Draganfly Inc. — Interim / Quarterly Report 2020

May 25, 2020

==> picture [366 x 84] intentionally omitted <==

Draganfly Inc.

Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 (Expressed in Canadian Dollars)

Draganfly Inc. Condensed Consolidated Interim Statements of Financial Position Expressed in Canadian Dollars

Expressed in Canadian Dollars
			March 31,		December 31,
As at	Notes		2020		2019
			(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	4	$	1,909,942	$	2,429,375
Amounts receivable	5		160,091		224,695
Inventory	6		450,939		48,563
Prepaids	7		117,214		272,630
			2,638,186		2,975,263
Non-current Assets
Equipment	8		109,111		115,141
Intellectual property	9		503		1,385
Right of use asset	10		121,871		129,994
TOTAL ASSETS		$	2,869,671	$	3,221,783
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Trade payables and accrued liabilities	12	$	720,809	$	894,357
Lease liability	11		43,000		43,000
			763,809		937,357
Non-current Liabilities
Lease liability	11		86,339		93,073
TOTAL LIABILITIES			850,148		1,030,430
SHAREHOLDERS’ EQUITY
Share capital	13		28,942,056		27,786,517
Equity reserve	13		2,271,158		2,508,233
Accumulated deficit			(29,207,505)		(28,103,397)
Accumulated other comprehensive loss			13,814		-
TOTAL SHAREHOLDERS’ EQUITY			2,019,523		2,191,353
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	2,869,671	$	3,221,783

Nature and Continuance of Operations (Note 1) Subsequent Events (Notes 1, 19)

Approved and authorized for issuance by the Board of Directors on May 25, 2020

“Scott Larson” Director	“Cameron Chell”
	Director

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

Draganfly Inc. Condensed Consolidated Interim Statements of Comprehensive Loss - Unaudited Expressed in Canadian Dollars

Draganfly Inc. Condensed Consolidated Interim Statements of Comprehensive Loss - Unaudited Expressed in Canadian Dollars
Note	For the three months ended
	March 31, March 31, 2020 2019
Revenue from sales of goods 14 Revenue fromprovision of services 14	$ 22,356$ 51,775 474,701 96,454
TOTAL REVENUE COST OF SALES	497,057 148,229 (59,786) (56,209)
GROSS PROFIT	437,271 92,020
OPERATING EXPENSES Amortization 9 Depreciation 8,10 Office and miscellaneous Professional fees Research and development Share-based payments 13 Travel Wages and salaries	$ 882$ 3,883 14,153 4,338 650,297 62,857 92,425 32,823 3,969 5,626 519,384 - 7,620 1,293 366,503 237,923
OTHER INCOME (EXPENSE) Finance and other costs 17 Foreign exchange gain (loss) Gain on settlement of debt 18 Other income(loss)	(1,655,233) (348,743) (4,006) (41,259) 50,845 (43,792) 67,493 - (478) 1,960
NET LOSS OTHER COMPREHENSIVE LOSS Foreign exchange translation	$ (1,104,108)$ (339,814) 13,814 -
COMPREHENSIVE LOSS	(1,090,294) (339,814)
Loss per share Basic/Diluted Weighted average number of common shares outstanding	$ (0.02)$ (0.01) 70,178,481 39,346,807

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

Draganfly Inc.

Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity (Deficiency) - Unaudited Expressed in Canadian Dollars

Expressed in Canadian Dollars
								Accumulated		Total
								Other		Shareholders’
	Number of				Equity		Accumulated	Comprehensive		Equity
	Shares		Share Capital		Reserve		Deficit	Income		(Deficiency)
Balance at December 31, 2018	39,346,807	$	12,561,342	$	882,180	$	(17,576,131) $	-	$	(4,132,609)
Net loss	-		-		-		(339,814)	-		(339,814)
Balance at March 31, 2019	39,346,807		12,561,342		882,180		(17,915,945)	-		(4,472,423)
Shares issued for settlement of notes payable	1,291,549		645,775		-		-	-		645,775
Shares issued as transaction 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 for settlement of trades payable	45,325		22,662		-		-	-		22,662
Shares issued for settlement of convertible
debentures	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
Share-based payments	-		-		761,559		-	-		761,559
Net loss	-		-		-		(10,755,243)	-		(10,755,243)
Balance at December 31, 2019	69,670,613		27,786,517		2,508,233		(28,103,397)	-		2,191,353
Shares issued for exercise of warrants	3,110,800		1,155,539		(756,459)		-	-		399,080
Share-based payments	-		-		519,384		-	-		519,384
Net loss	-		-		-		(1,104,108)	-		(1,104,108)
Translation of foreign operations	-		-		-		-	13,814		13,814
Balance at March 31, 2020	72,781,413	$	28,942,056	$	2,271,158	$	(29,207,505) $	13,814	$	2,019,523

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

Draganfly Inc. Condensed Consolidated Interim Statements of Cash Flows - Unaudited Expressed in Canadian Dollars

Draganfly Inc. Condensed Consolidated Interim Statements of Cash Flows - Unaudited Expressed in Canadian Dollars
	For the three months ended
	March 31, 2020 March 31, 2019
OPERATING ACTIVITIES Comprehensive loss Adjustments for: Amortization Depreciation Finance and other costs Gain on settlement of debt Share-basedpayments	$ (1,104,108)$ (339,814) 882 3,883 14,153 4,338 4,006 41,259 (67,493) - 519,384 -
Net changes in non-cash working capital items: Accounts receivable Inventory Prepaid expenses Tradepayables and accrued liabilities	(633,176) (290,334) 64,604 3,655 (402,376) (3,672) 155,416 503 (104,688) 40,001
Funds used in operations activities	(920,220) (249,847)
INVESTING ACTIVITIES Disposal of equipment Disposal of intellectualproperty	- (583) - 16
Fundsprovided by (used in) investing activities	- (567)
FINANCING ACTIVITIES Proceeds from issuance of common shares Proceeds from issuance of notes payable Repayment of notes payable Repayment of convertible debentures Repayment of lease liability	399,080 - - 394,000 - (48,439) - (100,833) (10,750) -
Fundsprovided by financing activities	388,330 244,728
Effects of exchange rate changes on cash Change in cash Cash,beginningofperiod	12,457 69 (531,890) (5,686) 2,429,375 101,787
Cash,end ofperiod	$ 1,909,942$ 96,170
Cash and cash equivalents consist of the following: Cash held in banks Guaranteed investment certificate	$ 1,767,932$ 96,170 142,010 -
	$ 1,909,942$ 96,470

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

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

1. NATURE AND CONTINUANCE OF OPERATIONS

Draganfly Inc. (the “Company”) was incorporated on June 1, 2018 under the Business Corporations Act (British Columbia). The Company’s shares began trading on the Canadian Securities Exchange (the “CSE”) under the symbol “DFLY”.

The Company’s head office is located at 2108 St. George Avenue, Saskatoon, SK, S7M 0K7 and its registered office is located at 2300 – 550 Burrard Street, Vancouver, BC, V6C 2B5.

On August 15, 2019, the Company and 1187607 B.C. Ltd. (“Merger Co.”), a wholly-owned subsidiary of the Company, completed a Business Combination Agreement (the “BCA”) with Draganfly Innovations Inc. (“Draganfly Innovations”) (the “Amalgamation”). Under the Amalgamation, shareholders of Draganfly Innovations received 1.794 fully paid and nonassessable 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.”.

On January 28, 2020, the Company incorporated a new Delaware subsidiary, Draganfly Innovations USA, Inc. (“Draganfly USA”) to provide better access and service to our US market.

The Company has incurred losses and negative cash flows from operations from inception that has primarily been funded through financing activities. The Company will need to raise additional capital during the next twelve months and beyond to support current operations and planned development. These factors indicate the existence of a material uncertainty that may cast significant doubt as to the Company’s ability to continue as a going concern. Management intends to finance operating costs over the next twelve months with cash on hand, convertible debentures and through private placement of common shares. These condensed consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. These financial statements do not reflect the adjustments to the carrying values of assets and liabilities, the reporting revenues and expenses, and the statements of financial position classifications used, that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.

2. BASIS OF PREPARATION

Statement of Compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations issued by the International Reporting Interpretation Committee (“IFRIC”). The principal accounting policies applied in the preparation of these interim financial statements, including International Accounting Standards (“IAS”) 34 Interim Financial Reporting, are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

The notes presented in these condensed consolidated interim financial statements include only significant events and transactions occurring since the Company’s last fiscal year end and they do not include all of the information required in the Company’s most recent annual financial statements. Except as noted below, these condensed consolidated interim financial statements follow the same accounting policies and methods of application as the Company’s annual financial statements and should be read in conjunction with the Company’s annual financial statements for the year ended December 31, 2019, which were prepared in accordance with IFRS as issued by IASB. There have been no significant changes in judgement or estimates from those disclosed in the financial statements for the year ended December 31, 2019.

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

2. BASIS OF PREPARATION (CONT’D)

These condensed consolidated interim financial statements were authorized for issue by the Board of Directors on May 25, 2020.

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

Basis of consolidation

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

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

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

All intercompany balances and transactions were eliminated on consolidation.

3. AMALGAMATION

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

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

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)
Listingexpense	$	7,804,859

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

3. AMALGAMATION (CONT’D)

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.

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 dividendyield	0%

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

4. CASH AND CASH EQUIVALENTS

		March 31, 2020	December 31,2019
Cash held in banks	$	1,767,932$	96,170
Guaranteed investment certificate		142,010	-
	$	1,909,942$	96,170

On March 27, 2020, the Company invested $142,000 in a guaranteed investment certificate (“GIC”) to secure its credit cards. The terms of the GIC are for 1 year at a rate of 0.50% per annum. During the three months ended March 31, 2020, the Company accrued interest of $10 on this GIC.

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

5. AMOUNTS RECEIVABLE

		March 31, 2020	December 31,2019
Trade accounts receivable	$	102,029$	169,810
GST input tax credits		58,062	54,885
	$	160,091$	224,695

6. INVENTORY

		March	31, 2020	December 31,2019
Finished goods	$		415,882$	-
Parts			35,057	48,563
	$		450,939$	48,563

During the three months ended March 31, 2020, the Company recorded a provision for its obsolete and slow-moving inventory.

During the three months ended March 31, 2020, $7,576 (2019: $39,653) of inventory was sold and recognized in cost of sales.

7. PREPAID EXPENSES AND DEPOSITS

		March 31, 2020		December 31, 2019
Insurance	$	33,618	$	35,703
Prepaid marketing services		76,240		227,459
Prepaid rent		3,583		-
Prepaid subscriptions		705		1,583
WCB Premiums		-		916
Deposits		3,068		6,969
	$	117,214	$	272,630

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

8. EQUIPMENT

		Computer	Furniture and
		Equipment	Equipment	Software	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
Balance at March 31, 2020	$	7,000$	142,173$	29,967$	179,140
Accumulated depreciation
Balance at January 1, 2019	$	150,026 $	153,999 $	69,774 $	373,799
Charge for the period		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 theperiod		18	5,212	800	6,030
Balance at March 31, 2020	$	6,779$	43,156$	20,094$	70,029
Net book value:
December 31,2019	$	239$	104,229$	10,673$	115,141
March 31, 2020	$	221$	99,017$	9,873$	109,111

9. INTELLECTUAL PROPERTY

		Total
Cost
Balance at January 1, 2019	$	71,805
Impairment		(29,874)
Balance at December 31,2019	$	41,931
Balance at March 31, 2020	$	41,931
Accumulated depreciation
Balance at January 1, 2019	$	59,896
Charge for the period		8,386
Impairment		(27,736)
Balance at December 31, 2019	$	40,546
Charge for theperiod		882
Balance at March 31, 2020	$	41,428
Net book value:
December 31,2019	$	1,385
March 31, 2020	$	503

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

10. RIGHT OF USE ASSETS

		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
Balance at March 31, 2020	$	159,539
Accumulated depreciation
Balance at January 1, 2019, on adoption of IFRS 16	$	-
Charge for theperiod		29,545
Balance at December 31, 2019	$	29,545
Charge for theperiod		8,123
Balance at March 31, 2020	$	37,668
Net book value:
December 31,2019	$	129,994
March 31, 2020	$	121,871

11. 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
Interest expense		4,016
Leasepayments		(10,750)
Balance at March 31, 2020		129,339
Which consists of:
Current lease liability	$	43,000
Non-current lease liability		86,339
Balance at March 31, 2020	$	129,339

12. TRADE PAYABLES AND ACCRUED LIABILITIES

		March 31, 2020	December 31,2019
Trade accounts payable	$	570,651$	688,309
Accrued liabilities		116,449	162,658
Due to related parties (Note 16)		-	9,681
Governmentgrantpayable(Note 15)		33,709	33,709
	$	720,809$	894,357

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

13. SHARE CAPITAL

Authorized share capital

Unlimited number of common shares without par value.

Issued share capital

During the three months ended March 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.

During the three months ended March 31, 2019, no common shares were issued.

Stock Options

The Company has adopted an incentive share compensation plan, which provides that the Board of Directors of the Company may from time to time, in its discretion, and in accordance with the CSE requirements, grant to directors, officers, employees and technical consultants to the Company, non-transferable stock options to purchase common shares. The total number of common shares reserved and available for grant and issuance pursuant to this plan shall not exceed 20% (in the aggregate) of the issued and outstanding common shares from time to time. The number of options awarded and underlying vesting conditions are determined by the Board of Directors in its discretion.

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

				Remaining	Number of	Number of
				Contractual	Options	Options
Grant Date	Expiry Date		Exercise Price	Life(years)	Outstanding	Exercisable
October 30, 2019	October 30, 2029	$	0.50	9.59	3,075,000	1,024,992
November 19,2019	November 19,2029	$	0.50	9.64	650,000	83,333
					3,725,000	1,108,325
					Weighted Average
				Number	of Options	Exercise Price
Outstanding, December 31, 2018					- $	-
Granted					3,725,000	0.50
Outstanding,December 31,2019					3,725,000$	0.50
Outstanding, March 31, 2020					3,725,000$	0.50

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.

During the three months ended March 31, 2020, the Company recorded share-based payment expense of $274,584 (2019: $nil) related to the expense of stock options granted during the year ended December 31, 2019, which vested in the over their vesting period. The weighted average grant date fair value of options granted during the year ended December 31, 2019 was $0.46 per option.

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

13. SHARE CAPITAL (CONT’D)

Restricted Share Units

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

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

Grant Date	Number of RSUs Outstanding
October 30, 2019	2,925,000
November 19,2019	250,000
	3,175,000

During the year ended December 31, 2019, the Company committed to granted 3,175,000 RSUs to employees and consultants of the Company with each RSU exercisable into one common share of the Company or the cash equivalent thereof upon the vesting conditions being met for a period of three years from the grant date. During the three months ended March 31, 2020, the Company recorded share-based payment expense of $244,800 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. No additional RSUs were granted during he three months ended March 31, 2020.

Warrants

		Weighted Average
	Number of Warrants	Exercise Price
Outstanding, December 31, 2018	770,000 $	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
Issued	14,051,499	0.50
Outstanding, December 31, 2019	18,051,499 $	0.41
Exercised	(3,110,800)	0.13
Outstanding, March 31, 2020	14,940,699$	0.47

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

Date issued	Expiry date	Exercise price	Number of warrants outstanding
February 4, 2019	February 4, 2021	$0.10	1,109,200
November 5, 2019	November 5, 2020	$0.50	13,831,499
			14,940,699

The weighted average remaining contractual life of warrants outstanding as of March 31, 2020 was 0.62 years (December 31, 2019 - 0.84 years).

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

14. REVENUE

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

		March 31, 2020	March 31,2019
Product sales	$	22,356$	51,775
Consulting		474,701	96,454
	$	497,057$	148,229

The Company operates in an international market within one reportable industry segment. Geographic revenue segmentation is as follows:

		March 31, 2020	March 31,2019
Canada	$	7,931$	35,629
United States		489,126	112,600
	$	497,057$	148,229

The Company derives significant revenues from certain customers, for the three months ended March 31, 2020 one customer provided at 96% of total revenues and for the three months ended March 31, 2019, three customers provided at 84% of total revenues.

15. GOVERNMENT ASSISTANCE

In February 2016, the Company and an Alberta-based government funded not-for-profit organization (the “Organization”) entered into a funding agreement, whereby the Organization would fund 50% of the total costs, up to $375,000 to the Company for the development of a new product. During the year ended December 31, 2016, the Company received $75,000 in funding. On February 28, 2017, the Company and the Organization entered into a repayment agreement, where the Company would refund and repay a portion of the Organization’s initial funding. The repayment agreement set out the terms and conditions upon which the Company was to pay $41,292 over a 12-month repayment plan. In addition, the Company will pay the Organization $33,709 if the Company ever sells a product that the Organization’s funding contributed to. During the year ended December 31, 2019, the final repayment of $13,764 was made and the contingent balance of $33,709 remains in government grants payable (Note 12).

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

16. RELATED PARTY TRANSACTIONS

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

Trade payables and accrued liabilities:

On Aug 1, 2019, the Company entered in a business services agreement with a company controlled by a 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. For the three months ended March 31, 2020, the company incurred fees of $70,350 compared to $nil in 2019. As at March 31, 2020, the Company was indebted to this company in the amount of $nil (December 31, 2019 - $nil).

As at March 31, 2020, the Company had $15,000 (December 31, 2019 – $9,681) payable to related parties outstanding that were included in accounts payable. The balances are unsecured, non-interest bearing, and due on demand.

Key management compensation

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

		March 31, 2020	March 31,2019
Management fees paid to a company controlled by a director	$	33,600$	-
Management fees paid to a company controlled by a former director		30,000	-
Salaries		71,190	29,077
Salaries paid to the former owner of the Company		33,415	39,508
Share-basedpayments		182,774	-
Total	$	350,979$	68,585

17. FINANCE AND OTHER COSTS

		March 31, 2020	March 31,2019
Accretion expense	$	-$	7,957
Interest expense for notes payable		-	11,798
Interest on outstanding trade payables and bank charges		-	21,504
Interest income on GIC		(10)	-
Interest on lease liability		4,016	-
	$	4,006$	41,259

18. GAIN ON SETTLEMENT OF DEBT

During the three months ended March 31, 2020, as a result of the transactions relating to the private placement and ensuing debt repayments, a gain of $67,493 was recognized on the settlement of outstanding debt.

Draganfly Inc. Notes to the Condensed Consolidated Interim Financial Statements - Unaudited For The Three Months Ended March 31, 2020 Expressed in Canadian Dollars

19. SUBSEQUENT EVENTS

Subsequent to March 31, 2020, 1,239,200 warrants were exercised for $175,920.

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 US$709,544 and an estimated US$145,294 will be received in 18 months.

On April 30, 2020, the Company closed the share purchase agreement with the shareholders of Dronelogics Systems Inc. (“Dronelogics”), whereby the Company acquired all of the issued and outstanding shares in the capital of Dronelogics, excluding the cinematography division, for a consideration of $2,000,000, plus the amount, if any, by which the estimated closing date working capital exceeds the target closing working capital (the “Transaction”). The consideration was paid $500,000 in cash, subject to working capital adjustment and 3,225,438 common shares in the capital of the Company at a deemed price of $0.50 per share. In addition, the Company welcomed Mr. Hannewyk as a member of the Board.

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

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 the Company’s business operations cannot be reasonably estimated at this time. As at the financial statement approval date, the outbreak and the related mitigation measures have had the following impacts on the Company’s operations, among others: temporary closure of business locations, supply chain issues, and decrease in sales. The extent to which these events may impact the Company’s business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in Canada and other countries to contain and treat the disease. These events are highly uncertain and as such, the Company cannot determine the ultimate financial impacts at this time. Any deterioration in the current situation could have an adverse impact on our business, results of operations, financial position and cash flows in 2020.