Interesting bits on USDR, an emerging growth company, from its recent 10-K, part of it is an interesting read on "The Jumpstart Our Business Startups Act" (a/k/a the JOBS Act). Stuff I didn't know.
DOCUMENTS INCORPORATED BY REFERENCE
A description of "Documents Incorporated by Reference" is contained in Part IV, Item 15 of this Annual Report.
PART I
Item 1. Business.
OVERVIEW
UAS Drone Corp., a Nevada corporation (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. Our mailing address is 420 Royal Palm Way, Suite 100, Palm Beach, FL 33480, and our telephone number is 561-693-1424. Our web site address is www.uasdronecorp.com.
BUSINESS
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 2018, the Company did not sell any drones.
In October 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.
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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.
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 and may be terminated, as there has been no manufacturing of the drones nor development of marketing or service programs.
Necessary Material
None.
Licenses
None.
Patents Pending
None.
Environmental Compliance
None.
Governmental Regulations
None.
Employees
UAS has no full-time employees and two part-time employees.
Emerging Growth Company
We are and we will remain an " emerging growth company " as defined under The Jumpstart Our Business Startups Act (the “ JOBS Act ”), until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, or (iv) the date on which we are deemed a " large accelerated filer " (with at least $700 million in public float) under the Securities and Exchange Act of 1934, as amended (the “ Exchange Act ”).
As an " emerging growth company ", we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
· only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “ Management ’ s Discussion and Analysis ” disclosure;
· reduced disclosure about our executive compensation arrangements;
· no requirement that we hold non-binding advisory votes on executive compensation or golden parachute arrangements; and
· exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.
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We have taken advantage of some of these reduced burdens, and thus the information we provide stockholders may be different from what you might receive from other public companies in which you hold shares.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Notwithstanding the above, we are also currently a “ smaller reporting company ”, meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and have a public float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. In the event that we are still considered a “ smaller reporting company ”, at such time as we cease being an “ emerging growth company ”, the disclosure we will be required to provide in our SEC filings will increase, but will still be less than it would be if we were not considered either an “ emerging growth company ” or a “ smaller reporting company ”. Specifically, similar to “ emerging growth companies ”, “ smaller reporting companies ” are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act (“SOX”) requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports.
Item 1A. Risk Factors.
Risks Relating to Our Business
We have an extremely limited operating history – We are currently in the early stages of our business and earned zero revenue during 2018 and $5,000 during 2017. There is no historical basis to make judgments on the capabilities associated with our enterprise, management and/or employee’s ability to produce a product leading to a profitable company.
We may be deemed to be a “shell company.” Due to our lack of material operations and our lack of material assets, we may be deemed to be a “shell company” within the meaning of Rule 405 of the Securities and Exchange Commission (the “Commission”). Rule 144(i) of the Commission makes the “safe harbor” transactional exemption of Rule 144 unavailable for resales of securities initially issued by shell companies. As a result of this prohibition, our stockholders may have more difficulty selling shares of our common stock in any market that may develop for our shares.
We will need to raise additional capital - Given our lack of revenues from sales of our products to date, with no assurance as to when we may begin to receive revenues and very limited operations, we expect that UAS will need to obtain additional operating capital either through equity offerings, debt offerings or a combination thereof, in the future. In addition, if in the future the Company is not capable of generating sufficient revenues from operations and its capital resources are insufficient to meet future requirements, the Company may have to raise funds to allow it to continue to commercialize, market and sell its products or to pursue other business opportunities. We presently have no committed sources of funding and we have not entered into any agreements or arrangements with respect to our fundraising efforts. The Company cannot be certain that funding will be available on acceptable terms or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that may impact our ability to conduct business. If we are unable to raise additional capital if required or on acceptable terms, we may have to shut down all remaining operations or obtain funds by entering into agreements on unattractive terms.
Our financial statements contain an “auditor’s ‘going concern’ opinion” – The Report of Independent Registered Public Accounting Firm issued in connection with our audited financial statements for the calendar years ended December 31, 2018 and 2017 expressed substantial doubt about our ability to continue as a going concern, due to the fact that we have
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incurred significant operating losses, earned $0 of revenue during 2018, and have had negative cash flows from operations since inception, and at December 31, 2018, had an accumulated deficit of $890,628.
Our management has limited experience in our industry - Other than our CEO, management has limited experience in aerospace, aviation and unmanned aerial systems manufacturing sectors. While our management has considerable general management experience, some have specialized knowledge and abilities in the unmanned aerial industry, but none of the managers have experience managing a business that manufacturers and markets aircrafts. Management will rely on contracted individuals with the specified skills, qualifications and knowledge related to aircraft manufacturing and marketing, without impacting the overall budget for compensation.
Potential product liabilities may harm our operating results – As a prospective manufacturer of an Unmanned Aerial Vehicle (UAV) product, and with aircrafts and aviation sector companies being scrutinized heavily, we may be subject to Federal Aviation Administration (FAA) mandates and/or regulations, which could result in potential law suits. Defects in our future products may lead to life, health and property risks. Currently, the unmanned aerial systems industry lacks a formative insurance market. It is possible that our operations could be adversely affected by the costs and disruptions of responding to such liabilities even if insurance against liabilities is available.
We may be unable to respond to rapid technology changes and innovative products - In a constantly changing and innovative technology market with frequent new product introductions, enhancement and modifications, we may be forced to implement and develop new technologies into our products for anticipation of changing customer requirements that may significantly impact costs in order to retain or enhance our competitive position in existing and new markets. Our current drone product may be obsolete in the systems and technology that it utilizes which may make it unmarketable.
Operating margins may be negatively impacted by reduction in sales or products sold - Expectations regarding future sales and expenses are largely fixed in the short term. UAS maintains limited raw materials and finished goods, and such items may not be sufficient for future distribution and sales. Therefore, we may not be able to fulfill orders or reduce costs in a timely manner.
There is intense competition in our market - The aerospace and aviation markets are very saturated and intensely competitive. By entering this sector, management is aware that failure to compete with direct market leading companies and new entrants will affect overall business and the product. Therefore, the faster innovative applications and technologies are implemented to the developed product, the better the pricing and commercial business strategies management will be able to offer to consumers. Competitive factors in this market are all related to product performance, price, customer service, training platforms, reputation, sales, and marketing effectiveness. We do not believe we are currently competitive in the market.
Future acquisitions may be unsuccessful and may negatively affect operations and financial condition - Management is seeking acquisitions and strategic agreements to create a viable business for the Company; however, no such agreements are currently in place. Further, the integration of businesses, personnel, product lines and technologies can be difficult, time consuming and subject to significant risks. Any difficulties could disrupt any ongoing business, distract our management, increase our expenses, and limit our ability to generate revenue.
We may be unable to protect our intellectual property - Our ability to protect our proprietary technology and operate without infringing the rights of others will allow the Company’s business to compete successfully and achieve future revenue growth. If we are unable to protect our proprietary technology or infringe upon the rights of others, it could negatively impact the operating results of the Company. We have not protected any of our technology to date.
For manufacturing and distribution, we are reliant primarily on one company, and if that company fails to perform, our results could suffer – We have two agreements with one company to manufacture and distribute our drone products. If they fail to perform to the standards expected, our results of operations may suffer materially. If they terminate the agreements with us, which is probable, we could have difficulties in finding other manufacturers and/or distributors that can perform these functions, and our results could suffer. Our agreements with this company are on hold while we continue to refine our technology, and therefore, this company is not currently providing material benefits to us.
We will be reliant on information systems, electronic communication systems, and internal and external data and applications - Business operations and manufacturing are dependent on computer hardware, software, and communication systems. Information systems are vulnerable and are subject to failures that could create internal or external events that will
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affect our business and operations. Management is mindful of these risks. Any breach of security could disrupt our overall business and result in various effects in operations and efficiency. UAS could encounter increased overhead costs and loss of important information and data, which may also hinder our reputation.
Our future success depends on our ability to attract, retain, and motivate highly skilled technical, marketing, management, accounting, and administrative personnel - We plan to hire additional personnel in all areas of our business as we grow. Competition for qualified personnel is intense. As a result, we may be unable to attract and retain qualified personnel. The failure to retain and attract the necessary personnel could seriously harm our business, financial condition, and results of operations. We are currently understaffed to fully implement our business plan, including performing R&D and sales functions.
We face a higher risk of failure because we cannot accurately forecast our future revenues and operating results. - The rapidly changing nature of the markets in which we compete makes it difficult to accurately forecast our revenues and operating results. Furthermore, we expect revenues and operating results to fluctuate in the future due to a number of factors, including the following:
• the timing of sales of our products;
• unexpected delays in introducing new products;
• increased expenses, whether related to sales and marketing, or administration;
• costs related to possible acquisitions of businesses.
Our products may suffer defects - Products may suffer defects that may lead to substantial product liability, damage, or warranty claims. Given our complex platforms and systems within our product, errors and defects may be related to flight and/or communications. Such an event could result in significant expenses arising from product liability and warranty claims, and keep us from creating sales in the short term, which could have a material adverse effect on business, financial condition, and results of operations. We do not have any products currently being used in the market.
Our products are subject to FAA regulations – In August 2016, the FAA passed regulations to allow unmanned aerial systems operations for commercial usage and profit without a certification under Section 333 of the FAA Modernization and Reform Act of 2012 (the “ FMRA ”). However, there are still requirements for commercial operators, such as obtaining a flight safety certificate. If these regulations become more stringent again in the future, it could affect sales and revenue of the Company. If our consumers are unable to obtain a flight certificate, this may negatively affect commercial usage of our UAVs, which will adversely disrupt UAS operations and overall sales.
UAS may pursue acquisitions, investments or other strategic relationships or alliances, which may consume significant resources, may be unsuccessful and could dilute holders of its common stock. - Acquisitions, investments and other strategic relationships and alliances, if pursued, may involve significant cash expenditures, debt incurrence, operating losses, and expenses that could have a material adverse effect on UAS’s financial condition and operating results. Acquisitions involve numerous other risks, including:
· Diversion of management time and attention from daily operations;
· Difficulties integrating acquired businesses, technologies, and personnel into UAS’s business;
· Inability to obtain required regulatory approvals and/or required financing on favorable terms;
· Entry into new markets in which UAS has little previous experience;
· Potential loss of key employees, key contractual relationships, or key customers of acquired companies or of UAS; and
· Assumption of the liabilities and exposure to unforeseen liabilities of acquired companies.
If these types of transactions are pursued, it may be difficult for UAS to complete these transactions quickly and to integrate these acquired operations efficiently into its current business operations. Any acquisitions, investments or other strategic relationships and alliances by UAS may ultimately harm our business and financial condition. In addition, future acquisitions may not be as successful as originally anticipated and may result in impairment charges. Furthermore, such acquisitions, investments of other strategic alliances may be in businesses or sectors that have no connection to drones and the aviation industry.
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If the Company sells inventory to Havis, it may incur losses if the inventory is not sold by Havis in a timely fashion. – The Distribution Agreement with Havis includes right of return language that requires the Company to repurchase any unsold inventory held by Havis, upon termination or expiration of the agreement. We have not yet sold any products to or through this party and do not have any current plans to do so.
There Are Substantial Risks Related to Our Common Stock
Our status as a “shell company” may make it more difficult for stockholders to sell their common stock – Due to our lack of material operations and material assets, holders of “restricted” shares of our common stock may not be able to avail themselves of the Rule 144 “safe harbor” exemption for resales of such securities. The unavailability of Rule 144 in such circumstances may impose severe limitations on the liquidity of our common stock for such stockholders.
There is no established market for our shares of common stock – Our common stock is quoted on the Pink market of OTC Markets under the symbol “USDR.” However, trading in our common stock has historically been extremely limited or non-existent. This lack of any established market for our common stock is likely to make it extremely difficult for stockholders to sell their shares of common stock for the foreseeable future.
Any substantial sale of stock by existing shareholders could depress the market value of the stock of UAS, thereby devaluing the market price and causing investors to risk losing all or part of their investment - Stockholders, including our directors and officers hold a large number of UAS’s outstanding shares. We can make no prediction as to the effect, if any, that sales of shares, or the availability of shares for future sale, will have on any prevailing market price of our shares of common stock in the event that any market for such shares develops in the future. Sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could depress any prevailing market prices for the shares. Such sales may also make it more difficult for UAS to sell equity securities or equity-related securities in the future at a time and price which it deems appropriate.
Because our common stock is "penny stock," you may have greater difficulty selling your shares. – Our common stock is “penny stock” as defined in Rule 3a51-1 of the Commission. Section 15(g) of the Exchange Act and Rule 15g-2 of the Commission require broker/dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before making any transaction in a penny stock for the investor's account. In addition, Rule 15g-9 of the Commission requires broker/dealers in penny stocks to approve the account of any investor for transactions in these stocks before selling any penny stock to that investor. Compliance with these requirements may make it harder for our selling stockholders and other stockholders to resell their shares in the event that any established public market for such shares ever develops.
We have no intention to pay dividends on our common stock – For the foreseeable future, we intend to retain future earnings, if any, to finance our operations. We do not anticipate paying any cash dividends with respect to our common stock. As a result, investors should not expect to receive dividends on their shares of common stock for a long period of time, if ever.
Our issuance of preferred stock in the future may adversely affect the rights of our common stockholders – The Company’s Articles of Incorporation permit it to issue up to 10 million shares of preferred stock with such rights and preferences as the Board of Directors may designate. As a result, our Board of Directors may authorize a series of preferred stock that would grant to preferred stockholders’ preferential rights to our assets upon liquidation; the right to receive dividends before dividends become payable to our common stockholders; the right to redemption of the preferred stock prior to the redemption of our common stock; and super-voting rights to our preferred stockholders. To the extent that we designate and issue such a class or series of preferred stock, the rights of our common stockholders may be impaired.
Item 1B. Unresolved Staff Comments.
Not applicable to smaller reporting companies.
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Item 2. Properties.
Our headquarters are located at 420 Royal Palm Way, Suite 100, Palm Beach, Florida 33480, for which we pay no rent. These offices are shared with GreenBlock Capital, which is the beneficial owner of approximately 37% of our outstanding shares of common stock.
Item 3. Legal Proceedings.
UAS is not involved in any legal, pending legal or administrative proceedings at the current time, and management knows of no such proceedings that are pending or threatened.
