Exhibit
99.2
Management
Discussion and Analysis
For
the Three Months ended March 31, 2024
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
This
Management’s Discussion and Analysis (“MD&A”) of Draganfly Inc. (“Draganfly” or the “Company”)
is presented and dated as of May 14, 2024, and should be read in conjunction with the unaudited consolidated interim financial
statements and related notes for the three months ended March 31, 2024 and the annual consolidated financial statements and related notes
for the year ended December 31, 2023. The Company’s audited consolidated financial statements have been prepared on a “going
concern” basis, which presumes that the Company will be able to realize its assets and discharge its liabilities in the normal
course of business for the foreseeable future.
The
operations of the Company have been primarily funded through its Regulation A+ Offering of units, its Nasdaq prospectus financing, internally
generated cashflow and private placements of equity and convertible debentures. The continued operations of the Company are dependent
on the Company’s ability to generate profitable operations in the future, develop and execute a sufficient financing plan for future
operations and receive continued financial support from shareholders and other providers of finance.
The
consolidated financial statements do not reflect the adjustments, if any, or changes in presentation that may be necessary should the
Company not be able to continue on a going concern basis.
All
currency amounts in the accompanying financial statements and this management discussion and analysis are in Canadian dollars unless
otherwise noted.
Special
Note Regarding Forward Looking Information
This
Management Discussion & Analysis is intended to provide readers with the information that management believes is required to gain
an understanding of the current results of the Company and to assess the Company’s future prospects. Accordingly, certain sections
of this report, other than statements of historical fact, may contain forward-looking statements that are based on current plans and
expectations and are subject to certain risks and uncertainties. These forward-looking statements include information about possible
or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. In some cases,
you can identify forward-looking statements by terminology such as “believe,” “may,” “estimate,”
“continue,” “anticipate,” “intend,” “should,” “plan,” “expect,”
“predict,” “potential,” or the negative of these terms or other similar expressions.
The
statements we make regarding the following matters are forward-looking by their nature and are based on certain of the assumptions noted
below:
| ● | the
intentions, plans and future actions of the Company; |
| ● | statements
relating to the business and future activities of the Company; |
| ● | anticipated
developments in operations of the Company; |
| ● | market
position, ability to compete and future financial or operating performance of the Company; |
| ● | the
timing and amount of funding required to execute the Company’s business plans; |
| ● | capital
expenditures; |
| ● | the
effect on the Company of any changes to existing or new legislation or policy or government
regulation; |
| ● | the
availability of labor; |
| ● | requirements
for additional capital; |
| ● | goals,
strategies and future growth; |
| ● | the
adequacy of financial resources; |
| ● | expectations
regarding revenues, expenses and anticipated cash needs; |
| ● | general
market conditions and macroeconomic trends driven by geopolitical conflicts, including supply
chain disruptions, market volatility, inflation, and labor challenges, among other factors. |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
The
preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are
based on our beliefs, assumptions, and expectations of future performance, taking into account the information currently available to
us. Furthermore, unless otherwise stated, the forward-looking statements contained in these statements are made as of the date hereof,
and we have no intention and undertake no obligation to update or revise any forward-looking statements, whether as a result of new information,
future events, changes or otherwise, except as required by law.
These
statements are only predictions based upon our current expectations and projections about future events. There are important factors
that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of
activity, performance or achievements expressed or implied by the forward-looking statements. These include, without limitation, the
Company’s current and planned operations and the expected results of new operations and new clients. These risks and uncertainties
include, but are not restricted to:
| ● | The
Company’s history of losses; |
| ● | The
dilution of holdings in the Company’s securities; |
| ● | Research
and development costs; |
| ● | The
failure of new business models to produce financial returns; |
| ● | Operational
risks for which the Company may not be adequately insured; |
| ● | The
Company operates in an evolving market that makes it difficult to evaluate business and future
prospects; |
| ● | Competitive
market conditions and challenges from competitors; |
| ● | The
pace of technological change and the Company’s ability to stay on top of market and
technology changes; |
| ● | The
failure to obtain necessary regulatory approvals and permits or limitations placed on the
development, operation, and sale of unmanned aerial vehicles (“UAVs”) by governments; |
| ● | Risks
associated with any particular future acquisitions that would allow the company to provide
additional product or service offerings; |
| ● | The
Company’s ability to retain key employees and personnel and the Company’s ability
to manage growth; |
| ● | Adverse
economic changes; |
| ● | Negative
macroeconomic and geopolitical trends that could restrict the Company’s ability to
access capital; |
| ● | Uncertainties
associated with operations in foreign countries; |
| ● | Adverse
tax policies; |
| ● | An
inability to access critical components or raw materials used to manufacture the Company’s
products and supply chain disruptions; |
| ● | Weather
and other natural outdoor conditions that can imperil the use of UAVs; |
| ● | The
Company’s products may be subject to recalls or returns or defective products or services
that could negatively affect the Company’s operating results; |
| ● | An
inability to secure adequate funding for research and development; |
| ● | Export
controls or restrictions on the Company’s ability to deliver its product outside of
Canada; |
| ● | Consumer
perception regarding the use and safety of UAVs; |
| ● | A
failure to successfully market the Company’s products; |
| ● | Security
risks associated with electronic communications and IT infrastructure; |
| ● | Inadequate
consumer protection and data privacy practices; |
| ● | An
inability of our business partners to fulfill their obligations to us or to secure company
information; |
| ● | A
failure to protect the Company’s intellectual property, proprietary rights, and trade
secrets, including through a failure to adequately apply for or seek such protections; |
| ● | Failure
to adhere to financial reporting obligations and mandates associated with being a public
company; |
| ● | The
Company’s limited experience operating as publicly traded corporation; |
| ● | Changes
in accounting standards and subjective assumptions, estimates and judgments by management
related to complex accounting matters; |
| ● | Write-downs
of goodwill or other intangible assets; |
| ● | Legal
proceedings in which the Company may become involved; |
| ● | Conflicts
of interests among our directors and officers; |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
| ● | Volatility
related to our share price; |
| ● | A
failure to maintain an active trading market for our common shares; |
| ● | The
Company may never pay dividends, and a return on an investment in the Company will depend
upon an appreciation in the price of our shares after purchase; |
| ● | The
Company may be classified as a “passive foreign investment company” for U.S.
federal income tax purposes; |
| ● | United
States investors may not be able to obtain an enforcement of civil liabilities against the
Company |
| ● | The
Company’s status as an “emerging growth company”; |
| ● | Increased
costs and compliance matters related to our status as a public company in the United States;
and |
| ● | The
Company’s status as a “foreign private issuer.” |
Readers
are cautioned to read more about the potential risks the Company faces under the heading “Business Risks” at the end of this
MD&A.
Non-GAAP
Measures and Additional GAAP Measures
In
this MD&A we describe certain income and expense items that are unusual or non-recurring. There are terms not defined by International
Financial Reporting Standards (“IFRS”). Our usage of these terms may vary from the usage adopted by other companies. Specifically,
Gross profit, Gross margin and Cash flow from operations are undefined terms by IFRS that may be referenced herein. We
provide this detail so that readers have a better understanding of the significant events and transactions that have had an impact on
our results.
Throughout
this document, reference is made to “gross profit,” “gross margin,” and “working capital”, which
are non-IFRS measures. Management believes that gross profit, defined as revenue less cost of sales, is a useful supplemental measure
of operations. Gross profit helps provide an understanding of the level of costs needed to create revenue. Gross margin illustrates the
gross profit as a percentage of revenue. Management believes that working capital, defined as current assets less current liabilities,
is an indicator of the Company’s liquidity and its ability to meet its current obligations. Readers are cautioned that these non-IFRS
measures may not be comparable to similar measures used by other companies. Readers are also cautioned not to view these non-IFRS financial
measures as an alternative to financial measures calculated in accordance with IFRS.
Core
Business and Strategy
Draganfly
creates quality, cutting-edge unmanned and remote data collection and analysis platforms and systems that are designed to revolutionize
the way companies do business. The Company is incorporated
under the British Columbia Business Corporations Act and has its registered office located at 2800 – 666 Burrard Street, Vancouver,
BC, V6C 2Z75 with a head office at 235 103rd St. E, Saskatoon, SK, S7N 1Y8.
Recognized
as being at the forefront of UAV (unmanned aerial vehicles) technology for two decades, Draganfly is an award-winning, industry-leading
manufacturer, contract engineering, and product development company within the commercial UAV space serving the public safety, agriculture,
industrial inspections, and mapping and surveying markets. Draganfly is a company driven by passion, ingenuity, and the need to provide
efficient solutions and first-class services to its customers around the world with the goal of saving time, money, and lives.
Founded
in 1998, Draganfly is recognized as one of the first commercial multi-rotor manufacturers and has a legacy for its innovation and superior
customer service. The company has sold products and services to over 50 countries.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Draganfly
can provide its customers with an entire suite of products and services that include quad-copters, fixed-wing aircrafts, handheld controllers,
flight training, and software used for tracking, live streaming, data collection, and health monitoring. The integrated UAV system is
equipped for automated take-offs and landings with altitude and return to home functions as well as in-house created survey software.
Draganfly’s standard features combined with custom fit camera payloads ranging from multi-spectral, hyper-spectral, LIDAR, thermal,
and infrared allows Draganfly to offer a truly unique solution to clients.
With
23 issued and one pending fundamental UAV patents in the portfolio, Draganfly will continue to expand and grow its intellectual property
portfolio.
Historically,
the main business of the Company was as a manufacturing company offering commercial UAVs directly to its customer base across various
industry verticals. The Company has evolved to offer drone solutions, including continuing to sell and develop its own OEM products,
providing engineering procurement, drone services, and reselling third party products.
Draganfly
works with its customers to customize a product or platform from idea to research and development (R&D) to completion and testing.
A work plan is created with timelines and budgets which includes materials, travel, testing, and engineering time. The work plan is approved
by the customer before work begins. To date, the majority of this work is considered proprietary in nature and is protected by trade
secrets and other intellectual property protections.
The
Company’s scope includes providing custom built parts, accessories, drone services, and the ability to sell third-party manufactured
UAVs along with support services.
On
February 26, 2024, the Company completed an underwritten share placement of 11,200,000 units with each unit consisting of one common
share and one warrant to purchase one common share and 2,200,000 units consisting of one pre-funded warrant to purchase one common share
and one warrant to purchase one common share. Each unit was sold at a price of $0.27 USD for gross proceeds of $3,617,780 million ($4,075,946
million CAD). Net proceeds of $3,289,520 million USD ($4,433,831 million CAD) was received after share issue costs of $328,260 USD ($442,450
thousand CAD). The pre-funded warrants have an exercise price of $0.0001 USD and were exercised on the date of issue bringing the total
gross proceeds to $3,618,000 USD. The remaining warrants have an exercise price of $0.36 USD and are exercisable immediately with a term
of 5 years. As part of this transaction 670,000 warrants were issued to the underwriter with an exercise price of $0.3375 USD and will
have a term of 3 years.
On
October 30, 2023, the Company completed a public offering and issued 6,400,000 share units at an offering price of USD $0.55 per unit
for gross proceeds of USD $3,520,000. The units were issued as follows: 4,800,000 units comprised of one share and one warrant and 1,600,000
units comprised of one pre-funded warrant with an exercise price of $0.0001 USD and have no expiry date, and one warrant. The warrants
had an exercise price of USD $0.61 per share, are exercisable immediately and expire five years from the date of issuance.
On
March 31, 2023 the Company closed an underwritten
public offering of 8,000,000 common shares at a price of $1.00 USD per share for total gross proceeds of $8,000,000 USD ($10,856,166
million CAD) with share issue costs of $1,443,163 USD ($1,953,032 million CAD) for net proceeds of $6,556,837 ($8,903,134 million CAD).
On
January 31, 2023, the Company entered into an equity distribution agreement. The agreement will allow the Company from time to time,
to distribute in an at-the-market offering (“ATM”) up to $15,000,000 (USD) in common shares. Draganfly intends to use the
net proceeds from the ATM for general corporate purposes, including to fund ongoing operations, growth initiatives and/or for
working capital requirements including the continuing development and marketing of the Company’s core products, potential
acquisitions and research and development.
From
February 1, 2023 to February 17, 2023, the Company distributed 650,759 ATM shares under the ATM offering at an average price of $2.69
per share for net proceeds of $1,526,810.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
On
July 30, 2021, the Company’s shares began trading on the Nasdaq Capital Market (the “Nasdaq”) under the symbol “DPRO”.
The Company’s shares continue to trade on the Canadian Stock Exchange (the “CSE”), however, as of July 30, 2021 they
now trade under the symbol “DPRO” on that exchange as well. The Company’s shares also trade on the Frankfurt Stock
Exchange under the Symbol “3U8A”.
In
order to become compliant with Nasdaq regulations, the company also underwent a stock consolidation. Effective July 29, 2021, the Company
consolidated its issued and outstanding common shares on a 5 to 1 basis, which resulted in 27,045,909 common shares outstanding post-consolidation.
Subsequent
to the period ending March 31, 2024: May 1, 2024 the Company entered into a securities purchase agreement with a single institutional
investor to purchase 13,513,514 units of the Company, with each unit consisting of one common share (or one prefunded warrant to purchase
one common share in lieu thereof) and one warrant to purchase one common share. Each unit was sold at an offering price of US$ 0.259
for gross proceeds of approximately US$ 3.5 million before deducting underwriting discounts and offering expenses.
Pursuant
to a prior underwritten public offering, the Company issued 6,400,000 common share warrants (the “October Warrants”) with
each warrant entitling the holder thereof to purchase one common share of the Company at an exercise price of US$ 0.6123, subject to
adjustment, until October 28, 2028. In connection with the closing of the offering above, the Company and the holder of the October Warrants
have entered into an amendment agreement whereby the exercise price of the October Warrants was reduced and converted to Canadian dollars
for a new exercise price of $ 0.3583 and the cashless exercise provision was removed.
Additional
information relating to the Company may be found at the Company’s website, www.draganfly.com.
2024
Q1 Highlights
| ● | 2024
Q1 Total Revenues of $1,329,581 with Product Sales of $ 1,237,948 |
2024
Q1 revenues decreased by $271,905 from $1,601,486 in Q1 2023 to $1,329,581 with the bulk of this revenue coming from product revenue.
Service revenue decreased by $129,037 from $220,670 in Q1 2023 to $91,633 in Q1 2024.
| ● | Gross
Profit was $280,011 with a Gross Margin decrease of 6.6% in Q1 2024 compared to Q1 2023. |
In
Q1 2024, the Company’s total gross margin was 21.1% compared to 27.7% in Q1 2023.
| ● | Continued
Diversification of its Product and Services Offering |
Given
the Company’s deep engineering talent, the Company continues to expand its product and services available to its customers. Doing
this leverages the Company’s core skill set of innovation that tends to lead to future projects, bringing in more consistent revenue.
The Company continues to increase its scope of products and services to include the sale of third-party manufactured UAVs and drone-as-a-service
type work. Having a larger breadth of products and services, in part mitigates some risk for the Company given its offering covers a
broader market.
| ● | Risks
Related to Operations |
The
Company’s UAVs are sold in rapidly evolving markets. The commercial UAV market is in early stages of customer adoption. Accordingly,
the Company’s business and future prospects may be difficult to evaluate. The Company cannot accurately predict the extent to which
demand for its products and services will increase, if at all. The challenges, risks and uncertainties frequently encountered by companies
in rapidly evolving markets could impact the Company’s ability to do the following:
| ● | generate
sufficient revenue to maintain profitability; |
| ● | acquire
and maintain market share; |
| ● | achieve
or manage growth in operations; |
| ● | develop
and renew contracts; |
| ● | attract
and retain additional engineers and other highly qualified personnel; |
| ● | successfully
develop and commercially market new products; |
| ● | adapt
to new or changing policies and spending priorities of governments and government agencies;
and |
| ● | access
additional capital when required and on reasonable terms. |
For
further and more detailed risk disclosure, please reference “Business Risks” at the end of this MD&A.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Outlook
and Guidance
General
The
Company believes that drone regulations are gradually evolving in favor of additional use cases, which could lead to more revenue opportunities
from a greater pool of customers. The Company is positioned properly to take advantage of this dynamic given its legacy and ongoing innovative
product development coupled with being publicly traded providing greater market awareness than its private competitors. The Company will
increasingly focus on some of its growth initiatives beyond Canada and into the United States and abroad. All else being equal, accessing
more capital will help the Company expand and diversify its engineering and drone services businesses. The Company has already built
the infrastructure including human resources from an oversight, sales, and engineering perspective. Further, the Company will continue
to focus on innovation, product development, and expanding its hardware offerings opportunistically into niche segments of the UAV and
related sectors. Finally, the Company has considered providing various other non-engineering services and it may make more sense to buy
an existing industry player than to build out this offering. The Company expects to be active in this regard reviewing partnerships and
acquisitions in the current fiscal year and the near future.
Selected
Financial Information
The
following selected financial data has been extracted from the unaudited condensed consolidated interim financial statements, prepared
in accordance with International Financial Reporting Standards, for the fiscal years indicated and should be read in conjunction with
the unaudited condensed consolidated interim financial statements. All earnings per share calculations are shown post-consolidation.
| | |
Three months ended March 31, | |
| | |
2024 | | |
2023 | |
| Total revenues | |
$ | 1,329,581 | | |
$ | 1,601,486 | |
| Gross Margin (as a % of revenues) (1) | |
| 21.1 | % | |
| 27.7 | % |
| Net income (loss) | |
| (1,863,808 | ) | |
| (7,067,626 | ) |
| Net income (loss) per share ($) | |
| | | |
| | |
| - Basic | |
| (0.03 | ) | |
| (0..20 | ) |
| - Diluted | |
| (0.03 | ) | |
| (0.20 | ) |
| Comprehensive income (loss) | |
| (1,884,416 | ) | |
| (7,096,995 | ) |
| Comprehensive income (loss) per share ($) | |
| | | |
| | |
| - Basic | |
| (0.03 | ) | |
| (0.20 | ) |
| - Diluted | |
| (0.03 | ) | |
| (0.20 | ) |
| Change in cash and cash equivalents | |
$ | 1,246,124 | | |
$ | 5,474,1555 | |
| (1) | Gross
Profit (as a % of revenues) would have been 32.2% and 32.5% not including a one-time non-cash
write down of inventory for $148,760 and $77,047 respectively for the three month period
ending March 31 2024 and 2023, respectively. |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
The
net income (loss) and comprehensive income (loss) for the three months ended March 31, 2024, includes non-cash changes comprised of a
change in fair value of derivative liability of $1,817,569, a write down of inventory of $148,760, and an impairment gain on notes
receivable of $6,751. The net loss and comprehensive loss for the three month period ended March 31, 2024 would otherwise have been a
loss of $3,539,368 (2023 - $7,047,893 ) for the net loss, and a loss of $3,559,976 (2023 - $7,077,262) for the comprehensive
loss.
| As at | |
March 31, 2024 | | |
December 31, 2023 | |
| Total assets | |
$ | 8,990,548 | | |
$ | 8,330,292 | |
| Working capital | |
| 534,226 | | |
| (717,017 | ) |
| Total non-current liabilities | |
| 482,374 | | |
| 523,584 | |
| Shareholders’ equity | |
$ | 1,678,527 | | |
$ | 407,716 | |
| Number of shares outstanding | |
| 63,393,221 | | |
| 49,229,563 | |
Shareholders’
equity and working capital as at March 31, 2024, includes a fair value of derivative liability of $4,033,574 (2023 - $4,196,125) and
would otherwise be $5,712,101 (2023 - $4.603,841) and $4,567,800 (2023 - $3,479,108), respectively.
Results
of Operations
Revenue
| | |
Three months ended March 31, | |
| | |
2024 | | |
2023 | |
| Sales of goods | |
$ | 1,237,948 | | |
$ | 1,380,816 | |
| Provision of services | |
| 91,633 | | |
| 220,670 | |
| Total revenue | |
$ | 1,329,581 | | |
$ | 1,601,486 | |
Total
revenue for the three months ended March 31, 2024, decreased by $271,905 or 17% as compared to Q1 2023. The decrease in revenue is largely
due to decreased revenue from the sales of goods from Draganfly Innovations USA, Inc. (“DI USA”) and Dronelogics Systems
Inc. (“Dronelogics”).
Services
revenue decreased $129,037 or 58.5% in Q1 2024 as compared to Q1 2023. The decrease in revenue is largely due to decreased service revenue
from Dronelogics.
Cost
of sales / Gross Margin
| | |
Three months ended March 31, | |
| | |
2024 | | |
2023 | |
| Cost of sales (1) | |
$ | (1,049,570 | ) | |
$ | (1,158,052 | ) |
| Gross profit | |
$ | 280,011 | | |
$ | 443,434 | |
| Gross margin (%) | |
| 21.1 | % | |
| 27.7 | % |
| (1) | Cost
of sales would have been $900,810 and $1,081,005 not including a one-time non-cash write
down of inventory for $148,760 and $77,047, respectively for the three month periods ending
March 31, 2024 and 2023 respectively. |
Gross
profit is the difference between the revenue received and the direct cost of that revenue. Gross margin is gross profit divided by revenue
and is often presented as a percent.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
For
the three months ended March 31, 2024, the Company’s Gross Profit decreased by $163,423 or 36.9% compared to Q1 2023. As a percentage
of sales, gross margin decreased from 27.7% in Q1 2023 to 21.1% in Q1 2024. Not including the one-time non-cash write down of inventory
of $148,760 (2023 - $77,047), the Company’s Gross Profit decreased by $91,710 or 17.6% compared to Q1 2023. The decrease in gross
margin percentage was due to a larger decrease in sales than in cost of sales.
Selling,
General, and Administrative (SG&A)
| | |
Three months ended March 31, | |
| | |
2024 | | |
2023 | |
| Insurance | |
$ | 364,274 | | |
$ | 498,006 | |
| Office and Miscellaneous | |
| 346,270 | | |
| 2,800,652 | |
| Professional Fees | |
| 580,260 | | |
| 847,187 | |
| Research and development | |
| 121,391 | | |
| 793,224 | |
| Share-based payments | |
| 198,907 | | |
| 540,563 | |
| Travel | |
| 40,019 | | |
| 89,262 | |
| Wages and salaries | |
| 1,581,431 | | |
| 1,821,081 | |
| Total | |
$ | 3,232,552 | | |
$ | 7,389,975 | |
For
the three months ended March 31, 2024, SG&A expenses decreased by 56.3%, from $7,389,975 in Q1 2023 to $3,232,552 in
Q1 2024. The largest contributors to the decrease are professional fees, research and development, office and miscellaneous, and share-based
compensation.
Net
and Comprehensive Income (Loss)
| | |
Three months ended March 31, | |
| | |
2024 | | |
2023 | |
| Loss from operations | |
$ | (3,250,922 | ) | |
$ | (7,164,699 | ) |
| Change in fair value of derivative liability | |
| 1,817,569 | | |
| 57,314 | |
| Finance and other costs | |
| (21,522 | ) | |
| 35,861 | |
| Foreign exchange gain (loss) | |
| 66,736 | | |
| (18,156 | ) |
| Gain (loss) on disposal of assets | |
| 43,528 | | |
| 21,203 | |
| Recovery of notes receivable | |
| 6,751 | | |
| 1,275 | |
| Income from government assistance | |
| - | | |
| - | |
| Other income (loss) | |
| (525,948 | ) | |
| (424 | ) |
| Net income (loss) | |
| (1,863,808 | ) | |
| (7,067,626 | ) |
| Cumulative translation differences | |
| (9,562 | ) | |
| (86,402 | ) |
| Change in fair value of equity investments at FVOCI | |
| (11,046 | ) | |
| 57,033 | |
| Comprehensive income (loss) | |
$ | (1,884,416 | ) | |
$ | (7,096,995 | ) |
For
the three months ended March 31, 2024, the Company recorded a comprehensive loss of $1,884,416 compared to comprehensive loss
of $7,096,995 in Q1 2023.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
The
net and comprehensive loss for the three months ended March 31, 2024, includes non-cash changes comprised of a change in fair value
of derivative liability of $1,817,569, a write down of inventory of $148,760, and a recovery of notes receivable of $6,751 and
would otherwise be a loss of $3,539,368 and comprehensive loss of $3,559,976. The net and comprehensive loss for the same
period last year, included a gain in fair value of derivative liability of $57,314 and an inventory write down of $77,047 and would otherwise
be a loss of $7,047,893 and a comprehensive loss of $7,077,262.
Authorized
share capital
Unlimited
number of common shares without par value.
Issued
share capital
During
the three months ended March 31, 2024,
| ● | The
Company issued 63,658 common shares for the vesting of restricted share units. |
| ● | The
Company issued 3,800,000 common shares for the exercise of warrants |
| | ● | The
Company issued 11,200,000 units consisting of one common share and one warrant and 2,200,00
units consisting of one prefunded warrant and one warrant in a financing for $4,877,475 with
share issuance costs of $752,498 for net proceeds of $4,274,391. Of the total share issuance
costs $441,166 were expensed in other income (expense). Value of the issuance was allocated
$2,017,966 to the shares, and $2,859,509 to the warrants, including $431,084 allocated to
prefunded warrants. The prefunded warrants were exercised on the date of issue. |
| ● | 900,000
shares were returned to treasury that were held in escrow related to the Vital Intelligence
Inc. acquisition for failure to meet required milestones. All value that had been recorded
related to these shares had been previously written off. |
During
the year ended December 31, 2023,
| ● | The
Company issued 1,508,255 common shares for the vesting of restricted share units. |
| ● | The
Company issued 8,000,000 common shares in a financing for $10,856,166 with share issuance
costs of $1,953,032 for net proceeds of $8,903,134. |
| ● | The
Company issued 650,729 common shares in an ATM (“At – the - market”) financing
for $1,748,946 with share issuance costs of $222,136 for net proceeds of $1,526,810. |
| ● | The
Company issued 4,800,000 common shares in a financing for proceeds of $4,858,995 with share
issuance costs of $889,623 for net proceeds of $3,969,372. Of the total share issuance costs
$793,979 were expensed in other income (expense). Value of the issuance was allocated
$520,064 to the shares and $4,338,931 to derivative liability. |
Summary
of Quarterly Results
The
following selected quarterly financial data has been extracted from the financial statements, prepared in accordance with International
Financial Reporting Standards.
Total
revenue for the three months ended March 31, 2024, decreased by $271,905 or 17.0% as compared to the same period in 2023. The decrease
was mainly due to lower revenue from services.
SG&A
expenses for the three months ended March 31, 2024 decreased 56.3% compared to the same period in 2023 due to decreased professional
fees, research and development, office and miscellaneous, and share-based compensation. The other income (expense) and comprehensive
loss for the first quarter of 2024 includes non-cash changes of a change in fair value of derivative liability of $1,817,569,
a write down of inventory of $148,760, an impairment recovery on notes receivable of $6,751 and
would otherwise be an other expense of $45,506 and comprehensive loss of $3,559,976, respectively.
Total
revenue for the three months ended March 31, 2024, increased by $413,282 or 45.1% as compared to the three months ended December 31,
2023. The primary increase in revenue is due to the increase in product revenue. Product sales increased by $566,140 or 84.3% in the
first quarter of 2024 as compared to the fourth quarter of 2023 primarily due to increased demand.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
SG&A
expenses increased by $56,735 or 1.79% compared to the fourth quarter of 2023 due to increased wages and salaries partially
offset by a decrease travel and office and miscellaneous.
The
table below summarizes the quarterly results over the past eight fiscal quarters. All earnings per share calculations are shown post-consolidation.
| | |
2024 Q1 | | |
2023 Q4 | | |
2023 Q3 | | |
2023 Q2 | |
| Revenue | |
$ | 1,329,581 | | |
$ | 916,299 | | |
$ | 2,138,018 | | |
$ | 1,899,039 | |
| Cost of sales(2) | |
$ | (1,049,570 | ) | |
$ | (657,420 | ) | |
$ | (1,243,334 | ) | |
$ | (1,431,922 | ) |
| Gross profit(3) | |
$ | 280,011 | | |
$ | 258,879 | | |
$ | 894,684 | | |
$ | 467,117 | |
| Gross margin – percentage | |
| 21.1 | % | |
| 28.3 | % | |
| 41.8 | % | |
| 24.6 | % |
| Operating expenses | |
$ | (3,530,933 | ) | |
$ | (3,482,141 | ) | |
$ | (6,356,138 | ) | |
$ | (7,234,034 | ) |
| Operating income (loss) | |
$ | (3,250,922 | ) | |
$ | (3,223,262 | ) | |
$ | (5,461,454 | ) | |
$ | (6,766,917 | ) |
| Operating loss per share - basic | |
$ | (0.05 | ) | |
$ | (0.08 | ) | |
$ | (0.13 | ) | |
$ | (0.15 | ) |
| Operating loss per share - diluted | |
$ | (0.05 | ) | |
$ | (0.08 | ) | |
$ | (0.13 | ) | |
$ | (0.15 | ) |
| Other income (expense) | |
$ | 1,387,114 | | |
$ | (965,075 | ) | |
$ | 14,569 | | |
$ | (142,046 | ) |
| Change in fair value of derivative liability (1) | |
$ | 1,817,569 | | |
$ | 153,798 | | |
$ | - | | |
$ | - | |
| Other comprehensive income (loss) | |
$ | (20,608 | ) | |
$ | (3,461 | ) | |
$ | (83,363 | ) | |
$ | 18,152 | |
| Comprehensive income (loss) | |
$ | (1,884,416 | ) | |
$ | (4,191,796 | ) | |
$ | (5,530,248 | ) | |
$ | (6,890,812 | ) |
| Comprehensive income (loss) per share - basic | |
$ | (0.03 | ) | |
$ | (0.13 | ) | |
$ | (0.13 | ) | |
$ | (0.15 | ) |
| Comprehensive income (loss) per share - diluted | |
$ | (0.03 | ) | |
$ | (0.13 | ) | |
$ | (0.13 | ) | |
$ | (0.15 | ) |
| | |
2023 Q1 | | |
2022 Q4 | | |
2022 Q3 | | |
2022 Q2 | |
| Revenue | |
$ | 1,601,486 | | |
$ | 1,314,162 | | |
$ | 1,876,221 | | |
$ | 2,370,115 | |
| Cost of sales | |
$ | (1,158,052 | ) | |
$ | (2,980,133 | ) | |
$ | (1,249,313 | ) | |
$ | (1,356,526 | ) |
| Gross profit | |
$ | 443,434 | | |
$ | (1,665,971 | ) | |
$ | 626,908 | | |
$ | 1,013,589 | |
| Gross margin – percentage | |
| 27.7 | % | |
| -126.8 | % | |
| 33.4 | % | |
| 42.8 | % |
| Operating expenses | |
$ | (7,608,133 | ) | |
$ | (7,342,669 | ) | |
$ | (7,007,691 | ) | |
$ | (7,176,445 | ) |
| Operating loss | |
$ | (7,164,699 | ) | |
$ | (9,008,640 | ) | |
$ | (6,380,783 | ) | |
$ | (6,162,856 | ) |
| Operating loss per share - basic | |
$ | (0.21 | ) | |
$ | (0.26 | ) | |
$ | (0.19 | ) | |
$ | (0.19 | ) |
| Operating loss per share - diluted | |
$ | (0.21 | ) | |
$ | (0.26 | ) | |
$ | (0.19 | ) | |
$ | (0.19 | ) |
| Other income (expense) | |
$ | 97,073 | | |
$ | (7,575,889 | ) | |
$ | 1,039,968 | | |
$ | 6,638,171 | |
| Change in fair value of derivative liability (1) | |
$ | 57,314 | | |
$ | 334,016 | | |
$ | 305,094 | | |
$ | 6,094,438 | |
| Other comprehensive income (loss) | |
| (29,369 | ) | |
$ | (76,073 | ) | |
$ | 348,282 | | |
$ | 165,009 | |
| Comprehensive income (loss) | |
$ | (7,096,995 | ) | |
$ | (16,660,602 | ) | |
$ | (4,992,533 | ) | |
$ | 640,324 | |
| Comprehensive income (loss) per share - basic | |
$ | (0.20 | ) | |
$ | (0.49 | ) | |
$ | (0.15 | ) | |
$ | 0.02 | |
| Comprehensive income (loss) per share - diluted | |
$ | (0.20 | ) | |
$ | (0.49 | ) | |
$ | (0.15 | ) | |
$ | 0.02 | |
| |
(1) |
Included
in other income (expense). |
| |
(2) |
Cost
of goods sold would have been $900,810 in Q1 2024 not including a one-time non-cash write down of inventory for $148,760. For the
comparative quarters cost of goods sold not including inventory writedowns of $77,047 in Q1 2023, $122,600 in Q2 2023, $8,600 in
Q3 2023 and $123,424 in Q4 2023 would have been $1,081,005 in Q1 2023, $1,309,322 in Q2, $1,234,734 in Q3, and $533,996 in Q4 2023
before these write downs. |
| |
(3) |
Gross
profit would have been $428,771 not including a one-time non-cash write down of inventory for $148,760 (2023 - $77,047). Gross profit
would have been $520,481 in Q1 2023, $589,717 in Q2 2023, $903,283 in Q3 2023 and $382,303 in Q4 2023 without the write downs. Gross
profit would have been $310,543 in Q4 of 2022 without the write downs. |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Liquidity
and Capital Resources
The
Company’s liquidity risk is derived from its loans, accounts payable, and accrued liabilities, as it may encounter difficulty discharging
those obligations, but the Company endeavors to mitigate that risk through the careful management of its debt holders and the assertive
pursuit of capital inflow for its operations. The Company’s working capital of $534,226 as at March 31, 2024 would be increased
to $4,567,800 if the non-cash derivative liability was excluded. The Company’s working capital at December 31, 2023 was a deficit
of $717,017 and would be increased to a surplus of $3,479,108 if the non-cash derivative liability was excluded.
The
Company considers the items included in capital to include shareholders’ equity. The Company manages its capital structure and
makes adjustments to it in light of changes in economic and business conditions, financing environment, and the risk characteristics
of the underlying assets. The Company does not have any contracted or committed capital expenditures as of the date of this MD&A.
The Company utilizes its credit card facilities from time to time to make various purchases for their operations.
Pursuant
to a prior underwritten public offering, the Company issued 6,400,000 common share warrants (the “October Warrants”) with
each warrant entitling the holder thereof to purchase one common share of the Company at an exercise price of US$ 0.6123, subject to
adjustment, until October 28, 2028. In connection with the closing of the offering above, the Company and the holder of the October Warrants
have entered into an amendment agreement whereby the exercise price of the October Warrants was reduced and converted to Canadian dollars
for a new exercise price of $ 0.3583 and the cashless exercise provision was removed.
On
February 26, 2024, the Company completed an underwritten share placement of 11,200,000 units with each unit consisting of one common
share and one warrant to purchase one common share and 2,200,000 units consisting of one pre-funded warrant to purchase one common share
and one warrant to purchase one common share. Each unit was sold at a price of $0.27 USD for gross proceeds of $3,617,780 million ($4,075,946
million CAD). Net proceeds of $3,289,520 million USD ($4,433,831 million CAD) was received after share issue costs of $328,260 USD ($442,450
thousand CAD). The pre-funded warrants have an exercise price of $0.0001 USD and were exercised on the date of issue bringing the total
gross proceeds to $3,618,000 USD. The remaining warrants have an exercise price of $0.36 USD and are exercisable immediately with a term
of 5 years. As part of this transaction 670,000 warrants were issued to the underwriter with an exercise price of $0.3375 USD and will
have a term of 3 years.
On
May 1, 2024 the Company entered into a securities purchase agreement with a single institutional investor to purchase 13,513,514 units
of the Company, with each unit consisting of one common share (or one prefunded warrant to purchase one common share in lieu thereof)
and one warrant to purchase one common share. Each unit was sold at an offering price of US$ 0.259 for gross proceeds of approximately
US$ 3.5 million before deducting underwriting discounts and offering expenses.
Further,
in order to maintain or adjust its capital structure, the Company may issue new shares, new debt, or scale back the size and nature of
its operations. The Company is not subject to externally imposed capital requirements.
The
Company’s ability to continue as a going concern is dependent upon its ability to obtain additional financing and or achieve profitable
operations in the future. These factors indicate the existence of a material uncertainty that may cast significant doubt on the Company’s
ability to continue as a going concern. Based on the Company’s existing operations, the Company will need to raise additional capital
during the next twelve months and beyond to support its business plan.
We
expect, from time to time, to evaluate the acquisition of businesses, intellectual property, products and technologies for which a portion
of the net proceeds may be used. There is always the potential that any acquisition or investment in a company or product has a negative
impact on future cash flows of the Company.
Our
plan of operations for the next year includes the following: (i) ensure production capacity is adequate to meet demand for products;
(ii) continuing to hone existing product offerings; (iii) streamline workflow efficiencies; (iv) diversifying and expanding business
lines organically and by considering potential acquisitions; (v) continuing to patent innovative ideas for new products; and (vi) developing
and increasing current product offering to various niche industries that are not currently being served.
As
of the date of this MD&A, we cannot predict with certainty all of the particular uses for the net proceeds received from the closing
of past financings. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Off-Balance
Sheet Arrangements
The
Company has no material undisclosed off-balance sheet arrangements that have or are reasonably likely to have, a current or future effect
on our results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources.
Contractual
Obligations
As
of March 31, 2024, and as of the date of this MD&A, and in the normal course of business, the following is a summary of the Company’s
material obligations to make future payments, representing contracts, and other commitments that are known and committed.
Right
of Use Assets
| | |
Vehicles | | |
Buildings | | |
Land | | |
Total | |
| Balance at December 31, 2022 | |
$ | 2,385 | | |
$ | 342,361 | | |
$ | - | | |
$ | 344,746 | |
| Additions | |
| - | | |
| 322,354 | | |
| 418,001 | | |
| 740,355 | |
| Depreciation | |
| (2,385 | ) | |
| (149,644 | ) | |
| (211,057 | ) | |
| (363,086 | ) |
| Foreign exchange translation | |
| - | | |
| - | | |
| (328 | ) | |
| (328 | ) |
| Balance at December 31, 2023 | |
$ | - | | |
$ | 515,071 | | |
$ | 206,616 | | |
$ | 721,687 | |
| Additions | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| Depreciation | |
| - | | |
| (35,681 | ) | |
| (52,777 | ) | |
| (88,458 | ) |
| Foreign exchange translation | |
| - | | |
| - | | |
| 4,919 | | |
| 4,919 | |
| Balance at March 31, 2024 | |
$ | - | | |
$ | 479,390 | | |
$ | 158,758 | | |
$ | 638,148 | |
The
Company added two new leases during the year ended December 31, 2023. A lease for land in the amount of $418,001 with an expiration
date of December 31, 2024, and another lease for a facility in the amount of $322,354 with an expiration date of September 30, 2028.
The Company has five leases with expiration dates of December 31, 2023, December 31, 2024, May 31, 2026, January 31, 2027, and September
30, 2028
Lease
Liability
| As at | |
Total | |
| Balance at December 31, 2022 | |
$ | 378,643 | |
| Interest expense | |
| 96,423 | |
| Additions | |
| 734,903 | |
| Lease payments | |
| (423,410 | ) |
| Foreign exchange translation | |
| 3,464 | |
| Balance at December 31, 2023 | |
| 790,023 | |
| Interest expense | |
| 20,323 | |
| Lease payments | |
| (101,440 | ) |
| Foreign exchange translation | |
| (1,064 | ) |
| Balance at March 31, 2024 | |
$ | 707,842 | |
Which consists of:
| | |
March 31, 2024 | | |
December 31, 2023 | |
| Current lease liability | |
$ | 316,931 | | |
$ | 362,001 | |
| Non-current lease liability | |
| 390,911 | | |
| 428,022 | |
| Ending balance | |
$ | 707,842 | | |
$ | 790,023 | |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
| Maturity analysis | |
Total | |
| Less than one year | |
$ | 372,356 | |
| One to three years | |
| 334,746 | |
| Four to five years | |
| 114,937 | |
| Total undiscounted lease liabilities | |
| 822,039 | |
| Amount representing interest | |
| (114,197 | ) |
| | |
$ | 707,842 | |
Related
Party Transactions
On
August 1, 2019, the Company entered in a business services agreement (the “Agreement”) with Business Instincts Group (“BIG”),
a company that Cameron Chell, CEO and director has a material interest in that he previously controlled, to provide: corporate development
and governance, strategic facilitation and management, general business services, office space, corporate business development video
content, website redesign and management, and online visibility management. The services are provided by a team of consultants and the
costs of all charges are based on the fees set in the Agreement. For the three months ended March 31, 2024, the company incurred fees
of $60,000 (2023 - $103,629). As at March 31, 2024, the Company was indebted to this company in the amount of $nil (2023 - $4,850).
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. For the three months ended March 31, 2024, the Company incurred fees of
$106,250 (2023 - $100,000). As at March 31, 2024, the Company was indebted to this company in the amount of $nil (2023 - $nil).
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. On May 9, 2022, Scott Larson ceased to be President
of the Company and entered into an agreement to provide executive consulting services to the Company and all fees are set in the consulting
agreement. For the three months ended March 31, 2024, the Company incurred fees of $40,433 (2023 - $58,398). As at March 31, 2024, the
Company was indebted to this company in the amount of $nil (2023 - $17,500).
Trade
receivables/payables and accrued receivables/payables:
As
at March 31, 2024, the Company had $nil (2023 - $nil) receivable from related parties outstanding that were included in accounts receivable
and $298,100 (2023 - $22,350) payable to related parties that was included in accounts payable. The balances outstanding are unsecured,
non-interest bearing and due on demand.
Key
management compensation
Key
management personnel include those persons having authority and responsibility for planning, directing and controlling the activities
of the Company as a whole. Compensation awarded to key management for the three months ended March 31, 2024 and 2023 included:
| | |
For the three months ended March 31, | |
| | |
2024 | | |
2023 | |
| Director fees | |
$ | 152,438 | | |
$ | 151,663 | |
| Salaries | |
| 142,068 | | |
| 102,115 | |
| Share-based payments | |
| 122,112 | | |
| 263,242 | |
| | |
$ | 416,618 | | |
$ | 517,020 | |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Other
related parties
| | |
For the three months ended March 31, | |
| | |
2024 | | |
2023 | |
| Management fees paid to a company controlled by CEO and director | |
$ | 106,250 | | |
$ | 100,000 | |
| Management fees paid to a company that the CEO holds an economic interest in | |
| 60,000 | | |
| 103,629 | |
| Management fees paid to a company controlled by the former President and director | |
| 40,433 | | |
| 58,398 | |
| | |
$ | 206,683 | | |
$ | 262,027 | |
Share
Capital
| | |
Number
of Common Shares | | |
Share
Capital | |
| Balance,
December 31, 2022 | |
| 34,270,579 | | |
$ | 83,600,089 | |
| Shares
issued for financing - ATM | |
| 650,729 | | |
| 1,748,946 | |
| Share
issue costs | |
| - | | |
| (222,136 | ) |
| Shares
issued for financing | |
| 12,800,000 | | |
| 11,376,230 | |
| Share
issue costs | |
| - | | |
| (2,072,886 | ) |
| Shares
issued for the exercise of RSU’s | |
| 1,508,255 | | |
| 2,640,733 | |
| Balance,
December 31, 2023 | |
| 49,229,563 | | |
| 97,070,976 | |
| Shares
issued for financing | |
| 11,200,000 | | |
| 2,017,966 | |
| Share
issue costs | |
| - | | |
| (338,836 | ) |
| Shares
issued for the exercise of warrants | |
| 3,800,000 | | |
| 1,205,005 | |
| Shares
returned to treasury | |
| (900,000 | ) | |
| - | |
| Shares
issued for the exercise of RSU’s | |
| 63,658 | | |
| 68,751 | |
| Balance,
March 31, 2024 | |
| 63,393,221 | | |
| 100,023,862 | |
Stock
options
The
following is the summary of the Company’s stock option activity. Number of options and weighted average exercise prices in the
table below are shown as they were outstanding, forfeited, granted, and exercised:
| | |
Number of Options | | |
Weighted Average Exercise Price | |
| Outstanding, December 31, 2022 | |
| 877,157 | | |
$ | 4.60 | |
| Forfeited | |
| (9,999 | ) | |
| 3.77 | |
| Issued | |
| 30,000 | | |
| 0.63 | |
| Outstanding, December 31, 2023 | |
| 897,158 | | |
$ | 4.48 | |
| Forfeited | |
| (8,335 | ) | |
| 10.15 | |
| Outstanding, March 31, 2024 | |
| 888,823 | | |
$ | 4.42 | |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Restricted
Share Units (RSUs)
The
following is the summary of the Company’s RSU activity. Number of RSUs in the table below are shown as they were outstanding, exercised,
forfeited, and issued:
| | |
Number of RSUs | |
| Outstanding, December 31, 2022 | |
| 1,198,875 | |
| Vested | |
| (1,508,255 | ) |
| Issued | |
| 1,685,316 | |
| Forfeited | |
| (262,969 | ) |
| Outstanding, December 31, 2023 | |
| 1,112,967 | |
| Vested | |
| (63,658 | ) |
| Forfeited | |
| (36,203 | ) |
| Outstanding, March 31, 2024 | |
| 1,013,106 | |
Warrants
During
the three months ended March 31, 2024 and the year ended December 31, 2023, the Company issued pre-funded warrants (“USD pre-funded
Warrants”) where a portion of the funds related to the eventual exercise have already been received with the remaining exercise
price in USD. Being in a foreign currency that is not the Company’s functional currency and these pre-funded warrants were not
issued in exchange for services, the value related to the future exercise price of the USD pre-funded Warrants are required to be recorded
as a financial liability and not as equity. As a financial liability, the portion of the USD pre-funded Warrants related to the future
exercise price will be revalued on a quarterly basis to fair market value with the change in fair value being recorded in profit or loss.
The initial fair value of these USD pre-funded Warrants was parsed out from equity and recorded as a financial liability.
During
the three months ended March 31, 2024 and the year ended December 31, 2023, the Company issued warrants (“USD Warrants”)
with a USD exercise price. Being in a currency that is not the Company’s functional currency and these warrants were not issued
in exchange for services, 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 profit or 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 Nasdaq. 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.
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 Nasdaq.
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. At the date of issue the warrants were valued with a risk free rate of 4.33%, volatility of 119.23%, expected
life of 5 years and an expected dividend yield rate of 0%. The broker warrants were valued with a risk free rate of 4.48%, volatility
of 107.8%, expected life of 3 years and an expected dividend yield of 0%.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Warrant
Derivative Liability
| Balance at December 31, 2022 | |
$ | - | |
| Warrants issued | |
| 3,985,015 | |
| Change in fair value of warrants outstanding | |
| 211,110 | |
| Balance at December 31, 2023 | |
$ | 4,196,125 | |
| Warrants issued | |
| 2,859,509 | |
| Warrants exercised | |
| (1,204,491 | ) |
| Change in fair value of warrants outstanding | |
| (1,817,569 | ) |
| Balance at March 31, 2024 | |
$ | 4,033,574 | |
| Derivative liability balance at | |
March 31, 2024 | | |
December 31, 2023 | |
| Warrants | |
$ | 4,033,574 | | |
$ | 4,196,125 | |
The
contingent liability is related to an acquisition on March 22, 2021, whereby 1,200,000 warrants were issued and 900,000 were held in
escrow and classified as a contingent liability that was to be released upon completion of the milestones. The warrants expired on March
25, 2023.
Details
of these warrants and their fair values are as follows:
| Issue Date |
| Exercise Price |
| |
Number of Warrants Outstanding at March 31, 2024 | | |
Fair Value at March 31, 2024 | | |
Number of Warrants Outstanding at December 31, 2023(5) | | |
Fair Value at December 31, 2023 | |
| October 30, 2023 (1) |
| US$ |
0.6123 |
| |
| 6,400,000 | | |
| 1,130,828 | | |
| 6,400,000 | | |
| 3,180,543 | |
| October 30, 2023 (2) |
| US$ |
0.0001 |
| |
| - | | |
| - | | |
| 1,600,000 | | |
| 1,015,582 | |
| February 26, 2024 (3) |
| US$ |
0.1761 |
| |
| 13,400,000 | | |
| 2,902,746 | | |
| - | | |
| - | |
| February 26, 2024 (4) |
| US$ |
0.17 |
| |
| - | | |
| - | | |
| - | | |
| - | |
| |
| |
|
| |
| 19,800,000 | | |
$ | 4,033,574 | | |
| 8,000,000 | | |
$ | 4,196,125 | |
| |
1) |
The
warrants expire October 30, 2028. |
| |
2) |
The
warrants have no expiry date. They were exercised January 5, 2024. |
| |
3) |
The
warrants expire February 26, 2029. |
| |
4) |
The
warrants have no expiry date. They were exercised February 26, 2024. |
The
fair values of these warrants were estimated using the Black-Scholes Option Pricing Model with the following weighted average assumptions:
| | |
March 31, 2024 | | |
December 31, 2023 | |
| Risk free interest rate | |
| 4.21 | % | |
| 3.84 | % |
| Expected volatility | |
| 119.47 | % | |
| 113.78 | % |
| Expected life | |
| 4.6 - 4.91 years | | |
| 4.8 years | |
| Expected dividend yield | |
| 0 | % | |
| 0 | % |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
| | |
Number of Warrants | | |
Weighted Average Exercise Price | |
| Outstanding, December 31, 2022 | |
| 7,916,797 | | |
$ | 5.08 | |
| Issued | |
| 8,320,000 | | |
| 0.50 | |
| Expired | |
| (7,661,999 | ) | |
| 5.89 | |
| Outstanding, December 31, 2023 | |
| 8,574,798 | | |
$ | 0.63 | |
| Issued | |
| 16,270,000 | | |
| 0.22 | |
| Exercised | |
| (3,800,000 | ) | |
| 0.0001 | |
| Outstanding March 31, 2024 | |
| 21,044,798 | | |
$ | 0.51 | |
As
at March 31, 2024, the Company had the following warrants outstanding:
| Date issued | |
Expiry date | |
Exercise price | | |
Number of warrants outstanding | |
| July 29, 2021 | |
July 29, 2024 | |
| US$ 5.00 | | |
| 250,000 | |
| September 14, 2021 | |
September 14, 2024 | |
| US$ 5.00 | | |
| 4,798 | |
| October 30, 2023 | |
October 30, 2026 | |
| US$ 0.6875 | | |
| 320,000 | |
| October 30, 2023 | |
October 30, 2028 | |
| US$ 0.6123 | | |
| 6,400,000 | |
| February 26, 2024 | |
February 26, 2027 | |
| US$ 0.3375 | | |
| 670,000 | |
| February 26, 2024 | |
February 26, 2029 | |
| US$ 0.1761 | | |
| 13,400,000 | |
| | |
| |
| | | |
| 21,044,798 | |
The
weighted average remaining contractual life of warrants outstanding as of March 31, 2024, was 4.66 years (December 31, 2023 – 4.63
years).
Critical
Accounting Policies and Estimates
Significant
estimates and assumptions
The
preparation of consolidated financial statements in accordance with IFRS requires the Company to 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.
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.
Income
taxes
Provisions
for income taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant
factors. The Company reviews the adequacy of these income tax provisions at the end of each reporting period. However, it is possible
that at some future date an additional liability could result from audits by tax authorities. Where the final outcome of these tax-related
matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in
which such determination is made. Deferred tax assets are recognized when it is determined that the Company is likely to recognize their
recovery from the generation of taxable income.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
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
less costs to sell. The Company estimates selling price based upon assumptions about future demand and current and anticipated retail
market conditions. The future realization of these inventories may be affected by future technology or other market- driven changes that
may reduce future selling prices.
Investments
in Private companies
Where
the fair value of investments in private companies recorded on the consolidated statement of financial position cannot be derived
from active markets, they are determined using a variety of valuation techniques. The inputs to these models are derived from
observable market data where possible, but where observable market data is not available, judgment is required to establish fair
value and this value may not be indicative of the eventual recoverable value.
Expected
credit losses on trade receivables and notes receivable
When
determining expected credit losses (“ECLs”), the Company considers the historic credit losses observed by the Company, customer-specific
payment history and economic conditions. When determining whether the credit risk of a financial asset has increased significantly since
initial recognition and when estimating ECL’s, the Company considers reasonable and supportable information that is relevant and
available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Company’s
historical experience, informed credit assessment and forward-looking information.
Useful
lives of equipment and intangible assets
Estimates
of the useful lives of equipment and intangible assets are based on the period over which the assets are expected to be available for
use. The estimated useful lives are reviewed annually and are updated if expectations differ from previous estimates due to physical
wear and tear, technical or commercial obsolescence, and legal or other limits on the use of the relevant assets. In addition, the estimation
of the useful lives of the relevant assets may be based on internal technical evaluation and experience with similar assets. It is possible,
however, that future results of operations could be materially affected by changes in the estimates brought about by changes in the factors
mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances.
A reduction in the estimated useful lives of the equipment would increase the recorded expenses and decrease the non-current assets.
Other
Significant judgements
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 applied to 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 each entity in the group. |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Foreign
currency translation
Transactions
in foreign currencies are translated into the functional currency at rates of exchange at the time of such transactions. Monetary assets
and liabilities are translated at the reporting period rate of exchange. Non-monetary assets and liabilities are translated at historical
exchange rates. Gains and losses resulting from foreign exchange adjustments are included in profit or loss.
The
functional currencies of the parent company and each subsidiary are as follows:
| Draganfly
Inc. |
Canadian
Dollar |
| Draganfly
Innovations Inc. |
Canadian
Dollar |
| Draganfly
Innovations USA, Inc. |
US
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 revenue 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 translation of foreign operations in other comprehensive loss.
Share-based
payments
The
Company may grant stock options or restricted share units (“RSU’s”) to its directors, officers, employees and consultants.
The Company records share-based compensation related to stock options using the Black-Scholes Option Pricing Model.
The
RSU’s granted entitle an employee, director or officer to either the issuance of common shares or cash payments payable upon vesting
with terms determined by the Company’s Board of Directors at the time of the grant. If on the grant date it is determined there
is an obligation to settle in cash, the RSU’s are accounted for as liabilities, with the fair value remeasured at the end of each
reporting period and on the settlement date. Changes in fair value are recognized in profit and loss. Expense is recognized over the
vesting 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. |
| 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). |
The
aggregate sales price 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).
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
In
conjunction with private placements or brokered financings, the Company may issue compensatory warrants to agents as consideration for
services provided. Awards of grants are accounted for in accordance with the fair value method of accounting and result in an increase
in share issue costs and a credit to warrants within shareholders’ equity when warrants are issued.
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 year.
Diluted
income per share is calculated by dividing the profit attributable to common shareholders of the parent by the weighted average number
of common shares outstanding during the year plus the weighted average number of common shares that would be issued on the conversion
of all the dilutive potential common shares into common shares. The Company had 8,574,798 warrants, 897,158 options and 1,112,967 RSU’s
that would be potentially dilutive if the Company were not in a loss position and were to calculate diluted income per share.
Financial
Instruments
Financial
instruments are accounted for in accordance with IFRS 9 Financial Instruments: Classification and Measurement. A financial instrument
is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
| Financial
assets/liabilities |
|
Classification |
| Cash
and cash equivalents |
|
Fair
value through profit or loss |
| Receivables |
|
Amortized
cost |
| Notes
receivable |
|
Fair
value through profit or loss |
| Investments |
|
Fair
value through other comprehensive income |
| Trade
payables |
|
Amortized
cost |
| Customer
deposits |
|
Amortized
cost |
| Loans
payable |
|
Amortized
cost |
| Derivative
liability |
|
Fair
value through profit or loss |
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 cash flows are not solely principal and interest, 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.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Financial
assets at FVTPL
Financial
assets carried at FVTPL are initially recorded at fair value and transaction costs are recorded to profit or loss. Realized and unrealized
gains and losses arising from changes in the fair value of financial assets held at FVTPL are included in the profit or loss in the period
in which they arise. Derivatives are also categorized as FVTPL unless they are designated as hedges.
Financial
assets at FVTOCI
Financial
assets carried 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.
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 the risks and rewards of ownership have been transferred. Gains and losses on derecognition of financial
assets classified as FVTPL or amortized cost are recorded to profit or loss. Gains or losses on financial assets classified as FVTOCI
remain within accumulated other comprehensive loss.
The
Company classifies its financial liabilities into one of two categories as follows:
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 payable are included in this category.
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 recognized in profit or loss.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Impairment
of non-financial assets
The
carrying amounts of the 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; and |
| ● | an
intangible asset not yet available for use; |
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.
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 profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of
any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU 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.
Current
income taxes 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 liabilities 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.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Inventory
Inventory
consists of raw materials and finished goods for manufacturing of multi-rotor helicopters, industrial areal video systems, civilian small
unmanned aerial systems or vehicles, health monitoring equipment, and wireless video systems. Inventory is initially valued at cost and
subsequently at the lower of cost and net realizable value. Cost is determined using the first-in-first-out method. The cost of inventories
comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and
condition. The costs of purchase include the purchase price, import duties and non-recoverable taxes and transport, handling and other
costs directly attributable to the acquisition of finished goods, materials or services. The costs of conversion include direct materials
and labour costs and a systematic allocation of fixed and variable overheads incurred in converting materials into finished goods. 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. The control transfer for Dronelogics
Systems Inc. (“Dronelogics”) and Draganfly Innovations USA, Inc. is when the products are shipped to the customer and there
is no unfulfilled obligation that could affect the customer’s acceptance of the products. At this point revenue is recognized.
For Draganfly Innovations Inc. transfer occurs for sales outside of North America when shipped and for sales within North America on
delivery which occurs in proximity to shipping. Revenue is recognized when the transfer of control has occurred.
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 performance obligations, such as the sale of hardware and support or maintenance. Where support or maintenance
is performed by another party and does not include an integration service it is accounted for as a separate performance obligation. In
this case, the transaction price will be allocated to each performance obligation based on stand-alone selling price. Where the stand-alone
selling price is not directly observable, the price is estimated based on expect cost plus margin. Where the support or maintenance is
provided by the Company, the contract is analyzed to identify the performance obligations and transaction price. The price is then allocated
across the obligations identified in the contract. Revenue is recognized when the Company satisfies a performance obligation.
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 over time as the services are rendered.
The
Company provides rental of equipment which is measured based on rates through contracts or other written agreements with customers. Revenue
is recognized in the period when services are performed and only when there is reasonable assurance that the revenue will be collected.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Deferred
Income
A
payment received is included as deferred revenue when products have yet to be shipped to the customers as of the period end or there
are unfulfilled obligations related to the revenue received. The amount to be recognized within twelve months following the year-end
date is classified as current.
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, or lower of cost and net realizable value adjustments as required.
Intangible
Assets
An
intangible asset is an identifiable asset without physical substance. An asset is identifiable if it is separable, or arises from contractual
or legal rights, regardless of whether those rights are transferrable or separable from the Company or from other rights and obligations.
Intangible assets include intellectual property, which consists of patent and trademark applications, brands and software.
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 straight-line basis over the expected life of each intellectual property to write
off the cost of the assets from the date they are available for use.
| Class
of intangible asset |
|
Useful
live |
| Customer
relationship |
|
5
years |
| Brand |
|
5
years |
| Software |
|
5
years |
| Patents |
|
5
years |
Goodwill
represents the excess of the value of the consideration transferred over the fair value of the net identifiable assets and liabilities
acquired in a business combination. Goodwill is allocated to the cash generating unit to which it relates.
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 consolidated 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 consolidated statement
of comprehensive loss.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
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 |
|
3
year straight line |
| Furniture
and equipment |
|
5
year straight line |
| Leasehold
improvements |
|
Expected
lease term |
| Vehicles |
|
30%
declining balance |
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. The Company can also
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.
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.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
A
lease modification will be accounted for as a separate lease if it materially changes the scope of the lease. For a modification that
is not a separate lease, on the effective date of the lease modification, the Company will remeasure the lease liability and corresponding
ROU asset using the interest rate implicit in the lease or the Company’s incremental borrowing rate. Any variance between the remeasured
ROU asset and lease liability will be recognized as a gain or loss in net income to reflect the change in scope.
BUSINESS
RISKS
The
Company does engage in significant transactions and activities in currencies other than its functional currency. Depending on the timing
of the transactions and the applicable currency exchange rates such conversions may positively or negatively impact the Company.
An
investment in the Company’s Common Shares is highly speculative and involves significant risks. In addition to the other information
contained in this MD&A and the documents incorporated by reference herein and therein, you should review and carefully consider
the risks described herein. The risks described herein are not the only risk factors facing us and should not be considered
exhaustive. Additional risks and uncertainties not currently known to us, or that we currently consider immaterial, may also materially
and adversely affect our business, operations and condition, financial or otherwise.
Risks
Related to the Company, its Business and Industry
The
Company has a history of losses.
The
Company has incurred net losses since its inception. The Company cannot assure that it can become profitable or avoid net losses
in the future or that there will be any earnings or revenues in any future quarterly or other periods. The Company expects that
its operating expenses will increase as it grows its business, including expending substantial resources for research, development
and marketing. As a result, any decrease or delay in generating revenues could result in material operating losses.
A
shareholder’s holding in the Company may be diluted if the Company issues additional Common Shares or other securities in
the future.
The
Company may issue additional Common Shares or other securities in the future, which may dilute a shareholder’s holding
in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares, and shareholders
have no pre-emptive rights in connection with further issuances of any securities. The directors of the Company have the discretion
to determine if an issuance of Common Shares or other securities is warranted, the price at which any such securities
are issued and the other terms of issue of Common Shares or securities. In addition, the Company may issue additional
Common Shares upon the exercise of incentive stock options to acquire Common Shares under its share compensation plan
or upon the exercise or conversion of other outstanding convertible securities of the Company, which will result in further dilution
to shareholders. In addition, the issuance of Common Shares or other securities in any potential future acquisitions,
if any, may also result in further dilution to shareholder interests.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
The
Company expects to incur substantial research and development costs and devote significant resources to identifying and commercializing
new products and services, which could significantly reduce its profitability and may never result in revenue to the Company.
The
Company’s future growth depends on penetrating new markets, adapting existing products to new applications, and introducing
new products and services that achieve market acceptance. The Company plans to incur substantial research and development costs
as part of its efforts to design, develop and commercialize new products and services and enhance its existing products. The
Company believes that there are significant opportunities in a number of business areas. Because the Company accounts for research
and development costs as operating expenses, these expenditures will adversely affect its earnings in the future. Further,
the Company’s research and development programs may not produce successful results, and its new products and services
may not achieve market acceptance, create any additional revenue or become profitable, which could materially harm the Company’s
business, prospects, financial results and liquidity.
Shortfalls
in available external research and development funding could adversely affect the Company.
The
Company depends on its research and development activities to develop the core technologies used in its UAV products and for
the development of the Company’s future products. A portion of the Company’s research and development activities
can depend on funding by commercial companies and the Canadian government. Canadian government and commercial spending levels
can be impacted by a number of variables, including general economic conditions, specific companies’ financial performance
and competition for Canadian government funding with other Canadian government-sponsored programs in the budget formulation
and appropriation processes. Moreover, the Canadian, federal and provincial governments provide energy rebates and incentives
to commercial companies, which directly impact the amount of research and development that companies appropriate for energy
systems. To the extent that these energy rebates and incentives are reduced or eliminated, company funding for research and
development could be reduced. Any reductions in available research and development funding could harm the Company’s
business, financial condition and operating results.
The
Company’s adoption of new business models could fail to produce any financial returns.
Forecasting
the Company’s revenues and profitability for new business models is inherently uncertain and volatile. The Company’s
actual revenues and profits for its business models may be significantly less than the Company’s forecasts. Additionally,
the new business models could fail for one or more of the Company’s products and/or services, resulting in the loss of
Company’s investment in the development and infrastructure needed to support the new business models, and the opportunity
cost of diverting management and financial resources away from more successful businesses.
The
Company will be affected by operational risks and may not be adequately insured for certain risks.
The Company will be affected by a number of operational risks and the Company may not be adequately insured for certain risks,
including: labour disputes; catastrophic accidents; fires; blockades or other acts of social activism; changes in the regulatory
environment; impact of non-compliance with laws and regulations; natural phenomena, such as inclement weather conditions, floods,
earthquakes and ground movements. There is no assurance that the foregoing risks and hazards will not result in damage to,
or destruction of, the Company’s technologies, personal injury or death, environmental damage, adverse impacts on
the Company’s operation, costs, monetary losses, potential legal liability and adverse governmental action, any of which
could have an adverse impact on the Company’s future cash flows, earnings and financial condition. Also, the Company
may be subject to or affected by liability or sustain loss for certain risks and hazards against which the Company cannot insure
or which the Company may elect not to insure because of the cost. This lack of insurance coverage could have an adverse impact
on the Company’s future cash flows, earnings, results of operations and financial condition.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
The
Company operates in evolving markets, which makes it difficult to evaluate the Company’s business and future prospects.
The
Company’s unmanned aerial vehicles (“UAVs”) are sold in rapidly evolving markets. The commercial UAV market
is in early stages of customer adoption. Accordingly, the Company’s business and future prospects may be difficult to evaluate.
The Company cannot accurately predict the extent to which demand for its products and services will increase, if at all. The
challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets could impact the Company’s
ability to do the following:
| |
● |
generate sufficient revenue
to reach and maintain profitability; |
| |
● |
acquire and maintain market
share; |
| |
● |
achieve or manage growth
in operations; |
| |
● |
develop and renew contracts; |
| |
● |
attract and retain additional
engineers and other highly-qualified personnel; |
| |
● |
successfully develop and
commercially market new products; |
| |
● |
adapt to new or changing
policies and spending priorities of governments and government agencies; and |
| |
● |
access additional capital
when required and on reasonable terms. |
If
the Company fails to address these and other challenges, risks and uncertainties successfully, its business, results of operations
and financial condition would be materially harmed.
The
Company operates in a competitive market.
The
Company faces competition and new competitors will continue to emerge throughout the world. Services offered by the Company’s
competitors may take a larger share of consumer spending than anticipated, which could cause revenue generated from the Company’s
products and services to fall below expectations. It is expected that competition in these markets will intensify.
If
competitors of the Company develop and market more successful products or services, offer competitive products or services at lower
price points, or if the Company does not produce consistently high-quality and well-received products and services, revenues, margins,
and profitability of the Company will decline.
The
Company’s ability to compete effectively will depend on, among other things, the Company’s pricing of services and equipment,
quality of customer service, development of new and enhanced products and services in response to customer demands and changing
technology, reach and quality of sales and distribution channels and capital resources. Competition could lead to a reduction in
the rate at which the Company adds new customers, a decrease in the size of the Company’s market share and a decline in its
customers. Examples include but are not limited to competition from other companies in the UAV industry.
In
addition, the Company could face increased competition should there be an award of additional licenses in jurisdictions in which
the Company operates in.
The
markets in which the Company competes are characterized by rapid technological change, which requires the Company to develop new
products and product enhancements and could render the Company’s existing products obsolete.
Continuing
technological changes in the market for the Company’s products could make its products less competitive or obsolete,
either generally or for particular applications. The Company’s future success will depend upon its ability to develop
and introduce a variety of new capabilities and enhancements to its existing product and service offerings, as well as introduce
a variety of new product offerings, to address the changing needs of the markets in which it offers products. Delays in introducing
new products and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative
products or enhancements at competitive prices may cause existing and potential customers to purchase the Company’s competitors’
products.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
If
the Company is unable to devote adequate resources to develop new products or cannot otherwise successfully develop new products
or enhancements that meet customer requirements on a timely basis, its products could lose market share, its revenue and profits
could decline, and the Company could experience operating losses.
Failure
to obtain necessary regulatory approvals from Transport Canada or other governmental agencies, or limitations put on the use of
small UAV in response to public privacy concerns, may prevent the Company from expanding sales of its small UAV to non-military
customers in Canada.
Transport
Canada is responsible for establishing, managing, and developing safety and security standards and regulations for civil aviation
in Canada, and includes unmanned civil aviation (drones). Civil operations include law enforcement, scientific research, or
use by private sector companies for commercial purposes. The Canadian Aviation Regulations (“CARs”) govern civil
aviation safety and security in Canada, and by extension govern operation of drones in Canada to an acceptable level of safety.
While
Transport Canada has been a leader in the development of regulations for the commercial use of remotely piloted aircraft systems
(“RPAS”) and continues to move forward rapidly with its regulatory development, it has acknowledged the challenge
of regulations keeping pace with the rapid development in technology and the growing demand for commercial RPAS use, particularly
in the beyond visual line-of-sight environment. In 2012, the Canadian Aviation Regulation Advisory Council UAS working group
released its Phase 2 report which outlined a proposed set of revision to the CARs to permit beyond visual line of sight operations.
This report was the basis for the recently released Notice of Proposed Amendment (“NPA”) by Transport Canada on lower
risk beyond visual line-of-sight.
Failure
to obtain necessary regulatory approvals from Transport Canada or other governmental agencies, including the granting of certain
Special Flight Operations Certificates (“SFOCs”), or limitations put on the use of RPAS in response to public
safety concerns, may prevent the Company from testing or operating its aircraft and/or expanding its sales which could have an adverse
impact on the Company’s business, prospects, results of operations and financial condition.
There
are risks associated with the regulatory regime and permitting requirements of the Company’s business.
A
significant portion of the Company’s business is based on the operation of RPAS. The operation of RPAS poses a risk or
hazard to airspace users as well as personnel on the ground. As the RPAS industry is rapidly developing, the regulatory
environment for RPAS is constantly evolving to keep pace. As such, whenever a policy change with respect to operating
regulations occurs, there is a risk that the Company could find itself to be in non-compliance with these new regulations.
While the Company endeavours to take all necessary action to reduce the risks associated with the operations of RPAS and
to remain well-informed and up-to-date on any addendums and changes to the applicable regulations, there is
no assurance that an incident involving an RPAS or the Company’s non-compliance would not create a significant current
or future liability for the company.
The
regulation of RPAS operations within the Canadian Domestic Airspace (“CDA”) is still evolving and is expected to
continue to change with the proliferation of RPAS, advancements in technology, and standardization within the industry. Changes
to the regulatory regime may be disruptive and result in the Company needing to adopt significant changes in its operations
and policies, which may be costly and time-consuming, and may materially adversely affect the Company’s ability to manufacture
and make delivery of its products and services in a timely fashion.
The
Company’s business and research and development activities are subject to oversight by Transport Canada, the federal
institution responsible for transportation policies and programs, including the rules in the CARs. Currently, Transport
Canada requires that any non-recreational operators of RPAS have a SFOC. The Company’s ability to develop, test,
demonstrate, and sell products and services depends on its ability to acquire and maintain a valid SFOC.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
In
addition, there exists public concern regarding the privacy implications of Canadian commercial and law enforcement use
of small UAV. This concern has included calls to develop explicit written policies and procedures establishing UAV usage
limitations. There is no assurance that the response from regulatory agencies, customers and privacy advocates to these
concerns will not delay or restrict the adoption of small UAV by prospective non-military customers.
The
Company may be subject to the risks associated with future acquisitions.
As
part of the Company’s overall business strategy, the Company may pursue select strategic acquisitions that would provide additional
product or service offerings, additional industry expertise, and a stronger industry presence in both existing and new jurisdictions.
Any such future acquisitions, if completed, may expose the Company to additional potential risks, including risks associated with:
(a) the integration of new operations, services and personnel; (b) unforeseen or hidden liabilities; (c) the diversion of resources
from the Company’s existing business and technology; (d) potential inability to generate sufficient revenue to offset new
costs; (e) the expenses of acquisitions; or (f) the potential loss of or harm to relationships with both employees and existing
users resulting from its integration of new businesses. In addition, any proposed acquisitions may be subject to regulatory approval.
The
Company’s inability to retain management and key employees could impair the future success of the Company.
The
Company’s future success depends substantially on the continued services of its executive officers and its key development
personnel. If one or more of its executive officers or key development personnel were unable or unwilling to continue in their present
positions, the Company might not be able to replace them easily or at all. In addition, if any of its executive officers or key
employees joins a competitor or forms a competing company, the Company may lose experience, know-how, key professionals and
staff members as well as business partners. These executive officers and key employees could develop drone technologies that could
compete with and take customers and market share away from the Company.
The
Company faces uncertainty and adverse changes in the economy.
Adverse
changes in the economy could negatively impact the Company’s business. Future economic distress may result in a decrease
in demand for the Company’s products, which could have a material adverse impact on the Company’s operating results
and financial condition. Uncertainty and adverse changes in the economy could also increase costs associated with developing
and publishing products, increase the cost and decrease the availability of sources of financing, and increase the Company’s
exposure to material losses from bad debts, any of which could have a material adverse impact on the financial condition
and operating results of the Company.
The
Company is subject to certain market-based financial risks associated with its operations.
The
Company could be subject to interest rate risks, which is the risk that the value of a financial instrument might be adversely affected
by a change in the interest rates. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposure
through its normal operating and financing activities, however market fluctuations could increase the costs at which the Company
can access capital and its ability to obtain financing and the Company’s cash balances carry a floating rate of interest.
In addition, the Company engages in transactions in currencies other than its functional currency. Depending on the timing of these
transactions and the applicable currency exchange rates, conversions to the Company’s functional currency may positively or
negatively impact the Company.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Negative
macroeconomic and geopolitical trends could affect demand for the Company’s products and its ability to access sources of
capital.
There
can be no assurance that the Company’s business and corresponding financial performance will not be adversely affected by
general negative economic or consumer trends or events, including pandemics, public health crises, weather catastrophes, acts of
terrorism, war, and political instability. In particular, global economic markets have seen extensive volatility over the past few
years owing to the outbreak of the COVID-19 pandemic, the war between Russia and Ukraine, and the war between Israel and Hamas,
the closing of certain financial institutions by regulators in March 2023, and political instability. These events have created,
and may continue to create, significant disruption of the global economy, supply chains and distribution channels, and financial
and labor markets. If such conditions continue, recur or worsen, this may have a material adverse effect on the Company’s
business, financial condition and results of operations as consumer demand and its ability to access capital on favorable terms,
or at all, could be negatively impacted as a result of such conditions and consequences. Furthermore, such economic conditions have
produced downward pressure on share prices and on the availability of credit for financial institutions and corporations while also
driving up interest rates, further complicating borrowing and lending activities. If current levels of market disruption and volatility
continue or increase, the Company might experience reductions in business activity, increases in funding costs, decreases in asset
values, additional write-downs and impairment charges and lower profitability.
The
Company may be subject to the risks associated with foreign operations in other countries.
The
Company’s primary revenues are expected to be achieved in Canada and the US. However, the Company may expand to markets outside
of North America and become subject to risks normally associated with conducting business in other countries. As a result of such
expansion, the Company may be subject to the legal, political, social and regulatory requirements and economic conditions of foreign
jurisdictions. The Company cannot predict government positions on such matters as foreign investment, intellectual property rights
or taxation. A change in government positions on these issues could adversely affect the Company’s business.
If
the Company expands its business to foreign markets, it will need to respond to rapid changes in market conditions, including differing
legal, regulatory, economic, social and political conditions in these countries. If the Company is not able to develop and implement
policies and strategies that are effective in each location in which it does business, then the Company’s business, prospects,
results of operations and financial condition could be materially and adversely affected.
There
are tax risks the Company may be subject to in carrying on business in Canada.
The
Company is a resident of Canada for purposes of the Income Tax Act (Canada) (the “Tax Act”). Since the
Company is operating in a new and developing industry there is a risk that foreign governments may look to increase
their tax revenues or levy additional taxes to level the playing field for perceived disadvantages to traditional brick
and mortar businesses. There is no guarantee that governments will not impose such additional adverse taxes in the future.
If
critical components or raw materials used to manufacture the Company’s products become scarce or unavailable, then the Company
may incur delays in manufacturing and delivery of its products, which could damage its business.
The
Company obtains hardware components, various subsystems and systems from a limited group of suppliers. The Company does not
have long-term agreements with any of these suppliers that obligate it to continue to sell components, subsystems, systems
or products to the Company. The Company’s reliance on these suppliers involves significant risks and uncertainties, including
whether its suppliers will provide an adequate supply of required components, subsystems, or systems of sufficient quality,
will increase prices for the components, subsystems or systems and will perform their obligations on a timely basis.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
The
global supply chain has experienced significant disruptions recently, caused by the COVID-19 pandemic and by geopolitical conflict,
including the wars in Ukraine and Gaza, and the possibility of widening conflict in the Middle East. These disruptions have impacted
a variety of products and goods and have had various downstream effects, making it more difficult to reliably and timely
source and supply goods and has also resulted in shortages of labor and equipment. The macroeconomic impacts of the COVID-19
pandemic and global conflicts, including the disruption of global shipping lanes in the Middle East, have contributed to inflationary
pressure, rising interest rates, and increased market volatility, adding additional pricing uncertainty. These conditions,
if not mitigated or remedied in a timely manner, could delay or preclude delivery of raw materials needed to manufacture the
Company’s products or delivery of its products to customers, particularly in international markets. If the Company
is unable to obtain components from third-party suppliers in the quantities and of the quality that it requires, on a
timely basis and at acceptable prices, then it may not be able to deliver its products on a timely or cost-effective basis
to its customers, or at all, which could cause customers to terminate their contracts with the Company, increase the Company’s
costs and seriously harm its business, results of operations and financial condition. Moreover, if any of the Company’s
suppliers become financially unstable, then it may have to find new suppliers. It may take several months to locate alternative
suppliers, if required, or to redesign the Company’s products to accommodate components from different suppliers.
The Company may experience significant delays in manufacturing and shipping its products to customers and incur additional
development, manufacturing and other costs to establish alternative sources of supply if the Company loses any of these
sources or is required to redesign its products. The Company cannot predict if it will be able to obtain replacement components
within the time frames that it requires at an affordable cost, if at all.
Natural
outdoor elements such as wind and precipitation may have a material adverse effect on the use and effectiveness of the Company’s
products.
The
Company’s business will involve the operation and flying of UAVs, a technology-based product used outside. As such, the
business is subject to various risks inherent in a technology-based businesses operated in outdoor conditions, including faulty
parts, breakdowns and crashes. Although the Company anticipates the use of its UAVs in good climactic conditions and that adequate
flying conditions will be monitored by trained personnel, there can be no assurance that unpredictable natural outdoor
elements, which could be exacerbated due to risks associated with climate change, will not have a material adverse effect on the use
and effectiveness of its products.
The
Company’s products may be subject to recall or return.
Manufacturers
and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons,
including product defects, safety concerns, packaging issues and inadequate or inaccurate labeling disclosure. If any
of the Company’s equipment were to be recalled due to an alleged product defect, safety concern or for any other
reason, the Company could be required to incur unexpected expenses of the recall and any legal proceedings that might
arise in connection with the recall. The Company may lose a significant amount of sales and may not be able to replace
those sales at an acceptable margin or at all. In addition, a product recall may require significant management time and
attention. Additionally, product recalls may lead to increased scrutiny of the Company’s operations by Transport
Canada or other regulatory agencies, requiring further management time and attention and potential legal fees, costs and
other expenses.
If
the Company releases defective products or services, its operating results could suffer.
Products
and services designed and released by the Company involve extremely complex software programs and are difficult to develop
and distribute. While the Company has quality controls in place to detect and prevent defects in its products and services
before they are released, these quality controls are subject to human error, overriding, and reasonable resource constraints.
Therefore, these quality controls and preventative measures may not be effective in detecting and preventing defects in
the Company’s products and services before they have been released into the marketplace. In such an event,
the Company could be required, or decide voluntarily, to suspend the availability of the product or services, which could significantly
harm its business and operating results.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
The
Company’s products and services are complex and could have unknown defects or errors, which may give rise to legal claims
against the Company, diminish its brand or divert its resources from other purposes.
The
Company’s UAVs rely on complex avionics, sensors, user-friendly interfaces and tightly integrated, electromechanical
designs to accomplish their missions. Despite testing, the Company’s products have contained defects and errors and may
in the future contain defects, errors or performance problems when first introduced, when new versions or enhancements are
released, or even after these products have been used by the Company’s customers for a period of time. These problems
could result in expensive and time-consuming design modifications or warranty charges, delays in the introduction of new
products or enhancements, significant increases in the Company’s service and maintenance costs, exposure to liability
for damages, damaged customer relationships and harm to the Company’s reputation, any of which could materially harm
the Company’s results of operations and ability to achieve market acceptance. In addition, increased development and
warranty costs could be substantial and could significantly reduce the Company’s operating margins.
The
existence of any defects, errors, or failures in the Company’s products or the misuse of the Company’s products
could also lead to product returns, recalls, or liability claims or lawsuits against it. A defect, error or failure in one of the
Company’s UAV could result in injury, death or property damage and significantly damage the Company’s reputation
and support for its UAV in general. The Company anticipates this risk will grow as its UAV begins to be used in Canadian domestic
airspace and urban areas. The Company’s UAV test systems also have the potential to cause injury, death or property damage
in the event that they are misused, malfunction or fail to operate properly due to unknown defects or errors. Although
the Company maintains insurance policies, it cannot provide any assurance that this insurance will be adequate to protect
the Company from all material judgments and expenses related to potential future claims or that these levels of insurance will
be available in the future at economical prices or at all. A successful product liability claim could result in substantial
cost to us. Even if the Company is fully insured as it relates to a particular claim, the claim could nevertheless diminish
the Company’s brand and divert management’s attention and resources, which could have a negative impact on the
Company’s business, financial condition and results of operations.
The
Company could be prohibited from shipping its products to certain countries if it is unable to obtain Canadian government authorization
regarding the export of its products, or if current or future export laws limit or otherwise restrict the Company’s business.
The
Company must comply with Canadian federal and provincial laws regulating the export of its products. In some cases, explicit
authorization from the Canadian government is needed to export its products. The export regulations and the governing policies
applicable to the Company’s business are subject to change. The Company cannot provide assurance that such export authorizations
will be available for its products in the future. Compliance with these laws has not significantly limited the Company’s
operations or sales in the recent past, but could significantly limit them in the future. Non-compliance with applicable export
regulations could potentially expose the Company to fines, penalties and sanctions. If the Company cannot obtain required government
approvals under applicable regulations, the Company may not be able to sell its products in certain international jurisdictions,
which could adversely affect the Company’s financial condition and results of operations.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Negative
consumer perception regarding the Company’s products could have a material adverse effect on the demand for the Company’s
products and the business, results of operations, financial condition and cash flows of the Company.
The
Company believes the UAV industry is highly dependent upon consumer perception regarding the safety, efficacy, and quality
of the UAV used. Consumer perception of these products can be significantly influenced by scientific research or findings,
regulatory investigations, litigation, media attention, and other publicity regarding the use of UAV. There can be no assurance
that future scientific research, findings, regulatory proceedings, litigation, media attention, or other research findings
or publicity will be favourable to the UAV market. Future research reports, findings, regulatory proceedings, litigation,
media attention or other publicity that are perceived as less favourable than, or that question, earlier research reports,
findings or publicity could have a material adverse effect on the demand for the Company’s products and the business,
results of operations, financial condition and cash flows of the Company. The dependence upon consumer perceptions means that
adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether
or not accurate or with merit, could have a material adverse effect on the Company, the demand for the Company’s products,
and the business, results of operations, financial condition and cash flows of the Company. Further, adverse publicity
reports or other media attention regarding the safety, the efficacy, and quality of UAV based surveys in general, or the Company’s
products specifically, could have a material adverse effect.
If
the Company fails to successfully promote its product brand, this could have a material adverse effect on the Company’s
business, prospects, financial condition and results of operations.
The
Company believes that brand recognition is an important factor to its success. If the Company fails to promote its brands
successfully, or if the expenses of doing so are disproportionate to any increased net sales it achieves, it would have
a material adverse effect on the Company’s business, prospects, financial condition and results of operations. This
will depend largely on the Company’s ability to maintain trust, be a technology leader, and continue to provide
high-quality and secure technologies, products and services. Any negative publicity about the Company or its industry,
the quality and reliability of the Company’s technologies, products and services, the Company’s risk management processes,
changes to the Company’s technologies, products and services, its ability to effectively manage and resolve customer
complaints, its privacy and security practices, litigation, regulatory activity, and the experience of sellers and buyers with the
Company’s products or services, could adversely affect the Company’s reputation and the confidence in and use of the
Company’s technologies, products and services. Harm to the Company’s brand can arise from many sources,
including; failure by the Company or its partners to satisfy expectations of service and quality; inadequate protection of
sensitive information; compliance failures and claims; litigation and other claims; employee misconduct; and misconduct
by the Company’s partners, service providers, or other counterparties. If the Company does not successfully maintain
a strong and trusted brand, its business could be materially and adversely affected.
The
Company may be subject to electronic communication security risks.
A
significant potential vulnerability of electronic communications is the security of transmission of confidential information
over public networks. Cyberattacks could result in unauthorized access to the Company’s computer systems or its third-party
IT service provider’s systems and, if successful, misappropriate personal or confidential information. Anyone who is
able to circumvent the Company’s security measures could misappropriate proprietary information or cause interruptions
in its operations. The Company may be required to expend capital and other resources to protect against such security breaches
or to alleviate problems caused by such breaches.
The
last few years have seen an increase in the volume and sophistication of targeted cyber-attacks. A failure of the Company’s
IT infrastructure could severely limit the Company’s ability to conduct ordinary operations or expose the Company
to liability. To date, the Company’s systems have functioned capably, and it has not experienced a material impact to
its operations as a result of an IT infrastructure issue. Data security breaches suffered by well-known companies and institutions
have attracted a substantial amount of media attention, prompting new foreign, federal, provincial and state laws and legislative
proposals addressing data privacy and security. As a result, the Company may become subject to more extensive requirements to protect
the customer information that it processes in connection with the purchase of its products, resulting in increased compliance costs.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
While
the Company has taken measures to protect against cyberattacks, even the most well-protected IT networks, systems and facilities
remain potentially vulnerable because the techniques used in attempted security breaches are continually evolving and generally
are not recognized until launched against a target or, in some cases, are designed not to be detected and, in fact, may
not be detected. Any such compromise of the Company’s or its third party’s IT service providers’ data security
and access, public disclosure, or loss of personal or confidential business information, could result in legal claims and proceedings,
liability under laws to protect privacy of personal information, and regulatory penalties, and could disrupt the Company’s
operations, require significant management attention and resources to remedy any damages that result, and damage its reputation
and customers willingness to transact business with us, any of which could adversely affect our business.
The
Company’s business could be adversely affected if its consumer protection and data privacy practices are not perceived as
adequate or there are breaches of its security measures or unintended disclosures of its consumer data.
The
rate of privacy law-making is accelerating globally and interpretation and application of consumer protection and data privacy
laws in Canada, the United States, Europe and elsewhere are often uncertain, contradictory and in flux. As business practices
are being challenged by regulators, private litigants, and consumer protection agencies around the world, it is possible that
these laws may be interpreted and applied in a manner that is inconsistent with the Company’s data and/or consumer protection
practices. If so, this could result in increased litigation government or court-imposed fines, judgments or orders requiring
that the Company change its practices, which could have an adverse effect on its business and reputation. Complying with these
various laws could cause the Company to incur substantial costs or require it to change its business practices in a manner
adverse to its business.
The
Company relies on its business partners, and they may be given access to sensitive and proprietary information in order to provide
services and support to the Company’s teams.
The
Company relies on various business partners, including third-party service providers, vendors, licensing partners, development
partners, and licensees, among others, in some areas of the Company’s business. In some cases, these third parties are
given access to sensitive and proprietary information in order to provide services and support to the Company’s teams.
These third parties may misappropriate the Company’s information and engage in unauthorized use of it. The failure of
these third parties to provide adequate services and technologies, or the failure of the third parties to adequately maintain
or update their services and technologies, could result in a disruption to the Company’s business operations. Further,
disruptions in the financial markets and economic downturns may adversely affect the Company’s business partners and
they may not be able to continue honoring their obligations to the Company. Alternative arrangements and services may not be
available to the Company on commercially reasonable terms or the Company may experience business interruptions upon a transition
to an alternative partner or vendor. If the Company loses one or more significant business partners, the Company’s
business could be harmed.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
If
the Company fails to protect, or incurs significant costs in defending, its intellectual property and other proprietary rights,
the Company’s business, financial condition, and results of operations could be materially harmed.
The
Company’s success depends, in large part, on its ability to protect its intellectual property and other proprietary rights.
The Company relies primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license
agreements and other contractual provisions, to protect the Company’s intellectual property and other proprietary rights.
However, a portion of the Company’s technology is not patented, and the Company may be unable or may not seek to obtain
patent protection for this technology. Moreover, existing Canadian legal standards relating to the validity, enforceability
and scope of protection of intellectual property rights offer only limited protection, may not provide the Company with any
competitive advantages, and may be challenged by third parties. The laws of countries other than Canada may be even less protective
of intellectual property rights. Accordingly, despite its efforts, the Company may be unable to prevent third parties from
infringing upon or misappropriating its intellectual property or otherwise gaining access to the Company’s technology.
Unauthorized third parties may try to copy or reverse engineer the Company’s products or portions of its products or
otherwise obtain and use the Company’s intellectual property. Moreover, many of the Company’s employees have access
to the Company’s trade secrets and other intellectual property. If one or more of these employees leave to work for one
of the Company’s competitors, then they may disseminate this proprietary information, which may as a result damage the
Company’s competitive position. If the Company fails to protect its intellectual property and other proprietary rights,
then the Company’s business, results of operations or financial condition could be materially harmed. From time
to time, the Company may have to initiate lawsuits to protect its intellectual property and other proprietary rights. Pursuing
these claims is time consuming and expensive and could adversely impact the Company’s results of operations.
In
addition, affirmatively defending the Company’s intellectual property rights and investigating whether the Company is
pursuing a product or service development that may violate the rights of others may entail significant expense. Any of the
Company’s intellectual property rights may be challenged by others or invalidated through administrative processes or
litigation. If the Company resorts to legal proceedings to enforce its intellectual property rights or to determine the validity
and scope of the intellectual property or other proprietary rights of others, then the proceedings could result in significant
expense to the Company and divert the attention and efforts of the Company’s management and technical employees, even
if the Company prevails.
Obtaining
and maintaining the Company’s patent protection depends on compliance with various procedural, document submission, fee payment,
and other requirements imposed by governmental patent agencies, and its patent protection could be reduced or eliminated for non-compliance
with these requirements.
The
Canadian Intellectual Property Office (“CIPO”), the United States Patent and Trademark Office (“USPTO”)
and various foreign national or international patent agencies require compliance with a number of procedural, documentary, fee payment,
and other similar provisions during the patent application process. Periodic maintenance fees on any issued patent are due to be
paid to the CIPO, the USPTO and various foreign national or international patent agencies in several stages over the lifetime of
the patent. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with
the applicable rules, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent
application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could
result in abandonment or lapse of patent rights include, but are not limited to, failure to timely file national and regional stage
patent applications based on the Company’s international patent application, failure to respond to official actions within
prescribed time limits, non-payment of fees, and failure to properly legalize and submit formal documents. If the Company fails
to maintain the patents and patent applications covering its product candidates, its competitors might be able to enter the market,
which would have a material adverse effect on the Company’s business.
While
a patent may be granted by a national patent office, there is no guarantee that the granted patent is valid. Options exist
to challenge the validity of a patent which, depending upon the jurisdiction, may include re-examination, opposition proceedings
before the patent office, and/or invalidation proceedings before the relevant court. Patent validity may also be the subject
of a counterclaim to an allegation of patent infringement.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Pending
patent applications may be challenged by third parties in protest or similar proceedings. Third parties can typically submit
prior art material to patentability for review by the patent examiner. Regarding Patent Cooperation Treaty applications, a
positive opinion regarding patentability issued by the International Searching Authority does not guarantee allowance of a
national application derived from the Patent Cooperation Treaty application. The coverage claimed in a patent application can
be significantly reduced before the patent is issued, and the patent’s scope can be modified after issuance. It is also
possible that the scope of claims granted may vary from jurisdiction to jurisdiction.
The
grant of a patent does not have any bearing on whether the invention described in the patent application would infringe the
rights of earlier filed patents. It is possible to both obtain patent protection for an invention and yet still infringe the
rights of an earlier granted patent.
The
Company may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming
and limit the Company’s ability to use certain technologies in the future.
The
Company may become subject to claims that its technologies infringe upon the intellectual property or other proprietary rights
of third parties. Any claims, with or without merit, could be time-consuming and expensive, and could divert the Company’s
management’s attention away from the execution of its business plan. Moreover, any settlement or adverse judgment resulting
from these claims could require the Company to pay substantial amounts or obtain a license to continue to use the disputed
technology, or otherwise restrict or prohibit the Company’s use of the technology. The Company cannot assure that it
would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all,
that the Company would be able to develop alternative technology on a timely basis, if at all, or that the Company would be
able to obtain a license to use a suitable alternative technology to permit the Company to continue offering, and the Company’s
customers to continue using, the Company’s affected product. An adverse determination also could prevent the Company
from offering its products to others. Infringement claims asserted against the Company may have a material adverse effect
on its business, results of operations or financial condition.
The
Company may not be able to protect its intellectual property rights throughout the world.
Filing,
prosecuting, and defending patents on all of the Company’s product candidates throughout the world would be prohibitively
expensive. Therefore, the Company has filed applications and/or obtained patents only in key markets including the United States
and Canada. Competitors may use the Company’s technologies in jurisdictions where it has not obtained patent protection to
develop their own products and their products may compete with products of the Company.
If
the Company is required to write down goodwill and other intangible assets, the Company’s financial condition and results
could be negatively affected.
Goodwill
impairment arises when there is deterioration in the capabilities of acquired assets to generate cash flows, and the fair value
of the goodwill dips below its book value. The Company is required to review its goodwill for impairment at least annually.
Events that may trigger goodwill impairment include deterioration in economic conditions, increased competition, loss of key
personnel, and regulatory action. Should any of these occur, an impairment of goodwill relating to the acquisition of Dronelogics
Systems Inc. could have a negative effect on the assets of the Company.
From
time to time, the Company may become involved in legal proceedings, which could adversely affect the Company.
The
Company may, from time to time in the future, become subject to legal proceedings, claims, litigation and government investigations
or inquiries, which could be expensive, lengthy, and disruptive to normal business operations. In addition, the outcome of
any legal proceedings, claims, litigation, investigations or inquiries may be difficult to predict and could have a material
adverse effect on the Company’s business, operating results, or financial condition.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
The
Company’s directors and officers may have conflicts of interest in conducting their duties.
Because
directors and officers of the Company are or may become directors or officers of other reporting companies or have significant
shareholdings in other technology companies, the directors and officers of the Company may have conflicts of interest in conducting
their duties. The Company and its directors and officers will attempt to minimize such conflicts. In the event that such a
conflict of interest arises at a meeting of the directors of the Company, a director who has such a conflict will abstain from
voting for or against a particular matter in which the director has the conflict. In appropriate cases, the Company
will establish a special committee of independent directors to review a particular matter in which several directors, or officers,
may have a conflict. In determining whether or not the Company will participate in a particular program and the interest therein
to be acquired by it, the directors will primarily consider the potential benefits to the Company, the degree of risk to which
the Company may be exposed and its financial position at that time. Other than as indicated, the Company has no other procedures
or mechanisms to deal with conflicts of interest.
The
Company’s Articles provide that the Company must indemnify a director or former director against all judgments, penalties
or fines to which such person is or may be liable by reason of such person being or having been a director of the Company
and the executive officers and directors may also have rights to indemnification from the Company, including pursuant
to directors’ and officers’ liability insurance policies, that will survive termination of their agreements.
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting
matters could significantly affect the Company’s reported financial results or financial condition.
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting
matters could significantly affect the Company’s reported financial results or financial condition.
Generally
accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with
regard to a wide range of matters that are relevant to the Company’s business, including but not limited to revenue
recognition, impairment of goodwill and intangible assets, inventory, income taxes and litigation, are highly complex
and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes
in underlying assumptions, estimates or judgments could significantly change the Company’s reported financial performance
or financial condition in accordance with generally accepted accounting principles.
Risks
Related to Our Common Shares
The
market price of the Common Shares may be highly volatile.
The
market price of the Common Shares is highly volatile and has been subject to wide fluctuations in response to a number of factors
that are beyond the Company’s control, including but not limited to
| |
● |
revenue or results of operations
in any quarter failing to meet the expectations, published or otherwise, of the investment community; |
| |
● |
actual or anticipated changes
or fluctuations in its results of operations; |
| |
● |
announcements by us or
the Company’s competitors of new products or new or terminated significant contracts, commercial relationships or capital
commitments; |
| |
● |
rumors and market speculation
involving it or other companies in its industry; |
| |
● |
changes in its executive
management team or the composition of the board of directors of the Company (the “Board”); |
| |
● |
fluctuations in the share
prices of other companies in the technology and emerging growth sectors; |
| |
● |
general market conditions
and macroeconomic trends driven by factors outside the Company’s control, such as pandemics, geopolitical conflicts, supply
chain disruptions, market volatility, inflation, rising interest rate, political instability, and labor challenges, among other factors; |
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
| |
● |
actual or anticipated developments
in its business or its competitors’ businesses or the competitive landscape generally; |
| |
● |
litigation involving us,
the Company’s industry or both, or investigations by regulators into its operations or those of competitors; |
| |
● |
announced or completed
acquisitions of businesses or technologies by the Company or its competitors; |
| |
● |
new laws or regulations
or new interpretations of existing laws or regulations applicable to its business; |
| |
● |
shareholder activism and
related publicity; |
| |
● |
foreign exchange rates;
and |
| |
● |
other risk factors as set
out in this Annual Report and in the documents incorporated by reference into this Annual Report. |
If
the market price of the Company’s Common Shares drops significantly, shareholders could institute securities class action lawsuits
against it, regardless of the merits of such claims. Such a lawsuit could cause it to incur substantial costs and could divert the
time and attention of management and other resources from the Company’s business, which could harm its business, results of
operations and financial condition.
There
is no guarantee that an active trading market for the Company’s Common Shares will be maintained on the CSE and/or Nasdaq.
Investors may not be able to sell their Common Shares quickly or at the latest market price if the trading in our Common Shares
is not active.
The
Company’s Common Shares are currently listed on the Canadian Stock Exchange (“CSE”), the Nasdaq Stock Market,
LLC (“Nasdaq”), and the Frankfurt Stock Exchange, however, it shareholders may be unable to sell significant
quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares,
or at all and there can be no guarantee that an active trading market for the Common Shares may be maintained. There can be
no assurance that there will be sufficient liquidity of its Common Shares on the trading market, and that we will continue
to meet the listing requirements of the CSE, Nasdaq or any other public listing exchange.
Failure
to meet Nasdaq’s continued listing requirements could result in the delisting of the Company’s Common Shares, negatively
impact the price of the Company’s Common Shares and negatively impact its ability to raise additional capital.
If
the Company fails to satisfy the continued listing requirements of the Nasdaq, such as corporate governance requirements or the minimum
closing bid price requirement, the exchange may take steps to delist the Company’s Common Shares. Such a delisting would likely
have a negative effect on the price of the Company’s Common Shares and would impair shareholders’ ability to sell or purchase
its Common Shares when they wish to do so.
As
previously disclosed, on September 22, 2023, the Company received a letter from the Listing Qualifications Department of Nasdaq
notifying the Company of its noncompliance with Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”) by failing to
maintain a minimum bid price for the Company’s common shares of at least $1.00 per share for 30 consecutive business days.
The Company was allowed an initial 180-day grace period, or until March 20, 2024, (the “Bid Price Compliance Period”),
to regain compliance with the Bid Price Rule. To regain compliance with the Bid Price Rule the closing bid price of the Company’s
common shares needed to be at least $1.00 per share for a minimum of ten consecutive business days during the Bid Price Compliance
Period.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
On
March 21, 2024, the Company received notification that it had failed to regain compliance with the Bid Price Rule and is not eligible
for a second 180 day compliance period because of its failure to comply with the $5 million minimum stockholders’ equity initial
listing requirement for the period ended September 30, 2023. Unless the Company timely requests a hearing before an independent
Nasdaq Hearings Panel (the “Nasdaq Panel”), the Company’s securities will be subject to delisting. Accordingly,
the Company will request a hearing before the Nasdaq Panel. The hearing request will automatically stay any suspension or delisting
action pending the hearing and the expiration of any additional extension period granted by the Nasdaq Panel following the hearing.
In that regard, pursuant to the Nasdaq Listing Bid Price Rules, the Nasdaq Panel has the discretion to grant an additional extension
period that can expire as late as September 17, 2024. At the hearing, the Company will be asked to provide a plan to regain compliance
to the Nasdaq Panel. The Company intends to present a plan to regain compliance with the Bid Price Rule and request the continued
listing of its common shares on Nasdaq pending such compliance. However, there can be no assurance that the Nasdaq Panel will grant
the Company’s request or that the Company will ultimately regain compliance with all applicable requirements for continued
listing on Nasdaq.
Future
issuances of equity securities by us or sales by the Company’s existing shareholders may cause the price of its Common Shares
to fall.
The
market price of the Company’s Common Shares could decline as a result of issuances of securities or sales by its existing
shareholders in the market, including by its directors, executive officers and significant shareholders, or the perception
that these sales could occur. Sales of the Company’s Common Shares by shareholders might also make it more difficult
for it to sell Common Shares at a time and price that it deems appropriate. The Company also expects to issue Common Shares
in the future. Future issuances of Common Shares, or the perception that such issuances are likely to occur, could affect the
prevailing trading prices of the Common Shares.
We
may never pay dividends over the foreseeable future.
Investors
should not rely on an investment in the Company’s Common Shares to provide dividend income. The Company does not anticipate
that it will pay any cash dividends to holders of its Common Shares in the foreseeable future. Instead, the Company plans to
retain any earnings to maintain and expand its operations. In addition, any future debt financing arrangement may contain terms
prohibiting or limiting the amount of dividends that may be declared or paid on its Common Shares. Accordingly, investors must
rely on sales of their Common Shares after price appreciation, which may never occur, as the only way to realize any return
on their investment. As a result, investors seeking cash dividends should not purchase the Company’s Common Shares.
United
States investors may not be able to obtain enforcement of civil liabilities against us.
The
Company is incorporated under the laws of British Columbia, Canada, and its principal executive offices are located in Canada. Most of
the Company’s directors and officers and most of the experts named in this Annual Report reside outside of the United States and
all or a substantial portion of the Company’s assets and the assets of these persons are located outside the United States. Consequently,
it may not be possible for an investor to effect service of process within the United States on the Company or those persons. Furthermore,
it may not be possible for an investor to enforce judgments obtained in United States courts based upon the civil liability provisions
of United States federal securities laws or other laws of the United States against those persons or the Company. There is doubt as to
the enforceability, in original actions in Canadian courts, of liabilities based upon United States federal securities laws and as to
the enforceability in Canadian courts of judgments of United States courts obtained in actions based upon the civil liability provisions
of the United States federal securities laws. Therefore, it may not be possible to enforce those actions against the Company, certain
of the Company’s directors and officers or the experts named in this Annual Report.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
We
are an emerging growth company and intend to take advantage of reduced disclosure requirements applicable to emerging growth companies,
which could make the Company’s Common Shares less attractive to investors.
We
are an “emerging growth company” as defined in the JOBS Act. We will remain an emerging growth company until the earliest
to occur of (i) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (ii) December
31, 2026 (the last day of the fiscal year ending after the fifth anniversary of the date of the completion of the first sales of
its common equity pursuant to an effective registration statement under the Securities Act); (iii) the date on which we have
issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; or (iv) the date we qualify
as a “large accelerated filer” under the rules of the SEC, which means the market value of the Company’s Common
Shares held by non-affiliates exceeds $700 million as of the last business day of its most recently completed second fiscal quarter
after we have been a reporting company in the United States for at least 12 months. For so long as we remain an emerging growth
company, we are permitted to and intend to rely upon exemptions from certain disclosure requirements that are applicable to other
public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor
attestation requirements of Section 404 (“Section 404”) of the Sarbanes-Oxley Act (2002), as amended (the “Sarbanes-Oxley
Act”).
We
may take advantage of some, but not all, of the available exemptions available to emerging growth companies. We cannot predict
whether investors will find the Company’s Common Shares less attractive if it relies on these exemptions. If some investors
find the Company’s Common Shares less attractive as a result, there may be a less active trading market for its Common
Shares and the price of its Common Shares may be more volatile.
We
will incur increased costs as a result of operating as a public company in the United States and the Company’s management
will be required to devote substantial time to new compliance initiatives.
As
a U.S. public company, particularly if or when we are no longer an “emerging growth company” as defined under
the JOBS Act, we incur significant legal, accounting and other expenses, in addition to those we incur as a Canadian public
company, that we did not incur prior to being listed on Nasdaq. In addition, the Sarbanes-Oxley Act, and rules implemented
by the SEC and Nasdaq impose various other requirements on public companies, and the Company spends time and resources
to ensure compliance with its reporting obligations in both Canada and the United States.
For
example, pursuant to Section 404, we are required to furnish a report by our management on our internal control over financial
reporting (“ICFR”), which, if or when we are no longer an emerging growth company, must be accompanied by an attestation
report on ICFR issued by our independent registered public accounting firm. To achieve compliance with Section 404, we must
document and evaluate our ICFR, which is both costly and challenging. In this regard, we must dedicate internal resources,
potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our ICFR,
continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented
and implement a continuous reporting and improvement process for ICFR. Despite our efforts, there is a risk that neither we
nor our independent registered public accounting firm will be able to conclude that our ICFR is effective as required by Section
404. This could result in a determination that there are one or more material weaknesses in our ICFR, which could cause an
adverse reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial
statements.
In
addition, becoming a public company in the United States has increased legal and financial compliance as well as regulatory
costs, such as additional Nasdaq fees, and has made some of our public company obligations more time consuming. We invest resources
to comply with evolving laws, regulations and standards in both Canada and the United States, and this investment results in
increased general and administrative expenses and increased diversion of management’s time and attention from revenue-generating
activities to compliance activities. If our efforts to comply with public company laws, regulations and standards in the United
States are insufficient, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
Being
a public company in the United States and complying with applicable rules and regulations also makes it more expensive for
us to obtain sufficient levels of director and officer liability insurance coverage. This factor may also make it more difficult
for us to attract and retain qualified executive officers and members of our Board of Directors.
As
a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit
the information publicly available to the Company’s U.S. shareholders.
We
currently qualify as a “foreign private issuer” under applicable U.S. federal securities laws and, therefore, are not
required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations.
As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC, although we are required
to file with or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian
securities laws. In addition, the Company’s officers, directors and principal shareholders are exempt from the reporting
and “short swing” profit recovery provisions of Section 16 of the Exchange Act. Therefore, the Company’s shareholders
may not know on as timely a basis when its officers, directors and principal shareholders purchase or sell our securities as
the reporting periods under the corresponding Canadian insider reporting requirements are longer. In addition, as a foreign
private issuer, the Company is exempt from the proxy rules under the Exchange Act. The Company is also exempt from Regulation FD,
which prohibits issuers from making selective disclosures of material non-public information. While the Company expects to
comply with the corresponding requirements relating to proxy statements and disclosure of material non-public information under
Canadian securities laws, these requirements differ from those under the Exchange Act and Regulation FD and shareholders should
not expect to receive in every case the same information at the same time as such information is provided by U.S. domestic
issuers.
In
addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices, except
to the extent that such laws would be contrary to U.S. federal securities laws and Nasdaq listing rules and provided that we
disclose the requirements we are not following and describe the Canadian practices we follow instead. We rely on this exemption
in part. As a result, the Company’s shareholders may not have the same protections afforded to shareholders of U.S. domestic
issuers that are subject to all U.S. corporate governance requirements.
At
some point in the future, we may cease to be a foreign private issuer. If we cease to qualify, we will be subject to the same
reporting requirements and corporate governance requirements as a U.S. domestic issuer, which may increase the Company’s
costs of being a public company in the United States.
Draganfly Inc. Management Discussion and Analysis For the three months ended March 31, 2024 |
REGULATORY
POLICIES
Disclosure
Controls and Procedures
Disclosure
Controls and Procedures (“DC&P”) are designed to provide reasonable assurance that all material information is gathered
and reported on a timely basis to senior management so that appropriate decisions can be made regarding public disclosure and that information
required to be disclosed by the issuer under securities legislation is recorded, processed, summarized and reported within the time periods
specified in securities legislation. The Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),
along with other members of management, have designed, or caused to be designed under the CEO and CFO’s supervision, DC&P and
established processes to ensure that they are provided with sufficient knowledge to support the representations made in the interim certificates
required to be filed under National Instrument 52-109.
Internal
Controls over Financial Reporting
The
CEO and CFO, along with participation from other members of management, are responsible for establishing and maintaining adequate ICFR
to provide reasonable assurance regarding the reliability of financial statements prepared in accordance with IFRS. During the three
months ended March 31, 2024, there has been no change in the Company’s ICFR that has materially affected, or is reasonably likely
to materially affect, the Company’s ICFR.
Limitations
of Controls and Procedures
The
Company’s management, including its CEO and CFO, believe that any DC&P or ICFR, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgements
in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost
effective control system, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Other
Information
Additional
information about the Company is available at www.draganfly.com
Approval
This
MD&A is authorized for issue by the Board on May 14, 2024
