UAS Drone Corp. (Duke Robotics business) — Form 10-Q summary
Reporting period: Three months ended March 31, 2020; filed May 20, 2020. The registrant is identified in the filing as UAS Drone Corp. On March 9, 2020, it completed a share exchange that made Duke Robotics, Inc. a majority-owned subsidiary and adopted Duke’s business plan. Duke was treated as the accounting acquirer, so historical financial statements reflect Duke. Financial statements are unaudited; dollar amounts below are in thousands unless noted.
Key financial results
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $0 | $0 |
| Gross profit | $0 | $0 |
| Research and development | $0 | $41 |
| General and administrative | $696 | $268 |
| Operating loss | $696 | $309 |
| Net loss | $691 | $365 in financial statements |
| Basic and diluted loss per share | $0.02 | $0.01 |
| Cash and cash equivalents | $625 at March 31, 2020 | $23 at December 31, 2019 |
| Total assets / total liabilities | $690 / $1,996 | $63 / $1,822 at December 31, 2019 |
| Stockholders’ deficit | $1,306 | $1,759 at December 31, 2019 |
No revenue was reported in either period, so revenue growth and operating margins are not meaningful. The filing reports no product sales and says meaningful commercialization has not begun.
Cash flow, debt, and liquidity
- The cash flow statement reports $355 of operating cash used, no investing cash flow, and $957 of financing cash provided, resulting in a $602 increase in cash. Cash was $625 at quarter-end, versus $23 at December 31, 2019.
- Current assets were $676 and current liabilities $1,251, implying negative working capital of $575. The filing states cash on hand at March 31 was insufficient to sustain operations for the next 12 months and identifies substantial doubt about the Company’s ability to continue as a going concern.
- Financing includes $965 of convertible loans bearing 15% annual interest, generally due one year after the March 2020 effective date, with a possible 12-month extension and conversion provisions. The balance sheet presents $830 as current and $334 as long-term convertible loans, plus $267 of fair-value liabilities for convertible components.
- New debentures of $400 bear 8% annual interest, mature three years after the effective date, and are convertible at an initial $0.374 per share, subject to downward adjustment for specified dilutive issuances. Stockholder loans of $282 remain outstanding; specified repayment conditions include a three-year waiting period and other thresholds.
- Management planned to seek additional capital and stated that, considering cash following the transactions, it anticipated funds would permit operations through the second half of 2021. It cautioned that financing might not be available on acceptable terms and could dilute shareholders.
Material changes and unusual items
- General and administrative expense rose $428, primarily from increased share-based compensation and legal expense associated with the Share Exchange. The quarter included $511 of stock-based compensation in the cash flow reconciliation; the filing also identifies $429 fair value for shares issued to a consultant and $82 option compensation expense.
- Research and development expense fell from $41 to zero. Management attributed the decrease to a temporary freeze in R&D while pursuing the Share Exchange.
- The Share Exchange resulted in Duke shareholders receiving approximately 71% of the Company’s common stock after the transaction. Common shares outstanding increased from 25,130,126 at December 31, 2019 to 40,075,151 at March 31, 2020.
- The Company exchanged or restructured existing obligations, including conversion of $400 of a prior convertible loan and accrued interest into shares, cancellation of $623 of stockholder debt for shares, and exchange of certain Company debt for new debentures and shares.
Outlook, risks, and subsequent events
- The Company is a development-stage robotics business focused on a stabilization system for remote, accurate firing of small arms and light weapons. It also described long-term ambitions for robotics and unmanned aerial systems for military and civilian use, but provided no revenue or earnings guidance.
- Management said product development and commercialization require substantial spending and that the Company has no recurring revenue. Additional financing is necessary; failure to raise funds could require reduced development, a change in strategy, or cessation of operations.
- COVID-19 risks include disruption to manufacturing and suppliers, travel restrictions, reduced operations, and challenges to fundraising. The Company reported its offices had been closed since mid-March and employees were working remotely.
- On April 29, 2020, the Company agreed to a short-form merger intended to acquire the remaining Duke shares and make Duke wholly owned, subject to customary closing conditions; 63,856 Company shares were to be issued to certain holders. On May 19, the Board appointed Shlomo Zakai as CFO.
- Management reported disclosure controls and procedures were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile cash-flow and MD&A figures: the cash flow statement reports $355 used in operations and $957 provided by financing, while MD&A reports $314 and $916, respectively.
- Reconcile the comparative net loss: the statements report $365 for Q1 2019, while MD&A states $326.
- Confirm the carrying amounts, maturity classifications, interest accruals, and potential dilution associated with convertible loans, debentures, and related derivative liabilities.
- Assess the going-concern disclosure against management’s stated expectation that cash could fund operations through the second half of 2021, and verify subsequent financing and cash use.
- Track completion of the short-form merger, commercialization progress, COVID-related operational effects, and the terms and dilution of any future capital raises.