DUKE Robotics Corp. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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. 21 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. 24 Item 7A. Quantitative and Qualitative Disclosure about Market Risk Not applicable to smaller reporting companies. Item 8. Financial Statements and Supplementary Data. All information required by this item is included in Item 15 of Part IV of this Annual Report and is incorporated into this item by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.