Draganfly Inc. — Management Reports 2020

Dec 31, 2020

China Keli Electric Company Ltd.

Management’s Discussion and Analysis (“MD&A”) For the three and six months ended October 31, 2020

(expressed in Canadian dollars unless otherwise noted)

The following Management’s Discussion and Analysis (“MD&A”) of the financial condition and results of operations of China Keli Electric Company Ltd. (“Keli” or the “Company”) should be read in conjunction with the unaudited financial statements for the three and six months ended October 31, 2020 including the notes therein, which are prepared in accordance with International Financial Reporting Standards (IFRS).

Additional information relevant to the Company, including 2020 Annual MD&A filed on December 29, 2020, is available for review on SEDAR at www.sedar.com and on Keli’s website at www.zkl.cc.

Forward-Looking Statements and non-GAAP measures

Certain information in this MD&A is forward-looking within the meaning of certain securities laws, and is subject to important risks, uncertainties and assumptions. This forward-looking information includes, among other things, information with respect to the demand for products and installation services, the expected capacity, the demand for Keli products and installation services, the expected revenues from Keli products and installation services, the revenues of the businesses, the changes in expenses, the financing of working capital and investment needs, as well as information with respect to the Company’s beliefs, plans, expectations, anticipations, estimates and intentions. The words “may”, “could”, “should”, “would”, “suspect”, “outlook”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan”, “target” and similar words and expressions are used to identify forward-looking information. The forward-looking information in this MD&A describes the Company’s expectations as of the date of this MD&A and are based on certain factors and assumptions and subject to certain risks and uncertainties. Assumptions underlying our expectations regarding forward-looking statements or information contained in this MD&A include, among others, that the Company will look for other profitable operations for fiscal year 2020; that the Company continues to be able to access additional capital on reasonable terms and on a timely basis. In the event that any of these assumptions prove to be incorrect, or in the event that we are impacted by any of the risks identified herein or any unforeseen risks, we may not be able to continue our business as planned, or at all.

Material factors or risks which could cause actual results or events to differ materially from a conclusion in such forward-looking information include the risks set out herein and in the Company’s other filings, which are all filed with Canadian securities regulators, which are available on SEDAR at www.sedar.com.

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THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A PRESENTS THE EXPECTATIONS OF THE COMPANY AS OF THE DATE OF THIS MD&A AND, ACCORDINGLY, IS SUBJECT TO CHANGE AFTER SUCH DATE. READERS SHOULD NOT PLACE UNDUE IMPORTANCE ON FORWARD-LOOKING INFORMATION AND SHOULD NOT RELY UPON THIS INFORMATION AS OF ANY OTHER DATE. WHILE THE COMPANY MAY ELECT TO, THE COMPANY DO NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME, EXCEPT AS REQUIRED BY APPLICABLE SECURITIES LEGISLATION.

Company Overview

The Company specialized in the manufacturing and installation of electrical components and equipment, including pre-assembled mini substations, electrical controllers, pressurized and vacuumed switchgears and circuit breakers. On October 29, 2018, the Company disposed Creative Grace Limited, with the resulting that the Company no longer had an active operating business.

Financial Highlights

• General and administrative expenses increased by 252.9% from $23,506 in the three months ended October 31, 2019 (“Comparable Quarter”) to $82,943 in the three months ended October 31, 2020 (“Q2”). General and administrative expenses increased by 57.8% from $64,391 in the six months ended October 31, 2019 (“Comparable Period”) to $101,614 in the six months ended October 31, 2020 (“First Half of FY2021”). The increase was mainly due to the increase of legal fee and consultation fee.

• Other income was $Nil in both Q2 and Comparable Quarter, and decreased by $2,089,702 from $2,089,702 in the Comparable Period to $Nil in the First Half of FY2021. The decrease was related to the forgiven of debts owing to Creative Grace Ltd. and Zhuhai Keli Electric Co., Ltd. amount of $2,089,702 in the three months ended July 31, 2019 (“Q1”).

• Net loss was $83,010 in Q2, an increase of $59,442 compared with a loss of $23,568 in Comparable Quarter. Net loss was $101,785 in the First Half of FY2021, a decrease of $2,126,839 compared with a profit of $2,025,054 in Comparable period. The decrease was related to the forgiven of debts owing to Creative Grace Ltd. and Zhuhai Keli Electric Co., Ltd. amount of $2,089,702 in Comparable Period and the increase in general and administrative expenses in Q2 mentioned above.

• Total assets were $27,675 as of October 31, 2020, a decrease of 2.9% compared with $28,510 as of April 30, 2020. The decrease was mainly attributed to the decrease of cash and cash equivalents.

• Total liabilities were $1,151,071 as of October 31, 2020, compared to $1,050,121 as of April 30, 2020. The total liabilities increased by 9.6%, which was primarily due to changes in amount due to related parties.

• Working capital deficit, defined as current assets less current liabilities, decreased $101,785 by 10.0% from negative $1,021,611 as of April 30, 2020 to negative $1,123,396 as of October 31, 2020. The change of working capital deficit was mainly due to the changes of assets and liabilities mentioned above.

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Results of Operation – The Second Quarter

	Three months ended October 31,
	2020 2019
General and Administrative Expenses Finance income (Cost) Other income EBITDA Net Loss Basic and Diluted Earnings (Loss) Per Share – Continuing Operations – Discontinued Operations Total Comprehensive Income (Loss)	$ (82,943) $ (23,506) (67) (62) - - (82,943) (23,506) (83,010) (23,568) (0.0009) (0.0003) - - (83,010) (23,568)

General and administrative expenses

General and administrative expenses of $82,943 in Q2, increased $59,437 compared with $23,506 in the Comparable Quarter. The significant increase was mainly due to the changes in legal and consultation fees in the quarter.

Finance cost

Finance cost was $67 in Q2, compared to a cost of $62 in the Comparable Quarter. The change was mainly due to the bank charge in the quarter.

EBITDA

EBITDA was of negative $82,943 in Q2, compared with negative $23,506 in the Comparable period. The decreased EBITDA was due to the increase in general and administrative expenses.

Loss for the period

Loss was $83,010 in Q2, an increase of $59,442 compared with a loss of $23,568 in the Comparable Quarter. The change was mainly due to the changes of general and administrative expenses.

The basic and diluted loss per-share for continuing operations in Q2 and in Comparable Quarter were negative 0.09 cents and negative 0.03 cents respectively, and the basic and diluted earnings per-share for discontinued operations in Q2 and in the Comparable Quarter were Nil cents.

Total comprehensive loss

In Q2, total comprehensive loss was $83,010 compared to a comprehensive loss of $23,568 for the Comparable Quarter

The Company recorded unrealized foreign currency translation loss of $Nil in Q2 and in the Comparable Quarter.

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Results of Operation – The First Half of FY2021

	Six months ended October 31,
	2020 2019
General and Administrative Expenses Finance income Other income EBITDA Net Income (Loss) Basic and Diluted Earnings (Loss) Per Share – Continuing Operations – Discontinued Operations Total Comprehensive Income /(Loss)	$ (101,614) $ (64,391) (171) (257) - 2,089,702 (101,614) 2,025,311 (101,785) 2,025,054 (0.0011) 0.0224 - - $ (101,785) $ 2,025,054

General and administrative expenses

General and administrative expenses were $101,614 in the First Half of FY2021, compared to $64,391 in the Comparable Period, the 57.8%, or $37,223 increase primarily due to the changes of legal fee and consultation fee in First Half of FY2021.

Finance cost

Finance cost was $171 in the First Half of FY2021 compared to cost $257 in the Comparable Period. The change was mainly due to the bank charge in the First Half of FY2021.

EBITDA

EBITDA was negative $101,614 in First Half of FY2021, compared with $2,025,311 in the Comparable period. The decreased EBITDA was due to the decrease in other income of the forgiven of debts owing to Creative Grace Ltd. and Zhuhai Keli Electric Co., Ltd. amount of $2,089,702 in the Comparable period and the increase in general and administrative expenses in First Half of FY2021.

Profit for the period

Net loss was $101,785 in the First Half of FY2021, a decrease from an income of $2,025,054 in the Comparable Period. The change was mainly caused by the other income in the Comparable Period and increase in general and administrative expenses in First Half of FY2021 mentioned above.

The basic and diluted earnings per-share for continuing operations in the First Half of FY2021 and in Comparable period was negative 0.11 cents and 2.24 cents respectively.

Total comprehensive income

In the First Half of FY2021, comprehensive loss was $101,785 compared to a comprehensive income of $2,025,054 for the Comparable Period.

The Company recorded unrealized foreign currency translation loss of $Nil in the First Half of FY2021 and the Comparable Period, respectively.

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Selected Financial Information

	October 31, 2020	October 31, 2020		April 30, 2020
Cash and cash equivalents	$	17,529	$	18,658
Other receivables		10,146		9,852
Total current assets		27,675		28,510
Total assets		27,675		28,510
Total current liabilities		1,151,071		1,050,121
Total liabilities		1,151,071		1,050,121
Working capital deficiency		(1,123,396)		(1,021,611)
Shareholder’s deficit	$	(1,123,396)	$	(1,021,611)

Cash and cash equivalents

Cash and cash equivalents decreased from $18,658 as at April 30, 220, to $17,529 as at October 31, 2020.

Other Receivables

Other receivables increased from $9,852 as at April 31, 2020 to $10,146 as at October 31, 2020.

Summary of Quarterly Results

The following table summarizes the quarterly financial information of the Company over the past eight quarters.

	October	July,	April,	January	October	July,	April,	January	31,
	2020	2020	2020	2020	2019	2019	2019	2019
	Q2	Q1	Q4	Q3	Q2	Q1	Q4	Q3
	$	$	$	$	$	$	$	$
Revenues	-	-	-	-	-	-	-		-
Cost of Sales	-	-	-	-	-	-	-		-
Gross Profit	-	-	-	-	-	-	-		-
Gross Margin Percentage	-%	-%	-%	-%	-%	-%	-%		-%
Total Operating Expenses	83,010	18,775	27,010	18,217	23,568	(2,048,622)	103,998	50,672
Net Profit (Loss)	(83,010)	(18,775)	(27,010)	(18,217)	(23,568)	2,048,622	(103,998)	(50,672)
Basic and Diluted Earnings
(Loss) Per Share
-Continuing Operations	(0.0009)	(0.0002)	(0.0003)	(0.0002)	(0.0003)	0.0227	(0.0012)	(0.0006)
-Discontinued Operations	-	-	-	-	-	-	-		-
Total Assets	27,675	28,530	28,510	28,404	28,409	41,351	33,192	142,930

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Liquidity and Capital Resources

Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. As at October 31, 2020, the Company was holding cash and cash equivalents of only $17,529. The Company tried to maintain adequate cash balances and credit facilities in order to meet short term expenditure requirements, after taking into account cash flows from disposition of operating subsidiaries. The Company's management believes that these sources will be marginally not sufficient to cover its likely short-term cash requirements.

The contractual obligations of the Company as at October 31, 2020, were composed of amounts due to related parties and accrued expenses and other liabilities in the amount of $1,151,071. The Company is not fully funded to meet its financial obligations. Additional funds will have to be generated through additional financing. For the six months ended October 31, 2020, the Company recorded a net loss of $101,785. Until the Company develops or acquires a new and profitable businesses, the Company will still require additional funds to maintain minimal operations. As at October 31, 2020, the working capital deficit was negative $1,123,396. In addition, the Company continues to progress with the following measures to manage cash flow of the Company: renew short term loans and financing with its Chairwoman and Chief Executive Officer, and to raise addition fund for operation. Capital is comprised of the Company’s shareholders’ equity and any debt that it may issue. The Company’s objectives when managing capital are to maintain financial strength and to protect its ability to meet its on-going liabilities, to continue as a going concern, to maintain creditworthiness and to maximize returns for shareholders over the long term. Protecting the ability to pay current and future liabilities includes maintaining capital above minimum regulatory levels, current financial strength rating requirements and internally determined capital guidelines and calculated risk management levels. The capital for the Company was primarily generated from the operating profit and issuance of common shares. There were no changes in the Company’s approach to capital management for the six months ended October 31, 2020 and 2019. The Company is not subject to externally imposed capital restrictions.

Transactions with Related Parties

The related party transactions mainly comprised the amount due to major shareholders and subsidiary companies without interest. As at October 31, 2020, the net balance of the amount due to related parties was $1,125,992.

Critical Accounting Estimates

The Company prepares its financial statements in accordance with IFRS which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates are based upon historical experience and other assumptions that are believed to be reasonable under the circumstances. These estimates are evaluated on an ongoing basis and form the basis for making decisions regarding the carrying value of assets and liabilities and the reported amount of revenues and expenses. Actual results may differ from these estimates under different assumptions.

The Company has identified the following as critical accounting estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of its financial condition and results of operations and could potentially result in materially different results under different assumptions and conditions.

Going concern

The assessment of the Company’s ability to execute its strategy by funding future working capital requirements involves judgment. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

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Income Taxes

The Company follows the asset and liability method of accounting for future income taxes. Under this method, future income tax assets and liabilities are recorded based on temporary differences between the carrying amount of balance sheet items and their corresponding tax bases. In addition, the future benefits of income tax assets, including unused tax losses, are recognized, subject to a valuation allowance, to the extent that it is more likely than not that such future benefits will ultimately be realized. Future income tax assets and liabilities are measured using enacted tax rates and laws expected to apply when the tax liabilities or assets are to be either settled or realized.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements as defined by applicable securities regulations in Canada as at October 31, 2020 that have, or are reasonably likely to have, a current or future material effect on the Company’s results of operations or its financial condition.

Financial Instruments

The Company follows IFRS 9, Financial Instruments, which applies a single approach to determine whether a financial asset is measured at amortized cost or fair value. The classification is based on two criteria: the Company’s business objectives for managing the assets; and whether the financial instruments’ contractual cash flows represent “solely payments of principal and interest” on the principal amount outstanding (the “SPPI test”). Financial assets are required to be reclassified only when the business model under which they are managed has changed. All reclassifications are to be applied prospectively from the reclassification date.

Financial liabilities under IFRS 9 are generally classified and measured at fair value at initial recognition and subsequently measured at amortized cost.

Financial assets

The Company initially recognizes financial assets at fair value on the date that the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.

Classification and measurement Under IFRS 9, financial assets are initially measured at fair value. In the case of a financial asset not categorized as fair value through profit or loss (“FVTPL”), transaction costs are included. Transaction costs of financial assets carried at FVTPL are expensed in net income (loss). Subsequent classification and measurement of financial assets depends on the Company’s business objective for managing the asset and the cash flow characteristics of the asset:

(i) Amortized cost – Financial assets held for collection of contractual cash flows that meet the SPPI test are measured at amortized cost. Interest income is recognized as Other income (expense) in the financial statements, and gains/losses are recognized in net income (loss) when the asset is derecognized or impaired. The Company measures cash and other receivables at amortized

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(ii) Fair value through other comprehensive income (“FVOCI”) – Financial assets held to achieve a particular business objective other than short-term trading are designated at FVOCI. IFRS 9 also provides the ability to make an irrevocable election at initial recognition of a financial asset, on an instrument-by-instrument basis, to designate an equity investment that would otherwise be classified as FVTPL and that is neither held for trading nor contingent consideration arising from a business combination to be classified as FVOCI. There is no recycling of gains or losses through net income (loss). Upon derecognition of the asset, accumulated gains or losses are transferred from other comprehensive income (“OCI”) directly to Deficit.

(iii) FVTPL – Financial assets that do not meet the criteria for amortized cost or FVOCI are measured at FVTPL. In 2017, cash was measured at FVTPL. The change in classification did not affect the carrying value.

Financial liabilities

The Company initially recognizes financial liabilities at fair value on the date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. The subsequent measurement of financial liabilities is determined based on their classification as follows:

(i) FVTPL Derivative financial instruments entered into by the Company that do not meet hedge accounting criteria are classified as FVTPL. Gains or losses on these types of financial liabilities are recognized in net income (loss).

(ii) Amortized cost – All other financial liabilities are classified as amortized cost using the effective interest method. Gains and losses are recognized in net income (loss) when the liabilities are derecognized as well as through the amortization process. The Company measures accounts payable and accrued liabilities and amounts payable to related parties at amortized cost and did so in fiscal 2017.

Classification of financial instruments

IFRS 7, Financial instruments: disclosures , establishes a fair value hierarchy that reflects the significance of inputs in measuring fair value as the following:

Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 –inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from prices); and

Level 3 – inputs for the assets or liability that are not based on observable market data (unobservable inputs).

The classification of a financial instrument in the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of fair value.

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.

Share Capital

The Company is authorized to issue an unlimited number of common shares. As at October 31, 2020, there were 90,415,223 common shares issued and outstanding.

During Q1, no stock options were granted. As at October 31, 2020, there were no stock options outstanding and exercisable.

As at October 31, 2019, the number of common shares outstanding on a fully-diluted basis was 90,415,223.

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Subsequent Events

(a) Partial revocation order

On November 18, 2020, British Columbia Securities Commission (“BCSC”) has approved a partial revocation order of the failure-to-file cease trade order (the “FFCTO”) issued on October 30, 2018.

(b) Bridge-Loan financing

On November 18, 2020, with the approved partial revocation order, the Company entered into a loan agreement with Sean Leigh Webster for a sum of CAD$200,000 (the “Bridge-Loan”) with a term of convertible into common shares of the Company at $0.05 per share if the loan is not repaid on or before February 28, 2021. The Bridge-Loan is to be used as financial resources for continuous disclosure and outstanding fees and expenses up to date.

Except mentioned above, there was no significant subsequent event.

Risks and Uncertainties

For the Company’s risk factors, see the risks identified in the forward-looking information section above, and refer to the risk factors section of the Company’s Annual MD&A filed on December 29, 2020 and the Company’s press releases, all filed with the Canadian securities regulators, which are available on SEDAR at www.sedar.com

The Company may need additional financing to develop its business

The Company is currently at a stage where it requires external capital for additional future working capital amounts for expenditure. There can be no certainty that the Company can obtain these funds.

The Company’s controlling shareholders have significant influence over the Company

The Company’s largest shareholders are Ms. Sou Wa Wong and Mr. Lou Meng Cheong, who collectively owns 62,000,000 Common Shares, and 68.6% of the total issued and outstanding share capital of the Company. Accordingly, Ms. Wong and Mr. Cheong have significant influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of the Company’s assets, election of directors and other significant corporate actions. Ms. Wong and Mr. Cheong also have the power to prevent or cause a change in control. In addition, without the consent of Ms. Wong and Mr. Cheong, the Company could be prevented from entering into transactions that are otherwise beneficial to the Company. Ms. Wong and Mr. Cheong may cause the Company to take actions that are opposed by other shareholders as the interests of Ms. Wong and Mr. Cheong may differ from the interests of the other shareholders of the Company.

There is no assurance of liquidity for the Common shares

There is no assurance that there will be a liquid market for the Common Shares. Trading volumes for the Common Shares can and do fluctuate dramatically from day to day and from month to month. Should investor interest in the Company wane, shareholders may find it difficult to sell their shares or may be unable to do so. In addition, if an active trading market for the Common Shares shall fail to develop, share prices may also decline. This will in turn affect the Company’s ability to raise capital in the future.

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The Company’s operations are subject to various environmental laws and regulations

The Company’s operations are subject to various environmental laws which regulate matters such as health, safety, treatment of waste and land use. Failure to comply with applicable laws, regulations, and licensing requirements may result in enforcement actions. Penalties could include suspension or revocation of necessary licenses or permits, civil liability, or the imposition of fines. The cost of compliance, remediation, or liability could materially adversely affect future operating results. Furthermore, the operational or financial impact of new or amended laws or regulations cannot be predicted and could have a material adverse impact on the Company’s financial condition and operating results.

Commitments

The Company did not have any significant operating, capital and other commitments, longterm obligations, or guarantees as of October 31, 2020.

Board Approval

The Board of Directors of the Company has approved this MD&A on December 31, 2020

“Tsz Fung Philip Lo " Chief Executive Officer

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