Business context and reporting period
The filing is a Form 10-K for the fiscal year ended December 31, 2017, filed March 29, 2018. The filing identifies the registrant as UAS Drone Corp., not DUKE Robotics Corp.; verify that this is the intended company. UAS describes itself as an early-stage developer and manufacturer of commercial quadrotor drones for law enforcement and first responders. It reports two part-time employees, no full-time employees, and no research and development spending in 2017.
The company says it sold two drones to a flight-training company during 2017 and is discussing a possible arrangement for that company to manufacture and sell a next-generation product. Existing Havis manufacturing and distribution agreements are on hold. The filing also checks the box indicating the registrant is a shell company.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $5,000 | $0 |
| Cost of revenue | $4,741 | $0 |
| Gross profit (margin) | $259 (5.2%) | $0 |
| Operating expenses | $109,853 | $268,268 |
| Net loss | $149,056 | $299,174 |
| Cash used in operations | $82,657 | $180,052 |
- At December 31, 2017, cash was $343, current assets were $34,278, and current liabilities were $639,419, implying a working-capital deficit of $605,141. Total assets were $34,278; total liabilities were $639,419; stockholders’ deficit was $605,141.
- Current liabilities included $450,015 of convertible notes, $60,190 of related-party notes, $19,804 of other notes payable, $22,586 of accounts payable, and $86,824 of accrued expenses. The company reported $39,462 of interest expense in 2017.
- Financing activities provided $83,000 of cash in 2017, including $50,005 from a convertible note and net shareholder advances. The company also disclosed a $10,787 shareholder advance in January and February 2018.
- Accumulated deficit was $748,304 at year-end. Basic and diluted loss per share was $0.13, compared with $0.26 in 2016.
Material changes versus the prior comparable period
- Revenue increased from zero to $5,000, while net loss decreased by $150,118, primarily alongside lower expenses—especially professional fees. Operating expenses fell from $268,268 to $109,853.
- Operating cash use improved from $180,052 to $82,657, but cash at year-end remained only $343.
- Current liabilities rose from $512,269 to $639,419, including the new $50,005 convertible debenture issued in January 2017 and increased related-party borrowing.
- Inventory declined from $9,852 to $5,111; the filing reported no inventory impairment charge in 2017, versus $7,524 in 2016.
Outlook, risks and unusual items
- Going concern: The auditor’s report and management disclosures state that substantial doubt exists about the company’s ability to continue as a going concern, citing losses, negative operating cash flows, and a working-capital deficit. Management plans to seek debt or equity financing, with no assurance it will succeed. The filing says available cash is insufficient for the next 12 months.
- Commercialization: No quantitative guidance is provided. Future sales depend on product development, staffing, customer demand, financing, and potential manufacturing or sales arrangements. Havis agreements are on hold, and no products were sold to Havis in either reported year.
- Debt and dilution: The company reports $450,015 in convertible notes, including notes with stated 8% interest and conversion terms; the January 2017 loan was not reduced to writing according to MD&A, although the notes describe a debenture agreement. Conversion could dilute shareholders. The company also anticipates needing additional capital.
- Operating and regulatory risks: Risks include intense competition, limited personnel and operating history, product defects and liability exposure, FAA requirements, dependence on third parties, and difficulty protecting intellectual property. The Havis distribution agreement includes a repurchase obligation for certain unsold inventory upon termination or expiration.
- Controls and governance: Management concluded disclosure controls were not effective and identified material weaknesses involving limited accounting staff and segregation of duties, lack of full-time CEO/CFO oversight, and no independent audit committee. Elsewhere, the filing states that internal control over financial reporting was effective; this inconsistency merits clarification. The board had no independent directors.
- Other: The company reported no pending legal proceedings and no off-balance-sheet arrangements. The 2017 financial statements received an unqualified audit opinion, accompanied by a going-concern emphasis. The common stock is described as penny stock, with no assurance of a sustained market.
Most important facts for investors to verify
- Whether this UAS Drone Corp. filing is the intended filing for DUKE Robotics Corp.
- The status, maturity, interest, conversion provisions, and documentation of all convertible and related-party notes, including the January 2017 borrowing.
- Whether the company obtained financing after year-end and whether it can meet obligations and fund operations for the next 12 months.
- Whether the proposed training-company manufacturing and sales arrangement became binding, and the status of the Havis agreements and any inventory return obligations.
- The conflicting statements about internal-control effectiveness and the company’s shell-company classification.
- Whether the reported $5,000 of revenue and two-unit sale can be repeated at viable margins; 2017 gross margin was approximately 5.2%.