Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Readers are advised to
review the following discussion and analysis of our financial condition and results of operations together with our consolidated financial
statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements
and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2022. Some of the information contained in
this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy
for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking
Statements”. You should review the “Risk Factors” section of our Annual Report for the fiscal year ended December 31,
2022 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied
by the forward-looking statements contained in the following discussion and analysis.
We are a robotics company
dedicated to the development of an advanced robotics system that enables remote, real-time, pinpoint accurate firing of small arms and
light weapons. Our advanced robotics system is able to achieve pinpoint accuracy regardless of the movement of the weapons platform or
the target.
We were founded in 2014 as
Unlimited Aerial Systems, LLP (“UAS LLP”), and until the consummation of the Share Exchange Agreement (as hereinafter defined),
we were 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.
On March 9, 2020, we closed
on the Share Exchange Agreement (the “Share Exchange Agreement”), pursuant to which Duke Robotics, Inc., a Delaware corporation
(“Duke”) became our majority-owned subsidiary (the “Share Exchange”). Such closing date is referred to as the
“Effective Time.” As a result of the Share Exchange, the Company adopted the business plan of Duke.
On April 29, 2020, we, Duke,
and UAS Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary (“UAS Sub”), executed an Agreement and
Plan of Merger (the “Merger Agreement”), pursuant to which UAS Sub was to merge, upon the satisfaction of customary closing
conditions, with and into Duke, with Duke surviving as our wholly-owned subsidiary (the “Short-Form Merger”). Pursuant to
the Merger Agreement, we intended to acquire the remaining outstanding shares of Duke held by those certain Duke shareholders that did
not participate in the Share Exchange. On June 25, 2020, Duke filed a Certificate of Merger with the State of Delaware, and consequently,
Duke became our wholly-owned subsidiary and the Short-Form Merger was consummated.
On January 29, 2021, we, through
Duke Israel, and Elbit Systems Land Ltd., an Israeli corporation (“Elbit”), entered into a collaboration agreement (the “Collaboration
Agreement”) for the global marketing and sales, and the production and further development of our developed advanced robotic system
mounted on an UAS, armed with lightweight firearms, which we market under the commercial name “TIKAD.”
On August 15, 2022, Duke Israel
introduced the IC Drone, a drone technology for conducting routine maintenance of critical infrastructure, and has signed an agreement
with Israel Electric Corporation (IEC) to provide drone-enabled systems for cleaning electric utility cable insulators.
Duke has a wholly-owned subsidiary,
Duke Airborne Systems Ltd. (“Duke Israel”), which was formed under the laws of the State of Israel in March 2014 and became
the sole subsidiary of Duke after its incorporation. Our mailing address is 10 HaRimon Street, Mevo Carmel Science and Industrial Park,
Israel 2069203, and our telephone number is 011-972-4-8124101. Our web site address is https://dukeroboticsys.com/.
Effective as of October 22,
2020, the Company’s common stock began to be quoted on the OTCQB tier Venture Market, under the symbol “USDR”.
Critical Accounting Policies
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 accounting principles generally accepted
in the United States of America. 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.
Please see Note 2 of Part
I, Item 1 of this Quarterly Report on Form 10-Q for the summary of significant accounting policies. In addition, reference is made to
Part I, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form
10-K for the year ended December 31, 2022 (filed on March 24, 2023) with respect to our Critical Accounting Policies and Estimates.
Results of Operations
Comparison of the three months ended March 31, 2023 and 2022
Revenues.
During the three months ended March 31, 2023 and 2022 we had no revenues.
Research
and Development. Our research and development expenses for the three months ended March 31, 2023, amounted to $0, compared to $5,700
for the three months ended March 31, 2022. We have paused our research and development activity pending our evaluation of additional and
different applications for use of our technology and know-how including for use in the civil market, while the research and development
activities of the TIKAD product is carried out by Elbit pursuant to the Collaboration Agreement and development activities under our Collaboration
and Development Agreement with the Israel Electric Corporation Ltd. (IEC) are currently recorded in deferred expenses.
General
and Administrative. Our general and administrative expenses for the three months ended March 31, 2023, which consisted primarily
of professional services, stock-based compensation expenses and legal expenses, amounted to $202,000, compared to $331,000 for the three
months ended March 31, 2022. The decrease in general and administrative expenses for the three months ended March 31, 2023 was mainly
due to the decrease in share based compensations expenses.
Financial
Income (Expense). For the three months ended March 31, 2023, we had financial income of $23,000 compared to financial expense of $32,000
for the three months ended March 31, 2022. The reason for the increase in financial income (expense) for the three months ended March
31, 2023, was mainly due to the decrease in interest expense related to the changes in fair value in connection with warrants issued as
part of our May 2021 financing as well as interest income on bank deposits resulted from the increase in interest rates.
Net
Loss. We incurred a net loss of $179,000 for the three months ended March 31, 2023 as compared to a net loss of $369,000 for the three
months ended March 31, 2022, for the reasons set forth above.
Liquidity and Capital Resources
We
had $2,621,000 in cash on March 31, 2023 versus $3,415,000 in cash at March 31, 2022. The reason for the decrease in our cash balance
was due to the operating expenses describe above as well as our deferred expenses under our Collaboration and Development Agreement with
the IEC. Cash used in operations for the three months ended March 31, 2023 was $208,000 as compared to cash provided by operations of
$133,000 for the three months ended March 31, 2022. The reason for the increase in cash used in operations is mainly related to deferred
expenses under our Collaboration and Development Agreement with the IEC.
Net
cash used in investing activities was $16,000 for the three months ended March 31, 2023, as compared to net cash used in investing activities
of $12 for the three months ended March 31, 2022. The increase is mainly related to leasehold improvements for an office space in Mevo
Carmel, which we entered into in February 2023.
Net
cash used in financing activities was $0 for the three months ended March 31, 2023 and 2022.
On
September 2, 2019, we executed a promissory note having a total principal amount of $35,000 bearing interest at a 6% per annum and maturing
on September 2, 2021 (the “Promissory Note”). 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, par value $0.0001 per
share (the “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 (each, a “Convertible Loan Agreement”). 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. As of March 31, 2021, the Convertible Loan Agreements
had an aggregate outstanding principal balance of $835,000. 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 securities exchange agreements (each, an “Exchange Agreement”) with
our outstanding debt, Alpha Capital Anstalt (“Alpha”) and GreenBlock Capital LLC (“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 (the “Original Conversion Price”); 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. As of March 31, 2021, the
Convertible Debentures had an aggregate outstanding principal balance of $200,000. 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 Securities Purchase Agreements (the “Securities Purchase Agreements”) with eight (8) non-U.S. investors (the “Investors”),
pursuant to which we, in a private placement offering (the “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 (the “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. On April
5, 2022, we entered into an agreement with the Investors pursuant to which we extended the term of the Warrants, which now expire on
November 11, 2023.
We
believe that we have sufficient cash to fund our operations for at least the next 12 months. Readers are advised that available resources
may be consumed more rapidly than currently anticipated, resulting in the need for additional funding sooner than expected. Should this
occur, we will need to seek additional capital earlier than anticipated in order to fund (1) further development and, if needed (2) expenses
which will be required in order to expand manufacturing of our products, (3) sales and marketing efforts and (4) general working capital.
Such funding may be unavailable to us on acceptable terms, or at all. Our failure to obtain such funding when needed could create a negative
impact on our stock price or could potentially lead to the failure of our company. This would particularly be the case if we are unable
to commercially distribute our products and services in the jurisdictions and in the timeframes we expect.
Off-Balance Sheet Arrangements
As of March 31, 2023, we
did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.