UAS Drone Corp. (Duke Robotics business) — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; comparison is with FY2019. The filing is by UAS Drone Corp., which adopted Duke Robotics’ business following a March 2020 share exchange and completed the acquisition of the remaining Duke shares in June 2020. Amounts below are U.S. dollars; financial statement amounts are generally in thousands.
Business context and outlook
The company is developing TIKAD, a robotic stabilization and control system designed to enable remote precision firing of small arms and light weapons from an unmanned aerial system or other platforms. It reports that its first-generation system is complete, but meaningful commercialization and recurring sales had not begun. The company assembles systems in Israel and relies on third-party suppliers for components.
On January 29, 2021, Duke Israel signed a collaboration agreement with Elbit Systems Land for worldwide exclusive military, defense, homeland-security and paramilitary marketing, sales, production and further development of TIKAD. Elbit may invest in development and production subject to milestones; the filing says it can recoup half of its investment, up to $6 million, by offsetting royalty payments.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $0 | $112 |
| Cost of revenue / gross profit | $0 / $0 | $105 / $7 |
| Research and development | $0 | $75 |
| General and administrative expenses | $1,305 | $961 |
| Financial expense, net | $63 | $82 |
| Net loss | $(1,368) | $(1,111) |
| Net loss per share | $(0.04) | $(0.04) |
| Net cash used in operations | $(849) | $(138) |
FY2020 G&A included $645 of stock-based compensation, versus $540 in FY2019. Management attributed the higher G&A mainly to increased stock compensation and legal and professional fees. It attributed the absence of revenue, cost of revenue and R&D in 2020 to a temporary operating freeze during the share exchange, registration filing and merger process.
At December 31, 2020, cash was $105, versus $23 at December 31, 2019; total assets were $136, total liabilities $1,985, and shareholders’ deficit $1,849. Working capital was negative $1,176, compared with negative $1,491 a year earlier. Accumulated deficit was $5,131. Financing activities provided $931 in 2020, principally from secured promissory notes; cash increased by $82 for the year.
Year-end liabilities included $950 of current convertible loans and debentures, $371 of noncurrent convertible loans, $288 of noncurrent stockholder loans, and $6 of current bank loans. The convertible loan agreements bear 15% annual interest, have conversion and price-adjustment provisions, and were extended for 12 months in December 2020. The separate new debentures bear 8% interest and mature three years after the March 2020 effective date. Subsequent conversions reduced balances; as of March 30, 2021, the filing reports $835 of convertible-loan principal and $200 of debenture principal outstanding.
Material changes, risks and unusual items
- The independent auditor reported substantial doubt about the company’s ability to continue as a going concern. The company had limited cash, recurring operating losses and negative operating cash flows, and depends on obtaining further financing. The financial statements contain no adjustments for the outcome of this uncertainty.
- Management concluded that disclosure controls and internal control over financial reporting were not effective at year-end. Identified material weaknesses included limited accounting personnel and segregation of duties, no full-time CEO or CFO overseeing daily operations and financial reporting, and no independent audit committee. The auditor did not attest to internal-control effectiveness.
- The company had one full-time employee as of the filing’s stated date and depends on consultants and contractors. Commercial success, customer acceptance, financing, production scaling and required defense export and sales approvals remain uncertain. The company expects substantial dependence on government and international sales.
- COVID-19 restrictions could disrupt personnel, travel, suppliers, manufacturing and defense spending. The filing said restrictions had not affected operations to date, but future effects were uncertain.
- A pending Israeli lawsuit seeks damages or shares based on an alleged services agreement and an asserted right to equity. Defendants dispute the claim; company founders agreed to indemnify the group for resulting losses, including any share issuance.
- Conversion features and down-round provisions may produce dilution and require fair-value accounting. The filing identifies valuation of these Level 3 liabilities as a critical audit matter.
- The Elbit agreement’s royalty term contains an apparent inconsistency: the business discussion states royalties continue until 15 years following $50 million in cumulative TIKAD revenue, while the subsequent-events note states $5 million. The filing text does not resolve the discrepancy.
Most important facts for investors to verify
- Confirm the company’s current cash runway, financing plans and post-year-end debt balances, conversions and potential dilution.
- Review the going-concern disclosure and whether the company has secured sufficient funding to sustain operations and commercialization.
- Verify the executed Elbit agreement’s royalty threshold, rates, investment milestones, recoupment provisions and project/customer status.
- Seek evidence of TIKAD customer orders, sales, regulatory approvals, production readiness and any revenue since year-end; FY2020 revenue was zero.
- Track remediation of material weaknesses and changes to accounting oversight, segregation of duties and board independence.
- Monitor the status and potential share or financial impact of the Blackhawk litigation.