Business context and reporting period
UAS Drone Corp. (the registrant; the filing describes Duke Robotics as its acquired business) filed this unaudited Form 10-Q for the quarter ended June 30, 2020. On March 9, 2020, UAS completed a share exchange that made Duke Robotics a majority-owned subsidiary; a June 25 short-form merger made Duke wholly owned. The company adopted Duke’s robotics business plan: developing a stabilization system for remote, accurate firing of small arms and light weapons. The filing says meaningful commercialization had not begun and reports no revenue. Financial statement amounts below are in USD thousands unless stated otherwise.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $0 in 2020 and 2019 | $0 in 2020 and 2019 |
| Research and development | $0; $12 in 2019 | $0; $53 in 2019 |
| General and administrative | $247; $190 in 2019 | $942; $457 in 2019 |
| Operating loss | $247; $202 in 2019 | $942; $510 in 2019 |
| Financing expense, net | $65; $12 in 2019 | $60; $69 in 2019 |
| Net loss | $312; $214 in 2019 | $1,002; $579 in 2019 |
| Basic and diluted loss per share | $(0.01); $(0.01) in 2019 | $(0.03); $(0.03) in 2019 |
Margins are not meaningful because the company reported no revenue. For the six months, stock-based compensation was $580, including share-based compensation issued in connection with the transaction and services. Management attributed higher G&A mainly to compensation, legal, and other professional costs associated with the share exchange and S-1 registration. It attributed the year-over-year decrease in R&D to a temporary freeze in development activity during the transaction process.
| Balance sheet / cash flow item | June 30, 2020 | December 31, 2019 or six-month comparison |
|---|---|---|
| Cash and cash equivalents | $430 | $23 at December 31, 2019; $98 at June 30, 2019 |
| Total assets | $487 | $63 at December 31, 2019 |
| Current liabilities | $1,282 | $1,537 at December 31, 2019 |
| Total liabilities | $2,035 | $1,822 at December 31, 2019 |
| Stockholders’ deficit | $(1,548) | $(1,759) at December 31, 2019 |
| Net cash used in operating activities | $(542) | $(78) for first half 2019 |
| Net cash provided by financing activities | $949 | $(14) for first half 2019 |
| Increase in cash | $407 | Decrease of $92 for first half 2019 |
Working capital was negative $809 at June 30, 2020. Current debt included $860 of convertible loans and $118 of related conversion-feature fair value; noncurrent balances included $346 of convertible loans and $123 of conversion-feature fair value. Stockholders’ loans totaled $284, and current maturities of a bank loan were $22. The filing also describes $965 of investor convertible loans bearing 15% interest, generally due one year after the March 2020 transaction with a possible 12-month extension, and $400 of new debentures bearing 8% interest and maturing in three years. Their conversion terms include price-adjustment provisions.
Material changes, outlook, and risks
- Results reflect a substantial business and reporting change: the Duke transaction was accounted for as a reverse asset acquisition, with Duke treated as the accounting acquirer. The filing’s historical financial statements therefore reflect Duke’s historical statements.
- Common shares outstanding increased to 40,075,151 at June 30, 2020 from 25,130,126 at year-end 2019. The increase included shares issued in the transaction, for debt exchanges and loan conversion, and for services. Additional financing or conversion could further dilute existing shareholders.
- Management and the notes report substantial doubt about the company’s ability to continue as a going concern. The company had a $1,002 net loss for the first half, accumulated deficit of $4,765, negative working capital, and no recurring revenue; it depends on obtaining external financing.
- The filing says June 30 cash was not sufficient to sustain operations for the next 12 months, while also stating that management anticipated cash would support operations until the second half of 2021 after the transactions. The company planned to seek additional capital but gave no assurance it could obtain financing on acceptable terms. Failure to raise funds could require reduced development, a changed strategy, or cessation of operations.
- COVID-19 could disrupt employees, suppliers, manufacturers, operations, and government spending. The company said its Israeli offices had been closed since mid-March 2020 and employees were working remotely. It also cited uncertainty about COVID-19’s effect on capital-raising conditions.
- No revenue or commercialization guidance was provided. Forward-looking statements about future sales, markets, partnerships, approvals, manufacturing, and capital needs are subject to significant uncertainty. The company remained in development, and the filing noted that future profitability and timing were uncertain.
- Management stated disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter. The interim financial statements were unaudited.
Important facts for investors to verify
- Confirm the registrant and issuer identity: this filing is by UAS Drone Corp., which acquired Duke Robotics and adopted its business plan.
- Review the company’s cash runway and subsequent financing activity, particularly given the going-concern warning and the filing’s differing cash-runway statements.
- Check the outstanding balances, maturity dates, interest payments, conversion prices, and dilution provisions of the convertible loans and debentures.
- Assess progress toward product development, required regulatory or export approvals, manufacturing readiness, and meaningful commercial revenue; none is established by this filing.
- Review the transaction accounting and share issuance, including the resulting ownership and potential dilution to shareholders.
- Compare the reported cash-flow statement and MD&A figures with the underlying filing: MD&A cites $98 of cash at June 30, 2019, while the cash-flow statement reports $98 at the end of the first half of 2019.