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.


 






    2


     


    




	 



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.


 






    3


     


    




	 



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.


 






    4


     


    




	 



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.


 






    5


     


    




	 



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.


 






    6


     


    




	 



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.


 






    7


     


    




	 



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.


 






    8


     


    




	 



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.



 






    9


     


    




	 



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.


 






    10


     


    




	 



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.


              






    11


     


    




	 



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	 



                    






    12


     


    





	 



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.


            






    13


     


    




	 



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.


 






    14


     


    




	 



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.



 






    15


     


    




	 



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.


        






    16


     


    




	 



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).


 






    17


     


    




	 



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	 



           






    18


     


    




	 



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	 



 






    19


     


    

 


	 



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	 



     






    20


     


    




	 



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.


 






    21


     


    

 


	 



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:


 


		a.	SR&ED tax credits



 


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.


 






    22


     


    

 



 


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.


 






    23


     


    

 


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.


 






    24


     


    

 


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.


 


		a)	Financial assets



 


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.


 






    25


     


    

 


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.


 


		b)	Financial liabilities



 


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.


 






    26


     


    

 


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.


 






    27


     


    

 


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.


 






    28


     


    

 


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.


 






    29


     


    

 


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.


 






    30


     


    

 


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.


 






    31


     


    

 


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.


 






    32


     


    

 


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.


 






    33


     


    

 


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).


 






    34


     


    

 


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.




 






    35