DUKE Robotics Corp. quarterly report, Q2 FY2021

Business context and reporting period

This is UAS Drone Corp.’s unaudited Form 10-Q for the quarter ended June 30, 2021. Although the request identifies Duke Robotics Corp., the filing registrant is UAS Drone Corp.; Duke Robotics is its wholly owned subsidiary. The company develops the TIKAD armed-drone robotic stabilization system and reports in U.S. dollars. It describes itself as a start-up with limited revenue and no meaningful commercialization to date.

Financial results and position

Unless otherwise stated, figures below are in USD thousands. The statements compare the three- and six-month periods ended June 30, 2021 with the corresponding 2020 periods.

The six-month revenue was an upfront fee under the Elbit collaboration agreement for engineering materials and transfer support. There were no reported cost of sales or research and development expenses; reported gross margin for the six-month period was therefore 100%, but this reflects the nature of the fee and should not be treated as evidence of established product economics. No revenue was recorded in the second quarter. Six-month other income was 132; the filing does not clearly identify its source in the presented results. Per-share loss was reported as approximately $0.00 for the three- and six-month 2021 periods.

At June 30, cash and cash equivalents were 3,946, versus 105 at December 31, 2020. Total current assets were 4,002 and current liabilities 284. Total liabilities were 577, including 293 in stockholder loans; convertible loans and debentures had been fully repaid or converted by quarter-end. Total assets were 4,013 and stockholders’ equity was 3,436, compared with a deficit of 1,849 at year-end 2020. Six-month investing cash flow was zero. Financing activities provided 3,689, principally reflecting the May share offering, partly offset by convertible-loan repayments.

Material changes versus prior comparable periods

• Six-month revenue increased from zero to 500, while net loss narrowed from 1,002 to 167, mainly alongside lower G&A expense and the Elbit fee. G&A fell by about 510, including lower share-based compensation and legal costs.
• Financing expense rose to 366 from 60 for the first half; the filing attributes much of the increase to costs associated with previously outstanding convertible loans. For the second quarter, financing expense was 147 versus 65, and net loss widened to 419 from 312.
• Cash increased substantially after the May 2021 private placement. The company issued 12.5 million shares at $0.40 each and warrants to purchase a further 12.5 million shares at $0.40, exercisable immediately for 18 months. Gross proceeds were approximately $5.0 million; net proceeds were reported as $4.605 million.
• Convertible financing was eliminated by June 30 through conversion and repayment. Common shares outstanding increased to 54,018,813 at June 30 from 40,075,151 at year-end; the cover page reports 54,018,813 shares outstanding as of August 11, 2021.

Outlook, commentary and risks

Management anticipates that available cash will fund operations through the end of 2023. This is management’s estimate, not formal revenue or earnings guidance. The company says it may seek further capital; inability to raise funds could force it to reduce development, change strategy, or cease operations, while equity financing may dilute shareholders.

Under the January 2021 Elbit agreement, Elbit received a worldwide exclusive license for TIKAD military, defense, homeland-security and paramilitary applications. Royalties to Duke Israel are tiered and described as low- to mid-double-digit percentages. The agreement also covers a customer evaluation project in Asia Pacific; Elbit’s further development and production investment is discretionary and milestone-dependent, and the agreement may be terminated in specified circumstances, including cancellation of that project. Elbit may recoup 50% of investment, up to $6 million, by offsetting royalty payments. Future product sales, royalties, production scale-up and investment are uncertain.

Management reported no material COVID-19 impact to date but said the full effect remains uncertain. Forward-looking statements are subject to start-up, commercialization, regulatory approval, manufacturing, partnership, capital-raising and market risks. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Confirm the source, timing and recurrence potential of the 500 revenue fee, and the precise basis and timing for any future Elbit royalties or customer-project revenue.
• Review the cash runway assumptions behind management’s estimate through year-end 2023, including expected development, operating and production costs, and possible additional financing needs.
• Assess dilution from the 12.5 million offering warrants, service-provider compensation tied to the offering and warrant exercises, and subsequent equity awards.
• Reconcile the reported 132 of other income and the significant financing expense, including the effects of convertible-instrument fair-value accounting and repayments.
• Check the terms and repayment conditions of the 293 stockholder loans, and the Elbit agreement’s royalty, investment, recoupment and termination provisions.