The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
UAS DRONE CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS
UAS Drone Corp. (“the Company”) was incorporated under the laws of the State of Nevada on February 4, 2015. The Company began limited operations on February 11, 2015. Prior to the Company’s formation, the operations were functioning under Unlimited Aerial Systems, LLP (UAS LLP). UAS LLP was formed under the laws of the State of Louisiana on August 22, 2014. Effective March 31, 2015, the Company completed a reverse merger with UASLLP. The reverse merger was accounted for as a reverse capitalization. Accordingly, the accompanying consolidated financial statements represent the historical assets, liabilities, and results of operations of UAS LLP.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
These condensed consolidated financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States. The Company’s financial statements are prepared using the accrual method of accounting. The Company has elected a December 31 fiscal year end.
Principles of consolidation
The accompanying consolidated financial presented reflect the accounts of UAS Drone Corp.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States of America (“U.S.”) as promulgated by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and with the rules and regulations of the U.S Securities and Exchange Commission (“SEC”) for interim financial information. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods shown. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes for the period ended December 31, 2017, as filed with the SEC on March 28, 2018.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include evaluation of obsolete inventory, valuation of stock options granted and valuation for awards of common stock.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity date of three months or less when purchased to be cash equivalents. At June 30, 2018, the Company had no cash balance in excess of federally insured limits.
6
UAS DRONE CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Inventory
Inventory consist of the Company’s finished goods and is stated as the lower of cost or market, using the FIFO method of inventory, net of reserves for excess, obsolete, damaged, or slow moving items. Inventory consists of the following:
|
|
|
|
|
|
| |
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
Raw materials
|
$
|
4,320
|
|
$
|
4,320
|
|
|
Finished goods
|
|
10,452
|
|
|
10,452
|
|
|
Allowance for obsolescence
|
|
(9,661)
|
|
|
(9,661)
|
|
|
Total inventory
|
$
|
5,111
|
|
$
|
5,111
|
|
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, consisting of accounts payable, notes payable and convertible notes payable approximate their fair value due to the short-term maturity of such instruments. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial statements.
Revenue Recognition
The Company is in the business of selling unmanned aerial systems (drones). The sale of drones are recognized upon shipment of the product only if no significant Company obligations remain, the fee is fixed or determinable, and collection is received or the resulting receivable is deemed probable. Revenue is generally recognized during the period in which drones are delivered to the customer.
Income Taxes
A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
When required, the Company records a liability for unrecognized tax positions, defined as the aggregate tax effect of differences between positions taken on tax returns and the benefits recognized in the financial statements. Tax positions are measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do not meet this threshold.
We recognize interest and penalties related to unrecognized tax benefits on the interest expense line and other expense line, respectively, in the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related liability lines in the unaudited condensed consolidated balance sheet.
Loss per Share
The basic loss per share is calculated by dividing our net loss by the weighted average number of common shares during the period. The diluted earnings (loss) per share is calculated by dividing our net loss by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. As of June 30, 2018, 1,257,415 shares underlying the convertible debt and 45,000 shares underlying stock options have been excluded from the calculation of diluted loss per share because their impact was anti-dilutive.
7
UAS DRONE CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued changes to the accounting for leases that primarily affect presentation and disclosure requirements. The new standard will require the recognition of a right to use asset and underlying lease liability for operating leases with an initial life in excess of one year. This standard is effective for us beginning in the first quarter of 2019. We have not yet determined the impact of the new standard on our consolidated financial statements.
Recent accounting pronouncements issued by the FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
NOTE 3 — GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has net losses for the year ended December 31, 2017 and for the six months ended June 30, 2018 and has a working capital deficit. This condition raises substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain profitability. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management is planning to raise additional funds through debt or equity offerings. There is no guarantee that the Company will be successful in these efforts.
NOTE 4 – RELATED PARTY TRANSACTIONS
During 2016, a stockholder of the Company loaned $37,182 to the company. During 2017, a stockholder of the Company loaned $23,008 to the company. During the first six months of 2018, a stockholder of the Company advanced $41,680 to the Company. The advances bear no interest or maturity. The balance due to the shareholder is $101,869, as of June 30, 2018.
NOTE 5 – NOTES PAYABLE
On April 1, 2015, the Company closed a Subscription Agreement by which one institutional investor purchased an 8% Convertible Debenture having a total principal amount of $300,000, convertible into common shares of the Company at $0.33 per share and maturing April 1, 2017. The Company estimated the fair value of the underlying common stock and determined that the convertible note did not include a beneficial conversion feature. As of June 30, 2018, the balance of the convertible note payable was $300,000.
On April 1, 2016, the Company closed a convertible debenture by which one institutional investor purchased an 8% Convertible Debenture having a total principal amount of $100,010, convertible into common shares of the Company at $1.55 per share and maturing April 1, 2017. The Company estimated the fair value of the underlying common stock and determined that the convertible note did not include a beneficial conversion feature. As of June 30, 2018, the balance of these convertible note payable was $100,010.
On January 27, 2017, the Company closed a convertible debenture by which one institutional investor purchased an 8% Convertible Debenture having a total principal amount of $50,005, convertible into common shares of the Company at $1.55 per share and maturing August 1, 2018. The Company estimated the fair value of the underlying common stock and determined that the convertible note did not include a beneficial conversion feature. As of June 30, 2018, the balance of this convertible note payable was $50,005.
On September 23, 2017, the Company financed the premium for directors’ and officers’ insurance. The Company borrowed $28,098 at 5.54% interest, and the note will be repaid in 10 equal installments of $2,882. As of June 30, 2018, the balance of the note payable was $11,395.
8
UAS DRONE CORP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — EQUITY
Common Stock
The Company has authorized 100,000,000 shares of common stock, $0.0001 par value. As of June 30, 2018, 1,172,544 shares were issued and outstanding.
As of June 30, 2018, the Company accrued liabilities of $3,300 for refunds that will be returned to prospective investors.
Stock Options
No options were granted during the six months ended June 30, 2018. A summary of the status of options granted as of June 30, 2018, and changes during the period then ended are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
As of June 30, 2018
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at beginning of period
|
|
45,000
|
|
|
$
|
1.50
|
|
|
|
1.96 years
|
|
|
$
|
—
|
|
|
Outstanding at end of period
|
|
45,000
|
|
|
|
1.50
|
|
|
1.47 years
|
|
|
|
—
|
|
|
Exercisable at end of period
|
|
45,000
|
|
|
|
1.50
|
|
|
|
1.47 years
|
|
|
|
—
|
|
The Company had 45,000 vested options at the beginning of the period. At June 30, 2018, the Company had 45,000 vested options with a weighted average exercise price of $1.50.
The total intrinsic value of options exercised during the six months ended June 30, 2018 was $0. Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at June 30, 2018 (for outstanding options), less the applicable exercise price.
NOTE 7 — CONFLICTS OF INTEREST
The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, such person(s) may face a conflict in selecting between the Company and his other business interests. The Company has not formulated a policy for the resolution of such conflicts.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
.
Safe Harbor Statement
.
Statements made in this Form 10-Q which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company, including, without limitation, (i) our ability to gain a larger share of unmanned aerial systems industry, our ability to continue to develop products acceptable to our industry, our ability to retain our business relationships, and our ability to raise capital and the growth of the unmanned aerial systems industry, and (ii) statements preceded by, followed by or that include the words "may", "would", "could", "should", "expects", "projects", "anticipates", "believes", "estimates", "plans", "intends", "targets", "tend" or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Company's control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, in addition to those contained in the Company's reports on file with the Securities and Exchange Commission (the “SEC”): general economic or industry conditions, nationally and/or in the communities in which the Company conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, changes in the unmanned aerial systems, the development of products that may be superior to the products offered by the Company, competition, changes in the quality or composition of the Company's products, our ability to develop new products, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting the Company’s operations, products and prices.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Business Highlights
UAS Drone Corp. (the “Company”, “UAS”, “we”, “us”, or similar terms), headquartered in Palm Beach Florida, was founded in 2014 as Unlimited Aerial Systems, LLP (“UAS LLP”). We completed an Asset Purchase Agreement on March 31, 2015, purchasing all the assets and certain liabilities of UAS LLP in exchange for 600,000 shares of our common stock and our assumption of certain liabilities of UAS LLP.
We are a developer and manufacturer of commercial unmanned aerial systems, or drones, with the goal of providing a superior Quadrotor aerial platform at an affordable price point in the law enforcement and first responder markets.
In late 2016, we began working with a flight training company in the western U.S. We sent one of our inventory Quadrotors to them with the intention of: (1) allowing them to use our drone in their training courses, specifically with law enforcement and first responder professionals, (2) obtaining feedback on performance and operating characteristics of our drone with the intention of improving the product for future generations, and (3) seeking sales of additional Quadrotors to this company or its clients. During 2017, we sold two Quadrotors to this company.
On October 21, 2015, we entered into two agreements with Havis Inc., of Warminster, Pennsylvania, to provide manufacturing and distribution services for our products. Havis is an 80 year-old privately held, ISO 9001:2008 certified company that manufactures in-vehicle mobile computer and workflow solutions for public safety, public works government agencies and mobile professionals. Havis products are distributed through a nationwide network of resellers and sales representatives in the United States.
Under the Manufacturing Agreement, Havis will manufacture the Company’s commercial drone products for the law enforcement sector in the United States. The agreement has a five-year term with successive three-year renewal terms, and lays out a framework for engineering, fulfillment of purchase orders, warehousing and other material terms.
10
Under the Distribution Agreement, the Company has appointed Havis as its distributor to the law enforcement sector in the United States for the Company’s commercial drones. The agreement has a five-year term with successive three-year renewal terms, and provides a framework for development of marketing materials, warranty and service programs, training and risk mitigation, among other material terms. The agreement also provides for sales quotas to be established after the first year of sales, and Havis to brand all drones with its corporate name and logo. No pricing or margins are specified in the agreement.
Our agreements with Havis are currently on hold as there has been no manufacturing of the drones nor development of marketing or service program.
Results of Operations
Six Months Ended June 30, 2018 versus June 30, 2017.
The Company was formed on February 4, 2015 and completed an Asset Purchase Agreement on March 31, 2015, whereby it purchased all the assets and certain liabilities of UAS LLP. In consideration of the sale, transfer, conveyance and assignment of assets, the Company assumed approximately $43,558 in liabilities and issued 600,000 “unregistered” and “restricted” shares of its common stock to the principals of UAS LLP, who, collectively owned approximately 55% of the Company’s issued and outstanding shares at the time of closing.
During the six months ended June 30, 2018, the Company did not sell any drones. During the six months ended June 30, 2017, the Company recorded revenue of $5,000 for the sale of drones.
During the six months ended June 30, 2018, the Company incurred $47,338 of expenses compared to $58,277 for the six months ended June 30, 2017. The expenses for 2018 were primarily for director fees, legal fees, and audit fees. The decrease was the result of less spending for professional fees.
UAS’s net loss was $65,693 for the six months ended June 30, 2018, versus $77,044 for the same period in 2017.
Three Months Ended June 30, 2018 versus June 30, 2017.
During the three months ended June 30, 2017, the Company recorded revenue of $5,000 for the sale of drones and for the three months ended June 30, 2018, the Company did not sell any drones.
During the three months ended June 30, 2018, the Company incurred $18,388 of expenses compared to $22,941 for the three months ended June 30, 2017. The expenses were primarily for director fees, legal fees, audit fees, and non-cash expense for the issuance of common stock and vesting of stock options. The decrease was the result of less spending for OTCQB fees.
UAS’s net loss was $27,507 for the three months ended June 30, 2018, versus $32,142 for the same period in 2017.
Liquidity and Capital Resources
.
Cash on hand was $606 at June 30, 2018. Cash used by operations for the six months ended June 30, 2018, was $24,481 versus $35,016 for the same period in 2017. The cash used was for legal and accounting fees, board fees and consulting fees.
The cash on hand is not sufficient to fund operations for the next twelve months. While there can be no guarantees, the Company plans to raise additional capital to fund its operations.
During first six months of 2018, a Shareholder advanced $41,680 to the Company for operating purposes.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
.
Not required for smaller reporting companies.
Item 4. Controls and Procedures
.
(a) Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), which we refer to as disclosure controls, are controls and procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the EC's rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
As of June 30, 2018, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and the Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls. Based upon that evaluation, the Chief Executive Officer and the Acting Chief Financial Officer concluded that, as of such date, the design and operation of these disclosure controls were not effective to accomplish their objectives at the reasonable assurance level.
Management identified the following weaknesses, which were deemed to be material weaknesses in internal controls:
1.
Due to the size of the Company and available resources, there are limited personnel to assist with the accounting and financial reporting function, which results in a lack of segregation of duties.
2.
The Company does not have a full time Chief Executive Officer nor Chief Financial Officer that can oversee day to day operations and the financial reporting function.
3.
The Company does not have an Independent Audit Committee that can provide management oversight.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), occurred during the fiscal quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
.
We have no material pending legal or administrative proceedings to which we or any of our subsidiaries are a party or of which any property is the subject.
Item 1A. Risk Factors
.
Not required for smaller reporting companies.
12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
.
During the quarterly period ended June 30, 2018, the Company did not offer or sell any equity securities that were not registered under the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
.
None; not applicable.
Item 4. Mine Safety Disclosures
.
None; not applicable.
Item 5. Other Information
.
(a)
None; not applicable.
(b) During the quarterly period ended June 30, 2018, there were no changes to the procedures by which shareholders may recommend nominees to the Company’s Board of Directors.
Item 6. Exhibits
.
Exhibit No.
Description
31.1
302 Certification of Grant A. Begley
31.2
302 Certification of Scott Kahoe
32
906 Certification.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UAS DRONE CORP.
|
|
|
|
| |
|
Date:
|
8/14/18
|
|
By:
|
/s/ Grant A. Begley
|
|
|
|
|
|
Grant A. Begley
|
|
|
|
|
|
Chief Executive Officer and Director
|
|
|
|
|
| |
|
Date:
|
8/14/18
|
|
|
/s/ Scott Kahoe
|
|
|
|
|
|
Scott Kahoe
|
|
|
|
|
|
Acting Chief Financial Officer
|
14