Exhibit 4.2


 


 


 


 


Draganfly Inc. (formerly Drone Acquisition Corp.)


 


Consolidated Financial Statements


 


Years Ended December 31, 2020 and 2019


 


(Expressed in Canadian Dollars)


 






     


     


    

 


 


 


INDEPENDENT AUDITOR’S REPORT


 


To the Shareholders of Draganfly Inc. (formerly
Drone Acquisition Corp.)


 


Opinion


 


We have audited the consolidated financial statements
of Draganfly Inc. (formerly Drone Acquisition Corp.) (the “Company”), which comprise the consolidated statements of financial
position as at December 31, 2020 and 2019, and the consolidated statements of comprehensive loss, changes in shareholders’ equity
and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting
policies (collectively referred to as the “financial statements”).


 


In our opinion, the accompanying financial statements
present fairly, in all material respects, the financial position of the Company as at December 31, 2020 and 2019, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards.


 


Basis for Opinion


 


We conducted our audit in accordance with Canadian
generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.


 


Other Information


 


Management is responsible for the other information.
The other information comprises the information included in Management’s Discussion and Analysis.


 


Our opinion on the financial statements does not
cover the other information and we do not express any form of assurance conclusion thereon.


 


In connection with our audit of the financial
statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information
is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.


 


Responsibilities of Management and Those
Charged with Governance for the Financial Statements


 


Management is responsible for the preparation
and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.


 


In preparing the financial statements, management
is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations,
or has no realistic alternative but to do so.


 


Those charged with governance are responsible
for overseeing the Company's financial reporting process.


 






    2


     


    

 


Auditor's Responsibilities for the Audit
of the Financial Statements


 


Our objectives are to obtain reasonable assurance
about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted
in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally
accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:


 


		·	Identify and assess the risks of material misstatement of the financial statements, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate
to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.



 


		·	Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control.



 


		·	Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.



 


		·	Conclude on the appropriateness of management’s use of the going concern basis of accounting and
based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant
doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Company to cease to continue as a going concern.



 


		·	Evaluate the overall presentation, structure and content of the financial statements, including the disclosures,
and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.



 


We communicate with those charged with governance
regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.


 


We also provide those charged with governance
with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships
and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.


 


The engagement partner on the audit resulting
in this independent auditor's report is David J. Goertz.


 


 


 


DALE MATHESON CARR-HILTON LABONTE LLP

CHARTERED PROFESSIONAL ACCOUNTANTS

Vancouver, BC


 


April 16, 2021


 


 


 






    3


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Consolidated Statements of Financial Position


Expressed in Canadian Dollars


	 	 	 	 	 	 	 	 	 
	 	 	 	 	December 31,	 	 	December 31,	 
	As at	 	Notes	 	2020	 	 	2019	 
	ASSETS	 	 	 	 	 	 	 	 	 	 
	Current Assets	 	 	 	 	 	 	 	 	 	 
	  Cash	 	5	 	$	1,982,416	 	 	$	2,429,375	 
	  Accounts receivable	 	6	 	 	810,791	 	 	 	224,695	 
	  Inventory	 	7	 	 	1,233,619	 	 	 	48,563	 
	  Prepaid expenses and deposits	 	8	 	 	335,022	 	 	 	272,630	 
	 	 	 	 	 	4,361,848	 	 	 	2,975,263	 
	 	 	 	 	 	 	 	 	 	 	 
	Non-current Assets	 	 	 	 	 	 	 	 	 	 
	  Goodwill	 	4,10	 	 	2,166,563	 	 	 	-	 
	  Equipment	 	9	 	 	153,870	 	 	 	115,141	 
	  Intangible assets	 	10	 	 	273,867	 	 	 	1,385	 
	  Right of use asset	 	11	 	 	144,419	 	 	 	129,994	 
	TOTAL ASSETS	 	 	 	$	7,100,567	 	 	$	3,221,783	 
	 	 	 	 	 	 	 	 	 	 	 
	LIABILITIES AND SHAREHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	 	 
	Current Liabilities	 	 	 	 	 	 	 	 	 	 
	  Trade payables and accrued liabilities	 	13,22	 	$	1,857,177	 	 	$	894,357	 
	  Customer deposits	 	14	 	 	385,449	 	 	 	-	 
	  Loans	 	16	 	 	62,978	 	 	 	-	 
	  Liability for outstanding USD warrants	 	17	 	 	748,634	 	 	 	-	 
	  Lease liability	 	12	 	 	93,239	 	 	 	43,000	 
	 	 	 	 	 	3,147,477	 	 	 	937,357	 
	 	 	 	 	 	 	 	 	 	 	 
	Non-current Liabilities	 	 	 	 	 	 	 	 	 	 
	  Deferred income	 	16	 	 	5,062	 	 	 	-	 
	  Lease liability	 	12	 	 	64,885	 	 	 	93,073	 
	  Loans	 	16	 	 	34,938	 	 	 	-	 
	TOTAL LIABILITIES	 	 	 	 	3,252,362	 	 	 	1,030,430	 
	 	 	 	 	 	 	 	 	 	 	 
	SHAREHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	 	 
	  Share capital	 	17	 	 	36,943,304	 	 	 	27,786,517	 
	  Equity reserve	 	17	 	 	3,024,007	 	 	 	2,508,233	 
	  Accumulated deficit	 	 	 	 	(36,119,210	)	 	 	(28,103,397	)
	  Accumulated other comprehensive loss	 	 	 	 	104	 	 	 	-	 
	TOTAL SHAREHOLDERS’ EQUITY	 	 	 	 	3,848,205	 	 	 	2,191,353	 
	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	 	 	 	$	7,100,567	 	 	$	3,221,783	 




 


Nature of continuance and operations (Note 1)


Subsequent events (Note 28)


 


Approved and authorized for issuance by the Board
of Directors on April 16, 2021.


 


	“Scott Larson”	 	“Cameron Chell”
	Director	 	Director


 


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


 






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Draganfly Inc. (formerly Drone Acquisition Corp.)


Consolidated Statements of Comprehensive Loss


Expressed in Canadian Dollars


	 	 	 	 	 	 
	 	 	 	 	For the years ended December 31,	 
	 	 	Note	 	2020	 	 	2019	 
	Revenue from sales of goods	 	18	 	$	3,087,223	 	 	$	248,939	 
	Revenue from services	 	18	 	 	1,276,288	 	 	 	1,131,488	 
	TOTAL REVENUE	 	 	 	 	4,363,511	 	 	 	1,380,427	 
	 	 	 	 	 	 	 	 	 	 	 
	Cost of sales from sales of goods	 	7	 	 	(2,460,891	)	 	 	(206,783	)
	Cost of sales from services	 	 	 	 	(143,020	)	 	 	(12,017	)
	COST OF SALES	 	 	 	 	(2,603,911	)	 	 	(218,800	)
	 	 	 	 	 	 	 	 	 	 	 
	GROSS PROFIT	 	 	 	 	1,759,600	 	 	 	1,161,627	 
	 	 	 	 	 	 	 	 	 	 	 
	OPERATING EXPENSES	 	 	 	 	 	 	 	 	 	 
	  Amortization	 	10	 	$	43,518	 	 	$	8,386	 
	  Depreciation	 	9,11	 	 	109,108	 	 	 	41,250	 
	  Office and miscellaneous	 	19	 	 	3,427,853	 	 	 	2,127,632	 
	  Professional fees	 	 	 	 	1,762,594	 	 	 	524,101	 
	  Research and development	 	 	 	 	567,999	 	 	 	16,883	 
	  Share-based compensation	 	17	 	 	2,668,464	 	 	 	761,559	 
	  Travel	 	 	 	 	25,617	 	 	 	30,896	 
	  Wages and salaries	 	 	 	 	1,649,329	 	 	 	989,083	 
	 	 	 	 	 	(10,254,482	)	 	 	(4,499,790	)
	OTHER INCOME (EXPENSE)	 	 	 	 	 	 	 	 	 	 
	  Change in fair value of derivative liability	 	17	 	 	(748,634	)	 	 	-	 
	  Finance and other costs	 	24	 	 	(23,117	)	 	 	(171,905	)
	  Foreign exchange gain (loss)	 	 	 	 	(87,104	)	 	 	5,803	 
	  Gain on disposal of assets	 	9	 	 	-	 	 	 	28,651	 
	  Net gains and losses on settlement of debt	 	13,17	 	 	(38,879	)	 	 	198,976	 
	  Gain on forgiveness of trades payable	 	13	 	 	127,711	 	 	 	-	 
	  Listing expense	 	3	 	 	-	 	 	 	(7,804,859	)
	  Loss on write-off loan receivable	 	 	 	 	-	 	 	 	(13,560	)
	  Income from government assistance	 	16	 	 	21,090	 	 	 	-	 
	  Other income	 	25	 	 	1,197,465	 	 	 	-	 
	  Scientific research and development credit	 	 	 	 	30,537	 	 	 	-	 
	NET LOSS	 	 	 	 	(8,015,813	)	 	 	(11,095,057	)
	 	 	 	 	 	 	 	 	 	 	 
	OTHER COMPREHENSIVE LOSS	 	 	 	 	 	 	 	 	 	 
	  Foreign exchange translation	 	 	 	 	104	 	 	 	-	 
	COMPREHENSIVE LOSS	 	 	 	$	(8,015,709	)	 	$	(11,095,057	)
	 	 	 	 	 	 	 	 	 	 	 
	Loss per share	 	 	 	 	 	 	 	 	 	 
	  Basic	 	 	 	$	(0.10	)	 	$	(0.23	)
	  Diluted	 	 	 	$	(0.10	)	 	$	(0.23	)
	Weighted average number of common shares outstanding – Basic	 	 	 	 	77,092,696	 	 	 	47,647,977	 
	Weighted average number of common shares outstanding – Diluted	 	 	 	 	77,092,696	 	 	 	47,647,977	 



 


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


 






    5


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Consolidated Statements of Changes in Shareholders’ Equity


Expressed in Canadian Dollars


	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Number of

 Shares	 	 	Share Capital	 	 	Equity

 Reserve	 	 	Deficit	 	 	Accumulated

 Other

 Comprehensive

 Income	 	 	Total 

Shareholders’

 Equity	 
	Balance at December 31, 2018	 	 	39,346,807	 	 	$	12,561,342	 	 	$	882,180	 	 	$	(17,576,131	)	 	$	-	 	 	$	(4,132,609	)
	Shares issued for settlement of notes payable	 	 	1,291,549	 	 	 	645,775	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	645,775	 
	Shares issued as transactions fees	 	 	2,000,000	 	 	 	1,000,000	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,000,000	 
	Recapitalization of Draganfly Inc.	 	 	10,500,001	 	 	 	5,250,001	 	 	 	1,645,193	 	 	 	-	 	 	 	-	 	 	 	6,895,194	 
	Shares issued of settlement of trades payable	 	 	45,325	 	 	 	22,662	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	22,662	 
	Shares issued for settlement of convertible       debentures and accrued interest	 	 	2,118,492	 	 	 	1,059,246	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,059,246	 
	Shares issued for exercise of warrants	 	 	316,940	 	 	 	221,741	 	 	 	(212,908	)	 	 	-	 	 	 	-	 	 	 	8,833	 
	Reclassification of unexercised conversion feature	 	 	-	 	 	 	-	 	 	 	(567,791	)	 	 	567,791	 	 	 	-	 	 	 	-	 
	Shares and warrants issued on private placement	 	 	14,051,499	 	 	 	7,025,750	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	7,025,750	 
	Stock-based compensation	 	 	-	 	 	 	-	 	 	 	761,559	 	 	 	-	 	 	 	-	 	 	 	761,559	 
	Net loss	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(11,095,057	)	 	 	-	 	 	 	(11,095,057	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2019	 	 	69,670,613	 	 	 	27,786,517	 	 	 	2,508,233	 	 	 	(28,103,397	)	 	 	-	 	 	 	2,191,353	 
	Shares issued for exercise of warrants	 	 	7,923,875	 	 	 	4,007,130	 	 	 	(1,645,193	)	 	 	-	 	 	 	-	 	 	 	2,361,937	 
	Shares issued for acquisition	 	 	3,225,438	 	 	 	2,178,961	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	2,178,961	 
	Shares issued as finder’s fees	 	 	200,000	 	 	 	100,000	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	100,000	 
	Shares issued for debt settlement	 	 	555,409	 	 	 	344,354	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	344,354	 
	Shares issued for financing	 	 	3,518,034	 	 	 	2,018,845	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	2,018,845	 
	Shares issued for exercise of RSUs	 	 	999,992	 	 	 	507,497	 	 	 	(507,497	)	 	 	-	 	 	 	-	 	 	 	-	 
	Share-based payments	 	 	-	 	 	 	-	 	 	 	2,668,464	 	 	 	-	 	 	 	-	 	 	 	2,668,464	 
	Net loss	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(8,015,813	)	 	 	-	 	 	 	(8,015,813	)
	Translation of foreign operations	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	104	 	 	 	104	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2020	 	 	86,093,361	 	 	 	36,943,304	 	 	 	3,024,007	 	 	 	(36,119,210	)	 	 	104	 	 	 	3,848,205	 



 


The purpose of the Equity Reserve is to record the fair values of equity-based
financial instruments until exercised, cancelled, or forfeited.


 


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


 






    6


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Consolidated Statements of Cash Flows


Expressed in Canadian Dollars


	 	 	 	 
	 	 	For the years ended December 31,	 
	 	 	2020	 	 	2019	 
	OPERATING ACTIVITIES	 	 	 	 	 	 	 	 
	  Net loss	 	$	(8,015,813	)	 	$	(11,095,057	)
	    Adjustments for:	 	 	 	 	 	 	 	 
	      Amortization	 	 	43,518	 	 	 	8,386	 
	      Depreciation	 	 	109,108	 	 	 	41,250	 
	      Change in fair value of derivative liability	 	 	748,634	 	 	 	-	 
	      Finance and other costs	 	 	23,117	 	 	 	171,905	 
	      Net gains and losses on settlement of debt	 	 	38,879	 	 	 	(198,976	)
	      Gain on forgiveness of trades payable	 	 	(127,711	)	 	 	-	 
	      Gain on disposal of assets	 	 	-	 	 	 	(28,651	)
	      Income from government assistance	 	 	(21,090	)	 	 	-	 
	      Expense of non-financial asset	 	 	-	 	 	 	15,389	 
	      Listing expense	 	 	-	 	 	 	7,804,859	 
	      Share-based compensation	 	 	2,668,464	 	 	 	761,559	 
	 	 	 	(4,532,894	)	 	 	(2,519,336	)
	Net changes in non-cash working capital items:	 	 	 	 	 	 	 	 
	      Accounts receivable	 	 	(1,481,944	)	 	 	(126,799	)
	      Inventory	 	 	(555,371	)	 	 	12,622	 
	      Prepaid expenses	 	 	31,605	 	 	 	(249,325	)
	      Trade payables and accrued liabilities	 	 	1,261,066	 	 	 	(1,005,121	)
	      Customer deposits	 	 	139,490	 	 	 	-	 
	      Loans	 	 	(5,062	)	 	 	-	 
	      Deferred income	 	 	5,062	 	 	 	-	 
	Funds used in operations activities	 	 	(5,138,048	)	 	 	(3,887,959	)
	 	 	 	 	 	 	 	 	 
	INVESTING ACTIVITIES	 	 	 	 	 	 	 	 
	      Cash paid for acquisition, net of cash received	 	 	(457,407	)	 	 	28,538	 
	      Purchase of equipment	 	 	(23,888	)	 	 	(87,785	)
	      Disposal of equipment	 	 	-	 	 	 	31,500	 
	      Proceeds received from sale of investment	 	 	997,714	 	 	 	-	 
	Funds provided by (used in) investing activities	 	 	516,419	 	 	 	(27,747	)
	 	 	 	 	 	 	 	 	 
	FINANCING ACTIVITIES	 	 	 	 	 	 	 	 
	      Proceeds from issuance of common shares for financing	 	 	2,018,845	 	 	 	6,534,583	 
	      Proceeds from issuance of common shares for warrants exercised	 	 	2,361,937	 	 	 	-	 
	      Repayment of convertible debentures	 	 	-	 	 	 	(486,131	)
	      Proceeds from issuance of notes payable	 	 	-	 	 	 	1,137,978	 
	      Repayment of notes payable	 	 	(60,000	)	 	 	(882,770	)
	      Proceeds from issuance of loans	 	 	129,310	 	 	 	-	 
	      Repayment of loans	 	 	(192,084	)	 	 	-	 
	      Repayment of lease liability	 	 	(83,442	)	 	 	(38,000	)
	Funds provided by financing activities	 	 	4,597,830	 	 	 	6,265,660	 
	 	 	 	 	 	 	 	 	 
	Effects of exchange rate changes on cash	 	 	104	 	 	 	(22,366	)
	Change in cash	 	 	(447,063	)	 	 	2,349,954	 
	Cash, beginning	 	 	2,429,375	 	 	 	101,787	 
	Cash, ending	 	$	1,982,416	 	 	$	2,429,375	 



 


Supplemental
cash flow disclosure (Note 26)


 


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


 






    7


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars


 


1.                  
NATURE AND CONTINUANCE OF OPERATIONS


 


Draganfly Inc. (formerly Drone Acquisition
Corp.) (the “Company”) was incorporated by articles of incorporation dated June 1, 2018 under the Business Corporations Act
(British Columbia). The Company’s shares began trading on the Canadian Securities Exchange (the “CSE”) under the symbol
 “DFLY”.


 


The Company’s head office is
located at 2108 St. George Avenue, Saskatoon, SK, S7M 0K7 and its registered office is located at 2800 – 666 Burrard Street, Vancouver,
BC, V6C 2Z7.


 


On August 15, 2019, the Company and
1187607 B.C. Ltd. (“Merger Co.”), a wholly-owned subsidiary of the Company, completed a Business Combination Agreement (the
 “BCA”) with Draganfly Innovations Inc. (“Draganfly Innovations”) (the “Amalgamation”). Under the Amalgamation,
shareholders of Draganfly Innovations received 1.794 fully paid and non-assessable common shares in the authorized share structure of
the Company for each Draganfly Innovations share. Consequently, the Company owns 100% of Draganfly Innovations and the Draganfly Innovations
shareholders became shareholders of the Company. Draganfly is an operational business of developing and manufacturing multi-rotor helicopters,
industrial aerial video systems and civilian small unmanned aerial systems or vehicles. Pursuant to the Amalgamation the Company changed
its name to “Draganfly Inc.”.


 


The recent outbreak of the coronavirus, also known
as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus
continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. These measures,
which include the implementation of travel bans, self-imposed quarantine periods, and social distancing, have caused material disruption
to business globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments
and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.


 


There are significant uncertainties with respect
to future developments and impact to the Company related to the COVID-19 pandemic, including the duration, severity, and scope of the
outbreak and the measures taken by governments and businesses to contain the pandemic. While the impact of COVID-19 is expected to be
temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations cannot be reasonably estimated
at this time. At the date of these financial statements, the outbreak and the related mitigation measures have had the following impacts
on the Company’s operations, among others: temporary closure of business locations, supply chain issues, and decrease in sales.
The extent to which these events may impact the Company’s business activities will depend on future developments, such ass the ultimate
geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions
taken in Canada and other countries to contain and treat the disease. With COVID-19 being an ongoing issue, the Company has prepared its
employees at its Saskatchewan and British Columbia facilities to be ‎able to work from home. The Company also applied to the various
federal government relief ‎initiatives. Although the Company’s major custom engineering customer temporarily closed that part
of its business, the Company believes it will start up again. Further, the Company has entered into a distribution agreement to be the
 ‎exclusive provider of one of their products which has helped offset custom engineering work from that customer. Aside from the
acquisition of Dronelogics and being opportunistic ‎on other partnerships or acquisitions, the Company expanded its products/services
offered to include ‎health/telehealth applications relating to COVID-19, as a way to deal with the impacts of COVID-19. However,
these ongoing events are highly uncertain and as such, the Company cannot determine the ultimate financial impacts at this time. Any deterioration
in the current situation could have an adverse impact on our business, results of operations, financial position, and cash flows in 2021.


 






    8


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars


 



2.                  
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION


 


Statement of Compliance


 


These consolidated financial statements
have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”) and interpretations issued by the International Reporting Interpretation Committee (“IFRIC”).
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies
have been consistently applied to all years presented, unless otherwise stated.


 


These consolidated financial statements
were authorized for issue by the Board of Directors on April 16, 2021.


 


Basis of preparation


 


The consolidated financial statements
of the Company have been prepared on a historical cost basis, modified where applicable. In addition, the consolidated financial statements
have been prepared using the accrual basis of accounting except for cash flow information.


 


Certain comparative figures have been
reclassified to conform to the current year’s presentation.


 


Basis of consolidation


 


Each subsidiary is fully consolidated from the
date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control
ceases.


 


The consolidated financial statements include
the accounts and results of operations of the Company and its wholly owned subsidiaries listed in the following table:


 


	Name of Subsidiary	Place of Incorporation	Ownership Interest
	Draganfly Innovations Inc.	Canada	100%
	Draganfly Innovations USA, Inc.	US	100%
	Dronelogics Systems Inc.	Canada	100%


 


All intercompany balances and transactions were
eliminated on consolidation.


 


Significant estimates and assumptions


 


The preparation of financial statements
in accordance with IFRS requires the Company to use judgment in applying its accounting policies and make estimates and assumptions about
reported amounts at the date of the consolidated financial statements and in the future. The Company’s management reviews these
estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events
that are believed to be reasonable under the circumstances. Revisions to estimates are adjusted for prospectively in the period in which
the estimates are revised.


 






    9


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars


 



2.                  
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)


 


Share-based payments


 


The cost of share-based payment transactions
with directors, officers and employees are measured by reference to the fair value of the equity instruments. Estimating fair value for
share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions
of the grant. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model
including the expected life, volatility, risk-free interest rate, expected forfeiture rate and dividend yield of the stock option.


 


Income taxes


 


Provisions for income taxes are made
using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews
the adequacy of these income tax provisions at the end of each reporting period. However, it is possible that at some future date an additional
liability could result from audits by tax authorities. Where the final outcome of these tax-related matters is different from the amounts
that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. Deferred
tax assets are recognized when it is determined that the company is likely to recognize their recovery from the generation of taxable
income.


 


Inventory


 


Inventory is valued at the lower of
cost and net realizable value. Net realizable value is determined with reference to the estimated selling price. The Company estimates
selling price based upon assumptions about future demand and current and anticipated retail market conditions.


 


Contingencies


 


The assessment of contingencies involves
the exercise of significant judgment and estimates of the outcome of future events. In assessing loss contingencies related to legal proceedings
that are pending against the Company and that may result in regulatory or government actions that may negatively impact the Company’s
business or operations, the Company and its legal counsel evaluate the perceived merits of the legal proceeding or unasserted claim or
action as well as the perceived merits of the nature and amount of relief sought or expected to be sought, when determining the amount,
if any, to recognize as a contingent liability or when assessing the impact on the carrying value of the Company’s assets. Contingent
assets are not recognized in the consolidated financial statements.


 


Useful lives of equipment and intangible
assets


 


Estimates of the useful lives of equipment
and intangible assets are based on the period over which the assets are expected to be available for use. The estimated useful lives are
reviewed annually and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial
obsolescence, and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of the relevant
assets may be based on internal technical evaluation and experience with similar assets. It is possible, however, that future results
of operations could be materially affected by changes in the estimates brought about by changes in the factors mentioned above. The amounts
and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated
useful lives of the equipment would increase the recorded expenses and decrease the non-current assets.


 






    10


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars


 



2.                  
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)


 


Business combinations


 


The definition of whether a set of
assets acquired and liabilities assumed constitute a business may require the company to make certain judgements taking into account all
facts and circumstances. A business is presumed to be an integrated set of activities and assets capable of being conducted and managed
for the purpose of providing a return in the form of dividends, lower costs, or economic benefits.


 


Business combination versus asset
acquisition


 


The Company considered the applicability
of IFRS 3 – Business Combinations (“IFRS 3”) with respect to the Acquisition (Note 4). IFRS 3 defines a business as
having a system where inputs enter a process to produce outputs. The Company has determined that the acquisition of Dronelogics Systems
Inc. is a business combination and, accordingly, accounted for as such.


 


Other significant judgments


 


The preparation of consolidated financial
statements in accordance with IFRS requires the Company to make judgments, apart from those involving estimates, in applying accounting
policies. The most significant judgments in applying the Company’s consolidated financial statements include:


 


		−	The assessment of the Company’s ability to continue as
a going concern and whether there are events or conditions that may give rise to significant uncertainty;



		−	the classification of financial instruments;



		−	the assessment of revenue recognition using the five-step approach under IFRS 15
and the collectability of amounts receivable;



		−	the determination of whether a set of assets acquired and liabilities assumed constitute
a business; and



		−	the determination of the functional currency of the company.



 


Foreign currency translation


 


The Corporation’s functional
currency is the Canadian dollar and transactions in foreign currencies are translated into Canadian dollars at rates of exchange at the
time of such transactions. Monetary assets and liabilities are translated at reporting period rate of exchange. Non-monetary assets and
liabilities are translated at historical exchange rates. Revenue and expenses denominated in a foreign currency are translated at the
monthly average exchange rate. Gains and losses resulting from the translation adjustments are included in income.


 


The functional currencies for the parent
company and each subsidiary are as follows:


 


	Draganfly Inc.	Canadian Dollar
	Draganfly Innovations Inc.	Canadian Dollar
	Draganfly Innovations USA, Inc.	U.S. Dollar
	Dronelogics Systems Inc.	Canadian Dollar




 


Financial statements of subsidiaries
for which the functional currency is not the Canadian dollar are translated into Canadian dollars as follows: all asset and liability
accounts are translated at the year-end exchange rate and all earnings and expense accounts and cash flow statement items are translated
at average exchange rates for the year. The resulting translation gains and losses are recorded as exchange differences on translating
foreign operations in accumulated other comprehensive income (“AOCI”).


 






    11


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars


 



2.                   SIGNIFICANT ACCOUNTING POLICIES
AND BASIS OF PREPARATION (CONT’D)


 


Transactions and balances:


 


Foreign currency transactions are translated
into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated
at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date
of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined.


 


Exchange differences arising on the
translation of monetary items or on settlement of monetary items are recognized in the statement of comprehensive loss in the period in
which they arise, except where deferred in equity as a qualifying cash flow or net investment hedge.


 


Exchange differences arising on the
translation of non-monetary items are recognized in other comprehensive income to the extent that gains and losses arising on those non-monetary
items are also recognized in other comprehensive income. Where the non-monetary gain or loss is recognized in profit or loss, the exchange
component is also recognized in profit or loss.


 


Share-based payments


 


The Company operates a stock option
plan. Share-based payments to employees are measured at the fair value of the instruments issued and amortized over the vesting periods.
Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments
issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods
or services are received. The corresponding amount is recorded to the option reserve. The fair value of options is determined using a
Black–Scholes Option Pricing Model. The number of shares and options expected to vest is reviewed and adjusted at the end of each
reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based
on the number of equity instruments that eventually vest. Amounts recorded for forfeited or expired unexercised options are transferred
to deficit in the year of forfeiture or expiry. Amounts recorded for forfeited unvested options are reversed in the period the forfeiture
occurs.


 


Share-based payment expense relating
to cash-settled awards, including restricted share units is accrued over the vesting period of the units based on the quoted market value
of Company’s common shares. As these awards will be settled in cash, the expense and liability are adjusted each reporting period
for changes in the underlying share price.


 


Restricted Share Units


 


The restricted share units (“RSUs”)
entitle employees, directors, or officers to cash payments payable upon vesting based on vesting terms determined by the Company’s
Board of Directors at the time of the grant. As the RSUs are redeemed and common shares are issued, the amount previously recognized in
reserves is recorded as an increase in share capital.


 






    12


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars


 



2.                   SIGNIFICANT
ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)


 


Loss per share


 


Basic loss per share is calculated
by dividing the loss attributable to common shareholders by the weighted average number of common shares outstanding in the period. For
all periods presented, the loss attributable to common shareholders equals the reported loss attributable to owners of the Company. Diluted
loss per share is calculated by the treasury stock method. Under the treasury stock method, the weighted average number of common shares
outstanding for the calculation of diluted loss per share assumes that the proceeds to be received on the exercise of dilutive share options
and warrants are used to repurchase common shares at the average market price during the period.


 


		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.


 






    13


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars


 



2.                  
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)


 


Impairment of financial assets at amortized
cost


The Company recognizes a loss allowance for expected
credit losses on financial assets that are measured at amortized cost. At each reporting date, the loss allowance for the financial asset
is measured at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly
since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the
loss allowance is measured for the financial asset at an amount equal to twelve month expected credit losses. For trade receivables the
Company applies the simplified approach to providing for expected credit losses, which allows the use of a lifetime expected loss provision.


 


Impairment losses on financial assets carried
at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be objectively related to
an event occurring after the impairment was recognized.


 


Derecognition of financial assets


Financial assets are derecognized when they mature
or are sold, and substantially all the risks and rewards of ownership have been transferred. Gains and losses on derecognition of financial
assets classified as FVTPL or amortized cost are recognized in the income statement. Gains or losses on financial assets classified as
FVTOCI remain within accumulated other comprehensive income.


 


		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. Trade payables, customer deposits and loans are included
in this category. The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire.


 


Derecognition of financial liabilities


Financial liabilities are derecognized when its
contractual obligations are discharged, cancelled, or expire. The Company also derecognizes a financial liability when the terms of the
liability are modified such that the terms and/or cash flows of the modified instrument are substantially different, in which case a new
financial liability based on the modified terms is recognized at fair value. Gains and losses on derecognition are generally recognized
in profit or loss.


 






    14


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars


 



2.                  
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)


 


Impairment of non-financial assets


 


The carrying amounts of the Company’s
non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If indicators exist,
then the asset’s recoverable amount is estimated. The recoverable amounts of the following types of intangible assets are measured
annually, whether or not there is any indication that it may be impaired:


 


		•	an intangible asset with an indefinite useful life;



		•	an intangible asset not yet available for use; and



		•	goodwill recognized in a business combination.



 


The recoverable amount of an asset
or cash-generating unit (“CGU”) is the greater of its value in use and its fair value less costs to sell. In assessing value
in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest identifiable group of assets that generates cash inflows from continuing
use that are largely independent of the cash inflows of other assets or groups of assets.


 


If there is an indication that a corporate
asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.


 


An impairment loss is recognized if
the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in the statement
of comprehensive loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill
allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.


 


In respect of assets other than goodwill
and intangible assets that have indefinite useful lives, impairment losses recognized in prior periods are assessed at each reporting
date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed in a subsequent period when there
has been an increase in the recoverable amount of a previously impaired asset or CGU. An impairment loss is reversed only to the extent
that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization,
if no impairment loss had been recognized.


 


Income taxes


 


Current income tax:


Current income tax assets and liabilities
for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and
tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the countries where
the Company operates and generates taxable income.


 






    15


     


    

 



 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars







 



 


2.               SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)


 


Current income tax relating to items
recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or
loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations
are subject to interpretation and establishes provisions where appropriate.


 


Deferred income tax:


Deferred income tax is recognized,
using the asset and liability method, on temporary differences at the reporting date arising between the tax bases of assets and li abilities
and their carrying amounts for financial reporting. The carrying amount of deferred income tax assets is reviewed at the end of each reporting
period and recognized only to the extent that it is probable that sufficient taxable profit will be available to allow all or part of
the deferred income tax asset to be utilized. Deferred income tax assets and liabilities are measured at the tax rates that are expected
to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted
or substantively enacted by the end of the reporting period. Deferred income tax assets and deferred income tax liabilities are offset,
if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes
relate to the same taxable entity and the same taxation authority.


 


Inventory


 


Inventory consists of raw materials
for manufacturing of multi-rotor helicopters, industrial areal video systems, civilian small unmanned aerial systems or vehicles, and
wireless video systems. Inventory is initially valued at cost and subsequently at the lower of cost and net realizable value. Net realizable
value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated
costs necessary to make the sale. Cost is determined using the weighted average cost basis. The Company reviews inventory for obsolete
and slow-moving goods and any such inventory is written-down to net realizable value.


 


Revenue recognition


 


Revenue comprises the fair value of
consideration received or receivable for the sale of goods and consulting services in the ordinary course of the Company’s business.
Revenue is shown net of return allowances and discounts.


 


Sales of goods


The Company manufactures and sells
a range of multi-rotor helicopters, industrial aerial video systems, and civilian small unmanned aerial systems or vehicles. Sales are
recognized at a point-in-time when control of the products has transferred, being when the products are delivered to the customer and
there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery occurs when the products
have been shipped to the specific location or picked up by the customer, the risks of obsolescence and loss have been transferred to the
customer.


 


Revenue from these sales is recognized
based on the price specified in the contract, net of the estimated discounts and returns. Accumulated experience is used to estimate and
provide for the discounts and returns, using the expected value method, and revenue is only recognized to the extent that it is highly
probable that a significant reversal will not occur. To date, returns have not been significant. No element of financing is deemed present
as the sales are made with a credit term of 30 days, which is consistent with market practice.


 


Some contracts include multiple deliverables,
such as the manufacturing of hardware and support. Support is performed by another party and does not include an integration service.
It is therefore accounted for as a separate performance obligation. In this case, the transaction price will be allocated to each performance
obligation based on the stand-alone selling prices. Where these are not directly observable, they are estimated based on expect cost plus
margin.


 






    16


     


    

 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars





 



 


2.               SIGNIFICANT
ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)


 


A receivable is recognized when the
goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required
before the payment is due.


 


Services


The Company provides consulting, custom
engineering, drones as a service, and investigating and solving on a project-by-project basis under fixed-price and variable price contracts.
Revenue from providing services is recognized in the accounting period in which the services are rendered. For fixed-price contracts,
revenue is recognized based on the actual service provided to the end of the reporting period as a proportion of the total services to
be provided. This is determined based on the actual labour hours spend relative to the total expected labour hours. If contracts include
the manufacturing of hardware, revenue for the hardware is recognized at a point in time when the hardware is delivered, the legal title
has passed and the customer has accepted the hardware.


 


Estimates of revenues, costs or extent
of progress toward completion are revised if circumstances change. Any resulting increases or decreases in estimated revenues or costs
are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known by management.


 


In case of fixed-price contracts, the
customer pays the fixed amount based on a payment schedule. If the services rendered by the Company exceed the payment, a contract asset
is recognized. If the payments exceed the services rendered, a contract liability is recognized. If the contract includes an hourly fee,
revenue is recognized in the amount to which the Company has a right to invoice. Customers are invoiced on a monthly basis and consideration
is payable when invoiced.


 


Cost of Goods Sold


 


Cost of sales includes the expenses
incurred to acquire and produce inventory for sale, including product costs, freight costs, as well as provisions for reserves related
to product shrinkage, excess or obsolete inventory, or lower of cost and net realizable value adjustments as required.


 


Intangible Assets and Goodwill


 


An intangible asset is an identifiable
asset without physical substance. An asset is identifiable if it is separable, or arises from contractual or legal rights, regardless
of whether those rights are transferrable or separable from the Company or from other rights and obligations. Intangible assets include
intellectual property, which consists of patent and trademark applications.


 


Intangible assets acquired externally
are measured at cost less accumulated amortization and impairment losses. The cost of a group of intangible assets acquired is allocated
to the individual intangible assets based on their relative fair values. The cost of intangible assets acquired externally comprises its
purchase price and any directly attributable cost of preparing the asset for its intended use. Research and development costs incurred
subsequent to the acquisition of externally acquired intangible assets and on internally generated intangible assets are accounted for
as research and development costs.


 


Intangible assets with finite useful
lives are amortized on a declining balance method with a rate of 20% to write off the cost of the assets from the date they are available
for use.


 


Goodwill represents the excess of the
value of the consideration transferred over the fair value of the net identifiable assets and liabilities acquired. Goodwill is allocated
to the cash generating unit to which it relates.


 






    17


     


    

 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars





 



 


2.                  
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)


 


Equipment


 


Equipment is stated at historical cost
less accumulated depreciation and accumulated impairment losses.


 


Subsequent costs are included in the
asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits
associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced
part is derecognized. All other repairs and maintenance are charged to the statement of comprehensive loss during the financial period
in which they are incurred.


 


Gains and losses on disposals are determined
by comparing the proceeds with the carrying amount and are recognized in the statement of comprehensive loss.


 


Depreciation is generally calculated
on a declining balance method to write off the cost of the assets to their residual values over their estimated useful lives. Depreciation
for leasehold improvements is fully expensed over the expected term of the lease. The depreciation rates applicable to each category of
equipment are as follows:


 


	Class of equipment	 	Depreciation rate	 
	Computer equipment	 	 	30	%
	Furniture and equipment	 	 	20	%
	Leasehold improvements	 	 	Over expected life of lease	 
	Software	 	 	30	%
	Vehicles	 	 	30	%



 


Research and development expenditures


 


Expenditures on research are expensed
as incurred. Research activities include formulation, design, evaluation and final selection of possible alternatives, products, processes,
systems or services. Development expenditures are expensed as incurred unless the Company can demonstrate all of the following: (i) the
technical feasibility of completing the intangible asset so that it will be available for use or sale; (ii) its intention to complete
the intangible asset and use or sell it; (iii) its ability to use or sell the intangible asset; (iv) how the intangible asset will generate
probable future economic benefits. Among other things, the Company can demonstrate the existence of a market for the output of the intangible
asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; (v) the availability
of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and (vi) its
ability to measure reliably the expenditure attributable to the intangible asset during its development.


 


Government Assistance


 


Government grants are recognized when
there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates
to an expense item, it is recognized as income on a systematic basis over the period that the related costs, for which it is intended
to compensate, are expensed. When the grant relates to an asset, the cost of the asset is reduced by the amount of the grant and the grant
is recognized as income in equal amounts over the expected useful life of the asset.


 






    18


     


    

 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars





 



 


2.               SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONT’D)


 


SR&ED Investment tax credits


 


The Company claims federal investment
tax credits as a result of incurring scientific research and experimental development (“SR&ED”) expenditures. Federal
investment tax credits are recognized when the related expenditures are incurred and there is reasonable assurance of their realization.
Federal investment tax credits are accounted for as a reduction of research and development expense for items of a period expense nature
or as a reduction of property and equipment for items of a capital nature. Management has made a number of estimates and assumptions in
determining the expenditures eligible for the federal investment tax credit claim. It is possible that the allowed amount of the federal
investment tax credit claim could be materially different from the recorded amount upon assessment by Canada Revenue Agency.


 


The Company claims provincial investment
tax credits as a result of incurring SR&ED expenditures. Provincial investment tax credits are recognized when the related expenditures
are incurred and there is reasonable assurance of their realization. Management has made a number of estimates and assumptions in determining
the expenditures eligible for the provincial investment tax credit claim. The provincial investment tax credits are refundable and have
been recorded as a SR&ED tax credit receivable, and as a reduction in research and development expenses on the statement of comprehensive
loss. It is possible that the allowed amount of the provincial investment tax credit claim could be materially different from the recorded
amount upon assessment by Canada Revenue Agency and the Alberta Tax and Revenue Administration.


 


Leases


 


A contract is, or contains, a lease
if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At the
commencement date, the lease liability is recognized at the present value of the future lease payments and discounted using the interest
rate implicit in the lease or the Company's incremental borrowing rate. A corresponding right-of-use ("ROU”) asset will be
recognized at the amount of the lease liability, adjusted for any lease incentives received and initial direct costs incurred. Over the
term of the lease, financing expense is recognized on the lease liability using the effective interest rate method and charged to net
income, lease payments are applied against the lease liability and depreciation on the ROU asset is recorded by class of underlying asset.


 


The lease term is the non-cancellable
period of a lease and includes periods covered by an optional lease extension option if reasonably certain the Company will exercise the
option to extend. Conversely, periods covered by an option to terminate are included if the Company does not expect to end the lease during
that time frame. Leases with a term of less than twelve months or leases for underlying low value assets are recognized as an expense
in net income on a straight-line basis over the lease term.


 


A lease modification will be accounted
for as a separate lease if it materially changes the scope of the lease. For a modification that is not a separate lease, on the effective
date of the lease modification, the Company will remeasure the lease liability and corresponding ROU asset using the interest rate implicit
in the lease or the Company's incremental borrowing rate. Any variance between the remeasured ROU asset and lease liability will be recognized
as a gain or loss in net income to reflect the change in scope.


 






    19


     


    

 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars





 



 


3.               AMALGAMATION


 


Prior to the Amalgamation (business combination),
access to capital was limited as a private company. Through the amalgamation agreement, management would have the resources needed to
raise significant capital and further have broader access to investors by being listed on a public exchange.


 


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


 


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


 


	Number of shares of Draganfly Inc.	 	 	10,500,001	 
	Fair value of common shares in concurrent financing	 	$	0.50	 
	Fair value of shares of Draganfly Inc.	 	$	5,250,001	 
	Fair value of warrants	 	 	1,645,193	 
	Fair value of shares issued for transaction fees	 	 	1,000,000	 
	Net assets acquired	 	$	(90,335	)
	Listing expense	 	$	7,804,859	 



 


	Fair value of the Company acquired, net of liabilities	 	 	 
	Cash	 	$	28,538	 
	Accounts receivable	 	 	4,991	 
	Loans receivable	 	 	963,269	 
	Accounts payable and accrued liabilities	 	 	(406,463	)
	Subscription receipts	 	 	(500,000	)
	 	 	$	90,335	 



 


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


 


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


 






    20


     


    

 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars





 



 


3.              
AMALGAMATION (CONT’D)


 


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


 


	Risk-free interest rate	 	 	0.86	%
	Estimate life	 	 	1.48 years	 
	Expected volatility	 	 	100	%
	Expected dividend yield	 	 	0	%



 


As at August 15, 2019, the Company received $7,025,750
in proceeds to issue subscription receipts (the “Subscription Receipts”) at a price of $0.50 per Subscription Receipt. Each
Subscription Receipt was automatically converted, without payment of additional consideration and without any further action on the part
of the holder, into one unit of the Company (a “Unit”) on completion of the Amalgamation and the Company becoming reporting
issuer in the Province of Saskatchewan and obtaining conditional approval of a listing of the common shares on the CSE (the “Amalgamation”).
Each Unit consists of one common share and one warrant. Each warrant will entitle the holder to purchase one common share at a price of
$0.50 for a period of 12 months following the issuance of warrants. The proceeds of the private placement were released to the Company
on November 5, 2019 (Note 17).


 


	4.	ACQUISITION



 


On April 30, 2020, the Company acquired all of
the issued and outstanding shares of Dronelogics Systems Inc. (“Dronelogics”), excluding the cinematography division, for
consideration of $500,000 cash and 3,225,438 common shares (the “Transaction”).


 


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


 


The purchase price allocation (“PPA”)
is as follows:


 


	Number of shares of Draganfly Inc.	 	 	3,225,438	 
	Fair value of shares of Draganfly Inc.	 	$	2,178,960	 
	Cash portion of purchase price	 	 	500,000	 
	Total	 	$	2,678,960	 



 






    21


     


    

 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars





 



 


	4.	ACQUISITION (CONT’D)



 


	Tangible assets acquired	 	 	 
	Cash	 	$	42,593	 
	Accounts receivable	 	 	98,852	 
	Inventory	 	 	629,684	 
	Prepaids and deposits	 	 	93,997	 
	Other current assets	 	 	3,014	 
	Equipment	 	 	54,946	 
	Right-of-use assets	 	 	83,428	 
	Accounts payable and accrued liabilities	 	 	(222,766	)
	Customer deposits	 	 	(245,959	)
	Loans	 	 	(245,752	)
	Other current liabilities	 	 	(8,437	)
	Lease liabilities	 	 	(87,203	)
	 	 	 	196,397	 
	 	 	 	 	 
	Identifiable intangible assets	 	 	 	 
	Customer relationships	 	 	197,000	 
	Website	 	 	119,000	 
	 	 	 	316,000	 
	 	 	 	 	 
	Goodwill	 	 	2,166,563	 
	Total consideration	 	$	2,678,960	 



 


The Company estimated the fair value
as follows:


		•	Customer relationships based on an income approach, specifically multi-period excess
earnings method, by identifying key customers, applying attribution rate of 15% per annum and discount rate of 18% per annum; and



		•	Website based on an income approach, specifically relief from royalty methodology,
using a reasonable royalty rate of 0.5% and discount rate of 17% per annum.



 


Furthermore, the excess of the consideration
paid over the fair value of the identifiable assets (liabilities) acquired were recognized as goodwill, which primarily consisted of the
assembled workforce.


 


From the date of the acquisition to
December 31, 2020, the acquired business contributed $2,870,481 of revenue and a net income of $458,743.


 


	5.	CASH AND CASH EQUIVALENTS



 


	 	 	December 31, 2020	 	 	December 31, 2019	 
	Cash held in banks	 	$	1,839,871	 	 	$	2,429,375	 
	Guaranteed investment certificate	 	 	142,545	 	 	 	-	 
	 	 	$	1,982,416	 	 	$	2,429,375	 



 


On March 27, 2020, the Company held a $142,000
guaranteed investment certificate (“GIC”) to secure its credit cards. The terms of the GIC are for 1 year at a rate of 0.50%
per annum.


 






    22


     


    

 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars





 



 


6.               ACCOUNTS
RECEIVABLE


 


	 	 	December 31, 2020	 	 	December 31, 

2019	 
	Trade accounts receivable	 	$	780,254	 	 	$	146,194	 
	GST input tax credits	 	 	-	 	 	 	54,885	 
	SR&ED receivable	 	 	30,537	 	 	 	23,616	 
	 	 	$	810,791	 	 	$	224,695	 



 


7.               INVENTORY


 


	 	 	December 31, 2020	 	 	December 31, 

2019	 
	Finished goods	 	$	1,155,871	 	 	$	-	 
	Parts	 	 	77,748	 	 	 	48,563	 
	 	 	$	1,233,619	 	 	$	48,563	 



 


During the year ended December 31,
2020, the Company recorded an allowance to value its inventory for obsolete and slow-moving inventory, recognizing an expense in cost
of sales of $23,955 (2019: $nil).


 


During the year ended December 31,
2020, $2,257,797 (2019: $118,826) of inventory was sold and recognized in cost of sales.


 


	8.	PREPAID EXPENSES AND DEPOSITS



 


	 	 	December 31, 2020	 	 	December 31, 

2019	 
	Insurance	 	$	992	 	 	$	35,703	 
	Prepaid marketing services	 	 	187,826	 	 	 	227,459	 
	Prepaid rent	 	 	3,583	 	 	 	-	 
	Prepaid subscriptions	 	 	5,953	 	 	 	1,583	 
	WCB Premiums	 	 	-	 	 	 	916	 
	Deposits	 	 	136,668	 	 	 	6,969	 
	 	 	$	335,022	 	 	$	272,630	 



 






    23


     


    

 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars





 



 


9.               EQUIPMENT


 


	 	 	Computer
    Equipment	 	 	Furniture
    

and Equipment	 	 	Leasehold
    Improvements	 	 	Software	 	 	Vehicles	 	 	Total	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at January 1, 2019	 	$	163,275	 	 	$	181,362	 	 	$	-	 	 	$	84,340	 	 	$	-	 	 	$	428,977	 
	Additions	 	 	-	 	 	 	87,785	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	87,785	 
	Disposals	 	 	(1,056	)	 	 	(31,647	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(32,703	)
	Impairment	 	 	(155,219	)	 	 	(95,327	)	 	 	-	 	 	 	(54,373	)	 	 	-	 	 	 	(304,919	)
	Balance at December 31, 2019	 	$	7,000	 	 	$	142,173	 	 	$	-	 	 	$	29,967	 	 	$	-	 	 	$	179,140	 
	Additions	 	 	2,028	 	 	 	21,860	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	23,888	 
	   Net
assets acquired in the Acquisition
	 	 	15,369	 	 	 	7,573	 	 	 	4,352	 	 	 	-	 	 	 	27,652	 	 	 	54,946	 
	Balance at December 31, 2020	 	$	24,397	 	 	$	171,606	 	 	$	4,352	 	 	$	29,967	 	 	$	27,652	 	 	$	257,974	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accumulated depreciation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at January 1, 2019	 	$	150,026	 	 	$	153,999	 	 	$	-	 	 	$	69,774	 	 	$	-	 	 	$	373,799	 
	Charge for the year	 	 	103	 	 	 	7,028	 	 	 	-	 	 	 	4,574	 	 	 	-	 	 	 	11,705	 
	Eliminated on disposal	 	 	(1,654	)	 	 	(26,770	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(28,424	)
	Impairment	 	 	(141,714	)	 	 	(96,313	)	 	 	-	 	 	 	(55,054	)	 	 	-	 	 	 	(293,081	)
	Balance at December 31, 2019	 	$	6,761	 	 	$	37,944	 	 	$	-	 	 	$	19,294	 	 	$	-	 	 	$	63,999	 
	Charge
    for the year	 	 	5,631	 	 	 	22,019	 	 	 	3,220	 	 	 	3,202	 	 	 	6,033	 	 	 	40,105	 
	Balance at December 31, 2020	 	$	12,392	 	 	$	59,963	 	 	$	3,220	 	 	$	22,496	 	 	$	6,033	 	 	$	104,104	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net book value:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	December 31, 2019	 	$	239	 	 	$	104,229	 	 	$	-	 	 	$	10,673	 	 	$	-	 	 	$	115,141	 
	December 31, 2020	 	$	12,005	 	 	$	111,643	 	 	$	1,132	 	 	$	7,471	 	 	$	21,619	 	 	$	153,870	 



 


During the year ended December 31,
2019, the Company sold computer equipment for a gain on disposal of assets of $28,651.


 






    24


     


    

 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019




Expressed in Canadian Dollars





 



 


10.             INTANGIBLE ASSETS AND GOODWILL


 


	 	 	Patents	 	 	Customer Relationships	 	 	Website	 	 	Goodwill	 	 	Total	 
	Cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at January 1, 2019	 	$	71,805	 	 	$	-	 	 	$	-	 	 	$	-	 	 	$	71,805	 
	Impairment	 	 	(29,874	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(29,874	)
	Balance at December 31, 2019	 	 	41,931	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	41,931	 
	Intangible
assets acquired in the Acquisition
	 	 	-	 	 	 	197,000	 	 	 	119,000	 	 	 	2,166,563	 	 	 	2,482,563	 
	Balance at December 31, 2020	 	$	41,931	 	 	$	197,000	 	 	$	119,000	 	 	$	2,166,563	 	 	$	2,524,494	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accumulated amortization	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at January 1, 2019	 	$	59,896	 	 	$	-	 	 	$	-	 	 	$	-	 	 	$	59,896	 
	Charge for the year	 	 	8,386	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	8,386	 
	Impairment	 	 	(27,736	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(27,736	)
	Balance at December 31, 2019	 	 	40,546	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	40,546	 
	Charge for the year	 	 	1,385	 	 	 	26,267	 	 	 	15,866	 	 	 	-	 	 	 	43,518	 
	Balance at December 31, 2020	 	$	41,931	 	 	$	26,267	 	 	$	15,866	 	 	$	-	 	 	$	84,064	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net book value:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	December 31, 2019	 	$	1,385	 	 	$	-	 	 	$	-	 	 	$	-	 	 	$	1,385	 
	December 31, 2020	 	$	-	 	 	$	170,733	 	 	$	103,134	 	 	$	2,166,563	 	 	$	2,440,430	 



 


Customer relationships


 


On April 30, 2020, the Company acquired
a 100% interest in Dronelogics and assigned $197,000 to the fair value of customer relationships.


 


Website


 


On April 30, 2020, the Company acquired
a 100% interest in Dronelogics and assigned $119,000 to the fair value of the website/domain name.


 


Goodwill


 


On April 30, 2020, the Company acquired
a 100% interest in Dronelogics, which included goodwill. Goodwill was valued at $2,166,563.


 


The key assumptions used in the calculations
of the recoverable amounts include sales growth per year, changes in cost of sales and capital expenditures based on internal forecasts.


 






    25


     


    

 


 



 




Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 


11.               
RIGHT OF USE ASSETS


 


The Company’s right-of-use asset
relates to the lease of office space.


 


On December 1, 2019, the Company entered
into an amendment for the lease agreement, where the lease was amended with a change in annual payments. As there was no change to the
underlying asset, the modification was not accounted for as a separate lease.


 


	 	 	Total	 
	Cost	 	 	 	 
	Balance at January 1, 2019, on adoption of IFRS 16	 	$	131,634	 
	  Lease modification	 	 	27,905	 
	Balance at December 31, 2019	 	$	159,539	 
	  Leases acquired in the Acquisition	 	 	83,428	 
	Balance at December 31, 2020	 	$	242,967	 
	 	 	 	 	 
	Accumulated depreciation	 	 	 	 
	Balance at January 1, 2019, on adoption of IFRS 16	 	$	-	 
	  Charge	 	 	29,545	 
	Balance at December 31, 2019	 	$	29,545	 
	  Charge	 	 	69,003	 
	Balance at December 31, 2020	 	$	98,548	 
	 	 	 	 	 
	Net book value:	 	 	 	 
	December 31, 2019	 	$	129,994	 
	December 31, 2020	 	$	144,419	 



 


12.               
LEASE LIABILITY


 


	 	 	Total	 
	Balance at January 1, 2019, on adoption of IFRS 16	 	$	131,634	 
	  Interest expense	 	 	14,534	 
	  Lease payments	 	 	(38,000	)
	  Lease modification	 	 	27,905	 
	Balance at December 31, 2019	 	$	136,073	 
	  Leases acquired in the Acquisition	 	 	87,203	 
	  Interest expense	 	 	18,290	 
	  Lease payments	 	 	(83,442	)
	Balance at December 31, 2020	 	 	158,124	 
	 	 	 	 	 
	Which consists of:	 	 	 	 
	  Current lease liability	 	$	93,239	 
	  Non-current lease liability	 	 	64,885	 
	Balance at December 31, 2020	 	$	158,124	 



 






    26 


     


    




 







Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 



13.               
TRADES PAYABLE AND ACCRUED LIABILITIES


 


	 	 	 
December 31,
 2020
	 	 	December 31, 

2019	 
	Trades payable	 	$	813,881	 	 	$	688,309	 
	Accrued liabilities	 	 	512,205	 	 	 	162,658	 
	Due to related parties (Note 22)	 	 	475,628	 	 	 	9,681	 
	Government grant payable (Note 20)	 	 	33,709	 	 	 	33,709	 
	GST/PST Payable	 	 	21,754	 	 	 	-	 
	 	 	$	1,857,177	 	 	$	894,357	 







 


During the year ended December 31, 2020, the Company
settled an outstanding debt with the issuance of 555,409 shares and recognized a $38,879 losspx on settlement of debt. During the year
ended December 31, 2019, the Company settled $1,030,714 in trades payable through repayment of $512,492 and recognized a gain on settlement
of debt of $518,222. During the year ended December 31, 2020, the Company recognized a gain on forgiveness of trades payable of $127,711.


 


		14.	CUSTOMER DEPOSITS



 


At times, the Company’s subsidiary, Dronelogics,
may take a customer deposit as it orders specific items in. These amounts are held and applied against the final purchase.


 


	 	 	December 31,

 2020	 	 	December 31, 

2019	 
	Customer deposits	 	$	385,449	 	 	$	-	 



 


15.               
NOTES PAYABLE


 


	 	 	December 31, 2020	 	 	December 31, 2019	 
	Opening balance	 	$	-	 	 	$	844,304	 
	Issuance of notes payable	 	 	60,000	 	 	 	1,137,978	 
	Repayment of notes payable	 	 	(60,000	)	 	 	(1,036,336	)
	Settlement of notes payable	 	 	-	 	 	 	(62,000	)
	Foreign exchange	 	 	-	 	 	 	(22,366	)
	Interest accrued	 	 	-	 	 	 	101,689	 
	Eliminated on consolidation	 	 	-	 	 	 	(963,269	)
	Ending balance	 	$	-	 	 	$	-	 



 


The Company had no notes payable outstanding
as at December 31, 2020.


 


During the year ended December 31,
2019, the following new notes were executed:


		-	A note was entered into with a company controlled by a director of the Company, bear interest at 12% per
annum and are unsecured. This note was settled during the year ended December 31, 2019.



		-	Four notes were entered into between the Company and Draganfly Innovations for $930,000, were interest
bearing at 10% per annum, calculated annually, and due at the earlier of 30 days from the date the Amalgamation was completed and one
year from the date of the advance. Upon closing of the Amalgamation (Note 3), these were eliminated upon consolidation.



		-	A note was entered into with an individual for USD$125,000, interest bearing at
18% per annum, and was unsecured. The note had a maturity date of October 29, 2019 and was repaid during the year ended December 31, 2019.
This note also bore a USD$6,250 due diligence fee and a USD$6,250 closing fee that are being recognized over the life of the note as additional
interest.



 






    27 


     


    




 







Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 



		16.	LOANS



 


With the acquisition of Dronelogics, the Company
took ownership of two loans held by the subsidiary.


 


	 	 	Start
    Date	 	Maturity
    Date	 	Rate	 	 	Principal	 	 	Interest	 	 	Total	 
	CEBA	 	2020-05-19	 	2022-12-31	 	 	0	%	 	$	33,848	 	 	$	1,090	 	 	$	34,938	 
	Vehicle
    loan	 	2019-08-30	 	2024-09-11	 	 	6.99	%	 	 	21,247	 	 	 	4,048	 	 	 	25,295	 
	Shopify
    loan	 	2020-08-05	 	 	 	 	7.00	%	 	 	35,217	 	 	 	2,466	 	 	 	37,683	 
	Total	 	 	 	 	 	 	 	 	 	$	90,312	 	 	$	7,604	 	 	$	97,916	 



 


On May 19, 2020, Dronelogics received a $40,000
Canada Emergency Business Account (CEBA) loan. This loan is currently interest-free and 25% of the loan, up to $10,000, is forgivable
if the loan is repaid on or before December 31, 2022. If the loan is not repaid by that date, the loan can be converted to a three-year
term loan at an interest rate of 5%.


 


On December 4, 2020, the Government of Canada
allowed for an expansion of the CEBA loan by $20,000, of which, an additional $10,000 is forgivable if the loan is repaid on or before
December 31, 2022.


 


The CEBA loan is unsecured, the vehicle loan is
secured by the vehicle, and the Shopify loan is secured by the Company’s accounts receivable.


 



    28 


     


    




 







Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars














 


17.               
SHARE CAPITAL


 


Authorized share capital


 


Unlimited number of common shares without
par value.


 


Issued share capital


 


For the year ended December 31, 2020,


		-	On February 18, 2020, the Company issued 120,000 common shares for the exercise of warrants for $60,000.



		-	On February 25, 2020, the Company issued 100,000 common shares for the exercise of warrants for $50,000.



		-	On March 6, 2020, the Company issued 1,051,600 common shares for the exercise of warrants for $105,160.



		-	On March 20, 2020, the Company issued 365,000 common shares for the exercise of warrants for $36,500.



		-	On March 26, 2020, the Company issued 1,474,200 common shares for the exercise of warrants for $147,420.



		-	On April 8, 2020, the Company issued 609,200 common shares for the exercise of warrants for $60,920.



		-	On April 16, 2020, the Company issued 630,000 common shares for the exercise of warrants for $115,000.



		-	On April 30, 2020, the Company issued 3,225,438 common shares for the acquisition of Dronelogics and an
additional 200,000 common shares as finder’s fees.



		-	On May 27, 2020, the Company issued 60,000 common shares for the exercise of warrants for $30,000.



		-	On June 23, 2020, the Company issued 228,000 common shares for the exercise of warrants for $114,000.



		-	On July 3, 2020, the company issued 961,538 common shares for cash proceeds of $500,000.



		-	On July 16, 2020, the Company issued 555,409 common shares for debt settlement of $344,354 and recognized
a loss of $38,879 in the statement of comprehensive loss.



		-	On September 21, 2020, the Company issued 10,000 common shares for the exercise of warrants for $5,000.



		-	On October 20, 2020, the Company issued 11,000 common shares for the exercise of warrants for $5,500.



		-	On October 21, 2020, the Company issued 3,189,875 common shares for the exercise of warrants for $1,594,938.



		-	On November 5, 2020, the Company issued 35,586 common shares for the vesting of Restricted Share Units.



		-	On November 30, 2020 the Company issued 2,556,496 units for the Regulation A+ financing in the United
States. Each unit is comprised of one common share and one share purchase warrant. These warrants have an exercise price of $0.71 USD
per warrant, each convert to one common share, and have a life of two years, expiring on November 30, 2022.



		-	On December 4, 2020, the Company issued 10,202 common shares for the vesting of Restricted Share Units.



		-	On December 8, 2020, the Company issued 13,234 common shares for the vesting of Restricted Share Units.



		-	On December 15, 2020, the Company issued 940,970 common shares for the vesting of Restricted Share Units.



		-	On December 23, 2020, the Company issued 75,000 common shares for the exercise of warrants for $37,500.






 



    29 


     


    







 







Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










  


17.               
SHARE CAPITAL (CONT’D)


 


For the year ended December 31, 2019,


		-	Prior to the closing of the Amalgamation (Note 3), Draganfly Innovations issued 719,927 (pre-consolidation)
common shares to a company controlled by a director of the Company for settlement of $799,341 in accounts payable and application of $153,566
in subscription receivable.



		-	Prior to the closing of the Amalgamation (Note 3), Draganfly Innovations issued 1,114,827 (pre-consolidation)
common shares with a value of $1,000,000 as transaction fees for the Amalgamation to related parties.



		-	On August 15, 2019, the Amalgamation (Note 3) was completed and the Company acquired, on a 1.794 for 1
basis, all issued and outstanding shares of Draganfly Innovations in exchange for 42,638,356 common shares of the Company.



		-	On August 15, 2019, the Company issued 45,325 common shares for settlement of $22,662 in trades payables
at a value of $0.50 per share.



		-	On August 15, 2019, the Company issued 2,118,492 common shares for settlement of $740,000 in convertible
debentures and interest. As a result of the settlement, the Company recognized loss on settlement of debt of $319,246 in the statement
of loss and comprehensive loss.



		-	On August 23, 2019, the Company issued 316,940 common shares for exercise of share purchase warrants of
the Company for proceeds of $8,833. As a result of the exercise, $212,908 from reserve was reclassification to share capital.



		-	On October 25, 2019, the Company issued 14,051,499 units per the private placement (Note 3). Each unit
consists of one common share and one warrant. These warrants have an exercise price of $0.50 per warrant, each convert to one common share,
and have a life of one year, expiring on October 25, 2020.



 


Stock options


 


The Company has adopted an incentive share compensation
plan, which provides that the Board of Directors of the Company may from time to time, in its discretion, and in accordance with the CSE
requirements, grant to directors, officers, employees and technical consultants to the Company, non-transferable stock options to purchase
common shares. The total number of common shares reserved and available for grant and issuance pursuant to this plan shall not exceed
20% (in the aggregate) of the issued and outstanding common shares from time to time. The number of options awarded and underlying vesting
conditions are determined by the Board of Directors in its discretion. Such options will be exercisable for a period of up to 10 years
from the date of grant. The aggregate sales price (meaning the sum of all cash, property, notes, cancellation of debt, or other consideration
received or to be received by the Company for the sale of the securities) or amount of common shares issued during any consecutive 12-month
period will not exceed the greatest of the following: (i) U.S.$1,000,000; (ii) 15% of the total assets of the Company, measured at the
Company's most recent balance sheet date; or (iii) 15% of the outstanding amount of the common shares of the Company, measured at the
Company's most recent balance sheet date; and The number of common shares issuable pursuant to the exercise of options under the plan
within a 12 month period to all eligible persons retained to provide investor relations activities (together with those common shares
that are issued pursuant to any other share compensation arrangement) shall not, at any time, exceed 1% of the issued and outstanding
common shares.





 



    30 


     


    







 







Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 



17.               
SHARE CAPITAL (CONT’D)


 


As at December 31, 2020, the Company had the following
options outstanding and exercisable:


 


	Grant Date	 	Expiry Date	 	Exercise Price	 	 	Remaining Contractual Life (years)	 	 	Number of 

Options

 Outstanding	 	 	Number of 

Options

 Exercisable	 
	October 30, 2019	 	October 30, 2029	 	$	0.50	 	 	 	8.84	 	 	 	2,858,332	 	 	 	1,974,993	 
	November 19, 2019	 	November 19, 2029	 	$	0.50	 	 	 	8.89	 	 	 	650,000	 	 	 	566,666	 
	April 30, 2020	 	April 30, 2030	 	$	0.50	 	 	 	9.33	 	 	 	445,000	 	 	 	124,999	 
	April 30, 2020	 	April 30, 2030	 	$	0.77	 	 	 	9.33	 	 	 	600,000	 	 	 	200,000	 
	July 3, 2020	 	July 3, 2025	 	$	0.64	 	 	 	4.51	 	 	 	1,000,000	 	 	 	166,666	 
	November 24, 2020	 	November 24, 2030	 	$	0.50	 	 	 	9.90	 	 	 	165,000	 	 	 	55,000	 
	December 11, 2020	 	December 11, 2030	 	$	0.43	 	 	 	9.95	 	 	 	250,000	 	 	 	62,500	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	5,968,332	 	 	 	3,150,824	 



 


The following is a summary of the Company’s
stock option activity:


 


	 	 	Number of Options	 	 	Weighted Average

 Exercise Price	 
	Outstanding, December 31, 2018	 	 	-	 	 	$	-	 
	Granted	 	 	3,725,000	 	 	 	0.50	 
	Outstanding, December 31, 2019	 	 	3,725,000	 	 	 	-	 
	Forfeited	 	 	(216,668	)	 	 	0.50	 
	Granted	 	 	2,460,000	 	 	 	0.63	 
	Outstanding, December 31, 2020	 	 	5,968,332	 	 	$	0.55	 



 


During the year ended December 31,
2020,


		-	The Company granted 445,000 options to employees. Each option is exercisable at
$0.50 per share for a period of 10 years from the grant date.



		-	The Company issued 600,000 options to consultants. Each option is exercisable at
$0.77 per share for a period of 10 years from the grant date.



		-	The Company granted 1,000,000 options to employees. Each option is exercisable
at $0.64 per share for a period of 5 years from the grant date.



		-	The Company granted 165,000 options to employees. Each option is exercisable at
$0.50 per share for a period of 10 years from the grant date.



		-	The Company granted 250,000 options to a consultant. Each option is exercisable
at $0.43 per share for a period of 10 years from the grant date.



 


During the year ended December 31,
2019,


		-	The Company granted 2,925,000 options to employees. Each option is exercisable
at $0.50 per share for a period of 10 years from the grant date.



		-	The Company issued 800,000 options to consultants. Each option is exercisable at
$0.50 per share for a period of 10 years from the grant date.






 



    31 


     


    




 







Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 



17.               
SHARE CAPITAL (CONT’D)


 


During the year ended December 31, 2020, the Company
recorded $1,724,853 (2019 – $599,701) in stock-based compensation for stock options, based on the fair values of stock options granted
which were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:


 


	Year ended December 31,	 	 	 	2020	 	 	2019	 
	Risk free interest rate	 	 	 	 	0.43%-0.66%	 	 	 	1.45%-1.46%	 
	Expected volatility	 	 	 	 	113.53%-119.03%	 	 	 	100%	
	Expected life	 	 	 	 	5-10 years	 	 	 	7.5 years	 
	Expected dividend yield	 	 	 	 	0%		 	 	0%	
	Exercise price	 	 	 	$	0.43-0.77	 	 	$	0.50	 



 


Volatility is calculated using the historical
volatility method.


 


The weighted average grant date fair value of
options granted during the year ended December 31, 2020 was $0.63 per option (2019 – $0.50 per option).


 


Restricted share units (RSUs)


 


The Company has adopted an incentive share compensation
plan, which provides that the Board of Directors of the Company may from time to time, in its discretion, and in accordance with the Exchange
requirements, grant to directors, officers, employees and technical consultants to the Company, restricted stock units (RSUs). The number
of RSUs awarded and underlying vesting conditions are determined by the Board of Directors in its discretion. RSUs will have a 3-year
vesting period following the award date. The total number of common shares reserved and available for grant and issuance pursuant to this
plan, and the total number of Restricted Share Units that may be awarded pursuant to this plan, shall not exceed 20% (in the aggregate)
of the issued and outstanding common shares from time to time.


 


The aggregate sales price (meaning the sum of
all cash, property, notes, cancellation of debt, or other consideration received or to be received by the Company for the sale of the
securities) or amount of common shares issued during any consecutive 12-month period will not exceed the greatest of the following: (i)
USD $1,000,000; (ii) 15% of the total assets of the Company, measured at the Company's most recent balance sheet date; or (iii) 15% of
the outstanding amount of the common shares of the Company, measured at the Company's most recent balance sheet date. At the election
of the Board of Directors, upon each vesting date, participants receive (a) the issuance of common shares from treasury equal to the number
of RSUs vesting, or (b) a cash payment equal to the number of vested RSUs multiplied by the fair market value of a common share, calculated
as the closing price of the common shares on the CSE for the trading day immediately preceding such payment date; or (c) a combination
of (a) and (b).


 


On the grant date of RSUs, the Company determines
whether it has a present obligation to settle in cash. If the Company has a present obligation to settle in cash, the RSUs are accounted
for as liabilities, with the fair value remeasured at the end of each reporting period and at the date of settlement, with any changes
in fair value recognized in profit or loss for the period. The Company has a present obligation to settle in cash if the choice of settlement
in shares has no commercial substance, or the Company has a past practice or a stated policy of setting in cash, or generally settles
in cash whenever the counterparty asks for cash settlement. If no such obligation exists, RSUs are accounted for as equity settled share-based
payments and are valued using the share price on grant date. Upon settlement:


 


		a)	If the Company elects to settle in cash, the cash payment is accounted for as the repurchase of an equity
interest (i.e. as a deduction from equity), except as noted in (c) below.



		b)	If the Company elects to settle by issuing shares, the value of RSUs initially recognized in reserves
is reclassified to share capital, except as noted in (c) below.



 



    32 


     


    




 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 



17.               
SHARE CAPITAL (CONT’D)


 


		c)	If the Company elects the settlement alternative with the higher fair value, as at the date of settlement,
the Company recognizes an additional expense for the excess value given (i.e. the difference between the cash paid and the fair value
of shares that would otherwise have been issued, or the difference between the fair value of the shares and the amount of cash that would
otherwise have been paid, whichever is applicable).



 


During the year ended December 31, 2020, the Company
committed to grant 1,240,000 RSUs to employees and consultants of the Company with each RSU exercisable into one common share of the Company
or the cash equivalent thereof upon the vesting conditions being met for a period of three years from the grant date. The Company recorded
share-based payment expense of $943,611 (2019 – $161,858) in stock-based compensation for RSUs, based on the fair values of RSUs
granted which were calculated using the closing price of the Company’s stock on the day prior to grant.


 


The following is a summary of the Company’s
RSU activity:


 


	 	 	Number of RSUs	 
	Outstanding, December 31, 2018	 	 	-	 
	Granted	 	 	3,175,000	 
	Outstanding, December 31, 2019	 	 	3,175,000	 
	Exercised	 	 	(999,992	)
	Forfeited	 	 	(341,667	)
	Granted	 	 	1,240,000	 
	Outstanding, December 31, 2020	 	 	3,073,341	 



 


As at December 31, 2020 the Company had the following
RSUs outstanding:


 


	Grant Date	 	Number of RSUs Outstanding	 
	October 30, 2019	 	 	1,666,674	 
	November 19, 2019	 	 	166,667	 
	April 30, 2020	 	 	375,000	 
	November 24, 2020	 	 	865,000	 
	 	 	 	3,073,341	 



 


Warrants


 


During the year ended December 31, 2020, the Company
issued warrants (“USD Warrants”) with a USD exercise price. Being in a foreign currency that is not the Company’s functional
currency, these USD Warrants are required to be recorded as a financial liability and not as equity. As a financial liability, these USD
Warrants are revalued on a quarterly basis to fair market value with the change in fair value being recorded through the Consolidated
Statement of Comprehensive Loss. The initial fair value of these USD Warrants was parsed out from equity and recorded as a financial liability.


 


To reach a fair value of the USD Warrants, a Black
Scholes calculation is used, calculated in USD as the Company also trades on the OTCQB. The Black Scholes value per USD Warrant is then
multiplied by the number of outstanding warrants and then multiplied by the foreign exchange rate at the end of the period from the Bank
of Canada.


 



    33 


     


    




 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 


17.               
SHARE CAPITAL (CONT’D)


 


Warrant Derivative Liability


 


	 	 	December 31, 2020	 
	Balance, Beginning	 	$	-	 
	Change in fair value of warrants outstanding	 	 	748,634	 
	Balance, Ending	 	$	748,634	 



 


The derivative financial liability consists of
the fair value of the non-compensatory share purchase warrants that have exercise prices that differ from the functional currency of the
Company and are within the scope of IAS 32 “Financial Instruments: Presentation”. Details of these warrants and their fair
values are as follows:


 


	Issue Date	 	Exercise Price	 	 	Number of

 Warrants


    Outstanding at

 December 31,

 2020	 	 	Fair Value at December 31, 2020	 	 	Number of Warrants Outstanding at December 31, 2019	 	 	Fair Value at December 31,

 2019	 
	November 30, 2020	 	 	US$     0.71	 	 	 	2,556,496	 	 	$	748,634	 	 	 	-	 	 	$	-	 
	 	 	 	 	 	 	 	2,556,496	 	 	$	748,634	 	 	 	-	 	 	$	-	 



 


During the year ended December 31, 2020, the Company
extended the life of the November 5, 2019 warrants from expiring on November 5, 2020 to expiring on November 5, 2021. To do this, it was
required that 25% of the remaining November 5, 2019 warrants needed to be exercised by October 21, 2020 and was completed.


 


The fair values of these warrants were estimated
using the Black-Scholes option pricing model with the following weighted average assumptions:


 


	Year ended December 31,	 	2020	 	 	2019	 
	Risk free interest rate	 	 	0.20%-0.24%	 	 	 	-	 
	Expected volatility	 	 	72.76%-74.10%	 	 	 	-	 
	Expected life	 	 	2 years	 	 	 	-	 
	Expected dividend yield	 	 	0%		 	 	-	 
	Exercise price	 	$	0.71	 	 	$	-	 



 


Volatility is calculated using the historical
volatility method.


 


The following is the summary of the Company’s
warrant activity:


 


	 	 	Number of Warrants	 	 	Exercise Price	 
	Outstanding, December 31, 2018	 	 	770,030	 	 	$	0.27	 
	Warrants of the Company at time of Amalgamation (Note 3)	 	 	4,000,000	 	 	 	0.10	 
	Expired	 	 	(453,090	)	 	 	0.03	 
	Exercised	 	 	(316,940	)	 	 	0.03	 
	Granted	 	 	14,051,499	 	 	 	0.50	 
	Outstanding, December 31, 2019	 	 	18,051,499	 	 	$	0.41	 
	Exercised	 	 	(7,923,874	)	 	 	0.30	 
	Forfeited	 	 	(600,000	)	 	 	0.50	 
	Granted	 	 	2,556,496	 	 	 	0.71	 
	Outstanding, December 31, 2020	 	 	12,084,121	 	 	$	0.59	 



 






    34 


     


    

 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 



		17.	SHARE CAPITAL (CONT’D)



 


As at December 31, 2020, the Company had the following warrants outstanding:


 


	Issue Date	 	Expiry Date	 	Exercise Price	 	 	Number of Warrants Outstanding	 
	November 5, 2019	 	November 5, 2021	 	 	CDN$     0.50	 	 	 	9,527,625	 
	November 30, 2020	 	November 30, 2022	 	 	US$     0.71	 	 	 	2,556,496	 
	 	 	 	 	 	 	 	 	 	12,084,121	 



 


The weighted average remaining contractual life
of the warrants outstanding as of December 31, 2020 was 1.07 years (December 31, 2019 - 0.90 years).


 


18.               
REVENUE


 


The Company sub-classifies revenue
within the following components: product revenue and services revenue. Product revenue comprises of sales of internally assembled multi-rotor
helicopters, industrial aerial video systems, civilian small unmanned aerial systems or vehicles, and wireless video systems. Services
revenue consists of fees charged for custom engineering, drone as a service work, and training and simulation consulting.


 


	 	 	December 31, 2020	 	 	December 31, 2019	 
	Product sales	 	$	3,087,223	 	 	$	248,939	 
	Drone services	 	 	630,532	 	 	 	-	 
	Custom engineering services	 	 	645,756	 	 	 	1,131,488	 
	 	 	$	4,363,511	 	 	$	1,380,427	 



 


The Company derives significant revenues
from one (2019 – one) customer, which exceeds 10% of total revenues for the year ended December 31, 2020 at $474,701 of custom engineering
services revenue (2019 – $1,116,093 of custom engineering services revenue).


 


Consulting revenue:


On May 22, 2017, the Company executed
a standard consulting agreement, whereby the Company would provide consulting, custom engineering and investigating and solving on a project-by-project
basis. The Company shall be responsible for the development, design, procurement, fabrication, assembly, integration, checkout, integration
and test of hardware, software, and firmware necessary to produce a complete system per each project. The consideration for the services
performed are based on the labor cost incurred on an hourly basis and minimal preapproved expenditures.


 


Geographic revenue segmentation is
as follows:


 


	 	 	December 31, 2020	 	 	December 31, 2019	 
	Canada	 	$	2,270,862	 	 	$	127,118	 
	United States	 	 	1,982,404	 	 	 	1,251,199	 
	International	 	 	110,245	 	 	 	2,110	 
	 	 	$	4,363,511	 	 	$	1,380,427	 






 



    35 


     


    




 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 






18.               
REVENUE (CONT’D)


 


The Company operates in an international
market with four reportable operating segments.


 


	 	 	Draganfly

 Inc.	 	 	Draganfly Innovations Inc.	 	 	Draganfly Innovations USA, Inc.	 	 	Dronelogics Systems

 Inc.	 	 	Total	 
	Product sales	 	$	-	 	 	$	169,709	 	 	$	660,227	 	 	$	2,257,287	 	 	$	3,087,223	 
	Drone services	 	 	-	 	 	 	-	 	 	 	17,338	 	 	 	613,194	 	 	 	630,532	 
	Custom engineering services	 	 	-	 	 	 	645,756	 	 	 	-	 	 	 	-	 	 	 	645,756	 
	 	 	 	-	 	 	 	815,465	 	 	 	677,565	 	 	 	2,870,481	 	 	 	4,363,511	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of sales	 	 	-	 	 	 	(339,398	)	 	 	(543,541	)	 	 	(1,720,972	)	 	 	(2,603,911	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Gross profit	 	 	-	 	 	 	476,067	 	 	 	134,024	 	 	 	1,149,509	 	 	 	1,759,600	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Expenses	 	 	7,455,393	 	 	 	1,635,096	 	 	 	404,194	 	 	 	759,799	 	 	 	10,254,482	 
	Other income (expenses)	 	 	(698,174	)	 	 	1,150,350	 	 	 	(7	)	 	 	26,900	 	 	 	479,069	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net income (loss)	 	 	(8,153,567	)	 	 	(8,679	)	 	 	(270,177	)	 	 	416,610	 	 	 	(8,015,813	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cumulative translation differences	 	 	-	 	 	 	-	 	 	 	104	 	 	 	-	 	 	 	104	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Comprehensive income (loss)	 	$	(8,153,567	)	 	$	(8,679	)	 	$	(270,073	)	 	$	416,610	 	 	$	(8,015,709	)



 


The Company separated the operating
segments based on the existing subsidiaries and have revenues as follows:


		-	Draganfly Inc.: No revenues.



		-	Draganfly Innovations Inc.: Product sales revenues and revenues derived from custom
integration and engineering services.



		-	Draganfly Innovations USA, Inc.: Product sales revenues and revenues derived from
drone and health/telehealth services.



		-	Dronelogics Systems Inc.: Product sales revenues and revenues derived from rental,
repair, drone as a service, and training services.



 


For 2019 and 2020, all revenues are
derived from external customers.


 


		19.	OFFICE AND MISCELLANEOUS



 


	 	 	December 31, 2020	 	 	December 31, 2019	 
	Advertising, Marketing, and Investor Relations	 	$	2,601,848	 	 	$	1,436,699	 
	Contract Work	 	 	399,494	 	 	 	438,601	 
	Other	 	 	426,511	 	 	 	252,332	 
	 	 	$	3,427,853	 	 	$	2,127,632	 






 



    36 


     


    




 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 


20.               
GOVERNMENT ASSISTANCE


 


During the year ended December 31,
2020, the Company received $30,537 (December 31, 2019 – $nil) in government assistance for the purchase of research related to scientific
research and experimental development tax credit, the entire amount is included in other income. In addition, the Company recorded $30,537
(December 31, 2019 - $nil) in SR&ED receivable for current year SR&ED claim.


 


In February 2016, the Company and an
Alberta based government funded not-for-profit organization (the “Organization”) entered into a funding agreement, whereby
the Organization would fund 50% of the total costs, up to $375,000 to the Company for the development of a new product. the Company will
pay the Organization $33,709 if the Company ever sells a product that the Organization’s funding contributed to, recorded in accounts
payable and accrued liabilities.


 


21.               
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT


 


The Company is exposed in varying degrees
to a variety of financial instrument related risks. The Board of Directors approves and monitors the risk management processes, inclusive
of documented investment policies, counterparty limits, and controlling and reporting structures. The type of risk exposure and the way
in which such exposure is managed is provided as follows:


 


Credit risk


Credit risk is the risk that one party
to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company’s
primary exposure to credit risk is on its cash held in bank accounts and trade receivables. The majority of cash is deposited in bank
accounts held with major bank in Canada and the United States. As most of the Company’s cash is held by one bank there is a concentration
of credit risk. This risk is managed by using major banks that are high credit quality financial institutions as determined by rating
agencies. The Company does not have any past due outstanding receivables and the expected loss rate for undue balance is estimated to
be nominal.


 


Liquidity risk


Liquidity risk is the risk that the
Company will not be able to meet its financial obligations as they fall due. The Company has a planning and budgeting process in place
to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis. The Company ensures
that there are sufficient funds to meet its short-term business requirements, taking into account its anticipated cash flows from operations
and its holdings of cash and cash equivalents. Historically, the Company's sole source of funding has been the issuance of equity securities
for cash, primarily through private placements. The Company’s access to financing is always uncertain. There can be no assurance
of continued access to significant equity funding.


 


Foreign exchange risk 


Foreign currency risk is the risk that
the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from
the respective functional currency. The Company does not hedge its exposure to fluctuations in foreign exchange rates.


 


Interest rate risk


Interest rate risk is the risk that
the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company
is exposed to interest rate risk on its cash equivalents as these instruments have original maturities of three months or less and are
therefore exposed to interest rate fluctuations on renewal.


 


Fair value


The fair value of the Company’s
financial assets and liabilities approximates the carrying amount.


 



    37 


     


    




 


Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars










 



 21.                FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (CONT’D)




 


Capital Management


The Company manages its capital to
maintain its ability to continue as a going concern and to provide returns to shareholders and benefits to other stakeholders. The capital
structure of the Company consists of cash, debt, and equity comprised of issued share capital, and share-based payment reserve.


 


The Company manages its capital structure
and makes adjustments to it in light of economic conditions. The Company, upon approval from its board of directors, will balance its
overall capital structure through new equity issuances or by undertaking other activities as deemed appropriate under the specific circumstances.
The Company is not subject to externally imposed capital requirements and the Company’s overall strategy with respect to capital
risk management remains unchanged from the year ended December 31, 2018.


 


The breakdown of the Company’s
capital is as follows:


 


	 	 	December 31, 2020	 	 	December 31, 2019	 
	Cash	 	$	1,982,416	 	 	$	2,429,375	 
	Debt	 	 	97,916	 	 	 	-	 
	Equity	 	$	3,848,205	 	 	$	2,191,353	 



 


22.               
RELATED PARTY TRANSACTIONS


 


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


 


Related party transactions and balances:


 


On
Aug 1, 2019, the Company entered in a business services agreement (the “Agreement”) with Business Instincts Group (“BIG”),
a company controlled by Cameron Chell, CEO and director, to provide: corporate development and governance, strategic facilitation and
management, general business services, office space, corporate business development video content, website redesign and management, and
online visibility management. The services are provided by a team of up to six consultants and the costs of all charges are based on the
fees set in the Agreement and are settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the
year ended December 31, 2020, the company incurred fees of $177,000 compared to $80,000 in 2019. As at December 31, 2020, the Company
was indebted to this company in the amount of $nil (December 31, 2019 - $nil).


 


On October 1, 2019, the Company entered into an
independent consultant agreement (“Consultant Agreement”) with 1502372 Alberta Ltd, a company controlled by Cameron Chell,
CEO and director, to provide executive consulting services to the Company. The costs of all charges are based on the fees set in the Consultant
Agreement and are settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the year ended December
31, 2020, the Company incurred fees of $525,164 compared to $9,000 in 2019. The year over year increase can largely be attributed to a
transaction bonus relating to the sale of an asset for the benefit of the Company, a performance bonus, and an increase in annual compensation
that is more commensurate with the role of CEO. As at December 31, 2020, the Company was indebted to this company in the amount of $321,741
(December 31, 2019 - $9,450).





 



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Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars













 


22.               
RELATED PARTY TRANSACTIONS (CONT’D)


 


On July 3, 2020, the Company entered
into an executive consultant agreement (“Executive Agreement”) with Scott Larson, a director of the Company, to provide executive
consulting services, as President, to the Company. The costs of all charges are based on the fees set in the Executive Agreement and are
settled on a monthly basis. The Company records these charges under Office and Miscellaneous. For the year ended December 31, 2020, the
Company incurred fees of $227,524. As at December 31, 2020, the Company was indebted to this company in the amount of $153,887.


 


During the year ended December 31,
2020 the Company had $475,628 (2019 - $9,681) payable to related parties outstanding that were included in accounts payable. The balances
outstanding are unsecured, non-interest bearing and due on demand.


 


Key management compensation


 


Key management includes the Company’s
directors and members of the executive management team. Compensation awarded to key management for the year ended December 31, 2020 and
2019 included:


 


	 	 	December 31, 2020	 	 	December 31, 2019	 
	Management fees paid to a company controlled by CEO and director	 	$	737,164	 	 	$	186,000	 
	Management fees paid to a company controlled by president and director	 	 	227,524	 	 	 	-	 
	Management fees paid to a company controlled by a former director	 	 	165,000	 	 	 	195,000	 
	Salaries	 	 	655,799	 	 	 	179,429	 
	Salaries paid to the former owner of the Company	 	 	86,097	 	 	 	149,060	 
	Share-based compensation	 	 	1,614,158	 	 	 	480,158	 
	Total	 	$	3,485,742	 	 	$	1,189,647	 



 


 23.                INCOME TAXES 




 


The following table reconciles the
expected income taxes at the Canadian statutory income tax rates to the amounts recognized in the statements of comprehensive loss for
the years ended December 31, 2020 and 2019:


 


	 	 	December 31, 2020	 	 	December 31,
    2019	 
	Loss before income taxes	 	$	8,015,813	 	 	$	11,095,507	 
	Canadian statutory rates	 	 	27	%	 	 	27	%
	Expected income tax	 	 	2,164,000	 	 	 	2,996,000	 
	Non-deductible items	 	 	(687,000	)	 	 	(2,043,000	)
	Adjustments to prior years provision versus statutory tax returns	 	 	189,000	 	 	 	(388,000	)
	Differences between prior year provision and final tax return	 	 	(535,000	)	 	 	(18,000	)
	Change in deferred tax asset not recognized	 	 	(1,131,000	)	 	 	(547,000	)
	Income tax	 	$	-	 	 	$	-	 



 



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Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars













 


 23.                INCOME TAXES (CONT’D)




 


The Company’s unrecognized deductible
temporary differences and unused tax losses for which no deferred tax asset is recognized consist of the following amounts:


 


	 	 	December 31, 2020	 	 	December 31, 2019	 
	Deferred income tax assets (liabilities):	 	 	 	 	 	 	 	 
	Share issuance costs	 	$	30,000	 	 	$	-	 
	Non-capital losses	 	 	3,656,000	 	 	 	2,439,000	 
	Property and equipment	 	 	457,000	 	 	 	581,000	 
	Intangible assets	 	 	-	 	 	 	-	 
	Scientific Research and Experimental Development	 	 	57,000	 	 	 	49,000	 
	Total deferred income tax assets	 	$	4,200,000	 	 	$	3,069,000	 
	Deferred income tax not recognized	 	 	(4,200,000	)	 	 	(3,069,000	)
	Net deferred tax assets	 	$	-	 	 	$	-	 



 


The Company has non-capital loss carry
forward of approximately $13,539,000 which may be carried forward to apply against future year income tax for Canadian income tax purposes,
subject to the final determination by taxation authorities, expiring in the years 2036 to 2040.


 


 24.                FINANCE AND OTHER COSTS




 


	 	 	December 31, 2020	 	 	December 31, 2019	 
	Accretion and interest expense (Note 16)	 	$	1,090	 	 	$	16,088	 
	Interest expense for notes payable (note 15)	 	 	-	 	 	 	101,689	 
	Interest expense on lease liabilities (note 12)	 	 	18,290	 	 	 	14,534	 
	Interest on outstanding trade payables and bank charges	 	 	3,737	 	 	 	39,594	 
	 	 	$	23,117	 	 	$	171,905	 



 


25.                OTHER INCOME




 


The Company had previously written off an investment
in a UK-based company. On April 27, 2020, this company was sold and the Company received $997,714 (US$709,544) and an estimated $193,808
(US$145,294) will be received by the end of October, 2021, which has been accounted for in accounts receivable.


 


26.                SUPPLEMENTAL CASH FLOW DISCLOSURES




 


During the year ended December 31,
2020, the Company settled debt of $344,354 with the issuance of 555,409 common shares and recognized a gain on settlement of debt of $28,614.


 


During the year ended December 31, 2019:


		-	Settlement of $822,003 in accounts payable and application of $153,566 in subscription receivable through
issuance of shares (Note 17);



		-	Issuance of 200,000 common shares at $0.50 per shares as finders’ fees;



		-	Settlement of $344,354 in trades payable for issuance of 555,409 common shares and recognized a loss of
$38,879; and



		-	Settlement of $740,000 of convertible debentures.



 



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Draganfly Inc. (formerly Drone Acquisition Corp.)


Notes to the Consolidated Financial Statements


For the Years Ended December 31, 2020 and 2019


Expressed in Canadian Dollars








 


27.                CANADIAN EMERGENCY WAGE SUBSIDY




 


In response to COVID-19, the Government
of Canada announced the Canada Emergency Wage Subsidy ("CEWS") program in April 2020. CEWS provides a wage subsidy on eligible
remuneration, subject to a maximum per employee, to eligible employers based on meeting certain eligibility criteria. The Company determined
that it qualified for this subsidy. The Company has recognized the government grant as a reduction to expenses as it has complied with
the eligibility criteria and the subsidy has been received. Included in the statement of operations and comprehensive income for the year
ended December 31, 2020 is $490,748 relating to the CEWS program of which was recorded as a reduction of wages and salaries included in
operating expenses. As at December 31, 2020, the Company had $37,185 included in amounts receivables for CEWS subsidies receivable.


 


28.               
SUBSEQUENT EVENTS


 


The following reportable events occurred
subsequent to the year ended December 31, 2020:


 


		-	On February 5, 2021, the Company closed a second tranche of its Regulation
A+ Offering for gross proceeds in the amount of $4,003,195 (US$3,135,838).



		-	On March 9, 2021, the Company announced that it completed the final closing of its Regulation A+
Offering of units sold pursuant to the Company’s Regulation A+ offering circular (the “Offering Document”) filed with
the U.S. Securities and Exchange Commission. The Company issued 25,771,465 units at the offering price set out in the Offering Document
for gross proceeds in the ‎amount of $15,504,135 (US$12,112,606) in the final closing. Each unit is comprised of one common share
of the Company ‎‎and one common share purchase warrant, with each warrant entitling the ‎holder to acquire one common
share at a price of US$0.71 per common share for period of two years from the date of issuance. ‎The common shares and warrants
issued in connection with the offering are subject to a nine month ‎hold period.‎ In total, the Company issued 35,000,000
units under its Offering Document for aggregate gross proceeds of US$16,450,000.



		-	On March 9, 2021, the Company announced that it entered into an asset purchase agreement with Vital Intelligence
 ‎Inc. (“Vital”) to purchase all the assets of Vital in consideration for: (a) a cash payment of $500,000 with ‎‎$50,000
paid upon execution of the asset purchase agreement, $200,000 to be paid at closing and ‎‎$250,000 to be paid on the six-month
anniversary date of ‎closing; and (b) ‎6,000,000 units of the ‎Company with each unit being comprised of one common
share of the Company and one common share ‎purchase warrant. Each warrant will entitle the holder to acquire one common share for
a period of 24 ‎months following closing at an exercise price of $2.67 per common share and the Company will be able ‎to accelerate
the expiry date of the warrants after one year in the event the underlying common shares ‎have a value of at least 30% greater than
the exercise price of the warrants. The units will be held in ‎escrow following closing with 1,500,000 units being released at closing
and the remainder to be released ‎upon the Company reaching certain revenue milestones received from the purchased assets. The acquisition
closed on March ‎25‎, 2021.‎



		-	A total of 8,907,619 warrants and options have been exercised for proceeds of $4,462,935.



		-	A total of 624,998 shares have been issued for the vesting of RSUs.



		-	A total of 75,000 shares have been issued to a third party for services provided.



		-	A total of 740,000 RSUs have been granted.



 



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