Risks Relating to Our Business
We have an extremely limited operating history – We are currently in the business development stage, and have just started to commence commercial sales of our products. 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 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, 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. 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 significantly scale back, delay or discontinue the development and/or commercialization of our products, restrict our 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, 2015 and 2014 expressed substantial doubt about our ability to continue as a going concern, due to the fact that we have incurred significant operating losses and have had negative cash flows from operations since inception, and at December 31, 2015, had an accumulated deficit of $300,074.
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. The 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 manufacturer of a UAV product, and with aircrafts and aviation sector companies being scrutinized heavily, we may be subject to FAA mandates and/or regulations, which could result in potential law suits. Defects in our product 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.
If our proposed marketing efforts are unsuccessful we may not earn enough revenue to become profitable – Our success will depend on investment in marketing resources and the successful implementation of our marketing plan. Our marketing plan may include attendance at trade shows and making private demonstrations, advertising and promotional materials and advertising campaigns in print and/or broadcast media. We cannot give any assurance that our marketing efforts will be successful. If they are not, revenue may not be sufficient to cover our fixed costs and we may not become profitable.
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.
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 raw materials and finished goods at a volume management feels is necessary for anticipated distribution and sales. Therefore, we may not be able to reduce costs in a timely manner to compensate for any unexpected shortfalls between forecasted and actual sales.
There is intense competition in our market - The aerospace and aviation markets are very saturated and intensely competitive. By entering this sector, UAS and 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.
Future acquisitions may be unsuccessful and may negatively affect operations and financial condition - The integration of businesses, personnel, product lines and technologies can be difficult, time consuming and subject to significant risks. Any difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and decrease our 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.
For manufacturing and distribution, we are reliant on one company, and if that company fails to perform, our results could suffer – We have two agreements with one company to exclusively 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, we could have difficulties in finding other manufacturers and/or distributors that can perform these functions, and our results could suffer. We are reliant on these agreements for the success of our business.
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 affect our business and operations. Management is mindful of these risks since we are developing a strategy by adopting third party information technology and system practices. Any breach of security could disrupt our overall business and result in various effects in operations and efficiency. UAS could encounter increased overhead costs, loss of important information and data, which may also hinder our reputation.
If we lose our key personnel or are unable to hire additional personnel, we will have trouble growing our business. - We depend to a large extent on the abilities of our key management. The loss of any key employee or our inability to attract or retain other qualified employees could seriously impair our results of operations and financial condition.
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. We may also be unable to retain the employees that we currently employ or to attract additional technical personnel. The failure to retain and attract the necessary personnel could seriously harm our business, financial condition and results of operations.
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 our 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 reduce sales, which could have a material adverse effect on business, financial condition and results of operations.
Our products are subject to FAA regulations – We are aware that the FAA has not passed any regulations to date 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”). This could affect sales and revenue given that our customers would probably not have permission under a Section 333 exemption to operate any UAVs for their business practice. If the consumers are unable to obtain a FAA Section 333 exemption or withstand the application process, 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.
We may be required to record a significant charge to earnings as we are required to reassess our goodwill or other intangible assets arising from acquisitions. - We are required under U.S. GAAP to review our intangible assets, including goodwill for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment annually or more frequently if facts and circumstances warrant a review. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable
6
intangible assets may not be recoverable include a decline in stock price and market capitalization and slower or declining growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined.
Should the agreement with Havis be terminated or expire, the Company may incur losses for any unsold inventory held by Havis. – Per the terms of the Distribution Agreement, upon termination of the agreement with HAVIS, the Company shall repurchase any or all merchantable inventory of the Quadrotor drones on hand with Havis at the prices paid for by Havis to UAS.
There Are Substantial Risks Related to Our Common Stock
Failure to meet financial expectations could have an adverse impact on the market price of UAS’s common stock. - UAS’s ability to achieve its financial targets is subject to a number of risks, uncertainties and other factors affecting its business and the UAV industry generally, many of which are beyond UAS’s control. These factors may cause actual results to differ materially. UAS describes a number of these factors throughout this document, including in these Risk Factors. UAS cannot assure you that it will meet these targets. If UAS is not able to meet these targets, it could harm the market price of its common stock.
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 the prevailing market price of our shares of common stock. Sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could depress prevailing market prices for the shares. Such sales may also make it more difficult for UAV 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. – If and when it becomes eligible for quotation on the OTCQB, we expect that our common stock will be “penny stock” as defined in Rule 3a51-1 of the Securities and Exchange Commission. Section 15(g) of the Exchange Act and Rule 15g-2 of the Securities and Exchange 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 Securities and Exchange 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.
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.
Item 2. Properties.
Our headquarters are located at 420 Royal Palm Way, Suite 100, Palm Beach, Florida 33480. UAS currently utilizes another facility without rent located 514 Eight Mile Loop, Natchitoches, LA 71457. This serves as the corporate research and development and sales office.
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.
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
As of March 28, 2016, 1,180,944 shares of our common stock were outstanding and our stock is not trading on any securities exchange or other quotation medium. We have approximately 49 stockholders of record.
We have not declared any cash dividends on our common stock, and do not intend to declare dividends in the foreseeable future. Management intends to use all available funds for the development of our plan of operation. There are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our common stock.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.
We have not issued any unregistered securities during the calendar year ended December 31, 2015 that have not already been reported in our Registration Statement on Form S-1 or a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Use of Proceeds.
The Company’s Registration Statement on Form S-1 (Commission File No. 333-206561) was declared effective by the SEC on September 15, 2015. We registered a total of 3,000,000 shares of our $0.0001 par value common stock for offer and
sale by the Company (the “Primary Offering”) and an additional 1,100,000 such shares for offer and sale by certain selling stockholders, all at a price per share of $1.50. The Primary Offering has terminated as of March 15, 2016, after sales of 75,944 shares of common stock for aggregate gross proceeds of $113,916, and incurred costs totaling $3,504 for finder's fees to a registered broker dealer firm. Approximately $2,500 of such proceeds were used to pay a director of the Company a contractual quarterly fee. No other proceeds were used to pay, directly or indirectly, any other director or officer or their associates or to any person owning 10 percent or more of any class of equity securities of the Company. All other proceeds raised in funding activities will be used for general working capital unless otherwise stated. In addition to the above-referenced proceeds, the Company received proceeds of $4,800 from jurisdictions in which the Company has not registered its shares of common stock and for which no exemption from registration is available. The Company has not accepted these subscriptions and has determined to refund these proceeds.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
None; not applicable.
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in this Form 10-K.
Safe Harbor Statement.
Statements made in this Form 10-K 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 UAS, including, without limitation, (i) our ability to gain a larger share of the commercial drone industry, our ability to develop products and services acceptable to that industry, our ability to retain our business relationships, and our ability to raise capital, and (ii) statements preceded by, followed by or that include the words "may", "would", "could", "should", "expects", "projects", "anticipates", "believes", "estimates", "plans", "intends", "targets" or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond UAS'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 our reports on file with the SEC: general economic or industry conditions, nationally and/or in the jurisdictions in which UAS conducts business, legislation or regulatory requirements, conditions of the securities markets, changes in the UAV industry, the development of products that may be superior to those offered by UAS, demand for commercial drone by the law enforcement sector, competition, 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 UAS’s operations, services 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. UAS 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.
Company Overview
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.
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, SO 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.
Our CEO is an experienced executive and military officer from the commercial and military UAV industries. He has over 40 years’ experience with both the U.S. Navy and major corporations such as Raytheon and Lockheed Martin developing, flying and working with aviation technologies and drones. Our Vice President, David Sweeney, is a retired US Marine who has spent his entire military and professional career in the UAV sector. Sweeney is considered to be an expert pilot, developer and programmer of the aircraft systems for drones. Sweeney has a track and knowledge of UAV innovations and technological advances for military and commercial uses.
We intend to manufacture and sell our drone product through our partnership with Havis to law enforcement agencies in the United States. Additionally, we intend on providing additional value-added services to our product offering, including specialized training for police officer and video/data management software and hosting services. Further, we are exploring development or acquisitions of other drone-based technologies that we may be able to offer to in the future.