You should read the following discussion and analysis of our financial condition
and results of operations together with our audited annual consolidated
financial statements as of December 31, 2021 and December 31, 2020 and
accompanying notes appearing elsewhere in this Annual Report. This discussion
and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this Annual Report. All amounts are in U.S. dollars and rounded.
Company Overview
On March 9, 2020, Duke and certain shareholders of Duke entered into the Share
Exchange with the Company, pursuant to which approximately 99% of the issued and
outstanding shares of common stock of Duke were purchased by the Company in
exchange for shares of the Company's common stock, resulting in Duke becoming a
subsidiary of the Company. Following the Share Exchange, the Company has adopted
the business plan of Duke.
On April 29, 2020, the Company, Duke, and UAS Sub, entered into the Merger
Agreement, pursuant to which UAS Sub was to merge, upon the satisfaction of
customary closing conditions, with and into Duke. Upon closing of the Short-Form
Merger, each outstanding share of UAS Sub's common stock, par value $0.0001 per
share, was to be converted into and become one share of common stock of Duke,
with Duke surviving as a wholly-owned subsidiary of the Company. Pursuant to the
Merger Agreement, the Company intended to acquire the remaining outstanding
shares of Duke held by certain stockholders of Duke that did not participate in
the Share Exchange Agreement. At the closing of the transaction contemplated by
the Merger Agreement, the Company was to issue 63,856 shares to certain Duke
stockholders, and Duke will become a wholly owned subsidiary of the Company. On
June 25, 2020, Duke filed a Certificate of Merger with the State of Delaware,
and consequently, Duke became a wholly-owned subsidiary of the Company and the
Short-Form Merger was consummated.
As the result of the Share Exchange and the change in business and operations of
the Company, a discussion of the past financial results of the Company is not
pertinent, and under applicable accounting principles the historical financial
results of Duke, the accounting acquirer, prior to the Share Exchange are
considered the historical financial results of the Company.
Operating Results
The selected historical financial information presented below is derived from
the Company's audited consolidated financial statements for the year ended
December 31, 2021 and Duke's audited consolidated financial statements for the
year ended December 31, 2020. The data set forth below should be read in
conjunction with the financial statements and accompanying notes elsewhere in
this prospectus.
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Comparison of the year ended December 31, 2021 to the year ended December 31,
2020
Revenues. We had $500,000 in revenues for the year ended December 31, 2021.
During the year ended December 31, 2020, we had no revenues.
Research and Development. During the year ended December 31, 2021, we had
$14,000 research and development expenses, compare to $0 in research and
development expenses for the year ended December 31, 2020. Our research and
development expenses, for the year ended December 31, 2021, consisted primarily
of professional services. Our research and development activity is pending our
evaluation of additional different applications for use of our technology and
know-how including for its use in the civil market, while the research and
development activities of the TIKAD product is carried out by ELBIT according to
the Collaboration Agreement.
General and Administrative Expenses. For the year ended December 31, 2021, our
general and administrative expenses amounted to $1,026,000, of which $416,000
were related to stock-based compensation expenses, and were $1,305,000 for the
year ended December 31, 2020, of which $645,000 related to stock-based
compensation expenses. This decrease in general and administrative expenses for
the year ended December 31, 2021 was mainly due to a decrease in stock-based
compensation of $229,000.
Financial Expenses. For the year ended December 31, 2021 and 2020, our financial
expenses amounted to $446,000 and $63,000, respectively. The reason for the
increase in financial expenses for the year ended December 31, 2021, was mainly
due to the increase in interest expense related to our previously outstanding
convertible loans.
Net Loss. For the year ended December 31, 2021 and 2020, we recorded a net loss
of $888,000 and $1,368,000, respectively, which represented a decrease compared
to the year ended December 31, 2020, of $480,000.
Critical Accounting Policies
This MD&A of Financial Condition and Results of Operations discusses our
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP"). In
connection with the preparation of our financial statements, we were required to
make assumptions and estimates about future events, and apply judgments that
affect the reported amounts of assets, liabilities, revenue, expenses and the
related disclosures. We base our assumptions, estimates and judgments on
historical experience, current trends and other factors that management believes
to be relevant at the time our consolidated financial statements are prepared.
On a regular basis, management reviews the accounting policies, assumptions,
estimates and judgments to ensure that our financial statements are presented
fairly and in accordance with U.S. GAAP. However, because future events and
their effects cannot be determined with certainty, actual results could differ
from our assumptions and estimates, and such differences could be material. As
applicable to the consolidated financial statements included elsewhere in this
prospectus, the most significant estimates and assumptions relate to the going
concern and share based compensation assumptions.
Our significant accounting policies are discussed in Note 2, "Summary of
Significant Accounting Policies," of the notes to consolidated financial
statement, which are incorporated by reference into this prospectus. Our
management believes that, as for the financial statements for the periods
included in this prospectus, the "going concern" assessment and accounting share
based compensation are critical accounting policies. However, due to the early
stage of operations of our Company, there are no other accounting policies that
are considered to be critical accounting policies by management.
22
Liquidity and Capital Resources
Since inception, we have devoted substantially all our efforts to research and
development and have incurred accumulated losses of $6,019,000.
During the year ended December 31, 2021, our loss of $888,000 included non-cash
stock-based compensation of $416,000. As of December 31, 2021, we had a working
capital of $3,389,000, as compared to a negative working capital of $1,176,000
as of December 31, 2020.
As of December 31, 2021, we had a cash balance of $3,560,000 compared to the
cash balance of $105,000 as of December 31, 2020. The reason for the increase in
our cash balance was due to the financing transactions we completed in 2021 as
discussed more fully below and our revenues as discussed in note 12 to the
financial statements.
Since our inception we and Duke have funded our operations through equity and
debt financing, bank loans, loans provided by shareholders and demonstration
projects of its technology to potential customers.
As of December 31, 2021, the outstanding balance of the bank loans stood at zero
and as of December 31, 2020 at $6,000.
Since Duke's inception and until 2017, certain Duke affiliates provided loans to
Duke from time to time, as needed. Before entering into the Share Exchange, Duke
entered into debt cancellation letters (the "Debt Cancellation Letters") with
regard to the Stockholders Loans. Pursuant to the Debt Cancellation Letters the
accumulated interest on the Stockholders' Loans was waived and 842,135 shares of
Duke's common stock were issued in exchange for the cancellation of $623,180 in
debt, leaving $280,000 of outstanding Stockholders Loans (the "Outstanding
Stockholders' Loans"). The Outstanding Stockholders' Loans, including the
accumulated interest amount, shall be repaid on the earlier of the following:
(i) three years after the Effective Date; or (ii) Duke raised capital amounting
to at least $15 million following the Effective Date and the Earnings before
interest, tax, depreciation and amortization of Duke has reached an amount of $3
million.
As of December 31, 2021, and December 31, 2020, the outstanding balances of such
stockholders' loans were $297,000 and $288,000, respectively.
23
On September 2, 2019, we executed the Promissory Note having a total principal
amount of $35,000 bearing interest at 6% per annum and maturing September 2,
2021. The Promissory Note was a non-recourse and carried no personal guarantees.
In conjunction with the consummation of the Share Exchange, and as a condition
thereof, on March 6, 2020, we entered into several Securities Exchange
Agreements, on the same terms, to exchange the Promissory Note for 9,623,621
shares of our Common Stock. On May 18, 2021, we issued 54,019 shares of Common
Stock of the Company, to several holders pursuant to the terms of the Security
Exchange Agreements pursuant to which, such holders were entitled to an
anti-dilution clause in the event that the Convertible Debentures were converted
into shares of our Common Stock.
In connection with the Share Exchange, immediately prior to the Effective Time,
we entered into several Convertible Loan Agreements, on the same terms, in the
aggregate amount of $965,000. The terms of the Convertible Loan Agreements
required repayment of the borrowed amount by the one-year anniversary of the
Effective Time, unless, at our discretion, and subject to its compliance with
any and all terms of the material terms of the Convertible Loan Agreements, the
term of such loans is extended for an additional twelve (12) month period. The
terms of the Convertible Loan Agreements also provide that we may repay any
portion of the remaining outstanding loan amount, without penalty, provided,
however, that the Company provides the specific lender with three business days'
written notice prior to such repayment, during which time the lender may elect
to convert any or all of the outstanding loan amount into shares of common stock
of the Company. The Convertible Loan Agreements bore simple interest at a rate
equal to 15% per annum, payable on the 15th day of each calendar month. On
December 9, 2020, we utilized our rights under the Convertible Loan Agreements
and extended the terms of the loans for an additional twelve months. During
March 2021, a portion of the Convertible Debentures, representing principal
amount of $130,000 was converted into 347,594 shares of Common Stock and during
May 2021, we repaid the full balance of the principal of the Convertible Loans
in the amount of $835,000.
Also, in connection with the Share Exchange, we entered into Exchange Agreements
with our outstanding debt with Alpha and GBC to respectively cancel existing
debentures or debt in the total amount of $658,323 and in exchange issue new
debentures in the aggregate amount of $400,000 and issue 698,755 and 65,198
shares of common stock to each of Alpha and GBC, respectively. The New
Debentures matured three years from the Effective Date, bore interest at a rate
of 8% per year and were only convertible into shares of the Company's common
stock, at an original conversion price of $0.3740; provided, however, that such
Original Conversion Price shall be adjusted downward in the event that the
Company, as applicable, sells or grants any options to purchase or sells or
grants any right to reprice, or otherwise dispose or issues any common stock or
common stock equivalents entitling any purchaser to acquire shares of the
Company's common stock at an effective price per share that is lower than the
Original Conversion Price (such issuance, a "Dilutive Event"). In the event of a
Dilutive Event at any time from the Effective Time through the six (6) month
anniversary of the Effective Time, any such adjustment shall occur immediately
after the completion of such period. Subsequent to March 31, 2021, a portion of
the Convertible Debentures, representing an aggregate amount of $110,614
(including interest) was converted into 295,759 shares of Common Stock. During
May 2021, we prepaid the full balance of the principal and interest amount of
the Convertible Debentures in the amount of $108,541.
On May 11, 2021, we entered into the Securities Purchase Agreements with eight
(8) non-U.S. Investors, pursuant to which we, in a private placement Offering,
agreed to issue and sell to the Investors an aggregate of: (i) 12,500,000 shares
of our Common Stock at a price of $0.40 per share; and (ii) Warrants to purchase
12,500,000 of our Common Stock. The Warrants are exercisable immediately and for
a term of 18 months and have an exercise price of $0.40 per share. The aggregate
gross proceeds from the Offering were approximately $5,000,000 and the Offering
closed on May 11, 2021.
The spread of COVID-19 throughout the world may result in a period of business
and manufacturing disruption, and in reduced operations, any of which could
materially affect our business, financial condition and results of operations
especially regarding its ability to obtain the necessary finance to continue
Duke's operations. The extent to which COVID-19 impacts the Company's business
will depend on future developments, which are highly uncertain and cannot be
predicted, including new information which may emerge concerning the severity of
COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
We intend to continue to undertake efforts to raise additional funding;
provided, however, that there can be no assurance that we will be able to raise
capital, or that any capital raise will be on favorable terms or on terms that
do not create further dilution to our stockholders. In addition, we do not know
if the COVID-19 pandemic will have a material effect on our ability to raise
capital or if this will require us to raise capital on terms less favorable to
us as a result of global market conditions or as a result of the direct effect,
if any, of COVID-19 on our business.
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UAS DRONE CORP. 
