant judgment and estimates of the outcome of future events. In assessing loss contingencies related to legal proceedings
that are pending against the Company and that may result in regulatory or government actions that may negatively impact the Company’s
business or operations, the Company and its legal counsel evaluate the perceived merits of the legal proceeding or unasserted claim or
action as well as the perceived merits of the nature and amount of relief sought or expected to be sought, when determining the amount,
if any, to recognize as a contingent liability or when assessing the impact on the carrying value of the Company’s assets. Contingent
assets are not recognized in the consolidated financial statements.
Useful lives of equipment and intangible
assets
Estimates of the useful lives of equipment
and intangible assets are based on the period over which the assets are expected to be available for use. The estimated useful lives are
reviewed annually and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial
obsolescence, and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of the relevant
assets may be based on internal technical evaluation and experience with similar assets. It is possible, however, that future results
of operations could be materially affected by changes in the estimates brought about by changes in the factors mentioned above. The amounts
and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated
useful lives of the equipment would increase the recorded expenses and decrease the non-current assets.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2.
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)
Business combinations
The definition of whether a set of
assets acquired and liabilities assumed constitute a business may require the company to make certain judgements taking into account all
facts and circumstances. A business is presumed to be an integrated set of activities and assets capable of being conducted and managed
for the purpose of providing a return in the form of dividends, lower costs, or economic benefits.
Business combination versus asset
acquisition
The Company considered the applicability
of IFRS 3 – Business Combinations (“IFRS 3”) with respect to the Acquisition (Note 4). IFRS 3 defines a business as
having a system where inputs enter a process to produce outputs. The Company has determined that the acquisition of Dronelogics Systems
Inc. is a business combination and, accordingly, accounted for as such.
Other significant judgments
The preparation of consolidated financial
statements in accordance with IFRS requires the Company to make judgments, apart from those involving estimates, in applying accounting
policies. The most significant judgments in applying the Company’s consolidated financial statements include:
|
|
−
|
The assessment of the Company’s ability to continue as
a going concern and whether there are events or conditions that may give rise to significant uncertainty;
|
|
|
−
|
the classification of financial instruments;
|
|
|
−
|
the assessment of revenue recognition using the five-step approach under IFRS 15
and the collectability of amounts receivable;
|
|
|
−
|
the determination of whether a set of assets acquired and liabilities assumed constitute
a business; and
|
|
|
−
|
the determination of the functional currency of the company.
|
Foreign currency translation
The Corporation’s functional
currency is the Canadian dollar and transactions in foreign currencies are translated into Canadian dollars at rates of exchange at the
time of such transactions. Monetary assets and liabilities are translated at reporting period rate of exchange. Non-monetary assets and
liabilities are translated at historical exchange rates. Revenue and expenses denominated in a foreign currency are translated at the
monthly average exchange rate. Gains and losses resulting from the translation adjustments are included in income.
The functional currencies for the parent
company and each subsidiary are as follows:
|
Draganfly Inc.
|
Canadian Dollar
|
|
Draganfly Innovations Inc.
|
Canadian Dollar
|
|
Draganfly Innovations USA, Inc.
|
U.S. Dollar
|
|
Dronelogics Systems Inc.
|
Canadian Dollar
|
Financial statements of subsidiaries
for which the functional currency is not the Canadian dollar are translated into Canadian dollars as follows: all asset and liability
accounts are translated at the year-end exchange rate and all earnings and expense accounts and cash flow statement items are translated
at average exchange rates for the year. The resulting translation gains and losses are recorded as exchange differences on translating
foreign operations in accumulated other comprehensive income (“AOCI”).
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2. SIGNIFICANT ACCOUNTING POLICIES
AND BASIS OF PREPARATION (CONT’D)
Transactions and balances:
Foreign currency transactions are translated
into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated
at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date
of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined.
Exchange differences arising on the
translation of monetary items or on settlement of monetary items are recognized in the statement of comprehensive loss in the period in
which they arise, except where deferred in equity as a qualifying cash flow or net investment hedge.
Exchange differences arising on the
translation of non-monetary items are recognized in other comprehensive income to the extent that gains and losses arising on those non-monetary
items are also recognized in other comprehensive income. Where the non-monetary gain or loss is recognized in profit or loss, the exchange
component is also recognized in profit or loss.
Share-based payments
The Company operates a stock option
plan. Share-based payments to employees are measured at the fair value of the instruments issued and amortized over the vesting periods.
Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments
issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods
or services are received. The corresponding amount is recorded to the option reserve. The fair value of options is determined using a
Black–Scholes Option Pricing Model. The number of shares and options expected to vest is reviewed and adjusted at the end of each
reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based
on the number of equity instruments that eventually vest. Amounts recorded for forfeited or expired unexercised options are transferred
to deficit in the year of forfeiture or expiry. Amounts recorded for forfeited unvested options are reversed in the period the forfeiture
occurs.
Share-based payment expense relating
to cash-settled awards, including restricted share units is accrued over the vesting period of the units based on the quoted market value
of Company’s common shares. As these awards will be settled in cash, the expense and liability are adjusted each reporting period
for changes in the underlying share price.
Restricted Share Units
The restricted share units (“RSUs”)
entitle employees, directors, or officers to cash payments payable upon vesting based on vesting terms determined by the Company’s
Board of Directors at the time of the grant. As the RSUs are redeemed and common shares are issued, the amount previously recognized in
reserves is recorded as an increase in share capital.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2. SIGNIFICANT
ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)
Loss per share
Basic loss per share is calculated
by dividing the loss attributable to common shareholders by the weighted average number of common shares outstanding in the period. For
all periods presented, the loss attributable to common shareholders equals the reported loss attributable to owners of the Company. Diluted
loss per share is calculated by the treasury stock method. Under the treasury stock method, the weighted average number of common shares
outstanding for the calculation of diluted loss per share assumes that the proceeds to be received on the exercise of dilutive share options
and warrants are used to repurchase common shares at the average market price during the period.
Classification and measurement
The Company classifies its financial assets in
the following categories: at fair value through profit or loss (“FVTPL”), at fair value through other comprehensive income
(“FVTOCI”) or at amortized cost. The classification depends on the purpose for which the financial assets were acquired. Management
determines the classification of its financial assets at initial recognition.
The classification of debt instruments is driven
by the business model for managing the financial assets and their contractual cash flow characteristics. Debt instruments are measured
at amortized cost if the business model is to hold the instrument for collection of contractual cash flows and those cash flows are solely
principal and interest. If the business model is not to hold the debt instrument, it is classified as FVTPL. Financial assets with embedded
derivatives are considered in their entirety when determining whether their cash flows are solely payments of principal and interest.
Equity instruments that are held for trading (including
all equity derivative instruments) are classified as FVTPL, for other equity instruments, on the day of acquisition the Company can make
an irrevocable election (on an instrument by-instrument basis) to designate them as at FVTOCI.
Financial assets at FVTPL
Financial assets carried at FVTPL are initially
recorded at fair value and transaction costs are expensed in the income statement. Realized and unrealized gains and losses arising from
changes in the fair value of the financial asset held at FVTPL are included in the income statement in the period in which they arise.
Derivatives are also categorized as FVTPL unless they are designated as hedges.
Financial assets at FVTOCI
Investments in equity instruments at FVTOCI are
initially recognized at fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses arising
from changes in fair value recognized in other comprehensive income. There is no subsequent reclassification of fair value gains and losses
to profit or loss following the derecognition of the investment.
Financial assets at amortized cost
Financial assets at amortized cost are initially
recognized at fair value and subsequently carried at amortized cost less any impairment. They are classified as current assets or non-current
assets based on their maturity date.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2.
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)
Impairment of financial assets at amortized
cost
The Company recognizes a loss allowance for expected
credit losses on financial assets that are measured at amortized cost. At each reporting date, the loss allowance for the financial asset
is measured at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly
since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the
loss allowance is measured for the financial asset at an amount equal to twelve month expected credit losses. For trade receivables the
Company applies the simplified approach to providing for expected credit losses, which allows the use of a lifetime expected loss provision.
Impairment losses on financial assets carried
at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be objectively related to
an event occurring after the impairment was recognized.
Derecognition of financial assets
Financial assets are derecognized when they mature
or are sold, and substantially all the risks and rewards of ownership have been transferred. Gains and losses on derecognition of financial
assets classified as FVTPL or amortized cost are recognized in the income statement. Gains or losses on financial assets classified as
FVTOCI remain within accumulated other comprehensive income.
The Company classifies its financial liabilities
into one of two categories as follows:
Fair value through profit or loss (FVTPL) - This
category comprises derivatives and financial liabilities incurred principally for the purpose of selling or repurchasing in the near term.
They are carried at fair value with changes in fair value recognized in profit or loss.
Other financial liabilities - This category consists
of liabilities carried at amortized cost using the effective interest method. Trade payables, customer deposits and loans are included
in this category. The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire.
Derecognition of financial liabilities
Financial liabilities are derecognized when its
contractual obligations are discharged, cancelled, or expire. The Company also derecognizes a financial liability when the terms of the
liability are modified such that the terms and/or cash flows of the modified instrument are substantially different, in which case a new
financial liability based on the modified terms is recognized at fair value. Gains and losses on derecognition are generally recognized
in profit or loss.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2.
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)
Impairment of non-financial assets
The carrying amounts of the Company’s
non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If indicators exist,
then the asset’s recoverable amount is estimated. The recoverable amounts of the following types of intangible assets are measured
annually, whether or not there is any indication that it may be impaired:
|
|
•
|
an intangible asset with an indefinite useful life;
|
|
|
•
|
an intangible asset not yet available for use; and
|
|
|
•
|
goodwill recognized in a business combination.
|
The recoverable amount of an asset
or cash-generating unit (“CGU”) is the greater of its value in use and its fair value less costs to sell. In assessing value
in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest identifiable group of assets that generates cash inflows from continuing
use that are largely independent of the cash inflows of other assets or groups of assets.
If there is an indication that a corporate
asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.
An impairment loss is recognized if
the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in the statement
of comprehensive loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill
allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.
In respect of assets other than goodwill
and intangible assets that have indefinite useful lives, impairment losses recognized in prior periods are assessed at each reporting
date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed in a subsequent period when there
has been an increase in the recoverable amount of a previously impaired asset or CGU. An impairment loss is reversed only to the extent
that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization,
if no impairment loss had been recognized.
Income taxes
Current income tax:
Current income tax assets and liabilities
for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and
tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the countries where
the Company operates and generates taxable income.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)
Current income tax relating to items
recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or
loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations
are subject to interpretation and establishes provisions where appropriate.
Deferred income tax:
Deferred income tax is recognized,
using the asset and liability method, on temporary differences at the reporting date arising between the tax bases of assets and li abilities
and their carrying amounts for financial reporting. The carrying amount of deferred income tax assets is reviewed at the end of each reporting
period and recognized only to the extent that it is probable that sufficient taxable profit will be available to allow all or part of
the deferred income tax asset to be utilized. Deferred income tax assets and liabilities are measured at the tax rates that are expected
to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted
or substantively enacted by the end of the reporting period. Deferred income tax assets and deferred income tax liabilities are offset,
if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes
relate to the same taxable entity and the same taxation authority.
Inventory
Inventory consists of raw materials
for manufacturing of multi-rotor helicopters, industrial areal video systems, civilian small unmanned aerial systems or vehicles, and
wireless video systems. Inventory is initially valued at cost and subsequently at the lower of cost and net realizable value. Net realizable
value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated
costs necessary to make the sale. Cost is determined using the weighted average cost basis. The Company reviews inventory for obsolete
and slow-moving goods and any such inventory is written-down to net realizable value.
Revenue recognition
Revenue comprises the fair value of
consideration received or receivable for the sale of goods and consulting services in the ordinary course of the Company’s business.
Revenue is shown net of return allowances and discounts.
Sales of goods
The Company manufactures and sells
a range of multi-rotor helicopters, industrial aerial video systems, and civilian small unmanned aerial systems or vehicles. Sales are
recognized at a point-in-time when control of the products has transferred, being when the products are delivered to the customer and
there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery occurs when the products
have been shipped to the specific location or picked up by the customer, the risks of obsolescence and loss have been transferred to the
customer.
Revenue from these sales is recognized
based on the price specified in the contract, net of the estimated discounts and returns. Accumulated experience is used to estimate and
provide for the discounts and returns, using the expected value method, and revenue is only recognized to the extent that it is highly
probable that a significant reversal will not occur. To date, returns have not been significant. No element of financing is deemed present
as the sales are made with a credit term of 30 days, which is consistent with market practice.
Some contracts include multiple deliverables,
such as the manufacturing of hardware and support. Support is performed by another party and does not include an integration service.
It is therefore accounted for as a separate performance obligation. In this case, the transaction price will be allocated to each performance
obligation based on the stand-alone selling prices. Where these are not directly observable, they are estimated based on expect cost plus
margin.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2. SIGNIFICANT
ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)
A receivable is recognized when the
goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required
before the payment is due.
Services
The Company provides consulting, custom
engineering, drones as a service, and investigating and solving on a project-by-project basis under fixed-price and variable price contracts.
Revenue from providing services is recognized in the accounting period in which the services are rendered. For fixed-price contracts,
revenue is recognized based on the actual service provided to the end of the reporting period as a proportion of the total services to
be provided. This is determined based on the actual labour hours spend relative to the total expected labour hours. If contracts include
the manufacturing of hardware, revenue for the hardware is recognized at a point in time when the hardware is delivered, the legal title
has passed and the customer has accepted the hardware.
Estimates of revenues, costs or extent
of progress toward completion are revised if circumstances change. Any resulting increases or decreases in estimated revenues or costs
are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known by management.
In case of fixed-price contracts, the
customer pays the fixed amount based on a payment schedule. If the services rendered by the Company exceed the payment, a contract asset
is recognized. If the payments exceed the services rendered, a contract liability is recognized. If the contract includes an hourly fee,
revenue is recognized in the amount to which the Company has a right to invoice. Customers are invoiced on a monthly basis and consideration
is payable when invoiced.
Cost of Goods Sold
Cost of sales includes the expenses
incurred to acquire and produce inventory for sale, including product costs, freight costs, as well as provisions for reserves related
to product shrinkage, excess or obsolete inventory, or lower of cost and net realizable value adjustments as required.
Intangible Assets and Goodwill
An intangible asset is an identifiable
asset without physical substance. An asset is identifiable if it is separable, or arises from contractual or legal rights, regardless
of whether those rights are transferrable or separable from the Company or from other rights and obligations. Intangible assets include
intellectual property, which consists of patent and trademark applications.
Intangible assets acquired externally
are measured at cost less accumulated amortization and impairment losses. The cost of a group of intangible assets acquired is allocated
to the individual intangible assets based on their relative fair values. The cost of intangible assets acquired externally comprises its
purchase price and any directly attributable cost of preparing the asset for its intended use. Research and development costs incurred
subsequent to the acquisition of externally acquired intangible assets and on internally generated intangible assets are accounted for
as research and development costs.
Intangible assets with finite useful
lives are amortized on a declining balance method with a rate of 20% to write off the cost of the assets from the date they are available
for use.
Goodwill represents the excess of the
value of the consideration transferred over the fair value of the net identifiable assets and liabilities acquired. Goodwill is allocated
to the cash generating unit to which it relates.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2.
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)
Equipment
Equipment is stated at historical cost
less accumulated depreciation and accumulated impairment losses.
Subsequent costs are included in the
asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits
associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced
part is derecognized. All other repairs and maintenance are charged to the statement of comprehensive loss during the financial period
in which they are incurred.
Gains and losses on disposals are determined
by comparing the proceeds with the carrying amount and are recognized in the statement of comprehensive loss.
Depreciation is generally calculated
on a declining balance method to write off the cost of the assets to their residual values over their estimated useful lives. Depreciation
for leasehold improvements is fully expensed over the expected term of the lease. The depreciation rates applicable to each category of
equipment are as follows:
|
Class of equipment
|
|
Depreciation rate
|
|
|
Computer equipment
|
|
|
30
|
%
|
|
Furniture and equipment
|
|
|
20
|
%
|
|
Leasehold improvements
|
|
|
Over expected life of lease
|
|
|
Software
|
|
|
30
|
%
|
|
Vehicles
|
|
|
30
|
%
|
Research and development expenditures
Expenditures on research are expensed
as incurred. Research activities include formulation, design, evaluation and final selection of possible alternatives, products, processes,
systems or services. Development expenditures are expensed as incurred unless the Company can demonstrate all of the following: (i) the
technical feasibility of completing the intangible asset so that it will be available for use or sale; (ii) its intention to complete
the intangible asset and use or sell it; (iii) its ability to use or sell the intangible asset; (iv) how the intangible asset will generate
probable future economic benefits. Among other things, the Company can demonstrate the existence of a market for the output of the intangible
asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; (v) the availability
of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and (vi) its
ability to measure reliably the expenditure attributable to the intangible asset during its development.
Government Assistance
Government grants are recognized when
there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates
to an expense item, it is recognized as income on a systematic basis over the period that the related costs, for which it is intended
to compensate, are expensed. When the grant relates to an asset, the cost of the asset is reduced by the amount of the grant and the grant
is recognized as income in equal amounts over the expected useful life of the asset.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)
SR&ED Investment tax credits
The Company claims federal investment
tax credits as a result of incurring scientific research and experimental development (“SR&ED”) expenditures. Federal
investment tax credits are recognized when the related expenditures are incurred and there is reasonable assurance of their realization.
Federal investment tax credits are accounted for as a reduction of research and development expense for items of a period expense nature
or as a reduction of property and equipment for items of a capital nature. Management has made a number of estimates and assumptions in
determining the expenditures eligible for the federal investment tax credit claim. It is possible that the allowed amount of the federal
investment tax credit claim could be materially different from the recorded amount upon assessment by Canada Revenue Agency.
The Company claims provincial investment
tax credits as a result of incurring SR&ED expenditures. Provincial investment tax credits are recognized when the related expenditures
are incurred and there is reasonable assurance of their realization. Management has made a number of estimates and assumptions in determining
the expenditures eligible for the provincial investment tax credit claim. The provincial investment tax credits are refundable and have
been recorded as a SR&ED tax credit receivable, and as a reduction in research and development expenses on the statement of comprehensive
loss. It is possible that the allowed amount of the provincial investment tax credit claim could be materially different from the recorded
amount upon assessment by Canada Revenue Agency and the Alberta Tax and Revenue Administration.
Leases
A contract is, or contains, a lease
if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At the
commencement date, the lease liability is recognized at the present value of the future lease payments and discounted using the interest
rate implicit in the lease or the Company's incremental borrowing rate. A corresponding right-of-use ("ROU”) asset will be
recognized at the amount of the lease liability, adjusted for any lease incentives received and initial direct costs incurred. Over the
term of the lease, financing expense is recognized on the lease liability using the effective interest rate method and charged to net
income, lease payments are applied against the lease liability and depreciation on the ROU asset is recorded by class of underlying asset.
The lease term is the non-cancellable
period of a lease and includes periods covered by an optional lease extension option if reasonably certain the Company will exercise the
option to extend. Conversely, periods covered by an option to terminate are included if the Company does not expect to end the lease during
that time frame. Leases with a term of less than twelve months or leases for underlying low value assets are recognized as an expense
in net income on a straight-line basis over the lease term.
A lease modification will be accounted
for as a separate lease if it materially changes the scope of the lease. For a modification that is not a separate lease, on the effective
date of the lease modification, the Company will remeasure the lease liability and corresponding ROU asset using the interest rate implicit
in the lease or the Company's incremental borrowing rate. Any variance between the remeasured ROU asset and lease liability will be recognized
as a gain or loss in net income to reflect the change in scope.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
3. AMALGAMATION
Prior to the Amalgamation (business combination),
access to capital was limited as a private company. Through the amalgamation agreement, management would have the resources needed to
raise significant capital and further have broader access to investors by being listed on a public exchange.
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 Draganfly
Innovations shares (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 consolidated financial statements present the historical financial information of Draganfly Innovations
up to the date of the Amalgamation.
|
Number of shares of Draganfly Inc.
|
|
|
10,500,001
|
|
|
Fair value of common shares in concurrent financing
|
|
$
|
0.50
|
|
|
Fair value of shares of Draganfly Inc.
|
|
$
|
5,250,001
|
|
|
Fair value of warrants
|
|
|
1,645,193
|
|
|
Fair value of shares issued for transaction fees
|
|
|
1,000,000
|
|
|
Net assets acquired
|
|
$
|
(90,335
|
)
|
|
Listing expense
|
|
$
|
7,804,859
|
|
|
Fair value of the Company acquired, net of liabilities
|
|
|
|
|
Cash
|
|
$
|
28,538
|
|
|
Accounts receivable
|
|
|
4,991
|
|
|
Loans receivable
|
|
|
963,269
|
|
|
Accounts payable and accrued liabilities
|
|
|
(406,463
|
)
|
|
Subscription receipts
|
|
|
(500,000
|
)
|
|
|
|
$
|
90,335
|
|
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.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
3.
AMALGAMATION (CONT’D)
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:
|
Risk-free interest rate
|
|
|
0.86
|
%
|
|
Estimate life
|
|
|
1.48 years
|
|
|
Expected volatility
|
|
|
100
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
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 “Amalgamation”).
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 (Note 17).
On April 30, 2020, the Company acquired all of
the issued and outstanding shares of Dronelogics Systems Inc. (“Dronelogics”), excluding the cinematography division, for
consideration of $500,000 cash and 3,225,438 common shares (the “Transaction”).
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 price of $0.50 per share and as to $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:
|
Number of shares of Draganfly Inc.
|
|
|
3,225,438
|
|
|
Fair value of shares of Draganfly Inc.
|
|
$
|
2,178,960
|
|
|
Cash portion of purchase price
|
|
|
500,000
|
|
|
Total
|
|
$
|
2,678,960
|
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
|
Tangible assets acquired
|
|
|
|
|
Cash
|
|
$
|
42,593
|
|
|
Accounts receivable
|
|
|
98,852
|
|
|
Inventory
|
|
|
629,684
|
|
|
Prepaids and deposits
|
|
|
93,997
|
|
|
Other current assets
|
|
|
3,014
|
|
|
Equipment
|
|
|
54,946
|
|
|
Right-of-use assets
|
|
|
83,428
|
|
|
Accounts payable and accrued liabilities
|
|
|
(222,766
|
)
|
|
Customer deposits
|
|
|
(245,959
|
)
|
|
Loans
|
|
|
(245,752
|
)
|
|
Other current liabilities
|
|
|
(8,437
|
)
|
|
Lease liabilities
|
|
|
(87,203
|
)
|
|
|
|
|
196,397
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
|
|
|
Customer relationships
|
|
|
197,000
|
|
|
Website
|
|
|
119,000
|
|
|
|
|
|
316,000
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,166,563
|
|
|
Total consideration
|
|
$
|
2,678,960
|
|
The Company estimated the fair value
as follows:
|
|
•
|
Customer relationships based on an income approach, specifically multi-period excess
earnings method, by identifying key customers, applying attribution rate of 15% per annum and discount rate of 18% per annum; and
|
|
|
•
|
Website based on an income approach, specifically relief from royalty methodology,
using a reasonable royalty rate of 0.5% and discount rate of 17% per annum.
|
Furthermore, the excess of the consideration
paid over the fair value of the identifiable assets (liabilities) acquired were recognized as goodwill, which primarily consisted of the
assembled workforce.
From the date of the acquisition to
December 31, 2020, the acquired business contributed $2,870,481 of revenue and a net income of $458,743.
|
5.
|
CASH AND CASH EQUIVALENTS
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Cash held in banks
|
|
$
|
1,839,871
|
|
|
$
|
2,429,375
|
|
|
Guaranteed investment certificate
|
|
|
142,545
|
|
|
|
-
|
|
|
|
|
$
|
1,982,416
|
|
|
$
|
2,429,375
|
|
On March 27, 2020, the Company held a $142,000
guaranteed investment certificate (“GIC”) to secure its credit cards. The terms of the GIC are for 1 year at a rate of 0.50%
per annum.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
6. ACCOUNTS
RECEIVABLE
|
|
|
December 31, 2020
|
|
|
December 31,
2019
|
|
|
Trade accounts receivable
|
|
$
|
780,254
|
|
|
$
|
146,194
|
|
|
GST input tax credits
|
|
|
-
|
|
|
|
54,885
|
|
|
SR&ED receivable
|
|
|
30,537
|
|
|
|
23,616
|
|
|
|
|
$
|
810,791
|
|
|
$
|
224,695
|
|
7. INVENTORY
|
|
|
December 31, 2020
|
|
|
December 31,
2019
|
|
|
Finished goods
|
|
$
|
1,155,871
|
|
|
$
|
-
|
|
|
Parts
|
|
|
77,748
|
|
|
|
48,563
|
|
|
|
|
$
|
1,233,619
|
|
|
$
|
48,563
|
|
During the year ended December 31,
2020, the Company recorded an allowance to value its inventory for obsolete and slow-moving inventory, recognizing an expense in cost
of sales of $23,955 (2019: $nil).
During the year ended December 31,
2020, $2,257,797 (2019: $118,826) of inventory was sold and recognized in cost of sales.
|
8.
|
PREPAID EXPENSES AND DEPOSITS
|
|
|
|
December 31, 2020
|
|
|
December 31,
2019
|
|
|
Insurance
|
|
$
|
992
|
|
|
$
|
35,703
|
|
|
Prepaid marketing services
|
|
|
187,826
|
|
|
|
227,459
|
|
|
Prepaid rent
|
|
|
3,583
|
|
|
|
-
|
|
|
Prepaid subscriptions
|
|
|
5,953
|
|
|
|
1,583
|
|
|
WCB Premiums
|
|
|
-
|
|
|
|
916
|
|
|
Deposits
|
|
|
136,668
|
|
|
|
6,969
|
|
|
|
|
$
|
335,022
|
|
|
$
|
272,630
|
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
9. EQUIPMENT
|
|
|
Computer
Equipment
|
|
|
Furniture
and Equipment
|
|
|
Leasehold
Improvements
|
|
|
Software
|
|
|
Vehicles
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
$
|
163,275
|
|
|
$
|
181,362
|
|
|
$
|
-
|
|
|
$
|
84,340
|
|
|
$
|
-
|
|
|
$
|
428,977
|
|
|
Additions
|
|
|
-
|
|
|
|
87,785
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,785
|
|
|
Disposals
|
|
|
(1,056
|
)
|
|
|
(31,647
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(32,703
|
)
|
|
Impairment
|
|
|
(155,219
|
)
|
|
|
(95,327
|
)
|
|
|
-
|
|
|
|
(54,373
|
)
|
|
|
-
|
|
|
|
(304,919
|
)
|
|
Balance at December 31, 2019
|
|
$
|
7,000
|
|
|
$
|
142,173
|
|
|
$
|
-
|
|
|
$
|
29,967
|
|
|
$
|
-
|
|
|
$
|
179,140
|
|
|
Additions
|
|
|
2,028
|
|
|
|
21,860
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,888
|
|
|
Net
assets acquired in the Acquisition
|
|
|
15,369
|
|
|
|
7,573
|
|
|
|
4,352
|
|
|
|
-
|
|
|
|
27,652
|
|
|
|
54,946
|
|
|
Balance at December 31, 2020
|
|
$
|
24,397
|
|
|
$
|
171,606
|
|
|
$
|
4,352
|
|
|
$
|
29,967
|
|
|
$
|
27,652
|
|
|
$
|
257,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
$
|
150,026
|
|
|
$
|
153,999
|
|
|
$
|
-
|
|
|
$
|
69,774
|
|
|
$
|
-
|
|
|
$
|
373,799
|
|
|
Charge for the year
|
|
|
103
|
|
|
|
7,028
|
|
|
|
-
|
|
|
|
4,574
|
|
|
|
-
|
|
|
|
11,705
|
|
|
Eliminated on disposal
|
|
|
(1,654
|
)
|
|
|
(26,770
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,424
|
)
|
|
Impairment
|
|
|
(141,714
|
)
|
|
|
(96,313
|
)
|
|
|
-
|
|
|
|
(55,054
|
)
|
|
|
-
|
|
|
|
(293,081
|
)
|
|
Balance at December 31, 2019
|
|
$
|
6,761
|
|
|
$
|
37,944
|
|
|
$
|
-
|
|
|
$
|
19,294
|
|
|
$
|
-
|
|
|
$
|
63,999
|
|
|
Charge
for the year
|
|
|
5,631
|
|
|
|
22,019
|
|
|
|
3,220
|
|
|
|
3,202
|
|
|
|
6,033
|
|
|
|
40,105
|
|
|
Balance at December 31, 2020
|
|
$
|
12,392
|
|
|
$
|
59,963
|
|
|
$
|
3,220
|
|
|
$
|
22,496
|
|
|
$
|
6,033
|
|
|
$
|
104,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
239
|
|
|
$
|
104,229
|
|
|
$
|
-
|
|
|
$
|
10,673
|
|
|
$
|
-
|
|
|
$
|
115,141
|
|
|
December 31, 2020
|
|
$
|
12,005
|
|
|
$
|
111,643
|
|
|
$
|
1,132
|
|
|
$
|
7,471
|
|
|
$
|
21,619
|
|
|
$
|
153,870
|
|
During the year ended December 31,
2019, the Company sold computer equipment for a gain on disposal of assets of $28,651.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
10. INTANGIBLE ASSETS AND GOODWILL
|
|
|
Patents
|
|
|
Customer Relationships
|
|
|
Website
|
|
|
Goodwill
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
$
|
71,805
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
71,805
|
|
|
Impairment
|
|
|
(29,874
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(29,874
|
)
|
|
Balance at December 31, 2019
|
|
|
41,931
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,931
|
|
|
Intangible
assets acquired in the Acquisition
|
|
|
-
|
|
|
|
197,000
|
|
|
|
119,000
|
|
|
|
2,166,563
|
|
|
|
2,482,563
|
|
|
Balance at December 31, 2020
|
|
$
|
41,931
|
|
|
$
|
197,000
|
|
|
$
|
119,000
|
|
|
$
|
2,166,563
|
|
|
$
|
2,524,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
$
|
59,896
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
59,896
|
|
|
Charge for the year
|
|
|
8,386
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,386
|
|
|
Impairment
|
|
|
(27,736
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,736
|
)
|
|
Balance at December 31, 2019
|
|
|
40,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,546
|
|
|
Charge for the year
|
|
|
1,385
|
|
|
|
26,267
|
|
|
|
15,866
|
|
|
|
-
|
|
|
|
43,518
|
|
|
Balance at December 31, 2020
|
|
$
|
41,931
|
|
|
$
|
26,267
|
|
|
$
|
15,866
|
|
|
$
|
-
|
|
|
$
|
84,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
1,385
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,385
|
|
|
December 31, 2020
|
|
$
|
-
|
|
|
$
|
170,733
|
|
|
$
|
103,134
|
|
|
$
|
2,166,563
|
|
|
$
|
2,440,430
|
|
Customer relationships
On April 30, 2020, the Company acquired
a 100% interest in Dronelogics and assigned $197,000 to the fair value of customer relationships.
Website
On April 30, 2020, the Company acquired
a 100% interest in Dronelogics and assigned $119,000 to the fair value of the website/domain name.
Goodwill
On April 30, 2020, the Company acquired
a 100% interest in Dronelogics, which included goodwill. Goodwill was valued at $2,166,563.
The key assumptions used in the calculations
of the recoverable amounts include sales growth per year, changes in cost of sales and capital expenditures based on internal forecasts.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
11.
RIGHT OF USE ASSETS
The Company’s right-of-use asset
relates to the lease of office space.
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 there was no change to the
underlying asset, the modification was not accounted for as a separate lease.
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
Balance at January 1, 2019, on adoption of IFRS 16
|
|
$
|
131,634
|
|
|
Lease modification
|
|
|
27,905
|
|
|
Balance at December 31, 2019
|
|
$
|
159,539
|
|
|
Leases acquired in the Acquisition
|
|
|
83,428
|
|
|
Balance at December 31, 2020
|
|
$
|
242,967
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
Balance at January 1, 2019, on adoption of IFRS 16
|
|
$
|
-
|
|
|
Charge
|
|
|
29,545
|
|
|
Balance at December 31, 2019
|
|
$
|
29,545
|
|
|
Charge
|
|
|
69,003
|
|
|
Balance at December 31, 2020
|
|
$
|
98,548
|
|
|
|
|
|
|
|
|
Net book value:
|
|
|
|
|
|
December 31, 2019
|
|
$
|
129,994
|
|
|
December 31, 2020
|
|
$
|
144,419
|
|
12.
LEASE LIABILITY
|
|
|
Total
|
|
|
Balance at January 1, 2019, on adoption of IFRS 16
|
|
$
|
131,634
|
|
|
Interest expense
|
|
|
14,534
|
|
|
Lease payments
|
|
|
(38,000
|
)
|
|
Lease modification
|
|
|
27,905
|
|
|
Balance at December 31, 2019
|
|
$
|
136,073
|
|
|
Leases acquired in the Acquisition
|
|
|
87,203
|
|
|
Interest expense
|
|
|
18,290
|
|
|
Lease payments
|
|
|
(83,442
|
)
|
|
Balance at December 31, 2020
|
|
|
158,124
|
|
|
|
|
|
|
|
|
Which consists of:
|
|
|
|
|
|
Current lease liability
|
|
$
|
93,239
|
|
|
Non-current lease liability
|
|
|
64,885
|
|
|
Balance at December 31, 2020
|
|
$
|
158,124
|
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
13.
TRADES PAYABLE AND ACCRUED LIABILITIES
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
Trades payable
|
|
$
|
813,881
|
|
|
$
|
688,309
|
|
|
Accrued liabilities
|
|
|
512,205
|
|
|
|
162,658
|
|
|
Due to related parties (Note 22)
|
|
|
475,628
|
|
|
|
9,681
|
|
|
Government grant payable (Note 20)
|
|
|
33,709
|
|
|
|
33,709
|
|
|
GST/PST Payable
|
|
|
21,754
|
|
|
|
-
|
|
|
|
|
$
|
1,857,177
|
|
|
$
|
894,357
|
|
During the year ended December 31, 2020, the Company
settled an outstanding debt with the issuance of 555,409 shares and recognized a $38,879 losspx on settlement of debt. During the year
ended December 31, 2019, the Company settled $1,030,714 in trades payable through repayment of $512,492 and recognized a gain on settlement
of debt of $518,222. During the year ended December 31, 2020, the Company recognized a gain on forgiveness of trades payable of $127,711.
At times, the Company’s subsidiary, Dronelogics,
may take a customer deposit as it orders specific items in. These amounts are held and applied against the final purchase.
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
Customer deposits
|
|
$
|
385,449
|
|
|
$
|
-
|
|
15.
NOTES PAYABLE
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Opening balance
|
|
$
|
-
|
|
|
$
|
844,304
|
|
|
Issuance of notes payable
|
|
|
60,000
|
|
|
|
1,137,978
|
|
|
Repayment of notes payable
|
|
|
(60,000
|
)
|
|
|
(1,036,336
|
)
|
|
Settlement of notes payable
|
|
|
-
|
|
|
|
(62,000
|
)
|
|
Foreign exchange
|
|
|
-
|
|
|
|
(22,366
|
)
|
|
Interest accrued
|
|
|
-
|
|
|
|
101,689
|
|
|
Eliminated on consolidation
|
|
|
-
|
|
|
|
(963,269
|
)
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company had no notes payable outstanding
as at December 31, 2020.
During the year ended December 31,
2019, the following new notes were executed:
|
|
-
|
A note was entered into with a company controlled by a director of the Company, bear interest at 12% per
annum and are unsecured. This note was settled during the year ended December 31, 2019.
|
|
|
-
|
Four notes were entered into between the Company and Draganfly Innovations for $930,000, were interest
bearing at 10% per annum, calculated annually, and due at the earlier of 30 days from the date the Amalgamation was completed and one
year from the date of the advance. Upon closing of the Amalgamation (Note 3), these were eliminated upon consolidation.
|
|
|
-
|
A note was entered into with an individual for USD$125,000, interest bearing at
18% per annum, and was unsecured. The note had a maturity date of October 29, 2019 and was repaid during the year ended December 31, 2019.
This note also bore a USD$6,250 due diligence fee and a USD$6,250 closing fee that are being recognized over the life of the note as additional
interest.
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
With the acquisition of Dronelogics, the Company
took ownership of two loans held by the subsidiary.
|
|
|
Start
Date
|
|
Maturity
Date
|
|
Rate
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
CEBA
|
|
2020-05-19
|
|
2022-12-31
|
|
|
0
|
%
|
|
$
|
33,848
|
|
|
$
|
1,090
|
|
|
$
|
34,938
|
|
|
Vehicle
loan
|
|
2019-08-30
|
|
2024-09-11
|
|
|
6.99
|
%
|
|
|
21,247
|
|
|
|
4,048
|
|
|
|
25,295
|
|
|
Shopify
loan
|
|
2020-08-05
|
|
|
|
|
7.00
|
%
|
|
|
35,217
|
|
|
|
2,466
|
|
|
|
37,683
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
90,312
|
|
|
$
|
7,604
|
|
|
$
|
97,916
|
|
On May 19, 2020, Dronelogics received a $40,000
Canada Emergency Business Account (CEBA) loan. This loan is currently interest-free and 25% of the loan, up to $10,000, is forgivable
if the loan is repaid on or before December 31, 2022. If the loan is not repaid by that date, the loan can be converted to a three-year
term loan at an interest rate of 5%.
On December 4, 2020, the Government of Canada
allowed for an expansion of the CEBA loan by $20,000, of which, an additional $10,000 is forgivable if the loan is repaid on or before
December 31, 2022.
The CEBA loan is unsecured, the vehicle loan is
secured by the vehicle, and the Shopify loan is secured by the Company’s accounts receivable.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
17.
SHARE CAPITAL
Authorized share capital
Unlimited number of common shares without
par value.
Issued share capital
For the year ended December 31, 2020,
|
|
-
|
On February 18, 2020, the Company issued 120,000 common shares for the exercise of warrants for $60,000.
|
|
|
-
|
On February 25, 2020, the Company issued 100,000 common shares for the exercise of warrants for $50,000.
|
|
|
-
|
On March 6, 2020, the Company issued 1,051,600 common shares for the exercise of warrants for $105,160.
|
|
|
-
|
On March 20, 2020, the Company issued 365,000 common shares for the exercise of warrants for $36,500.
|
|
|
-
|
On March 26, 2020, the Company issued 1,474,200 common shares for the exercise of warrants for $147,420.
|
|
|
-
|
On April 8, 2020, the Company issued 609,200 common shares for the exercise of warrants for $60,920.
|
|
|
-
|
On April 16, 2020, the Company issued 630,000 common shares for the exercise of warrants for $115,000.
|
|
|
-
|
On April 30, 2020, the Company issued 3,225,438 common shares for the acquisition of Dronelogics and an
additional 200,000 common shares as finder’s fees.
|
|
|
-
|
On May 27, 2020, the Company issued 60,000 common shares for the exercise of warrants for $30,000.
|
|
|
-
|
On June 23, 2020, the Company issued 228,000 common shares for the exercise of warrants for $114,000.
|
|
|
-
|
On July 3, 2020, the company issued 961,538 common shares for cash proceeds of $500,000.
|
|
|
-
|
On July 16, 2020, the Company issued 555,409 common shares for debt settlement of $344,354 and recognized
a loss of $38,879 in the statement of comprehensive loss.
|
|
|
-
|
On September 21, 2020, the Company issued 10,000 common shares for the exercise of warrants for $5,000.
|
|
|
-
|
On October 20, 2020, the Company issued 11,000 common shares for the exercise of warrants for $5,500.
|
|
|
-
|
On October 21, 2020, the Company issued 3,189,875 common shares for the exercise of warrants for $1,594,938.
|
|
|
-
|
On November 5, 2020, the Company issued 35,586 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
On November 30, 2020 the Company issued 2,556,496 units for the Regulation A+ financing in the United
States. Each unit is comprised of one common share and one share purchase warrant. These warrants have an exercise price of $0.71 USD
per warrant, each convert to one common share, and have a life of two years, expiring on November 30, 2022.
|
|
|
-
|
On December 4, 2020, the Company issued 10,202 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
On December 8, 2020, the Company issued 13,234 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
On December 15, 2020, the Company issued 940,970 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
On December 23, 2020, the Company issued 75,000 common shares for the exercise of warrants for $37,500.
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
17.
SHARE CAPITAL (CONT’D)
For the year ended December 31, 2019,
|
|
-
|
Prior to the closing of the Amalgamation (Note 3), Draganfly Innovations issued 719,927 (pre-consolidation)
common shares to a company controlled by a director of the Company for settlement of $799,341 in accounts payable and application of $153,566
in subscription receivable.
|
|
|
-
|
Prior to the closing of the Amalgamation (Note 3), Draganfly Innovations issued 1,114,827 (pre-consolidation)
common shares with a value of $1,000,000 as transaction fees for the Amalgamation to related parties.
|
|
|
-
|
On August 15, 2019, the Amalgamation (Note 3) was completed and the Company acquired, on a 1.794 for 1
basis, all issued and outstanding shares of Draganfly Innovations in exchange for 42,638,356 common shares of the Company.
|
|
|
-
|
On August 15, 2019, the Company issued 45,325 common shares for settlement of $22,662 in trades payables
at a value of $0.50 per share.
|
|
|
-
|
On August 15, 2019, the Company issued 2,118,492 common shares for settlement of $740,000 in convertible
debentures and interest. As a result of the settlement, the Company recognized loss on settlement of debt of $319,246 in the statement
of loss and comprehensive loss.
|
|
|
-
|
On August 23, 2019, the Company issued 316,940 common shares for exercise of share purchase warrants of
the Company for proceeds of $8,833. As a result of the exercise, $212,908 from reserve was reclassification to share capital.
|
|
|
-
|
On October 25, 2019, the Company issued 14,051,499 units per the private placement (Note 3). Each unit
consists of one common share and one warrant. These warrants have an exercise price of $0.50 per warrant, each convert to one common share,
and have a life of one year, expiring on October 25, 2020.
|
Stock options
The Company has adopted an incentive share compensation
plan, which provides that the Board of Directors of the Company may from time to time, in its discretion, and in accordance with the CSE
requirements, grant to directors, officers, employees and technical consultants to the Company, non-transferable stock options to purchase
common shares. The total number of common shares reserved and available for grant and issuance pursuant to this plan shall not exceed
20% (in the aggregate) of the issued and outstanding common shares from time to time. The number of options awarded and underlying vesting
conditions are determined by the Board of Directors in its discretion. Such options will be exercisable for a period of up to 10 years
from the date of grant. The aggregate sales price (meaning the sum of all cash, property, notes, cancellation of debt, or other consideration
received or to be received by the Company for the sale of the securities) or amount of common shares issued during any consecutive 12-month
period will not exceed the greatest of the following: (i) U.S.$1,000,000; (ii) 15% of the total assets of the Company, measured at the
Company's most recent balance sheet date; or (iii) 15% of the outstanding amount of the common shares of the Company, measured at the
Company's most recent balance sheet date; and The number of common shares issuable pursuant to the exercise of options under the plan
within a 12 month period to all eligible persons retained to provide investor relations activities (together with those common shares
that are issued pursuant to any other share compensation arrangement) shall not, at any time, exceed 1% of the issued and outstanding
common shares.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
17.
SHARE CAPITAL (CONT’D)
As at December 31, 2020, the Company had the following
options outstanding and exercisable:
|
Grant Date
|
|
Expiry Date
|
|
Exercise Price
|
|
|
Remaining Contractual Life (years)
|
|
|
Number of
Options
Outstanding
|
|
|
Number of
Options
Exercisable
|
|
|
October 30, 2019
|
|
October 30, 2029
|
|
$
|
0.50
|
|
|
|
8.84
|
|
|
|
2,858,332
|
|
|
|
1,974,993
|
|
|
November 19, 2019
|
|
November 19, 2029
|
|
$
|
0.50
|
|
|
|
8.89
|
|
|
|
650,000
|
|
|
|
566,666
|
|
|
April 30, 2020
|
|
April 30, 2030
|
|
$
|
0.50
|
|
|
|
9.33
|
|
|
|
445,000
|
|
|
|
124,999
|
|
|
April 30, 2020
|
|
April 30, 2030
|
|
$
|
0.77
|
|
|
|
9.33
|
|
|
|
600,000
|
|
|
|
200,000
|
|
|
July 3, 2020
|
|
July 3, 2025
|
|
$
|
0.64
|
|
|
|
4.51
|
|
|
|
1,000,000
|
|
|
|
166,666
|
|
|
November 24, 2020
|
|
November 24, 2030
|
|
$
|
0.50
|
|
|
|
9.90
|
|
|
|
165,000
|
|
|
|
55,000
|
|
|
December 11, 2020
|
|
December 11, 2030
|
|
$
|
0.43
|
|
|
|
9.95
|
|
|
|
250,000
|
|
|
|
62,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,968,332
|
|
|
|
3,150,824
|
|
The following is a summary of the Company’s
stock option activity:
|
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Outstanding, December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
3,725,000
|
|
|
|
0.50
|
|
|
Outstanding, December 31, 2019
|
|
|
3,725,000
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(216,668
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
2,460,000
|
|
|
|
0.63
|
|
|
Outstanding, December 31, 2020
|
|
|
5,968,332
|
|
|
$
|
0.55
|
|
During the year ended December 31,
2020,
|
|
-
|
The Company granted 445,000 options to employees. Each option is exercisable at
$0.50 per share for a period of 10 years from the grant date.
|
|
|
-
|
The Company issued 600,000 options to consultants. Each option is exercisable at
$0.77 per share for a period of 10 years from the grant date.
|
|
|
-
|
The Company granted 1,000,000 options to employees. Each option is exercisable
at $0.64 per share for a period of 5 years from the grant date.
|
|
|
-
|
The Company granted 165,000 options to employees. Each option is exercisable at
$0.50 per share for a period of 10 years from the grant date.
|
|
|
-
|
The Company granted 250,000 options to a consultant. Each option is exercisable
at $0.43 per share for a period of 10 years from the grant date.
|
During the year ended December 31,
2019,
|
|
-
|
The Company granted 2,925,000 options to employees. Each option is exercisable
at $0.50 per share for a period of 10 years from the grant date.
|
|
|
-
|
The Company issued 800,000 options to consultants. Each option is exercisable at
$0.50 per share for a period of 10 years from the grant date.
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
17.
SHARE CAPITAL (CONT’D)
During the year ended December 31, 2020, the Company
recorded $1,724,853 (2019 – $599,701) in stock-based compensation for stock options, based on the fair values of stock options granted
which were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Risk free interest rate
|
|
|
|
|
0.43%-0.66%
|
|
|
|
1.45%-1.46%
|
|
|
Expected volatility
|
|
|
|
|
113.53%-119.03%
|
|
|
|
100%
|
|
|
Expected life
|
|
|
|
|
5-10 years
|
|
|
|
7.5 years
|
|
|
Expected dividend yield
|
|
|
|
|
0%
|
|
|
|
0%
|
|
|
Exercise price
|
|
|
|
$
|
0.43-0.77
|
|
|
$
|
0.50
|
|
Volatility is calculated using the historical
volatility method.
The weighted average grant date fair value of
options granted during the year ended December 31, 2020 was $0.63 per option (2019 – $0.50 per option).
Restricted share units (RSUs)
The Company has adopted an incentive share compensation
plan, which provides that the Board of Directors of the Company may from time to time, in its discretion, and in accordance with the Exchange
requirements, grant to directors, officers, employees and technical consultants to the Company, restricted stock units (RSUs). The number
of RSUs awarded and underlying vesting conditions are determined by the Board of Directors in its discretion. RSUs will have a 3-year
vesting period following the award date. The total number of common shares reserved and available for grant and issuance pursuant to this
plan, and the total number of Restricted Share Units that may be awarded pursuant to this plan, shall not exceed 20% (in the aggregate)
of the issued and outstanding common shares from time to time.
The aggregate sales price (meaning the sum of
all cash, property, notes, cancellation of debt, or other consideration received or to be received by the Company for the sale of the
securities) or amount of common shares issued during any consecutive 12-month period will not exceed the greatest of the following: (i)
USD $1,000,000; (ii) 15% of the total assets of the Company, measured at the Company's most recent balance sheet date; or (iii) 15% of
the outstanding amount of the common shares of the Company, measured at the Company's most recent balance sheet date. At the election
of the Board of Directors, upon each vesting date, participants receive (a) the issuance of common shares from treasury equal to the number
of RSUs vesting, or (b) a cash payment equal to the number of vested RSUs multiplied by the fair market value of a common share, calculated
as the closing price of the common shares on the CSE for the trading day immediately preceding such payment date; or (c) a combination
of (a) and (b).
On the grant date of RSUs, the Company determines
whether it has a present obligation to settle in cash. If the Company has a present obligation to settle in cash, the RSUs are accounted
for as liabilities, with the fair value remeasured at the end of each reporting period and at the date of settlement, with any changes
in fair value recognized in profit or loss for the period. The Company has a present obligation to settle in cash if the choice of settlement
in shares has no commercial substance, or the Company has a past practice or a stated policy of setting in cash, or generally settles
in cash whenever the counterparty asks for cash settlement. If no such obligation exists, RSUs are accounted for as equity settled share-based
payments and are valued using the share price on grant date. Upon settlement:
|
|
a)
|
If the Company elects to settle in cash, the cash payment is accounted for as the repurchase of an equity
interest (i.e. as a deduction from equity), except as noted in (c) below.
|
|
|
b)
|
If the Company elects to settle by issuing shares, the value of RSUs initially recognized in reserves
is reclassified to share capital, except as noted in (c) below.
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
17.
SHARE CAPITAL (CONT’D)
|
|
c)
|
If the Company elects the settlement alternative with the higher fair value, as at the date of settlement,
the Company recognizes an additional expense for the excess value given (i.e. the difference between the cash paid and the fair value
of shares that would otherwise have been issued, or the difference between the fair value of the shares and the amount of cash that would
otherwise have been paid, whichever is applicable).
|
During the year ended December 31, 2020, the Company
committed to grant 1,240,000 RSUs to employees and consultants of the Company with each RSU exercisable into one common share of the Company
or the cash equivalent thereof upon the vesting conditions being met for a period of three years from the grant date. The Company recorded
share-based payment expense of $943,611 (2019 – $161,858) in stock-based compensation for RSUs, based on the fair values of RSUs
granted which were calculated using the closing price of the Company’s stock on the day prior to grant.
The following is a summary of the Company’s
RSU activity:
|
|
|
Number of RSUs
|
|
|
Outstanding, December 31, 2018
|
|
|
-
|
|
|
Granted
|
|
|
3,175,000
|
|
|
Outstanding, December 31, 2019
|
|
|
3,175,000
|
|
|
Exercised
|
|
|
(999,992
|
)
|
|
Forfeited
|
|
|
(341,667
|
)
|
|
Granted
|
|
|
1,240,000
|
|
|
Outstanding, December 31, 2020
|
|
|
3,073,341
|
|
As at December 31, 2020 the Company had the following
RSUs outstanding:
|
Grant Date
|
|
Number of RSUs Outstanding
|
|
|
October 30, 2019
|
|
|
1,666,674
|
|
|
November 19, 2019
|
|
|
166,667
|
|
|
April 30, 2020
|
|
|
375,000
|
|
|
November 24, 2020
|
|
|
865,000
|
|
|
|
|
|
3,073,341
|
|
Warrants
During the year ended December 31, 2020, the Company
issued warrants (“USD Warrants”) with a USD exercise price. Being in a foreign currency that is not the Company’s functional
currency, these USD Warrants are required to be recorded as a financial liability and not as equity. As a financial liability, these USD
Warrants are revalued on a quarterly basis to fair market value with the change in fair value being recorded through the Consolidated
Statement of Comprehensive Loss. The initial fair value of these USD Warrants was parsed out from equity and recorded as a financial liability.
To reach a fair value of the USD Warrants, a Black
Scholes calculation is used, calculated in USD as the Company also trades on the OTCQB. The Black Scholes value per USD Warrant is then
multiplied by the number of outstanding warrants and then multiplied by the foreign exchange rate at the end of the period from the Bank
of Canada.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
17.
SHARE CAPITAL (CONT’D)
Warrant Derivative Liability
|
|
|
December 31, 2020
|
|
|
Balance, Beginning
|
|
$
|
-
|
|
|
Change in fair value of warrants outstanding
|
|
|
748,634
|
|
|
Balance, Ending
|
|
$
|
748,634
|
|
The derivative financial liability consists of
the fair value of the non-compensatory share purchase warrants that have exercise prices that differ from the functional currency of the
Company and are within the scope of IAS 32 “Financial Instruments: Presentation”. Details of these warrants and their fair
values are as follows:
|
Issue Date
|
|
Exercise Price
|
|
|
Number of
Warrants
Outstanding at
December 31,
2020
|
|
|
Fair Value at December 31, 2020
|
|
|
Number of Warrants Outstanding at December 31, 2019
|
|
|
Fair Value at December 31,
2019
|
|
|
November 30, 2020
|
|
|
US$ 0.71
|
|
|
|
2,556,496
|
|
|
$
|
748,634
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
2,556,496
|
|
|
$
|
748,634
|
|
|
|
-
|
|
|
$
|
-
|
|
During the year ended December 31, 2020, the Company
extended the life of the November 5, 2019 warrants from expiring on November 5, 2020 to expiring on November 5, 2021. To do this, it was
required that 25% of the remaining November 5, 2019 warrants needed to be exercised by October 21, 2020 and was completed.
The fair values of these warrants were estimated
using the Black-Scholes option pricing model with the following weighted average assumptions:
|
Year ended December 31,
|
|
2020
|
|
|
2019
|
|
|
Risk free interest rate
|
|
|
0.20%-0.24%
|
|
|
|
-
|
|
|
Expected volatility
|
|
|
72.76%-74.10%
|
|
|
|
-
|
|
|
Expected life
|
|
|
2 years
|
|
|
|
-
|
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
-
|
|
|
Exercise price
|
|
$
|
0.71
|
|
|
$
|
-
|
|
Volatility is calculated using the historical
volatility method.
The following is the summary of the Company’s
warrant activity:
|
|
|
Number of Warrants
|
|
|
Exercise Price
|
|
|
Outstanding, December 31, 2018
|
|
|
770,030
|
|
|
$
|
0.27
|
|
|
Warrants of the Company at time of Amalgamation (Note 3)
|
|
|
4,000,000
|
|
|
|
0.10
|
|
|
Expired
|
|
|
(453,090
|
)
|
|
|
0.03
|
|
|
Exercised
|
|
|
(316,940
|
)
|
|
|
0.03
|
|
|
Granted
|
|
|
14,051,499
|
|
|
|
0.50
|
|
|
Outstanding, December 31, 2019
|
|
|
18,051,499
|
|
|
$
|
0.41
|
|
|
Exercised
|
|
|
(7,923,874
|
)
|
|
|
0.30
|
|
|
Forfeited
|
|
|
(600,000
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
2,556,496
|
|
|
|
0.71
|
|
|
Outstanding, December 31, 2020
|
|
|
12,084,121
|
|
|
$
|
0.59
|
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
|
|
17.
|
SHARE CAPITAL (CONT’D)
|
As at December 31, 2020, the Company had the following warrants outstanding:
|
Issue Date
|
|
Expiry Date
|
|
Exercise Price
|
|
|
Number of Warrants Outstanding
|
|
|
November 5, 2019
|
|
November 5, 2021
|
|
|
CDN$ 0.50
|
|
|
|
9,527,625
|
|
|
November 30, 2020
|
|
November 30, 2022
|
|
|
US$ 0.71
|
|
|
|
2,556,496
|
|
|
|
|
|
|
|
|
|
|
|
12,084,121
|
|
The weighted average remaining contractual life
of the warrants outstanding as of December 31, 2020 was 1.07 years (December 31, 2019 - 0.90 years).
18.
REVENUE
The Company sub-classifies revenue
within the following components: product revenue and services revenue. Product revenue comprises of sales of internally assembled multi-rotor
helicopters, industrial aerial video systems, civilian small unmanned aerial systems or vehicles, and wireless video systems. Services
revenue consists of fees charged for custom engineering, drone as a service work, and training and simulation consulting.
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Product sales
|
|
$
|
3,087,223
|
|
|
$
|
248,939
|
|
|
Drone services
|
|
|
630,532
|
|
|
|
-
|
|
|
Custom engineering services
|
|
|
645,756
|
|
|
|
1,131,488
|
|
|
|
|
$
|
4,363,511
|
|
|
$
|
1,380,427
|
|
The Company derives significant revenues
from one (2019 – one) customer, which exceeds 10% of total revenues for the year ended December 31, 2020 at $474,701 of custom engineering
services revenue (2019 – $1,116,093 of custom engineering services revenue).
Consulting revenue:
On May 22, 2017, the Company executed
a standard consulting agreement, whereby the Company would provide consulting, custom engineering and investigating and solving on a project-by-project
basis. The Company shall be responsible for the development, design, procurement, fabrication, assembly, integration, checkout, integration
and test of hardware, software, and firmware necessary to produce a complete system per each project. The consideration for the services
performed are based on the labor cost incurred on an hourly basis and minimal preapproved expenditures.
Geographic revenue segmentation is
as follows:
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Canada
|
|
$
|
2,270,862
|
|
|
$
|
127,118
|
|
|
United States
|
|
|
1,982,404
|
|
|
|
1,251,199
|
|
|
International
|
|
|
110,245
|
|
|
|
2,110
|
|
|
|
|
$
|
4,363,511
|
|
|
$
|
1,380,427
|
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
18.
REVENUE (CONT’D)
The Company operates in an international
market with four reportable operating segments.
|
|
|
Draganfly
Inc.
|
|
|
Draganfly Innovations Inc.
|
|
|
Draganfly Innovations USA, Inc.
|
|
|
Dronelogics Systems
Inc.
|
|
|
Total
|
|
|
Product sales
|
|
$
|
-
|
|
|
$
|
169,709
|
|
|
$
|
660,227
|
|
|
$
|
2,257,287
|
|
|
$
|
3,087,223
|
|
|
Drone services
|
|
|
-
|
|
|
|
-
|
|
|
|
17,338
|
|
|
|
613,194
|
|
|
|
630,532
|
|
|
Custom engineering services
|
|
|
-
|
|
|
|
645,756
|
|
|
|
-
|
|
|
|
-
|
|
|
|
645,756
|
|
|
|
|
|
-
|
|
|
|
815,465
|
|
|
|
677,565
|
|
|
|
2,870,481
|
|
|
|
4,363,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
-
|
|
|
|
(339,398
|
)
|
|
|
(543,541
|
)
|
|
|
(1,720,972
|
)
|
|
|
(2,603,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
476,067
|
|
|
|
134,024
|
|
|
|
1,149,509
|
|
|
|
1,759,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
7,455,393
|
|
|
|
1,635,096
|
|
|
|
404,194
|
|
|
|
759,799
|
|
|
|
10,254,482
|
|
|
Other income (expenses)
|
|
|
(698,174
|
)
|
|
|
1,150,350
|
|
|
|
(7
|
)
|
|
|
26,900
|
|
|
|
479,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8,153,567
|
)
|
|
|
(8,679
|
)
|
|
|
(270,177
|
)
|
|
|
416,610
|
|
|
|
(8,015,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation differences
|
|
|
-
|
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(8,153,567
|
)
|
|
$
|
(8,679
|
)
|
|
$
|
(270,073
|
)
|
|
$
|
416,610
|
|
|
$
|
(8,015,709
|
)
|
The Company separated the operating
segments based on the existing subsidiaries and have revenues as follows:
|
|
-
|
Draganfly Inc.: No revenues.
|
|
|
-
|
Draganfly Innovations Inc.: Product sales revenues and revenues derived from custom
integration and engineering services.
|
|
|
-
|
Draganfly Innovations USA, Inc.: Product sales revenues and revenues derived from
drone and health/telehealth services.
|
|
|
-
|
Dronelogics Systems Inc.: Product sales revenues and revenues derived from rental,
repair, drone as a service, and training services.
|
For 2019 and 2020, all revenues are
derived from external customers.
|
|
19.
|
OFFICE AND MISCELLANEOUS
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Advertising, Marketing, and Investor Relations
|
|
$
|
2,601,848
|
|
|
$
|
1,436,699
|
|
|
Contract Work
|
|
|
399,494
|
|
|
|
438,601
|
|
|
Other
|
|
|
426,511
|
|
|
|
252,332
|
|
|
|
|
$
|
3,427,853
|
|
|
$
|
2,127,632
|
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
20.
GOVERNMENT ASSISTANCE
During the year ended December 31,
2020, the Company received $30,537 (December 31, 2019 – $nil) in government assistance for the purchase of research related to scientific
research and experimental development tax credit, the entire amount is included in other income. In addition, the Company recorded $30,537
(December 31, 2019 - $nil) in SR&ED receivable for current year SR&ED claim.
In February 2016, the Company and an
Alberta based government funded not-for-profit organization (the “Organization”) entered into a funding agreement, whereby
the Organization would fund 50% of the total costs, up to $375,000 to the Company for the development of a new product. the Company will
pay the Organization $33,709 if the Company ever sells a product that the Organization’s funding contributed to, recorded in accounts
payable and accrued liabilities.
21.
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Company is exposed in varying degrees
to a variety of financial instrument related risks. The Board of Directors approves and monitors the risk management processes, inclusive
of documented investment policies, counterparty limits, and controlling and reporting structures. The type of risk exposure and the way
in which such exposure is managed is provided as follows:
Credit risk
Credit risk is the risk that one party
to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company’s
primary exposure to credit risk is on its cash held in bank accounts and trade receivables. The majority of cash is deposited in bank
accounts held with major bank in Canada and the United States. As most of the Company’s cash is held by one bank there is a concentration
of credit risk. This risk is managed by using major banks that are high credit quality financial institutions as determined by rating
agencies. The Company does not have any past due outstanding receivables and the expected loss rate for undue balance is estimated to
be nominal.
Liquidity risk
Liquidity risk is the risk that the
Company will not be able to meet its financial obligations as they fall due. The Company has a planning and budgeting process in place
to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis. The Company ensures
that there are sufficient funds to meet its short-term business requirements, taking into account its anticipated cash flows from operations
and its holdings of cash and cash equivalents. Historically, the Company's sole source of funding has been the issuance of equity securities
for cash, primarily through private placements. The Company’s access to financing is always uncertain. There can be no assurance
of continued access to significant equity funding.
Foreign exchange risk
Foreign currency risk is the risk that
the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from
the respective functional currency. The Company does not hedge its exposure to fluctuations in foreign exchange rates.
Interest rate risk
Interest rate risk is the risk that
the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company
is exposed to interest rate risk on its cash equivalents as these instruments have original maturities of three months or less and are
therefore exposed to interest rate fluctuations on renewal.
Fair value
The fair value of the Company’s
financial assets and liabilities approximates the carrying amount.
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
21. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (CONT’D)
Capital Management
The Company manages its capital to
maintain its ability to continue as a going concern and to provide returns to shareholders and benefits to other stakeholders. The capital
structure of the Company consists of cash, debt, and equity comprised of issued share capital, and share-based payment reserve.
The Company manages its capital structure
and makes adjustments to it in light of economic conditions. The Company, upon approval from its board of directors, will balance its
overall capital structure through new equity issuances or by undertaking other activities as deemed appropriate under the specific circumstances.
The Company is not subject to externally imposed capital requirements and the Company’s overall strategy with respect to capital
risk management remains unchanged from the year ended December 31, 2018.
The breakdown of the Company’s
capital is as follows:
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Cash
|
|
$
|
1,982,416
|
|
|
$
|
2,429,375
|
|
|
Debt
|
|
|
97,916
|
|
|
|
-
|
|
|
Equity
|
|
$
|
3,848,205
|
|
|
$
|
2,191,353
|
|
22.
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.
Related party transactions and balances:
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 services are provided by a team of up to six consultants and 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
year ended December 31, 2020, the company incurred fees of $177,000 compared to $80,000 in 2019. As at December 31, 2020, the Company
was indebted to this company in the amount of $nil (December 31, 2019 - $nil).
On October 1, 2019, the Company entered into an
independent consultant agreement (“Consultant Agreement”) with 1502372 Alberta Ltd, a company controlled by Cameron Chell,
CEO and director, to provide executive consulting services to the Company. The costs of all charges are based on the fees set in the Consultant
Agreement and are settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the year ended December
31, 2020, the Company incurred fees of $525,164 compared to $9,000 in 2019. The year over year increase can largely be attributed to a
transaction bonus relating to the sale of an asset for the benefit of the Company, a performance bonus, and an increase in annual compensation
that is more commensurate with the role of CEO. As at December 31, 2020, the Company was indebted to this company in the amount of $321,741
(December 31, 2019 - $9,450).
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
22.
RELATED PARTY TRANSACTIONS (CONT’D)
On July 3, 2020, the Company entered
into an executive consultant agreement (“Executive Agreement”) with Scott Larson, a director of the Company, to provide executive
consulting services, as President, to the Company. The costs of all charges are based on the fees set in the Executive Agreement and are
settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the year ended December 31, 2020, the
Company incurred fees of $227,524. As at December 31, 2020, the Company was indebted to this company in the amount of $153,887.
During the year ended December 31,
2020 the Company had $475,628 (2019 - $9,681) payable to related parties outstanding that were included in accounts payable. The balances
outstanding 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 year ended December 31, 2020 and
2019 included:
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Management fees paid to a company controlled by CEO and director
|
|
$
|
737,164
|
|
|
$
|
186,000
|
|
|
Management fees paid to a company controlled by president and director
|
|
|
227,524
|
|
|
|
-
|
|
|
Management fees paid to a company controlled by a former director
|
|
|
165,000
|
|
|
|
195,000
|
|
|
Salaries
|
|
|
655,799
|
|
|
|
179,429
|
|
|
Salaries paid to the former owner of the Company
|
|
|
86,097
|
|
|
|
149,060
|
|
|
Share-based compensation
|
|
|
1,614,158
|
|
|
|
480,158
|
|
|
Total
|
|
$
|
3,485,742
|
|
|
$
|
1,189,647
|
|
23. INCOME TAXES
The following table reconciles the
expected income taxes at the Canadian statutory income tax rates to the amounts recognized in the statements of comprehensive loss for
the years ended December 31, 2020 and 2019:
|
|
|
December 31, 2020
|
|
|
December 31,
2019
|
|
|
Loss before income taxes
|
|
$
|
8,015,813
|
|
|
$
|
11,095,507
|
|
|
Canadian statutory rates
|
|
|
27
|
%
|
|
|
27
|
%
|
|
Expected income tax
|
|
|
2,164,000
|
|
|
|
2,996,000
|
|
|
Non-deductible items
|
|
|
(687,000
|
)
|
|
|
(2,043,000
|
)
|
|
Adjustments to prior years provision versus statutory tax returns
|
|
|
189,000
|
|
|
|
(388,000
|
)
|
|
Differences between prior year provision and final tax return
|
|
|
(535,000
|
)
|
|
|
(18,000
|
)
|
|
Change in deferred tax asset not recognized
|
|
|
(1,131,000
|
)
|
|
|
(547,000
|
)
|
|
Income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
23. INCOME TAXES (CONT’D)
The Company’s unrecognized deductible
temporary differences and unused tax losses for which no deferred tax asset is recognized consist of the following amounts:
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Deferred income tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Share issuance costs
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
Non-capital losses
|
|
|
3,656,000
|
|
|
|
2,439,000
|
|
|
Property and equipment
|
|
|
457,000
|
|
|
|
581,000
|
|
|
Intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
Scientific Research and Experimental Development
|
|
|
57,000
|
|
|
|
49,000
|
|
|
Total deferred income tax assets
|
|
$
|
4,200,000
|
|
|
$
|
3,069,000
|
|
|
Deferred income tax not recognized
|
|
|
(4,200,000
|
)
|
|
|
(3,069,000
|
)
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has non-capital loss carry
forward of approximately $13,539,000 which may be carried forward to apply against future year income tax for Canadian income tax purposes,
subject to the final determination by taxation authorities, expiring in the years 2036 to 2040.
24. FINANCE AND OTHER COSTS
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Accretion and interest expense (Note 16)
|
|
$
|
1,090
|
|
|
$
|
16,088
|
|
|
Interest expense for notes payable (note 15)
|
|
|
-
|
|
|
|
101,689
|
|
|
Interest expense on lease liabilities (note 12)
|
|
|
18,290
|
|
|
|
14,534
|
|
|
Interest on outstanding trade payables and bank charges
|
|
|
3,737
|
|
|
|
39,594
|
|
|
|
|
$
|
23,117
|
|
|
$
|
171,905
|
|
25. OTHER INCOME
The Company had previously written off an investment
in a UK-based company. On April 27, 2020, this company was sold and the Company received $997,714 (US$709,544) and an estimated $193,808
(US$145,294) will be received by the end of October, 2021, which has been accounted for in accounts receivable.
26. SUPPLEMENTAL CASH FLOW DISCLOSURES
During the year ended December 31,
2020, the Company settled debt of $344,354 with the issuance of 555,409 common shares and recognized a gain on settlement of debt of $28,614.
During the year ended December 31, 2019:
|
|
-
|
Settlement of $822,003 in accounts payable and application of $153,566 in subscription receivable through
issuance of shares (Note 17);
|
|
|
-
|
Issuance of 200,000 common shares at $0.50 per shares as finders’ fees;
|
|
|
-
|
Settlement of $344,354 in trades payable for issuance of 555,409 common shares and recognized a loss of
$38,879; and
|
|
|
-
|
Settlement of $740,000 of convertible debentures.
|
Draganfly Inc. (formerly Drone Acquisition Corp.)
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2020 and 2019
Expressed in Canadian Dollars
27. CANADIAN EMERGENCY WAGE SUBSIDY
In response to COVID-19, the Government
of Canada announced the Canada Emergency Wage Subsidy ("CEWS") program in April 2020. CEWS provides a wage subsidy on eligible
remuneration, subject to a maximum per employee, to eligible employers based on meeting certain eligibility criteria. The Company determined
that it qualified for this subsidy. The Company has recognized the government grant as a reduction to expenses as it has complied with
the eligibility criteria and the subsidy has been received. Included in the statement of operations and comprehensive income for the year
ended December 31, 2020 is $490,748 relating to the CEWS program of which was recorded as a reduction of wages and salaries included in
operating expenses. As at December 31, 2020, the Company had $37,185 included in amounts receivables for CEWS subsidies receivable.
28.
SUBSEQUENT EVENTS
The following reportable events occurred
subsequent to the year ended December 31, 2020:
|
|
-
|
On February 5, 2021, the Company closed a second tranche of its Regulation
A+ Offering for gross proceeds in the amount of $4,003,195 (US$3,135,838).
|
|
|
-
|
On March 9, 2021, the Company announced that it completed the final closing of its Regulation A+
Offering of units sold pursuant to the Company’s Regulation A+ offering circular (the “Offering Document”) filed with
the U.S. Securities and Exchange Commission. The Company issued 25,771,465 units at the offering price set out in the Offering Document
for gross proceeds in the amount of $15,504,135 (US$12,112,606) in the final closing. Each unit is comprised of one common share
of the Company and one common share purchase warrant, with each warrant entitling the holder to acquire one common
share at a price of US$0.71 per common share for period of two years from the date of issuance. The common shares and warrants
issued in connection with the offering are subject to a nine month hold period. In total, the Company issued 35,000,000
units under its Offering Document for aggregate gross proceeds of US$16,450,000.
|
|
|
-
|
On March 9, 2021, the Company announced that it entered into an asset purchase agreement with Vital Intelligence
Inc. (“Vital”) to purchase all the assets of Vital in consideration for: (a) a cash payment of $500,000 with $50,000
paid upon execution of the asset purchase agreement, $200,000 to be paid at closing and $250,000 to be paid on the six-month
anniversary date of closing; and (b) 6,000,000 units of the Company with each unit being comprised of one common
share of the Company and one common share purchase warrant. Each warrant will entitle the holder to acquire one common share for
a period of 24 months following closing at an exercise price of $2.67 per common share and the Company will be able to accelerate
the expiry date of the warrants after one year in the event the underlying common shares have a value of at least 30% greater than
the exercise price of the warrants. The units will be held in escrow following closing with 1,500,000 units being released at closing
and the remainder to be released upon the Company reaching certain revenue milestones received from the purchased assets. The acquisition
closed on March 25, 2021.
|
|
|
-
|
A total of 8,907,619 warrants and options have been exercised for proceeds of $4,462,935.
|
|
|
-
|
A total of 624,998 shares have been issued for the vesting of RSUs.
|
|
|
-
|
A total of 75,000 shares have been issued to a third party for services provided.
|
|
|
-
|
A total of 740,000 RSUs have been granted.
|
President of Candrone from ?January 2009 to present
Exhibit 4.3
Draganfly Inc. (formerly Drone Acquisition
Corp.)
Management’s Discussion and Analysis
For the year ended December 31, 2020
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
Special Note Regarding Forward Looking Information
This Management
Discussion & Analysis (“MD&A”) is intended to provide readers with the information that management believes is required
to gain an understanding of the current results of Draganfly Inc. (the "Company" or “Draganfly") and to assess the
Company’s future prospects. Accordingly, certain sections of this report contain forward-looking statements that are based on current
plans and expectations. These forward-looking statements are affected by risks and uncertainties that are discussed in this document
and that could have a material impact on future prospects. Readers are cautioned that actual events and results will vary.
In this MD&A
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.
Certain statements
in the MD&A, other than statements of historical fact, may include forward-looking information that involves various risks and uncertainties.
These include, without limitation, the Company’s current and planned operations in the technology sector and the expected results
of new operations and new clients. These statements are based on current expectations involving a number of risks and uncertainties related
to all aspects of the technology sector. These risks and uncertainties include, but are not restricted to, continued increased demand
for the Company’s products, the Company’s ability to maintain its technological and competitive advantages, the Company’s
ability to attract and retain key employees, the ability of the Company to take advantage of its intellectual property, the Company’s
ability to raise capital on acceptable terms when needed and the availability of key suppliers and contractors. These uncertainties may
cause actual results to differ from information contained herein. There can be no assurance that such statements will prove to be accurate.
Actual results and future events could differ materially from those anticipated in such statements. These forward-looking statements
are based on the estimates and opinions of Management on the dates they are made and are expressly qualified in their entirety by this
notice. The reader is cautioned not to rely on these forward-looking statements. The Company assumes no obligation to update forward-looking
statements should circumstances or Management’s estimates or opinions change except as required by securities laws.
The following MD&A is presented and dated
as of April 16, 2021 and should be read in conjunction with the audited consolidated financial statements and related notes for the year
ended December 31, 2020. 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.
The operations of the Company have been primarily
funded through internally generated cashflow and private placements of equity and convertible debentures. The continued operations of
the Company are dependent on the Company's ability to generate profitable operations in the future, develop and execute a sufficient
financing plan for future operations and receive continued financial support from shareholders and other providers of finance.
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.
The recent outbreak of the coronavirus, also
known as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus
continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. These
measures, which include the implementation of travel bans, self-imposed quarantine periods, and social distancing, have caused material
disruption to business globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and
weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic
conditions.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
There are significant uncertainties with respect
to future developments and impact to the Company related to the COVID-19 pandemic, including the duration, severity, and scope of the
outbreak and the measures taken by governments and businesses to contain the pandemic. While the impact of COVID-19 is expected to be
temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations cannot be reasonably estimated
at this time. At the date of this MD&A, 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. The extent to which these
events may impact the Company’s business activities will depend on future developments, such as the ultimate geographic spread
of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in Canada
and other countries to contain and treat the disease. With COVID-19 being an ongoing issue, the Company has prepared its employees at
its Saskatchewan and British Columbia facilities to be able to work from home. The Company also applied to the various federal
government relief initiatives. Although the Company’s major custom engineering customer temporarily closed that part of
its business, the Company believes it will start up again. Further, the Company has entered into a distribution agreement to be the exclusive
provider of one of their products which has helped offset custom engineering work from that customer. Aside from the acquisition of Dronelogics
and being opportunistic on other partnerships or acquisitions, the Company expanded its products/services offered to include health/telehealth
applications relating to COVID-19, as a way to deal with the impacts of COVID-19. However, these ongoing events are highly uncertain
and as such, the Company cannot determine the ultimate financial impacts at this time. Any deterioration in the current situation could
have an adverse impact on our business, results of operations, financial position, and cash flows in 2021.
Non-GAAP Measures and Additional GAAP Measures
Throughout
this document, 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”).
Core Business and Strategy
Draganfly
creates quality, cutting-edge unmanned and remote data collection and analysis platforms and systems that are designed to revolutionize
the way companies do business. The Company is incorporated under the British Columbia Business Corporations Act and has its registered
office located at 2800 – 666 Burrard Street, Vancouver, BC, V6C 2Z75 with a head office at 2108 St. George Avenue, Saskatoon, SK,
S7M 0K7.
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. More recently, the Company’s offering expanded to include the health/telehealth
field providing illness detection, social monitoring solutions, and sanitary spraying services relating to the ongoing COVID-19 pandemic.
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,
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 Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
With 18 fundamental UAV patents in the portfolio,
Draganfly will continue to expand and grow their intellectual property portfolio.
In addition, Draganfly has launched a health/telehealth
platform. The initial focus is a COVID-19 screening set of technologies that remotely detect a number of key underlying respiratory symptoms,
whereas the same technology stack enables true remote telehealth features. Further, it is offering sanitary spraying services to any
indoor or outdoor public gathering space such as sports auditoriums and fields to provide an additional level of protection against the
spread of contagious viruses such as COVID-19.
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 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 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. The Company incurred significant listing expenses to complete the process
but is well positioned to execute on its business plan.
On March 9, 2021, the Company announced
that it completed the final closing of its Regulation A+ Offering of units sold pursuant to the Company’s Regulation A+ offering
circular (the “Offering Document”) filed with the U.S. Securities and Exchange Commission. The Company issued 25,771,465
units at the offering price set out in the Offering Document for gross proceeds in the amount of $15,504,135 (US$12,112,606) in
the final closing. Each unit is comprised of one common share of the Company and one common share purchase warrant, with
each warrant entitling the holder to acquire one common share at a price of US$0.71 per common share for period of two years from
the date of issuance. The common shares and warrants issued in connection with the offering are subject to a nine month hold
period. In total, the Company issued 35,000,000 units under its Offering Document for aggregate gross proceeds of US$16,450,000.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
The Company has recently announced its intention
to file for an up listing to the NASDAQ exchange. The rational is that companies listed on the NASDAQ have to follow stringent reporting
requirements and as a result, provide greater access to investors, especially in the United States.
Additional information relating to the Company
may be found at the Company’s website, www.draganfly.com.
2020 Highlights
|
·
|
2020
Total Revenues at $4,363,511 with Product Revenue of $3,087,223
|
2020 was another milestone year for Draganfly.
The Company successfully closed and integrated its Dronelogics Systems Inc acquisition which provided the bulk of the product revenue
sales. Given the Company’s main custom engineering customer effectively shut this portion of their business in Q1/20, services
revenues were offset by other drone services work. Although, the Company’s OEM 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. With
its recent acquisition, the Company can now offer these lower priced drones for more traditional and less niche type work. The Company
believes there is still an opportunity for engineering procurement and product sales for those customers that either choose not to buy
foreign-made UAVs or are restricted from doing so due to information security concerns. 2020 revenues were up 216% year over year coming
in at $4,363,511 versus $1,380,427 in the previous year. $645,756 represents custom engineering services work, $630,532 represents drone
services work while the balance of revenue is from hardware sales.
|
·
|
Gross
Margins Decrease Due to Shift in Business Mix
|
With the Company now offering more products than
services, the gross margins decreased 52.1%. The Company’s total gross margin for 2020 was 40.3% vs 84.1% in 2019. Custom Engineering
services tends to have a much higher gross margin over manufacturing or non-OEM product sales given lower material costs.
|
·
|
Company
Diversified its Product and Services Offering with Acquisition
|
Given the Company’s impressive history
and deep engineering talent, a natural evolution was to outsource in-house capabilities to customers. Doing this leverages the Company’s
core skill set of innovation that tends to lead to future projects, bringing in more consistent revenue. With its recent acquisition,
the Company has increased its scope of products and services to include non-OEM products and drone as a service type work. This has proved
beneficial during the current pandemic as not all services are impacted the same way so having a larger breadth of products and services,
in part mitigates some risk for the Company.
|
·
|
Company
Broadens its Services to Include Health Vertical in the Face of Global Pandemic
|
Through its partnership with Vital Intelligence
and Varigard, the Company recently added health monitoring and prevention to its product and service offering. Securing some key clients
in this business line was key to proving out this new vertical. These clients were important for validation of this relatively new technology,
but more importantly demonstrates the Company’s ability to evolve and offer products and services that have global applicability.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
|
·
|
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:
|
|
·
|
generate
sufficient revenue to maintain profitability;
|
|
|
·
|
acquire
and maintain market share;
|
|
|
·
|
achieve
or manage growth in operations;
|
|
|
·
|
develop
and renew contracts;
|
|
|
·
|
attract
and retain additional engineers and other highly qualified personnel;
|
|
|
·
|
successfully
develop and commercially market new products;
|
|
|
·
|
adapt
to new or changing policies and spending priorities of governments and government agencies;
and
|
|
|
·
|
access
additional capital when required and on reasonable terms.
|
For further and more detailed risk disclosure,
please reference Business Risks at the end of this MD&A
Outlook and Guidance
This Outlook and Guidance contains forward-looking statements that
the Corporation 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
current economic climate and its effect on the Company’s client base business;
|
|
·
|
the
Company’s ability to successfully acquire new customers;
|
|
·
|
the
Company’s ability to successfully implement its technology;
|
|
·
|
management’s
assumptions regarding the sustainability of recurring revenue streams and the Company’s
expected profitability; and
|
|
·
|
management’s
outlook and guidance contains forward looking statements of the Company’s ability to
penetrate the US and international client base with its products and services and continue
its penetration in the Canadian market.
|
As the Company is now more capitalized and has
easier access to funds in the public markets, the Company will increasingly focus on some of its growth initiatives. Operationally, having
more capital will help the Company expand and diversify its engineering, drone, and health services businesses. This will require more
human resources from an oversight, sales, and engineering perspective and the Company anticipates adding additional staff to accommodate
these plans. Further, the Company will continue to focus on innovation, product development, and expanding its hardware offerings opportunistically
into niche segments of the UAV and related sectors. Finally, the Company has considered providing various other non-engineering services
and it may make more sense to buy an existing industry player than to build out this offering. With the Company being listed, it will
open up further opportunities to use its Common Shares as a currency for potential acquisitions. The Company expects to be opportunistic
with regards to any potential opportunities in the existing fiscal year and the near future.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
Selected Annual Financial Information
The following selected financial data has been
extracted from the audited consolidated financial statements, prepared in accordance with International Financial Reporting Standards,
for the fiscal years indicated and should be read in conjunction with those audited financial statements.
|
For the year ended December 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Total revenues
|
|
$
|
$4,363,511
|
|
|
$
|
1,380,427
|
|
|
$
|
1,387,013
|
|
|
Gross Profit (as a % of revenues)
|
|
|
40.3
|
%
|
|
|
84.1
|
%
|
|
|
67.4
|
%
|
|
Net loss
|
|
|
(8,015,813
|
)
|
|
|
(11,095,057
|
)
|
|
|
(601,729
|
)
|
|
Net loss per share ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
(0.10
|
)
|
|
|
(0.23
|
)
|
|
|
(0.03
|
)
|
|
-
Diluted
|
|
|
(0.10
|
)
|
|
|
(0.23
|
)
|
|
|
(0.03
|
)
|
|
Comprehensive loss
|
|
|
(8,015,709
|
)
|
|
|
(11,095,057
|
)
|
|
|
(601,729
|
)
|
|
Comprehensive loss per share ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
(0.10
|
)
|
|
|
(0.23
|
)
|
|
|
(0.03
|
)
|
|
-
Diluted
|
|
|
(0.10
|
)
|
|
|
(0.23
|
)
|
|
|
(0.03
|
)
|
|
Change in cash and cash equivalents
|
|
|
(447,063
|
)
|
|
|
2,349,954
|
|
|
|
(27,547
|
)
|
|
Total assets
|
|
|
7,100,567
|
|
|
|
3,221,783
|
|
|
|
504,825
|
|
|
Working capital
|
|
|
1,214,371
|
|
|
|
2,037,906
|
|
|
|
(4,353,261
|
)
|
|
Total non-current liabilities
|
|
|
104,885
|
|
|
|
93,073
|
|
|
|
-
|
|
|
Shareholder’s equity (deficiency)
|
|
$
|
3,848,205
|
|
|
$
|
2,191,353
|
|
|
$
|
(4,132,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares outstanding
|
|
|
86,093,361
|
|
|
|
69,670,613
|
|
|
|
21,932,454
|
|
Results of Operations
Revenue
|
For the year ended December 31,
|
|
2020
|
|
|
2019
|
|
|
Product sales
|
|
$
|
3,087,223
|
|
|
$
|
248,939
|
|
|
Product services
|
|
|
630,532
|
|
|
|
-
|
|
|
Consulting services
|
|
|
645,756
|
|
|
|
1,131,488
|
|
|
Total revenue
|
|
$
|
4,363,511
|
|
|
$
|
1,380,427
|
|
Total revenue for the year ended December 31,
2020 increased by $2,983,084 or 216.1% as compared to 2019. The increase in revenue is largely due to the Company’s acquisition
of Dronelogics Systems Inc. and the retail sales and services business that they brought partially offset by a decrease in Custom Engineering
services due to the downturn caused by COVID-19.
Draganfly Innovations Inc.’s ("Draganfly
Innovations") primary custom engineering customer is domiciled in the US and was shut down and reduced a number of its projects.
As a result, there was no contribution ($0) from this customer after March, 2020. However, services in 2020 is currently made
up of custom engineering (product development) and drone services work. Although the custom engineering part of this business
line was impacted, it was somewhat offset by drone services work that came from Dronelogics Systems Inc. ("Dronelogics").
Early in 2020, Draganfly signed an acquisition
agreement with Dronelogics Systems Inc. At the time, the Company had forecast a combined proforma revenue of $6 - $7 million for fiscal
2020. However, the acquisition did not officially close until April 30, 2020. Had the Company had the full benefit of the acquisition,
revenue would have been approximately $5 million. As noted in our COVID-19 disclosure, the pandemic did negatively impact the business
which can be attributed to most of the shortfall of the original projections.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
As at April 30, 2020, the Issuer completed its
acquisition of Dronelogics. Therefore, the December 31, 2020 results include 8 months of Dronelogics and 12 months of Draganfly Innovations.
As at December 31, 2020, $645,756 represents custom engineering services work, $630,532 represents drone services work and $3,087,223
represents products sales. While for the twelve-month period ended December 31, 2019, $1,131,488 came from Custom Engineering Service
work, no contribution from drone services work, and $248,939 coming from product sales. Accordingly, year over year, drone service revenue
and product sales increased due to the acquisition of Dronelogics and custom engineering service revenue decreased due to the
customer cutting back work due to the COVID-19 pandemic.
Cost of Goods Sold / Gross Margin
|
For the year ended December 31,
|
|
2020
|
|
|
2019
|
|
|
Cost of goods sold
|
|
$
|
(2,603,911
|
)
|
|
$
|
(218,800
|
)
|
|
Gross profit
|
|
$
|
1,759,600
|
|
|
$
|
1,161,627
|
|
|
Gross margin (%)
|
|
|
40.3
|
%
|
|
|
84.1
|
%
|
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. As
a result of increased product sales and service revenue, the Company’s Gross Profit increased by $597,973 or 51.5%. As a percentage
of sales, gross margin decreased from 84.1% in 2019 to 40.3% in 2020. This shift in gross margin is due to the lower margin product sales
that the Company acquired with Dronelogics.
Selling, General, and Administrative (SG&A)
|
For the year ended December 31,
|
|
2020
|
|
|
2019
|
|
|
Office and Miscellaneous
|
|
$
|
3,427,853
|
|
|
$
|
2,127,632
|
|
|
Professional Fees
|
|
|
1,762,594
|
|
|
|
524,101
|
|
|
Research and Development
|
|
|
567,999
|
|
|
|
16,883
|
|
|
Share-based compensation
|
|
|
2,668,464
|
|
|
|
761,559
|
|
|
Travel
|
|
|
25,617
|
|
|
|
30,896
|
|
|
Wages and salaries
|
|
|
1,649,329
|
|
|
|
989,083
|
|
|
Total
|
|
$
|
10,101,856
|
|
|
$
|
4,450,154
|
|
Selling, General and Administrative expenses
in 2020 increased by 127.0%, from $4,450,154 in 2019 to $10,101,856 in 2020. The largest contributor to the increase is share-based compensation
followed by marketing and investor relations expenses. Professional fees were also higher due to legal fees associated with the Company’s
Dronelogics acquisition, Reg A financing, and in the regular course of being a publicly listed Company for the full year.
Share-Based Compensation
|
For the year ended December 31,
|
|
2020
|
|
|
2019
|
|
|
Share-based compensation
|
|
$
|
2,668,464
|
|
|
$
|
761,559
|
|
Stock options
The Company has adopted an incentive share compensation
plan, which provides that the Board of Directors of the Company may from time to time, in its discretion, and in accordance with the
CSE requirements, grant to directors, officers, employees and technical consultants to the Company, non-transferable stock options to
purchase common shares. The total number of common shares reserved and available for grant and issuance pursuant to this plan shall not
exceed 20% (in the aggregate) of the issued and outstanding common shares from time to time. The number of options awarded and underlying
vesting conditions are determined by the Board of Directors in its discretion. Such options will be exercisable for a period of up to
10 years from the date of grant. The aggregate sales price (meaning the sum of all cash, property, notes, cancellation of debt, or other
consideration received or to be received by the Company for the sale of the securities) or amount of common shares issued during any
consecutive 12-month period will not exceed the greatest of the following: (i) U.S.$1,000,000; (ii) 15% of the total assets of the Company,
measured at the Company's most recent balance sheet date; or (iii) 15% of the outstanding amount of the common shares of the Company,
measured at the Company's most recent balance sheet date; and The number of common shares issuable pursuant to the exercise of options
under the plan within a 12 month period to all eligible persons retained to provide investor relations activities (together with those
common shares that are issued pursuant to any other share compensation arrangement) shall not, at any time, exceed 1% of the issued and
outstanding common shares.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
Authorized share capital
Unlimited number of common shares without par
value.
Issued share capital
For the year ended December 31, 2020,
|
|
-
|
On February 18, 2020, the Company issued
120,000 common shares for the exercise of warrants for $60,000.
|
|
|
-
|
On February 25, 2020, the Company issued
100,000 common shares for the exercise of warrants for $50,000.
|
|
|
-
|
On March 6, 2020, the Company issued 1,051,600
common shares for the exercise of warrants for $105,160.
|
|
|
-
|
On March 20, 2020, the Company issued
365,000 common shares for the exercise of warrants for $36,500.
|
|
|
-
|
On March 26, 2020, the Company issued
1,474,200 common shares for the exercise of warrants for $147,420.
|
|
|
-
|
On April 8, 2020, the Company issued 609,200
common shares for the exercise of warrants for $60,920.
|
|
|
-
|
On April 16, 2020, the Company issued
630,000 common shares for the exercise of warrants for $115,000.
|
|
|
-
|
On April 30, 2020, the Company issued
3,225,438 common shares for the acquisition of Dronelogics and an additional 200,000 common
shares as finder’s fees.
|
|
|
-
|
On May 27, 2020, the Company issued 60,000
common shares for the exercise of warrants for $30,000.
|
|
|
-
|
On June 23, 2020, the Company issued 228,000
common shares for the exercise of warrants for $114,000.
|
|
|
-
|
On July 3, 2020, the company issued 961,538
common shares for cash proceeds of $500,000.
|
|
|
-
|
On July 16, 2020, the Company issued 555,409
common shares for debt settlement of $344,354 and recognized a loss of $38,879 in the statement
of comprehensive loss.
|
|
|
-
|
On September 21, 2020, the Company issued
10,000 common shares for the exercise of warrants for $5,000.
|
|
|
-
|
On October 20, 2020, the Company issued
11,000 common shares for the exercise of warrants for $5,500.
|
|
|
-
|
On October 21, 2020, the Company issued
3,189,875 common shares for the exercise of warrants for $1,594,938.
|
|
|
-
|
On November 5, 2020, the Company issued
35,586 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
On November 30, 2020 the Company issued
2,556,496 units for the Regulation A+ financing in the United States. Each unit is comprised
of one common share and one share purchase warrant. These warrants have an exercise price
of $0.71 USD per warrant, each convert to one common share, and have a life of two years,
expiring on November 30, 2022.
|
|
|
-
|
On December 4, 2020, the Company issued
10,202 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
On December 8, 2020, the Company issued
13,234 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
On December 15, 2020, the Company issued
940,970 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
On December 23, 2020, the Company issued
75,000 common shares for the exercise of warrants for $37,500.
|
For the year ended December 31, 2019,
|
|
-
|
Prior to the closing of the Amalgamation
(Note 3), Draganfly Innovations issued 719,927 (pre-consolidation) common shares to a company
controlled by a director of the Company for settlement of $799,341 in accounts payable and
application of $153,566 in subscription receivable (Note 4).
|
|
|
-
|
Prior to the closing of the Amalgamation
(Note 3), Draganfly Innovations issued 1,114,827 (pre-consolidation) common shares with a
value of $1,000,000 as transaction fees for the Amalgamation to related parties.
|
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
|
|
-
|
On August 15, 2019, the Amalgamation (Note
3) was completed and the Company acquired, on a 1.794 for 1 basis, all issued and outstanding
shares of Draganfly Innovations in exchange for 42,638,356 common shares of the Company.
|
|
|
-
|
On August 15, 2019, the Company issued
45,325 common shares for settlement of $22,662 in trades payables at a value of $0.50 per
share.
|
|
|
-
|
On August 15, 2019, the Company issued
2,118,492 common shares for settlement of $740,000 in convertible debentures and interest.
As a result of the settlement, the Company recognized loss on settlement of debt of $319,246
in the statement of loss and comprehensive loss.
|
|
|
-
|
On August 23, 2019, the Company issued
316,940 common shares for exercise of share purchase warrants of the Company for proceeds
of $8,833. As a result of the exercise, $212,908 from reserve was reclassification to share
capital.
|
|
|
-
|
On October 25, 2019, the Company issued
14,051,499 units per the private placement (Note 3). Each unit consists of one common share
and one warrant. These warrants have an exercise price of $0.50 per warrant, each convert
to one common share, and have a life of one year, expiring on October 25, 2020.
|
Amalgamation
Prior to the Amalgamation (business combination),
access to capital was limited as a private company. Through the amalgamation agreement, management would have the resources needed to
raise significant capital and further have broader access to investors by being listed on a public exchange.
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.
|
Number of shares of Draganfly Inc.
|
|
|
10,500,001
|
|
|
Fair value of common shares in concurrent
financing
|
|
$
|
0.50
|
|
|
Fair value of shares of Draganfly Inc.
|
|
$
|
5,250,001
|
|
|
Fair value of warrants
|
|
|
1,645,193
|
|
|
Fair value of shares issued for transaction
fees
|
|
|
1,000,000
|
|
|
Net assets acquired
|
|
$
|
(90,335
|
)
|
|
Listing expense
|
|
$
|
7,804,859
|
|
|
Fair value of the
Company acquired, net of liabilities
|
|
|
|
|
Cash
|
|
$
|
28,538
|
|
|
Accounts receivable
|
|
|
4,991
|
|
|
Loans receivable
|
|
|
963,269
|
|
|
Accounts payable and accrued liabilities
|
|
|
(406,463
|
)
|
|
Subscription receipts
|
|
|
(500,000
|
)
|
|
|
|
$
|
90,335
|
|
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.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
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:
|
Risk-free interest rate
|
|
|
0.86
|
%
|
|
Estimate life
|
|
|
1.48
years
|
|
|
Expected volatility
|
|
|
100
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
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 the 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 working capital adjustment and 3,225,438 common shares in the capital of the
Company at a deemed price of $0.50 per share. In addition, the Company welcomed Mr. Hannewyk as a member of the Board.
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
as to $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.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
The purchase price allocation (“PPA”)
is as follows:
|
Number of shares of Draganfly Inc.
|
|
|
3,225,438
|
|
|
Fair value of common shares
|
|
$
|
0.83
|
|
|
Fair value of shares of Draganfly Inc.
|
|
$
|
2,677,114
|
|
|
Present value of the fair value of shares of Draganfly
Inc.
|
|
|
2,178,960
|
|
|
Cash portion of purchase price
|
|
|
500,000
|
|
|
Total
|
|
$
|
2,678,960
|
|
|
Tangible assets acquired
|
|
|
|
|
Cash
|
|
$
|
42,593
|
|
|
Accounts receivable
|
|
|
98,852
|
|
|
Inventory
|
|
|
629,684
|
|
|
Prepaids and deposits
|
|
|
93,997
|
|
|
Other current assets
|
|
|
3,014
|
|
|
Capital assets
|
|
|
54,946
|
|
|
Right-of-use assets
|
|
|
83,428
|
|
|
Accounts payable and accrued liabilities
|
|
|
(222,766
|
)
|
|
Customer deposits
|
|
|
(245,959
|
)
|
|
Loans
|
|
|
(245,752
|
)
|
|
Other current liabilities
|
|
|
(8,437
|
)
|
|
Lease liabilities
|
|
|
(87,203
|
)
|
|
|
|
|
196,397
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
|
|
|
Customer relationships
|
|
|
197,000
|
|
|
Website
|
|
|
119,000
|
|
|
|
|
|
316,000
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,166,563
|
|
|
Total consideration
|
|
$
|
2,678,960
|
|
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
Net and Comprehensive Loss
|
For the year ended December 31,
|
|
2020
|
|
|
2019
|
|
|
(Loss) income from operations
|
|
$
|
(8,494,882
|
)
|
|
$
|
(3,338,163
|
)
|
|
Change in fair value of derivative liability
|
|
|
(748,634
|
)
|
|
|
-
|
|
|
Finance and other costs
|
|
|
(23,117
|
)
|
|
|
(171,905
|
)
|
|
Foreign exchange loss
|
|
|
(87,104
|
)
|
|
|
5,803
|
|
|
Gain on disposal of assets
|
|
|
-
|
|
|
|
28,651
|
|
|
Gain on forgiveness of trades payable
|
|
|
127,711
|
|
|
|
-
|
|
|
Net gains and losses on settlement of debt
|
|
|
(38,879
|
)
|
|
|
198,976
|
|
|
Income from government assistance
|
|
|
21,090
|
|
|
|
-
|
|
|
Listing expense
|
|
|
-
|
|
|
|
(7,804,859
|
)
|
|
Loss on write-off loan receivable
|
|
|
-
|
|
|
|
(13,560
|
)
|
|
Other income
|
|
|
1,197,465
|
|
|
|
-
|
|
|
Scientific research and development tax
credit
|
|
|
30,537
|
|
|
|
-
|
|
|
Net loss
|
|
|
(8,015,813
|
)
|
|
|
(11,095,057
|
)
|
|
Cumulative translation differences
|
|
|
104
|
|
|
|
-
|
|
|
Comprehensive loss
|
|
$
|
(8,015,709
|
)
|
|
$
|
(11,095,057
|
)
|
For the year ended December 31, 2020, the Company
recorded a comprehensive loss of $8,015,709 compared to a comprehensive loss of $11,095,057 in 2019. The decreased loss was largely the
result of the lack of listing expense resulting from the amalgamation and the funds received from the disposal of an investment that
had been previously written off partially offset by an increase in loss from operations and the loss from the change in fair value of
liability for the USD warrants. The Company received Scientific Research and Experimental Development tax credit in 2020.
Selected Quarterly Information
The following selected quarterly financial data
has been extracted from the financial statements, prepared in accordance with International Financial Reporting Standards.
In Q4 2020, the Company recorded revenues of
$1,486,009, an increase of $994,489 or 202.3% as compared to the equivalent quarter in 2019. Most of the increase can be attributed to
higher product sales and services relating to the acquisition of Dronelogicis, which also reduced the gross margin to 22.2% vs 91.4%
in Q4 2019. Operating expenses increased in Q4 2020 ($3,359,508 compared to $2,947,523 for the same period last year). Operating costs
for the previous other three quarters were much higher than the three quarters in 2019. The increase in operating costs were primarily
due to increased marketing and investor relations expenses.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
|
|
|
2020 Q4
|
|
|
2020 Q3
|
|
|
2020 Q2
|
|
|
2020 Q1
|
|
|
Revenue
|
|
$
|
1,486,009
|
|
|
$
|
1,453,905
|
|
|
$
|
926,540
|
|
|
$
|
497,057
|
|
|
Cost of goods sold
|
|
$
|
(1,155,491
|
)
|
|
$
|
(893,441
|
)
|
|
$
|
(495,193
|
)
|
|
$
|
(59,786
|
)
|
|
Gross profit
|
|
$
|
330,518
|
|
|
$
|
560,464
|
|
|
$
|
431,347
|
|
|
$
|
437,271
|
|
|
Gross margin – percentage
|
|
|
22.2
|
%
|
|
|
38.5
|
%
|
|
|
46.6
|
%
|
|
|
88.0
|
%
|
|
Operating expenses
|
|
$
|
(3,359,508
|
)
|
|
$
|
(2,852,003
|
)
|
|
$
|
(2,387,738
|
)
|
|
$
|
(1,655,233
|
)
|
|
Operating loss
|
|
$
|
(3,028,990
|
)
|
|
$
|
(2,291,539
|
)
|
|
$
|
(1,956,391
|
)
|
|
$
|
(1,217,962
|
)
|
|
Operating loss per share – basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
Operating loss per share – diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
Other income (expense)
|
|
$
|
(713,885
|
)
|
|
$
|
91,228
|
|
|
$
|
987,872
|
|
|
$
|
113,854
|
|
|
Other comprehensive income (loss)
|
|
|
1,235
|
|
|
|
(1,232
|
)
|
|
|
(13,713
|
)
|
|
|
13,814
|
|
|
Comprehensive loss
|
|
$
|
(3,741,640
|
)
|
|
$
|
(2,201,543
|
)
|
|
$
|
(982,232
|
)
|
|
$
|
(1,090,294
|
)
|
|
Comprehensive loss per share – basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
Comprehensive loss per share –
diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
2019 Q4
|
|
|
2019 Q3
|
|
|
2019 Q2
|
|
|
2019 Q1
|
|
|
Revenue
|
|
$
|
491,520
|
|
|
$
|
450,943
|
|
|
$
|
289,735
|
|
|
$
|
148,229
|
|
|
Cost of goods sold
|
|
$
|
(42,401
|
)
|
|
$
|
(71,043
|
)
|
|
$
|
(49,147
|
)
|
|
$
|
(56,209
|
)
|
|
Gross profit
|
|
$
|
449,119
|
|
|
$
|
379,900
|
|
|
$
|
240,588
|
|
|
$
|
92,020
|
|
|
Gross margin – percentage
|
|
|
91.4
|
%
|
|
|
84.2
|
%
|
|
|
83.0
|
%
|
|
|
62.1
|
%
|
|
Operating expenses
|
|
$
|
(2,983,115
|
)
|
|
$
|
(683,777
|
)
|
|
$
|
(484,155
|
)
|
|
$
|
(348,743
|
)
|
|
Operating loss
|
|
$
|
(2,533,996
|
)
|
|
$
|
(303,877
|
)
|
|
$
|
(243,567
|
)
|
|
$
|
(256,723
|
)
|
|
Operating loss per share – basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
Operating loss per share – diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
Other income (expense)
|
|
$
|
506,080
|
|
|
$
|
(8,133,663
|
)
|
|
$
|
(46,220
|
)
|
|
$
|
(83,091
|
)
|
|
Comprehensive loss
|
|
$
|
(2,027,916
|
)
|
|
$
|
(8,437,540
|
)
|
|
$
|
(289,787
|
)
|
|
$
|
(339,814
|
)
|
|
Comprehensive loss per share – basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
Comprehensive loss per share –
diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
Liquidity and Capital Resources
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
December 31, 2020, the Company has a working capital of $1,214,371 (December 31, 2019 had working capital of $2,037,906).
The Company considers the items included in capital
to include cash, debt, and 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. A $500,000 cash payment was paid
from the Company’s available funds to close the Dronelogics share purchase agreement. A $250,000 cash payment will be due in September
2021 as part of an asset purchase agreement of VI, as noted in Subsequent Events. Aside from this transaction and 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. 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 December 31, 2020, shareholders’ equity was $3,848,205 and at December 31, 2019, shareholder’s
equity was $2,191,353.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
In September 2020, the Company filed with the
SEC a Regulation A+ offering where it can offer up to 35 million units priced at US$0.47 for gross proceeds of US$16.45 million (the
“Regulation A+ Offering”). Each unit includes a warrant that is priced at US$0.71. On November 30, 2020, the Company
completed an initial closing of its Regulation A+ Offering for gross proceeds in the amount of $1,559,462.56. The Company issued 2,556,496
units at price of US$0.47 per unit.
From December 31, 2019 to December 31, 2020,
the following shows the actual use of proceeds:
|
Use of Proceeds
|
|
Approximate
actual
use up to
December 31,
2020
|
|
|
General Corporate and Working
Capital
|
|
$
|
1,800,000
|
|
Subsequent
to the Company's December 31, 2020 financial year end, on February 5, 2021, the Company closed a second tranche of its Regulation A+
Offering for gross proceeds in the amount of $4,003,195 (US$3,135,838). On March 9,
2021, the Company announced that it completed the final closing of its Regulation A+ offering of units
sold pursuant to the Company’s Regulation A+ offering circular (the “Offering Document”) filed with the U.S. Securities
and Exchange Commission. The Company issued 25,771,465 units at the offering price set out in the Offering Document for gross proceeds
in the amount of $15,504,135 (US$12,112,606) in the final closing. Each unit is comprised of one common share of the Company and
one common share purchase warrant, with each warrant entitling the holder to acquire one common share at a price of US$0.71 per
common share for period of two years from the date of issuance. The common shares and warrants issued in connection with the offering
are subject to a nine month hold period. In total, the Company issued 35,000,000 units under its Offering Document for
aggregate gross proceeds of US$16,450,000.
We expect, from time to time, to evaluate the
acquisition of businesses, intellectual property, products and technologies for which a portion of the net proceeds may be used.
Our plan of operations for the next year includes
the following: (i) hiring engineers to perform more engineering service work, to complete contracts on a timelier basis, and to perform
R&D for the Company’s next generation of products; (ii) hiring sales/marketing employees for our product lines and engineering
services work; (iii) hiring sales/marketing employees for further expansion into services (e.g. drone as a service); (iv) diversifying
and expanding business lines organically and by potential acquisitions; (v) updating machinery used for manufacturing and production;
(vi) continuing to patent innovative ideas for new products; and (vii) developing and increasing current product offering to various
niche industries that are not currently being served.
This expected use of the net proceeds from the
Regulation A+ Offering represents our intentions based upon our current financial condition, results of operations, and conditions. As
of the date of this MD&A, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the
closing of this Regulation A+ Offering. The amounts and timing of our actual expenditures may vary significantly depending on numerous
factors.
Subsequent Events
The following reportable events occurred subsequent
to the year ended December 31, 2020:
|
|
-
|
On January 13, 2021, the Corporation announced
it had begun the process of preparing to list its common shares on The Nasdaq Capital Market
(the “Nasdaq”). Such listing is subject to the approval of the Nasdaq and the
satisfaction of all applicable listing criteria and requirements. No assurance can be given
that such application will be approved or that such listing will be completed.
|
|
|
-
|
On February 5, 2021, the Company closed
a second tranche of its Regulation A+ Offering for gross proceeds in the amount of $4,003,195
(US$3,135,838).
|
|
|
-
|
On March 9, 2021, the Company announced
that it completed the final closing of its Regulation A+ Offering of units sold pursuant
to the Company’s Regulation A+ offering circular (the “Offering Document”)
filed with the U.S. Securities and Exchange Commission. The Company issued 25,771,465 units
at the offering price set out in the Offering Document for gross proceeds in the amount
of $15,504,135 (US$12,112,606) in the final closing. Each unit is comprised of one common
share of the Company and one common share purchase warrant, with each warrant
entitling the holder to acquire one common share at a price of US$0.71 per common
share for period of two years from the date of issuance. The common shares and warrants
issued in connection with the offering are subject to a nine month hold period.
In total, the Company issued 35,000,000 units under its Offering Document for aggregate gross
proceeds of US$16,450,000.
|
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
|
|
-
|
On March 9, 2021, the Company announced
that it entered into an asset purchase agreement with Vital Intelligence Inc. (“Vital”)
to purchase all the assets of Vital in consideration for: (a) a cash payment of $500,000
with $50,000 paid upon execution of the asset purchase agreement, $200,000
to be paid at closing and $250,000 to be paid on the six-month anniversary
date of closing; and (b) 6,000,000 units of the Company with each unit
being comprised of one common share of the Company and one common share purchase warrant.
Each warrant will entitle the holder to acquire one common share for a period of 24 months
following closing at an exercise price of $2.67 per common share and the Company will be
able to accelerate the expiry date of the warrants after one year in the event the
underlying common shares have a value of at least 30% greater than the exercise price
of the warrants. The units will be held in escrow following closing with 1,500,000
units being released at closing and the remainder to be released upon the Company
reaching certain revenue milestones received from the purchased assets. The acquisition closed
on March 25, 2021.
|
|
|
-
|
A total of 8,907,619 warrants and options
have been exercised for proceeds of $4,462,935.
|
|
|
-
|
A total of 624,998 shares have been issued
for the vesting of RSUs.
|
|
|
-
|
A total of 75,000 shares have been issued
to a third party for services provided.
|
|
|
-
|
A total of 740,000 RSUs have been granted.
|
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
As of December 31, 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 a lease agreement with a related party. The lease agreement is for a period of two years from December 1, 2019 to December 1, 2021
with the option to make six one-year extensions. Management believes that the Company will be at the current location for four years.
The lease agreement is for $43,000 per annum or $3,583.33 on a monthly basis. Per IFRS 16, a right of use asset and a lease liability
were established.
The Company’s right-of-use asset
relates to the lease of office space.
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 there was no change to the
underlying asset, the modification was not accounted for as a separate lease.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
Right of Use Asset
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
Balance at January 1, 2019, on adoption of IFRS
16
|
|
$
|
131,634
|
|
|
Lease modification
|
|
|
27,905
|
|
|
Balance at December 31, 2019
|
|
$
|
159,539
|
|
|
Leases acquired
in the Acquisition
|
|
|
83,428
|
|
|
Balance at December 31, 2020
|
|
$
|
242,967
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
Balance at January 1, 2019, on adoption of IFRS 16
|
|
$
|
-
|
|
|
Charge for the
period
|
|
|
29,545
|
|
|
Balance at December 31, 2019
|
|
$
|
29,545
|
|
|
Charge for
the period
|
|
|
69,003
|
|
|
Balance at December 31, 2020
|
|
$
|
98,548
|
|
|
|
|
|
|
|
|
Net book value:
|
|
|
|
|
|
December 31, 2019
|
|
$
|
129,994
|
|
|
December 31, 2020
|
|
$
|
144,419
|
|
Lease Liability
|
|
|
Total
|
|
|
Balance at January 1, 2019, on adoption of IFRS
16
|
|
$
|
131,634
|
|
|
Interest expense
|
|
|
14,534
|
|
|
Lease payments
|
|
|
(38,000
|
)
|
|
Lease modification
|
|
|
27,905
|
|
|
Balance at December 31, 2019
|
|
$
|
136,073
|
|
|
Leases acquired in the Acquisition
|
|
|
87,203
|
|
|
Interest expense
|
|
|
18,290
|
|
|
Lease payments
|
|
|
(83,442
|
)
|
|
Balance at December 31, 2020
|
|
|
158,124
|
|
|
|
|
|
|
|
|
Which consists of:
|
|
|
|
|
|
Current lease liability
|
|
$
|
93,239
|
|
|
Non-current lease
liability
|
|
|
64,885
|
|
|
Balance at December 31, 2020
|
|
$
|
158,124
|
|
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 services are provided by a team of up to six consultants and 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 year ended December 31, 2020, the company incurred fees of $177,000 compared to $80,000 in 2019.
As at December 31, 2020, the Company was indebted to this company in the amount of $nil (December 31, 2019 - $nil).
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
On October 1, 2019, the Company entered into
an independent consultant agreement (“Consultant Agreement”) with 1502372 Alberta Ltd, a company controlled by Cameron Chell,
CEO and director, to provide executive consulting services to the Company. The costs of all charges are based on the fees set in the
Consultant Agreement and are settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the year
ended December 31, 2020, the Company incurred fees of $525,164 compared to $9,000 in 2019. The year over year increase can largely be
attributed to a transaction bonus relating to the sale of an asset for the benefit of the Company, a performance bonus, and an increase
in annual compensation that is more commensurate with the role of CEO. As at December 31, 2020, the Company was indebted to this company
in the amount of $321,741 (December 31, 2019 - $9,450).
On July 3, 2020, the Company entered
into an executive consultant agreement (“Executive Agreement”) with Scott Larson, a director of the Company, to provide executive
consulting services, as President, to the Company. The costs of all charges are based on the fees set in the Executive Agreement and
are settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the year ended December 31, 2020,
the Company incurred fees of $227,524. As at December 31, 2020, the Company was indebted to this company in the amount of $153,887.
During the year ended December 31,
2020 the Company had $nil (2019 - $9,681) payable to related parties outstanding that were included in accounts payable. The balances
outstanding 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 year ended December 31, 2020 and
2019 included:
|
|
|
December
31, 2020
|
|
|
December 31,
2019
|
|
|
Management fees paid to a company controlled by
CEO and director
|
|
$
|
737,164
|
|
|
$
|
186,000
|
|
|
Management fees paid to a company controlled by president
and director
|
|
|
227,524
|
|
|
|
-
|
|
|
Management fees paid to a company controlled by a former director
|
|
|
165,000
|
|
|
|
195,000
|
|
|
Salaries
|
|
|
655,799
|
|
|
|
179,429
|
|
|
Salaries paid to the former owner of the Company
|
|
|
86,097
|
|
|
|
149,060
|
|
|
Share-based compensation
|
|
|
1,614,158
|
|
|
|
480,158
|
|
|
Total
|
|
$
|
3,485,742
|
|
|
$
|
1,189,647
|
|
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
Share Capital
Shares outstanding and dilutive instruments as
at the date hereof are as follows:
Stock Options
The following is the summary of the Company’s
stock option activity:
|
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding, December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
3,725,000
|
|
|
|
0.50
|
|
|
Outstanding, December 31, 2019
|
|
|
3,725,000
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(216,668
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
2,460,000
|
|
|
|
0.63
|
|
|
Outstanding, December 31, 2020
|
|
|
5,968,332
|
|
|
$
|
0.55
|
|
During the year ended December 31,
2020,
|
|
-
|
The Company granted
445,000 options to employees. Each option is exercisable at $0.50 per share for a period
of 10 years from the grant date.
|
|
|
-
|
The Company issued
600,000 options to consultants. Each option is exercisable at $0.77 per share for a period
of 10 years from the grant date.
|
|
|
-
|
The Company granted
500,000 options to employees. Each option is exercisable at $0.64 per share for a period
of 10 years from the grant date.
|
|
|
-
|
The Company granted
500,000 options to employees. Each option is exercisable at $0.64 per share for a period
of 5 years from the grant date.
|
|
|
-
|
The Company granted
165,000 options to employees. Each option is exercisable at $0.50 per share for a period
of 10 years from the grant date.
|
|
|
-
|
The Company granted
250,000 options to a consultant. Each option is exercisable at $0.43 per share for a period
of 10 years from the grant date.
|
During the year ended December 31,
2019,
|
|
-
|
The Company granted
2,925,000 options to employees. Each option is exercisable at $0.50 per share for a period
of 10 years from the grant date.
|
|
|
-
|
The Company issued
800,000 options to consultants. Each option is exercisable at $0.50 per share for a period
of 10 years from the grant date.
|
As at December 31, 2020, the Company had the
following options outstanding and exercisable:
|
Grant Date
|
|
Expiry Date
|
|
Exercise
Price
|
|
|
Remaining
Contractual
Life (years)
|
|
|
Number
of
Options
Outstanding
|
|
|
Number
of
Options
Exercisable
|
|
|
October 30, 2019
|
|
October 30, 2029
|
|
$
|
0.50
|
|
|
|
8.84
|
|
|
|
2,858,332
|
|
|
|
1,974,993
|
|
|
November 19, 2019
|
|
November 19, 2029
|
|
$
|
0.50
|
|
|
|
8.89
|
|
|
|
650,000
|
|
|
|
566,666
|
|
|
April 30, 2020
|
|
April 30, 2030
|
|
$
|
0.50
|
|
|
|
9.33
|
|
|
|
445,000
|
|
|
|
124,999
|
|
|
April 30, 2020
|
|
April 30, 2030
|
|
$
|
0.77
|
|
|
|
9.33
|
|
|
|
600,000
|
|
|
|
200,000
|
|
|
July 3, 2020
|
|
July 3, 2025
|
|
$
|
0.64
|
|
|
|
4.51
|
|
|
|
1,000,000
|
|
|
|
166,666
|
|
|
November 24, 2020
|
|
November 24, 2030
|
|
$
|
0.50
|
|
|
|
9.90
|
|
|
|
165,000
|
|
|
|
55,000
|
|
|
December 11, 2020
|
|
December 11, 2030
|
|
$
|
0.43
|
|
|
|
9.95
|
|
|
|
250,000
|
|
|
|
62,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,968,332
|
|
|
|
3,150,824
|
|
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
Restricted Share Units (RSUs)
The following is a summary of the
Company’s RSU activity:
|
|
|
Number
of RSUs
|
|
|
Outstanding, December 31, 2018
|
|
|
-
|
|
|
Granted
|
|
|
3,175,000
|
|
|
Outstanding, December 31, 2019
|
|
|
3,175,000
|
|
|
Exercised
|
|
|
(999,992
|
)
|
|
Forfeited
|
|
|
(341,667
|
)
|
|
Granted
|
|
|
1,240,000
|
|
|
Outstanding, December 31, 2020
|
|
|
3,073,341
|
|
During the year ended December 31 2020, the Company
issued 1,240,000 RSUs to employees.
During the year ended December 31, 2019,
|
|
-
|
The Company issued 2,925,000 RSUs to employees
|
|
|
-
|
The Company issued 250,000 RSUs to consultants
|
As at December 31, 2020 the Company had the following
RSUs outstanding:
|
Grant Date
|
|
Number
of RSUs Outstanding
|
|
|
October 30, 2019
|
|
|
1,666,674
|
|
|
November 19, 2019
|
|
|
1,66,667
|
|
|
April 30, 2020
|
|
|
375,000
|
|
|
November 24, 2020
|
|
|
865,000
|
|
|
|
|
|
3,073,341
|
|
Warrants
During the year ended December 31, 2020, the
Company issued warrants (“USD Warrants”) with a USD exercise price. Being in a foreign currency that is not the Company’s
functional currency, these USD Warrants are required to be recorded as a financial liability and not as equity. As a financial liability,
these USD Warrants are revalued on a quarterly basis to fair market value with the change in fair value being recorded through the Consolidated
Statement of Comprehensive Loss. The initial fair value of these USD Warrants was parsed out from equity and recorded as a financial
liability.
To reach a fair value of the USD Warrants, a
Black Scholes calculation is used, calculated in USD as the Company also trades on the OTCQB. The Black Scholes value per USD Warrant
is then multiplied by the number of outstanding warrants and then multiplied by the foreign exchange rate at the end of the period from
the Bank of Canada.
Warrant Derivative Liability
|
|
|
December
31, 2020
|
|
|
Balance, Beginning
|
|
$
|
-
|
|
|
Change in fair value of warrants
outstanding
|
|
|
748,634
|
|
|
Balance, Ending
|
|
$
|
748,634
|
|
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
The derivative financial liability consists of
the fair value of the non-compensatory share purchase warrants that have exercise prices that differ from the functional currency of
the Company and are within the scope of IAS 32 “Financial Instruments: Presentation”. Details of these warrants and their
fair values are as follows:
|
Issue Date
|
|
Exercise Price
|
|
Number
of
Warrants
Outstanding at
December 31,
2020
|
|
|
Fair Value
at
December 31,
2020
|
|
|
Number
of
Warrants
Outstanding at
December 31,
2019
|
|
|
Fair Value
at
December 31,
2019
|
|
|
November 30, 2020
|
|
US$ 0.71
|
|
|
2,556,496
|
|
|
$
|
748,634
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
2,556,496
|
|
|
$
|
748,634
|
|
|
|
-
|
|
|
$
|
-
|
|
During the year ended December 31, 2020, the
Company extended the life of the November 5, 2019 warrants from expiring on November 5, 2020 to expiring on November 5, 2021. To do this,
it was required that 25% of the remaining November 5, 2019 warrants needed to be exercised by October 21, 2020 and was completed.
The following is the summary of the Company’s
warrant activity:
|
|
|
Number
of Warrants
|
|
|
Exercise
Price
|
|
|
Outstanding, December 31, 2018
|
|
|
770,030
|
|
|
$
|
0.27
|
|
|
Warrants of the Company at time of Amalgamation
|
|
|
4,000,000
|
|
|
|
0.10
|
|
|
Expired
|
|
|
(453,090
|
)
|
|
|
0.03
|
|
|
Exercised
|
|
|
(316,940
|
)
|
|
|
0.03
|
|
|
Granted
|
|
|
14,051,499
|
|
|
|
0.50
|
|
|
Outstanding, December 31, 2019
|
|
|
18,051,499
|
|
|
$
|
0.41
|
|
|
Exercised
|
|
|
(7,923,874
|
)
|
|
|
0.30
|
|
|
Forfeited
|
|
|
(600,000
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
2,556,496
|
|
|
|
0.71
|
|
|
Outstanding, December 31, 2020
|
|
|
12,084,121
|
|
|
|
0.59
|
|
As at December 31, 2020, the Company had the
following warrants outstanding:
|
Issue Date
|
|
Expiry Date
|
|
Exercise Price
|
|
Number of
Warrants Outstanding
|
|
|
November 5, 2019
|
|
November 5, 2021
|
|
CDN$
|
0.50
|
|
|
9,527,625
|
|
|
November 30, 2020
|
|
November 30, 2022
|
|
US$
|
0.71
|
|
|
2,556,496
|
|
|
|
|
|
|
|
|
|
12,084,121
|
|
The weighted average remaining contractual life
of the warrants outstanding as of December 31, 2020 was 1.07 years (December 31, 2019 - 0.90 years).
Critical Accounting Policies and Estimates
Measurement Uncertainty (Use of Estimates)
The preparation of the financial statements in
conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and
contingent liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the
reporting period. Estimates and judgments are continuously evaluated and are based on management’s experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ
from these estimates.
Draganfly Inc.
Management’s Discussion and Analysis
For the year
ended December 31, 2020
The key sources of estimation uncertainty that
have a significant risk of causing material adjustment to the amounts recognized in the financial statements are:
The determination of the amount of the SR&ED
tax credit receivable requires management to make calculations based on its interpretation of eligible expenditures in accordance with
the terms of the programs. The reimbursement claims submitted by the Company are subject to review by the relevant government agencies.
Although the Company has used its best judgment and understanding of the related program agreements in determining the receivable amount,
it is possible that the amounts could increase or decrease by a material amount in the near-term dependent on the review and audit by
the government agency.
|
|
b.
|
Allowance for uncollectible
trade and other receivables
|
The Company makes use of estimates when making
allowances for uncollectible trade and other receivables. The Company evaluates each receivable at year end using factors such as age
of receivable, payment history, and credit risk to estimate when determining if an allowance is required, and the amount of the allowance.
|
|
c.
|
Share-based payment transactions
|
The Company measures the cost of share-based
payment transactions with employees by reference to the fair value of the equity instruments. Estimating fair value for share-based payment
transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant.
This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model including the
expected lives and forfeiture rates of the share options and volatility of the market value of the underlying shares.
Significant estimates and assumptions
The preparation of financial statements in accordance
with IFRS requires the Company to use judgment in applying its accounting policies and make estimates and assumptions about reported
amounts at the date of the financial statements and in the future. The Company’s management reviews these estimates and underlying
assumptions on an ongoing basis, based on experience and other factors, including expectations of future events that are believed to
be reasonable under the circumstances. Revisions to estimates are adjusted for prospectively in the period in which the estimates are
revised.
Share-based payments
The cost of share-based payment transactions
with directors, officers and employees are measured by reference to the fair value of the equity instruments. Estimating fair value for
share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions
of the grant. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model
including the expected life, volatility, risk-free interest rate, expected forfeiture rate and dividend yield of the stock option.
Income taxes
Provisions for income taxes are made using the
best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy
of these income tax provisions at the end of each reporting period. However, it is possible that at some future date an additional liability
could result from audits by tax authorities. Where the final outcome of these tax-related matters is different from the amounts that
were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. Deferred
tax assets are recognized when it is determined that the company is likely to recognize their recovery from the generation of taxable
income.
Draganfly
Inc.
Management’s
Discussion and Analysis
For
the year ended December 31, 2020
Inventories
Inventory
is valued at the lower of cost and net realizable value. Net realizable value is determined with reference to the estimated selling price.
The Company estimates selling price based upon assumptions about future demand and current and anticipated retail market conditions.
Contingencies
The assessment
of contingencies involves the exercise of significant judgment and estimates of the outcome of future events. In assessing loss contingencies
related to legal proceedings that are pending against the Company and that may result in regulatory or government actions that may negatively
impact the Company’s business or operations, the Company and its legal counsel evaluate the perceived merits of the legal proceeding
or unasserted claim or action as well as the perceived merits of the nature and amount of relief sought or expected to be sought, when
determining the amount, if any, to recognize as a contingent liability or when assessing the impact on the carrying value of the Company’s
assets. Contingent assets are not recognized in the annual financial statements.
Useful
lives of equipment and intangible assets
Estimates
of the useful lives of equipment and intangible assets are based on the period over which the assets are expected to be available for
use. The estimated useful lives are reviewed annually and are updated if expectations differ from previous estimates due to physical
wear and tear, technical or commercial obsolescence, and legal or other limits on the use of the relevant assets. In addition, the estimation
of the useful lives of the relevant assets may be based on internal technical evaluation and experience with similar assets. It is possible,
however, that future results of operations could be materially affected by changes in the estimates brought about by changes in the factors
mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances.
A reduction in the estimated useful lives of the equipment would increase the recorded expenses and decrease the non-current assets.
Other
Significant judgments
The preparation
of consolidated financial statements in accordance with IFRS requires the Company to make judgments, apart from those involving estimates,
in applying accounting policies. The most significant judgments in applying the Company’s consolidated financial statements include:
−
The assessment of the Company’s ability to continue as a going concern and whether there are events or conditions that may give
rise to significant uncertainty;
−
the classification of financial instruments;
−
the assessment of revenue recognition using the five-step approach under IFRS 15 and the collectability of amounts receivable;
−
the determination of whether a set of assets acquired and liabilities assumed constitute a business; and
−
the determination of the functional currency of the company.
Foreign
currency translation
The Company’s
functional currency is the Canadian dollar and transactions in foreign currencies are translated into Canadian dollars at rates of exchange
at the time of such transactions. Monetary assets and liabilities are translated at reporting period rate of exchange. Non-monetary assets
and liabilities are translated at historical exchange rates. Revenue and expenses denominated in a foreign currency are translated at
the monthly average exchange rate. Gains and losses resulting from the translation adjustments are included in income.
Draganfly
Inc.
Management’s
Discussion and Analysis
For
the year ended December 31, 2020
The functional
currencies for the parent company and each subsidiary are as follows:
|
Draganfly Inc.
|
Canadian Dollar
|
|
Draganfly Innovations Inc.
|
Canadian Dollar
|
|
Draganfly Innovations USA,
Inc.
|
U.S. Dollar
|
|
Dronelogics Systems Inc.
|
Canadian Dollar
|
Financial
statements of subsidiaries for which the functional currency is not the Canadian dollar are translated into Canadian dollars as follows:
all asset and liability accounts are translated at the year-end exchange rate and all earnings and expense accounts and cash flow statement
items are translated at average exchange rates for the year. The resulting translation gains and losses are recorded as exchange differences
on translating foreign operations in accumulated other comprehensive income (“AOCI”).
Transactions and balances:
Foreign
currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign
currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be
carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate
at the date when fair values were determined.
Exchange
differences arising on the translation of monetary items or on settlement of monetary items are recognized in the statement of comprehensive
loss in the period in which they arise, except where deferred in equity as a qualifying cash flow or net investment hedge.
Exchange
differences arising on the translation of non-monetary items are recognized in other comprehensive income to the extent that gains and
losses arising on those non-monetary items are also recognized in other comprehensive income. Where the non-monetary gain or loss is
recognized in profit or loss, the exchange component is also recognized in profit or loss.
Share-based
payments
The Company
operates a stock option plan. Share-based payments to employees are measured at the fair value of the instruments issued and amortized
over the vesting periods. Share-based payments to non-employees are measured at the fair value of goods or services received or the fair
value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and
are recorded at the date the goods or services are received. The corresponding amount is recorded to the option reserve. The fair value
of options is determined using a Black–Scholes Option Pricing Model. The number of shares and options expected to vest is reviewed
and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity
instruments granted shall be based on the number of equity instruments that eventually vest. Amounts recorded for forfeited or expired
unexercised options are transferred to deficit in the year of forfeiture or expiry. Amounts recorded for forfeited unvested options are
reversed in the period the forfeiture occurs.
Share-based
payment expense relating to cash-settled awards, including restricted share units is accrued over the vesting period of the units based
on the quoted market value of Company’s common shares. As these awards will be settled in cash, the expense and liability are adjusted
each reporting period for changes in the underlying share price.
Restricted
Share Units
The restricted
share units (“RSUs”) entitle employees, directors, or officers to cash payments payable upon vesting based on vesting terms
determined by the Company’s Board of Directors at the time of the grant. A liability for outstanding RSUs is measured at fair value
on the grant date and is subsequently adjusted for changes in fair value at each reporting date until settlement. The liability is recognized
on a graded vesting basis over the vesting period, with a corresponding charge to profit or loss.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Loss
per share
Basic loss
per share is calculated by dividing the loss attributable to common shareholders by the weighted average number of common shares outstanding
in the period. For all periods presented, the loss attributable to common shareholders equals the reported loss attributable to owners
of the Company. Diluted loss per share is calculated by the treasury stock method. Under the treasury stock method, the weighted average
number of common shares outstanding for the calculation of diluted loss per share assumes that the proceeds to be received on the exercise
of dilutive share options and warrants are used to repurchase common shares at the average market price during the period.
Financial
instruments
All financial
assets are initially recorded at fair value and classified into one of four categories: fair value through profit or loss (“FVTPL”),
fair value through other comprehensive income (“FVTOCI”) and at amortized costs. All financial liabilities are initially
recorded at fair value and classified as either FVTPL or other financial liabilities. Financial instruments comprise cash and accounts
payable and accrued liabilities.
Classification
and measurement
The Company
classifies its financial assets in the following categories: at fair value through profit or loss (“FVTPL”), at fair value
through other comprehensive income (“FVTOCI”) or at amortized cost. The classification depends on the purpose for which the
financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
The classification
of debt instruments is driven by the business model for managing the financial assets and their contractual cash flow characteristics.
Debt instruments are measured at amortized cost if the business model is to hold the instrument for collection of contractual cash flows
and those cash flows are solely principal and interest. If the business model is not to hold the debt instrument, it is classified as
FVTPL. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely
payments of principal and interest.
Equity
instruments that are held for trading (including all equity derivative instruments) are classified as FVTPL, for other equity instruments,
on the day of acquisition the Company can make an irrevocable election (on an instrument by-instrument basis) to designate them as at
FVTOCI.
Financial
assets at FVTPL
Financial
assets carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the income statement. Realized and
unrealized gains and losses arising from changes in the fair value of the financial asset held at FVTPL are included in the income statement
in the period in which they arise. Derivatives are also categorized as FVTPL unless they are designated as hedges.
Financial
assets at FVTOCI
Investments
in equity instruments at FVTOCI are initially recognized at fair value plus transaction costs. Subsequently they are measured at fair
value, with gains and losses arising from changes in fair value recognized in other comprehensive income. There is no subsequent reclassification
of fair value gains and losses to profit or loss following the derecognition of the investment.
Financial
assets at amortized cost
Financial
assets at amortized cost are initially recognized at fair value and subsequently carried at amortized cost less any impairment. They
are classified as current assets or non-current assets based on their maturity date.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Impairment
of financial assets at amortized cost
The Company
recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date,
the loss allowance for the financial asset is measured at an amount equal to the lifetime expected credit losses if the credit risk on
the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased
significantly since initial recognition, the loss allowance is measured for the financial asset at an amount equal to twelve month expected
credit losses. For trade receivables the Company applies the simplified approach to providing for expected credit losses, which allows
the use of a lifetime expected loss provision.
Impairment
losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease
can be objectively related to an event occurring after the impairment was recognized.
Derecognition
of financial assets
Financial
assets are derecognized when they mature or are sold, and substantially all the risks and rewards of ownership have been transferred.
Gains and losses on derecognition of financial assets classified as FVTPL or amortized cost are recognized in the income statement. Gains
or losses on financial assets classified as FVTOCI remain within accumulated other comprehensive income.
The Company
classifies its financial liabilities into one of two categories as follows:
Fair value
through profit or loss (FVTPL) - This category comprises derivatives and financial liabilities incurred principally for the purpose of
selling or repurchasing in the near term. They are carried at fair value with changes in fair value recognized in profit or loss.
Other financial
liabilities - This category consists of liabilities carried at amortized cost using the effective interest method. Accounts payable and
accrued liabilities, and convertible debentures, are included in this category. The Company derecognizes a financial liability when its
contractual obligations are discharged, cancelled or expire.
Derecognition
of financial liabilities
Financial
liabilities are derecognized when its contractual obligations are discharged or cancelled, or expire. The Company also derecognizes a
financial liability when the terms of the liability are modified such that the terms and/or cash flows of the modified instrument are
substantially different, in which case a new financial liability based on the modified terms is recognized at fair value. Gains and losses
on derecognition are generally recognized in profit or loss.
Impairment
of assets
The carrying
amount of the Company’s non-financial assets (which include equipment and intangible assets) is reviewed at each reporting date
to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the asset is estimated
in order to determine the extent of the impairment loss. An impairment loss is recognized whenever the carrying amount of an asset or
its cash generating unit exceeds its recoverable amount. Impairment losses are recognized in the statement of comprehensive loss.
The recoverable
amount of assets is the greater of an asset’s fair value less cost to sell and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of
the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of
those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment
loss is only reversed if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates
used to determine the recoverable amount. Any reversal of impairment cannot increase the carrying value of the asset to an amount higher
than the carrying amount that would have been determined had no impairment loss been recognized in previous years. Assets
that have an indefinite useful life are not subject to amortization and are tested annually for impairment.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Income
taxes
Current
income tax:
Current
income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation
authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting
date, in the countries where the Company operates and generates taxable income.
Current
income tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income
or equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations
in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Deferred
income tax:
Deferred
income tax is recognized, using the asset and liability method, on temporary differences at the reporting date arising between the tax
bases of assets and li abilities and their carrying amounts for financial reporting. The carrying amount of deferred income tax assets
is reviewed at the end of each reporting period and recognized only to the extent that it is probable that sufficient taxable profit
will be available to allow all or part of the deferred income tax asset to be utilized. Deferred income tax assets and liabilities are
measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax
rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred income tax assets and
deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income
tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
Inventory
Inventory
consists of raw materials for manufacturing of multi-rotor helicopters, industrial areal video systems, civilian small unmanned aerial
systems or vehicles, and wireless video systems. Inventory is initially valued at cost and subsequently at the lower of cost and net
realizable value. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale. Cost is determined using the weighted average cost basis. The
Company reviews inventory for obsolete and slow-moving goods and any such inventory is written-down to net realizable value.
Revenue
recognition
Revenue
comprises the fair value of consideration received or receivable for the sale of goods and consulting services in the ordinary course
of the Company’s business. Revenue is shown net of return allowances and discounts.
Sales
of goods
The Company
manufactures and sells a range of multi-rotor helicopters, industrial aerial video systems, and civilian small unmanned aerial systems
or vehicles. Sales are recognized when control of the products has transferred, being when the products are delivered to the customer
and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery occurs when the products
have been shipped to the specific location or picked up by the customer, the risks of obsolescence and loss have been transferred to
the customer.
Revenue
from these sales is recognized based on the price specified in the contract, net of the estimated discounts and returns. Accumulated
experience is used to estimate and provide for the discounts and returns, using the expected value method, and revenue is only recognized
to the extent that it is highly probable that a significant reversal will not occur. To date, returns have not been significant. No element
of financing is deemed present as the sales are made with a credit term of 30 days, which is consistent with market practice.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Some contracts
include multiple deliverables, such as the manufacturing of hardware and support. Support is performed by another party and does not
include an integration service. It is therefore accounted for as a separate performance obligation. In this case, the transaction price
will be allocated to each performance obligation based on the stand-alone selling prices. Where these are not directly observable, they
are estimated based on expect cost plus margin.
A receivable
is recognized when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage
of time is required before the payment is due.
Consulting
services
The Company
provides consulting, custom engineering and investigating and solving on a project by project basis under fixed-price and variable price
contracts. Revenue from providing services is recognized in the accounting period in which the services are rendered. For fixed-price
contracts, revenue is recognized based on the actual service provided to the end of the reporting period as a proportion of the total
services to be provided. This is determined based on the actual labour hours spend relative to the total expected labour hours. If contracts
include the manufacturing of hardware, revenue for the hardware is recognized at a point in time when the hardware is delivered, the
legal title has passed and the customer has accepted the hardware.
Estimates
of revenues, costs or extent of progress toward completion are revised if circumstances change. Any resulting increases or decreases
in estimated revenues or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision
become known by management.
In case
of fixed-price contracts, the customer pays the fixed amount based on a payment schedule. If the services rendered by the Company exceed
the payment, a contract asset is recognized. If the payments exceed the services rendered, a contract liability is recognized. If the
contract includes an hourly fee, revenue is recognized in the amount to which the Company has a right to invoice. Customers are invoiced
on a monthly basis and consideration is payable when invoiced.
Cost
of Goods Sold
Cost of
sales includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight costs, as well as provisions
for reserves related to product shrinkage, excess or obsolete inventory, or lower of cost and net realizable value adjustments as required.
Intangible
Assets
An intangible
asset is an identifiable asset without physical substance. An asset is identifiable if it is separable, or arises from contractual or
legal rights, regardless of whether those rights are transferrable or separable from the Company or from other rights and obligations.
Intangible assets includes intellectual property, which consists of patent and trademark applications.
Intangible
assets acquired externally are measured at cost less accumulated amortization and impairment losses. The cost of a group of intangible
assets acquired is allocated to the individual intangible assets based on their relative fair values. The cost of intangible assets acquired
externally comprises its purchase price and any directly attributable cost of preparing the asset for its intended use. Research and
development costs incurred subsequent to the acquisition of externally acquired intangible assets and on internally generated intangible
assets are accounted for as research and development costs.
Intangible
assets with finite useful lives are amortized declining balance at 20% rate over their estimated useful lives from the date they are
available for use. The amortization period of the Company’s intellectual property is 5 years.
Goodwill
represents the excess of the value of the consideration transferred over the fair value of the net identifiable assets and liabilities
acquired. Goodwill is allocated to the cash generating unit to which it relates.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Equipment
Equipment
is stated at historical cost less accumulated depreciation and accumulated impairment losses.
Subsequent
costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that
future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying
amount of the replaced part is derecognized. All other repairs and maintenance are charged to the statement of comprehensive loss during
the financial period in which they are incurred.
Gains and
losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in the statement of comprehensive
loss.
Depreciation
is generally calculated on a declining balance method to write off the cost of the assets to their residual values over their estimated
useful lives. Depreciation for leasehold improvements is fully expensed over the expected term of the lease. The depreciation rates applicable
to each category of equipment are as follows:
|
Class
of equipment
|
|
Depreciation
rate
|
|
|
Computer equipment
|
|
|
30
|
%
|
|
Furniture and equipment
|
|
|
20
|
%
|
|
Leasehold improvements
|
|
|
Over
expected life of lease
|
|
|
Software
|
|
|
30
|
%
|
|
Vehicles
|
|
|
30
|
%
|
Research
and development expenditures
Expenditures
on research are expensed as incurred. Research activities include formulation, design, evaluation and final selection of possible alternatives,
products, processes, systems or services. Development expenditures are expensed as incurred unless the Company can demonstrate all of
the following: (i) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (ii) its
intention to complete the intangible asset and use or sell it; (iii) its ability to use or sell the intangible asset; (iv) how the intangible
asset will generate probable future economic benefits. Among other things, the Company can demonstrate the existence of a market for
the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible
asset; (v) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible
asset; and (vi) its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Government
Assistance
Government
grants are recognized when there is reasonable assurance that the grant will be received and all attached conditions will be complied
with. When the grant relates to an expense item, it is recognized as income on a systematic basis over the period that the related costs,
for which it is intended to compensate, are expensed. When the grant relates to an asset, the cost of the asset is reduced by the amount
of the grant and the grant is recognized as income in equal amounts over the expected useful life of the asset.
SR&ED
Investment tax credits
The Company
claims federal investment tax credits as a result of incurring scientific research and experimental development (“SR&ED”)
expenditures. Federal investment tax credits are recognized when the related expenditures are incurred and there is reasonable assurance
of their realization. Federal investment tax credits are accounted for as a reduction of research and development expense for items of
a period expense nature or as a reduction of property and equipment for items of a capital nature. Management has made a number of estimates
and assumptions in determining the expenditures eligible for the federal investment tax credit claim. It is possible that the allowed
amount of the federal investment tax credit claim could be materially different from the recorded amount upon assessment by Canada Revenue
Agency.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
The Company
claims provincial investment tax credits as a result of incurring SR&ED expenditures. Provincial investment tax credits are recognized
when the related expenditures are incurred and there is reasonable assurance of their realization. Management has made a number of estimates
and assumptions in determining the expenditures eligible for the provincial investment tax credit claim. The provincial investment tax
credits are refundable and have been recorded as SR&ED tax credit receivable, and as a reduction in research and development expenses
on the statement of comprehensive loss. It is possible that the allowed amount of the provincial investment tax credit claim could be
materially different from the recorded amount upon assessment by Canada Revenue Agency and the Tax and Revenue Administration.
Leases
A contract
is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange
for consideration. At the commencement date, the lease liability is recognized at the present value of the future lease payments and
discounted using the interest rate implicit in the lease or the Company's incremental borrowing rate. A corresponding right-of-use ("ROU”)
asset will be recognized at the amount of the lease liability, adjusted for any lease incentives received and initial direct costs incurred.
Over the term of the lease, financing expense is recognized on the lease liability using the effective interest rate method and charged
to net income, lease payments are applied against the lease liability and depreciation on the ROU asset is recorded by class of underlying
asset.
The lease
term is the non-cancellable period of a lease and includes periods covered by an optional lease extension option if reasonably certain
the Company will exercise the option to extend. Conversely, periods covered by an option to terminate are included if the Company does
not expect to end the lease during that time frame. Leases with a term of less than twelve months or leases for underlying low value
assets are recognized as an expense in net income on a straight-line basis over the lease term.
A lease
modification will be accounted for as a separate lease if it materially changes the scope of the lease. For a modification that is not
a separate lease, on the effective date of the lease modification, the Company will remeasure the lease liability and corresponding ROU
asset using the interest rate implicit in the lease or the Company's incremental borrowing rate. Any variance between the remeasured
ROU asset and lease liability will be recognized as a gain or loss in net income to reflect the change in scope.
Business
Risks
In the
normal course of business, the Company’s operations are influenced by a number of internal and external factors and are exposed
to risks and uncertainties that can affect its business, financial condition and operating results. The activities of the Company are
subject to ongoing operational risks including the performance of key suppliers, potential customer concentration, product performance,
and government and other industry regulations and reliance on information systems, all of which may affect the ability of the Company
to meet its obligations. While management believes its innovation and technology make it a leader in the industry, revenue and results
may be affected if products are not accepted in the market place, are not approved by regulatory authorities, or if products are not
brought to market in a timely manner.
The Company
will be affected by a number of operational risks and the Company may not be adequately insured for certain risks, including: labour
disputes; catastrophic accidents; fires; blockades or other acts of social activism; changes in the regulatory environment; impact of
non-compliance with laws and regulations; natural phenomena, such as inclement weather conditions, floods, earthquakes and ground movements.
There is no assurance that the foregoing risks and hazards will not result in damage to, or destruction of, the Company’s technologies,
personal injury or death, environmental damage, adverse impacts on the Company’s operation, costs, monetary losses, potential legal
liability and adverse governmental action, any of which could have an adverse impact on the Company’s future cash flows, earnings
and financial condition. Also, the Company may be subject to or affected by liability or sustain loss for certain risks and hazards against
which the Company cannot insure or which the Company may elect not to insure because of the cost. This lack of insurance coverage could
have an adverse impact on the Company’s future cash flows, earnings, results of operations and financial condition.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Resale
of Shares
There can
be no assurance that the publicly-traded market price of the Company Shares will be high enough to create a positive return for the existing
investors. Further, there can be no assurance that the Company Shares will be sufficiently liquid so as to permit investors to sell their
position in the Company without adversely affecting the stock price. In such event, the probability of resale of the Company Shares would
be diminished.
As well,
the continued operation of the Company will be dependent upon its ability to procure additional financing in the short term and to generate
operating revenues in the longer term. There can be no assurance that any such financing can be obtained or that revenues can be generated.
If the Company is unable to obtain such additional financing or generate such revenues, investors may be unable to sell their Company
Shares and any investment in the Company may be lost.
Ability
to Manage Future Growth
Future
growth, if any, may cause a significant strain on the Company’s management and its operational, financial, human and other resources.
The Company’s ability to manage growth effectively will require it to implement and improve operational, financial, software development
and management information systems and to expand, train, manage and motivate employees. These demands may require the addition of management
and other personnel and the development of additional expertise. Any increase in resources devoted to research, product development and
marketing and sales efforts without a corresponding increase in operational, financial, product development and management information
systems could have a material adverse effect on the Company’s business, financial condition and results of operations. There can
be no assurance that the Company will be able to manage such growth effectively, that its management, personnel or systems will be adequate
to support the Company's operations or that the Company will be able to achieve the increased levels of revenue commensurate with the
increased levels of operating expenses associated with this growth. The Company is exposed to a variety of financial risks by virtue
of its activities, including currency risk, credit risk, and liquidity risk. The overall risk management program focuses on the unpredictability
of financial markets and seeks to minimize potential adverse effects on financial performance.
Market
for Securities
In recent
years, the securities markets in the United States and Canada have experienced a high level of price and volume volatility, and the market
prices of securities of many companies have experienced wide fluctuations in price which have not necessarily been related to the operating
performance, underlying asset values or prospects of such companies. There can be no assurance that continuing fluctuations in price
will not occur. It may be anticipated that any quoted market for the Company Shares will be subject to market trends generally, notwithstanding
any potential success of the Company in creating revenues, cash flows or earnings. The value of the Company Shares will be affected by
such volatility.
Dilution
and future sale of Common Shares
We may
issue additional Common Shares in the future, which may dilute a Shareholder’s holding in the Company. Our articles will permit
the issuance of an unlimited number of Common Shares, and Shareholders will have no pre-emptive rights in connection with such further
issuances. The Directors of the Company have the discretion to determine if an issuance of Common Shares is warranted, the price at which
such issuance is effected and the other terms of issue of Common Shares. Also, we may issue additional Common Shares upon the exercise
of options to acquire Common Shares under the Option Plan, which will result in further dilution to the Shareholders. Potential future
acquisitions may also divert Management’s attention and result in further dilution to the Shareholders.
History
of Losses
The Company
cannot assure that it can become profitable or avoid net losses in the future or that there will not be any earnings or revenue declines
for any future quarterly or other periods. The Company expects that its operating expenses will increase as it grows its business, including
expending substantial resources for research and development and marketing. As a result, any decrease or delay in generating revenues
could result in material operating losses.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Reliance
on Management and Key Employees
The Company’s
future success depends substantially on the continued services of its executive officers and its key development personnel. If one or
more of its executive officers or key development personnel were unable or unwilling to continue in their present positions, the Company
might not be able to replace them easily or at all. In addition, if any of its executive officers or key employees joins a competitor
or forms a competing company, the Company may lose know-how, key professionals and staff members as well as partners. These executive
officers and key employees could develop drone technologies that could compete with and take customers and market share away from the
Company.
Risks
Associated with Acquisitions
As part
of the Company’s overall business strategy, after the completion of the Listing, the Company may pursue select strategic acquisitions
that would provide additional product or service offerings, additional industry expertise, and a stronger industry presence in both existing
and new jurisdictions. Future acquisitions may expose it to potential risks, including risks associated with: (a) the integration
of new operations, services and personnel; (b) unforeseen or hidden liabilities; (c) the diversion of resources from the Company’s
existing business and technology; (d) potential inability to generate sufficient revenue to offset new costs; (e) the expenses of acquisitions;
or (f) the potential loss of or harm to relationships with both employees and existing users resulting from its integration of new businesses.
In addition, any proposed acquisitions may be subject to regulatory approval.
Competitive
Markets
The Company
faces competition and new competitors will continue to emerge throughout the world. Services offered by the Company’s competitors
may take a larger share of consumer spending than anticipated, which could cause revenue generated from the Company’s products
and services to fall below expectations. It is expected that competition in these markets will intensify.
If competitors
of the Company develop and market more successful products or services, offer competitive products or services at lower price points,
or if the Company does not produce consistently high-quality and well-received products and services, revenues, margins, and profitability
of the Company will decline.
The Company’s
ability to compete effectively will depend on, among other things, the Company’s pricing of services and equipment, quality of
customer service, development of new and enhanced products and services in response to customer demands and changing technology, reach
and quality of sales and distribution channels and capital resources. Competition could lead to a reduction in the rate at which the
Company adds new customers, a decrease in the size of the Company’s market share and a decline in its customers. Examples include
but are not limited to competition from other companies in the UAV industry.
In addition,
the Company could face increased competition should there be an award of additional licences in jurisdictions in which the Company operates
in.
Uncertainty
and adverse changes in the economy
Adverse
changes in the economy could negatively impact the Company’s business. Future economic distress may result in a decrease in demand
for the Company’s products, which could have a material adverse impact on the Company’s operating results and financial condition.
Uncertainty and adverse changes in the economy could also increase costs associated with developing and publishing products, increase
the cost and decrease the availability of sources of financing, and increase the Company’s exposure to material losses from bad
debts, any of which could have a material adverse impact on the financial condition and operating results of the Company.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Uncertainty
to develop and renew contracts
A significant
portion of the Company’s business is based on the operation of remotely piloted aircraft systems (“RPAS”). The operation
of RPAS’ poses a risk or hazard to airspace users as well as personnel on the ground. As the RPAS industry is rapidly developing,
the regulatory environment for RPAS is constantly evolving to keep pace. As such, whenever a policy change with respect to operating
regulations occurs, there is a risk that the Company could find itself to be in non-compliance with these new regulations and as a result
lose the ability to develop and renew contracts relating to its business. While the Company endeavours to take all necessary action to
reduce the risks associated with the operations of RPAS’ and to remain well-informed and up-to-date on any addendums and changes
to the applicable regulations, there is no assurance that an incident involving an RPAS or the Company’s non-compliance would not
create a significant current or future liability for the company.
The regulation
of RPAS operations within the Canadian Domestic Airspace (CDA) is still evolving and is expected to continue to change with the proliferation
of RPAS’, advancements in technology, and standardization within the industry. Changes to the regulatory regime may be disruptive
and result in the Company needing to adopt significant changes in its operations and policies, which may be costly and time-consuming,
and may materially adversely affect our ability to manufacture and make delivery of our Company’s products and services in a timely
fashion.
Company
business and research and development activities are subject to oversight by Transport Canada, the federal institution responsible for
transportation policies and programs, including the rules in the Canadian Aviation Regulations (CARs). Currently, Transport Canada requires
that any non-recreational operators of RPAS’ have a Special Flight Operations Certificate (SFOC). Our ability to develop, test,
demonstrate, and sell products and services depends on the Company’s ability to acquire and maintain a valid SFOC.
In addition,
there exists public concern regarding the privacy implications of Canadian commercial and law enforcement use of small UAV. This concern
has included calls to develop explicit written policies and procedures establishing usage limitations. There is no assurance that the
response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the adoption of small
UAV by non-military customers.
Attract
and retain engineering talent and other highly qualified personnel
The Company
may experience a period of significant growth and require a high number of personnel that will place a strain upon its management systems
and resources. Its future will depend in part on the ability of its officers and other key employees to implement and improve financial
and management controls, reporting systems and procedures on a timely basis and to expand, train, motivate and manage the workforce.
The Company’s current and planned personnel, systems, procedures and controls may be inadequate to support its future operations.
Further, management may not be able to retain its existing workforce in an expanding and competitive marketplace for talent.
Ability
to successfully develop and commercially market new products
Continuing
technological changes in the market for the Company’s products could make its products less competitive or obsolete, either generally
or for particular applications. The Company’s future success will depend upon its ability to develop and introduce a variety of
new capabilities and enhancements to its existing product and service offerings, as well as introduce a variety of new product offerings,
to address the changing needs of the markets in which it offers products. Delays in introducing new products and enhancements, the failure
to choose correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may
cause existing and potential customers to purchase the Company’s competitors’ products. If the Company is unable to devote
adequate resources to develop new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements
on a timely basis, its products could lose market share, its revenue and profits could decline, and the Company could experience operating
losses.
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Changing
policies and spending priorities of governments and government agencies
The Company
must comply with Canadian federal and provincial laws regulating the export of its products. In some cases, explicit authorization from
the Canadian government is needed to export its products. The export regulations and the governing policies applicable to the Company’s
business are subject to change. The Company cannot provide assurance that such export authorizations will be available for its products
in the future. Compliance with these laws has not significantly limited the Company’s operations or sales in the recent past, but
could significantly limit them in the future. Non-compliance with applicable export regulations could potentially expose the Company
to fines, penalties and sanctions. If the Company cannot obtain required government approvals under applicable regulations, the Company
may not be able to sell its products in certain international jurisdictions, which could adversely affect the Company’s financial
condition and results of operations.
Access
additional capital when required and on reasonable terms
In order
to finance future operations and development efforts, the Company may raise funds through the issue of Common Shares or the issue of
securities convertible into or exercisable for Common Shares. The Company cannot predict the size of future issues of Common Shares or
the issue of securities convertible into or exercisable for Common Shares or the effect, if any, that future issues and sales of the
Common Shares will have on the market price of the Common Shares. Any transaction involving the issue of previously unissued shares,
or securities convertible into or exercisable for shares, would result in dilution, which may be substantial, to existing holders of
shares
Continuing
impact from COVID-19
The recent
outbreak of the coronavirus, also known as "COVID-19", has spread across the globe and is impacting worldwide economic activity.
Conditions surrounding the coronavirus continue to rapidly evolve and government authorities have implemented emergency measures to mitigate
the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods, and social
distancing, have caused material disruption to business globally resulting in an economic slowdown. Global equity markets have experienced
significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed
to stabilize economic conditions.
There are
significant uncertainties with respect to future developments and impact to the Company related to the COVID-19 pandemic, including the
duration, severity, and scope of the outbreak and the measures taken by governments and businesses to contain the pandemic. While the
impact of COVID-19 is expected to be temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations
cannot be reasonably estimated at this time. At the date of this MD&A, 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. The extent to which these events may impact the Company’s business activities will depend on future developments,
such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the
effectiveness of actions taken in Canada and other countries to contain and treat the disease. These events are highly uncertain and
as such, the Company cannot determine the ultimate financial impacts at this time. Any deterioration in the current situation could have
an adverse impact on our business, results of operations, financial position, and cash flows in 2021.
Credit
risk
Credit
and liquidity risk associated with cash and the marketable security is managed by ensuring assets are placed with major financial institutions
with strong investment grade ratings.
Credit
risk on trade and other receivables reflects the risk that the Company may be unable to recover them. The Company manages its credit
risk by closely monitoring the granting of credit. Trade and other receivables that are greater than 30 days are considered past due.
Based on the status of trade and other receivables, no allowance for doubtful accounts has been recorded as at December 31, 2020 (December
31, 2019 - $nil).
Draganfly
Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Interest
rate risk
Interest
rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. In seeking
to minimize the risks from interest rate fluctuations, the Company manages exposure through its normal operating and financing activities.
The Company is exposed to minimal interest rate risk on its cash balances as they carry a floating rate of interest.
Foreign
currency risk
The Company
does engage in significant transactions and activities in currencies other than its functional currency. Depending on the timing of the
transactions and the applicable currency exchange rates such conversions may positively or negatively impact the Company.
Other Information
Additional information about
the Company is available at www.draganfly.com
Approval
This MD&A is authorized
for issue by the Board on April 16, 2021.
Exhibit 4.4
Draganfly Inc.
Condensed Consolidated Interim Financial Statements
- Unaudited
For the Three Months Ended March 31, 2021
(Expressed in Canadian Dollars)
Draganfly Inc.
Condensed Consolidated Interim Statements of Financial Position
Expressed in Canadian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
As at
|
|
Notes
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
5
|
|
|
$
|
21,067,923
|
|
|
$
|
1,982,416
|
|
|
Amounts receivable
|
|
|
6
|
|
|
|
946,961
|
|
|
|
810,791
|
|
|
Inventory
|
|
|
7
|
|
|
|
1,377,405
|
|
|
|
1,233,619
|
|
|
Prepaids
|
|
|
8
|
|
|
|
301,141
|
|
|
|
335,022
|
|
|
|
|
|
|
|
|
|
23,693,430
|
|
|
|
4,361,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,4,11
|
|
|
|
17,697,079
|
|
|
|
2,166,563
|
|
|
Equipment
|
|
|
10
|
|
|
|
241,133
|
|
|
|
153,870
|
|
|
Intellectual property
|
|
|
11
|
|
|
|
2,511,173
|
|
|
|
273,867
|
|
|
Investment
|
|
|
9
|
|
|
|
777,143
|
|
|
|
-
|
|
|
Right of use asset
|
|
|
12
|
|
|
|
135,874
|
|
|
|
144,419
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
$
|
45,055,832
|
|
|
$
|
7,100,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables and accrued liabilities
|
|
|
14
|
|
|
$
|
1,908,593
|
|
|
$
|
1,857,177
|
|
|
Customer deposits
|
|
|
15
|
|
|
|
289,803
|
|
|
|
385,449
|
|
|
Deferred income
|
|
|
16
|
|
|
|
440,000
|
|
|
|
-
|
|
|
Loans
|
|
|
17
|
|
|
|
38,465
|
|
|
|
62,978
|
|
|
Derivative liability
|
|
|
18
|
|
|
|
41,767,806
|
|
|
|
748,634
|
|
|
Lease liability
|
|
|
13
|
|
|
|
83,283
|
|
|
|
93,239
|
|
|
|
|
|
|
|
|
|
44,527,950
|
|
|
|
3,147,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income
|
|
|
16
|
|
|
|
8,932
|
|
|
|
5,062
|
|
|
Loans
|
|
|
17
|
|
|
|
71,068
|
|
|
|
34,938
|
|
|
Lease liability
|
|
|
13
|
|
|
|
66,397
|
|
|
|
64,885
|
|
|
TOTAL LIABILITIES
|
|
|
|
|
|
|
44,674,347
|
|
|
|
3,252,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
18
|
|
|
|
75,459,911
|
|
|
|
36,943,304
|
|
|
Equity reserve
|
|
|
18
|
|
|
|
5,955,327
|
|
|
|
3,024,007
|
|
|
Accumulated deficit
|
|
|
|
|
|
|
(81,320,287
|
)
|
|
|
(36,119,210
|
)
|
|
Unrealized gain on investments available for sale
|
|
|
9
|
|
|
|
277,143
|
|
|
|
-
|
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
9,391
|
|
|
|
104
|
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
381,485
|
|
|
|
3,848,205
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
$
|
45,055,832
|
|
|
$
|
7,100,567
|
|
Nature and Continuance of Operations (Note 1)
Subsequent Events (Notes 1, 25)
Approved and authorized for issuance by the Board
of Directors on May 26, 2021.
|
“Scott Larson”
|
|
“Cameron Chell”
|
|
|
Director
|
|
Director
|
|
The accompanying notes are an integral part of
these condensed consolidated interim financial statements.
Draganfly Inc.
Condensed Consolidated Interim Statements of Comprehensive Loss
- Unaudited
Expressed in Canadian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
Note
|
|
|
2021
|
|
|
2020
|
|
|
Revenue from sales of goods
|
|
|
19
|
|
|
$
|
1,129,307
|
|
|
$
|
22,356
|
|
|
Revenue from provision of services
|
|
|
19
|
|
|
|
410,429
|
|
|
|
474,701
|
|
|
TOTAL REVENUE
|
|
|
|
|
|
|
1,539,736
|
|
|
|
497,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
|
|
|
|
(1,024,729
|
)
|
|
|
(59,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
|
|
|
|
515,007
|
|
|
|
437,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
11
|
|
|
$
|
13,694
|
|
|
$
|
882
|
|
|
Depreciation
|
|
|
10,12
|
|
|
|
35,302
|
|
|
|
14,153
|
|
|
Director fees
|
|
|
22
|
|
|
|
86,691
|
|
|
|
-
|
|
|
Office and miscellaneous
|
|
|
20
|
|
|
|
2,339,401
|
|
|
|
650,297
|
|
|
Professional fees
|
|
|
|
|
|
|
868,479
|
|
|
|
92,425
|
|
|
Research and development
|
|
|
|
|
|
|
15,048
|
|
|
|
3,969
|
|
|
Share-based payments
|
|
|
18
|
|
|
|
1,049,866
|
|
|
|
519,384
|
|
|
Travel
|
|
|
|
|
|
|
28,758
|
|
|
|
7,620
|
|
|
Wages and salaries
|
|
|
|
|
|
|
402,361
|
|
|
|
366,503
|
|
|
|
|
|
|
|
|
|
(4,839,600
|
)
|
|
|
(1,655,233
|
)
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liability
|
|
|
18
|
|
|
|
(41,019,172
|
)
|
|
|
-
|
|
|
Finance and other costs
|
|
|
23
|
|
|
|
(6,405
|
)
|
|
|
(4,006
|
)
|
|
Foreign exchange gain (loss)
|
|
|
|
|
|
|
145,095
|
|
|
|
50,845
|
|
|
Gain on settlement of debt
|
|
|
24
|
|
|
|
-
|
|
|
|
67,493
|
|
|
Government income
|
|
|
|
|
|
|
20,706
|
|
|
|
-
|
|
|
Other income (loss)
|
|
|
|
|
|
|
(16,708
|
)
|
|
|
(478
|
)
|
|
Unrealized investment gain
|
|
|
9
|
|
|
|
277,143
|
|
|
|
-
|
|
|
NET LOSS
|
|
|
|
|
|
$
|
(44,923,934
|
)
|
|
$
|
(1,104,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange translation
|
|
|
|
|
|
|
9,287
|
|
|
|
13,814
|
|
|
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
(44,914,647
|
)
|
|
|
(1,090,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic/Diluted
|
|
|
|
|
|
$
|
(0.48
|
)
|
|
$
|
(0.02
|
)
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
93,426,279
|
|
|
|
70,178,481
|
|
The accompanying notes are an integral part of
these condensed consolidated interim financial statements.
Draganfly Inc.
Condensed Consolidated Interim Statements of Changes in Shareholders’
Equity (Deficiency) - Unaudited
Expressed in Canadian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Share Capital
|
|
|
Equity Reserve
|
|
|
Accumulated Deficit
|
|
|
Unrealized Gain on Investments Available for Sale
|
|
|
Accumulated Other Comprehensive Income
|
|
|
Total Shareholders’ Equity (Deficiency)
|
|
|
Balance at December 31, 2019
|
|
|
69,670,613
|
|
|
$
|
27,786,517
|
|
|
$
|
2,508,233
|
|
|
$
|
(28,103,397
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,191,353
|
|
|
Shares issued for exercise of warrants
|
|
|
3,110,800
|
|
|
|
1,155,539
|
|
|
|
(756,459
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
399,080
|
|
|
Share-based payments
|
|
|
-
|
|
|
|
-
|
|
|
|
519,384
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
519,384
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,104,108
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,015,813
|
)
|
|
Translation of foreign operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,814
|
|
|
|
13,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
|
72,781,413
|
|
|
$
|
28,942,056
|
|
|
$
|
2,271,158
|
|
|
$
|
(29,207,505
|
)
|
|
$
|
-
|
|
|
$
|
13,814
|
|
|
$
|
2,019,523
|
|
|
Shares issued for exercise of warrants
|
|
|
4,813,075
|
|
|
|
2,851,591
|
|
|
|
(888,734
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,962,857
|
|
|
Shares issued for acquisition
|
|
|
3,225,438
|
|
|
|
2,178,961
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,178,961
|
|
|
Shares issued as finder’s fees
|
|
|
200,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
Shares issued for debt settlement
|
|
|
555,409
|
|
|
|
344,354
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
344,354
|
|
|
Shares issued for financing
|
|
|
3,518,034
|
|
|
|
2,018,845
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,018,845
|
|
|
Shares issued for exercise of RSUs
|
|
|
999,992
|
|
|
|
507,497
|
|
|
|
(507,497
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Share-based payments
|
|
|
-
|
|
|
|
-
|
|
|
|
2,149,080
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,149,080
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,911,705
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,911,705
|
)
|
|
Translation of foreign operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,710
|
)
|
|
|
(13,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
86,093,361
|
|
|
$
|
36,943,304
|
|
|
$
|
3,024,007
|
|
|
$
|
(36,119,210
|
)
|
|
$
|
-
|
|
|
$
|
104
|
|
|
$
|
3,848,205
|
|
|
Shares issued for exercise of warrants
|
|
|
7,015,124
|
|
|
|
3,507,562
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,507,562
|
|
|
Shares issued for acquisition
|
|
|
6,000,000
|
|
|
|
14,220,000
|
|
|
|
3,072,857
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,292,857
|
|
|
Shares issued for exercise of RSUs
|
|
|
624,998
|
|
|
|
300,000
|
|
|
|
(300,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Shares issued for exercise of stock options
|
|
|
1,892,495
|
|
|
|
1,846,776
|
|
|
|
(891,403
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
955,373
|
|
|
Shares issued for financing
|
|
|
32,443,457
|
|
|
|
18,717,438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,717,438
|
|
|
Share issue costs
|
|
|
-
|
|
|
|
(273,169
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(273,169
|
)
|
|
Shares issued in lieu of cash
|
|
|
75,000
|
|
|
|
198,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
198,000
|
|
|
Share-based payments
|
|
|
-
|
|
|
|
-
|
|
|
|
1,049,866
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,049,866
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,201,077
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,201,077
|
)
|
|
Unrealized gain on investments available for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
277,143
|
|
|
|
-
|
|
|
|
277,143
|
|
|
Translation of foreign operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,287
|
|
|
|
9,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2021
|
|
|
134,144,435
|
|
|
$
|
75,459,911
|
|
|
$
|
5,955,327
|
|
|
$
|
(81,320,287
|
)
|
|
$
|
277,143
|
|
|
$
|
9,391
|
|
|
$
|
381,485
|
|
The accompanying notes are an integral part of
these condensed consolidated interim financial statements.
Draganfly Inc.
Condensed Consolidated Interim Statements of Cash Flows - Unaudited
Expressed in Canadian Dollars
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(44,923,934
|
)
|
|
$
|
(1,104,108
|
)
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
13,694
|
|
|
|
882
|
|
|
Depreciation
|
|
|
35,302
|
|
|
|
14,153
|
|
|
Change in fair value of derivative liability
|
|
|
41,019,172
|
|
|
|
-
|
|
|
Finance and other costs
|
|
|
6,405
|
|
|
|
4,006
|
|
|
Gain on settlement of debt
|
|
|
-
|
|
|
|
(67,493
|
)
|
|
Income from government assistance
|
|
|
(20,706
|
)
|
|
|
-
|
|
|
Share-based payments
|
|
|
1,049,866
|
|
|
|
519,384
|
|
|
Unrealized gain on investments
|
|
|
(277,143
|
)
|
|
|
-
|
|
|
|
|
|
(3,097,344
|
)
|
|
|
(633,176
|
)
|
|
Net changes in non-cash working capital items:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(136,170
|
)
|
|
|
64,604
|
|
|
Inventory
|
|
|
(143,786
|
)
|
|
|
(402,376
|
)
|
|
Prepaid expenses
|
|
|
33,881
|
|
|
|
155,416
|
|
|
Right of use asset
|
|
|
(14,365
|
)
|
|
|
-
|
|
|
Trade payables and accrued liabilities
|
|
|
(188,645
|
)
|
|
|
(104,688
|
)
|
|
Customer deposits
|
|
|
(95,646
|
)
|
|
|
-
|
|
|
Deferred income
|
|
|
(3,870
|
)
|
|
|
-
|
|
|
Loans
|
|
|
443,870
|
|
|
|
-
|
|
|
Lease liability
|
|
|
14,398
|
|
|
|
-
|
|
|
Funds used in operations activities
|
|
|
(3,187,677
|
)
|
|
|
(920,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition
|
|
|
(250,000
|
)
|
|
|
-
|
|
|
Purchase of equipment
|
|
|
(103,274
|
)
|
|
|
-
|
|
|
Revaluation of equipment
|
|
|
3,619
|
|
|
|
-
|
|
|
Investments
|
|
|
(500,000
|
)
|
|
|
-
|
|
|
Funds provided by (used in) investing activities
|
|
|
(849,655
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares for financing
|
|
|
18,717,438
|
|
|
|
399,080
|
|
|
Share issue costs
|
|
|
(273,169
|
)
|
|
|
-
|
|
|
Proceeds from issuance of common shares in lieu of cash
|
|
|
198,000
|
|
|
|
-
|
|
|
Proceeds from issuance of common shares for warrants exercised
|
|
|
3,507,562
|
|
|
|
-
|
|
|
Proceeds from issuance of common shares for stock options exercised
|
|
|
955,373
|
|
|
|
-
|
|
|
Proceeds from issuance of loans
|
|
|
60,000
|
|
|
|
-
|
|
|
Repayment of loans
|
|
|
(24,513
|
)
|
|
|
-
|
|
|
Repayment of lease liability
|
|
|
(27,139
|
)
|
|
|
(10,750
|
)
|
|
Funds provided by financing activities
|
|
|
23,113,552
|
|
|
|
388,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash
|
|
|
9,287
|
|
|
|
12,457
|
|
|
Change in cash
|
|
|
19,076,220
|
|
|
|
(531,890
|
)
|
|
Cash, beginning of period
|
|
|
1,982,416
|
|
|
|
2,429,375
|
|
|
Cash, end of period
|
|
$
|
21,067,923
|
|
|
$
|
1,909,942
|
|
The accompanying notes are an integral part of
these condensed consolidated interim financial statements.
Draganfly Inc.
Condensed Consolidated Interim Statements of Cash
Flows - Unaudited
Expressed in Canadian Dollars
|
|
|
|
|
|
|
|
|
Cash and cash equivalents consist of the following:
|
|
|
|
|
|
|
|
|
|
Cash held in banks
|
|
$
|
20,925,211
|
|
|
$
|
1,767,932
|
|
|
Guaranteed investment certificate
|
|
|
142,712
|
|
|
|
142,010
|
|
|
|
|
$
|
21,067,923
|
|
|
$
|
1,909,942
|
|
The accompanying notes are an integral part of
these condensed consolidated interim financial statements.
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
1.
|
NATURE AND CONTINUANCE OF OPERATIONS
|
Draganfly Inc. (the “Company”) was
incorporated on June 1, 2018 under the Business Corporations Act (British Columbia). The Company’s shares began trading on the Canadian
Securities Exchange (the “CSE”) under the symbol “DFLY”. The Company’s head office is located at 2108 St.
George Avenue, Saskatoon, SK, S7M 0K7 and its registered office is located at 2300 – 550 Burrard Street, Vancouver, BC, V6C 2B5.
On August 15, 2019, the Company and 1187607 B.C.
Ltd. (“Merger Co.”), a wholly-owned subsidiary of the Company, completed a Business Combination Agreement (the “BCA”)
with Draganfly Innovations Inc. (“Draganfly Innovations”) (the “Amalgamation”). Under the Amalgamation, shareholders
of Draganfly Innovations received 1.794 fully paid and non-assessable common shares in the authorized share structure of the Company for
each Draganfly Innovations share. Consequently, the Company owns 100% of Draganfly Innovations and the Draganfly Innovations shareholders
became shareholders of the Company. Draganfly is an operational business of developing and manufacturing multi-rotor helicopters, industrial
aerial video systems and civilian small unmanned aerial systems or vehicles. Pursuant to the Amalgamation the Company changed its name
to “Draganfly Inc.”.
The recent outbreak of the coronavirus, also known
as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus
continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. These measures,
which include the implementation of travel bans, self-imposed quarantine periods, and social distancing, have caused material disruption
to business globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments
and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.
There are significant uncertainties with respect
to future developments and impact to the Company related to the COVID-19 pandemic, including the duration, severity, and scope of the
outbreak and the measures taken by governments and businesses to contain the pandemic. While the impact of COVID-19 is expected to be
temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations cannot be reasonably estimated
at this time. At the date of these financial statements, 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.
The extent to which these events may impact the Company’s business activities will depend on future developments, such as the ultimate
geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions
taken in Canada and other countries to contain and treat the disease. With COVID-19 being an ongoing issue, the Company has prepared its
employees at its Saskatchewan and British Columbia facilities to be able to work from home. The Company also applied to the various
federal government relief initiatives. Although the Company’s major custom engineering customer temporarily closed that part
of its business, the Company believes it will start up again. Further, the Company has entered into a distribution agreement to be the
exclusive provider of one of their products which has helped offset custom engineering work from that customer. Aside from the
acquisition of Dronelogics and being opportunistic on other partnerships or acquisitions, the Company expanded its products/services
offered to include health/telehealth applications relating to COVID-19, as a way to deal with the impacts of COVID-19. However,
these ongoing events are highly uncertain and as such, the Company cannot determine the ultimate financial impacts at this time. Any deterioration
in the current situation could have an adverse impact on our business, results of operations, financial position, and cash flows in 2021.
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
Statement of Compliance
These condensed consolidated interim financial
statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”) and interpretations issued by the International Reporting Interpretation Committee (“IFRIC”).
The principal accounting policies applied in the preparation of these interim financial statements, including International Accounting
Standards (“IAS”) 34 Interim Financial Reporting, are set out below. These policies have been consistently applied to all
years presented, unless otherwise stated.
The notes presented in these condensed consolidated
interim financial statements include only significant events and transactions occurring since the Company’s last fiscal year end
and they do not include all of the information required in the Company’s most recent annual financial statements. Except as noted
below, these condensed consolidated interim financial statements follow the same accounting policies and methods of application as the
Company’s annual financial statements and should be read in conjunction with the Company’s annual financial statements for
the year ended December 31, 2020, which were prepared in accordance with IFRS as issued by IASB. There have been no significant changes
in judgement or estimates from those disclosed in the financial statements for the year ended December 31, 2020.
These condensed consolidated interim financial
statements were authorized for issue by the Board of Directors on May 25, 2021.
The financial statements of the Company have been
prepared on a historical cost basis, modified where applicable. In addition, the financial statements have been prepared using the accrual
basis of accounting except for cash flow information.
Basis of consolidation
Each subsidiary is fully consolidated from the
date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control
ceases.
The consolidated financial statements include
the accounts and results of operations of the Company and its wholly owned subsidiaries listed in the following table:
|
Name of Subsidiary
|
|
Place of Incorporation
|
|
|
Ownership Interest
|
|
|
Draganfly Innovations Inc.
|
|
|
Canada
|
|
|
|
100
|
%
|
|
Draganfly Innovations USA, Inc.
|
|
|
US
|
|
|
|
100
|
%
|
|
Dronelogics Systems Inc.
|
|
|
Canada
|
|
|
|
100
|
%
|
All intercompany balances and transactions were
eliminated on consolidation.
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
3.
|
DRONELOGICS ACQUISITIONS
|
On April 30, 2020, the Company acquired all of
the issued and outstanding shares of Dronelogics Systems Inc. (“Dronelogics”), excluding the cinematography division, for
consideration of $500,000 cash and 3,225,438 common shares (the “Transaction”).
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 price of $0.50 per share and as to $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 have a term of 10 years and 375,000 vest in three equal tranches, on the grant date
and first and second anniversaries of the date of grant while 70,000 vest on the first anniversary of the grant date, 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 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:
|
Number of shares of Draganfly Inc.
|
|
|
3,225,438
|
|
|
Fair value of common shares
|
|
$
|
0.83
|
|
|
Fair value of shares of Draganfly Inc.
|
|
$
|
2,677,114
|
|
|
Present value of the fair value of shares of Draganfly Inc.
|
|
|
2,178,960
|
|
|
Cash portion of purchase price
|
|
|
500,000
|
|
|
Total
|
|
$
|
2,678,960
|
|
|
Tangible assets acquired
|
|
|
|
|
|
Cash
|
|
$
|
42,593
|
|
|
Accounts receivable
|
|
|
98,852
|
|
|
Inventory
|
|
|
629,684
|
|
|
Prepaids and deposits
|
|
|
93,997
|
|
|
Other current assets
|
|
|
3,014
|
|
|
Capital assets
|
|
|
54,946
|
|
|
Right-of-use assets
|
|
|
83,428
|
|
|
Accounts payable and accrued liabilities
|
|
|
(222,766
|
)
|
|
Customer deposits
|
|
|
(245,959
|
)
|
|
Loans
|
|
|
(245,752
|
)
|
|
Other current liabilities
|
|
|
(8,437
|
)
|
|
Lease liabilities
|
|
|
(87,203
|
)
|
|
|
|
|
196,397
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
|
|
|
Customer relationships
|
|
|
197,000
|
|
|
Website
|
|
|
119,000
|
|
|
|
|
|
316,000
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,166,563
|
|
|
Total consideration
|
|
$
|
2,678,960
|
|
The Company estimated the fair value
as follows:
|
|
•
|
Customer relationships based on an income approach, specifically
multi-period excess earnings method, by identifying key customers, applying attribution rate of 15% per annum and discount rate of 18%
per annum; and
|
|
|
•
|
Website based on an income approach, specifically relief from royalty methodology,
using a reasonable royalty rate of 0.5% and discount rate of 17% per annum.
|
Furthermore, the excess of the consideration
paid over the fair value of the identifiable assets (liabilities) acquired were recognized as goodwill, which primarily consisted of the
assembled workforce.
From the date of the acquisition to
December 31, 2020, the acquired business contributed $4,086,350 of revenue and a net income of $434,528.
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
4.
|
VITAL INTELLIGENCE ACQUISITION
|
On March 25, 2021, the Company acquired the assets
of Vital Intelligence Inc. (“Vital”) for consideration of: (a) a cash payment of $500,000 with $50,000 paid
upon execution of the asset purchase agreement, $200,000 to be paid at closing and $250,000 to be paid on the six-month
anniversary date of closing; and (b) 6,000,000 units of the Company with each unit being comprised of one common
share of the Company and one common share purchase warrant (the “Acquisition”). Each warrant will entitle the holder
to acquire one common share for a period of 24 months following closing at an exercise price of $2.67 per common share and the
Company will be able to accelerate the expiry date of the warrants after one year in the event the underlying common shares have
a value of at least 30% greater than the exercise price of the warrants. The units will be held in escrow following closing with
1,500,000 units being released at closing and the remainder to be released upon the Company reaching certain revenue milestones
received from the purchased assets. The units were issued on March 22, 2021.
The units of the Company are to be releasable
from escrow in accordance with the terms and conditions of the Escrow Agreement, as follows:
|
|
a)
|
1,500,000 units shall be released on the closing date;
|
|
|
b)
|
1,500,000 units shall be released from escrow upon the Vital assets earning revenue in the aggregate amount
of $2,000,000;
|
|
|
c)
|
1,500,000 units shall be released from escrow upon the Vital assets earning revenue in the aggregate amount
of $4,000,000; and
|
|
|
d)
|
1,500,000 units shall be released from escrow upon the Vital assets earning revenue in the aggregate amount
of $6,000,000.
|
The Vital Intelligence product platform is a combination
of proprietary Intellectual Property along with external technology. The base technology is computer vision signal processing that incorporates
learning algorithms that can detect heart rate, breathing/respiratory rate, coughs, mask usage, social distancing, temperature, oxygen
saturation of blood, and blood pressure. Combined, all these data points provide and deliver an analysis of health and better accuracy
in determining infection with various respiratory related issues.
Vital Intelligence has developed a suite of products
that is designed to maximize the use of its technology by serving a variety of different market segments and sectors:
|
|
-
|
Drone Vital Sign Detection: Video from a drone is analyzed and can provide an individuals’ heart
rate, respiratory rate, and also detect coughing. The data is processed via either a local or cloud storage service in real or near-real
time.
|
|
|
-
|
Drone Social Distancing Detection: Video cameras attached to drones collect data which is then used to
determine social distancing. The data is processed via either a local or cloud storage service in real or near-real time.
|
|
|
-
|
Thermography Kiosk: This product, also branded as Safe Set Solution, is a moveable kiosk (consisting of
a thermal detection camera, laptop and stand) to provide thermal detection and reporting systems. Kiosk is able to be placed in entryways
or throughways to capture temperature readouts of passers-by.
|
|
|
-
|
Thermography Detection Camera System: This group of products is a stationary camera system, or systems
of networked cameras aimed at critical entryways or locations designed to capture core-body temperature of individuals entering a space.
Algorithms read video feeds and allow for company or facility use decisions to be made. An example would be capturing temperature readouts
from individuals and then integrating that data into a company’s employee badge systems for compliance and monitoring as well as
door locking systems to grant access to a space.
|
|
|
-
|
Social Distancing Camera System: This product is a stationary camera system, or system of networked cameras
aimed at high traffic areas in order to capture data on social distancing. Information is provided via overlay on capture footage. The
technology can be used on archived or real-time video footage to assist community health workers in predicting outbreaks of infections.
|
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
4.
|
VITAL INTELLIGENCE ACQUISITION
|
The PPA is as follows:
|
Number of units of Draganfly Inc.
|
|
|
6,000,000
|
|
|
Fair value of units
|
|
$
|
2.88
|
|
|
Fair value of units of Draganfly Inc.
|
|
$
|
17,292,857
|
|
|
Fair value of cash portion of purchase price
|
|
|
488,659
|
|
|
Total
|
|
$
|
17,781,516
|
|
|
Identifiable intangible assets
|
|
|
|
|
|
Brand
|
|
$
|
540,000
|
|
|
Software
|
|
|
1,711,000
|
|
|
|
|
|
2,251,000
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
15,530,516
|
|
|
Total consideration
|
|
$
|
17,781,516
|
|
The Company estimated the fair value
as follows:
|
|
•
|
Brand based on an income approach, specifically relief from royalty methodology,
using a reasonable royalty rate of 1.0% and discount rate of 40% per annum.
|
|
|
|
|
|
|
•
|
Software based on an income approach, specifically relief from royalty methodology,
using a reasonable royalty rate of 5.0% and discount rate of 40% per annum.
|
|
|
5.
|
CASH AND CASH EQUIVALENTS
|
|
|
|
March 31, 2020
|
|
|
December 31, 2020
|
|
|
Cash held in banks
|
|
$
|
20,925,211
|
|
|
$
|
1,839,871
|
|
|
Guaranteed investment certificate
|
|
|
142,712
|
|
|
|
142,545
|
|
|
|
|
$
|
21,067,923
|
|
|
$
|
1,982,416
|
|
On March 27, 2021, the Company has $142,710 in
a guaranteed investment certificate (“GIC”) to secure its credit cards. The terms of the GIC are for 1 year at a rate of 0.10%
per annum.
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Trade accounts receivable
|
|
$
|
946,961
|
|
|
$
|
780,254
|
|
|
SR&ED receivable
|
|
|
-
|
|
|
|
30,537
|
|
|
|
|
$
|
946,961
|
|
|
$
|
810,791
|
|
Draganfly Inc.
Notes to the Condensed Consolidated Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Finished goods
|
|
$
|
1,286,017
|
|
|
$
|
1,155,871
|
|
|
Parts
|
|
|
91,388
|
|
|
|
77,748
|
|
|
|
|
$
|
1,377,405
|
|
|
$
|
1,233,619
|
|
During the three months ended March 31, 2021,
$784,095 (2020: $7,576) of inventory was sold and recognized in cost of sales.
|
|
8.
|
PREPAID EXPENSES AND DEPOSITS
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Insurance
|
|
$
|
29,195
|
|
|
$
|
992
|
|
|
Prepaid interest
|
|
|
4,750
|
|
|
|
-
|
|
|
Prepaid marketing services
|
|
|
56,532
|
|
|
|
187,826
|
|
|
Prepaid rent
|
|
|
-
|
|
|
|
3,583
|
|
|
Prepaid subscriptions
|
|
|
4,167
|
|
|
|
5,953
|
|
|
Deposits
|
|
|
206,497
|
|
|
|
136,668
|
|
|
|
|
$
|
301,141
|
|
|
$
|
335,022
|
|
On March 10, 2021, the Company purchased 1,428,571
units of a company for $500,000. Each unit is comprised of one common share and one share purchase warrant. These warrants have an exercise
price of $0.50 per warrant, each convert to one common share, and have a life of two years, expiring on March 17, 2023. These assets have
been classified as Available for Sale and any unrealized gains or losses will be recognized through the income statement.
|
Balance at March 10, 2021
|
|
$
|
500,000
|
|
|
Gain/Loss
|
|
|
277,143
|
|
|
Balance at March 31, 2021
|
|
$
|
777,143
|
|
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
|
Computer Equipment
|
|
|
Furniture and Equipment
|
|
|
Leasehold Improvements
|
|
|
Software
|
|
|
Vehicles
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
7,000
|
|
|
$
|
142,173
|
|
|
$
|
-
|
|
|
$
|
29,967
|
|
|
$
|
-
|
|
|
$
|
179,140
|
|
|
Additions
|
|
|
2,028
|
|
|
|
21,860
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,888
|
|
|
Net assets acquired in the Acquisition
|
|
|
15,369
|
|
|
|
7,573
|
|
|
|
4,352
|
|
|
|
-
|
|
|
|
27,652
|
|
|
|
54,946
|
|
|
Balance at December 31, 2020
|
|
$
|
24,397
|
|
|
$
|
171,606
|
|
|
$
|
4,352
|
|
|
$
|
29,967
|
|
|
$
|
27,652
|
|
|
$
|
257,974
|
|
|
Additions
|
|
|
1,505
|
|
|
|
101,769
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103,274
|
|
|
Revaluation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,619
|
)
|
|
|
(3,619
|
)
|
|
Balance at March 31, 2021
|
|
$
|
25,902
|
|
|
$
|
273,376
|
|
|
$
|
4,352
|
|
|
$
|
29,967
|
|
|
$
|
24,033
|
|
|
$
|
357,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
6,761
|
|
|
$
|
37,944
|
|
|
$
|
-
|
|
|
$
|
19,294
|
|
|
$
|
-
|
|
|
$
|
63,999
|
|
|
Charge for the year
|
|
|
5,631
|
|
|
|
22,019
|
|
|
|
3,220
|
|
|
|
3,202
|
|
|
|
6,033
|
|
|
|
40,105
|
|
|
Balance at December 31, 2020
|
|
$
|
12,392
|
|
|
$
|
59,963
|
|
|
$
|
3,220
|
|
|
$
|
22,496
|
|
|
$
|
6,033
|
|
|
$
|
104,104
|
|
|
Charge for the year
|
|
|
1,744
|
|
|
|
7,606
|
|
|
|
1,132
|
|
|
|
560
|
|
|
|
1,350
|
|
|
|
12,392
|
|
|
Balance at March 31, 2021
|
|
$
|
14,136
|
|
|
$
|
67,569
|
|
|
$
|
4,352
|
|
|
$
|
23,056
|
|
|
$
|
7,383
|
|
|
$
|
116,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
$
|
12,005
|
|
|
$
|
111,643
|
|
|
$
|
1,132
|
|
|
$
|
7,471
|
|
|
$
|
21,619
|
|
|
$
|
153,870
|
|
|
March 31, 2021
|
|
$
|
11,765
|
|
|
$
|
205,807
|
|
|
$
|
-
|
|
|
$
|
6,911
|
|
|
$
|
16,650
|
|
|
$
|
241,133
|
|
|
|
11.
|
INTELLECTUAL PROPERTY
|
|
|
|
Patents
|
|
|
Customer Relationships
|
|
|
Brand & Software
|
|
|
Goodwill
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
41,931
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41,931
|
|
|
Intangible assets acquired in the Transaction
|
|
|
-
|
|
|
|
197,000
|
|
|
|
119,000
|
|
|
|
2,166,563
|
|
|
|
2,482,563
|
|
|
Balance at December 31, 2020
|
|
$
|
41,931
|
|
|
$
|
197,000
|
|
|
$
|
119,000
|
|
|
$
|
2,166,563
|
|
|
$
|
2,524,494
|
|
|
Intangible
assets acquired in the Acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
2,251,000
|
|
|
|
15,530,516
|
|
|
|
17,781,516
|
|
|
Balance at March 31, 2021
|
|
$
|
41,931
|
|
|
$
|
197,000
|
|
|
$
|
2,370,000
|
|
|
$
|
17,697,079
|
|
|
$
|
20,264,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
40,546
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
40,546
|
|
|
Charge for the year
|
|
|
1,385
|
|
|
|
26,267
|
|
|
|
15,866
|
|
|
|
-
|
|
|
|
43,518
|
|
|
Balance at December 31, 2020
|
|
$
|
41,931
|
|
|
$
|
26,267
|
|
|
$
|
15,866
|
|
|
$
|
-
|
|
|
$
|
84,064
|
|
|
Charge for the year
|
|
|
-
|
|
|
|
8,537
|
|
|
|
5,157
|
|
|
|
-
|
|
|
|
13,694
|
|
|
Balance at March 31, 2021
|
|
$
|
41,931
|
|
|
$
|
34,804
|
|
|
$
|
21,023
|
|
|
$
|
-
|
|
|
$
|
97,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
$
|
-
|
|
|
$
|
170,733
|
|
|
$
|
103,134
|
|
|
$
|
2,166,563
|
|
|
$
|
2,440,430
|
|
|
March 31, 2021
|
|
$
|
-
|
|
|
$
|
162,196
|
|
|
$
|
2,348,977
|
|
|
$
|
17,697,079
|
|
|
$
|
20,208,252
|
|
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
11.
|
INTELLECTUAL PROPERTY (CONT’D)
|
Customer relationships
On April 30, 2020, the Company acquired
a 100% interest in Dronelogics and assigned $197,000 to the fair value of customer relationships.
Brand
On April 30, 2020, the Company acquired
a 100% interest in Dronelogics and assigned $119,000 to the fair value of the website/domain name.
On March 25, 2021, the Company acquired
the assets of Vital and assigned $540,000 to the fair value of the brand.
Software
On March 25, 2021, the Company acquired
the assets of Vital and assigned $1,711,000 to the fair value of the software.
Goodwill
On April 30, 2020, the Company acquired
a 100% interest in Dronelogics, which included goodwill. Goodwill was valued at $2,166,563.
On March 25, 2021, the Company acquired
the assets of Vital, which included goodwill. Goodwill was valued at $15,530,516.
The key assumptions used in the calculations
of the recoverable amounts include sales growth per year, changes in cost of sales and capital expenditures based on internal forecasts.
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
159,539
|
|
|
Lease acquired in the Acquisition
|
|
|
83,428
|
|
|
Balance at December 31, 2020
|
|
$
|
242,967
|
|
|
Addition
|
|
|
28,610
|
|
|
Lease removal
|
|
|
(7,092
|
)
|
|
Balance at March 31, 2021
|
|
$
|
264,485
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
29,545
|
|
|
Charge for the period
|
|
|
69,003
|
|
|
Balance at December 31, 2020
|
|
$
|
98,548
|
|
|
Historical correction
|
|
|
7,152
|
|
|
Charge for the period
|
|
|
22,911
|
|
|
Balance at March 31, 2021
|
|
$
|
128,611
|
|
|
|
|
|
|
|
|
Net book value:
|
|
|
|
|
|
December 31, 2020
|
|
$
|
144,419
|
|
|
March 31, 2021
|
|
$
|
135,874
|
|
Draganfly Inc.
Notes to the Condensed Consolidated Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
|
Total
|
|
|
Balance at January 1, 2020
|
|
$
|
136,073
|
|
|
Leases acquired in the Acquisition
|
|
|
87,203
|
|
|
Interest expense
|
|
|
18,290
|
|
|
Lease Payments
|
|
|
(83,442
|
)
|
|
Balance at December 31, 2020
|
|
$
|
158,124
|
|
|
Historical correction
|
|
|
22,043
|
|
|
Interest expense
|
|
|
4,297
|
|
|
Lease payments
|
|
|
(27,139
|
)
|
|
Lease removal
|
|
|
(7,645
|
)
|
|
Balance at March 31, 2021
|
|
|
149,680
|
|
|
|
|
|
|
|
|
Which consists of:
|
|
|
|
|
|
Current lease liability
|
|
$
|
83,283
|
|
|
Non-current lease liability
|
|
|
66,397
|
|
|
Balance at March 31, 2021
|
|
$
|
149,680
|
|
|
|
14.
|
TRADE PAYABLES AND ACCRUED LIABILITIES
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Trade accounts payable
|
|
$
|
1,303,477
|
|
|
$
|
813,881
|
|
|
Accrued liabilities
|
|
|
478,669
|
|
|
|
512,205
|
|
|
Due to related parties (Note 21)
|
|
|
92,250
|
|
|
|
475,628
|
|
|
Government grant payable (Note 20)
|
|
|
33,709
|
|
|
|
33,709
|
|
|
GST/PST Payable
|
|
|
11,829
|
|
|
|
21,754
|
|
|
|
|
$
|
1,919,934
|
|
|
$
|
1,857,177
|
|
The Company takes a customer deposit on certain
orders.
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Customer deposits
|
|
$
|
289,803
|
|
|
$
|
385,449
|
|
At times, the Company’s subsidiaries may
take payment in advance for services to be rendered. These amounts are held and recognized as services are rendered.
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Deferred income from customers
|
|
$
|
440,000
|
|
|
$
|
-
|
|
|
Deferred income from government
|
|
|
8,932
|
|
|
|
5,062
|
|
|
|
|
|
448,932
|
|
|
|
5,062
|
|
The deferred income from the government is the
calculated fair value of the interest on the Canadian Emergency Business Account (CEBA) loans which is accreted over the remaining expected
life of the loans.
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
|
Start
Date
|
|
Maturity
Date
|
|
Rate
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
CEBA
|
|
2020-05-19
|
|
2022-12-31
|
|
|
0
|
%
|
|
$
|
33,848
|
|
|
$
|
1,686
|
|
|
$
|
35,534
|
|
|
CEBA
|
|
2021-03-15
|
|
2022-12-31
|
|
|
0
|
%
|
|
|
35,424
|
|
|
|
110
|
|
|
|
35,534
|
|
|
Vehicle loan
|
|
2019-08-30
|
|
2024-09-11
|
|
|
6.99
|
%
|
|
|
19,831
|
|
|
|
3,778
|
|
|
|
23,609
|
|
|
Shopify loan
|
|
2020-08-05
|
|
|
|
|
7.00
|
%
|
|
|
13,884
|
|
|
|
972
|
|
|
|
14,856
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
102,987
|
|
|
$
|
6,546
|
|
|
$
|
109,533
|
|
On May 19, 2020, Dronelogics received a $40,000
CEBA loan. This loan is currently interest-free and 25% of the loan, up to $10,000, is forgivable if the loan is repaid on or before December
31, 2022. If the loan is not repaid by that date, the loan can be converted to a three-year term loan at an interest rate of 5%.
On December 4, 2020, the Government of Canada
allowed for an expansion of the CEBA loan by $20,000, of which, an additional $10,000 is forgivable if the loan is repaid on or before
December 31, 2022.
On March 15, 2021, Draganfly Innovations Inc.
received a $60,000 CEBA loan. This loan is currently interest free and up to $20,000 is forgivable if the loan is repaid on or before
December 31, 2022. If the loan is not repaid by that date, the loan can be converted to a three-year term loan at an interest rate of
5%.
The CEBA loans are unsecured, the vehicle loan
is secured by the vehicle, and the Shopify loan is secured by the Company’s accounts receivable.
Draganfly Inc.
Notes to the Condensed Consolidated Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
Authorized share capital
Unlimited number of common shares without par
value.
Issued share capital
During the three months ended March 31, 2021,
|
|
-
|
The Company issued 7,015,124 common shares for the exercise of warrants for $3,507,562.
|
|
|
-
|
The Company issued 624,998 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
The Company issued 1,892,495 common shares for the exercise of stock options for $955,373.
|
|
|
-
|
The Company issued 75,000 common shares in lieu of cash.
|
|
|
-
|
The Company issued 32,443,457 units for the Regulation A+ financing in the United States. Each unit is
comprised of one common share and one share purchase warrant. These warrants have an exercise price of $0.71 USD per warrant, each convert
to one common share, and have a life of two years.
|
|
|
-
|
The Company issued 6,000,000 units for the acquisition of Vital Intelligence. Each unit is comprised of one common share and one warrant.
These warrants have an exercise price of $2.67 per warrant, each convert to one common share, and have a life of two years.
|
Stock Options
The Company has adopted an incentive share compensation
plan, which provides that the Board of Directors of the Company may from time to time, in its discretion, and in accordance with the CSE
requirements, grant to directors, officers, employees, and technical consultants to the Company, non-transferable stock options to purchase
common shares. The total number of common shares reserved and available for grant and issuance pursuant to this plan shall not exceed
20% (in the aggregate) of the issued and outstanding common shares from time to time. The number of options awarded and underlying vesting
conditions are determined by the Board of Directors in its discretion.
As at March 31, 2021, the Company had the following
options outstanding and exercisable:
|
Grant Date
|
|
Expiry Date
|
|
Exercise Price
|
|
|
Remaining Contractual Life (years)
|
|
|
Number of Options Outstanding
|
|
|
Number of Options Exercisable
|
|
|
October 30, 2019
|
|
October 30, 2029
|
|
$
|
0.50
|
|
|
|
8.59
|
|
|
|
1,483,337
|
|
|
|
599,998
|
|
|
November 19, 2019
|
|
November 19, 2029
|
|
$
|
0.50
|
|
|
|
8.64
|
|
|
|
250,000
|
|
|
|
166,666
|
|
|
April 30, 2020
|
|
April 30, 2030
|
|
$
|
0.50
|
|
|
|
9.09
|
|
|
|
445,000
|
|
|
|
124,999
|
|
|
April 30, 2020
|
|
April 30, 2030
|
|
$
|
0.77
|
|
|
|
9.09
|
|
|
|
550,000
|
|
|
|
150,000
|
|
|
July 3, 2020
|
|
July 3, 2025
|
|
$
|
0.64
|
|
|
|
4.26
|
|
|
|
1,000,000
|
|
|
|
166,666
|
|
|
November 24, 2020
|
|
November 24, 2030
|
|
$
|
0.50
|
|
|
|
9.66
|
|
|
|
160,000
|
|
|
|
50,000
|
|
|
December 11, 2020
|
|
December 11, 2030
|
|
$
|
0.43
|
|
|
|
9.70
|
|
|
|
187,500
|
|
|
|
-
|
|
|
February 2, 2021
|
|
February 2, 2031
|
|
$
|
2.64
|
|
|
|
9.85
|
|
|
|
150,000
|
|
|
|
50,000
|
|
|
March 8, 2021
|
|
March 8, 2026
|
|
$
|
2.78
|
|
|
|
4.94
|
|
|
|
50,000
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,275,837
|
|
|
|
1,320,829
|
|
Draganfly Inc.
Notes to the Condensed
Consolidated Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
18.
|
SHARE CAPITAL (CONT’D)
|
|
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Outstanding, December 31, 2019
|
|
|
3,725,000
|
|
|
$
|
0.50
|
|
|
Forfeited
|
|
|
(216,668
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
2,460,000
|
|
|
|
0.63
|
|
|
Outstanding, December 31, 2020
|
|
|
5,968,332
|
|
|
$
|
0.55
|
|
|
Exercised
|
|
|
(1,892,495
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
200,000
|
|
|
|
2.68
|
|
|
Outstanding, March 31, 2021
|
|
|
4,275,837
|
|
|
$
|
0.67
|
|
During the three months ended March
31, 2021,
|
|
-
|
The Company granted 150,000 options to an employee. Each option is exercisable
at $2.64 per share for 10 years.
|
|
|
-
|
The Company granted 50,000 options to a consultant. Each option is exercisable
at $2.78 per share for 5 years.
|
During the year ended December 31,
2020,
|
|
-
|
The Company granted 445,000 options to employees. Each option is exercisable at
$0.50 per share for a period of 10 years from the grant date.
|
|
|
-
|
The Company issued 600,000 options to consultants. Each option is exercisable at
$0.77 per share for a period of 10 years from the grant date.
|
|
|
-
|
The Company granted 1,000,000 options to employees. Each option is exercisable
at $0.64 per share for a period of 5 years from the grant date.
|
|
|
-
|
The Company granted 165,000 options to employees. Each option is exercisable at
$0.50 per share for a period of 10 years from the grant date.
|
|
|
-
|
The Company granted 250,000 options to a consultant. Each option is exercisable
at $0.43 per share for a period of 10 years from the grant date.
|
During the three months ended March 31, 2021,
the Company recorded share-based payment expense of $516,351 (2020: $274,584).
Restricted Share Units
The Company has adopted an incentive share compensation
plan, which provides that the Board of Directors of the Company may from time to time, in its discretion, and in accordance with the Exchange
requirements, grant to directors, officers, employees, and technical consultants to the Company, restricted stock units (RSUs). The number
of RSUs awarded and underlying vesting conditions are determined by the Board of Directors in its discretion. RSUs will have a 3-year
vesting period following the award date. The total number of common shares reserved and available for grant and issuance pursuant to this
plan, and the total number of Restricted Share Units that may be awarded pursuant to this plan, shall not exceed 20% (in the aggregate)
of the issued and outstanding common shares from time to time.
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
18.
|
SHARE CAPITAL (CONT’D)
|
As at March 31, 2021, the Company had the following
RSUs outstanding:
|
|
|
Number of RSUs
|
|
|
Outstanding, December 31, 2019
|
|
|
3,175,000
|
|
|
Exercised
|
|
|
(999,992
|
)
|
|
Forfeited
|
|
|
(341,667
|
)
|
|
Granted
|
|
|
1,240,000
|
|
|
Outstanding, December 31, 2020
|
|
|
3,073,341
|
|
|
Exercised
|
|
|
(624,998
|
)
|
|
Granted
|
|
|
740,000
|
|
|
Outstanding, March 31, 2021
|
|
|
3,188,343
|
|
During the three months ended March 31, 2021,
the Company accelerated the vesting of 624,998 RSUs and issued 740,000 RSUs to employees of the Company with each RSU exercisable into
one common share of the Company or the cash equivalent thereof upon the vesting conditions being met for a period of three years from
the grant date.
During the year ended December 31, 2020, the Company
committed to grant 1,240,000 RSUs to employees and consultants of the Company with each RSU exercisable into one common share of the Company
or the cash equivalent thereof upon the vesting conditions being met for a period of three years from the grant date.
During the three months ended March 31, 2021,
the Company recorded share-based payment expense of $533,515 in stock-based compensation for RSUs, based on the fair values of RSUs granted
which were calculated using the closing price of the Company’s stock on the day prior to grant.
Warrants
During the year ended December 31, 2020 and the
three months ended March 31, 2021, the Company issued warrants (“USD Warrants”) with a USD exercise price. Being in a foreign
currency that is not the Company’s functional currency, these USD Warrants are required to be recorded as a financial liability
and not as equity. As a financial liability, these USD Warrants are revalued on a quarterly basis to fair market value with the change
in fair value being recorded through the Consolidated Statement of Comprehensive Loss. The initial fair value of these USD Warrants was
parsed out from equity and recorded as a financial liability.
To reach a fair value of the USD Warrants, a Black
Scholes calculation is used, calculated in USD as the Company also trades on the OTCQB. The Black Scholes value per USD Warrant is then
multiplied by the number of outstanding warrants and then multiplied by the foreign exchange rate at the end of the period from the Bank
of Canada.
Warrant Derivative Liability
|
Balance at January 1, 2020
|
|
$
|
-
|
|
|
Change in fair value of warrants outstanding
|
|
|
748,634
|
|
|
Balance at December 31, 2020
|
|
$
|
748,634
|
|
|
Change in fair value of warrants outstanding
|
|
|
41,019,172
|
|
|
Balance at March 31, 2021
|
|
$
|
41,767,806
|
|
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
18.
|
SHARE CAPITAL (CONT’D)
|
The derivative financial liability consists of
the fair value of the non-compensatory share purchase warrants that have exercise prices that differ from the functional currency of the
Company and are within the scope of IAS 32 “Financial Instruments: Presentation”. Details of these warrants and their fair
values are as follows:
|
Issue Date
|
|
Exercise Price
|
|
|
Number of
Warrants Outstanding at March 31, 2021
|
|
|
Fair Value at March 31, 2021
|
|
|
Number of Warrants Outstanding at December 31, 2020
|
|
|
Fair Value at December 31, 2020
|
|
|
November 30, 2020
|
|
US$
|
0.71
|
|
|
|
2,556,496
|
|
|
$
|
3,050,839
|
|
|
|
2,556,496
|
|
|
$
|
748,634
|
|
|
February 5, 2021
|
|
US$
|
0.71
|
|
|
|
6,671,992
|
|
|
|
7,962,138
|
|
|
|
-
|
|
|
|
-
|
|
|
March 5, 2021
|
|
US$
|
0.71
|
|
|
|
25,771,465
|
|
|
|
30,754,829
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
34,999,953
|
|
|
$
|
41,767,806
|
|
|
|
2,556,496
|
|
|
$
|
748,634
|
|
During the year ended December 31, 2020, the Company
extended the life of the November 5, 2019 warrants from expiring on November 5, 2020 to expiring on November 5, 2021. To do this, it was
required that 25% of the remaining November 5, 2019 warrants needed to be exercised by October 21, 2020 and was completed.
|
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Outstanding, December 31, 2019
|
|
|
18,051,499
|
|
|
$
|
0.41
|
|
|
Exercised
|
|
|
(7,923,874
|
)
|
|
|
0.30
|
|
|
Forfeited
|
|
|
(600,000
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
2,556,496
|
|
|
|
0.71
|
|
|
Outstanding, December 31, 2020
|
|
|
12,084,121
|
|
|
$
|
0.59
|
|
|
Exercised
|
|
|
(7,015,124
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
38,443,457
|
|
|
|
1.02
|
|
|
Outstanding, March 31, 2021
|
|
|
43,512,454
|
|
|
|
0.97
|
|
As at March 31, 2021, the Company had the following
warrants outstanding:
|
Date issued
|
|
Expiry date
|
|
Exercise price
|
|
Number of warrants outstanding
|
|
|
November 5, 2019
|
|
November 5, 2021
|
|
CDN$
|
0.50
|
|
2,512,501
|
|
|
November 30, 2020
|
|
November 30, 2022
|
|
US$
|
0.71
|
|
2,556,496
|
|
|
February 5, 2021
|
|
February 5, 2023
|
|
US$
|
0.71
|
|
6,671,992
|
|
|
March 5, 2021
|
|
March 5, 2023
|
|
US$
|
0.71
|
|
25,771,465
|
|
|
March 22, 2021
|
|
March 22, 2023
|
|
CDN$
|
2.67
|
|
6,000,000
|
|
|
|
|
|
|
|
|
43,512,454
|
|
The weighted average remaining contractual life
of warrants outstanding as of March 31, 2021, was 1.83 (December 31, 2020 - 0.90 years).
Of the 6,000,000 warrants issued on March 22,
2021 to acquire Vital, 4,500,000 of the warrants are currently held in escrow, to be released upon completion of the milestones (note
4).
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
The Company sub-classifies revenue within the
following components: product revenue and consulting revenue. Product revenue comprises of sales of internally assembled multi-rotor helicopters,
industrial aerial video systems, civilian small unmanned aerial systems or vehicles, and wireless video systems. Consulting revenue consists
of fees charged for custom engineering and training and simulation consulting.
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
Product sales
|
|
$
|
1,129,307
|
|
|
$
|
22,356
|
|
|
Drone service
|
|
|
409,963
|
|
|
|
-
|
|
|
Custom engineering services
|
|
|
466
|
|
|
|
474,701
|
|
|
|
|
$
|
1,539,736
|
|
|
$
|
497,057
|
|
The Company does not derive significant
revenue from any (2019 – one) customers, which exceed 10% of total revenues for the three months ended March 31, 2021 (2020 –
$474,701 of custom engineering services revenue).
Consulting revenue:
On May 22, 2017, the Company executed
a standard consulting agreement, whereby the Company would provide consulting, custom engineering and investigating and solving on a project-by-project
basis. The Company shall be responsible for the development, design, procurement, fabrication, assembly, integration, checkout, integration
and test of hardware, software, and firmware necessary to produce a complete system per each project. The consideration for the services
performed are based on the labor cost incurred on an hourly basis and minimal preapproved expenditures.
Geographic revenue segmentation is as follows:
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
Canada
|
|
$
|
769,380
|
|
|
$
|
7,931
|
|
|
United States
|
|
|
769,419
|
|
|
|
489,126
|
|
|
International
|
|
|
937
|
|
|
|
-
|
|
|
|
|
$
|
1,539,736
|
|
|
$
|
497,057
|
|
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
The Company operates in an international
market with four reportable operating segments.
|
|
|
Draganfly Inc.
|
|
|
Draganfly Innovations Inc.
|
|
|
Draganfly Innovations USA, Inc.
|
|
|
Dronelogics Systems Inc.
|
|
|
Total
|
|
|
Product sales
|
|
$
|
-
|
|
|
$
|
16,722
|
|
|
$
|
2,127
|
|
|
$
|
1,110,459
|
|
|
$
|
1,129,308
|
|
|
Drone services
|
|
|
-
|
|
|
|
-
|
|
|
|
244,552
|
|
|
|
165,410
|
|
|
|
409,962
|
|
|
Custom engineering services
|
|
|
-
|
|
|
|
466
|
|
|
|
-
|
|
|
|
-
|
|
|
|
466
|
|
|
|
|
|
-
|
|
|
|
17,188
|
|
|
|
246,679
|
|
|
|
1,275,869
|
|
|
|
1,539,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
-
|
|
|
|
(28,645
|
)
|
|
|
(170,756
|
)
|
|
|
(825,328
|
)
|
|
|
(1,024,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
(11,457
|
)
|
|
|
75,923
|
|
|
|
450,541
|
|
|
|
515,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
3,452,771
|
|
|
|
834,203
|
|
|
|
142,847
|
|
|
|
409,779
|
|
|
|
4,839,600
|
|
|
Other income (expenses)
|
|
|
(41,015,596
|
)
|
|
|
489,382
|
|
|
|
-
|
|
|
|
(73,127
|
)
|
|
|
(40,599,341
|
)
|
|
Net income (loss)
|
|
|
(44,468,367
|
)
|
|
|
(356,278
|
)
|
|
|
(66,924
|
)
|
|
|
(32,365
|
)
|
|
|
(44,923,934
|
)
|
|
Cumulative translation differences
|
|
|
-
|
|
|
|
-
|
|
|
|
9,287
|
|
|
|
-
|
|
|
|
9,287
|
|
|
Comprehensive income (loss)
|
|
$
|
(44,468,367
|
)
|
|
$
|
(356,278
|
)
|
|
$
|
(57,637
|
)
|
|
$
|
(32,365
|
)
|
|
$
|
(44,914,647
|
)
|
The Company separated the operating
segments based on the existing subsidiaries and have revenues as follows:
|
|
-
|
Draganfly Inc.: No revenues.
|
|
|
-
|
Draganfly Innovations Inc.: Product sales revenues and revenues derived from custom
integration and engineering services.
|
|
|
-
|
Draganfly Innovations USA, Inc.: Product sales revenues and revenues derived from
drone and health/telehealth services.
|
|
|
-
|
Dronelogics Systems Inc.: Product sales revenues and revenues derived from rental,
repair, drone as a service, and training services.
|
For 2020 and 2021, all revenues are
derived from external customers.
|
|
20.
|
OFFICE AND MISCELLANEOUS
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
Advertising, Marketing, and Investor Relations
|
|
$
|
2,095,092
|
|
|
$
|
486,639
|
|
|
Contract Work
|
|
|
34,077
|
|
|
|
118,663
|
|
|
Other
|
|
|
210,232
|
|
|
|
44,995
|
|
|
|
|
$
|
2,339,401
|
|
|
$
|
650,297
|
|
Draganfly Inc.
Notes to the Condensed
Consolidated Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
21.
|
GOVERNMENT ASSISTANCE
|
In February 2016, the Company and an Alberta-based
government funded not-for-profit organization (the “Organization”) entered into a funding agreement, whereby the Organization
would fund 50% of the total costs, up to $375,000 to the Company for the development of a new product. During the year ended December
31, 2016, the Company received $75,000 in funding. On February 28, 2017, the Company and the Organization entered into a repayment agreement,
where the Company would refund and repay a portion of the Organization’s initial funding. The repayment agreement set out the terms
and conditions upon which the Company was to pay $41,292 over a 12-month repayment plan. In addition, the Company will pay the Organization
$33,709 if the Company ever sells a product that the Organization’s funding contributed to. During the year ended December 31, 2019,
the final repayment of $13,764 was made and the contingent balance of $33,709 remains in government grants payable (Note 13).
|
|
22.
|
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 that Cameron Chell, CEO and director has a material interest in that he previously controlled, , 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 services are provided by a team of up to six consultants and 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 three months ended March 31, 2021, the company incurred fees of $43,500 compared to $70,350 in
2020. As at March 31, 2021, the Company was indebted to this company in the amount of $nil (December 31, 2020 - $nil).
On October 1, 2019, the Company entered into an
independent consultant agreement (“Consultant Agreement”) with 1502372 Alberta Ltd, a company controlled by Cameron Chell,
CEO and director, to provide executive consulting services to the Company. The costs of all charges are based on the fees set in the Consultant
Agreement and are settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the three months ended
March 31, 2021, the Company incurred fees of $53,764 compared to $24,150 in 2020. As at March 31, 2021, the Company was indebted to this
company in the amount of $73,500 (December 31, 2020 - $321,741).
On July 3, 2020, the Company entered
into an executive consultant agreement (“Executive Agreement”) with Scott Larson, a director of the Company, to provide executive
consulting services, as President, to the Company. The costs of all charges are based on the fees set in the Executive Agreement and are
settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the three months ended March 31, 2021,
the Company incurred fees of $44,123. As at March 31, 2021, the Company was indebted to this company in the amount of $nil (December 31,
2020 - $153,887).
As at March 31, 2021, the Company had
$92,250 (December 31, 2020 - $475,628) payable to related parties outstanding that were included in accounts payable. The balances outstanding
are unsecured, non-interest bearing and due on demand.
Draganfly Inc.
Notes to the Condensed Consolidated
Interim Financial Statements - Unaudited
For The Three Months Ended March 31, 2021
Expressed in Canadian Dollars
|
|
22.
|
RELATED PARTY TRANSACTIONS (CONT’D)
|
Key management compensation
Key management includes the Company’s
directors and members of the executive management team. Compensation awarded to key management for the three months ended March 31, 2021
and 2020 included:
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
Director fees
|
|
$
|
86,691
|
|
|
$
|
-
|
|
|
Management fees paid to a company controlled by CEO and director
|
|
|
53,764
|
|
|
|
-
|
|
|
Management fees paid to a company controlled by president and director
|
|
|
44,123
|
|
|
|
-
|
|
|
Management fees paid to a company controlled by a former director
|
|
|
45,000
|
|
|
|
30,000
|
|
|
Salaries
|
|
|
122,976
|
|
|
|
71,190
|
|
|
Salaries paid to the former owner of the Company
|
|
|
-
|
|
|
|
33,415
|
|
|
Share-based payments
|
|
|
680,097
|
|
|
|
271,639
|
|
|
Total
|
|
$
|
1,032,651
|
|
|
$
|
430,394
|
|
|
|
23.
|
FINANCE AND OTHER COSTS
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
Accretion expense
|
|
$
|
706
|
|
|
$
|
-
|
|
|
Interest expense on lease liabilities
|
|
|
4,297
|
|
|
|
-
|
|
|
Interest income on GIC
|
|
|
(2
|
)
|
|
|
(10
|
)
|
|
Interest on outstanding trade payables and bank charges
|
|
|
1,404
|
|
|
|
4,016
|
|
|
|
|
$
|
6,405
|
|
|
$
|
4,006
|
|
|
|
24.
|
GAIN ON SETTLEMENT OF DEBT
|
During the three months ended March 31, 2020,
as a result of the transactions relating to the private placement and ensuing debt repayments, a gain of $67,493 was recognized on the
settlement of outstanding debt.
Subsequent to March 31, 2021,
|
|
-
|
887,500 warrants were exercised for proceeds of $443,750.
|
|
|
-
|
910,000 stock options were granted to employees of the Company with an exercise price of $2.03 and expire
10 years from the date of grant. These stock options vest:
|
|
|
o
|
1/3 on the first anniversary;
|
|
|
o
|
1/3 on the second anniversary; and
|
|
|
o
|
1/3 on the third anniversary.
|
|
|
-
|
50,000 RSUs were granted to employees of the Company. These RSUs vest:
|
|
|
o
|
1/3 on the first anniversary;
|
|
|
o
|
1/3 on the second anniversary; and
|
|
|
o
|
1/3 on the third anniversary.
|
|
|
-
|
10,000 stock options were exercised for proceeds of $5,000.
|
|
|
-
|
124,999 RSUs vested and were exercised.
|
Exhibit 4.5
Management
Discussion and Analysis
For
The Three Months Ended March 31, 2021
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
Special Note Regarding Forward Looking Information
This Management
Discussion & Analysis (“MD&A”) is intended to provide readers with the information that management believes is required
to gain an understanding of the current results of Draganfly Inc. (the "Company" or “Draganfly") and to assess the
Company’s future prospects. Accordingly, certain sections of this report contain forward-looking statements that are based on current
plans and expectations. These forward-looking statements are affected by risks and uncertainties that are discussed in this document and
that could have a material impact on future prospects. Readers are cautioned that actual events and results will vary.
In this MD&A
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.
Certain statements
in the MD&A, other than statements of historical fact, may include forward-looking information that involves various risks and uncertainties.
These include, without limitation, the Company’s current and planned operations in the technology sector and the expected results
of new operations and new clients. These statements are based on current expectations involving a number of risks and uncertainties related
to all aspects of the technology sector. These risks and uncertainties include, but are not restricted to, continued increased demand
for the Company’s products, the Company’s ability to maintain its technological and competitive advantages, the Company’s
ability to attract and retain key employees, the ability of the Company to take advantage of its intellectual property, the Company’s
ability to raise capital on acceptable terms when needed and the availability of key suppliers and contractors. These uncertainties may
cause actual results to differ from information contained herein. There can be no assurance that such statements will prove to be accurate.
Actual results and future events could differ materially from those anticipated in such statements. These forward-looking statements are
based on the estimates and opinions of Management on the dates they are made and are expressly qualified in their entirety by this notice.
The reader is cautioned not to rely on these forward-looking statements. The Company assumes no obligation to update forward-looking statements
should circumstances or Management’s estimates or opinions change except as required by securities laws.
The following MD&A is presented and dated
as of May 26, 2021 and should be read in conjunction with the unaudited consolidated financial statements and related notes for the three
months ended March 31, 2021 and the annual consolidated financial statements an related notes for the year ended December 31, 2020. 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.
The operations of the Company have been primarily
funded through internally generated cashflow and private placements of equity and convertible debentures. The continued operations of
the Company are dependent on the Company's ability to generate profitable operations in the future, develop and execute a sufficient financing
plan for future operations and receive continued financial support from shareholders and other providers of finance.
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.
The recent outbreak of the coronavirus, also known
as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus
continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. These measures,
which include the implementation of travel bans, self-imposed quarantine periods, and social distancing, have caused material disruption
to business globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments
and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
There are significant uncertainties with respect
to future developments and impact to the Company related to the COVID-19 pandemic, including the duration, severity, and scope of the
outbreak and the measures taken by governments and businesses to contain the pandemic. While the impact of COVID-19 is expected to be
temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations cannot be reasonably estimated
at this time. At the date of this MD&A, 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. The extent to which these
events may impact the Company’s business activities will depend on future developments, such as the ultimate geographic spread of
the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in Canada
and other countries to contain and treat the disease. With COVID-19 being an ongoing issue, the Company has prepared its employees at
its Saskatchewan and British Columbia facilities to be able to work from home. The Company also applied to the various federal
government relief initiatives. Although the Company’s major custom engineering customer temporarily closed that part of its
business, the Company believes it will start up again. Further, the Company has entered into a distribution agreement to be the exclusive
provider of one of their products which has helped offset custom engineering work from that customer. Aside from the acquisition of Dronelogics
and being opportunistic on other partnerships or acquisitions, the Company expanded its products/services offered to include health/telehealth
applications relating to COVID-19, as a way to deal with the impacts of COVID-19. However, these ongoing events are highly uncertain and
as such, the Company cannot determine the ultimate financial impacts at this time. Any deterioration in the current situation could have
an adverse impact on our business, results of operations, financial position, and cash flows in 2021.
Non-GAAP Measures and Additional GAAP Measures
Throughout
this document, 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”).
Core Business and Strategy
Draganfly
creates quality, cutting-edge unmanned and remote data collection and analysis platforms and systems that are designed to revolutionize
the way companies do business. The Company is incorporated under the British Columbia Business Corporations Act and has its registered
office located at 2800 – 666 Burrard Street, Vancouver, BC, V6C 2Z75 with a head office at 2108 St. George Avenue, Saskatoon, SK,
S7M 0K7.
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. More recently, the Company’s offering expanded to include the health/telehealth
field providing illness detection, social monitoring solutions, and sanitary spraying services relating to the ongoing COVID-19 pandemic.
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,
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 Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
With 18 fundamental UAV patents in the portfolio,
Draganfly will continue to expand and grow their intellectual property portfolio.
In addition, Draganfly has launched a health/telehealth
platform. The initial focus is a COVID-19 screening set of technologies that remotely detect a number of key underlying respiratory symptoms,
whereas the same technology stack enables true remote telehealth features. Further, it is offering sanitary spraying services to any indoor
or outdoor public gathering space such as sports auditoriums and fields to provide an additional level of protection against the spread
of contagious viruses such as COVID-19.
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 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 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. The Company incurred significant listing expenses to complete the process
but is well positioned to execute on its business plan.
On March 9, 2021, the Company announced
that it completed the final closing of its Regulation A+ Offering of units sold pursuant to the Company’s Regulation A+
offering circular (the “Offering Document”) filed with the U.S. Securities and Exchange Commission. The Company issued
25,771,465 units at the offering price set out in the Offering Document for gross proceeds in the amount of $15,504,135
(US$12,112,606) in the final closing. Each unit is comprised of one common share of the Company and one common share
purchase warrant, with each warrant entitling the holder to acquire one common share at a price of US$0.71 per common share
for period of two years from the date of issuance. The common shares and warrants issued in connection with the offering are
subject to a nine month hold period. In total, the Company issued 35,000,000 units under its Offering Document for
aggregate gross proceeds of US$16,450,000.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
The Company has recently announced its intention
to file for an up listing to the NASDAQ exchange. The rational is that companies listed on the NASDAQ have to follow stringent reporting
requirements and as a result, provide greater access to investors, especially in the United States.
Additional information relating to the Company
may be found at the Company’s website, www.draganfly.com.
2021 Q1 Highlights
|
|
·
|
2021 Q1 Total Revenues of $1,539,736 with
Product Sales of $1,129,307
|
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. The Company recognized an opportunity to address this market by acquiring Dronelgogics, a company that among other
things, resells lower priced, third party drones. The first quarter of 2021 revenues increased by $1,042,679 from $497,057 in the first
quarter of 2020 to $1,539,736 with the bulk of this revenue coming from product sales. Engineering services revenue of $466 was down substantially
year over year in the first quarter of 2021 due to the continued impact from one of the Company’s Engineering Services customers
that has been affected by the pandemic. Drone services sales of $409,963 made up the balance of the revenues.
|
|
·
|
Gross Margins were Down 62.0% in 2021 Q1 Compared
to 2020 Q1
|
Engineering services tend to have higher gross
margins than hardware sales given lower material costs. In the first quarter of 2021, the Company’s total gross margin was 33.4%
vs 88.0% in the same period in 2020.
|
|
·
|
Company Diversified its Product and Services
Offering with Acquisition
|
Given the Company’s impressive history and
deep engineering talent, a natural evolution was to outsource in-house capabilities to customers. Doing this leverages the Company’s
core skill set of innovation that tends to lead to future projects, bringing in more consistent revenue. With its recent acquisition,
the Company has increased its scope of products and services to include non-OEM products and drone as a service type work. This has proved
beneficial during the current pandemic as not all services are impacted the same way so having a larger breadth of products and services,
in part mitigates some risk for the Company.
|
|
·
|
Company Broadens its Services to Include Health
Vertical in the Face of Global Pandemic
|
Through its recently purchased Vital Intelligence
assets and Varigard partnership, the Company recently added health monitoring and prevention to its product and service offering. Securing
some key clients in this business line was key to proving out this new vertical. These clients were important for validation of this relatively
new technology, but more importantly demonstrates the Company’s ability to evolve and offer products and services that have global
applicability.
|
|
·
|
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:
|
|
·
|
generate sufficient revenue to maintain profitability;
|
|
|
·
|
acquire and maintain market share;
|
|
|
·
|
achieve or manage growth in operations;
|
|
|
·
|
develop and renew contracts;
|
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
|
|
·
|
attract and retain additional engineers and other
highly qualified personnel;
|
|
|
·
|
successfully develop and commercially market
new products;
|
|
|
·
|
adapt to new or changing policies and spending
priorities of governments and government agencies; and
|
|
|
·
|
access additional capital when required and on
reasonable terms.
|
For further and more detailed risk disclosure,
please reference Business Risks at the end of this MD&A
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 current economic climate and its effect on
the Company’s client base business;
|
|
|
·
|
The Company’s ability to successfully acquire
new customers;
|
|
|
·
|
The Company’s ability to successfully implement
its technology;
|
|
|
·
|
Management’s assumptions regarding the
sustainability of recurring revenue streams and the Company’s expected profitability; and
|
|
|
·
|
Management’s outlook and guidance contains
forward looking statements of the Company’s ability to penetrate the US and international client base with its products and services
and continue its penetration in the Canadian market.
|
As the Company is now more capitalized and has
easier access to funds in the public markets, the Company will increasingly focus on some of its growth initiatives. Operationally, having
more capital will help the Company expand and diversify its engineering, drone, and health services businesses. This will require more
human resources from an oversight, sales, and engineering perspective and the Company anticipates adding additional staff to accommodate
these plans. Further, the Company will continue to focus on innovation, product development, and expanding its hardware offerings opportunistically
into niche segments of the UAV and related sectors. Finally, the Company has considered providing various other non-engineering services
and it may make more sense to buy an existing industry player than to build out this offering. With the Company being listed, it will
open up further opportunities to use its Common Shares as a currency for potential acquisitions. The Company expects to be opportunistic
with regards to any potential opportunities in the existing fiscal year and the near future.
Selected Financial Information
The following selected financial data has been
extracted from the unaudited condensed consolidated interim financial statements, prepared in accordance with International Financial
Reporting Standards, for the periods indicated and should be read in conjunction with the unaudited condensed consolidated interim financial
statements.
|
For the three months ended March 31,
|
|
2021
|
|
|
2020
|
|
|
Total revenues
|
|
$
|
1,539,736
|
|
|
$
|
497,057
|
|
|
Gross Profit (as a % of revenues)
|
|
|
33.4
|
%
|
|
|
88.0
|
%
|
|
Net loss
|
|
|
(44,923,934
|
)
|
|
|
(1,104,108
|
)
|
|
Net loss per share ($)
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
(0.48
|
)
|
|
|
(0.02
|
)
|
|
- Diluted
|
|
|
(0.48
|
)
|
|
|
(0.02
|
)
|
|
Comprehensive loss
|
|
|
(44,914,647
|
)
|
|
|
(1,090,294
|
)
|
|
Comprehensive loss per share ($)
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
(0.48
|
)
|
|
|
(0.02
|
)
|
|
- Diluted
|
|
|
(0.48
|
)
|
|
|
(0.02
|
)
|
|
Change in cash and cash equivalents
|
|
$
|
19,076,220
|
|
|
$
|
(531,890
|
)
|
The net loss and comprehensive loss for the three
months ended March 31, 2021 include a change in fair value of derivative liability for USD warrants of $41,019,172 and would otherwise
be $3,904,762 and $3,895,475, respectively.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
|
As at
|
|
March 31,
2021
|
|
|
December 31, 2020
|
|
|
Total assets
|
|
$
|
45,055,832
|
|
|
$
|
7,100,567
|
|
|
Working capital (deficit)
|
|
|
(20,834,520
|
)
|
|
|
1,214,371
|
|
|
Total non-current liabilities
|
|
|
146,397
|
|
|
|
104,885
|
|
|
Shareholders’ equity
|
|
$
|
381,485
|
|
|
$
|
3,848,205
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares outstanding
|
|
|
134,144,435
|
|
|
|
72,781,413
|
|
The working capital deficit as at March 31, 2021
includes a change in fair value of derivative liability for USD warrants of $41,019,172 and would otherwise be a working capital of $20,184,652.
Results of Operations
Revenue
|
For the three months ended March 31,
|
|
2021
|
|
|
2020
|
|
|
Product sales
|
|
$
|
1,129,307
|
|
|
$
|
22,356
|
|
|
Drone services
|
|
|
409,963
|
|
|
|
-
|
|
|
Custom engineering services
|
|
|
466
|
|
|
|
474,701
|
|
|
Total revenue
|
|
$
|
1,539,736
|
|
|
$
|
497,057
|
|
Total revenue for the three months ended March
31, 2021 increased by $1,042,679 or 209.8% as compared to the same period in 2020. The increase in revenue is largely due to the Company’s
acquisition of Dronelogics Systems Inc. and the retail sales and services business that they brought partially offset by a decrease in
Custom Engineering services due to the downturn caused by COVID-19. Product sales increased 4,951.5% or $1,106,951 in the first quarter
of 2021 as compared to the same period in 2020 primarily due to third party product sales generated from Dronelogics.
Draganfly Innovations Inc.’s ("Draganfly
Innovations") primary custom engineering customer is domiciled in the US and was shut down and reduced a number of its projects.
As a result, there was no contribution ($0) from this customer after March, 2020. However, services in 2020 is currently made up
of custom engineering (product development) and drone services work.
As at April 30, 2020, the Issuer completed its
acquisition of Dronelogics. Therefore, the March 31, 2020 results do not include any contribution from Dronelogics.
Cost of Goods Sold / Gross Margin
|
For the three months ended March 31,
|
|
2021
|
|
|
2020
|
|
|
Cost of goods sold
|
|
$
|
(1,024,729
|
)
|
|
$
|
(59,786
|
)
|
|
Gross profit
|
|
$
|
515,007
|
|
|
$
|
437,271
|
|
|
Gross margin (%)
|
|
|
33.4
|
%
|
|
|
88.0
|
%
|
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 March 31, 2021, the Company’s Gross Profit increased by $77,736 or 17.8%. As a percentage of sales, gross
margin decreased from 88.0% in 2020 to 33.4% in 2021.
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. With this business line currently impacted by the pandemic, gross profit margins were down as this
shift in gross margin is due to the lower margin product sales that the Company acquired with Dronelogics.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
Selling, General, and Administrative (SG&A)
|
For the three months ended March 31,
|
|
2021
|
|
|
2020
|
|
|
Office and Miscellaneous
|
|
$
|
2,339,401
|
|
|
$
|
650,297
|
|
|
Professional Fees
|
|
|
868,479
|
|
|
|
92,425
|
|
|
Research and development
|
|
|
15,048
|
|
|
|
3,969
|
|
|
Share-based payments
|
|
|
1,049,866
|
|
|
|
519,384
|
|
|
Travel
|
|
|
28,758
|
|
|
|
7,620
|
|
|
Wages and salaries
|
|
|
402,361
|
|
|
|
366,503
|
|
|
Total
|
|
$
|
4,703,913
|
|
|
$
|
1,640,198
|
|
For the three months ended March 31, 2021, Selling,
General, and Administrative expenses in 2021 increased by 186.8%, from $1,640,198 in 2020 to $4,703,913 in 2021. 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 around the Reg A financing and
in the regular course of being a publicly listed Company.
Net and Comprehensive Loss
|
For the three months ended March 31,
|
|
2021
|
|
|
2020
|
|
|
Loss from operations
|
|
$
|
(4,324,593
|
)
|
|
$
|
(1,217,962
|
)
|
|
Change in fair value of derivative liability
|
|
|
(41,019,172
|
)
|
|
|
-
|
|
|
Finance and other costs
|
|
|
(6,405
|
)
|
|
|
(4,006
|
)
|
|
Foreign exchange gain
|
|
|
145,095
|
|
|
|
50,845
|
|
|
Gain on settlement of debt
|
|
|
-
|
|
|
|
67,493
|
|
|
Income from government assistance
|
|
|
20,706
|
|
|
|
-
|
|
|
Other loss
|
|
|
(16,708
|
)
|
|
|
(478
|
)
|
|
Unrealized gain on investments available for sale
|
|
|
277,143
|
|
|
|
-
|
|
|
Net loss
|
|
|
(44,923,934
|
)
|
|
|
(1,104,108
|
)
|
|
Cumulative translation differences
|
|
|
9,287
|
|
|
|
13,814
|
|
|
Comprehensive loss
|
|
$
|
(44,914,647
|
)
|
|
$
|
(1,090,294
|
)
|
For the three months ended March 31, 2021, the
Company recorded a comprehensive loss of $44,914,647 compared to $1,090,294 in 2020. The net loss and comprehensive loss for the three
months ended March 31, 2021 include a change in fair value of derivative liability for USD warrants of $41,019,172 and would otherwise
be $3,904,762 and $3,895,475, respectively. The second largest contributor to the year over year increase is 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.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
Issued share capital
During the three months ended March 31, 2021,
|
|
-
|
The Company issued 7,015,124 common shares for the exercise of warrants for $3,507,562.
|
|
|
-
|
The Company issued 624,998 common shares for the vesting of Restricted Share Units.
|
|
|
-
|
The Company issued 1,892,495 common shares for the exercise of stock options for $955,373.
|
|
|
-
|
The Company issued 75,000 common shares in lieu of cash.
|
|
|
-
|
The Company issued 32,443,457 units for the Regulation A+ financing in the United States. Each unit is
comprised of one common share and one share purchase warrant. These warrants have an exercise price of $0.71 USD per warrant, each convert
to one common share, and have a life of two years.
|
|
|
-
|
The Company issued 6,000,000 units for the acquisition of Vital Intelligence. Each unit is comprised of one common share and one warrant.
These warrants have an exercise price of $2.67 per warrant, each convert to one common share, and have a life of two years.
|
Dronelogics Acquisition
On April 30, 2020, the Company closed the 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 working capital adjustment and 3,225,438 common shares in the capital of the Company
at a deemed price of $0.50 per share. In addition, the Company welcomed Mr. Hannewyk as a member of the Board.
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
as to $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 375,000 vest in three equal tranches, on the
grant date and first and second anniversaries of the date of grant while 70,000 vest on the first anniversary of the grant date, 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:
|
Number of shares of Draganfly Inc.
|
|
|
|
3,225,438
|
|
|
Fair value of common shares
|
|
|
$
|
0.83
|
|
|
Fair value of shares of Draganfly Inc.
|
|
|
$
|
2,677,114
|
|
|
Present value of the fair value of shares of Draganfly Inc.
|
|
|
|
2,178,960
|
|
|
Cash portion of purchase price
|
|
|
|
500,000
|
|
|
Total
|
|
|
$
|
2,678,960
|
|
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
|
Tangible assets acquired
|
|
|
|
|
Cash
|
|
$
|
42,593
|
|
|
Accounts receivable
|
|
|
98,852
|
|
|
Inventory
|
|
|
629,684
|
|
|
Prepaids and deposits
|
|
|
93,997
|
|
|
Other current assets
|
|
|
3,014
|
|
|
Capital assets
|
|
|
54,946
|
|
|
Right-of-use assets
|
|
|
83,428
|
|
|
Accounts payable and accrued liabilities
|
|
|
(222,766
|
)
|
|
Customer deposits
|
|
|
(245,959
|
)
|
|
Loans
|
|
|
(245,752
|
)
|
|
Other current liabilities
|
|
|
(8,437
|
)
|
|
Lease liabilities
|
|
|
(87,203
|
)
|
|
|
|
|
196,397
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
|
|
|
Customer relationships
|
|
|
197,000
|
|
|
Website
|
|
|
119,000
|
|
|
|
|
|
316,000
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,166,563
|
|
|
Total consideration
|
|
$
|
2,678,960
|
|
Vital Intelligence Acquisition
On March 25, 2021, the Company acquired the assets
of Vital Intelligence Inc. (“Vital”) for consideration of: (a) a cash payment of $500,000 with $50,000 paid
upon execution of the asset purchase agreement, $200,000 to be paid at closing and $250,000 to be paid on the six-month
anniversary date of closing; and (b) 6,000,000 units of the Company with each unit being comprised of one common
share of the Company and one common share purchase warrant (the “Acquisition”). Each warrant will entitle the holder
to acquire one common share for a period of 24 months following closing at an exercise price of $2.67 per common share and the
Company will be able to accelerate the expiry date of the warrants after one year in the event the underlying common shares have
a value of at least 30% greater than the exercise price of the warrants. The units will be held in escrow following closing with
1,500,000 units being released at closing and the remainder to be released upon the Company reaching certain revenue milestones
received from the purchased assets.
The units of the Company are to be releasable
from escrow in accordance with the terms and conditions of the Escrow Agreement, as follows:
|
|
a)
|
1,500,000 units shall be released on the closing date;
|
|
|
b)
|
1,500,000 units shall be released from escrow upon the Vital assets earning revenue in the aggregate amount
of $2,000,000;
|
|
|
c)
|
1,500,000 units shall be released from escrow upon the Vital assets earning revenue in the aggregate amount
of $4,000,000; and
|
|
|
d)
|
1,500,000 units shall be released from escrow upon the Vital assets earning revenue in the aggregate amount
of $6,000,000.
|
The Vital Intelligence product platform is a combination
of proprietary Intellectual Property along with external technology. The base technology is computer vision signal processing that incorporates
learning algorithms that can detect heart rate, breathing/respiratory rate, coughs, mask usage, social distancing, temperature, oxygen
saturation of blood, and blood pressure. Combined, all these data points provide and deliver an analysis of health and better accuracy
in determining infection with various respiratory related issues.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
Vital Intelligence has developed a suite of products
that is designed to maximize the use of its technology by serving a variety of different market segments and sectors:
|
|
-
|
Drone Vital Sign Detection: Video from a drone is analyzed and can provide an individuals’ heart
rate, respiratory rate, and also detect coughing. The data is processed via either a local or cloud storage service in real or near-real
time.
|
|
|
-
|
Drone Social Distancing Detection: Video cameras attached to drones collect data which is then used to
determine social distancing. The data is processed via either a local or cloud storage service in real or near-real time.
|
|
|
-
|
Thermography Kiosk: This product, also branded as Safe Set Solution, is a moveable kiosk (consisting of
a thermal detection camera, laptop and stand) to provide thermal detection and reporting systems. Kiosk is able to be placed in entryways
or throughways to capture temperature readouts of passers-by.
|
|
|
-
|
Thermography Detection Camera System: This group of products is a stationary camera system, or systems
of networked cameras aimed at critical entryways or locations designed to capture core-body temperature of individuals entering a space.
Algorithms read video feeds and allow for company or facility use decisions to be made. An example would be capturing temperature readouts
from individuals and then integrating that data into a company’s employee badge systems for compliance and monitoring as well as
door locking systems to grant access to a space.
|
|
|
-
|
Social Distancing Camera System: This product is a stationary camera system, or system of networked cameras
aimed at high traffic areas in order to capture data on social distancing. Information is provided via overlay on capture footage. The
technology can be used on archived or real-time video footage to assist community health workers in predicting outbreaks of infections.
|
The PPA is as follows:
|
Number of units of Draganfly Inc.
|
|
|
6,000,000
|
|
|
Fair value of units
|
|
$
|
2.88
|
|
|
Fair value of units of Draganfly Inc.
|
|
$
|
17,292,857
|
|
|
Fair value of cash portion of purchase price
|
|
|
488,659
|
|
|
Total
|
|
$
|
17,781,516
|
|
|
Identifiable intangible assets
|
|
|
|
|
Brand
|
|
$
|
540,000
|
|
|
Software
|
|
|
1,711,000
|
|
|
|
|
|
2,251,000
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
15,530,516
|
|
|
Total consideration
|
|
$
|
17,781,516
|
|
The Company estimated the fair value
as follows:
|
|
•
|
Brand based on an income approach, specifically relief from royalty methodology,
using a reasonable royalty rate of 1.0% and discount rate of 40% per annum.
|
|
|
•
|
Software based on an income approach, specifically relief from royalty methodology,
using a reasonable royalty rate of 5.0% and discount rate of 40% per annum.
|
Summary of Quarterly Results
The following selected quarterly financial data
has been extracted from the financial statements, prepared in accordance with International Financial Reporting Standards.
Total revenue for the three months ended March
31, 2021 increased by $1,042,679 or 209.8% as compared to the same period in 2020. The increase in revenue is largely due to the Company’s
acquisition of Dronelogics Systems Inc. and the retail sales and services business that they brought partially offset by a decrease in
Custom Engineering services due to the downturn caused by COVID-19. Product sales increased 4,951.5% or $1,106,951 in the first quarter
of 2021 as compared to the same period in 2020 primarily due to third party product sales generated from Dronelogics.
Operating expenses increased 192.4% compared
to the same period in 2020 due to higher marketing, investor relations costs, professional fees, and share-based payments after
going public. The other expense and comprehensive loss for the first quarter of 2021 include a
change in fair value of derivative liability for USD warrants of $41,019,172 and would otherwise be income of $419,831 and loss of
$3,895,475, respectively.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
|
|
|
2021 Q1
|
|
|
2020 Q4
|
|
|
2020 Q3
|
|
|
2020 Q2
|
|
|
Revenue
|
|
$
|
1,539,736
|
|
|
$
|
1,486,009
|
|
|
$
|
1,453,905
|
|
|
$
|
926,540
|
|
|
Cost of goods sold
|
|
$
|
(1,024,729
|
)
|
|
$
|
(1,155,491
|
)
|
|
$
|
(893,441
|
)
|
|
$
|
(495,193
|
)
|
|
Gross profit
|
|
$
|
515,007
|
|
|
$
|
330,518
|
|
|
$
|
560,464
|
|
|
$
|
431,347
|
|
|
Gross margin – percentage
|
|
|
33.4
|
%
|
|
|
22.2
|
%
|
|
|
38.5
|
%
|
|
|
46.6
|
%
|
|
Operating expenses
|
|
$
|
(4,839,600
|
)
|
|
$
|
(3,359,508
|
)
|
|
$
|
(2,852,003
|
)
|
|
$
|
(2,387,738
|
)
|
|
Operating loss
|
|
$
|
(4,324,593
|
)
|
|
$
|
(3,028,990
|
)
|
|
$
|
(2,291,539
|
)
|
|
$
|
(1,956,391
|
)
|
|
Operating loss per share (basic and diluted)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
Other income (expense)
|
|
$
|
(40,599,341
|
)
|
|
$
|
(713,885
|
)
|
|
$
|
91,228
|
|
|
$
|
987,872
|
|
|
Other comprehensive income
|
|
$
|
9,287
|
|
|
$
|
1,235
|
|
|
$
|
(1,232
|
)
|
|
$
|
(13,713
|
)
|
|
Comprehensive loss
|
|
$
|
(44,914,647
|
)
|
|
$
|
(3,741,640
|
)
|
|
$
|
(2,451,453
|
)
|
|
$
|
(982,232
|
)
|
|
Comprehensive loss per share (basic and diluted)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
2020 Q1
|
|
|
2019 Q4
|
|
|
2019 Q3
|
|
|
2019 Q2
|
|
|
Revenue
|
|
$
|
497,057
|
|
|
$
|
491,520
|
|
|
$
|
450,943
|
|
|
$
|
289,735
|
|
|
Cost of goods sold
|
|
$
|
(59,786
|
)
|
|
$
|
(42,401
|
)
|
|
$
|
(71,043
|
)
|
|
$
|
(49,147
|
)
|
|
Gross profit
|
|
$
|
437,271
|
|
|
$
|
449,119
|
|
|
$
|
379,900
|
|
|
$
|
240,588
|
|
|
Gross margin – percentage
|
|
|
88.0
|
%
|
|
|
91.4
|
%
|
|
|
84.2
|
%
|
|
|
83.0
|
%
|
|
Operating expenses
|
|
$
|
(1,655,233
|
)
|
|
$
|
(2,983,115
|
)
|
|
$
|
(683,777
|
)
|
|
$
|
(484,155
|
)
|
|
Operating loss
|
|
$
|
(1,217,962
|
)
|
|
$
|
(2,533,996
|
)
|
|
$
|
(303,877
|
)
|
|
$
|
(243,567
|
)
|
|
Operating loss per share (basic and diluted)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
Other income (expense)
|
|
$
|
113,854
|
|
|
$
|
506,080
|
|
|
$
|
(8,133,663
|
)
|
|
$
|
(46,220
|
)
|
|
Other comprehensive income
|
|
$
|
13,814
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Comprehensive loss
|
|
$
|
(1,090,294
|
)
|
|
$
|
(2,027,916
|
)
|
|
$
|
(8,437,540
|
)
|
|
$
|
(289,787
|
)
|
|
Comprehensive loss per share (basic and diluted)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.01
|
)
|
Liquidity and Capital Resources
The Company’s liquidity
risk is derived from its loans, accounts payable, and accrued liabilities, as it may encounter difficulty discharging those obligations,
but the Company endeavors to mitigate that risk through the careful management of its debt holders and the assertive pursuit of capital
inflow for its operations. The Company’s working capital deficit of $20,834,520, as at March 31, 2021, would be a working capital
surplus of $20,184,652, if the non-cash liability for outstanding USD warrants were excluded. The Company’s working capital as at
December 31, 2020 was $1,214,371.
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. A $250,000 cash payment will be
paid from the Company’s available funds for the second and final payment of the Vital Intelligence assets. Aside from this transaction
and 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. 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 March 31, 2021, shareholders’ equity was $381,485 and at December 31, 2020, shareholder’s
equity was $3,848,205.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
On
February 5, 2021, the Company closed a second tranche of its Regulation A+ Offering for gross proceeds in the amount of $4,003,195 (US$3,135,838). On
March 9, 2021, the Company announced that it completed the final closing of its Regulation A+ offering
of units sold pursuant to the Company’s Regulation A+ offering circular (the “Offering Document”) filed with the U.S.
Securities and Exchange Commission. The Company issued 25,771,465 units at the offering price set out in the Offering Document for gross
proceeds in the amount of $15,504,135 (US$12,112,606) in the final closing. Each unit is comprised of one common share of the Company
and one common share purchase warrant, with each warrant entitling the holder to acquire one common share at a price
of US$0.71 per common share for period of two years from the date of issuance. The common shares and warrants issued in connection
with the offering are subject to a nine month hold period. In total, the Company issued 35,000,000 units under its Offering
Document for aggregate gross proceeds of US$16,450,000.
We expect, from time to time, to evaluate the
acquisition of businesses, intellectual property, products and technologies for which a portion of the net proceeds may be used.
Our plan of operations for the next year includes
the following: (i) hiring engineers to perform more engineering service work, to complete contracts on a timelier basis, and to perform
R&D for the Company’s next generation of products; (ii) hiring sales/marketing employees for our product lines and engineering
services work; (iii) hiring sales/marketing employees for further expansion into services (e.g. drone as a service); (iv) diversifying
and expanding business lines organically and by potential acquisitions; (v) updating machinery used for manufacturing and production;
(vi) continuing to patent innovative ideas for new products; and (vii) developing and increasing current product offering to various niche
industries that are not currently being served.
This expected use of the net proceeds from the
Regulation A+ Offering represents our intentions based upon our current financial condition, results of operations, and conditions. As
of the date of this MD&A, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the
closing of this Regulation A+ Offering. The amounts and timing of our actual expenditures may vary significantly depending on numerous
factors.
Subsequent Events
Subsequent to March 31, 2021,
|
|
-
|
887,500 warrants were exercised for proceeds of $443,750.
|
|
|
-
|
910,000 stock options were granted to employees of the Company with an exercise price of $2.03 and expire
10 years from the date of grant. These stock options vest:
|
|
|
o
|
1/3 on the first anniversary;
|
|
|
o
|
1/3 on the second anniversary; and
|
|
|
o
|
1/3 on the third anniversary.
|
|
|
-
|
50,000 RSUs were granted to employees of the Company. These RSUs vest:
|
|
|
o
|
1/3 on the first anniversary;
|
|
|
o
|
1/3 on the second anniversary; and
|
|
|
o
|
1/3 on the third anniversary.
|
|
|
-
|
10,000 stock options were exercised for proceeds of $5,000.
|
|
|
-
|
124,999 RSUs vested and were exercised.
|
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.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
Contractual Obligations
As of March 31, 2021, 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, 2020, 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:
Right of Use Asset
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
159,539
|
|
|
Lease acquired in the Acquisition
|
|
|
83,428
|
|
|
Balance at December 31, 2020
|
|
$
|
242,967
|
|
|
Addition
|
|
|
28,610
|
|
|
Lease removal
|
|
|
(7,092
|
)
|
|
Balance at March 31, 2021
|
|
$
|
264,485
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
29,545
|
|
|
Charge for the period
|
|
|
69,003
|
|
|
Balance at December 31, 2020
|
|
$
|
98,548
|
|
|
Historical correction
|
|
|
7,152
|
|
|
Charge for the period
|
|
|
22,911
|
|
|
Balance at March 31, 2021
|
|
$
|
128,611
|
|
|
|
|
|
|
|
|
Net book value:
|
|
|
|
|
|
December 31, 2020
|
|
$
|
144,419
|
|
|
March 31, 2021
|
|
$
|
135,874
|
|
Lease Liability
|
|
|
Total
|
|
|
Balance at January 1, 2020
|
|
$
|
136,073
|
|
|
Leases acquired in the Acquisition
|
|
|
87,203
|
|
|
Interest expense
|
|
|
18,290
|
|
|
Lease Payments
|
|
|
(83,442
|
)
|
|
Balance at December 31, 2020
|
|
$
|
158,124
|
|
|
Historical correction
|
|
|
22,043
|
|
|
Interest expense
|
|
|
4,297
|
|
|
Lease payments
|
|
|
(27,139
|
)
|
|
Lease removal
|
|
|
(7,645
|
)
|
|
Balance at March 31, 2021
|
|
|
149,680
|
|
|
|
|
|
|
|
|
Which consists of:
|
|
|
|
|
|
Current lease liability
|
|
$
|
83,283
|
|
|
Non-current lease liability
|
|
|
66,397
|
|
|
Balance at March 31, 2021
|
|
$
|
149,680
|
|
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
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 that Cameron Chell, CEO and director has a material interest in that he previously controlled, 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 services are provided by a team of up to six consultants and 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 three months ended March 31, 2021, the company incurred fees of $43,500 compared to $70,350 in
2020. As at March 31, 2021, the Company was indebted to this company in the amount of $nil (December 31, 2020 - $nil).
On October 1, 2019, the Company entered into an
independent consultant agreement (“Consultant Agreement”) with 1502372 Alberta Ltd, a company controlled by Cameron Chell,
CEO and director, to provide executive consulting services to the Company. The costs of all charges are based on the fees set in the Consultant
Agreement and are settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the three months ended
March 31, 2021, the Company incurred fees of $53,764 compared to $24,150 in 2020. As at March 31, 2021, the Company was indebted to this
company in the amount of $73,500 (December 31, 2020 - $321,741).
On July 3, 2020, the Company entered
into an executive consultant agreement (“Executive Agreement”) with Scott Larson, a director of the Company, to provide executive
consulting services, as President, to the Company. The costs of all charges are based on the fees set in the Executive Agreement and are
settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the three months ended March 31, 2021,
the Company incurred fees of $44,123. As at March 31, 2021, the Company was indebted to this company in the amount of $nil (December 31,
2020 - $153,887).
As at March 31, 2021, the Company had
$92,250 (December 31, 2020 - $475,628) payable to related parties outstanding that were included in accounts payable. The balances outstanding
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 three months ended March 31, 2021
and 2020 included:
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
Director fees
|
|
$
|
86,691
|
|
|
$
|
-
|
|
|
Management fees paid to a company controlled by CEO and director
|
|
|
53,764
|
|
|
|
-
|
|
|
Management fees paid to a company controlled by president and director
|
|
|
44,123
|
|
|
|
-
|
|
|
Management fees paid to a company controlled by a former director
|
|
|
45,000
|
|
|
|
30,000
|
|
|
Salaries
|
|
|
122,976
|
|
|
|
71,190
|
|
|
Salaries paid to the former owner of the Company
|
|
|
-
|
|
|
|
33,415
|
|
|
Share-based payments
|
|
|
680,097
|
|
|
|
271,639
|
|
|
Total
|
|
$
|
1,032,651
|
|
|
$
|
430,394
|
|
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
Share Capital
Common shares issued
|
|
|
Number of
Common Shares
|
|
|
Share Capital
|
|
|
Balance, December 31, 2019
|
|
|
69,670,613
|
|
|
$
|
27,786,517
|
|
|
Shares issued for exercise of warrants
|
|
|
7,923,875
|
|
|
|
4,007,130
|
|
|
Shares issued for acquisition
|
|
|
3,225,438
|
|
|
|
2,178,961
|
|
|
Shares issued as finder’s fees
|
|
|
200,000
|
|
|
|
100,000
|
|
|
Shares issued for debt settlement
|
|
|
555,409
|
|
|
|
344,354
|
|
|
Shares issued for financing
|
|
|
3,518,034
|
|
|
|
2,018,845
|
|
|
Shares issued for exercise of RSUs
|
|
|
999,992
|
|
|
|
507,497
|
|
|
Balance, December 31, 2020
|
|
|
86,093,361
|
|
|
$
|
36,943,304
|
|
|
Shares issued for exercise of warrants
|
|
|
7,015,124
|
|
|
|
3,507,562
|
|
|
Shares issued for acquisition
|
|
|
6,000,000
|
|
|
|
14,220,000
|
|
|
Shares issued for exercise of RSUs
|
|
|
624,998
|
|
|
|
300,000
|
|
|
Shares issued for exercise of stock options
|
|
|
1,892,495
|
|
|
|
1,846,776
|
|
|
Shares issued for financing
|
|
|
32,443,457
|
|
|
|
18,788,549
|
|
|
Share issue costs
|
|
|
-
|
|
|
|
(344,280
|
)
|
|
Shares issued in lieu of cash
|
|
|
75,000
|
|
|
|
198,000
|
|
|
Balance, March 31, 2021
|
|
|
134,144,435
|
|
|
$
|
75,459,911
|
|
Stock options
The following is the summary of the Company’s
stock option activity:
|
|
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Outstanding, December 31, 2019
|
|
|
|
3,725,000
|
|
|
$
|
0.50
|
|
|
Forfeited
|
|
|
|
(216,668
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
|
2,460,000
|
|
|
|
0.63
|
|
|
Outstanding, December 31, 2020
|
|
|
|
5,968,332
|
|
|
$
|
0.55
|
|
|
Exercised
|
|
|
|
(1,892,495
|
)
|
|
|
0.50
|
|
|
Granted
|
|
|
|
200,000
|
|
|
|
2.68
|
|
|
Outstanding, March 31, 2020
|
|
|
|
4,275,837
|
|
|
$
|
0.67
|
|
Restricted Share Units (RSUs)
The following is the summary of the Company’s
RSU activity:
|
|
|
|
Number of RSUs
|
|
|
Outstanding, December 31, 2019
|
|
|
|
3,175,000
|
|
|
Exercised
|
|
|
|
(999,992
|
)
|
|
Forfeited
|
|
|
|
(341,667
|
)
|
|
Granted
|
|
|
|
1,240,000
|
|
|
Outstanding, December 31, 2020
|
|
|
|
3,073,341
|
|
|
Exercised
|
|
|
|
(624,998
|
)
|
|
Granted
|
|
|
|
740,000
|
|
|
Outstanding, March 31, 2021
|
|
|
|
3,188,343
|
|
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
Warrants
During the year ended December 31, 2020 and the
three months ended March 31, 2021, the Company issued warrants (“USD Warrants”) with a USD exercise price. Being in a foreign
currency that is not the Company’s functional currency, these USD Warrants are required to be recorded as a financial liability
and not as equity. As a financial liability, these USD Warrants are revalued on a quarterly basis to fair market value with the change
in fair value being recorded through the Consolidated Statement of Comprehensive Loss. The initial fair value of these USD Warrants was
parsed out from equity and recorded as a financial liability.
To reach a fair value of the USD Warrants, a Black
Scholes calculation is used, calculated in USD as the Company also trades on the OTCQB. The Black Scholes value per USD Warrant is then
multiplied by the number of outstanding warrants and then multiplied by the foreign exchange rate at the end of the period from the Bank
of Canada.
Warrant Derivative Liability
|
Balance at January 1, 2020
|
|
$
|
-
|
|
|
Change in fair value of warrants outstanding
|
|
|
748,634
|
|
|
Balance at December 31, 2020
|
|
$
|
748,634
|
|
|
Change in fair value of warrants outstanding
|
|
|
41,019,172
|
|
|
Balance at March 31, 2021
|
|
$
|
41,767,806
|
|
The derivative financial liability consists of
the fair value of the non-compensatory share purchase warrants that have exercise prices that differ from the functional currency of the
Company and are within the scope of IAS 32 “Financial Instruments: Presentation”. Details of these warrants and their fair
values are as follows:
|
Issue Date
|
|
Exercise Price
|
|
|
Number of Warrants Outstanding at March 31,
2021
|
|
|
Fair Value at March 31,
2021
|
|
|
Number of Warrants Outstanding at December 31, 2020
|
|
|
Fair Value at December 31, 2020
|
|
|
November 30, 2020
|
|
US$
|
0.71
|
|
|
|
2,556,496
|
|
|
|
3,050,839
|
|
|
|
2,556,496
|
|
|
$
|
748,634
|
|
|
February 5, 2021
|
|
US$
|
0.71
|
|
|
|
6,671,992
|
|
|
|
7,962,138
|
|
|
|
-
|
|
|
|
-
|
|
|
March 5, 2021
|
|
US$
|
0.71
|
|
|
|
25,771,465
|
|
|
|
30,754,829
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
34,999,953
|
|
|
|
41,767,806
|
|
|
|
2,556,496
|
|
|
$
|
748,634
|
|
During the year ended December 31, 2020, the Company
extended the life of the November 5, 2019 warrants from expiring on November 5, 2020 to expiring on November 5, 2021. To do this, it was
required that 25% of the remaining November 5, 2019 warrants needed to be exercised by October 21, 2020 and was completed.
The following is the summary of the Company’s
warrant activity:
|
|
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Outstanding, December 31, 2019
|
|
|
|
18,051,499
|
|
|
$
|
0.41
|
|
|
Expired
|
|
|
|
(7,923,874
|
)
|
|
|
0.30
|
|
|
Exercised
|
|
|
|
(600,000
|
)
|
|
|
0.50
|
|
|
Issued
|
|
|
|
2,556,496
|
|
|
|
0.71
|
|
|
Outstanding, December 31, 2020
|
|
|
|
12,084,121
|
|
|
$
|
0.59
|
|
|
Exercised
|
|
|
|
(7,015,124
|
)
|
|
|
050
|
|
|
Granted
|
|
|
|
38,443,457
|
|
|
|
1.02
|
|
|
Outstanding, March 31, 2021
|
|
|
|
43,512,454
|
|
|
$
|
0.97
|
|
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
As at March 31, 2021, the Company had the following
warrants outstanding:
|
Date issued
|
|
Expiry date
|
|
Exercise price
|
|
|
Number of warrants outstanding
|
|
|
November 5, 2019
|
|
November 5, 2021
|
|
CDN$
|
0.50
|
|
|
|
2,512,501
|
|
|
November 30, 2020
|
|
November 30, 2022
|
|
US$
|
0.71
|
|
|
|
2,556,496
|
|
|
February 5, 2021
|
|
February 5, 2023
|
|
US$
|
0.71
|
|
|
|
6,671,992
|
|
|
March 5, 2021
|
|
March 5, 2023
|
|
US$
|
0.71
|
|
|
|
25,771,465
|
|
|
March 22, 2021
|
|
March 22, 2023
|
|
CDN$
|
2.67
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
43,512,454
|
|
The weighted average remaining contractual life
of warrants outstanding as of March 31, 2021 was 1.83 years (December 31, 2020 - 0.90 years).
Of the 6,000,000 warrants issued on March 22,
2021 with regards to the Vital Intelligence Acquisition, 4,500,000 of the warrants are currently held in escrow, to be released upon completion
of the milestones.
Critical Accounting Policies and Estimates
Note 2 of the
audited consolidated financial statements for the year ended December 31, 2020 describe fully the significant accounting policies used
in preparing the financial statements.
Measurement Uncertainty (Use of Estimates)
The preparation of the consolidated financial
statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities
and contingent liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the
reporting period. Estimates and judgments are continuously evaluated and are based on management’s experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ
from these estimates.
The key sources of estimation uncertainty that
have a significant risk of causing material adjustment to the amounts recognized in the consolidated financial statements are:
The determination of the amount of the Saskatchewan
SR&ED tax credit receivable requires management to make calculations based on its interpretation of eligible expenditures in accordance
with the terms of the programs. The reimbursement claims submitted by the Company are subject to review by the relevant government agencies.
Although the Company has used its best judgment and understanding of the related program agreements in determining the receivable amount,
it is possible that the amounts could increase or decrease by a material amount in the near-term dependent on the review and audit by
the government agency.
|
|
b.
|
Allowance for uncollectible trade and other receivables
|
The Company makes use of estimates when making
allowances for uncollectible trade and other receivables. The Company evaluates each receivable at year end using factors such as age
of receivable, payment history, and credit risk to estimate when determining if an allowance is required, and the amount of the allowance.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
|
|
c.
|
Share-based payment transactions
|
The Company measures the cost of share-based payment
transactions with employees by reference to the fair value of the equity instruments. Estimating fair value for share-based payment transactions
requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate
also requires determining and making assumptions about the most appropriate inputs to the valuation model including the expected lives
and forfeiture rates of the share options and volatility of the market value of the underlying shares.
New Policies Adopted
Accounting standards or amendments to existing
accounting standards that have been issued but have future effective dates are either not applicable or are not expected to have a significant
impact on the Company’s financial statements.
Business Risks
In the normal course of business, the Company’s
operations are influenced by a number of internal and external factors and are exposed to risks and uncertainties that can affect its
business, financial condition and operating results. The activities of the Company are subject to ongoing operational risks including
the performance of key suppliers, product performance, and government and other industry regulations and reliance on information systems,
all of which may affect the ability of the Company to meet its obligations. While management believes its innovation and technology make
it a leader in the industry, revenue and results may be affected if products are not accepted in the market place, are not approved by
regulatory authorities, or if products are not brought to market in a timely manner.
The Company will be affected by a number of operational
risks and the Company may not be adequately insured for certain risks, including: labour disputes; catastrophic accidents; fires; blockades
or other acts of social activism; changes in the regulatory environment; impact of non-compliance with laws and regulations; natural phenomena,
such as inclement weather conditions, floods, earthquakes and ground movements. There is no assurance that the foregoing risks and hazards
will not result in damage to, or destruction of, the Company’s technologies, personal injury or death, environmental damage, adverse
impacts on the Company’s operation, costs, monetary losses, potential legal liability and adverse governmental action, any of which
could have an adverse impact on the Company’s future cash flows, earnings and financial condition. Also, the Company may be subject
to or affected by liability or sustain loss for certain risks and hazards against which the Company cannot insure or which the Company
may elect not to insure because of the cost. This lack of insurance coverage could have an adverse impact on the Company’s future
cash flows, earnings, results of operations and financial condition.
Resale of Shares
There can be no assurance that the publicly-traded
market price of the Company Shares will be high enough to create a positive return for the existing investors. Further, there can be no
assurance that the Company Shares will be sufficiently liquid so as to permit investors to sell their position in the Company without
adversely affecting the stock price. In such event, the probability of resale of the Company Shares would be diminished.
As well, the continued operation of the Company
will be dependent upon its ability to procure additional financing in the short term and to generate operating revenues in the longer
term. There can be no assurance that any such financing can be obtained or that revenues can be generated. If the Company is unable to
obtain such additional financing or generate such revenues, investors may be unable to sell their Company Shares and any investment in
the Company may be lost.
Ability to Manage Future Growth
Future growth, if any, may cause a
significant strain on the Company’s management and its operational, financial, human and other resources. The Company’s
ability to manage growth effectively will require it to implement and improve operational, financial, software development and
management information systems and to expand, train, manage and motivate employees. These demands may require the addition of
management and other personnel and the development of additional expertise. Any increase in resources devoted to research, product
development and marketing and sales efforts without a corresponding increase in operational, financial, product development and
management information systems could have a material adverse effect on the Company’s business, financial condition and results
of operations. There can be no assurance that the Company will be able to manage such growth effectively, that its management,
personnel or systems will be adequate to support the Company's operations or that the Company will be able to achieve the increased
levels of revenue commensurate with the increased levels of operating expenses associated with this growth. The Company is exposed
to a variety of financial risks by virtue of its activities, including currency risk, credit risk, and liquidity risk. The overall
risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on
financial performance.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
Market for Securities
In recent years, the securities markets in the
United States and Canada have experienced a high level of price and volume volatility, and the market prices of securities of many companies
have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values
or prospects of such companies. There can be no assurance that continuing fluctuations in price will not occur. It may be anticipated
that any quoted market for the Company Shares will be subject to market trends generally, notwithstanding any potential success of the
Company in creating revenues, cash flows or earnings. The value of the Company Shares will be affected by such volatility.
Dilution
and future sale of Common Shares
We may issue additional Common Shares in the future,
which may dilute a Shareholder’s holding in the Company. Our articles will permit the issuance of an unlimited number of Common
Shares, and Shareholders will have no pre-emptive rights in connection with such further issuances. The Directors of the Company have
the discretion to determine if an issuance of Common Shares is warranted, the price at which such issuance is effected and the other terms
of issue of Common Shares. Also, we may issue additional Common Shares upon the exercise of options to acquire Common Shares under the
Option Plan, which will result in further dilution to the Shareholders. Potential future acquisitions may also divert Management’s
attention and result in further dilution to the Shareholders.
History of Losses
The Company cannot assure that it can become profitable
or avoid net losses in the future or that there will not be any earnings or revenue declines for any future quarterly or other periods.
The Company expects that its operating expenses will increase as it grows its business, including expending substantial resources for
research and development and marketing. As a result, any decrease or delay in generating revenues could result in material operating losses.
Reliance on Management and
Key Employees
The Company’s future success depends substantially
on the continued services of its executive officers and its key development personnel. If one or more of its executive officers or key
development personnel were unable or unwilling to continue in their present positions, the Company might not be able to replace them easily
or at all. In addition, if any of its executive officers or key employees joins a competitor or forms a competing company, the Company
may lose know-how, key professionals and staff members as well as partners. These executive officers and key employees could develop drone
technologies that could compete with and take customers and market share away from the Company.
Risks Associated with Acquisitions
As part of the Company’s overall business
strategy, after the completion of the Listing, the Company may pursue select strategic acquisitions that would provide additional product
or service offerings, additional industry expertise, and a stronger industry presence in both existing and new jurisdictions. Future acquisitions
may expose it to potential risks, including risks associated with: (a) the integration of new operations, services and personnel;
(b) unforeseen or hidden liabilities; (c) the diversion of resources from the Company’s existing business and technology; (d) potential
inability to generate sufficient revenue to offset new costs; (e) the expenses of acquisitions; or (f) the potential loss of or harm to
relationships with both employees and existing users resulting from its integration of new businesses. In addition, any proposed acquisitions
may be subject to regulatory approval.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
Competitive
Markets
The Company faces competition and new competitors
will continue to emerge throughout the world. Services offered by the Company’s competitors may take a larger share of consumer
spending than anticipated, which could cause revenue generated from the Company’s products and services to fall below expectations.
It is expected that competition in these markets will intensify.
If competitors of the Company develop and market
more successful products or services, offer competitive products or services at lower price points, or if the Company does not produce
consistently high-quality and well-received products and services, revenues, margins, and profitability of the Company will decline.
The Company’s ability to compete effectively
will depend on, among other things, the Company’s pricing of services and equipment, quality of customer service, development of
new and enhanced products and services in response to customer demands and changing technology, reach and quality of sales and distribution
channels and capital resources. Competition could lead to a reduction in the rate at which the Company adds new customers, a decrease
in the size of the Company’s market share and a decline in its customers. Examples include but are not limited to competition from
other companies in the UAV industry.
In addition, the Company could face increased
competition should there be an award of additional licences in jurisdictions in which the Company operates in.
Uncertainty
and adverse changes in the economy
Adverse changes in the economy could negatively
impact the Company’s business. Future economic distress may result in a decrease in demand for the Company’s products, which
could have a material adverse impact on the Company’s operating results and financial condition. Uncertainty and adverse changes
in the economy could also increase costs associated with developing and publishing products, increase the cost and decrease the availability
of sources of financing, and increase the Company’s exposure to material losses from bad debts, any of which could have a material
adverse impact on the financial condition and operating results of the Company.
Uncertainty to develop and renew contracts
A significant portion of the Company’s business
is based on the operation of remotely piloted aircraft systems (“RPAS”). The operation of RPAS’ poses a risk or hazard
to airspace users as well as personnel on the ground. As the RPAS industry is rapidly developing, the regulatory environment for RPAS
is constantly evolving to keep pace. As such, whenever a policy change with respect to operating regulations occurs, there is a risk that
the Company could find itself to be in non-compliance with these new regulations and as a result lose the ability to develop and renew
contracts relating to its business. While the Company endeavours to take all necessary action to reduce the risks associated with the
operations of RPAS’ and to remain well-informed and up-to-date on any addendums and changes to the applicable regulations, there
is no assurance that an incident involving an RPAS or the Company’s non-compliance would not create a significant current or future
liability for the company.
The regulation of RPAS operations within the Canadian
Domestic Airspace (CDA) is still evolving and is expected to continue to change with the proliferation of RPAS’, advancements in
technology, and standardization within the industry. Changes to the regulatory regime may be disruptive and result in the Company needing
to adopt significant changes in its operations and policies, which may be costly and time-consuming, and may materially adversely affect
our ability to manufacture and make delivery of our Company’s products and services in a timely fashion.
Company business and research and development
activities are subject to oversight by Transport Canada, the federal institution responsible for transportation policies and programs,
including the rules in the Canadian Aviation Regulations (CARs). Currently, Transport Canada requires that any non-recreational operators
of RPAS’ have a Special Flight Operations Certificate (SFOC). Our ability to develop, test, demonstrate, and sell products and services
depends on the Company’s ability to acquire and maintain a valid SFOC.
In addition, there exists public concern regarding
the privacy implications of Canadian commercial and law enforcement use of small UAV. This concern has included calls to develop explicit
written policies and procedures establishing usage limitations.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
There is no assurance that the response from regulatory
agencies, customers and privacy advocates to these concerns will not delay or restrict the adoption of small UAV by non-military customers.
Attract and retain engineering talent and other
highly qualified personnel
The Company may experience a period of significant
growth and require a high number of personnel that will place a strain upon its management systems and resources. Its future will depend
in part on the ability of its officers and other key employees to implement and improve financial and management controls, reporting systems
and procedures on a timely basis and to expand, train, motivate and manage the workforce. The Company’s current and planned personnel,
systems, procedures and controls may be inadequate to support its future operations. Further, management may not be able to retain its
existing workforce in an expanding and competitive marketplace for talent.
Ability to successfully develop and commercially
market new products
Continuing technological changes in the market
for the Company’s products could make its products less competitive or obsolete, either generally or for particular applications.
The Company’s future success will depend upon its ability to develop and introduce a variety of new capabilities and enhancements
to its existing product and service offerings, as well as introduce a variety of new product offerings, to address the changing needs
of the markets in which it offers products. Delays in introducing new products and enhancements, the failure to choose correctly among
technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential
customers to purchase the Company’s competitors’ products. If the Company is unable to devote adequate resources to develop
new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements on a timely basis,
its products could lose market share, its revenue and profits could decline, and the Company could experience operating losses.
Changing policies and spending priorities of
governments and government agencies
The Company must comply with Canadian federal
and provincial laws regulating the export of its products. In some cases, explicit authorization from the Canadian government is needed
to export its products. The export regulations and the governing policies applicable to the Company’s business are subject to change.
The Company cannot provide assurance that such export authorizations will be available for its products in the future. Compliance with
these laws has not significantly limited the Company’s operations or sales in the recent past, but could significantly limit them
in the future. Non-compliance with applicable export regulations could potentially expose the Company to fines, penalties and sanctions.
If the Company cannot obtain required government approvals under applicable regulations, the Company may not be able to sell its products
in certain international jurisdictions, which could adversely affect the Company’s financial condition and results of operations.
Access additional capital when required and
on reasonable terms
In order to finance future operations and development
efforts, the Company may raise funds through the issue of Common Shares or the issue of securities convertible into or exercisable for
Common Shares. The Company cannot predict the size of future issues of Common Shares or the issue of securities convertible into or exercisable
for Common Shares or the effect, if any, that future issues and sales of the Common Shares will have on the market price of the Common
Shares. Any transaction involving the issue of previously unissued shares, or securities convertible into or exercisable for shares, would
result in dilution, which may be substantial, to existing holders of shares
Continuing impact from COVID-19
The recent outbreak of the coronavirus, also known
as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus
continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. These measures,
which include the implementation of travel bans, self-imposed quarantine periods, and social distancing, have caused material disruption
to business globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments
and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.
|
Draganfly Inc.
|
|
Management Discussion and Analysis
|
|
For the three months ended March 31, 2021
|
There are significant uncertainties with respect
to future developments and impact to the Company related to the COVID-19 pandemic, including the duration, severity, and scope of the
outbreak and the measures taken by governments and businesses to contain the pandemic. While the impact of COVID-19 is expected to be
temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations cannot be reasonably estimated
at this time. At the date of this MD&A, 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. The extent to which these
events may impact the Company’s business activities will depend on future developments, such as the ultimate geographic spread of
the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in Canada
and other countries to contain and treat the disease. These events are highly uncertain and as such, the Company cannot determine the
ultimate financial impacts at this time. Any deterioration in the current situation could have an adverse impact on our business, results
of operations, financial position, and cash flows in 2021.
Credit risk
Credit and liquidity risk associated with cash
and the marketable security is managed by ensuring assets are placed with major financial institutions with strong investment grade ratings.
Credit risk on trade and other receivables reflects
the risk that the Company may be unable to recover them. The Company manages its credit risk by closely monitoring the granting of credit.
Trade and other receivables that are greater than 30 days are considered past due. Based on the status of trade and other receivables,
no allowance for doubtful accounts has been recorded as at March 31, 2021 (December 31, 2020 - $nil).
Interest rate risk
Interest rate risk is the risk that the value
of a financial instrument might be adversely affected by a change in the interest rates. In seeking to minimize the risks from interest
rate fluctuations, the Company manages exposure through its normal operating and financing activities. The Company is exposed to minimal
interest rate risk on its cash balances as they carry a floating rate of interest.
Foreign currency risk
The Company does engage in significant transactions
and activities in currencies other than its functional currency. Depending on the timing of the transactions and the applicable currency
exchange rates such conversions may positively or negatively impact the Company.
Other Information
Additional information about the Company is
available at www.draganfly.com
Approval
This MD&A is authorized for issue by the
Board on May 26, 2021.
Exhibit 4.6
2108
St. George Avenue
Saskatoon,
SK S7M 0K7
Tel: 1.800.979.9794
|
2021
ANNUAL
GENERAL
MEETING
|
Notice of Annual General Meeting of Shareholders
Management Information Circular
|
|
Place:
|
DLA Piper (Canada) LLP
Suite 2800, Park Place 666 Burrard St.
Vancouver, British Columbia, Canada
V6C 2Z7
|
|
Time:
|
10:00 a.m. (Vancouver time)
|
|
Date:
|
June 23, 2021
|
DRAGANFLY INC.
|
CORPORATE DATA
|
Head Office
2108 St. George Avenue
Saskatoon, SK S7M 0K7
|
|
|
Directors and Officers
Cameron Chell – Chairman, Chief Executive Officer
and Director
Scott Larson – President and Director
Olen Aasen – Director
Andrew Hill Card, Jr. –Director
Justin Hannewyk – Director
John M. Mitnick – Director
Paul Sun – Chief Financial Officer and Corporate Secretary
Denis Silva – Director
|
|
|
Registrar and Transfer Agent
Endeavor Trust Corporation
|
|
|
Legal Counsel
DLA Piper (Canada) LLP
|
|
|
Auditor
Dale Matheson Carr-Hilton Labonte
LLP, Chartered Professional Accountants
|
|
|
Stock Exchange Listing
Canadian Securities Exchange under symbol “DFLY”
Frankfurt Stock Exchange under symbol “3U8”
OTCQB under symbol “DFLYF”
|
DRAGANFLY INC.
2108 St. George Avenue
Saskatoon,
SK S7M 0K7
Tel: 1.800.979.9794
NOTICE OF ANNUAL
General MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the annual general
meeting (the “Meeting”) of the Shareholders of Draganfly Inc. (the “Company”) will be held at Suite
2800, Park Place 666 Burrard St Vancouver, British Columbia, Canada V6C 2Z7 on June 23, 2021 at 10:00 a.m. (Vancouver time), for the following
purposes:
|
1.
|
To receive the financial statements of the Company for the fiscal year ended December 31, 2020 together
with the report of the auditor thereon;
|
|
2.
|
To fix the number of directors of the Company at seven (7);
|
|
3.
|
To elect the directors of the Company for the ensuing year;
|
|
4.
|
To appoint Dale Matheson Carr-Hilton Labonte LLP, Chartered Professional Accountants, as auditors of the
Company for the ensuing year and to authorize the directors of the Company to fix their remuneration; and
|
|
5.
|
To transact such other business as may properly come before the Meeting or any adjournment thereof.
|
Accompanying this Notice is
the Information Circular and a form of Proxy (including the Financial Statement Request Form). The accompanying Information Circular provides
information relating to the matters to be addressed at the Meeting and is incorporated into this Notice.
In light of ongoing concerns related to the
spread of COVID-19, and in order to mitigate potential risks to the health and safety of the Company’s shareholders, employees,
communities and other stakeholders, Meeting participants are encouraged not to attend in person. Rather, participants are encouraged to
vote on the matters before the Meeting by proxy and to join the Meeting by teleconference. Those who attend the Meeting by teleconference
are requested to read the notes to the enclosed form of proxy and then to, complete, sign and return the enclosed form of proxy in accordance
with the instructions set out in the proxy and in the information circular accompanying this Notice.
To access the Meeting by teleconference, dial
toll free at (866) 214-9607 (U.S. and Canada), (647) 427-7523 (International), Access Code: 439.159.9895.
While registered shareholders are entitled to
attend the Meeting in person, we strongly recommend that all shareholders vote by proxy and accordingly ask that registered shareholders
read the notes to the enclosed form of Proxy and then complete, sign and return the enclosed form of Proxy in accordance with the instructions
set out in the Proxy and in the Information Circular accompanying this Notice.
DATED at Vancouver, British Columbia, this 10th
day of May, 2021.
BY ORDER OF THE BOARD
(signed) “Cameron Chell”
Chairman, Chief Executive Officer and Director
DRAGANFLY INC.
2108 St. George Avenue
Saskatoon,
SK S7M 0K7
Tel: 1.800.979.9794
INFORMATION
CIRCULAR
Unless otherwise stated, the information contained
in this information circular (this “Information Circular”) is given as at May 12, 2021. Except as otherwise
indicated, all dollar amounts in this Information Circular are expressed in Canadian dollars and references to $ are to Canadian
dollars. References to US$ are to United States dollars.
SOLICITATION OF
PROXIES
This Information Circular is furnished in connection
with the solicitation of proxies by the management of Draganfly Inc. (the “Company”) for use at the annual general
meeting of shareholders of the Company (and any adjournment thereof) to be held on June 23, 2021 (the “Meeting”) at
the time and place and for the purposes set forth in the accompanying notice of meeting (“Notice of Meeting”).
In light of ongoing concerns related to the
spread of COVID-19, and in order to mitigate potential risks to the health and safety of the Company’s shareholders, employees,
communities and other stakeholders, Meeting participants are encouraged not to attend in person. Rather, participants are encouraged to
vote on the matters before the Meeting by proxy and to join the Meeting by teleconference. To access the Meeting by teleconference, dial
toll free at (866) 214-9607 (U.S. and Canada), (647) 427-7523 (International), Access Code: 439.159.9895.
While it is expected that the solicitation will
be primarily by mail, proxies may be solicited personally or by telephone by the directors, officers and regular employees of the Company
at nominal cost. All costs of solicitation by management will be borne by the Company.
Pursuant to National Instrument 54-101 –
Communication with Beneficial Owners of Securities of a Reporting Issuer (“NI 54-101”), arrangements
have been made with clearing agencies, brokerage houses and other financial intermediaries to forward proxy solicitation
material to the beneficial owners of the common shares of the Company (“Common Shares”). The cost of
any such solicitation will be borne by the Company.
The contents and the sending of this Information
Circular have been approved by the board of directors of the Company (the “Board of Directors” or the “Board”).
NOTICE-AND-ACCESS
The Company is sending out proxy-related materials
to shareholders using the notice-and-access provisions under National Instrument 51-102 – Continuous Disclosure
Obligations (“NI 51-102”) and NI 54-101 (together with NI 51-102, the “Notice-and-Access
Provisions”). The Company anticipates that use of the Notice-and-Access Provisions will benefit the Company by
reducing the postage and material costs associated with the printing and mailing of the proxy-related materials and will
also reduce the environmental impact of such actions.
Shareholders will be provided with electronic
access to the Notice, this Information Circular, the Company's management's discussion and analysis of the results of operations
and financial condition of the Company for the year ended December 31, 2020 (the “MD&A”) and the
audited consolidated financial statements of the Company and accompanying notes for the year ended December 31, 2020 (together
with the MD&A, the “MD&A and Financials”) together with the auditor's report thereon on the
System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com and at www.draganfly.com.
Shareholders are reminded to review the Information
Circular before voting. Shareholders will receive paper copies of a notice package (the “Notice Package”)
via pre-paid mail containing a notice with information prescribed by the Notice-and-Access Provisions and a form of proxy
(if you are a registered Shareholder) or a voting instruction form (if you are a non-registered Shareholder). The Company
will not use procedures known as ‘stratification” in relation to the use of Notice-and-Access Provisions. Stratification
occurs when an issuer using Notice-and-Access Provisions sends a paper copy of the Information Circular to some securityholders
with a Notice Package.
Shareholders with questions about notice-and-access
can call the Company's transfer agent, Endeavor Trust Corporation (“Endeavor Trust” or the “Transfer
Agent”) toll-free at 1-888-787-0888 (Canada and the U.S. only) or direct at (604) 559-8880 (outside Canada and
the U.S.). Shareholders may obtain paper copies of the Information Circular and the MD&A and Financials free of charge
by calling (604) 559-8880 at any time up until and including the date of the Meeting, including any adjournment or postponement
thereof. Any Shareholder wishing to obtain a paper copy of the meeting materials should submit their request no later than
10:00 a.m. (Vancouver time) on June 16, 2021 in order to receive paper copies of the meeting materials in time to vote before
the Meeting. Under the Notice-and-Access Provisions, meeting materials will be available for viewing at wwww.draganfly.com
for one year from the date of posting.
APPOINTMENT OF
PROXYHOLDER
The individuals named in the accompanying form
of proxy are directors and/or officers of the Company (collectively, “Management’s Nominees”). A SHAREHOLDER
WISHING TO APPOINT SOME OTHER PERSON (WHO NEED NOT BE A SHAREHOLDER) TO REPRESENT HIM, HER OR IT AT THE MEETING HAS THE RIGHT TO DO SO,
EITHER BY STRIKING OUT THE NAMES OF MANAGEMENT’S NOMINEES NAMED IN THE ACCOMPANYING FORM OF PROXY AND INSERTING THE DESIRED PERSON’S
NAME IN THE BLANK SPACE PROVIDED IN THE FORM OF PROXY OR BY COMPLETING ANOTHER FORM OF PROXY.
REGISTERED SHAREHOLDERS
Registered shareholders may
wish to vote by proxy whether or not they are able to attend the Meeting in person. Registered shareholders electing to submit a proxy
may do so by:
|
(a)
|
completing, dating and signing the enclosed form of proxy and returning it to Endeavor Trust, by fax (604)
559-8908, or by mail at #702-777 Hornby Street, Vancouver, BC, V6Z 1S4; or
|
|
(b)
|
using the internet through the website of Endeavor Trust at www.eproxy.ca. Registered shareholders
must follow the instructions that appear on the screen and refer to the enclosed proxy form for the Control Number and the proxy access
number.
|
A proxy will not be valid
unless the completed form of proxy is received by Endeavor Trust not less than 48 hours (excluding Saturdays, Sundays and holidays) before
the time for holding the Meeting or any adjournment thereof. Proxies delivered after that time will not be accepted.
INFORMATION FOR
NON-REGISTERED SHAREHOLDERS
Only registered shareholders or duly
appointed proxyholders are permitted to vote at the Meeting. Most shareholders of the Company are “non-registered”
shareholders because the shares they own are not registered in their names but are instead registered in the names of a brokerage
firm, bank or other intermediary or in the name of a clearing agency. Shareholders who do not hold their shares in their own name
(referred to herein as “Beneficial Shareholders”) should note that only registered shareholders may vote at the
Meeting. If Common Shares are listed in an account statement provided to a shareholder by a broker, then in almost all cases
those Common Shares will not be registered in such shareholder’s name on the records of the Company. Such Common Shares will
more likely be registered under the name of the shareholder’s broker or an agent of that broker. In Canada, the vast majority
of such shares are registered under the name of CDS & Co. (the registration name for CDS Clearing and Depository Services Inc.,
which company acts as nominee for many Canadian brokerage firms). Common Shares held by brokers (or their agents or nominees) on
behalf of a broker’s client can only be voted (for or against resolutions) at the direction of the Beneficial Shareholder.
Without specific instructions, brokers and their agents and nominees are prohibited from voting shares for the brokers’
clients. Therefore, each Beneficial Shareholder should ensure that voting instructions are communicated to the appropriate person
well in advance of the Meeting.
Existing regulatory policy requires brokers and
other intermediaries to seek voting instructions from Beneficial Shareholders in advance of shareholders’ meetings. The various
brokers and other intermediaries have their own mailing procedures and provide their own return instructions to clients, which should
be carefully followed by Beneficial Shareholders in order to ensure that their Common Shares are voted at the Meeting. Often the form
of proxy supplied to a Beneficial Shareholder by its broker is identical to the form of proxy provided by the Company to the registered
shareholders. However, its purpose is limited to instructing the registered shareholder (i.e. the broker or agent of the broker) how to
vote on behalf of the Beneficial Shareholder. The majority of brokers now delegate responsibility for obtaining instructions from clients
to Broadridge Financial Solutions, Inc. (“Broadridge”). Broadridge typically prepares a machine-readable voting instruction
form, mails those forms to the Beneficial Shareholders and asks Beneficial Shareholders to return the forms to Broadridge, or otherwise
communicate voting instructions to Broadridge (by way of the internet or telephone, for example). Broadridge then tabulates the results
of all instructions received and provides appropriate instructions respecting the voting of Common Shares to be represented at the Meeting.
A Beneficial Shareholder who receives a Broadridge voting instruction form cannot use that form to vote Common Shares directly at the
Meeting. The voting instruction form must be returned to Broadridge (or instructions respecting the voting of Common Shares must be communicated
to Broadridge) well in advance of the Meeting in order to have the Common Shares voted.
Beneficial Shareholders may fall into two categories
- those who object to their identity being made known to the issuers of the securities which they own ("Objecting Beneficial
Owners") and those who do not object to their identity being made known to the issuers of the securities which they own ("Non-Objecting
Beneficial Owners"). Subject to the provisions of NI 54-101, issuers may request and obtain a list of their Non-Objecting
Beneficial Owners from intermediaries. Pursuant to NI 54-101, issuers may obtain and use the Non-Objecting Beneficial Owners list
in connection with any matters relating to the affairs of the issuer, including the distribution of proxy-related materials directly
to Non-Objecting Beneficial Owners. The Company is sending meeting materials to Non-Objecting Beneficial Owners with the
assistance of Broadridge (as defined herein). The Company does not intend to pay for intermediaries to deliver the meeting materials
to Objecting Beneficial Owners. The Company’s Non-Objecting Beneficial Owners and Objecting Beneficial Owners
can expect to be contacted by Broadridge or their brokers or their broker’s agents as set out above.
Although Beneficial Shareholders may not be recognized
directly at the Meeting for the purposes of voting Common Shares registered in the name of his broker, a Beneficial Shareholder may attend
the Meeting as proxyholder for the registered shareholder and vote the Common Shares in that capacity. Beneficial shareholders who
wish to attend the Meeting and indirectly vote their Common Shares as proxyholder for the registered shareholder should enter their own
names in the blank space on the proxy provided to them and return the same to their broker (or the broker’s agent) in accordance
with the instructions provided by such broker.
All references to shareholders in this Information
Circular and the accompanying form of proxy and Notice of Meeting are to shareholders of record unless specifically stated otherwise.
REVOCATION OF
PROXIES
In addition to revocation in any other manner
permitted by law, a registered shareholder who has given a proxy may revoke it by
|
|
(a)
|
executing a proxy bearing a later date or by executing a valid
notice of revocation, either of the foregoing to be executed by the registered shareholder or the registered shareholder’s authorized
attorney in writing, or, if the registered shareholder is a corporation, under its corporate seal by an officer or attorney duly authorized,
and by delivering the proxy bearing a later date to Endeavor Trust at #702-777 Hornby Street, Vancouver, BC, V6Z 1S4 or at the address
of the registered office of the Company at Suite 2800, Park Place 666 Burrard St Vancouver, British Columbia, Canada V6C 2Z7 at any time
up to and including the last business day that precedes the day of the Meeting or, if the Meeting is adjourned, the last business day
that precedes any reconvening thereof, or to the chairman of the Meeting on the day of the Meeting or any reconvening thereof, or in
any other manner provided by law, or
|
|
(b)
|
personally attending the Meeting and voting the registered shareholder’s Common Shares.
|
A revocation of a proxy does not affect any matter
on which a vote has been taken prior to the revocation.
VOTING OF PROXIES
The Common Shares represented by a properly executed
proxy in favour of persons proposed by management of the Company as proxyholders in the accompanying form of proxy will:
|
(a)
|
be voted or withheld from voting in accordance with the instructions of the person appointing the proxyholder
on any ballot that may be taken; and
|
|
(b)
|
where a choice with respect to any matter to be acted upon has been specified in the form of proxy, be
voted in accordance with the specification made in such proxy.
|
ON A POLL SUCH COMMON SHARES WILL BE VOTED IN
FAVOUR OF EACH MATTER FOR WHICH NO CHOICE HAS BEEN SPECIFIED BY THE SHAREHOLDER.
The enclosed form of proxy when properly completed
and delivered and not revoked confers discretionary authority upon the person appointed proxy thereunder to vote with respect to amendments
or variations of matters identified in the Notice of Meeting, and with respect to other matters which may properly come before the Meeting.
In the event that amendments or variations to matters identified in the Notice of Meeting are properly brought before the Meeting or any
further or other business is properly brought before the Meeting, it is the intention of the persons designated in the enclosed form of
proxy to vote in accordance with their best judgment on such matters or business. At the time of the printing of this Information Circular,
the management of the Company knows of no such amendment, variation or other matter which may be presented to the Meeting.
VOTING SECURITIES
AND PRINCIPAL HOLDERS THEREOF
|
Authorized Capital:
|
an unlimited number of Common Shares without par value
|
|
Issued and Outstanding:
|
135,031,935(1) Common Shares without par value
|
|
(1)
|
As at the date hereof.
|
The Common Shares are the only voting securities
of the Company. Only shareholders of record at the close of business on May 3, 2021, (the “Record Date”) who either
personally attend the Meeting or who have completed and delivered a form of proxy in the manner and subject to the provisions described
above shall be entitled to vote or to have their Common Shares voted at the Meeting.
On a show of hands, every individual who is present
and is entitled to vote as a shareholder or as a representative of one or more corporate shareholders, or who is holding a proxy on behalf
of a shareholder who is not present at the Meeting, will have one vote, and on a poll every shareholder present in person or represented
by a proxy and every person who is a representative of one or more corporate shareholders, will have one vote for each Common Share.
To the knowledge of the Board and executive officers
of the Company, as at the date hereof, no persons or companies beneficially own, directly or indirectly or exercise control or direction
over shares carrying 10% or more of the voting rights attached to all outstanding shares of the Company.
VOTES NECESSARY
TO PASS RESOLUTIONS
A simple majority of affirmative votes cast at
the Meeting is required to pass the ordinary resolutions described herein. Any special resolutions must be determined by a two thirds
(2/3) majority of the votes cast on each special resolution at the Meeting.
RECEIPT OF FINANCIAL
STATEMENTS
The financial statements of the Company for the
fiscal year ended December 31, 2020, together with the report of the auditor thereon, will be presented to the shareholders at the Meeting.
No vote by the shareholders is required to be taken on the financial statements.
ELECTION OF DIRECTORS
The Board of Directors presently consists of seven
(7) directors. Shareholders will be asked to fix the number of directors at seven (7) and to elect the seven (7) persons listed below
as directors for the ensuing year.
The term of office of each of the present directors
expires at the Meeting. The persons named below will be presented for election at the Meeting as the nominees of management and the persons
named in the accompanying form of proxy intend to vote for the election of these nominees. Management does not contemplate that any of
these nominees will be unable to serve as a director. Each director elected will hold office until the next annual general meeting of
the Company or until his successor is elected or appointed, unless his office is earlier vacated in accordance with the Articles of the
Company, or with the provisions of the Business Corporations Act (British Columbia).
The constating documents of the Company include
an advance notice provision. The purpose of the advance notice provision is to provide shareholders, directors and management of the Company
with direction on the procedure for shareholder nomination of directors. The advance notice provision is the framework by which the Company
seeks to fix a deadline by which holders of record of Common Shares must submit director nominations to the Company prior to any annual
or special meeting of shareholders and sets forth the information that a shareholder must include in the notice to the Company for the
notice to be in proper written form. The Company did not receive notice of any director nominations in connection with the Meeting within
the time periods prescribed by the Articles. Accordingly, at the Meeting, the only persons eligible to be nominated for election to the
Board are the nominees set forth below.
The following table and notes thereto states the
name of each person proposed to be nominated by management for election as a director (a “proposed director”), the
province or state and country of residence, all offices of the Company now held by him, his principal occupation, the period of time for
which he has been a director of the Company, and the number of Common Shares beneficially owned by him, directly or indirectly, or over
which he or she exercises control or direction, as at the date hereof.
Name, Position, Province or
State and Country of
Residence(1)
|
Principal Occupation(1)
|
Director
Since
|
Number of
Common Shares
beneficially owned
or directly or
indirectly
controlled(2)
|
Cameron Chell
Chairman, CEO and Director
British Columbia, Canada
|
Chairman and Chief Executive Officer of the Company since August 2019; co-founder of Business Instincts Group Inc., a Calgary-based Venture Creation Firm, since 2009; co-founder of Cold Bore Technologies Inc. from February 2013 to present; Chairman and founder of TraxOne Inc. from September 2016 to present; a director and an advisor to KodakCoin from May 2017 to present; Chairman and co-founder of CurrencyWorks Inc. from November 2017 to present; director and co-founder of Slyce Inc. from January 2012 to January 2017.
|
Aug 14, 2019
|
4,435,920(3)
|
Scott Larson(4)(5)
President and Director
British Columbia, Canada
|
President of the Company since July 2020; former Chief Executive Officer of Kater Technologies, a Vancouver-based mobility as a service (MaaS) company building out an integrated intermodal transportation platform incorporating public transportation, buses, taxis and ride hailing vehicles into a single service, from January 2019 to March 2020; former Chief Executive Officer of Helios Wire, a satellite company building out a space-enabled IoT/M2M network, from 2016 to 2019; and former Chief Executive Officer and founder of UrtheCast Corp. from 2010 to 2015.
|
Aug 14, 2019
|
111,140
|
Olen Aasen(4)(5)
Director
British Columbia, Canada
|
General Counsel at King & Bay West Management Corp. since February 2011.
|
Aug 14, 2019
|
81,478
|
Denis Silva(4)(5)
Director
British Columbia, Canada
|
Corporate and securities partner with the law firm DLA Piper (Canada) LLP since July 2020; and partner at the law firm Gowling WLG (Canada) LLP from 2015 to 2020.
|
Aug 14, 2019
|
94,465
|
Andrew Hill Card, Jr.
Director
New Hampshire, United States
|
Interim Chief Executive Officer of the George & Barbara Bush Foundation since June 2020; Chairman of the National Endowment for Democracy (NED), a non-profit organization dedicated to the growth and strengthening of democratic institutions around the world, since January 2018; and President of Franklin Pierce University in New Hampshire from January 2015 through July 2016.
|
Nov 7, 2019
|
170,952
|
Justin Hannewyk
President of Dronelogics Systems Inc. and Director
British Columbia, Canada
|
President of Dronelogics Systems Inc., a wholly-owned subsidiary of the Company, since 2009; President of Candrone from January 2009 to present; and an independent consultant to enterprise clients with respect to the integration of drones for over 10 years.
|
April 30, 2020
|
2,224,935
|
John M. Mitnick
Director
Virginia, United States
|
Member of Board of Directors of Valaurum, Inc., March 2016 to February 2018 and since October 2019; General Counsel of the U.S. Department of Homeland Security from February 2018 to September 2019; and Senior Vice President, General Counsel, and Secretary of The Heritage Foundation from March 2014 to February 2018.
|
June 18, 2020
|
188,011
|
|
|
|
|
|
Notes:
|
(1)
|
The information as to the province or state, and applicable country of residence and principal occupation,
not being within the knowledge of the Company, has been furnished by the respective directors individually.
|
|
(2)
|
The information as to the Common Shares beneficially owned or over which a director exercises control
or direction, not being within the knowledge of the Company, has been furnished by the respective directors individually.
|
|
(3)
|
These Common Shares are held through Business Instincts Group Inc. (“BIG”) an entity
that Mr. Chell has a material interest in.
|
|
(4)
|
Denotes member of the Audit Committee. Scott Larson is the chair of the Audit Committee.
|
|
(5)
|
Denotes member of the Nominating and Corporate Governance Committee. Denis Silva is the chair of the Nominating
and Corporate Governance Committee.
|
CORPORATE CEASE
TRADE ORDERS OR BANKRUPTCIES
Other than as disclosed herein, none of the proposed
directors (or any of their personal holding companies) of the Company:
|
(a)
|
is, as at the date of this Information Circular, or has been, within 10 years before the date of this
Information Circular, a director, chief executive officer or chief financial officer of any company, including the Company, that: (i)
was subject to a cease trade order or similar order or an order that denied the relevant company access to any exemption under securities
legislation, for a period of more than 30 consecutive days while that person was acting in the capacity as director, chief executive officer
or chief financial officer; or (ii) was the subject of a cease trade or similar order or an order that denied the issuer access to any
exemption under securities legislation in each case for a period of 30 consecutive days, that was issued after the person ceased to be
a director, chief executive officer or chief financial officer in the company and which resulted from an event that occurred while that
person was acting in the capacity as director, chief executive officer or chief financial officer; or
|
|
(b)
|
is as at the date of this Information Circular or has been within the 10 years before the date of this
Information Circular, a director or executive officer of any company, including the Company, that while that person was acting in that
capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating
to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver,
receiver manager or trustee appointed to hold its assets; or
|
|
(c)
|
has, within the 10 years before the date of this Information Circular, become bankrupt, made a proposal
under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangements or compromise
with creditors, or had a receiver, receiver manager as trustee appointed to hold the assets of the proposed director.
|
By Order of the Supreme Court of Newfoundland
and Labrador dated June 17, 2020, Deloitte Restructuring Inc. was appointed as the receiver and manager of all current and future
assets, undertakings, and properties of the Kami Mine Limited Partnership, Kami General Partner Limited, and Alderon Iron Ore Corp.
The receivership was initiated by a secured creditor of the Kami Mine Limited Partnership after its failure to refinance the secured
debt due to the COVID-19 pandemic. Mr. Aasen was Corporate Secretary of Alderon Iron Ore Corp. and Secretary and Director
of Kami General Partner Limited until April 28, 2020.
None of the proposed directors (or any of their
personal holding companies) has been subject to: (a) any penalties or sanctions imposed by a court relating to securities legislation
or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority after January
1, 2001; or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a
reasonable securityholder in deciding whether to vote for a proposed director.
AUDIT COMMITTEE
DISCLOSURE
Under National Instrument 52-110 –
Audit Committees (“NI 52-110”), companies are required to provide disclosure with respect to their
audit committee including the text of the audit committee’s charter, composition of the audit committee and the fees paid to the
external auditor.
A copy of the Company’s Audit Committee’s
charter is attached here to as Schedule A hereto.
Composition of the Audit Committee
The current members of the Audit Committee are:
|
Scott Larson (Chair)
|
Non-Independent (1)
|
Financially literate(2)
|
|
Olen Aasen
|
Independent(1)
|
Financially literate(2)
|
|
Denis Silva
|
Non-Independent (1)
|
Financially literate(2)
|
|
|
|
|
|
(1)
|
A member of the Audit Committee is independent if the member has no direct or indirect material relationship
with the Company which could, in the view of the Board, reasonably interfere with the exercise of a member’s independent judgment.
|
|
(2)
|
An individual is financially literate if he has the ability to read and understand a set of financial
statements that present a breadth of complexity of accounting issues that are generally comparable to the breadth and complexity of the
issues that can reasonably be expected to be raised by the Company’s financial statements.
|
Relevant Education and Experience
Olen Aasen, Director
Mr. Aasen is a corporate and securities lawyer
with more than 15 years of experience in corporate, securities and regulatory matters. He has been the Corporate Secretary, General Counsel
or Vice President, Legal at various Canadian and U.S.- listed companies. Mr. Aasen obtained a J.D. from the University of British
Columbia in 2006 and was called to the British Columbia Bar in 2007. Mr. Aasen was also appointed to the 2016 Legal 500 GC Powerlist for
Canada. Mr. Aasen has an understanding of financial statements and is financially literate as that term is defined in NI 52-110.
Scott Larson, President
and Director
Mr. Larson brings over 20 years of combined corporate
finance, technology development and entrepreneurial experience to the Board. Formerly CEO of Kater, a Vancouver-based mobility as a service
(MaaS) company building out an integrated intermodal transportation platform incorporating public transportation, buses, taxis and ride
haling vehicles into a single service. Previously, Mr. Larson has been CEO and co-founder of Helios Wire, a satellite company building
out a space-enabled IoT/M2M network, and was CEO/Co-Founder of UrtheCast. Mr. Larson helped scale the company from its inception, taking
it public on the Toronto Stock Exchange, raising $200 million, and leading the company to 250 employees over five years with seven offices
around the world. Mr. Larson has an understanding of financial statements and is financially literate as that term is defined in NI 52-110.
John M. Mitnick,
Director
Mr. Mitnick is an American attorney with 32
years of experience serving at the highest levels of government and the private sector. From February 2018 until September 2019, he
served as the General Counsel of the U.S. Department of Homeland Security (DHS), having been confirmed for that position unanimously
by the U.S. Senate. In that capacity, Mr. Mitnick was the chief legal officer of a federal security and law enforcement agency with
more than 240,000 employees, was responsible for providing legal advice and counsel from DHS and all of its components, and
supervised more than 2,500 attorneys. From March 2014 to February 2018, he served as Senior Vice President, General Counsel, and
Secretary of The Heritage Foundation, an influential think tank, and from November 2007 to April 2013 he served as
Vice President, General Counsel, and Secretary of a Raytheon division with over $3 billion in annual sales, over 9,000
employees, and business operations in over 40 countries and on all continents. Mr. Mitnick also served as Associate Counsel
to President George W. Bush from May 2005 until October 2007. He began his legal career in 1988 at the law firm now known as
Kilpatrick Townsend & Stockton LLP, where he was a partner specializing in mergers and acquisitions, strategic alliances,
commercial contracts, and business start-ups. He received his Juris Doctor degree from the University of Virginia School of
Law and a Bachelor of Arts degree in Jurisprudence from the University of Oxford. He also holds a Bachelor of Arts degree in
History and Political Science (summa cum laude) from Emory University. Mr. Mitnick has an understanding of financial
statements and is financially literate as that term is defined in NI 52-110.
Each member of the Audit Committee has:
|
|
·
|
an understanding of the accounting principles used by the Company to prepare its financial statements,
and the ability to assess the general application of those principles in connection with estimates, accruals and reserves;
|
|
|
·
|
experience with analyzing or evaluating financial statements that present a breadth and level of complexity
of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised
by the Company's financial statements, or experience actively supervising individuals engaged in such activities; and
|
|
|
·
|
an understanding of internal controls and procedures for financial reporting.
|
Audit Committee Oversight
At no time since the commencement of the Company’s
most recently completed financial year was a recommendation of the Audit Committee to nominate or compensate an external auditor not adopted
by the Board.
Reliance on Certain Exemptions
At no time since the commencement of the Company’s
most recently completed financial year has the Company relied on the exemption in Section 2.4 of NI 52-110 (De Minimis
Non-audit Services), or an exemption from NI 52-110, in whole or in part, granted under Part 8 of NI 52-110.
The Company has relied upon the exemption provided
by section 6.1 of NI 52-110 which exempts venture issuers from the requirement to comply with the restrictions on the composition
of its audit committee and the disclosure requirements of its audit committee in an annual information form as prescribed by NI 52-110.
Pre Approval Policies and Procedures
The Audit Committee is authorized by the Board
to review the performance of the Company’s external auditors and approve in advance provision of services other than auditing and
to consider the independence of the external auditors, including reviewing the range of services provided in the context of all consulting
services bought by the Company. The Audit Committee is authorized to approve any non-audit services or additional work which the Chairman
of the Audit Committee deems as necessary who will notify the other members of the Audit Committee of such non-audit or additional
work.
External Auditor Service Fees (By Category)
The aggregate fees billed by the Company’s
external auditors in each of the last two fiscal years for audit fees are as follows:
Financial Year
Ending Dec 31
|
|
Audit Fees(1)
|
|
|
Audit Related Fees(2)
|
|
|
Tax Fees(3)
|
|
|
All Other Fees(4)
|
|
|
2020
|
|
$
|
94,000
|
|
|
$
|
8,925
|
|
|
$
|
4,000
|
|
|
|
N/A
|
|
|
2019
|
|
$
|
46,000
|
|
|
|
N/A
|
|
|
$
|
2,500
|
|
|
|
N/A
|
|
Notes:
|
(1)
|
The aggregate audit fees billed.
|
|
(2)
|
The aggregate fees billed for assurance and related services that are reasonably
related to the performance of the audit or review of the Company’s financial statements which are not included under the heading
“Audit Fees”.
|
(3)
The aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning.
|
(4)
|
The aggregate fees billed for products and services other than as set out
under the headings “Audit Fees”, “Audit Related Fees” and “Tax Fees”.
|
STATEMENT OF EXECUTIVE COMPENSATION
For the purposes of this Information Circular,
a “Named Executive Officer”, or “NEO”, means each of the following individuals:
|
(a)
|
each individual who, during any part of the Company’s financial year ended December 31, 2020, served
as chief executive officer (“CEO”) of the Company, including an individual performing functions similar to a CEO;
|
|
(b)
|
each individual who, during any part of the Company’s financial year ended December 31, 2020, served
as chief financial officer (“CFO”) of the Company, including an individual performing functions similar to a CFO;
|
|
(c)
|
the most highly compensated executive officers of the Company and its subsidiaries, other than the individuals
identified in paragraphs (a) and (b), as at December 31, 2020 whose total compensation was more than $150,000, as determined in accordance
with subsection 1.3(5) of Form 51-102F6, for the financial year ended December 31, 2020; and
|
|
(d)
|
each individual who would be a NEO under paragraph (c) above but for the fact that the individual
was not an executive officer of the Company, and was not acting in a similar capacity, as at December 31, 2020.
|
Based on the foregoing definitions, the Company
had four (4) Named Executive Officers for the year ended December 31, 2020: Cameron Chell, the Company’s CEO, Paul Sun, the Company’s
CFO, Patrick Imbasciani, the Company’s former COO and Scott Larson, the Company’s President.
The Summary Compensation table below provides
information for the two most recently completed financial years ended December 31, 2020 and 2019 regarding compensation paid to or earned
by each of the Named Executive Officers.
Director and Named Executive Officer Compensation,
Excluding Compensation Securities
The following table sets forth all compensation
paid, payable, awarded, granted or given, or otherwise provided, directly or indirectly to the Company’s Named Executive Officers
and directors for the fiscal years ended December 31, 2020 and 2019.
|
Table of Compensation Excluding Compensation Securities
|
Name and
position
|
Dec 31
|
Salary,
consulting
fee, retainer or
commission
($)
|
Bonus
($)
|
Committee or meeting fees
($)
|
Value of
perquisites
($)
|
Value of all
other
compensation
($)
|
Total
compensation
($)
|
|
Cameron Chell(1)
Chairman, CEO and Director
|
2020
2019
|
139,172.93
9,000.00
|
385,990
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
525,163.69
9,000.00
|
|
Paul Sun
CFO
|
2020
2019
|
167,024.09
133,813.74
|
156,950
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
6,576.92(2)
|
323,974.09
140,390.66
|
|
Patrick Imbasciani(3)
Former COO
|
2020
2019
|
164,140.33
37,365.63(4)
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
164,140.33
37,365.63
|
|
Scott Larson
President and Director
|
2020
2019
|
88,490.74
Nil
|
139,033Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
227,524.18
Nil
|
|
Olen Aasen
Director
|
2020
2019
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
|
Denis Silva
Director
|
2020
2019
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
|
Andrew Hill Card, Jr
Director
|
2020
2019
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
|
Justin Hannewyk(5)
Director and President of Dronelogics Systems Inc.
|
2020
2019
|
80,000
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
80,000
Nil
|
|
John M. Mitnick(6)
Director
|
2020
2019
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Nil
Nil
|
Notes:
|
(1)
|
Mr. Chell provides his services through the Chell Consulting Agreement.
See below “Employment, Consulting and Management Agreements”.
|
|
(2)
|
Comprised of vacation accrual.
|
|
(3)
|
Mr. Imbasciani was appointed COO of the Company on October 22, 2019 and
ceased to hold that position on October 27, 2020.
|
|
(4)
|
US$28,604.17 converted based on an exchange rate of 1.3063 as at December
31, 2019.
|
|
(5)
|
Mr. Hannewyk was appointed to the Board as at April 30, 2020.
|
|
(6)
|
Mr. Mitnick was appointed to the Board as at June 18, 2020.
|
Stock Options and Other Compensation Securities
The following table sets out all compensation
securities granted or issued to all Named Executive Officers and directors by the Company or any of its subsidiaries during the fiscal
year ended December 31, 2020 for services provided or to be provided, directly or indirectly, to the Company or any of its subsidiaries.
|
Compensation Securities
|
Name and position
|
Type of
compensation
security
|
Number of
compensation
securities,
number of
underlying
securities, and
percentage of
class
|
Date of issue
or grant
|
Issue, conversion
or exercise
price
($)
|
Closing
price of
security
on date of
grant
($)
|
Closing
Price of
Security
on date at
year end
($)
|
Expiry Date
|
|
Cameron Chell
Chairman, CEO and Director
|
Stock options
RSUs
|
Nil
Nil
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
|
Paul Sun
CFO
|
Stock options
RSUs
|
Nil
Nil
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
|
Patrick Imbasciani
Former COO
|
Stock options
RSUs
|
Nil
Nil
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
|
Scott Larson
President and Director
|
Stock options(1)
RSUs(2)
|
500,000
125,000
|
July 3, 2020
Nov 24, 2020
|
0.64
N/A
|
0.64
0.50
|
0.81
0.81
|
July 3, 2025
N/A
|
|
Olen Aasen
Director
|
Stock options
RSUs(2)
|
Nil
125,000
|
N/A
Nov 24, 2020
|
N/A
N/A
|
N/A
0.50
|
N/A
0.81
|
N/A
N/A
|
|
Denis Silva
Director
|
Stock options
RSUs(2)
|
Nil
125,000
|
N/A
Nov 24, 2020
|
N/A
N/A
|
N/A
0.50
|
N/A
0.81
|
N/A
N/A
|
|
Andrew Hill Card, Jr
Director
|
Stock options
RSUs(2)
|
Nil
125,000
|
N/A
Nov 24, 2020
|
N/A
N/A
|
N/A
0.50
|
N/A
0.81
|
N/A
N/A
|
|
Justin Hannewyk
Director and President of Dronelogics Systems Inc.
|
Stock options(3)
RSUs(4)
RSUs(2)
|
250,000
250,000
125,000
|
April 30, 2020
April 30, 2020
Nov 24, 2020
|
0.50
N/A
N/A
|
0.83
0.83
0.50
|
0.81
0.81
0.81
|
April 30, 2030
N/A
N/A
|
|
John M. Mitnick
Director
|
Stock options
RSUs(2)
|
Nil
125,000
|
N/A
Nov 24, 2020
|
N/A
N/A
|
N/A
0.50
|
N/A
0.81
|
N/A
N/A
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These stock options vest on April 3, 2021.
|
|
(2)
|
These restricted share units are deliverable as to 1/3 on October 30, 2021,
1/3 on October 30, 2022 and 1/3 on October 30, 2023.
|
|
(3)
|
These stock options vest 1/3 on the grant date, 1/3 on the first anniversary
of the grant date and 1/3 on the second anniversary of the grant date.
|
|
(4)
|
These restricted share units are deliverable as to 1/3 on April 30, 2021,
1/3 on April 30, 2022 and 1/3 on April 30, 2023.
|
Exercise of Compensation Securities by Directors
and NEOs
The following table sets out all compensation
securities exercised by Named Executive Officers and directors of the Company or any of its subsidiaries during the year ended December
31, 2020.
|
Exercise of Compensation Securities by NEOs and Directors
|
|
Name and Position
|
Type of Compensation Security
|
Number of Underlying Securities
|
Price on date of Issuance or Exercise Price
per Security ($)
|
Date of Exercise Price
|
Closing Price of Security or Underlying Security on Date of Exercise
($)
|
Difference between Issue Price or Exercise Price and Closing Price on Date of Exercise
($)
|
Total Value on Exercise Date
($)
|
|
Cameron Chell
Chairman, CEO and Director
|
RSUs
|
83,333
|
0.50
|
Oct 30, 2020
|
0.57
|
0.07
|
47,499.81
|
|
Paul Sun
CFO
|
RSUs
|
166,666
|
0.50
|
Oct 30, 2020
|
0.57
|
0.07
|
94,999.62
|
|
Patrick Imbasciani
Former COO
|
RSUs
|
83,333
|
0.50
|
Oct 30, 2020
|
0.57
|
0.07
|
47,499.81
|
|
Scott Larson
President and Director
|
RSUs
|
83,333
|
0.50
|
Oct 30, 2020
|
0.57
|
0.07
|
47,499.81
|
|
Olen Aasen
Director
|
RSUs
|
83,333
|
0.50
|
Oct 30, 2020
|
0.57
|
0.07
|
47,499.81
|
|
Denis Silva
Director
|
RSUs
|
83,333
|
0.50
|
Oct 30, 2020
|
0.57
|
0.07
|
47,499.81
|
|
Andrew Hill Card, Jr
Director
|
RSUs
|
83,333
|
0.50
|
Oct 30, 2020
|
0.57
|
0.07
|
47,499.81
|
|
Justin Hannewyk
Director and President of Dronelogics Systems Inc.
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
John M. Mitnick
Director
|
RSUs
|
83,333
|
0.50
|
Oct 30, 2020
|
0.57
|
0.07
|
47,499.81
|
Stock Option Plans and Other Incentive Plans
The Board has previously adopted the
Company’s share compensation plan (the “Share Compensation Plan”), prepared in accordance with the policies
of the Canadian Securities Exchange (the “Exchange”), that provides for the granting of restricted share units
(“RSUs”) and stock options (“Options”) on such terms and conditions as prescribed by the Share
Compensation Plan. The Share Compensation Plan is a “rolling” plan, pursuant to which the maximum number of Common
Shares issuable under the Share Compensation Plan and any other share compensation arrangement of the Company including the RSUs
that may be awarded under the Share Compensation Plan, is 20% of the Common Shares then issued and outstanding. The Share
Compensation Plan was adopted effective August 19, 2019.
The Share Compensation Plan provides participants
(each, a “Participant”), who may include participants who are citizens or residents of the United States (each, a “US
Participant”), with the opportunity, through RSUs and Options, to acquire an ownership interest in the Company. The RSUs will
rise and fall in value based on the value of the Common Shares. Unlike the Options, the RSUs will not require the payment of any monetary
consideration to the Company. Instead, each RSU represents a right to receive one Common Share following the attainment of vesting criteria
determined at the time of the award. See “Restricted Share Units – Vesting Provisions” below. The Options, on
the other hand, are rights to acquire Common Shares upon payment of monetary consideration (i.e., the exercise price), subject also to
vesting criteria determined at the time of the grant. See “Options – Vesting Provisions” below.
Purpose of the Share
Compensation Plan
The stated purpose of the Share Compensation Plan
is to advance the interests of the Company and its subsidiaries, and its shareholders by: (a) ensuring that the interests of Participants
are aligned with the success of the Company and its subsidiaries; (b) encouraging stock ownership by such persons; and (c) providing compensation
opportunities to attract, retain and motivate such persons.
Eligible Persons
The following people are eligible to participate
in the Share Compensation Plan: any officer or employee of the Company or any officer or employee of any subsidiary of the Company and,
solely for purposes of the grant of Options, any director of the Company or any director of any subsidiary of the Company, and any Consultant
(defined under the Share Compensation Plan as an individual (other than an employee or a director of the Company) or a corporation that
is not a U.S. Person that: (a) is engaged to provide on an ongoing bona fide basis, consulting, technical, management or other services
to the Company or to an affiliate of the Company, other than services provided in relation to an offer or sale of securities of the Company
in a capital raising transaction, or services that promote or maintain a market for the Company’s securities; (b) provides the services
under a written contract between the Company or the affiliate and the individual or the Company, as the case may be; (c) in the reasonable
opinion of the Company, spends or will spend a significant amount of time and attention on the affairs and business of the Company or
an affiliate of the Company; and (d) has a relationship with the Company or an affiliate of the Company that enables the individual to
be knowledgeable about the business and affairs of the Company.
Administration of
the Share Compensation Plan
The Share Compensation Plan is administered by
the Board or such other persons as may be designated by the Board (the “Administrators”) based on the recommendation
of the Board or the compensation committee of the Board, if applicable. The Administrators determine the eligibility of persons to participate
in the Share Compensation Plan, when RSUs and Options will be awarded or granted, the number of RSUs and Options to be awarded or granted,
the vesting criteria for each award of RSUs and grant of Options and all other terms and conditions of each award and grant, in each case
in accordance with applicable securities laws and the requirements of the Exchange.
Restrictions on
the Award of RSUs and Grant of Options
The awards of RSUs and grants of Options under
the Share Compensation Plan is subject to a number of restrictions:
|
(a)
|
the total number of Common Shares issuable to insiders under the Share Compensation Plan and any other
share compensation arrangements of the Company cannot exceed 20% of the Common Shares then outstanding; and
|
|
(b)
|
the aggregate sales price (meaning the sum of all cash, property, notes, cancellation of debt, or other
consideration received or to be received by the Company for the sale of the securities) or amount of Common Shares issued during any consecutive
12 month period will not exceed the greatest of the following: (i) US$1,000,000; (ii) 15% of the total assets of the Company, measured
at the Company’s most recent balance sheet date; or (iii) 15% of the outstanding amount of the Common Shares, measured at the Company’s
most recent balance sheet date.
|
In the event of any declaration by the Company
of any stock dividend payable in securities (other than a dividend which may be paid in cash or in securities at the option of the holder
of Common Shares), or any subdivision or consolidation of the Common Shares, reclassification or conversion of the Common Shares, or any
combination or exchange of securities, merger, consolidation, recapitalization, amalgamation, plan of arrangement, reorganization, spin
off involving the Company, distribution (other than normal course cash dividends) of Company assets to holders of Common Shares, or any
other corporate transaction or event involving the Company or the Common Shares, the Administrators may in their sole discretion make
such changes or adjustments, if any, as the Administrators consider fair or equitable to reflect such change or event including, without
limitation, adjusting the number of Options and RSUs outstanding under the Share Compensation Plan, the type and number of securities
or other property to be received upon exercise or redemption thereof, and the exercise price of Options outstanding under the Share Compensation
Plan, provided that the value of any Option or RSU immediately after such an adjustment shall not exceed the value of such Option or RSU
prior thereto.
Restricted Share Units
The total number of Common Shares that may be
issued on exercise of Options and RSUs, together with any other share compensation arrangements of the Company, shall not exceed 20% of
the number of issued and outstanding Common Shares from time to time.
Mechanics for RSUs
RSUs awarded to Participants under the Share Compensation
Plan are credited to an account that is established on their behalf and maintained in accordance with the Share Compensation Plan. After
the relevant date of vesting of any RSUs awarded under the Share Compensation Plan, a Participant shall be entitled to receive and the
Company shall issue or pay (at its discretion): (i) a lump sum payment in cash equal to the number of vested RSUs recorded in the Participant’s
account multiplied by the volume weighted average price of the Common Shares traded on the Exchange for the five (5) consecutive
trading days prior to the payout date; (ii) the number of Common Shares required to be issued to a Participant upon the vesting of such
Participant’s RSUs in the Participant’s account will be, duly issued as fully paid and non assessable shares and such Participant
shall be registered on the books of the Company as the holder of the appropriate number of Common Shares; or (iii) any combination of
thereof.
Vesting Provisions
The provides that: (i) at the time of the award
of RSUs, the Administrators will determine the vesting criteria applicable to the awarded RSUs; (ii) vesting of RSUs may include criteria
such as performance vesting; (iii) each RSU shall be subject to vesting in accordance with the terms set out in an agreement evidencing
the award of the RSU attached as Exhibit A to the Share Compensation Plan (or in such form as the Administrators may approve from time
to time) (each an “RSU Agreement”); and (iv) all vesting and issuances or payments in respect of an RSU shall be completed
no later than December 15 of the third calendar year commencing after the award date for such RSU.
It is the current intention that RSUs may be awarded
with both time based vesting provisions as a component of the Company’s annual incentive compensation program, and performance based
vesting provisions as a component of the Company’s long term incentive compensation program.
Under the Share Compensation Plan, should the
date of vesting of an RSU fall within a blackout period or within nine business days following the expiration of a blackout period, the
date of vesting will be automatically extended to the tenth business day after the end of the blackout period.
Termination, Retirement
and Other Cessation of Employment in connection with RSUs
A person participating in the Share Compensation
Plan will cease to be eligible to participate in the following circumstances: (i) receipt of any notice of termination of employment
or service (whether voluntary or involuntary and whether with or without cause); (ii) retirement; and (iii) any cessation of employment
or service for any reason whatsoever, including disability and death (an “Event of Termination”). In such circumstances,
any vested RSUs will be issued (and with respect to each RSU of a US Participant, such RSU will be settled and shares issued as soon as
practicable following the date of vesting of such RSU as set forth in the applicable RSU Agreement, but in all cases within 60 days following
such date of vesting; and unless otherwise determined by the Administrators in their discretion, any unvested RSUs will be automatically
forfeited and cancelled (and with respect to any RSU of a US Participant, if the Administrators determine, in their discretion, to waive
vesting conditions applicable to an RSU that is unvested at the time of an Event of Termination, such RSU shall not be forfeited or cancelled,
but instead will be deemed to be vested and settled and shares delivered following the date of vesting date of such RSU as set forth in
the applicable RSU Agreement). Notwithstanding the above, if a person retires in accordance with the Company’s retirement policy
at such time, the pro rata portion of any unvested performance based RSUs will not be forfeited or cancelled and instead shall be eligible
to become vested in accordance with the vesting conditions set forth in the applicable RSU Agreement after such retirement (as if retirement
had not occurred), but only if the performance vesting criteria, if any, have been met on the applicable date. For greater certainty,
if a person is terminated for just cause, all unvested RSUs will be forfeited and cancelled.
Options
The total number of Common Shares that may be
issued on exercise of Options and RSUs, together with any other share compensation arrangements of the Company, shall not exceed 20% of
the number of issued and outstanding Common Shares from time to time.
Mechanics for Options
Each Option granted pursuant to the Share Compensation
Plan will entitle the holder thereof to the issuance of one Common Share upon achievement of the vesting criteria and payment of the applicable
exercise price. Options granted under the Share Compensation Plan will be exercisable for Common Shares issued from treasury once the
vesting criteria established by the Administrators at the time of the grant have been satisfied. However, the Company will continue to
retain the flexibility through the amendment provisions in the Share Compensation Plan to satisfy its obligation to issue Common Shares
by making a lump sum cash payment of equivalent value (i.e., pursuant to a cashless exercise), provided there is a full deduction of the
number of underlying Common Shares from the Share Compensation Plan’s reserve.
Vesting Provisions
The Share Compensation Plan provides that the
Administrators may determine when any Option will become exercisable and may determine that Options shall be exercisable in instalments
or pursuant to a vesting schedule. The Option agreement will disclose any vesting conditions prescribed by the Administrators.
Termination, Retirement
and Other Cessation of Employment in connection with Options
A person participating in the Share Compensation
Plan will cease to be eligible to participate where there is an Event of Termination. In such circumstances, unless otherwise determined
by the Administrators in their discretion, any unvested Options will be automatically cancelled, terminated and not available for exercise
and any vested Options may be exercised only before the earlier of: (i) the termination of the Option; and (ii) six months after the date
of the Event of Termination. If a person is terminated for just cause, all Options will be (whether or not then exercisable) automatically
cancelled.
Other Terms
The Administrators will determine the exercise
price and term/expiration date of each Option, provided that the exercise price in respect of that Option shall not be less than the
Market Price on the date of grant. “Market Price” is defined in the Share Compensation Plan, as of any date, the closing
price of the Common Shares on the Exchange for the last market trading day prior to the date of grant of the Option or if the Common
Shares are not listed on a stock exchange, the Market Price shall be determined in good faith by the Administrators.
No Option shall be exercisable after ten years
from the date the Option is granted. Under the Share Compensation Plan, should the term of an Option expire on a date that falls within
a blackout period or within nine business days following the expiration of a blackout period, such expiration date will be automatically
extended to the tenth business day after the end of the blackout period.
Unless otherwise determined by the Board, in the
event of a change of control, any surviving or acquiring corporation shall assume any Option outstanding under the Share Compensation
Plan on substantially the same economic terms and conditions or substitute or replace similar options for those Options outstanding under
the Share Compensation Plan on substantially the same economic terms and conditions.
Transferability
RSUs awarded and Options granted under the Share
Compensation Plan or any rights of a Participant cannot be transferred, assigned, charged, pledged or hypothecated, or otherwise alienated,
whether by operation of law or otherwise.
Reorganization and
Change of Control Adjustments
In the event of any declaration by the Company
of any stock dividend payable in securities (other than a dividend which may be paid in cash or in securities at the option of the holder
of Common Shares), or any subdivision or consolidation of Common Shares, reclassification or conversion of the Common Shares, or any combination
or exchange of securities, merger, consolidation, recapitalization, amalgamation, plan of arrangement, reorganization, spin off involving
the Company, distribution (other than normal course cash dividends) of Company assets to holders of Common Shares, or any other corporate
transaction or event involving the Company or the Common Shares, the Administrators may make such changes or adjustments, if any, as they
consider fair or equitable, to reflect such change or event including adjusting the number of Options and RSUs outstanding under the Share
Compensation Plan, the type and number of securities or other property to be received upon exercise or redemption thereof, and the exercise
price of Options outstanding under the Share Compensation Plan, provided that the value of any Option or RSU immediately after such an
adjustment shall not exceed the value of such Option or RSU prior thereto.
Amendment Provisions
in the Share Compensation Plan
The Board may amend the Share Compensation Plan
or any RSU or Option at any time without the consent of any Participant provided that such amendment shall:
|
(a)
|
not adversely alter or impair any RSU previously awarded or any Option previously granted, except as permitted
by the adjustment provisions of the Share Compensation Plan and with respect to RSUs and Options of US Participants;
|
|
(b)
|
be subject to any regulatory approvals including, where required, the approval of the Exchange; and
|
|
(c)
|
be subject to shareholder approval, where required, by the requirements of the Exchange, provided that
shareholder approval shall not be required for the following amendments:
|
|
|
(i)
|
amendments of a “housekeeping nature”, including any amendment to the Share Compensation Plan
or an RSU or Option that is necessary to comply with applicable laws, tax or accounting provisions or the requirements of any regulatory
authority, stock exchange or quotation system and any amendment to the Share Compensation Plan or an RSU or Option to correct or rectify
any ambiguity, defective provision, error or omission therein, including any amendment to any definitions therein;
|
|
|
(ii)
|
amendments that are necessary or desirable for RSUs or Options to qualify for favourable treatment under
any applicable tax law;
|
|
|
(iii)
|
amendments to the vesting provisions of any RSU or any Option (including any alteration, extension or
acceleration thereof), providing such amendments do not adversely alter or impair such RSU or Option;
|
|
|
(iv)
|
amendments to the termination provisions of any Option (e.g., relating to termination of employment, resignation,
retirement or death) that does not entail an extension beyond the original expiration date (as such date may be extended by virtue of
a blackout period) providing such amendments do not adversely alter or impair such Option;
|
|
|
(v)
|
amendments to the Share Compensation Plan that would permit the Company to retain a broker and make payments
for the benefit of Participants to such broker who would purchase Common Shares for such persons, instead of issuing Common Shares from
treasury upon the vesting of the RSUs;
|
|
|
(vi)
|
amendments to the Share Compensation Plan that would permit the Company to make lump sum cash payments
to Participants, instead of issuing Common Shares from treasury upon the vesting of the RSUs;
|
|
|
(vii)
|
the amendment of the cashless exercise feature set out in the Share Compensation Plan; and
|
|
|
(viii)
|
change the application of the Change of Control provisions in section 6.2 of the Share Compensation
Plan or the Reorganization Adjustments provisions in section 6.3 of the Share Compensation Plan.
|
For greater certainty, shareholder approval will
be required in circumstances where an amendment to the Share Compensation Plan would:
|
(a)
|
increase the fixed maximum percentage of issued and outstanding Common Shares issuable under the Share
Compensation Plan, other than by virtue of the adjustment provisions in the Share Compensation Plan, or change from a fixed maximum percentage
of issued and outstanding Common Shares to a fixed maximum number of Common Shares;
|
|
(b)
|
increase the limits referred to above under “Restrictions on the Award of RSUs and Grant of Options”;
|
|
(c)
|
reduce the exercise price of any Option (including any cancellation of an Option for the purpose of reissuance
of a new Option at a lower exercise price to the same person);
|
|
(d)
|
extend the term of any Option beyond the original term (except if such period is being extend by virtue
of a blackout period); or
|
|
(e)
|
amend the amendment provisions in Section 6.4 of the Share Compensation Plan.
|
Employment, Consulting and Management Agreements
Except as disclosed herein, there were no agreements
or arrangements under which compensation was provided during the most recently completed financial year or is payable in respect of services
provided to the Company or any of its subsidiaries that were: (a) performed by a director or named executive officer; or (b) performed
by any other party but are services typically provided by a director or a named executive officer.
The Company’s consulting agreement (the
“Chell Consulting Agreement”) with 1502372 Alberta Ltd. (the “Consultant”) whereby the Company
pays monthly fees of US$14,166.67 (amounting to US$170,000 annually) for the provision by of executive services by the Consultant to
the Company, and in this regard, has Cameron Chell hold the position of Chairman and Chief Executive Officer contains the following provisions:
(a) where termination notice is given by the Company, other than for certain specified reasons as set out in the Chell Consulting Agreement,
the Company shall give the Consultant at least 60 days’ advance notice in writing; and (b) where termination is given by the
Consultant, the Consultant shall give the Company 60 days’ advance notice in writing. If the Chell Consulting Agreement is terminated
pursuant to either (a) or (b) above, then the Consultant will be entitled to the fees earned to the effective date of termination and
any expenses incurred on behalf of the Company prior to the effective date of termination which are otherwise reimbursable by the Company
pursuant to the terms of the Chell Consulting Agreement. The Consultant is also entitled a bonus as determined by the Company’s
Compensation Committee equal to 100% of the Consultant annual fees. The Consultant is a private company controlled by Cameron Chell,
Chairman, Chief Executive Officer and Director of the Company.
The Company’s consulting agreement (the
“Larson Consulting Agreement”) with Scott Larson requires the Company pay (a) an annual base salary of US$140,000 (“Base
Salary”) and (b) as determined by the Company’s compensation committee an annual bonus of up to the Base Salary, for the
provision by of executive services as President to the Company. Mr. Larson also received 500,000 Options to acquire Common Shares concurrent
on the execution of the Larson Consulting Agreement. If the Larson Consulting Agreement is terminated by the Company without just cause,
Mr. Larson will be entitled to remuneration in the amount equal the Base Salary for a period of four months. See “Termination
and Change of Control Payments” table below.
The Company’s employment agreement (the
“Sun Agreement”) with Paul Sun requires the Company pay (a) an annual base salary of $150,000 (“Base Salary”)
plus an annual retention payment of $15,000 and (b) as determined by the Company’s compensation committee an annual bonus of up
to the Base Salary, for the provision by of executive services as President to the Company. If the Sun Agreement is terminated by the
Company without just cause, Mr. Sun will be entitled to remuneration in the amount equal the Base Salary and Mr. Sun’s last bonus
earned divided by 12 and multiplied by six. Mr. Sun is also entitled to receive a lump sum payment equal to 18 months of Base Salary and
average bonus upon a change of control. See “Termination and Change of Control Payments” table below.
On
August 1, 2019, the Company entered in a business services agreement (the “BIG Agreement”) with BIG, a company
that Cameron Chell, has a material interest in, 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 services are provided by a team of up to six consultants and the costs of all charges are based on the fees set forth
in the BIG Agreement and are settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the year
ended December 31, 2020, the Company incurred fees of $177,000 compared to $80,000 in 2019. As at December 31, 2020, the Company was indebted
to BIG in the amount of $nil (December 31, 2019 - $nil).
Termination and Change of Control Payments
The estimated amounts payable by the Company to
the NEOs under various termination scenarios as at the date of this Information Circular are outlined in the table below:
|
Name and Principal Position
|
|
Termination
without Cause
|
|
|
Change of Control with Termination
|
|
|
Scott Larson
President and Director
|
|
|
US$46,667
|
|
|
|
None
|
|
|
Paul Sun
Chief Financial Officer
|
|
$
|
225,975
|
|
|
$
|
452,952
|
|
Oversight and Description of Named Executive
Officer and Director Compensation
The Board is responsible for the oversight of
the Company’s strategy, policies and programs on the compensation and development of senior management and directors.
The Company’s executive compensation program
is intended to provide an appropriate overall compensation package that permits the Company to attract and retain highly qualified and
experienced senior executives and to encourage superior performance by the Company. The Company’s compensation policies are intended
to motivate individuals to achieve and to award compensation based on corporate and individual results. The compensation of the Company’s
executive officers is established based on a relatively equal weighing of each of these considerations.
Compensation for the Company’s executive
officers is intended to reflect a fair evaluation of overall performance and is intended to be competitive in aggregate with levels of
compensation of comparable companies. The Company’s compensation structure is primarily composed of two components: base salary
and Options and RSUs to purchase Common Shares. The Company generally strives to use long-term incentives, such as the grant of Options,
as performance incentives for executive management and to provide the opportunity for overall compensation of employees, including executives,
to be above industry average levels as well as to increase the alignment of interests between employees, executive management and shareholders.
Executive officers and directors are eligible to be granted Options and RSUs under the Share Compensation Plan, and previous grants of
Options and / or RSUs are taken into consideration when considering new grants. The Share Compensation Plan is intended to provide long-term
rewards linked directly to the market value of the Common Shares. The Company is of the view that the Share Compensation Plan is in the
best interests of the Company and will assist the Company to attract, motivate and retain talented and capable board members and executive
management.
The Share Compensation Plan also allows the Company
to grant from time to time RSUs to non-employee directors, employees and/or consultants of the Company or its designated affiliates on
such terms and conditions as prescribed by the Share Compensation Plan. As of the date of this Information Circular, there are 3,238,341
RSUs awarded under the Share Compensation Plan to directors, officers, employees and consultants of the Company. Each RSU represents a
right to receive one Common Share, following the vesting of such restricted share units over a three-year period. The RSUs are exercisable
for three years. As of the date of this Information Circular, there are 5,185,839 Options outstanding under the Share Compensation
Plan. See “Equity Compensation Plan Information” below.
The Company does not have a pension plan benefit
program nor a non-equity incentive plan in place. Therefore, there were no payments or benefits in connection with a defined benefit
or a defined contribution plan and no annual incentive plan or long term incentive plan awards offered to the Named Executive Officers
during the Company’s most recently completed financial year.
Given the current stage of development and the
limited elements of executive compensation, the Board believes it has effective risk management and regulatory compliance relating to
its compensation policies used in determining executive compensation. Risks related to compensation are taken into consideration as part
of the general review and determination of executive compensation by the Board. Inappropriate and excessive risks by executives are mitigated
by regular Board meetings during which financial and other information of the Company is reviewed, and which information includes executive
compensation. Interested directors declare their interest and abstain from voting on compensation matters. No risks have been identified
arising from the Company’s compensation policies and practices that are reasonably likely to have a material adverse effect on the
Company.
The Company does not permit its Named Executive
Officers or directors to purchase financial instruments, including, for greater certainty, prepaid variable forward contracts, equity
swaps, collars or units of exchange funds, that are designed to hedge or offset a decrease in market value of equity securities granted
as compensation or held, directly or indirectly, by the Named Executive or director.
Director Compensation
During the financial year ended December 31,
2020, none of the directors of the Company were paid, awarded or granted any compensation with respect to activities performed in their
capacity as directors except as noted above, see “Statement of Executive Compensation - Director and Named Executive Officer
Compensation, Excluding Compensation Securities”. Directors are eligible to participate in the Share Compensation Plan. Directors
are also entitled to be reimbursed for expenses incurred by them in their capacity as directors.
DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES
Effective June 30, 2005, National Instrument 58-101
– Disclosure of Corporate Governance Practices (“NI 58-101”) was adopted in each of the provinces
and territories in Canada. NI 58-101 requires reporting issuers to disclose the corporate governance practices that they have adopted
on an annual basis.
Corporate governance relates to the activities
of the Board, the members of which are elected by and are accountable to the shareholders, and takes into account the role of the individual
members of management who are appointed by the Board and who are charged with the day to day management of the Company. The Board is committed
to sound corporate governance practices, which are both in the interest of its shareholders and contribute to effective and efficient
decision-making.
The Company’s corporate governance practices
are summarized below:
Board of Directors
Subject to certain exceptions, a director is “independent”
within the meaning of NI 58-101 if he or she has no direct or indirect material relationship with the Company. A “material
relationship” is a relationship that could, in the view of the Board, be reasonably expected to interfere with the exercise
of a director’s independent judgment. Certain types of relationships are, by their nature, considered to be material
relationships.
Three of the seven members of the Board are considered
to be “independent” within the meaning of NI 58-101. Olen Aasen, Andrew Hill Card, Jr. and John M. Mitnick
are independent directors of the Company. Cameron Chell, the Chief Executive Officer of the Company, Scott Larson, the President of Company,
and Justin Hannewyk, President of Dronelogics Systems Inc., a wholly-owned subsidiary of the Company, are members
of management and, as a result, are not independent directors. Denis Silva is not considered an independent director as he is a Partner
with the law firm DLA Piper (Canada) LLP, which provides the Company with professional services.
The Company takes steps to ensure that adequate
structures and processes are in place to permit the Board to function independently of Management. The role of the Chair of the
Board is to effectively manage and to provide leadership to the Board and to ensure that the policies and procedures adopted by
the Board allow the Board to function independent of Management. Where matters arise at meetings of the Board which require decision
making and evaluation that is independent of Management and interested directors of the Company, directors hold an “in-camera”
session among the independent and disinterested directors, without Management present at such meeting.
Certain members of our Board are also members
of the board of directors of other public companies. Our Board has not adopted a director interlock policy, but is keeping informed of
other public directorships held by its members.
Directorships
The following table sets out the directors and
officers of the Company that are directors, officers or promoters of other reporting issuers:
|
Name
|
Name of Reporting Issuer
|
Position
|
Date
|
|
Cameron Chell
|
TruTrace Technologies Inc.
Pounce Technologies Inc.
CurrencyWorks Inc. (formerly, ICOX Innovations
Inc.)
|
Director
CEO and Director
Director
|
May 2018
July 2014
January 2012
|
|
Olen Aasen
|
Loopshare Ltd.
|
Director
|
November 2018
|
|
Scott Larson
|
UrtheCast Corp.
|
Director
|
June 2013
|
|
Paul Sun
|
Eminent Gold Corp.
Tier One Silver
|
Director / Officer
Director
|
September 2018
October 2020
|
|
Andrew Hill Card, Jr.
|
Union Pacific Corp.
|
Director
|
September 2006
|
|
Denis Silva
|
Nova Royalty Corp.
|
Director
|
July 2018
|
Orientation and Continuing Education
The CEO and/or the CFO are responsible for providing
an orientation for new directors. Director orientation and ongoing training includes presentations by senior management to familiarize
directors with the Company’s strategic plans, its significant financial, accounting and risk management issues, its compliance programs,
its principal officers and its internal and independent auditors. On occasions where it is considered advisable, the Board provides individual
directors with information regarding topics of general interest, such as fiduciary duties and continuous disclosure obligations. The Board
ensures that each director is up to date with current information regarding the business of the Company, the role the director is expected
to fulfill and basic procedures and operations of the Board. The Board members are given access to management and other employees and
advisors, who can answer any questions that may arise. Regular technical presentations are made to the directors to keep them informed
of the Company’s operations.
Ethical Business Conduct
We have adopted a written code of ethics (the
“Code of Ethics”) that applies to all of our officers, directors, employees, contractors and agents acting on behalf
of the Company. The objective of the Code of Ethics is to provide guidelines for maintaining our and our subsidiaries integrity, trust
and respect. The Code of Ethics addresses compliance with laws, rules and regulations, conflicts of interest, confidentiality, commitment,
preferential treatment, financial information, internal controls and disclosure, protection and proper use of our assets, communications,
fair dealing, fair competition, due diligence, illegal payments, equal employment opportunities and harassment, privacy, use of Company
computers and the internet, political and charitable activities and reporting any violations of law, regulation or the Code of Ethics.
Any person subject to the Code of Ethics should report all violations of law, regulation or of the Code of Ethics of which they become
aware to any one of the Company’s senior executives. Our Board has ultimate responsibility for monitoring compliance with the Code
of Ethics. The Code of Ethics is available on SEDAR at www.sedar.com under the Company’s profile.
Nomination of Directors
Nominating and Corporate
Governance Committee
The Nominating and Corporate Governance Committee
of the Board is responsible for identifying and recommending to the Board individuals qualified to be nominated for election to the Board,
recommending to the Board the members and Chair for each Board committee and developing and recommending corporate governance principles
for the Board of the Company.
The Nominating and Corporate Governance Committee
is comprised of Denis Silva (Chair), Scott Larson and Olen Aasen. The biographical summaries of the Compensation Committee members
are included under the section “Election of Directors” above and each are considered to be independent from the Company.
Each member of the Nominating and Corporate Governance Committee has direct experience relevant to their responsibilities on the committee,
including acting as officers and directors of other publicly traded corporations, and as a result is familiar with remuneration in the
Company industry.
Compensation Committee
The Board is to conduct a review with regard to
the compensation for the directors and Chief Executive Officer each year, taking into account the types of compensation and the amounts
paid to directors and Chief Executive Officers of comparable publicly traded Canadian companies and with a view to aligning theinterests
of directors with those of the shareholders.
Other Board Committees
Other than the Audit Committee and the Nominating
and Corporate Governance Committee, the Company has no other committees. As the Company evolves, and its operations and management structure
become more complex, the Board will likely find it appropriate to constitute additional standing committees, to ensure that such committees
are governed by written charters and are composed of at least a majority of independent directors.
Assessments
The Board does not conduct any formal evaluation
of the performance and effectiveness of the members of the Board, the Board as a whole or any committee of the Board, however, the Board
considers the effectiveness and contribution of the Board, its members and the Audit Committee on an ongoing basis. The directors and
the independent directors are free to discuss specific situations from time to time among themselves and/or with the CEO and, if need
be, steps are taken to remedy the situation, which steps may include a request for resignation. Furthermore, management and directors
will communicate with shareholders on an ongoing basis, and shareholders will be regularly consulted on the effectiveness of Board members
and the Board as a whole. The majority of the Board also serve as directors for other public companies and will utilize that experience
when assessing the Board, its members and committees.
INDEBTEDNESS OF
DIRECTORS AND EXECUTIVE OFFICERS
At any time during the Company’s last completed
financial year, no director, executive officer, employee, proposed management nominee for election as a director of the Company nor any
associate of any such director, executive officer, or proposed management nominee of the Company or any former director, executive officer
or employee of the Company or any of its subsidiaries is or has been indebted to the Company or any of its subsidiaries or is or has been
indebted to another entity where such indebtedness is or has been the subject of a guarantee, support agreement, letter of credit or other
similar arrangement or understanding provided by the Company or any of its subsidiaries, other than routine indebtedness.
Securities Authorized
for Issuance Under Equity Compensation Plans
Equity Compensation Plan Information
The following table provides information regarding
compensation plans under which equity securities of the Company are authorized for issuance in effect as of the end of the Company’s
most recently completed financial year:
|
Plan Category
|
|
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
(a)
|
|
|
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
|
|
|
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in Column (a))
(c)
|
|
|
Equity Compensation Plans Approved By Shareholders
|
|
|
7,211,677
|
|
|
$
|
0.32
|
|
|
|
10,006,995
|
|
|
Equity Compensation Plans Not Approved By Shareholders
|
|
|
Nil
|
|
|
|
N/A
|
|
|
|
Nil
|
|
|
Total:
|
|
|
7,211,677
|
|
|
$
|
0.32
|
|
|
|
10,006,995
|
|
Note:
(1)
Includes RSUs and Options granted pursuant to the Share Compensation Plan. See above “Stock Option Plans and Other Incentive
Plans”.
INTEREST OF INFORMED
PERSONS IN MATERIAL TRANSACTIONS
Other than as set forth herein and other than
transactions carried out in the ordinary course of business of the Company or any of its subsidiaries, none of the directors or executive
officers of the Company, a director or executive officer of a person or company that is itself an informed person or subsidiary of the
Company, nor any shareholder beneficially owning, directly or indirectly, Common Shares, or exercising control or direction over Common
Shares, or a combination of both, carrying more than 10% of the voting rights attached to the outstanding shares of the Company nor an
associate or affiliate of any of the foregoing persons has since the commencement of the Company’s most recently completed financial
year any material interest, direct or indirect, in any transactions which materially affected or would materially affect the Company or
any of its subsidiaries.
APPOINTMENT OF
AUDITORS
Unless such authority is withheld, the persons
named in the accompanying proxy intend to vote for the appointment of Dale Matheson Carr-Hilton Labonte LLP, Chartered Professional Accountants,
as auditors of the Company, at a remuneration to be determined by the directors. Dale Matheson Carr-Hilton Labonte LLP, Chartered Professional
Accountants, were first appointed auditors of the Company on October 22, 2019.
INTEREST OF CERTAIN
PERSONS OR COMPANIES IN MATTERS TO BE ACTED UPON
Other than as set forth below, no person who has
been a director or executive officer of the Company at any time since the beginning of the Company’s last financial year, nor any
proposed nominee for election as a director of the Company, nor any associate or affiliate of any of the foregoing, has any material interest,
direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon other than the election
of directors or the appointment of auditors.
ANY OTHER MATTERS
Management of the Company knows of no matters
to come before the meeting other than those referred to in the Notice of Meeting accompanying this Information Circular. However, if any
other matters properly come before the meeting, it is the intention of the persons named in the form of proxy accompanying this Information
Circular to vote the same in accordance with their best judgment of such matters.
ADDITIONAL INFORMATION
Additional information regarding the Company
and its business activities is available on the SEDAR website located at www.sedar.com “Company Profiles – Draganfly
Inc.” The Company’s financial information is provided in the Company’s audited comparative financial statements and
related management discussion and analysis for its most recently completed financial year and may be viewed on the SEDAR website at the
location noted above. Shareholders of the Company may request copies of the Company’s financial statements and related management
discussion and analysis by contacting the Company c/o Corporate Services Department, DLA Piper (Canada) LLP, Suite 2800, Park Place 666
Burrard St Vancouver, British Columbia, Canada V6C 2Z7 at telephone number (604) 687-9444.
SCHEDULE
A
DRAGANFLY INC.
AUDIT COMMITTEE CHARTER
PURPOSE
Senior management of Draganfly Inc. (the “Company”),
as overseen by its Board of Directors (the “Board”), has primary responsibility for the Company’s financial reporting,
accounting systems and internal controls. The Audit Committee (the “Committee”) is a standing committee of the Board
established for the purposes of overseeing:
|
|
(a)
|
the quality and integrity of the Company’s financial and accounting reporting processes, audits
of the financial statements of the Company, and internal accounting and financial control systems of the Company;
|
|
|
(b)
|
the external auditor’s qualifications and independence;
|
|
|
(c)
|
management’s responsibility for assessing the effectiveness of internal controls; and
|
|
|
(d)
|
the Company’s compliance with legal and regulatory requirements in connection with financial and
accounting matters;
|
COMPOSITION AND OPERATION
|
|
1.
|
The Committee shall be composed of at least three members, each of whom:
|
|
|
(a)
|
must be an “Independent Director” (as defined in the Definitions section of this Charter),
taking into account the rules and regulations of any securities regulatory authorities and/or stock exchanges that may be applicable to
the Company;
|
|
|
(b)
|
must not accept any consulting, advisory, or other compensatory fee from the Company (or any subsidiary)
other than for board or committee service;
|
|
|
(c)
|
must not be an “Affiliated Person” (as defined in the Definitions section of this Charter)
of the Company or any of its subsidiaries;
|
|
|
(d)
|
must not have participated in the preparation of the financial statements of the Company or any current
subsidiary of the Company at any time during the past three years;
|
|
|
(e)
|
must be Financially Literate.
|
In addition, at least
one member will be a “Committee Financial Expert” (as defined in the Definitions section of this Charter).
The foregoing requirements
are subject to any exemptions, exceptions, cure periods or phase-in accommodations that may be available to the Company under applicable
securities laws and stock exchange rules.
|
|
2.
|
The members of the Committee shall be appointed by the Board to serve one-year terms and are permitted
to serve an unlimited number of consecutive terms.
|
|
|
3.
|
The Committee shall appoint a chair (the “Chair”) from among its members who shall
be an independent director. If the Chair is not present at any meeting of the Committee, one of the other Committee members present at
the meeting shall be chosen to preside at the meeting.
|
|
|
4.
|
The Committee will make every effort to meet at least four times per year and each member is entitled
to request that an additional meeting be called, which will be held within two weeks of the request for such meeting. A quorum at meetings
of the Committee shall be two members present in person or by telephone. The Committee may also act by unanimous written consent of its
members as described under the heading “Authority” in this Charter.
|
|
|
5.
|
The external auditor may request the Chair to call a meeting of the Committee to consider any matter that
the auditor believes should be brought to the attention of the directors or the shareholders of the Company. In addition to the external
auditor, each committee chair, members of board, as well as the Chief Executive Officer (“CEO”) and the Chief Financial
Officer (“CFO”) shall be entitled to request the Chair to call a meeting, which meeting shall be held within two weeks
of the request.
|
|
|
6.
|
Notice of the time and place of every meeting shall be given in writing or by email communication to each
member of the Committee at least 24 hours prior to the time fixed for such meeting.
|
|
|
7.
|
The Committee shall fix its own procedure at meetings, keep records of its proceedings and provide a verbal
report to the Board routinely at the next regularly scheduled Board meeting and shall provide copies of finalized minutes of meetings
to the Corporate Secretary to be kept with the official minute books of the Company.
|
|
|
8.
|
The Committee will review and approve its minutes of meetings and copies will be made available to the
external auditor or its members as requested.
|
|
|
9.
|
In camera sessions will be scheduled for each regularly scheduled quarterly Committee meeting, and as
needed from time to time.
|
|
|
10.
|
On an ad-hoc basis, the Committee may also meet separately with the Chief Executive Officer and the Chief
Financial Officer and such other members of management as they may deem necessary.
|
RESPONSIBILITIES AND DUTIES
Overall Committee:
To fulfill its responsibilities and duties the
Committee will:
|
|
(a)
|
review this Charter periodically, but at least once per annum, and recommend to the Board any necessary
amendments;
|
|
|
(b)
|
review and, where necessary, recommend revisions to the Company’s disclosure in the Company’s
public disclosures and securities filings (including its Management Information Circular) regarding Committee’s composition and
responsibilities and how they are discharged;
|
|
|
(c)
|
assist the Board in the discharge of its responsibilities relating to the quality, acceptability and integrity
of the Company’s accounting policies and principles, reporting practices and internal controls;
|
|
|
(d)
|
review and recommend approval by the Board of all significant and material financial disclosure documents
to be released by the Company, including but not limited to, quarterly and annual financial statements and management discussion and analysis,
annual reports, Form 40-F, annual information forms, and prospectuses containing material information of a financial nature; and
|
|
|
(e)
|
oversee the relationship and maintain a direct line of communication with the Company’s internal
and external auditors and assess their respective performance.
|
Public Filings, Policies and Procedures:
The Committee is responsible for:
|
|
(a)
|
ensuring adequate procedures are in place for the review of the Company’s disclosure of financial
information extracted or derived from the Company’s financial statements and periodically assess the Company’s disclosure
controls and procedures, and management’s evaluation thereof, to ensure that financial information is recorded, processed, summarized
and reported within the time periods required by law;
|
|
|
(b)
|
reviewing disclosures made to the Committee by the CEO and the CFO during their certification process
for any significant deficiencies in the design or operation of internal controls or material weakness therein and any fraud involving
management or other employees who have a significant role in internal controls;
|
|
|
(c)
|
reviewing with management and the external auditor any correspondence with securities regulators or other
regulatory or government agencies which raise material issues regarding the Company’s financial reporting or accounting policies.
|
External Auditors
The responsibilities and duties of the Committee
as they relate to the external auditor are to:
|
|
(a)
|
consider and make recommendations to the Board with respect to the appointment, compensation, and retention
of the external auditor to be nominated for appointment by shareholders at each annual general meeting of the Company;
|
|
|
(b)
|
review the performance of the external auditor and, where appropriate, recommend to the Board the removal
of the external auditor;
|
|
|
(c)
|
confirm the independence and effectiveness of the external auditor, which will require receipt from the
external auditor of a formal written statement delineating all relationships between the auditor and the Company and any other factors
that might affect the independence of the auditor;
|
|
|
(d)
|
oversee the work of the external auditor generally, and review and report to the Board on the planning
and results of external audit work, including:
|
|
|
(i)
|
the external auditor’s engagement letter or other reports of the auditor;
|
|
|
(ii)
|
the reasonableness of the estimated fees and other compensation to be paid to the external auditor;
|
|
|
(iii)
|
the form and content of the quarterly and annual audit report, which should include, inter alia:
|
|
|
(A)
|
a summary of the Company’s internal controls and procedures;
|
|
|
(B)
|
any material issues raised in the most recent meeting of the Committee; and
|
|
|
(C)
|
any other related audit, review or attestation services performed for the Company by the external auditors.
|
|
|
(e)
|
actively engage in dialogue with the external auditor with respect to any disclosed relationships or services
that may affect the independence and objectivity of the external auditor and take, or recommend the Board
take, appropriate actions to oversee the independence of the external auditor;
|
|
|
(f)
|
monitor the relationship between management and the external auditor and resolve any disagreements between
them regarding financial reporting;
|
|
|
(g)
|
engage the external auditor in discussions regarding any amendments to critical accounting policies and
practices; alternative treatments of financial information within generally accepted accounting principles related to material items that
have been discussed with management, including any potential ramifications and the preferred treatment by the independent auditor; and
lastly, written communication between management and the independent auditor, including but not limited to, the management letter and
schedule of adjusted differences.
|
Internal Controls and Financial Reporting
The Committee will:
|
|
(a)
|
obtain reasonable assurance from discussions with (and/or reports from) management, and reports from the
external auditors that the Company’s financial and accounting systems are reliable and that the prescribed internal controls are
operating effectively;
|
|
|
(b)
|
in consultation with the external auditor, the CEO, the CFO, and where necessary, other members of management,
review the integrity of the Company’s financial reporting process and the internal control structure;
|
|
|
(c)
|
review the acceptability of the Company’s accounting principles and direct the auditors’ examinations
to particular areas of question or concern, as required;
|
|
|
(d)
|
request the auditors to undertake special examinations (e.g., review compliance with conflict of interest
policies) when it deems necessary;
|
|
|
(e)
|
together with management, review control weaknesses identified by the external and internal auditors;
|
|
|
(f)
|
review the appointments of the CFO and other key financial executives;
|
|
|
(g)
|
during the annual audit process, consider if any significant matters regarding the Company’s internal
controls and procedures over financial reporting, including any significant deficiencies or material weaknesses in their design or operation,
need to be discussed with the external auditor, and review whether internal control recommendations made by the auditor have been implemented
by management.
|
Ethical and Legal Compliance
The responsibilities and duties of the Committee
as they relate to compliance and risk management are to:
|
|
(a)
|
obtain reasonable assurances as to the integrity of the CEO and other senior management and that the CEO
and other senior management strive to create a culture of integrity throughout the Company;
|
|
|
(b)
|
review the adequacy, appropriateness and effectiveness of the Company’s policies and business practices
which impact on the integrity, financial and otherwise, of the Company, including those relating to hedging, insurance, accounting, information
services and systems and financial controls, and management reporting;
|
|
|
(c)
|
receive a report from management on tax issues and planning, including compliance with the Company’s
source deduction obligations and other remittances under applicable tax or other legislation;
|
|
|
(d)
|
review annually the adequacy and quality of the Company’s financial and accounting staffing, including
the need for and scope of internal audit reviews (if any);
|
|
|
(e)
|
establish procedures for a) the receipt, retention and treatment of complaints received by the Company
regarding accounting, internal controls, or auditing matters; and b) the confidential, anonymous submission by employees of the Company
of concerns regarding questionable accounting or auditing matters.
|
|
|
(f)
|
review any complaints and concerns received regarding accounting, internal controls, or auditing matters
or with respect to the Company’s Code of Ethical Conduct, and the investigation and resolution thereof, and provide all relevant
information relating to such complaints and concerns to the Nominating and Governance Committee;
|
|
|
(g)
|
review and monitor the Company’s compliance with applicable legal and regulatory requirements related
to financial reporting and disclosure;
|
|
|
(h)
|
review all “related party transactions” (as such term is defined under applicable securities
laws and stock exchange rules) for any potential conflicts of interest; and
|
|
|
(i)
|
carry the responsibility for reviewing reports from management, external auditors with respect to the
Company’s compliance with the laws and regulations having a material impact on financial reporting and disclosure, including: tax
and financial reporting laws and regulations; legal withholding requirements; environmental; and any other laws and regulations which
expose directors to liability.
|
AUTHORITY
|
|
1.
|
The Committee shall have the authority to:
|
|
|
(a)
|
engage independent counsel and other advisors as it determines necessary to carry out its duties;
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(b)
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set and pay the compensation for the external auditor engaged for the purpose of preparing or issuing
an audit report or performing other audit, review or attest services for the Company;
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(c)
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set and pay the compensation for any independent counsel and other advisors employed by the Committee;
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(d)
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incur ordinary administrative expenses that are necessary or appropriate in carrying out its duties; and
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(e)
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communicate directly with the external auditors.
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2.
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The Committee shall have the power, authority and discretion delegated to it by the Board which shall
not include the power to change the membership of or fill vacancies in the Committee.
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3.
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A resolution approved in writing by the members of the Committee shall be valid and effective as if it
had been passed at a duly called meeting. Such resolution shall be filed with the minutes of the proceedings of the Committee and shall
be effective on the date stated thereon or on the latest date stated in any counterpart.
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4.
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The Board shall have the power at any time to revoke or override the authority given to or acts done by
the Committee except as to acts done before such revocation or act of overriding and to terminate the appointment or change the membership
of the Committee or fill vacancies in it as it shall see fit.
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5.
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The Committee shall have unrestricted and unfettered access to all Company personnel and documents and
shall be provided with the resources necessary to carry out its responsibilities.
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6.
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At the invitation of the Chair, one or more officers or employees of the Company may, and if required
by the Committee, shall attend a meeting of the Committee.
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7.
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The Committee shall have the authority to obtain advice and assistance from outside legal, accounting
or financials advisors in its sole discretion.
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DEFINITIONS
Capitalized terms used in this Charter and not
otherwise defined have the meaning attributed to them below:
“Affiliated Person” means an
“affiliate” of, or a person “affiliated” with, a specified person, which is a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.
“Committee Financial Expert”
means a person who has the following attributes:
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(a)
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past employment experience in finance or accounting;
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(b)
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requisite professional certification in accounting; or
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(c)
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or any other comparable experience or background which results in the individual's financial sophistication,
including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.
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“Executive Officer” means the
Company’s president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the
controller), any vice-president of the Company in charge of a principal business unit, division or function (such as sales, administration
or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions
for the Company.
“Family Member” means a person's
spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other
than domestic employees) who shares such person's home.
“Financially Literate” means
the ability to read and understand a set of fundamental financial statements, including the Company’s balance sheet, income statement,
and cash flow statement, that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth
and complexity of the issues that can reasonably be expected to be raised in the Company’s financial statements.
“Independent Director” means
a director that is “independent” as the term is defined in both National Instrument 52-110 - Audit Committees (“NI
52-110”) and Nasdaq Rule 5605(a)(2), as each may be amended from time to time, and being a person other than an Executive Officer
or employee of the Company or any other individual having a relationship which, in the opinion of the Company's board of directors, would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not
be considered independent:
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(a)
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a director who is, or at any time during the past three years was, employed by the Company;
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(b)
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a director who accepted or who has a Family Member who accepted any compensation from the Company in excess
of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than
the following:
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(i)
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compensation for board or board committee service;
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(ii)
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compensation paid to a Family Member who is an employee (other than an Executive Officer) of the Company;
or
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(iii)
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benefits under a tax-qualified retirement plan, or non-discretionary compensation
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Provided, however, that in addition to
the requirements contained in this paragraph (B), audit committee members are also subject to additional, more stringent requirements
under Rule 5605(c)(2).
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(c)
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a director who is a Family Member of an individual who is, or at any time during the past three years
was, employed by the Company as an Executive Officer;
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(d)
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a director who is, or has a Family Member who is, a partner in, or a controlling Shareholder or an Executive
Officer of, any organization to which the Company made, or from which the Company received, payments for property or services in the current
or any of the past three fiscal years that exceed 5% of the recipient's consolidated gross revenues for that year, or $200,000, whichever
is more, other than the following:
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(i)
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payments arising solely from investments in the Company's securities; or
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(ii)
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payments under non-discretionary charitable contribution matching programs.
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(e)
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a director of the Company who is, or has a Family Member who is, employed as an Executive Officer of another
entity where at any time during the past three years any of the Executive Officers of the Company serve on the compensation committee
of such other entity; or
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(f)
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a director who is, or has a Family Member who is, a current partner of the Company's outside auditor,
or was a partner or employee of the Company's outside auditor who worked on the Company's audit at any time during any of the past three
years.
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Adopted by the Board on August 19, 2019, and amended Updated and Approved,
2021.
Exhibit 5.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We consent to the use in this Registration Statement on Form F-10 (the
“Registration Statement”) of our report dated April 16, 2021 relating to the financial statements of Draganfly Inc. incorporated
by reference into the Prospectus, which is a part of this Registration Statement, and to the references to us under the heading “Experts”
in such Prospectus.
/s/ DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Vancouver, BC
July 21, 2021