S-1/A 1 v464445_s1a.htm S-1/A

As filed with the Securities and Exchange Commission on April 25, 2017.

Registration No. 333-213982

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



 

MOTA GROUP, INC.

(Exact name of registrant as specified in its charter)



 

   
Delaware   3721   27-0225275
(State or other jurisdiction of
incorporation or organization)
  (Primary standard industrial
classification code number)
  (I.R.S. employer
identification number)

60 S. Market St., Suite 1100
San Jose, CA 95113
(408) 370-1248

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)



 

Michael Faro
President and Chief Executive Officer
Mota Group, Inc.
60 S. Market St., Suite 1100
San Jose, CA 95113
(408) 290-4080

(Name, address, including zip code, and telephone number, including area code, of agent for service)



 

Copies to:

 
Mitchell S. Nussbaum
Giovanni Caruso
Loeb & Loeb LLP
345 Park Avenue
New York, NY 10154
Tel. No.: 212-407-4000
Fax No.: 212-407-4990
  Edwin L. Miller Jr.
Avinash R. Rao
Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Tel. No.: 617-398-0408
Fax No.: 617-338-2880


 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer o   Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company x
Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. o

 

 


 
 

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CALCULATION OF REGISTRATION FEE

   
Title of Each Class of
Securities to be Registered
  Proposed
Maximum
Aggregate
Offering
Price(1)(2)
  Amount of
Registration
Fee(1)
Common Stock, $.0001 par value   $ 7,475,000     $ 866.36  
Warrants to Purchase Common Stock(3)            
Representative’s Warrants to Purchase Common Stock(4)   $     $  
Common Stock underlying Representative’s Warrants, $.0001 par value(5)   $ 914,062.50     $ 106  
Shares of Common Stock issuable upon exercise of the Warrants(1)(2)(6)   $ 9,343,750     $ 1,083.00  
Total   $ 17,732,812.50     $ 2,055.36 (7) 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act. In accordance with Rule 416(a), the Registrant is also registering hereunder an indeterminate number of additional shares of Common Stock that shall be issuable pursuant to Rule 416 to prevent dilution resulting from stock splits, stock dividends or similar transactions.
(2) Includes the aggregate offering price of additional shares that the underwriters have the right to purchase, if any.
(3) A warrant to purchase one share of common stock will be issued for every one share offered. Includes shares of common stock which may be issued upon exercise of a 45-day option granted to the underwriters to cover over-allotments, if any.
(4) We have agreed to issue warrants exercisable within five years after the effective date of this registration statement representing 5% of the securities issued in the offering, excluding any over-allotment securities (the “Representative’s Warrants”) to Joseph Gunnar & Co., LLC. The Representative’s Warrants will be exercisable at a per share price equal to 125% of the common stock public offering price. Resales of the Representative’s Warrants on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, are registered hereby. Resales of shares issuable upon exercise of the Representative’s Warrants are also being similarly registered on a delayed or continuous basis hereby. See “Underwriting.” In accordance with Rule 457(g) under the Securities Act, because the shares of the Registrant’s common stock underlying the Representative’s Warrants are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.
(5) Represents the maximum number of shares of common stock issuable upon exercise of the Representative’s Warrants.
(6) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The warrants are exercisable at a per share price of 125% of the common stock public offering price.
(7) Paid herewith.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


 
 

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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

   
PRELIMINARY PROSPECTUS   SUBJECT TO COMPLETION   APRIL 25, 2017

650,000 Shares of Common Stock
Warrants to Purchase up to 650,000 Shares of Common Stock

[GRAPHIC MISSING]

Mota Group, Inc.

This is an initial public offering of shares of common stock of Mota Group, Inc. We are offering an aggregate of 650,000 shares of our common stock, $0.0001 par value per share, and warrants to purchase 650,000 shares of our common stock at a public offering price of $9.99 per share and $0.01 per warrant, respectively. The warrants have an exercise price of $12.49 per share or 125% of the common stock public offering price and expire five years from the date of issuance. Each share of common stock purchased will be accompanied by one warrant, provided that the common stock with respect to over-allotment can be exercised separately. The shares and warrants will trade separately.

Prior to this offering, there has been no public market for our common stock and warrants. We have applied to list our common stock and warrants on the NASDAQ Capital Market under the symbol “MOTA” and “MOTAW,” respectively. No assurance can be given that our application will be approved.

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements for future filings.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 13 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

     
  Per Share   Per Warrant   Total
Offering Price   $ 9.99     $ 0.01     $ 6,500,000  
Underwriting Discounts and Commissions(1)   $ 0.6993     $ 0.0007     $ 455,000  
Proceeds, Before Expenses   $ 9.29       0.01     $ 6,045,000  
(1) We have agreed to pay a non-accountable expense allowance to the underwriters of 1.0% of the gross proceeds received in this offering and to reimburse the underwriters for other out-of-pocket expenses relating to this offering. See “Underwriting.”

We have granted the underwriters a 45-day option to purchase up to 97,500 additional shares of common stock and/or additional warrants to purchase up to an aggregate of 97,500 shares of our common stock solely to cover over-allotments, if any, at the public offering price less the underwriting discount solely to cover over-allotments, if any. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $523,250, and the additional proceeds to us, before expenses, from the over-allotment option exercise will be $6,951,750.

The underwriters are offering the common stock and the warrants as set forth under “Underwriting.” Delivery of the shares will be made on or about            , 2017.

 
Joseph Gunnar & Co.   Axiom Capital Management, Inc.

Prospectus dated            , 2017


 
 


 
 

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We have not authorized anyone to provide you with any information or to make any representation, other than those contained in this prospectus or any free writing prospectus we have prepared. We take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only in circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

Our logo and some of our trademarks and tradenames are used in this prospectus. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks, tradenames and service marks referred to in this prospectus may appear without the ®, TM and SM symbols, but those references are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensor to these trademarks, tradenames and service marks.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should read the entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus. Unless the context suggests otherwise, references in this prospectus to “MOTA,” “we,” “us” and “our” refer to Mota Group, Inc. and its subsidiaries.

Unless we specifically state otherwise, all information in this prospectus gives effect to a one-for-two and seven tenths stock split (the “Reverse Stock Split”) to be effected prior to the effective date of the registration statement of which this prospectus is a part and assumes (i) no exercise of the underwriters’ option to purchase up to an additional 97,500 shares of common stock; and (ii) no exercise of warrants to be issued to the representative of the underwriters on the closing of this offering to purchase a number of shares equal to 5% of the shares sold in connection with this offering, or 32,500 shares, exercisable at a price per share equal to the 125% of the offering price of this offering (the “Representative’s Warrants”).

The Company

Overview

We design, manufacture and market consumer products — including recreational and commercial drones, smart wearables and innovative mobile accessories for smartphone and camera users. We try to identify opportunities where users can benefit from new technology, identify the gaps and areas that can be simplified and enhanced, and develop these opportunities into products. Since 2012, we have sold and shipped over 1.7 million units of our products to consumers worldwide.

Mota Group has two principal divisions:

MOTA — Develops, manufactures and markets recreational and commercial drones and other unmanned aerial systems, also known as unmanned aircraft systems or UASs. We have two lines of drones: recreational (consumer) drones (under our JETJAT brand) and UAS platforms for commercial applications (under our Pro Live and GIGA brands). Many of our drones are capable of delivering real-time video, automatic control, tracking and geographic data, which increases flexibility in planning and execution.
TAMO — Designs, manufactures and markets stylish wearables, including smartwear, virtual reality products, portable power products and mobile accessories.

Our operations are substantially integrated — we start with an idea; we engage in the design process either in-house or in conjunction with third parties; we manufacture our products in outsourced factories, most of which are in China; and we distribute them both from third-party and in-house fulfillment centers and through major retail, e-commerce, and independent dealers throughout North America (and soon Europe and Latin America). Our integrated development process allows us to focus on product quality, cost, timeliness, marketing and customers for the entire commercialization cycle. Since our founding in 2003, we have streamlined our operations to enable us to rapidly deliver advanced, innovative solutions that are also easy to use and fun.

Products

Product Lines

We have a broad range of products, including four major product lines:

Drones and UASs
º Ultra-small recreational drones with highly advanced features.
º Autonomous commercial drones for industrial and civilian uses with artificial intelligence and robotics features.
º Virtual reality products and accessories that enable drones to livestream video feeds.

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Smartwear and Electronics
º Smartwatches and other devices to make smartphones more useful.
º Activity trackers and fitness products.
º A patent-pending wireless charger that adds run time for GoPro camera.
º Household automation, such as automatic pet feeders.
Mobile Accessories
º Attractive accessories that are needed on daily basis, such as portable power products, smartphone battery cases, cables and similar products in the latest consumer styles.
Toys
º Toys for a wide range of ages.
º Remote, robotic, wooden, skill and educational toys for toddlers to teens.
Our Existing Drone Products

Recreational Drones.  In our recreational drone line, our JETJAT Nano series drones bring the thrill of flight to almost everyone anywhere. Our JETJAT® ULTRATM drone, for example, which has a built-in streaming camera yet fits in the palm of your hand, can create indelible family memories, much like the first Kodak cameras, with the ability to record personal events from vantage points never before possible and stream them to the phone and internet. It provides novel capabilities for our NanoTM Series, such as live streaming video to a smartphone and throw-to-fly, along with ease-of-use features such as one-touch take-off that are designed to elicit consumer interest in our drones, some of which are smaller than a golf ball. Current retail prices for our recreational drones range from $40 to $130.

Professional and Commercial Drones.  Our highly versatile commercial drones are adaptable for specialized applications including construction, agriculture, energy, cinematography, real-estate marketing, sports training, warehouse, movie production, aerospace and defense, and many others. Current retail prices for our commercial drones range from $200 to $1,000.

Markets

Drones.  In March 2016, Goldman Sachs estimated the worldwide total addressable market for non-military drones at $38 billion by 2020. In May 2016, NPD Group’s Retail Tracking Service reported that U.S. drone sales grew 224% from April 2015 to April 2016. In 2015 Goldman Sachs estimated the increase in revenue and shipped units for non-military drones, as follows:

               
Year   2013   2014   2015E   2016E   2017E   2018E   2019E   2020E
Revenue (in million)   $ 250M     $ 700M     $ 1600M     $ 2250M     $ 2700M     $ 2950M     $ 3200M     $ 3350M  
Units     200,000       900,000       2,200,000       3,400,000       4,400,000       5,500,000       6,600,000       7,900,000  

In January 2016, the Consumer Technology Association, a trade association for the U.S. consumer electronics industry, predicted that sales of non-military drones in the U.S. will exceed 2.8 million units in 2016, a 149 percent increase over 2015. In May 2015, the same source estimated that drone flights will reach one million per day within the next 20 years, unless there are regulatory impediments.

Smartwear and Toys.  Our other large, high-growth markets include smartwear and toys. Gartner forecasts sales of wearable electronic devices at $28.7 billion in 2016. IDC estimates worldwide shipments of wearables at 110 million units by the end of 2016, doubling to 237 million units by 2020.

The U.S. toy industry had its best year in a decade in 2015. NPD Group estimated growth at 7% over 2014 and the total U.S. toy industry at $24 billion in 2015.

Marketing

We sell our products through multiple prominent retailers, including Amazon, Best Buy, Staples, Office Depot, Groupon, Buy.com, ShopHQ, Overstock, TigerDirect, LivingSocial, Woot, Sears, GovX, Office Depot, Fry’s, Bluestem Companies, BedBath and Beyond, Michael’s, Jet.com, HSN, Virgin MegaStores, Target,

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Nordstrom, Quill, Amazon UK, and Walmart. We also partner with large electronics distributors such as Ingram Micro, Synnex Corp., GBMicro, Emitak, and D&H Distributing, both domestically and internationally. Some of these distributors also provide local technical support for our products. Our focus is to leverage our distribution network to identify and market added value specialty and consumer electronics products.

Manufacturing

While we make most product decisions in our United States locations, we currently outsource a significant majority of our manufacturing to manufacturers located in China. Our operations team includes managers based in San Jose, California, Shenzhen, China, and Hong Kong who coordinate with our manufacturers’ engineering, manufacturing and quality control personnel to develop the requisite test and manufacturing processes and oversee manufacturing activities and worldwide shipping. We believe that using outsourced manufacturing enables greater scale and flexibility at far lower cost than establishing our own manufacturing facilities. We periodically evaluate the need and advisability of adding manufacturers to support our operations.

Recent Performance

Beginning in 2015, we have focused on the rapidly growing markets for consumer drones and commercial UASs. These products have higher margins than our legacy products, but also have higher upfront development costs.

From 2015 to date in 2017, cash constraints have limited our transition to a focus on drones and related development programs. Although we were able to successfully introduce our first suite of drone products in the second half of fiscal 2016 and first half of 2017, and were able to expand our customer relationships in both domestic and international markets, including selling our products in Asia, Australia and New Zealand, UAE, Europe and Canada, we have been unable to take full advantage of the market opportunity primarily due to insufficient inventory and lack of marketing funds. We believe that the proceeds of this offering will enable our growth plans by accelerating our ability to create innovative drone features, as well as increase our selling channels. These funds will also allow us to expand into worldwide markets such as Canada, Mexico and Europe by giving us additional funds for licensing, export and import, warehousing, product certifications, packaging, marketing and local support for our products in each region. For instance, retailers in Mexico require all radio frequency-operated devices, including drones, to be governmentally certified, in order to be mass marketed. Obtaining such certification, especially for the range of products we offer, is a significant expense. In addition, attending local tradeshows and funding marketing and promotional budgets with European, Canadian and Mexican distributors is essential to penetrate and gain market share in these markets. As our growth strategy is implemented, we will phase out our low-margin, low cost products that are volume-based, such as plastic phone cases, low priced-toys, and most of the portable power accessories. Our legacy products that we intend to continue to sell are our high volume toys such as our train series (Holiday Train Set with Smoke and Sound). We believe that we have demonstrated our growth potential by our ability, even though cash-constrained, to continually introduce new products to market while keeping their ease-of-use and “fun” aspects as core attributes, along with low cost.

Drone Features Under Development

We expect to introduce a number of drone features in 2017. One of the most innovative products in our development pipeline is DRONE HANDSTM, which will allow drones to automatically take certain pre-programmed actions in-flight, such as picking and moving objects. We believe addition of robotic features to generally available drones, in particular, has the ability to revolutionize the UAS market by introducing AI and robotic features in UAS operations for fully autonomous operation.

Other Products Under Development

Consumer electronics is a constantly changing industry. We expect to enhance our products to include ancillary technologies that advance in parallel with drone technologies and can be used in other markets that directly or indirectly involve drone and related technologies. For these products, we expect augmented reality, virtual reality, and robotics to be among the features with the greatest demand. We expect to work on acquisitions or partnerships with companies in this space in 2017 and 2018. Although we do not have any

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agreements for acquisitions or partnerships in place, we anticipate using a portion of the proceeds from this offering for such purposes. We do not yet know, however, how much funding will be needed for such purposes.

Growth Strategy

We intend to grow our business, both domestically and internationally, by continuing to innovate in the growing markets for drones/UAS and consumer electronics. Key components of this strategy include the following:

Market our drones to new categories of customers, including the mass market, the real-estate industry, military, law enforcement and other commercial users.  We intend to increase the penetration of our UAS products within the U.S. military, the militaries of allied nations and non-military U.S. customers, as well as law enforcement and first responder agencies. We believe our UAS platforms are suitable to address the needs of these target markets and that the demand for recreational, commercial and civil UAS deployments will continue to grow rapidly.
Deliver innovative solutions.  Innovation is the primary driver of our growth. We plan to continue our efforts to enable us to satisfy our customers through better, more capable products and services, in response to, and in anticipation of, their needs, and continue to deliver innovative new products that address needs within and outside of our current target markets. Our principal focus will be on innovative, high margin, products.
Increase our marketing efforts in UAS and hobby drones.  We strive to utilize industry experience we have accumulated to increase our presence in the drone market by investing in customer satisfaction, branding, product quality and innovation.
Foster our entrepreneurial culture and continue to attract, develop and retain highly-skilled personnel.  We have created a corporate culture that encourages ideas, innovation, collaboration and an entrepreneurial spirit, which helps to attract highly skilled professionals. We intend to further nurture this culture to promote the development of innovative, highly technical solutions. A core component of our culture is the demonstration of trust and integrity in all of our interactions, contributing to a positive work environment and engendering loyalty among our employees and customers.
Innovative use of both third-party and in-house fulfillment centers and carriers to reach end-user customers faster.  We utilize both third-party and in-house fulfillment centers in strategic locations in California and other states, and in the UK, Mexico, Canada, and Hong Kong. We typically airfreight smaller electronic accessories and drones/UAS, while accessories and packaging are typically shipped via ocean freighter from our manufacturers in China to our fulfillment centers, where the products are packaged for retail sale. Managers monitor inventory levels to ensure the optimum balance. This strategy allows us to reach customers faster, reduce shipping costs, improve shipment accuracy, reduce custom levies, customize products for local markets, and reduce inventory levels. It also allows us to improve flexibility, allowing us to act faster, and reduce labor costs while enhancing customer satisfaction.
Expanding distribution worldwide.  We have worked over the years, and will continue to pursue, increasing our distribution base from a relatively small number of e-commerce platforms to major distribution channels such as Ingram Micro, SYNNEX, D&H and others in key markets worldwide. This strategy will enable us to increase demand for our products and deepens brand loyalty due to localized sales and support.
Preserve our agility and flexibility.  Our organization is designed from the ground-up to be adaptable. This adaptability has allowed us to adjust as customer demands change over time. We are able to respond rapidly to evolving markets and deliver new products quickly, efficiently and affordably. We believe that this ability helps us to strengthen our relationships with customers and be able to identify market needs faster and better. We intend to maintain our agility, adaptability, and flexibility, which we believe to be important sources of differentiation when we compete against larger and better-funded competitors. See “Business — Competitive Advantages” below.

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Risks Affecting Our Business

Investing in our common stock involves significant risks and uncertainties. You should carefully consider the risks and uncertainties discussed under the section titled “Risk Factors” elsewhere in this prospectus before making a decision to invest in our common stock. If any of these risks and uncertainties occurs, our business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of our common stock would likely decline, and you may lose all or part of your investment. Below is a summary of some of the principal risks we face:

We operate in rapidly evolving markets, which makes it difficult to plan product strategy;
We face competition from other firms, many of which have substantially greater resources;
Failure to obtain any necessary regulatory approvals or new restrictions imposed on drone users by either domestic or international agencies may inhibit sales;
Our growth strategy for our drones and consumer electronics products is dependent on expanding into new customer categories and gaining broad consumer recognition and acceptance. We may not be able to successfully implement this strategy;
If critical components of our products that we currently purchase from a small number of suppliers or raw materials used to manufacture our products become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products, which could damage our business;
If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed; and
Our management, whose interests may not be aligned with yours, is able to control the vote on all matters requiring stockholder approval.

Emerging Growth Company under the JOBS Act

As a company with less than $1.0 billion in revenues during our last fiscal year, we qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we have elected to take advantage of reduced reporting requirements and are relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:

we may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations;
we are exempt from the requirement to obtain an attestation and report from our auditors on whether we maintained effective internal control over financial reporting under the Sarbanes-Oxley Act;
we are permitted to provide less extensive disclosure about our executive compensation arrangements; and
we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of these provisions for up to five years if we continue to be an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our shares held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. We have elected to provide two years of audited financial statements. Additionally, we have elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act.

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Our Corporate Information

We were originally organized in 2003 as a limited liability company under the laws of California as KingRidge LLC, We changed our name to UNorth, LLC in September 2008. In August 2014, we reorganized as UNorth, Inc., a Delaware corporation and subsequently changed our name to “Mota Group, Inc.” in March 2016. Our principal executive offices are located at 60 South Market St., Suite 1100, San Jose, CA 95113. Our telephone number is (408) 370-1248. Our corporate website address is https://www.mota.com. The information contained in, or that can be accessed through, our website is not a part of this prospectus.

Going Concern

We have incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as we implement our business plan. There can be no assurance that our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern. The report of our independent registered public accounting firm with respect to our financial statements for the years ended June 30, 2016 and 2015 indicates that our recurring losses and negative cash flows from operations and the need for additional capital raise substantial doubt about our ability to continue as a going concern. During the years ended June 30, 2016 and 2015, we had a net loss of approximately $2,431,000 and $299,000, respectively, and net cash used in operations of approximately $1,718,000 and $11,000, respectively, and our working capital deficit amounted to approximately $133,000 as of June 30, 2016.

Recent Developments

During January and February 2016, we consummated the closing of a private bridge financing of convertible notes (the “Convertible Bridge Notes”) in the aggregate principal amount of approximately $950,000 with maturity dates in January and February of 2018. The Convertible Bridge Notes issued in the bridge financing bear interest at the rate of 8% per annum, are unsecured and will convert into shares of our common stock upon the closing of this offering or any financing of at least $5,000,000 (“Qualified Financing”), at a conversion price equal to (i) 75% of the offering price (“Qualified Financing Price”), in the event such investor has purchased Convertible Bridge Notes in the aggregate principal amount of at least $500,000, (ii) 82% of the offering price in the event such investor has purchased Convertible Bridge Notes in the aggregate principal amount of at least $250,000 but less than $500,000, or (iii) 93% of the offering price in the event such investor has purchased Convertible Bridge Notes in the aggregate principal amount of less than $250,000.

On September 12, 2016, we consummated a bridge financing of Convertible Bridge Notes with an investor in the principal amount of $500,000 for a 2-year term with a maturity date in September 2018. This Convertible Bridge Note bears interest at the rate of 8% per annum, is unsecured and will convert into our shares of common stock upon the closing of a Qualified Financing at a conversion price equal to 75% of the Qualified Financing Price. This Convertible Bridge Note is subject to the same terms as those previously executed.

On October 8, 2016, we consummated a bridge financing of a Convertible Bridge Note with an investor in the principal amount of $200,000 for a 2-year term with a maturity date in October 2018. This Convertible Bridge Note bears interest at the rate of 8% per annum, is unsecured and will convert into our shares of common stock upon the closing of a Qualified Financing at a conversion price equal to 93% of the Qualified Financing Price. This Convertible Bridge Note is subject to the same terms as those previously executed.

Interest expense on these convertible notes amounted to approximately $36,800 for the year ended June 30, 2016 and $54,000 for the six months ended December 31, 2016.

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The table below summarizes the details, including the conversion prices, for each debenture outstanding at December 31, 2016 and June 30, 2016:

       
Date of Debentures   Interest
Rate
  Conversion Price   December 31,
2016
  June 30,
2016
Debenture#1 – January 17, 2016     8 %      75% of Qualified Financing Price     $ 500,000     $ 500,000  
Debenture#2 – January 21, 2016     8 %      93% of Qualified Financing Price       50,000       50,000  
Debenture#3 – January 26, 2016     8 %      93% of Qualified Financing Price       100,000       100,000  
Debenture#4 – January 26, 2016     8 %      82% of Qualified Financing Price       300,000       300,000  
Debenture#5 – September 12, 2016     8 %      75% of Qualified Financing Price       500,000        
Debenture#6 – October 8, 2016     8 %      93% of Qualified Financing Price       200,000        
                 $ 1,650,000     $ 950,000  

On October 12, 2016, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with a lending institution (the “Lender”) for a Senior Secured Redeemable Debenture (“Debenture”). We issued an initial Debenture in the amount of $1,500,000 and received cash proceeds of approximately $1,333,000 (net of debt issuance costs of approximately $167,000). We used part of the cash proceeds to repay the bank loan in the amount of approximately $123,000 on October 12, 2016. Under the terms of the Purchase Agreement, we were granted the option to issue additional Debentures up to a maximum amount of $3,000,000 if certain conditions are met including (i) no default occurs during the term of the Purchase Agreement, and (ii) approval by the lending institution. The Debenture carries an interest rate of 18% per annum, is secured by our assets, and is personally guaranteed by two of our principal stockholders and officers. We are required to remit interest payments only for the months of November and December 2016, and monthly payments including principal and interest during the period between January 2017 and January 2018. We have the right to redeem the Debenture in full prior to its maturity date. The Purchase Agreement is subject to certain fees, including an advisory fee of $300,000, which is due in three installments, and has a term of 15 months from the closing date. As of December 31, 2016, there was approximately $1,435,000 outstanding balance on this Debenture, net of unamortized debt issuance costs of approximately $65,000. Upon consummation of the initial public offering, the Lender has agreed to waive the requirement in the Purchase Agreement pursuant to which we would be required to repay the Debenture from the proceeds of the initial public offering in the event that the initial public offering constitutes a change of control (as defined in the Purchase Agreement). In addition, the Lender has further agreed that our failure to not repay the Debenture upon consummation of the initial public offering will not constitute a default or Event of Default (as set forth in the Purchase Agreement) with respect to any of the transaction documents entered into in connection with the Purchase Agreement.

On March 26, 2017, we entered into Exchange Agreements with certain of our suppliers and debt holder (the “Suppliers and Debt Holder”). Pursuant to the terms of the Exchange Agreements, we agreed to issue to the Suppliers and Debt Holder, in full satisfaction of the $5,111,800 in the aggregate, including payables of $2,984,175 and purchases of future goods of $2,127,625, due to the Suppliers and Debt Holder (the “Aggregate Outstanding Amount”), a number of the shares of our common stock (the “Securities”) issued in this offering equal to (i) the Aggregate Outstanding Amount divided by (ii) (a) the offering price per Security in this offering, multiplied by (b) .90, subject to satisfaction of the covenants and conditions set forth in the Exchange Agreement. The Suppliers and Debt Holder have entered into lock-up agreements with us and have further agreed to grant us the option to buy back all of the Securities during the lock-up period from the Suppliers and Debt Holder in exchange for the lesser of (i) the Aggregate Outstanding Amount multiplied by 1.05, and (ii) the number of Securities, multiplied by the closing trading price of the Securities on the day prior to the date that we deliver a notice to the Suppliers and Debt Holder, multiplied by 1.05. The Suppliers and Debt Holder have represented to us that they are “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.

On        , 2017, our board of directors approved a Reverse Split at a ratio of 2.7 to 1. All references to number of shares and per share amounts included in this prospectus gives effect to this anticipated ratio of the Reverse Stock Split. The number of shares and per share amounts included in the consolidated financial statements and the accompanying notes, included in the F-section have been adjusted to reflect the Reverse Stock Split retroactively. Unless otherwise indicated, if and when we effect the Reverse Stock Split, all

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outstanding shares and earnings per share information contained in this prospectus gives effect to this anticipated ratio of the Reverse Stock Split.

On          , 2017, the Company’s two major stockholders, Michael Faro and Lily Ju, agreed to cancel an aggregate of 1,318,518 shares (3,560,000 shares on a pre Reverse Stock Split basis) immediately prior to the effectiveness of this offering for nominal consideration.

On           , 2017, the convertible debt holders of the Convertible Bridge Notes converted the outstanding debt balance of $1,650,000 and accrued interest of $88,667 to our common stock at the conversion price set forth in the Convertible Bridge Notes.

Quarter Ended March 31, 2017

Our consolidated financial statements for the fiscal quarter ended March 31, 2017 are not yet available. We have presented preliminary estimates below for the quarter, based on information currently available to management as our financial closing procedures for the three months ended March 31, 2017 are not yet complete. As a result, our actual results may vary materially from the preliminary results included below and will not be publicly available until after the closing of this offering. Accordingly, you should not place undue reliance on these preliminary financial data. The preliminary financial data included in this prospectus has been prepared by, and is the responsibility of, management. Our independent registered public accounting firm has not audited, reviewed, compiled, or performed any procedures with respect to the preliminary financial data below and does not express an opinion or any other form of assurance with respect thereto. See “Risk Factors,” and “Special Note Regarding Forward-Looking Statements” for additional information regarding factors that could result in differences between the preliminary financial results presented below and the financial results we will ultimately report for quarter ended March 31, 2017 and/or the fiscal year ending June 30, 2017.

We expect our sales for the quarter ended March 31, 2017 to be approximately 53% higher than the quarter ended March 31, 2016. This increase is partially the result of the expansion of our customer base to include additional major retailers and online channels, including Walmart.com, Target.com, Virgin Airport Mega Stores, and Home Depot. Our unit shipments for all products increased from approximately 30,500 units for three months ended March 31, 2016 to 47,900 units for three months ended March 31, 2017, while our drone sales are expected to account for approximately 39% of our total sales during three months ended March 31, 2017, compared to 24% of our total sales during the same period in 2016. The increase in sales was primarily due to the increase in demand for our drone and electronic products.

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The Offering

Securities offered by us    
    An aggregate of 650,000 shares of our common stock and warrants to purchase 650,000 shares of our common stock. Each warrant will have an exercise price of $12.49 per share or 125% of public offering price of common stock, is exercisable immediately and will expire five years from the date of issuance. Each share of common stock purchased will be accompanied by one warrant, provided that the common stock with respect to over-allotment can be exercised separately. The shares and warrants will trade separately.
Common stock to be outstanding immediately after the offering    
    2,161,107 shares
Warrants to be outstanding immediately after the offering    
    650,000
Option to purchase additional shares    
    We have granted the underwriters an option, exercisable for 45 days after the date of this prospectus, to purchase up to 97,500 additional shares of our common stock and/or warrants to purchase 97,500 additional shares to cover allotments, if any.
Use of proceeds    
    We estimate that the net proceeds from this offering, based on an offering price of $9.99 per share of common stock and $0.01 per warrant and after deducting underwriting discount and estimated offering expenses payable by us, will be approximately $    . We intend to use the net proceeds of this offering for working capital and other general corporate purposes, including to finance our growth, enhance and improve our products, fund capital expenditures, and expand our existing business through investments in or acquisitions of other businesses, products or technology. See the section titled “Use of Proceeds.”
Risk factors    
    You should read “Risk Factors” beginning on page 13 for a discussion of factors to consider carefully before deciding to invest in our common stock.
Proposed NASDAQ Capital Market symbol    
    We have applied to list our common stock and warrants on the NASDAQ Capital Market under the symbols “MOTA” and “MOTAW,” respectively, and expect such listings to occur concurrently with this offering. However, there is no guarantee that our applications will be approved.

The number of shares of our common stock to be outstanding immediately after this offering is based on 2,044,443 shares of our common stock outstanding as of December 31, 2016.

Unless otherwise stated, all information in this prospectus assumes:

1 for 2.7 stock split to be effected on              , 2017;
the automatic conversion into 216,637 shares of common stock of our Convertible Bridge Notes (including accrued interest) immediately prior to the pricing of this offering, based on an assumed initial public offering price of $9.99 per share and $0.01 per warrant, at a weighted average conversion price equal to 80.3% of the public offering price;

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the automatic conversion into 568,545 shares of common stock of certain payables and purchases of future goods immediately prior to the pricing of this offering, based on an assumed initial public offering price of $9.99 per share and $0.01 per warrant, at a weighted average conversion price equal to 90.0% of the public offering price;
no exercise of the underwriters’ over-allotment option to purchase additional shares;
no exercise of the Representative’s Warrants; and
the cancellation of an aggregate of 1,318,518 shares (3,560,000 shares on a pre reverse split basis) by Michael Faro and Lily Ju immediately prior to the effectiveness of this offering for nominal consideration.

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Summary Consolidated Financial Information and Other Data

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the years ended June 30, 2016 and 2015 and the consolidated balance sheet data as of June 30, 2016 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the six months ended December 31, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2016 have been derived from our unaudited interim condensed financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with “Capitalization,” “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

       
  Year Ended
June 30,
  Six Months Ended
December 31,
     2016   2015   2016   2015
         (unaudited)
Consolidated Statements of Operations Data:
                                   
Net revenue   $ 3,977,992     $ 8,041,402     $ 3,657,363     $ 2,588,214  
Cost of goods sold     2,559,891       4,757,275       2,377,788       1,329,427  
Gross profit     1,418,101       3,284,127       1,279,575       1,258,787  
Operating expenses:
                                   
Selling expenses     1,500,115       1,678,231       1,054,356       802,280  
General and administrative expenses     2,126,698       1,796,933       1,333,475       972,274  
Total operating expenses     3,626,813       3,475,164       2,387,831       1,774,554  
Loss from operations     (2,208,712 )      (191,037 )      (1,108,256 )      (515,767 ) 
Other expenses, net     (222,296 )      (107,736 )      (334,186 )      (50,193 ) 
Net loss   $ (2,431,008 )    $ (298,773 )    $ (1,442,442 )    $ (565,960 ) 
Net loss per share   $ (1.18 )    $ (0.10 )    $ (0.71 )    $ (0.27 ) 
Weighted average common shares outstanding:     2,067,093       2,962,963       2,044,444       2,084,598  

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  As of
December 31, 2016
  As of June 30,   As of
December 31,
2016
(Pro Forma)
(unaudited)(1)
  As of
December 31,
2016
(Pro Forma as
adjusted)
(unaudited)(2)
     (unaudited)   2016   2015
Consolidated Balance Sheet Data:
                                            
Cash   $ 404,325     $ 46,052     $ 103,794     $ 404,325       6,449,325  
Accounts receivable, net     1,819,282       547,223       386,522       1,819,282       1,819,228  
Other receivable     71,612                   71,612       71,612  
Inventory, net     1,998,688       1,233,560       1,447,919       1,998,688       1,998,688  
Deposits with vendors     123,457       166,357       168,855       123,457       123,457  
Working (deficit) capital**     (774,126 )      (133,184 )      1,115,354       1,721,835       7,766,835  
Total assets     4,868,266       2,213,215       2,173,806       4,868,266       10,775,232  
Accounts payable     3,338,410       1,196,489       592,524       1,144,116       1,144,116  
Accrued expenses     382,918       435,006       42,973       281,251       281,251  
Customer advances     43,627       43,627       237,325       43,627       43,627  
Line of credit     87,402       91,299       90,287       87,402       87,402  
Bank loan           214,932                    
Note payable     200,000       200,000                    
Current portion of senior secured redeemable debenture, net of unamortized debt issuance costs     1,308,627                   1,308,627       1,308,627  
Convertible debentures     1,650,000       950,000                    
Senior secured redeemable debenture, net of unamortized debt issuance costs, excluding current portion     125,971                   125,971       125,971  
Loans payable to stockholders, including accrued interest     1,227,889       1,125,251       715,768       1,227,889       1,227,889  
Total liabilities     8,364,844       4,267,351       1,707,504       4,218,883       4,218,883  
Total stockholders’ (deficit) equity     (3,496,578 )      (2,054,136 )      466,302       649,383       6,556,349  

** Working deficit is equal to current assets minus current liabilities.
(1) The pro forma column gives effect to the automatic conversion of (i) the Convertible Bridge Notes in the aggregate principal amount of approximately $1,650,000 and accrued interest of $88,667, (ii) certain payables and purchases of future goods in the aggregate amount of $5,111,800, into common stock in conjunction with the offering.
(2) The pro forma as adjusted column gives effect to the conversion of (i) the Convertible Bridge Notes in the aggregate principal amount of approximately $1,650,000 and accrued interest of $88,667, (ii) certain payables and purchases of future goods in the aggregate amount of $5,111,800, and (iii) to the sale of 650,000 shares of our common stock in this offering at an assumed initial public offering price of $9.99 per share and $0.01 per warrant set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses.
(3) A $1.00 increase (decrease) in the assumed initial public offering price of $9.99 per share and $0.01 per warrant would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by $604,500, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 100,000 shares in the number of shares of our common stock offered would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $930,000, assuming that the assumed initial public offering price remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and the other terms of this offering determined at pricing.

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RISK FACTORS

You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our common stock and warrants. Any of the following risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations and prospects. Additionally, the market price of our common stock could decline due to any of these risks and uncertainties, and you may lose all or part of your investment.

Risks Related to Our Business and Our Industry.

We believe that a substantial portion of our growth will come from our recently introduced line of drone products. We have limited experience in that market, which makes our future success difficult to predict.

We introduced our first drone product in November 2015. The drone industry is in early stages of development, and our experience in that market is limited. Both of these factors make it difficult to predict our future success in that market.

Both the drone market and the consumer products market, particularly the consumer electronics market, are evolving rapidly, which makes it difficult to evaluate our business and future prospects.

In addition to drones, the consumer products market generally, and the consumer electronics market and related technologies in particular, are rapidly evolving. Accordingly, our business and future prospects are difficult to evaluate. We cannot accurately predict the extent to which demand for our products will increase, if at all. Prior to investing, you should consider the challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets. These challenges include our ability to do the following:

generate sufficient revenue to achieve and maintain profitability;
acquire and maintain market share;
manage growth in our operations;
develop and renew contracts;
attract and retain additional engineers and other highly-qualified personnel;
successfully develop and commercially market new products; and
access additional capital when required and on reasonable terms.

If we fail to address these and other challenges, risks and uncertainties successfully, our business, results of operations and financial condition would be materially harmed.

We face competition from other firms, many of which have substantially greater resources.

The consumer electronic industry as a whole is highly competitive and generally characterized by intense competition. Our current primary direct competitors in the consumer and commercial drone space include DJI, 3DR, Parrot, and potentially GoPro. As with any other product, there are always generic brands that always enter the market. We expect that additional competitors will enter both the consumer and commercial drone markets. In addition, some or all of these firms may have substantially greater financial, management, research and marketing resources and brand awareness than we have. Our competitors may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past contract performance, geographic presence, price and the availability of key professional personnel. Furthermore, many of our competitors may be able to utilize their substantially greater resources and economies of scale to develop competing products and technologies, divert sales away from us by monopolizing the market or enter into contracts with retail store chains to only carry their brand, or hire away our employees by offering more lucrative compensation packages. In the event that the market for drones or consumer electronics expands, we expect that competition will intensify as additional competitors enter the market and current competitors expand their product lines. In order to secure contracts successfully when competing with larger, well-financed companies, we may be forced to agree to less favorable contractual terms or lower pricing terms, which could adversely affect our margins. Our failure to compete effectively with respect to any of these or other factors could have a material adverse effect on our business, prospects, financial condition or results of operations.

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Government contract awards are not predictable.

While we are planning to use portion of the proceeds to expand our presence in the military and government sector, entering into government contracts and winning government awards are not predictable, as many government customers will likely be subject to budgetary constraints. In addition, award of contracts from these agencies could be jeopardized by governmental competitive bidding requirements. The funding of government programs is uncertain and dependent on continued congressional appropriations and administrative allotment of funds based on an annual budgeting process. Furthermore, almost all contracts with the U.S. government are terminable by the U.S. government at will and include provisions requiring the contractor to bear the risk of cost overruns and may also include “most favored nations” provisions requiring the government to receive the best pricing terms available to any other customer. Our ability to expand into this sector may also be negatively impacted by other developments that affect these government programs generally, including the following:

changes in government programs;
adoption of new laws or regulations relating to government contracting or changes to existing laws or regulations;
changes in political or public support for security and defense programs;
delays or changes in the government appropriations process;
uncertainties associated with the war on terror and other geo-political matters; and
delays in payment by government payment offices.

In addition, many government entities may elect to choose a “single-source-award” preference to restrict participation only to those manufacturers that they have entered into procurement with previously.

If drones, consumer electronic and/or unmanned aircraft systems do not experience significant growth, if we cannot expand our customer base or if our products do not achieve broad acceptance, then we will not be able to achieve our anticipated level of operations.

We rely on industry experts and research reports to predict the potential in the market. Market Research from RnRMarketResearch.com suggests that the demand for drones and related products will expand by 109% for the next three years, and if such analysts have not predicted the market correctly, it can have adverse effect on our revenue. As the drone industry is an evolving industry, we cannot accurately predict the future growth rates or sizes of these markets. Demand for these types of systems may not increase, or may decrease, either generally or in specific markets, for particular types of products or during particular time periods. Although we are seeking to expand our customer base to include foreign countries, governments, domestic, consumer, and commercial customers, we cannot assure you that our efforts will be successful. The expansion of the drone and consumer electronic markets in general, and the market for our products in particular, depends on a number of factors, including but not limited to the following:

customer satisfaction with these types of systems as solutions;
the cost, performance and reliability of our products and products offered by our competitors;
customer perceptions regarding the effectiveness and value of these types of systems;
limitations on our ability to market our products outside the United States;
obtaining timely regulatory approvals; and
marketing efforts and publicity regarding these types of systems.

If the components that we currently purchase from a small number of suppliers or raw materials used to manufacture our products become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products, which could damage our business.

We currently have a small number of suppliers that provide components to our outsourced manufacturing facilities. We do not have long-term agreements with any of these suppliers that obligate them to continue to

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sell products to us. Our reliance on these suppliers involves risks and uncertainties, including whether our suppliers will provide an adequate supply of required materials of sufficient quality, will increase prices for the products and will perform their obligations on a timely basis. In addition, our suppliers rely on the raw material supplies that may face shortages. Moreover, if any of our suppliers become financially unstable, then we may have to find new suppliers. It may take several months to locate alternative suppliers, if required. We may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish alternative sources of supply if we lose any of these sources. We cannot predict if we will be able to obtain replacement components within the time frames that we require at an affordable cost, if at all.

Our failure to obtain any necessary regulatory approvals or any new restrictions imposed on drone users by either domestic or international agencies may limit us from expanding the sales of our products.

Regulations imposed by governmental and quasi-governmental entities, both domestic such as the Federal Aviation Administration, or FAA, and international affect the drone industry. The regulatory environment in the drone industry is rapidly evolving and any significant restrictions adopted by these entities regarding the use of drones by our customers could have a materially adverse effect on our results of operations. In addition, certain testing requirements, such as voluntary standards adopted by ASTM International (formerly The American Society for Testing and Materials), and any relevant standards adopted by the Federal Communications Commission, or FCC, may require us to perform additional testing and product changes which would add to our expenses.

The markets in which we compete are characterized by rapid technological change, which requires us to develop new products and product enhancements, and could render our existing products obsolete.

Continuing technological changes in the market for our products could make our products less competitive or obsolete, either generally or for particular applications. Our future success will depend upon our ability to develop and introduce a variety of new capabilities and enhancements to our existing product offerings, as well as introduce a variety of new product offerings, to address the changing needs of the markets in which we offer our products. Delays in introducing new products and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential customers to purchase our competitors’ products.

If we are unable to devote adequate resources to develop new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements on a timely basis, our products could lose market share, our revenue and profits could decline, and we could experience operating losses.

We derive a significant amount of our revenue from a limited number of customers and purchase a significant portion of our inventories from a limited number of suppliers. Certain of our major customers are also major suppliers, and therefore the loss of such customers or suppliers could adversely impact our financial condition and results of operations.

We derived a significant portion of our revenues on an aggregate basis from our top three customers, and a significant portion of our purchases comes from our top three suppliers. As of June 30, 2016, two customers represented 78% of the total accounts receivable balance, and accounted for 68% of the total sales for the year ended June 30, 2016. As of June 30, 2015, one customer represented 71% of the total accounts receivable balance and accounted for 65% of total sales for the year ended June 30, 2015. As of December 31, 2016, two customers represented 88% of the total accounts receivable balance. Three customers accounted for 87% of the total sales for the six months ended December 31, 2016 while two customers accounted for 61% of the total sales for the six months ended December 31, 2015. These customers are large e-commerce and computer and technology distribution companies. As of June 30, 2016, two vendors located in China represented 63% of the total accounts payable balance and 90% of total purchases for the year ended June 30, 2016. As of June 30, 2015, one vendor located in China represented 22% of the total accounts payable balance and 93% of total purchases for the year ended June 30, 2015. As of December 31, 2016, one vendor located in China represented 51% of the total accounts payable balance. Five vendors located in China represented 95% of total purchases for the six months ended December 31, 2016 while two vendors located in China accounted for 88% of the total purchases for the six months ended December 31, 2015. We maintain close working relationships with our top customers and suppliers and continue to reduce the business concentration of our

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revenues and purchases among our top customers and suppliers. While we do not believe that the loss of any one major customer or supplier in and of itself would have a material adverse effect on our financial condition or results of operation, the loss of more than one such major customer or supplier, or our failure to replace such customer or supplier with other customers and suppliers, could have a material adverse effect on our financial condition and our results of operations.

Our senior management and key employees are important to our customer relationships and overall business.

We believe that our success depends in part on the continued contributions of our senior management and employees. We rely on our executive officers, senior management and key employees to generate business and execute programs successfully. We do not have employment agreements with any of our executive officers or key employees, and these individuals could terminate their employment with us at any time. The loss of any of our executive officers, members of our senior management team or key employees could significantly delay or prevent the achievement of our business objectives and could materially harm our business and customer relationships and impair our ability to identify and secure new contracts and otherwise manage our business.

We must recruit and retain highly-skilled employees to succeed in our competitive business.

We depend on our ability to recruit and retain employees who have advanced engineering and technical services skills and who we believe will work well with our customers. These employees are in great demand and are likely to remain a limited resource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, then our ability to maintain our competitiveness and grow our business could be negatively affected. In addition, because of the highly technical nature of our products, the loss of any significant number of our existing engineering personnel could have a material adverse effect on our business and operating results. In the event we are unable to retain these key personnel or acceptable substitutes, the customer may terminate the contract.

Our business may be dependent upon our employees obtaining and maintaining required security clearances.

If and when awarded, certain U.S. government contracts would require our employees to maintain various levels of security clearances, and we would be required to maintain certain facility security clearances complying with Department of Defense (DoD), requirements. The DoD has strict security clearance requirements for personnel who work on classified programs. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain security clearances in a timely manner, or at all, or if our employees who hold security clearances are unable to maintain the clearances or terminate employment with us, then a customer requiring classified work could terminate the contract or decide not to renew it upon its expiration. In addition, we expect that many of the contracts on which we expect to bid will require us to demonstrate our ability to obtain facility security clearances and employ personnel with specified types of security clearances. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts.

Our products are complex and could have unknown defects or errors, which may give rise to claims against us, diminish our brand or divert our resources from other purposes.

Our unmanned aircraft systems rely on complex avionics, sensors, user-friendly interfaces and tightly integrated, electromechanical designs to accomplish their missions. Despite testing, our products occasionally have contained defects, errors and performance problems and may in the future contain defects, errors or performance problems when first introduced, when new versions or enhancements are released, or even after these products have been used by our customers for a period of time. These problems could result in expensive and time-consuming design modifications or warranty charges, delays in the introduction of new products or enhancements, significant increases in our service and maintenance costs, exposure to liability for damages, damaged customer relationships and harm to our reputation, any of which could materially harm our results of operations and ability to achieve market acceptance. In addition, increased development and warranty costs could be substantial and could reduce our operating margins.

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The existence of any defects, errors, or performance problems in our products or the misuse of our products could also lead to product liability claims or lawsuits against us. A defect, error or performance problem in one of our unmanned aircraft systems could result in injury, death or property damage and significantly damage our reputation and support for unmanned aircraft systems in general. While our fast charge systems include certain safety mechanisms, these systems can deliver up to 600 amps of current in their application, and the failure, malfunction or misuse of these systems could result in injury or death. Although we maintain insurance policies, we cannot assure you that this insurance will be adequate to protect us from all material judgments and expenses related to potential future claims or that these levels of insurance will be available in the future at economical prices or at all. A successful product liability claim could result in substantial costs to us. Even if we are fully insured as it relates to a claim, the claim could nevertheless diminish our brand and divert management’s attention and resources, which could have a negative impact on our business, financial condition and results of operations.

The operation of unmanned aircraft systems in urban environments may be subject to risks, such as accidental collisions and transmission interference, which may create potential liability for us as the manufacturer.

Urban environments may present certain challenges to the operators of unmanned aircraft systems. Unmanned aircraft systems may accidentally collide with other aircrafts, persons or property, which could result in injury, death or property damage and create potential liability for us. While we believe that the operator should remain liable for any damage caused by an unmanned aircraft system, there can be no assurance that our design of that system or the manner in which we market its use, will not result in our being held responsible should the system cause any such injury, death or property damage.

We have not made material expenditures on our research and development activities relating to development of new products and as a result may not be able to compete effectively in a competitive market.

New technologies are rapidly emerging in the segments in which we conduct business. The development of new and advanced technologies, the continuous, timely and cost-effective incorporation of such technologies into products and services, and the effective marketing of such products and services are indispensable to remaining competitive. There can be no assurance that our limited research and development activities will be successful in maintaining our market position. If our products do not keep up with the pace of technological change, our products will not be accepted and our business, financial condition and results of operations will be materially affected.

The speedy introduction of our products to the marketplace is necessary for our business to be successful.

Our business is dependent on the speed with which we introduce our products to the market. The introduction of our products to the market is inherently difficult to manage and keep on schedule, and there can be no assurance that we will be able to meet our development objectives or to meet market expectations. We may experience substantial delays in completing development of our products which could negatively impact our competitiveness.

Our products may contain undetected flaws when introduced.

There can be no assurance that, despite testing by us and by potential customers, flaws will not be found in our products, resulting in loss of or delay in market acceptance. We may be unable, for technological or other reasons, to introduce products in a timely manner in response to changing customer requirements. In addition, there can be no assurance that while we are attempting to finish development of our products, a competitor will not introduce similar or superior products, thus diminishing our advantage, rendering our products and technologies partially or wholly obsolete, or at least requiring substantial re-engineering in order to become commercially acceptable. Our failure to maintain product introduction schedules, avoid cost overruns and undetected errors, or introduce products that are superior to competing products would have a materially adverse effect on our business, financial condition, and results of operations.

Volatility and cyclicality in the market for consumer electronics could adversely affect us.

Our financial success depends in part on the varying conditions in the market for our products. This market is subject to volatility as it moves in response to cycles in the overall business environment and is also

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particularly sensitive to the technology sector, which generates a significant portion of the demand. A significant decline in demand for products we sell could adversely affect our revenue and prospects, which would harm our business, financial condition and operating results.

If we are unable to implement and maintain effective internal control over financial reporting in the future, our ability to produce accurate financial statements could be impaired, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.

Upon becoming a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our first annual report on Form 10-K, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

We have identified material weaknesses in our internal control over financial reporting as of June 30, 2016, and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remedy our material weaknesses, or if we fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Prior to the completion of this offering, we have been a private company with limited accounting personnel and other resources to address our internal control over financial reporting. The material weaknesses that we identified related to the lack of a sufficient complement of resources with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements and the lack of timely and effective management review of account reconciliations and the timely preparation of schedules necessary for the preparation of financial statements and to make certain accounting judgments in accordance with generally accepted accounting principles.

Our failure to remediate the material weaknesses identified above or the identification of additional material weaknesses in the future, could adversely affect our ability to report financial information, including our filing of quarterly or annual reports with the SEC on a timely and accurate basis. Moreover, our failure to remediate the material weaknesses identified above or the identification of additional material weaknesses, could prohibit us from producing timely and accurate consolidated financial statements, which may adversely affect our stock price and we may be unable to maintain compliance with NASDAQ listing requirements.

Our ability to use our net operating loss carry forwards and certain other tax attributes may be limited.

Our ability to utilize our federal net operating loss carryforwards may be limited under Sections 382 of the Internal Revenue Code of 1986, as amended, or the Code. The limitations apply if an “ownership change,” as defined by Section 382, occurs. Generally, an ownership change occurs if the percentage of the

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value of the stock that is owned by one or more direct or indirect “five percent shareholders” increases by more than 50% over their lowest ownership percentage at any time during the applicable testing period (typically three years). If we have experienced an “ownership change” at any time since our formation, we may already be subject to limitations on our ability to utilize our existing net operating losses and other tax attributes to offset taxable income. In addition, future changes in our stock ownership, which may be outside of our control, may trigger an “ownership change” and, consequently, Section 382 limitations. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders. If we are unable to do so, we may not be able to bring additional or new products to the market, which would result in reduced revenue and market share.

We operate in emerging and rapidly evolving markets, which makes our prospects difficult to evaluate. We may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. As of December 31, 2016, we had a total stockholders’ deficit of $3,496,578. We may need additional financing to pursue our business strategies, including to:

hire additional staff;
develop new or enhance existing products;
enhance our operating infrastructure;
fund working capital requirements;
acquire complementary businesses or technologies; or
otherwise respond to competitive pressures.

Our projection of future capital needs is based on our operating plan, which in turn is based on assumptions that may prove to be incorrect. As a result, our financial resources may not be sufficient to satisfy our future capital requirements. Should these assumptions prove incorrect, there is no assurance that we can raise additional capital. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders, including those acquiring shares in this offering. We cannot be certain that additional financing will be available on terms favorable to us, or at all. Any future debt financing may contain covenants or other provisions that limit our operational or financial flexibility. In addition, certain of our customers require that we obtain letters of credit to support our obligations under some of our contracts. If adequate funds are not available or are not available on acceptable terms, if and when needed, then our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures would be significantly limited. Therefore, if such funds are not available, our revenues and market share could decline.

Our failure to successfully promote our brands and achieve strong brand recognition in our markets will limit and reduce the demand for our products.

We believe that brand recognition is an important factor to our success. We plan to increase our marketing expenditures to increase and maintain prominent brand awareness. If we fail to promote our brands successfully, or if the expenses of doing so are disproportionate to any increased net sales we achieve, it would have a material adverse effect on our business and results of operations. This will depend largely on our ability to maintain trust, be a technology leader, and continue to provide high-quality and secure products and services. Any negative publicity about our industry or our company, the quality and reliability of our products and services, our risk management processes, changes to our products and services, our ability to effectively manage and resolve seller and buyer complaints, our privacy and security practices, litigation, regulatory activity, and the experience of sellers and buyers with our products or services, could adversely affect our reputation and the confidence in and use of our products and services. Harm to our brand can arise from many sources, including failure by us or our partners to satisfy expectations of service and quality;

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inadequate protection of sensitive information; compliance failures and claims; litigation and other claims; employee misconduct; and misconduct by our partners, service providers, or other counterparties. If we do not successfully maintain a strong and trusted brand, our business could be materially and adversely affected. Other companies, who may have significantly more resources to promote their own brands than we do, may not be aggressively promoting their brands. If they begin to more aggressively promote their brand or if our products exhibit poor performance or other defects, our brand may be adversely affected, which would inhibit our ability to attract or retain customers.

If we fail to manage growth effectively, our business could be harmed.

In order to manage our growth effectively, we must continue to strengthen our existing infrastructure, develop and improve our internal controls, information technology and security policies, create and improve our reporting systems, and timely address issues as they arise. These efforts may require substantial financial expenditures, commitments of resources, developments of our processes, and other investments and innovations. Furthermore, we encourage employees to be bold and to quickly develop and launch new features for our products and services. As we grow, we may not be able to execute as quickly as a smaller, more efficient organization. If we do not successfully manage our growth, our business will suffer.

We face challenges in expanding into new geographic regions.

We plan to continue expanding our presence in new geographic regions, including Canada, Mexico, the European Union, Central and South America, and Asia. The expansion of our products and services globally exposes us to risks relating to staffing and managing cross-border operations; increased costs and difficulty protecting intellectual property and sensitive data; tariffs and other trade barriers; differing and potentially adverse tax consequences; increased and conflicting regulatory compliance requirements, including with respect to data privacy and security; lack of acceptance of our products and services; challenges caused by distance, language, and cultural differences; exchange rate risk; and political instability. Accordingly, our efforts to expand our global operations may not be successful, which could limit our ability to grow our business.

In addition, we currently face and will continue to face risks entering markets in which we have limited or no experience and in which we may not be well-known. Offering our products in new geographic regions often requires substantial expenditures and takes considerable time, and we may not be successful enough in these new geographies to recoup our investments in a timely manner or at all. We may be unable to attract a sufficient number of resellers, fail to anticipate competitive conditions, or face difficulties in operating effectively in these new markets.

Our international revenue and operations are subject to a number of material risks, including those described below, that could adversely affect our business, financial condition or results of operation.

Our international revenue and operations are subject to a number of material risks, including the following:

the unavailability of, or difficulties in obtaining any, necessary governmental authorizations for the export of our UAS products to certain foreign jurisdictions;
changes in regulatory requirements that may adversely affect our ability to sell certain products or repatriate profits to the United States;
the complexity and necessity of using foreign representatives and consultants;
difficulties in enforcing agreements and collecting receivables through foreign legal systems and other relevant legal issues, including fewer legal protections for intellectual property;
potential fluctuations in foreign economies and in the value of foreign currencies and interest rates;
potential preferences by prospective customers to purchase from local (non-U.S.) sources;
general economic and political conditions in the markets in which we operate;
the imposition of tariffs, embargoes, export controls and other trade restrictions; and

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different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future.

Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables and a higher cost of doing business, any of which could negatively impact our business, financial condition or results of operations. Moreover, our sales, including sales to customers outside the United States, are denominated in dollars, and downward fluctuations in the value of foreign currencies relative to the U.S. dollar may make our products more expensive than other products, which could harm our business.

We depend on third-party delivery services to deliver our products to us and our customers on a reliable and timely basis, and these third parties may increase the fees that they charge, limit or end their relationship with us with minimal prior notice, or become less reliable.

We use industry leading transportation services such as FedEx, the US Postal Service, UPS, DHL, Ocean and Freight and other third parties to ship our products. We continuously try to negotiate better rates among the carriers and generally try to balance between our shipments among carriers but we do not have long-term agreements with any of delivery service and we cannot assure you that our relationships with these delivery service providers will continue on terms favorable to us, or at all. We are highly dependent upon general transportation infrastructure, including common carriers, to fulfill customer orders. The transportation network is subject to a variety of disruptive causes, including labor disputes or port strikes, acts of war or terrorism and natural disasters. If our delivery times increase unexpectedly due to these or any other reasons, we could suffer a disruption of our business and delayed or lost net sales and our brand could be damaged.

Continued increases in shipping costs could harm our business, financial condition and results of operations by increasing our costs of doing business and reducing our gross margins. Passing these increased costs on to our customers could also cause us to lose sales to competitors. Furthermore, due to competitive pressures, we are increasingly either heavily discounting or not charging our customers for shipping. As our online competitors continue to use and expand programs that provide for free or reduced shipping charges, we expect to increasingly offer similar programs to maintain and build our customer base, which will have the effect of decreasing net sales from freight and decreasing our margins.

Our business and operations are subject to the risks of earthquakes and other natural catastrophic events.

Our corporate locations may be potentially exposed to seismic activity and wild fires or significant natural disaster, such as an earthquake, fire or other catastrophic event, which severely affect our ability to conduct normal business operations, and as a result, our future operating results could be materially and adversely affected.

Risks Related to Our Intellectual Property

If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.

Our intellectual property and other proprietary rights are an important component of our business. We rely on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. However, a significant portion of our technology is not patented, and we may be unable or may not seek to obtain patent protection for this technology. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and may be challenged by third parties. The laws of countries other than the United States often are even less protective of intellectual property rights. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products or otherwise obtain and use our intellectual property. Moreover, many of our employees have access to our trade secrets and other intellectual property. If one or more of these employees leave us to work for one of our competitors, then they may disseminate this

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proprietary information, which may as a result damage our competitive position. If we fail to protect our intellectual property and other proprietary rights, then our business, results of operations or financial condition could be materially harmed.

In addition, affirmatively defending our intellectual property rights and investigating whether we are pursuing a product or service development that may violate the rights of others may entail significant expense. We have not found it necessary to resort to legal proceedings to protect our intellectual property, but may find it necessary to do so in the future. Any of our intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, then the proceedings could result in significant expense to us and divert the attention and efforts of our management and technical employees, even if we prevail.

We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming and limit our ability to use certain technologies in the future.

We may become subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of third parties. Any claims, with or without merit, could be time-consuming and expensive, and could divert our management’s attention away from the execution of our business plan. Moreover, any settlement or adverse judgment resulting from these claims could require us to pay substantial amounts or obtain a license to continue to use the disputed technology, or otherwise restrict or prohibit our use of the technology. We cannot assure you that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all, that we would be able to develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected product. An adverse determination also could prevent us from offering our products to others. Infringement claims asserted against us may have a material adverse effect on our business, results of operations or financial condition.

Risks Relating to Securities Markets and Investment in Our Stock

We may be unable to continue as a going concern based on our recent performance, which has included significant losses and a working capital deficit.

We have incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as we implement our business plan. There can be no assurance that our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern. The report of our independent registered public accounting firm with respect to our financial statements for the years ended June 30, 2016 and 2015 indicates that our recurring losses and negative cash flows from operations and the need for additional capital raise substantial doubt about our ability to continue as a going concern. The report of our Independent Registered Public Accounting Firm has indicated these factors raised substantial doubt about our ability to continue as a going concern. During the years ended June 30, 2016 and 2015 and the six months ended December 31, 2016, we had a net loss of approximately $2,431,000, $299,000, and $1,442,000, respectively, and net cash used in operations of approximately $1,718,000, $11,000, and $1,456,000, respectively, and working deficit amounted to approximately $774,000 and $133,000 as of December 31, 2016 and June 30, 2016, respectively.

There may not be a viable public market for our common stock and warrants.

Prior to this offering, there has been no public market for our common stock and warrants, and there can be no assurance that a regular trading market will develop and continue after this offering or that the market price of our common stock and warrants will not decline below the initial public offering price. If no trading market develops, then securities analysts may not initiate or maintain research coverage of us which would reduce interest in our common stock and warrants. As a result, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell. The initial public offering price will be determined through negotiations between us and the underwriters and may not be indicative of the market price of our common stock and warrants following this offering.

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Following this offering, the market value of the warrants is uncertain and there can be no assurance that the market value of the warrants will equal or exceed their public offering price.

The warrants offered in this offering do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of our common stock at a fixed price for a limited period of time. Specifically, commencing on the date of issuance, holders of the warrants may exercise their right to acquire the common stock and pay an exercise price of 125% of the public offering price of our common stock in this offering, prior to five years from the date of issuance, after which date any unexercised warrants will expire and have no further value. Moreover, following this offering, the market value of the warrants is uncertain and there can be no assurance that the market value of the warrants will equal or exceed their public offering price. There can be no assurance that the market price of the common stock will ever equal or exceed the exercise price of the warrants, and consequently, whether it will ever be profitable for holders of the warrants to exercise the warrants.

We may continue to generate losses and be unable to service our outstanding liabilities in the future.

We recently entered into a number of debt financing transactions. On July 29, 2015, we entered into a $250,000 loan with a bank with a one year term. On May 18, 2016, we entered into another $250,000 bank loan to replace the bank loan above with a nine-month term. In January and February 2016, we closed on a private placement of Convertible Bridge Notes in the aggregate principal amount of approximately $950,000. On March 29, 2016, we issued a short term promissory note to an unrelated party for $200,000. On September 12 and October 8, 2016, we consummated two bridge financings of convertible notes in the aggregate amount of $700,000 with 2-year term with maturity dates in September and October 2018, respectively. On October 12, 2016, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with a lending institution for a Senior Secured Redeemable Debenture (“Debenture”). We issued an initial Debenture in the amount of $1,500,000 and received cash proceeds of approximately $1,333,000 (net of debt issuance costs of approximately $167,000). We used part of the cash proceeds to repay the Bank Loan in the amount of approximately $123,000 on October 12, 2016. Under the terms of the Purchase Agreement, we were granted the options to issue additional Debentures up to a maximum amount of $3,000,000 if certain conditions are met including (i) no default occurs during the term of the Purchase Agreement, and (ii) approval by lending institution. The Debenture carries an interest rate of 18% per annum, is secured by our assets, and is personally guaranteed by two of our principal stockholders and officers. We are required to remit interest payments only for the months of November and December 2016, and monthly payments including principal and interest during the period between January 2017 and January 2018. We have the right to redeem the debenture in full prior to its maturity date. The Securities Purchase Agreement is subject to certain fees, including an advisory fee of $300,000 which is due in three installments, and has a term of 15 months from the closing date. As of December 31, 2016, there was approximately $1,435,000 outstanding balance on this Debenture, net of unamortized debt issuance costs of approximately $65,000. Management’s plans include this initial public offering to which this prospectus relates. There can be no assurance that we will be successful in raising additional capital under our initial public offering. If we are not able to raise additional capital that may be needed, it could have a material adverse effect on our business plans. Management believes that if we are not able to consummate this Offering, we would have to find other sources of financing to complete our business plans for the future. There can be no guarantee that we would obtain financing with terms that are acceptable to us, in which case, we may have to limit our expansion of new products or limit our working capital.

We have never paid dividends on our common stock.

We have never paid dividends on our common stock and do not presently intend to pay any dividends. Any future dividend payment will be at the discretion of our Board of Directors. We anticipate that any funds available for payment of dividends will be re-invested into the Company to further its business strategy.

Our quarterly operating results may vary widely.

Our quarterly revenue, cash flow and operating results have and may continue to fluctuate significantly in the future due to a number of factors, including the following:

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the size and timing of orders from customers, including but not limited to increase or decrease in purchase requests from customers;
change in the mix of products that we sell in the period;
seasonal fluctuations in customer demand for some of our products or services;
unanticipated costs incurred in the introduction of new products;
the amount of price protection, volume incentive rebates, discounts, market development funds, cooperative advertising payments and other concessions and discounts that we may need to provide to some of our customers due to competitive pricing pressures;
fluctuations in the adoption of our products in new markets;
announcement or introduction of products and technologies by competitors or related industries; and
cancellations, delays or contract amendments by governmental agency customers.

Our management, whose interests may not be aligned with yours, is able to control the vote on all matters requiring stockholder approval.

As of December 31, 2016, our directors, executive officers and founders collectively beneficially owned 2,044,443 shares, or 89.9%, of our total outstanding shares of common stock. Upon consummation of this offering, our directors, executive officers and founders will collectively beneficially own 518,518 shares, or approximately 24.0%, of our total outstanding shares of common stock. Accordingly, both prior and subsequent to consummation of this offering our directors and executive officers as a group may control the vote on all matters requiring stockholder approval, including the election of directors. The interests of our directors and executive officers may not be fully aligned with yours. Although there is no agreement among our directors and executive officers with respect to the voting of their shares, this concentration of ownership may delay, defer or even prevent a change in control of our company, and make transactions more difficult or impossible without the support of all or some of our directors and executive officers. These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give you the opportunity to realize a premium over the then-prevailing market price for shares of our common stock.

We are a “controlled company” within the meaning of the NASDAQ Listing Rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Upon the completion of this offering, our existing owners will continue to control a majority of our common stock. As a result, we are a “controlled company” within the meaning of the NASDAQ listing rules. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain NASDAQ corporate governance requirements, including, without limitation (i) the requirement that a majority of the board of directors consist of independent directors, (ii) the requirement that the compensation of our officers be determined or recommended to our board of directors by a compensation committee that is comprised solely of independent directors, and (iii) the requirement that director nominees be selected or recommended to the board of directors by a majority of independent directors or a nominating committee comprised solely of independent directors. We do not currently intend to rely on those exemptions afforded to a “controlled company.” Nonetheless, in the future, we could potentially seek to rely on certain of those exemptions afforded to a “controlled company,” and in such case, you would not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.

Market volatility may affect our stock price and the value of your investment.

Following this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. The market prices for securities of emerging technology companies have historically been highly volatile, and the market has from time to time experienced significant price and

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volume fluctuations that are unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including the following:

announcements of new products or technologies, commercial relationships or other events relating to us or our industry or our competitors;
failure of any of our key products to gain market acceptance;
variations in our quarterly operating results;
perceptions of the prospects for the markets in which we compete;
changes in general economic conditions;
changes in securities analysts’ estimates of our financial performance;
regulatory developments in the United States and foreign countries;
fluctuations in stock market prices and trading volumes of similar companies;
news about the markets in which we compete or regarding our competitors;
U.S. government spending levels, both generally and by our potential government customers;
terrorist acts or military action related to international conflicts, wars or otherwise;
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; and
additions or departures of key personnel.

In addition, the equity markets in general, and technology stocks in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of emerging technology companies have been particularly volatile. These broad market and industry factors may affect the market price of our common stock adversely, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation often has been instituted against that company. This type of litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources.

Future sales of our common stock may depress our stock price.

After completion of this offering, we will have 2,161,107 shares of common stock outstanding. The 650,000 shares sold in this offering, or 747,500 shares if the underwriters’ over-allotment is exercised in full, will be freely tradable without restriction or further registration under federal securities laws unless purchased by our “affiliates” as such term is used in Rule 144 of the Securities Act of 1933, as amended, or the Securities Act. After the lock-up agreements pertaining to this offering expire, up to an additional      shares of our common stock will be eligible for sale in the public market,      of which are held by executive officers, and directors and will be subject to volume limitations under Rule 144 of the Securities Act.

The above information assumes the effectiveness of the lock-up agreements under which current holders of our common stock and all of our officers and directors have agreed not to sell or otherwise dispose of their shares of common stock. Joseph Gunnar & Co., on behalf of the underwriters, may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In considering any request to release shares subject to a lock-up agreement, Joseph Gunnar & Co. will consider the facts and circumstances relating to a request at the time of that request.

If our existing common stockholders sell substantial amounts of common stock in the public market, or if the market perceives that these sales may occur, then the market price of our common stock may decline, including below the initial public offering price.

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You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.

We expect the initial public offering price of our common stock in this offering to be substantially higher than the net tangible book value per share of our outstanding common stock. Accordingly, investors purchasing shares of common stock in this offering will pay a price that substantially exceeds the value of our tangible assets after subtracting our liabilities. As a result, investors will:

incur immediate dilution of $6.97 per share, based on an assumed initial public offering price of $9.99 per share and $0.01 per warrant our expected public offering price range; and
contribute 100% of the total amount invested to date to fund our company based on the initial offering price to the public of $9.99 per share and $0.01 per warrant, but will own only 30.08% of the shares of common stock outstanding upon completion of this offering.

The provisions in our charter documents, as amended and restated, and under Delaware law could delay or discourage a takeover that stockholders may consider favorable.

Provisions in our amended and restated certificate of incorporation and bylaws, to be effective upon completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. Some of these provisions include:

a requirement that special meetings of stockholders be called only by the chairman of our board of directors, the chief executive officer, the president or by a majority of the total number of authorized directors;
advance notice requirements for stockholder proposals and nominations;
a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our certificate of incorporation; and
the authority of our board of directors to issue preferred stock on terms determined by our board of directors without stockholder approval.

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including to delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, we will incur additional costs associated with our public company reporting requirements. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We currently are evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

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We may allocate the net proceeds from this offering in ways in which you and other stockholders may not agree or which may not yield a return.

We intend to use the net proceeds of this offering for working capital and other general corporate purposes, including to finance our growth, enhance and improve our solutions, fund capital expenditures, or expand our existing business through investments in or acquisitions of other businesses, solutions or technology.

Our management will, however, have broad discretion in the application of the net proceeds from this offering and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not necessarily improve our operating results or enhance the market value of our common stock. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that lose value.

Our certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this prospectus contains forward-looking statements within the meaning of the federal securities laws. These statements may be found under “Prospectus Summary,” “Risk Factors,” Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Statements about our future plans and intentions, results, levels of activity, performance, goals, achievements or other future events constitute forward-looking statements. Wherever possible, words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” or “potential” or the negative or other variations of these words, or similar words or phrases, have been used to identify these forward-looking statements. These statements reflect management’s current beliefs and are based on information available to management as at the date of this prospectus.

Forward-looking statements involve significant risk, uncertainties and assumptions. Although the forward-looking statements contained in this prospectus are based upon what management believes to be reasonable assumptions as of the date of this prospectus, we cannot assure readers that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this prospectus and we assume no obligation to update or revise them to reflect new events or circumstances, except as required by law. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including:

announcements of new products or technologies, commercial relationships or other events relating to us or our industry or our competitors;
failure of any of our key products to gain market acceptance;
variations in our quarterly operating results;
perceptions of the prospects for the markets in which we compete;
changes in general economic conditions;
changes in securities analysts’ estimates of our financial performance;
regulatory developments in the United States and foreign countries;
fluctuations in stock market prices and trading volumes of similar companies;
news about the markets in which we compete or regarding our competitors;
terrorist acts or military action related to international conflicts, wars or otherwise;
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
additions or departures of key personnel; and
other factors that we discuss in this prospectus in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

These factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act which does not extend to initial public offerings. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

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This prospectus also contains statistical data, estimates and forecasts that are based on independent industry publications or other publicly available information, while other information is based on our internal sources. Although we believe that these third-party sources referred to in this prospectus are reliable, neither we nor the underwriters have independently verified the information provided by these third parties. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under “Risk Factors.”

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of the shares of common stock and warrants we are offering will be approximately $6,045,000, based upon the public offering price of $9.99 per share and $0.01 per warrant set forth on the cover page of this prospectus. If the underwriters fully exercise the over-allotment option, we estimate the net proceeds of the common stock and warrants we sell will be approximately $6,951,750. “Net proceeds” is what we expect to receive after paying the underwriting discount and other expenses of the offering.

A $1.00 increase (decrease) in the initial public offering price of $9.99 per share and $0.01 per warrant would increase (decrease) the net proceeds to us from this offering by approximately $604,500, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriter discounts and estimated offering expenses payable by us.

We intend to use the net proceeds of this offering to increase in production, for working capital and for other general corporate purposes, including, but not limited to, financing our growth, enhancing and improve our products and solutions, increase our customer base, marketing and sales infrastructure, automating and scaling our business processes, funding capital expenditures, and expanding our existing business through investments in or acquisitions of other businesses, solutions, or technologies. However, we do not have any commitments for any such investments or acquisitions at this time.

Until we use the net proceeds of the offering, we will invest the funds in short-term, investment grade, interest-bearing securities, or in savings accounts. Our management will have broad discretion in the application of the net proceeds to us from this offering and investors will be relying on the judgment of our management regarding the application of the proceeds.

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DIVIDEND POLICY

We have paid no dividends on our common stock since our inception. At the present time, we intend to retain earnings, if any, to finance the expansion of our business. The payment of dividends in the future will depend on our earnings and financial condition and on such other factors as the Board of Directors may consider appropriate.

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2016, on:

an actual basis, giving retroactive effect to a 1-for-2.7 stock split to be effected in             2017 (the “Reverse Stock Split”);
on a pro forma basis to give effect to (i) the automatic conversion of the Convertible Bridge Notes in the aggregate principal amount of approximately $1,650,000 and accrued interest of $88,667 into 216,637 shares of our common stock, (ii) the conversion of certain payables and purchases of future goods in the aggregate amount of $5,111,800 into 568,545 shares of our common stock, including 236,639 shares issued for future goods and the conversion of certain payable resulted in a loss of $331,575, and (iii) the effectiveness of the amendment and restatement of our certificate of incorporation in connection with the completion of this offering; and
a pro forma as adjusted basis, to give further effect to the sale of 650,000 shares of common stock in this offering at an assumed initial public offering price of $9.99 per share and $0.01 per warrant set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses; and
the cancellation of an aggregate of 1,318,518 shares (3,560,000 shares on a pre Reverse Stock Split basis) shares by Michael Faro and Lily Ju (on a pre Reverse Stock Split basis) immediately prior to the effectiveness of this offering for nominal consideration.

The unaudited pro forma and pro forma as adjusted information below is illustrative only, and cash and cash equivalents and short-term investments, total stockholders’ equity and total capitalization after this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Capital Stock” and our consolidated financial statements and related notes included elsewhere in this prospectus.

     
     December 31, 2016
     Actual   Pro Forma   Pro Forma
As Adjusted
Cash   $ 404,325     $ 404,325     $ 6,449,325  
Accounts payable and other accrued expenses     2,207,294              
Accrued interest on convertible debentures     88,667              
Note payable     200,000              
Convertible debentures     1,650,000              
Stockholders’ equity (deficit):
                          
Common Stock, $0.0001 par value, 10,000,000 shares authorized, 2,044,443 shares issued and outstanding, actual; 10,000,000 shares authorized, and 1,511,107 issued and outstanding pro forma and 2,161,107 shares issued and outstanding, pro forma as adjusted     204       151       216  
Additional paid-in capital     376,506       7,795,004       13,701,905  
Shares issued for future goods           (2,940,909 )      (2,940,909 ) 
Accumulated deficit     (3,873,288 )      (4,204,863 )      (4,204,863 ) 
Total stockholders’ (deficit) equity     (3,496,578 )      649,383       6,556,349  
Total capitalization   $ 649,383       649,383       6,556,349  

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $9.99 per share and $0.01 per warrant set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of common stock and additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $604,500, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

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DILUTION

Our net tangible book value on December 31, 2016 was approximately a $3.5 million deficit, or $(1.72) per share. “Net tangible book value” is total assets minus the sum of liabilities and intangible assets. “Net tangible book value per share” is net tangible book value divided by the total number of shares outstanding on December 31, 2016. After giving pro forma effect to the conversion of our outstanding Convertible Bridge Notes (including accrued interest) into 216,637 shares of common stock and certain payables into 568,545 shares of common stock immediately prior to the pricing of this offering (based on the assumed initial public offering price of $9.99 per share and $0.01 per warrant set forth on the cover page of this prospectus), our pro forma net tangible book value on December 31, 2016 was approximately $619,438, or $0.41 per share.

After giving effect to the sale by us of 650,000 shares of common stock and warrants to purchase 650,000 shares of common stock in this offering at an assumed public offering price of $9.99 per share and $0.01 per warrant set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2016 would have been $6,526,404 or $3.02 per share. This represents an immediate increase in pro forma net tangible book value of $2.61 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $6.97 per share to investors purchasing shares of common stock in this offering at the assumed public offering price.

The following table illustrates this dilution:

 
Assumed public offering price per share to investors   $ 9.99  
Assumed public offering price per warrant investors   $ 0.01  
Pro forma net tangible book value per share as of December 31, 2016   $ 0.41  
Increase in pro forma net tangible book value per share attributable to the offering   $ 2.61  
Pro forma as adjusted net tangible book value per share as of December 31, 2016 after the offering   $ 3.02  
Dilution per share to new investors in the offering   $ 6.97  

If the underwriters exercise in full their over-allotment option to purchase up to 97,500 additional shares of common stock and/or warrants to purchase up to an aggregate of 97,500 shares of our common stock solely to cover over-allotments, if any, from us in this offering, the pro forma as adjusted net tangible book value as of December 31, 2016 after giving effect to this offering would increase to $7,433,154 or $3.29 per share, and dilution per share to new investors in this offering would be $6.70 per share.

Each $1.00 increase or decrease in an assumed public offering price of $9.99 per share and $0.01 per warrant, the price set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by $604,500, or $0.28 per share, and would increase or decrease, as applicable, dilution per share to new investors in this offering by $0.72, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses. In addition, to the extent any outstanding options to purchase shares are exercised, new investors would experience further dilution. If the underwriters exercise their option to purchase additional shares from us in full, the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering would be $3.56 per share, and the dilution in the pro forma as adjusted net tangible book value per share of our common stock to new investors in this offering would be $7.43 per share.

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The following table presents, on a pro forma basis as of December 31, 2016, the differences between the existing stockholders and the new investors purchasing our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common stock, cash received from the exercise of stock options and the average price per share paid or to be paid to us at the public offering price of $9.99 per share and $0.01 per warrant, the prices set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses:

         
  Shares Purchased   Total Consideration   Average
Price Per
Share
     Number   Percent   Amount   Percent
Existing stockholders     1,511,107       69.92 %    $ 7,795,155       54.55 %    $ 5.16  
New investors     650,000       30.08 %      6,493,500       45.45 %    $ 9.99  
Total     2,161,107       100.00 %    $ 14,288,655       100.00 %    $ 6.61  

Assuming the underwriters’ option to purchase additional shares is exercised in full, sales in this offering will reduce the percentage of shares held by existing stockholders to 66.90% and will increase the number of shares held by our new investors to 747,500 shares, or 33.10%, assuming no purchases of our common stock by existing stockholders in this offering.

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SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the years ended June 30, 2016 and 2015 and the consolidated balance sheet data as of June 30, 2016 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the six months ended December 31, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2016 have been derived from our unaudited interim condensed financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the year ended June 30, 2014 and the consolidated balance sheet data as of June 30, 2014 are derived from our audited consolidated financial statements not included in this prospectus. . Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with “Capitalization,” “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

         
  Year Ended June 30,   Six Months Ended December 31,
     2016   2015   2014   2016   2015
           (unaudited)   (unaudited)
Consolidated Statements of Operations Data:
                                            
Net revenue   $ 3,977,992     $ 8,041402     $ 7,147,661     $ 3,657,363     $ 2,588,214  
Cost of goods sold     2,559,891       4,757,275       4,459,528       2,377,788       1,329,427  
Gross profit     1,418,101       3,284,127       2,688,133       1,279,575       1,258,787  
Operating expenses:
                                            
Selling expenses     1,500,115       1,678,231       1,647,213       1,054,356       802,280  
General and administrative expenses     2,126,698       1,796,933       1,717,701       1,333,475       972,274  
Total operating expenses     3,626,813       3,475,164       3,364,914       2,387,831       1,774,554  
Loss from operations     (2,208,712 )      (191,037 )      (676,781 )      (1,108,256 )      (515,767 ) 
Other expenses, net     (222,296 )      (107,736 )      (75,737 )      (334,186 )      (50,193 ) 
Net loss   $ (2,431,008 )    $ (298,773 )    $ (752,518 )    $ (1,442,442 )    $ (565,960 ) 
Net loss per share   $ (1.18 )    $ (0.10 )    $ (0.24 )    $ (0.71 )    $ (0.27 ) 
Weighted average common shares outstanding:     2,067,093       2,962,963       2,962,963       2,044,444       2,084,598  

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  As of
December 31,
  As of June 30,
     2016   2016   2015   2014
     (unaudited)      
Consolidated Balance Sheet Data:
                                   
Cash   $ 404,325     $ 46,052     $ 103,794     $ 114,649  
Accounts receivable, net     1,819,282       547,223       386,522       804,362  
Other receivable     71,612                    
Inventory, net     1,998,688       1,233,560       1,447,919       605,685  
Deposits with vendors     123,457       166,357       168,855       261,871  
Working (deficit) capital**     (774,126 )      (133,184 )      1,115,354       1,372,398  
Total assets     4,868,266       2,213,215       2,173,806       1,849,188  
Accounts payable     3,338,410       1,196,489       592,524       271,324  
Accrued expenses     382,918       435,006       42,973       59,430  
Customer advances     43,627       43,627       237,325        
Line of credit     87,402       91,299       90,287       89,667  
Bank loan           214,932              
Note payable     200,000       200,000              
Current portion of senior secured redeemable debenture, net of unamortized debt issuance costs     1,308,627                    
Convertible debentures     1,650,000       950,000              
Senior secured redeemable debenture, net of unamortized debt issuance costs, excluding current portion     125,971                    
Loans payable to stockholders, including accrued interest     1,227,889       1,125,251       715,768       663,692  
Total liabilities     8,364,844       4,267,351       1,707,504       1,084,113  
Total stockholders’ (deficit) equity     (3,496,578 )      (2,054,136 )      466,302       765,075  

** Working (deficit) capital is equal to current assets minus current liabilities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes many forward-looking statements. For cautions about relying on such forward-looking statements, please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

This management’s discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the six months ended December 31, 2016 and 2015 and our audited consolidated financial statements and accompanying notes for the years ended June 30, 2016 and 2015, which have been prepared in accordance with US generally accepted accounting principles, or US GAAP, appearing elsewhere in this prospectus. All dollar amounts are in U.S. dollars, US$ or $, unless stated otherwise.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus 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.

Overview

We design, manufacture and market consumer products, from drones to smart wearables and innovative mobile accessories for smartphone and camera users.

Our operations are substantially integrated. We start with an idea; we engage in the design process either in house or in outsourced facilities; we manufacture them in outsourced factories including those in China; and we distribute them both from third-party and in-house fulfillment centers and through major retail, e-commerce, and independent dealers throughout North America (and soon in Europe and Latin America).

COMPONENTS OF OPERATING RESULTS

We operate in one segment. Our chief operating decision-maker reviews our operating results on an aggregate basis and manages our operations as a single operating segment.

Key Trends and Factors That May Impact Our Performance

We believe that there are many factors that will continue to affect our ability to sustain and increase both revenue and profitability and impact the nature and amount of our expenditures, including:

Market acceptance of our products.  We compete in markets where the value of certain aspects of our products is still in the process of market acceptance. We believe that our future growth depends in part on the continued and increasing acceptance and realization of the value of our product offerings.
Technological change.  Our success depends in part on our ability to keep pace with technological changes and evolving industry standards in our service offerings and to successfully develop, launch, and drive demand for new and enhanced, innovative, high-quality solutions that meet or exceed customer needs. For example, we recently developed and introduced a line of drone products during the second half of the fiscal year 2016, which we expect to have higher margins than some of our other products.
Technology spending.  Our growth and results depend in part on general economic conditions and the pace and level of technology spending by potential customers to take their content digital.
New customers.  As part of our strategy, we expect to increase our marketing efforts and expenses to expand our customer base and awareness of our brand.

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Results of Operations

Comparison of Six Months ended December 31, 2016 to Six Months ended December 31, 2015 (unaudited)

The following table sets forth our consolidated statements of operations data as a percentage of net revenues for each of the periods indicated:

           
  Six Months Ended
December 31,
     2016   % to Revenue   2015   % to Revenue   Change in
$
  Change in
%
Net revenue   $ 3,657,363       100.00 %    $ 2,588,214       100.00 %    $ 1,069,149       41.31 % 
Cost of goods sold     2,377,788       65.01 %      1,329,427       51.36 %      1,048,361       78.86 % 
Gross profit     1,279,575       34.99 %      1,258,787       48.64 %      20,788       1.65 % 
Operating expenses
                                                     
Selling expenses     1,054,356       28.83 %      802,280       31.00 %      252,076       31.42 % 
General and administrative expenses     1,333,475       36.46 %      972,274       37.57 %      361,201       37.15 % 
Total operating expenses     2,387,831       65.29 %      1,774,554       68.56 %      613,277       34.56 % 
Loss from operations     (1,108,256 )      (30.30 )%      (515,767 )      (19.93 )%      (592,489 )      114.88 % 
Other expenses, net     (334,186 )      (9.14 )%      (50,193 )      (1.94 )%      (283,993 )      565.80 % 
Net loss   $ (1,442,442 )      (39.44 )%    $ (565,960 )      (21.87 )%      (876,482 )      154.87 % 

Net Revenue

Net revenue increased $1,069,149, or 41.31%, to $3,657,363 for the six months ended December 31, 2016 from $2,588,214 in the six months ended December 31, 2015. The increase in revenue was primarily due to increase in variety and demand of our drone products and other popular electronics items, combined with sales generated from expanded customer base in Canada, Europe, and United States. We had seven drone models available for sale during the six months ended December 31, 2016 compared to two models during the same period of prior year. Due to insufficient inventory on-hand, we were only able to partially meet the customers' demand.

Cost of Goods Sold

Cost of goods sold increased $1,048,361, or 78.86%, to $2,377,788 in the six months ended December 31, 2016 from $1,329,427 in the six months ended December 31, 2015. Costs of goods sold increased primarily as a result of the increase in the net revenue. During the six months ended December 31, 2016, cost of goods sold was 65.01% of net revenue, compared to $1,329,427, or 51.36% of net revenue in the six months ended December 31, 2015. Cost of sales percentage increased primarily due to the premium paid to rush the delivery and production of the products to meet the customers’ deadline to prepare for the holiday sales. As a result, our gross margin decreased to 34.99% for the six months ended December 31, 2016, from 48.64% for the six months ended December 31, 2015.

Selling Expenses

Selling expense increased $252,076, or 31.42%, to $1,054,356 in the six months ended December 31, 2016, from $802,280 in the six months ended December 31, 2015. The increase in selling expenses was primarily related to higher internet advertising expense incurred during the six months ended December 31, 2016 compared to the same period of 2015. Certain selling expenses including outbound shipping and handling and advertising expenses did not increase proportionally to the increase in revenue. As a result, percentage of selling expense to revenue decreased to 28.83% in the six months ended December 31, 2016 compared to 31% in the six months ended December 31, 2015.

General and Administrative Expenses

General and administrative expense increased $361,201, or 37.15%, to $1,333,475 in the six months ended December 31, 2016 from $972,274 in the six months ended December 31, 2015. The increase in

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general and administrative expenses was primarily due to the increase in accounting and reporting costs related to preparation and audit of our financial statements and increase in headcounts in our management and administration department.

Other Expense

Other expense increased $283,993 or 565.8%, to $334,186 in the six months ended December 31, 2016, from $50,193 in the six months ended December 31, 2015. Other income (expense) is comprised primarily of interest expense and foreign transaction expense arising from currency gains and losses in transactions with vendors and customers denominated in a foreign currency and other income received in the period.

Interest expense increased $220,485, or 320.24%, to $289,336 in the six months ended December 31, 2016, from $68,851 in the six months ended December 31, 2015. We incurred more interest expense as we had more outstanding debt balances throughout the six months ended December 31, 2016 compared to the same period of 2015. As of December 31, 2016, we had an aggregate outstanding debt balance of approximately $4.6 million on line of credit, bank loan, note payable, senior secured redeemable debenture, convertible debentures and loans payable to stockholders, compared to approximately $977,000 as of December 31, 2015. As a result, we incurred more interest expense during the six months ended December 31, 2016 compared to the same period of December 31, 2015.

Foreign currency loss increased $63,795, or 355.56%, to $45,853 in the six months ended December 31, 2016, from foreign currency gain of $17,942 in the six months ended December 31, 2015. The increase in foreign currency loss was primarily due to the volatility impacts in the currency market became larger as we had more sales generated from customers located outside the U.S. during the six months ended December 31, 2016 compared to the same period of 2015 and payments of such sales were settled in foreign currency.

Net Loss

Net loss for the six months ended December 31, 2016 was $1,442,442, compared to net loss of $565,960 during the six months ended December 31, 2015, due to the factors discussed above.

Comparison of Years ended June 30, 2016 to June 30, 2015

The following table sets forth our consolidated statements of operations data as a percentage of net revenues for each of the periods indicated:

           
  Years Ended
June 30,
     2016   % to Revenue   2015   % to Revenue   Change in
$
  Change in
%
Net revenue   $ 3,977,992       100.00 %    $ 8,041,402       100.00 %    $ (4,063,410 )      (50.53 )% 
Cost of goods sold     2,559,891       64.35 %      4,757,275       59.16 %      (2,197,384 )      (46.19 )% 
Gross profit     1,418,101       35.65 %      3,284,127       40.84 %      (1,866,026 )      (56.82 )% 
Operating expenses
                                                     
Selling expenses     1,500,115       37.71 %      1,678,231       20.87 %      (178,116 )      (10.61 )% 
General and administrative expenses     2,126,698       53.46 %      1,796,933       22.35 %      329,765       18.35 % 
Total operating expenses     3,626,813       91.17 %      3,475,164       43.22 %      151,649       4.36 % 
Loss from operations     (2,208,712 )      (55.52 )%      (191,037 )      (2.38 )%      (2,017,675 )      (1,056.17 )% 
Other expenses, net     (222,296 )      (5.59 )%      (107,736 )      (1.34 )%      (114,560 )      106.33 % 
Net loss   $ (2,431,008 )      (61.11 )%    $ (298,773 )      (3.72 )%      (2,132,235 )      (713.66 )% 

Net Revenues

Net revenues decreased $4,063,410, or 50.53%, to $3,977,992 for the year ended June 30, 2016 from $8,041,402 in the year ended June 30, 2015. The significant decrease in net revenues was primarily due to lack of funding and liquidity that limited our purchase power and contributed to lower sales. In particular, due to the fact that cost associated with purchasing and marketing drone products is significantly higher than other products, we had to temporarily reduce our purchase of other products to fund the production of drones for delivery near end of

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fiscal 2016. The limits on our purchasing power also resulted in insufficient electronic products inventory supplies to meet the demands of two of our non-drone customers, which caused a decrease in our sales by approximately $3.45 million compared to the prior year. Lastly, the cost of this offering and associated expenses further limited our purchasing power which contributed to lower sales.

Cost of Goods Sold

Cost of goods sold decreased $2,197,384, or 46.19%, to $2,559,891in in the year ended June 30, 2016 from $4,757,275 in the year ended June 30, 2015. During the year ended June 30, 2016, we had cost of goods sold of $2,559,891, or 64.35%, of net revenue, compared to $4,757,275, or 59.16% of net revenue in the year ended June 30, 2015. Costs of goods sold decreased as a result of the decrease in the net revenue. Cost of sales percentage increased primarily due to lower gross margin for certain aging products which was partially offset by cost savings from negotiating lower manufacturing costs and lower sales volume requirements for non-drone products. As a result, our gross margin decreased to 35.65% for the year ended June 30, 2016, from 40.84% for the year ended June 30, 2015. We are working on shifting our focus to higher margin product categories such as drones.

Selling Expenses

Selling expense decreased $178,116, or 10.61%, to $1,500,115 in the year ended June 30, 2016, from $1,678,231 in the year ended June 30, 2015. The decrease in selling expenses was primarily related to lower commission paid to our sales agents and lower shipping and handling costs as a result of lower sales volume. In addition, advertising expenses decreased to approximately $270,000 during the year ended June 30, 2016 from approximately $290,000 during the year ended June 30, 2015. Certain selling expenses including shipping and handling and advertising expenses did not decrease proportionally to the decrease in revenue. As a result, percentage of selling expense to revenue increased to 37.71% in the year ended June 30, 2016 compared to 20.87% in the year ended June 30, 2015.

General and Administrative Expenses

General and administrative expense increased $329,765, or 18.35%, to $2,126,698 in the year ended June 30, 2016 from $1,796,933 in the year ended June 30, 2015. The increase in general and administrative expenses was primarily due to the general increase in office-related costs (such as cost related to maintaining additional warehouses and office leases), higher professional fees related to this offering as a result of engaging additional accounting professionals, more headcount and higher liability insurance as a result of increase in number of products.

Other Expense

Other expense increased $114,560, or 106.33%, to $222,296 in the year ended June 30, 2016, from $107,736 in the year ended June 30, 2015. Other income (expense) is comprised primarily of interest expense and foreign transaction expense arising from currency gains and losses in transactions with vendors and customers denominated in a foreign currency and other income received in the period.

Interest expense increased $120,326, or 143.02%, to $204,456 in the year ended June 30, 2016, from $84,130 in the year ended June 30, 2015. We incurred higher interest expense as we had more outstanding debt balances throughout the year ended June 30, 2016. We entered into a bank loan agreement, a note payable agreement and convertible debentures during the year ended June 30, 2016. In addition, we increased our borrowings from our stockholders in order to fund our operations. As a result, we incurred higher interest expenses during the year ended June 30, 2016 compared to the year ended June 30, 2015.

Net Loss

Net loss for the year ended June 30, 2016 was $2,431,008, compared to net loss of $298,773 in the year ended June 30, 2015, due to the factors discussed above.

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Key Performance Indicators of Our Business

We monitor a variety of key performance indicators to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. These key performance indicators include the following:

       
  Year Ended
June 30,
  Six Months Ended
December 31,
  2016   2015   2016   2015
Key Performance Indicators:
                                   
Net revenue   $ 3,977,992     $ 8,041,402     $ 3,657,363     $ 2,588,214  
Gross margin     35.65 %      40.84 %      34.99 %      48.64 % 
Loss from operations     (2,208,712 )      (191,037 )    $ (1,073,867 )    $ (515,767 ) 

Revenue.  We monitor our revenue to assess the acceptance of our products by our end-user customers and growth in the markets we serve.

Gross margin.  We monitor our gross margin to assess the impact on our current and forecasted financial results from any changes to the pricing and mix of products we are selling to our customers. New products generally offer higher gross margin and will decline when the products start to age. Our products generate higher gross margin when they are in the introduction and growth stages. As the product life cycle reaches the maturity or decline stages, the gross margin begins to decline.

Loss from operations.  We monitor our loss from operations to assess how effectively we are conducting our operations as well as controlling our operating expenses, which are primarily driven by shipping expense, advertising expense and salaries and wages.

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QUARTERLY TRENDS

Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, some of which are outside of our control. Our historical results should not be considered a reliable indicator of our future results of operations.

Our platform revenue is seasonal based significantly on the timing and size of events that our customers deliver through our solution. The second quarter of our fiscal year has historically been the quarter in which we recognize our highest revenue, however, we expect this seasonality to change as we add new customers products, and spread our distribution to other countries. Selling expense and general and administrative expense, or SG&A collectively, are the highest in this quarter, primarily as a result of additional employees needed to support increased revenue. We expect the dollar amount of our SG&A to increase as we add personnel, increase our spending on sales and marketing and growing our business. However, we expect SG&A to decline as a percentage of net revenue over time.

Costs associated with introducing product to market, selection and identification of manufacturers have been fairly stable for most quarters presented. We expect the dollar amount of these costs to increase as we continue to add personnel to enhance and grow our business and product lines, however we expect such costs to decline as a percentage of net revenue over time.

Liquidity and Capital Resources

As of December 31, 2016, we had cash of approximately $404,000 and working deficit of approximately $774,000. The following table sets forth the primary sources and uses of cash for the six months ended December 31, 2016 and 2015 and the years ended June 30, 2016 and 2015:

       
  Year Ended
June 30,
  Six Months Ended
December 31,
     2016   2015   2016   2015
Net cash (used in) provided by operating activities   $ (1,717,791 )    $ (11,475 )    $ (1,456,295 )    $ 52,907  
Net cash used in investing activities     (2,145 )            (78 )      (2,144 ) 
Net cash provided by financing activities     1,662,194       620       1,814,646       46,354  
Cash at beginning of period     103,794       114,649       46,052       103,794  
Cash at end of period     46,052       103,794       404,325       200,911  

Operating Activities

Net cash used in operating activities was $1,456,295 for the six months ended December 31, 2016 compared to net cash provided by operating activities of $52,907 for the six months ended December 31, 2015. During the six months ended December 31, 2016, net cash used in operating activities of $1,456,295 consisted primarily of net loss of approximately $1,442,000, increase in accounts receivable of approximately $1,519,000 and increase in inventories of approximately $665,000, which was partially offset by the increase in accounts payable of approximately $2,143,000. During the six months ended December 31, 2015, net cash provided by operating activities of $52,907 consisted primarily of increase in accounts payable of approximately $1,955,000 and increase in accrued expenses of approximately $352,000 which was partially offset by net loss of approximately $566,000, increase in accounts receivable of approximately $1,177,000, increase in inventories of approximately $294,000.

Net cash used in operating activities was $1,717,791 for the year ended June 30, 2016, compared to $11,475 for the year ended June 30, 2015. During the year ended June 30, 2016, net cash used in operating activities of $1,717,791 consisted primarily of the net loss of approximately $2,431,000, which was partially offset by an increase in accounts payable of approximately $554,000, and an increase in accrued expense of approximately $392,000.

During the year ended June 30, 2015, net cash used in operating activities of $11,475 consisted of primarily of the net loss of approximately $299,000, an increase in inventory of approximately $1,003,000,

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which was partially offset by a decrease in accounts receivable of approximately $418,000, an increase in accounts payable of $321,000 and an increase in customer advances of approximately $237,000.

Investing Activities

Net cash used in investing activities was $78, which was cost incurred related to our domain name, during the six months ended December 31, 2016 compared to $2,144, which was related to the purchase of property and equipment, during the six months ended December 31, 2015.

Net cash used in investing activities was $2,145, which was related to the purchase of property and equipment, during the year ended June 30, 2016 compared to $0 during the year ended June 30, 2015.

We anticipate making capital expenditures during the year ended June 30, 2017 of approximately $520,000 to $650,000 for an automated merchandise fulfillment system and expect to finance that system through the proceeds received from this offering.

Financing Activities

Net cash provided by financing activities was $1,814,646 for the six months ended December 31, 2016, compared to $46,354 for the six months ended December 31, 2015. During the six months ended December 31, 2016, net cash provided by financing activities of $1,814,646 consisted primarily of cash proceeds from issuance of senior secured redeemable debenture of approximately $1.2 million, net of debt issuance costs of approximately $167,000 and direct payoff of the bank loan in the amount of approximately $123,000 through the debenture proceeds, issuance of two additional convertible debentures in an aggregate amount of $700,000, and net cash proceeds from loans received from stockholders of approximately $52,000 (proceeds of $95,000 less repayments of $43,000), which was partially offset by the net repayments of bank loan of approximately $92,000. In addition, we made payments of approximately $52,000 for deferred offering costs during the six months ended December 31, 2016. During the six months ended December 31, 2015, net cash provided by financing activities of $46,354 consisted primarily of net cash proceeds from bank loan of approximately $138,000, which was partially offset by payments of approximately $88,000 for deferred offering costs, and net repayments for loans payable to stockholders of approximately $3,800.

Net cash provided by financing activities was $1,662,194 for the year ended June 30, 2016, compared to $620 for the year ended June 30, 2015. During the year ended June 30, 2016, net cash provided by financing activities of $1,662,194 consisted primarily of net cash proceeds from the bank loan of approximately $215,000 (proceeds of approximately $438,000 less repayments of $223,000), cash proceeds from issuance of convertible debentures of $950,000 and cash proceeds from issuance of note payable of $200,000, net cash proceeds from loans received from stockholders of approximately $334,000 (proceeds of $345,000 less repayments of approximately $11,000). During the year ended June 30, 2016, we drew approximately $18,100 and repaid $17,200, on our line of credit. Furthermore, we made payments of approximately $37,500 for deferred offering costs.

Net cash provided by financing activities was $620 for the year ended June 30, 2015, which represented the net cash proceeds from the line of credit.

Working (Deficit) Capital

We had a working deficit of approximately $774,000 and $133,000 as of December 31, 2016 and June 30, 2016, respectively, and working capital of approximately $1,115,000 as of June 30, 2015.

Our cash is used to finance the purchases of inventory, deposits to vendors, and operating expenses. During the year ended June 30, 2016, we obtained short term and long term debt financings including net cash proceeds received from a note payable in the amount of $200,000, bank loan in the amount of approximately $215,000 (proceeds of $438,000 less repayments of approximately $223,000), convertible debentures in the amount of $950,000, and stockholder loans in the amount of approximately $334,000 (proceeds of $345,000 less repayments of approximately $11,000) during the year ended June 30, 2016. These debts had outstanding balances due as of June 30, 2016. During the six months ended December 31, 2016, we issued two additional convertible debentures in an aggregate amount of $700,000 and obtained net stockholder loan of $52,000 (proceeds of $95,000 less repayments of $43,000). On October 12, 2016, we entered into a Securities Purchase Agreement with a lending institution for a Senior Secured Redeemable Debenture. We issued an

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initial Debenture in the amount of $1,500,000 and received cash proceeds of approximately $1,333,000 (net of debt issuance costs of approximately $167,000). We used part of the proceeds from the convertible debentures and Senior Secured Redeemable Debenture to repay outstanding bank loan balance and used the remaining proceeds to finance our inventory purchases and other working capital needs. As of December 31, 2016, we had an aggregate outstanding debt balance of approximately $4.6 million on line of credit, bank loan, note payable, Senior Secured Redeemable Debenture, convertible debentures and loans payable to stockholders.

We had an outstanding line of credit balance of $87,402, $91,299 and $90,287 as of December 31, 2016, June 30, 2016 and June 30, 2015, respectively.

Future Liquidity and Cash Flows

We incurred operating losses and had negative operating cash flows and may continue to generate negative cash flows as the Company implements its business plan for the future. There can be no assurance that the our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern as the report of our independent registered public accounting firm with respect to our financial statements for the years ended June 30, 2016 and 2015 indicates that our recurring losses and negative cash flows from operations and the need for additional capital raise substantial doubt about our ability to continue as a going concern. During the years ended June 30, 2016 and 2015 and the six months ended December 31, 2016, we had a net loss of approximately $2,431,000, $299,000, and $1,442,000, respectively and net cash used in operations of approximately $1,718,000, $11,000, and $1,456,000, respectively, and working deficit amounted to approximately $774,000 and $133,000 as of December 31, 2016 and June 30, 2016, respectively. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

On July 29, 2015, we entered into a loan with a bank for principal of $250,000, with a one year term. On May 18, 2016, we entered into another bank loan to replace the bank loan above for a principal of $250,000 with a nine-month term. In January and February 2016, we consummated the closing of a bridge financing of convertible notes in the aggregate principal amount of approximately $950,000 in a private placement. On March 29, 2016, we issued a short term promissory note to an unrelated party for $200,000. On September 12 and October 8, 2016, we consummated two bridge financings of convertible notes in the aggregate amount of $700,000 with 2-year term with maturity dates in September and October 2018, respectively. On October 12, 2016, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with a lending institution (the “Lender”) for a Senior Secured Redeemable Debenture (“Debenture”). We issued an initial Debenture in the amount of $1,500,000 and received cash proceeds of approximately $1,333,000 (net of debt issuance costs of approximately $167,000). We used part of the cash proceeds to repay the Bank Loan in the amount of approximately $123,000 on October 12, 2016. Under the terms of the Purchase Agreement, we were granted the options to issue additional Debentures up to a maximum amount of $3,000,000 if certain conditions are met including (i) no default occurs during the term of the Purchase Agreement, and (ii) approval by lending institution. The Debenture carries an interest rate of 18% per annum, is secured by our assets, and is personally guaranteed by two of our principal stockholders and officers. We are required to remit interest payments only for the months of November and December 2016, and monthly payments including principal and interest during the period between January 2017 and January 2018. We have the right to redeem the debenture in full prior to its maturity date. The Purchase Agreement is subject to certain fees, including an advisory fee of $300,000 which is due in three installments, and has a term of 15 months from the closing date. Upon consummation of the initial public offering, the Lender has agreed to waive the requirement in the Purchase Agreement pursuant to which we would be required to repay the Debenture from the proceeds of the initial public offering in the event that the initial public offering constitutes a change of control (as defined in the Purchase Agreement). In addition, the Lender has further agreed that our failure to not repay the Debenture upon consummation of the initial public offering will not constitute a default or Event of Default (as set forth in the Purchase Agreement) with respect to any of the transaction documents entered into in connection with the Purchase Agreement. As of December 31, 2016, there was approximately $1,435,000 outstanding balance on this Debenture, net of unamortized debt issuance costs of approximately $65,000. Management’s plans include the current public offering of up to approximately $20 million worth of our common stock. There can be no assurance that we will be successful to raise additional capital under this offering. If we are not able to raise additional capital that may be needed, it could have a

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material adverse effect on our future business plans. Management believes that if we are not able to consummate this offering, we would have to find other sources of financing to complete our business plans for the future. There can be no guarantee that we would obtain financing with terms that are acceptable to us, in which case, we may have to limit our expansion of new products or limit our working capital.

Effects of Inflation

Inflation generally affects us by increasing costs of raw materials, labor and equipment. We do not believe that inflation had any material effect on our results of operations in the periods presented in our financial statements.

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of December 31, 2016.

Financial Instruments

Our financial instruments are comprised of cash and cash equivalents, accounts receivable, deposits, accounts payable, shareholder loans, lines of credit and bank loans.

Fair value of financial instruments

Fair value of a financial instrument is defined as the amount for which the instrument could be exchanged in a current transaction between willing parties. The estimated fair value of our financial instruments approximates their carrying value due to the short maturity term of these financial instruments and/or the current interest rates payable in relation to current market conditions.

Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument might change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we might enter into exchange rate hedging arrangements to manage the risks described below.

Foreign exchange risk

We are exposed to foreign exchange risk as a result of transactions in currencies other than our functional currency, the United States dollar. The majority of our revenues are transacted in U.S. dollars, and the majority of our expenses are transacted in U.S. dollars. We do not use derivative instruments to hedge against foreign exchange risk.

Interest rate risk

We are exposed to interest rate risk on our invested cash and cash equivalents. The interest rates on these instruments are based on bank rates and therefore are subject to change with the market. We do not use derivative financial instruments to reduce our interest rate risk.

Credit risk

We sell our products to a variety of customers under various payment terms and therefore are exposed to credit risk. We have adopted policies and procedures designed to limit this risk and expect to seek additional protection in the form of entering into third party guarantees of international payment risks following the closing of this Offering. The maximum exposure to credit risk at the reporting date is the carrying value of receivables. As necessary, we establish an allowance for doubtful accounts that is estimated based on a variety of factors, including accounts receivable aging, historical experience and other currently available information, including current economic conditions. We had allowance for doubtful accounts of $17,000, $0 and $0 as of December 31, 2016, June 30, 2016 and 2015, respectively.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent

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assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most complex and subjective estimates include: accounts receivable valuation and collectability; inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including property and equipment and intangible assets, income taxes, including uncertain tax positions and recoverability of deferred income taxes. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates.

On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted.

We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Foreign Currency

The functional currency of our Hong Kong and Shenzhen, China subsidiaries are the U.S. dollar (“US$”), as the subsidiaries’ operations are a direct and integral component of the parent company’s operations.

Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are converted into US$ at the rate on the date of the transaction and included in the accompanying consolidated results of operations as incurred.

Revenue recognition

We sell our products to retailers, including those with a large internet presence, and also partner with large electronics distributors, in addition to selling directly to customers on their own website.

Revenues are recognized when the following criteria are met: there is persuasive evidence that a sales agreement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured.

The delivery criteria for sales to retailers is considered to be met when the applicable customer takes title to the goods and assumes the risks and rewards of ownership, which is generally on the date of shipment, at the shipping point. Delivery for sales related to distributors is considered to be satisfied on the date the distributors receive the shipment at the destination, which is when title passes.

Internet sales, including sales which take place through third party on-line retailers, are recognized on the date the goods are shipped, at which point title passes to the customer, and all other criteria for revenue recognition are met.

Sales Returns and Allowances

We analyze our historical sales returns experience and records allowances when considered necessary. Estimates of sales returns are based principally on historical experience and management’s expectations of trends in our business and industry. Certain of our e-commerce customers assume the risk of returns for the goods shipped to their customers. We record a provision for estimated returns as a reduction of revenues in the same period that related revenues are recorded. Use of management estimates is required in connection with establishing and maintaining an allowance for expected returns. If actual returns differ from the estimates, additional allowances could be required. We recorded approximately $0, $0, $232,000 and $0 of estimated potential sales returns during the years ended June 30, 2016, 2015, and during the six months ended December 31, 2016 and 2015, respectively.

Accounts Receivable

Accounts Receivable represents balances due from customers at invoice amounts. We continuously monitor accounts receivable balances to identify potential credit and collection risks and establishes an allowance for doubtful accounts when considered necessary. Estimate of credit and collection losses are based on a variety of factors including accounts receivable aging, historical experience and other currently available

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information, including current economic conditions. We had allowance for doubtful accounts of $17,000, $0 and $0 as of December 31, 2016, June 30, 2016 and 2015, respectively.

Inventory

Inventory consists of finished goods and is stated at the lower of cost (weighted average cost method), or market. We periodically evaluate inventories for potential excess, slow-moving or obsolescence goods and recorded reserves when considered necessary. Write-downs to lower of cost or market are considered permanent adjustments to the cost basis of goods when it is determined that their net realizable value is less than the carrying amount. As of December 31, 2016, and June 30, 2016 and 2015, we had a reserve for slow moving inventories in the amount of approximately $48,000, $148,000 and $161,000, respectively.

Taxes

In August 2014, we were reorganized into a C Corporation. Prior to the reorganization, we elected to be taxed as a partnership and the income or loss was required to be reported by each respective member on their separate income tax returns. Therefore, no provision for income taxes has been provided in the accompanying consolidated financial statements for periods prior to August 15, 2014 (the date on which we elected to be taxed as a C Corporation).

We account for income taxes under the asset and liability method. We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations.

In addition, our management performs an evaluation of all uncertain income tax positions taken or expected to be taken in the course of preparing our income tax returns to determine whether the income tax positions meet a “more likely than not” standard of being sustained under examination by the applicable taxing authorizes. This evaluation is required to be performed for all open tax years, as defined by the various statutes of limitations, for U.S. (federal and state), Hong Kong and PRC purposes.

Recently Issued Accounting Standards

In October 2016, the FASB issued Accounting Standards Update 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This update removes the current exception in US GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update addresses whether to present certain specific cash flow items as operating, investing or financing activities. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact of the future adoption of this standard on its consolidated Statements of Cash Flows.

In June 2016, the FASB issued Accounting Standard Update No. 2016-13 (ASU 2016-13) “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets held. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of 2019. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued Accounting Standard Update No. 2016-09 (ASU 2016-09) “Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of

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employee share-based payment accounting, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance will become effective for us beginning in the first quarter of 2017. Early adoption is permitted. We plan to adopt the guidance in the first quarter of 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-02 “Leases (Topic 842)”. This update amends leasing accounting requirements. The most significant change will result in the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current guidance. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, which for us is July 1, 2019, the first day of our 2019 fiscal year. Upon adoption, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted, and a number of optional practical expedients may be elected to simplify the impact of adoption. The Company is currently evaluating the impact of adopting this guidance.

On July 22, 2015, the FASB issued ASU 2015-11, “Inventory, Simplifying the Measurement of Inventory”, a new standard that requires entities to measure most inventory” at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method. The new standard will be effective for fiscal years beginning after December 15, 2016, and interim periods in fiscal years beginning after December 15, 2016. The Company is in the process of evaluating the impact of adoption on its condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” (ASU 2014-09) which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods for public business entities beginning after December 15, 2017, including interim periods within that reporting period, and for non-public entities annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The new standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

Other recently issued accounting standards are not expected to have a material effect on the Company’s condensed consolidated financial statements.

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BUSINESS

Overview

We design, manufacture and market consumer products — from recreational and commercial drones to smart wearables and innovative mobile accessories for smartphone and camera users. We try to identify opportunities where users can benefit from new technology, identify the gaps and areas that can be simplified and enhanced, and develop these opportunities into products. Based on our unit sales to date, we believe that more than one and a half million people worldwide have used our products.

Mota Group has two principal divisions:

MOTA — Develops, manufactures and markets recreational and commercial drones and other unmanned aerial systems, also known as unmanned aircraft systems or UASs. We have two lines of drones: recreational (consumer) drones (under our JETJAT brand) and UAS platforms for commercial applications (under our Pro Live and GIGA brands). Many of our drones are capable of delivering real-time video, automatic control, tracking and geographic data, which increases flexibility in planning and execution.
TAMO — Designs, manufactures and markets stylish wearables, including smartwear, virtual reality products, portable power products and mobile accessories.

Our operations are fully integrated — we start with an idea; we engage in the design process either in-house or in conjunction with third parties; we manufacture our products in outsourced factories, most of which are in China; and we distribute them both from third-party and in-house fulfillment centers and through major retail, e-commerce, and independent dealers throughout North America (and soon Europe and Latin America). Our integrated development process allows us to focus on product quality, cost, timeliness, marketing and customers for the entire commercialization cycle. Since our founding in 2003, we have streamlined our operations to enable us to rapidly deliver advanced, innovative solutions that are also easy to use and fun.

Our Solution

Our technology solutions incorporate identifying drone and related technologies that historically been available to “early adopters” and simplifying them so that the technology is usable by general consumers and businesses. This expands upon our core capabilities and, in the field of UAS, we intend to provide cost-effective consumer drones and commercial UAS that were previously available only at an extremely high cost of acquisition and operation.

Products

Product Lines

We have a broad range of products, including four major product lines:

Drones and UASs.
º Ultra-small recreational drones with highly advanced features.
º Autonomous commercial drones for industrial and civil uses that bring artificial intelligence and robotics to small unmanned commercial aircraft.
- Virtual Reality Products and Accessories
- Optimized for Drones and can operate to livestream drone’s point of view
Smartwear and Electronics
º Smartwatches and other devices to make smartphones more useful.
º Activity trackers and fitness products.
º A patent-pending wireless charger that lets people use a GoPro camera longer and recharge it anywhere.
º Household automation, such as automatic pet feeders.

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Mobile Accessories
º Attractive accessories that are needed on daily basis, such as portable power products, smartphone battery cases, cables and similar products in the latest consumer styles.
Toys
º Toys for almost all ages.
º Remote, robotic, wooden, skill, and educational toys for toddlers to teens.

We have two patents, four provisional patents, and 14 filed patent applications relating to drones, consumer electronics, and toys.

Our Existing Drone Products

Recreational Drones.  In our recreational drone line, our JETJAT Nano series drones bring the thrill of flight to almost everyone anywhere. Our JETJAT® ULTRATM drone, for example, which has a built-in streaming camera yet fits in the palm of your hand, can create indelible family memories, much like the first Kodak cameras, with the ability to record personal events from vantage points never before possible and stream them to the phone and internet. It provides novel capabilities for our NanoTM Series, such as live streaming video to a smartphone and throw-to-fly, along with ease-of-use features such as one-touch take-off that are designed to elicit consumer interest in our drones, some of which are smaller than a golf ball. Current retail prices for our recreational drones range from $40 to $130.

Professional and Commercial Drones.  Our highly versatile commercial drones are adaptable for specialized applications including construction, agriculture, energy, cinematography, real-estate marketing, sports training, warehouse, movie production, aerospace and defense, and many others. Current retail prices for our commercial drones range from $200 to $1,000.

Markets

Drones.  In March 2016, Goldman Sachs estimated the worldwide total addressable market for non-military drones at $38 billion by 2020. In May 2016, NPD Group’s Retail Tracking Service reported that U.S. drone sales grew 224% from April 2015 to April 2016. In May 2015, the Consumer Technology Association, a trade association for the U.S. consumer electronics industry, predicted sales of non-military drones in the U.S. will top 2.8 million units in 2016, a 149 percent increase over last year. They also estimated that drone flights will reach one million per day within the next 20 years, unless there are regulatory impediments.

Smartwear and Toys.  Our other large, high-growth markets include smartwear and toys. Gartner forecasts sales of wearable electronic devices at $28.7 billion in 2016. IDC estimates worldwide shipments of wearables at 110 million by the end of 2016, doubling to 237 million units by 2020.

The U.S. toy industry had best year in a decade in 2015. NPD Group estimated growth at 7% over 2014 and the total U.S. toy industry at $24 billion in 2015. In May 2016, NPD Group’s Retail Tracking Service reported that U.S. drone sales grew 224% from April of 2015 to April of 2016.

Marketing

We sell our products through multiple prominent retailers, including Amazon, Best Buy, Staples, Office Depot, Groupon, Buy.com, ShopHQ, Overstock, TigerDirect, LivingSocial, Woot, Sears, GovX, Office Depot, Fry’s, Bluestem Companies, BedBath and Beyond, Michael’s, Jet.com, HSN, Virgin MegaStores, Target, Nordstrom, Quill, Amazon UK, and Walmart. We also partner with large electronics distributors such as Ingram Micro, Synnex Corp. GBMicro, Emitak, and D&H Distributing, both domestically and internationally. Some of these distributors also provide local technical support for our products. Our focus is to leverage our distribution network to identify and market added value specialty and consumer electronics products.

Manufacturing

While we make most product decisions in our United States locations, we currently outsource a significant majority of our manufacturing to manufacturers located in China. Our operations team includes

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managers based in San Jose, California, Shenzhen, China, and Hong Kong who coordinate with our manufacturers’ engineering, manufacturing and quality control personnel to develop the requisite test and manufacturing processes and oversee manufacturing activities and worldwide shipping. We believe that using outsourced manufacturing enables greater scale and flexibility at far lower cost than establishing our own manufacturing facilities. We periodically evaluate the need and advisability of adding manufacturers to support our operations.

Recent Performance

Beginning in 2015, we have focused on the rapidly growing markets for consumer drones and commercial unmanned aircraft systems. These products have higher margins than our legacy products, but also have higher upfront development costs.

From 2015 to date in 2017, cash constraints have limited our transition to a focus on drones and related development programs. Although we were able to successfully introduce our first suite of drone products in the second half of fiscal 2016 and first half of 2017, and were able to expand our customer relationships in both domestic and international markets, including selling our products in Asia, Australia and New Zealand, UAE, Europe and Canada, we have been unable to take full advantage of the market opportunity primarily due to insufficient inventory and lack of marketing funds. We believe that the proceeds of this offering will enable our growth plans by accelerating our ability to create innovative drone features, as well as increase our selling channels, allowing us to expand into worldwide markets such as Canada, Mexico and Europe. The proceeds will provide us with additional funds for licensing, export and import, warehousing, product certifications, packaging, marketing and local support for our products in each region. For instance, retailers in Mexico require all radio frequency-operated devices, including drones, to be governmentally certified before the product can be sold to the mass market. Such certification, especially for the range of products we offer, is a significant expense. In addition, attending local tradeshows and funding marketing and promotional budgets with European, Canadian and Mexican distributors is an essential cost of business in penetrating and gaining market share in these markets As our growth strategy is implemented, we will phase out our low-margin, low cost products that are volume-based, such as plastic phone cases, low priced-toys, and most of our portable power accessories. Our legacy non-drone products that we intend to continue to sell are our high volume selling toys such as our train series (Holiday Train Set with Smoke and Sound). We believe that we have demonstrated our growth potential by our ability, even though cash-constrained, to continually introduce new products to market while keeping their ease-of-use and “fun” aspects as core attributes, along with low cost.

According to Business Finance News, Goldman Sachs has valued the drone industry at $1.5 billion for 2015, and expects it to reach $5 billion by 2017.

Drone Features Under Development

We expect to introduce a number of drone features in 2017. One of the most innovative products in our development pipeline is DRONE HANDSTM which will allow drones to automatically take certain pre-programmed actions in-flight, such as picking and moving objects. We believe addition of robotic features to generally available drones, in particular, has the ability to revolutionize the UAS market by introducing AI and robotic features in UAS operations for fully autonomous operation.

Future Products

Consumer electronic is an always-changing industry. We expect to expand our products to include additional types of drones, and products that can be used in conjunction with drones or in other markets that directly or indirectly involve drone and related technologies. For these products, we expect to develop features such as augmented reality, virtual reality, and robotics that will be among the features with the greatest demand. We expect to work on acquisitions or partnerships with companies in these areas in 2017 and 2018. Although we do not have any agreements for acquisitions or partnerships in place, we anticipate using a portion of the proceeds from this offering for such purposes. We do not yet know, however, how much will be needed for such purposes.

Large drones for precision agriculture can lift several kilograms of chemicals, and apply it to precise areas with less exposure and risk to the operator from contact with the chemical. This is an industry that is currently evolving, and we intend to enter into this segment as the market grows. They can also cover a large

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area with lesser cost than manned aircraft like cropdusting helicopters and airplanes. Such drones can retail for around $30,000, according to Goldman Sachs. The Yamaha RMAX, a helicopter drone capable of applying a 20 kg. (44 lb.) payload for agriculture, can cost around $85,000, according to the Association for Unmanned Vehicle Systems International.

In terms of channel distribution, we have worked, and will continue to pursue, from relatively small number of e-commerce platforms to establish major distribution channels such as Ingram Micro, SYNNEX, DandH and others in key markets worldwide. This strategy will enable us to increase demand for our products and deepens brand loyalty due to localized sales and support.

We have introduced stylish mobile accessories, including patented power solutions, one of which enables longer shoot times for GoPro camera users, and have created innovative, well designed wearables that enhance the usability of smart phones. Our technology-based household products include specialized LED lights and an automatic pet feeder.

Growth Strategy

We intend to grow our business, both domestically and internationally, by continuing to innovate in the growing markets for drones/UAS and consumer electronics. Key components of this strategy include the following:

Market our drones to new categories of customers, including the mass market, the real-estate industry, military, law enforcement and other commercial users.  We intend to increase the penetration of our UAS products within the U.S. military, the militaries of allied nations and non-military U.S. customers, as well as law enforcement and first responder agencies. We believe our UAS platforms are uniquely capable of addressing the needs of these target markets and that the demand for recreational, commercial and civil UAS deployments will continue to grow rapidly.
Deliver innovative solutions.  Innovation is the primary driver of our growth. We plan to continue our efforts to enable us to satisfy our customers through better, more capable products and services, in response to, and in anticipation of, their needs, and continue to deliver innovative new products that address needs within and outside of our current target markets. Our principal focus will be on innovative, high margin, products.
Increase our marketing efforts in UAS and hobby drones.  We strive to utilize industry experience we have accumulated to increase our presence in the drone market by investing in customer satisfaction, branding, product quality and innovation.
Foster our entrepreneurial culture and continue to attract, develop and retain highly-skilled personnel.  We have created a corporate culture that encourages ideas, innovation, collaboration and an entrepreneurial spirit, which helps to attract highly skilled professionals. We intend to further nurture this culture to promote the development of innovative, highly technical solutions. A core component of our culture is the demonstration of trust and integrity in all of our interactions, contributing to a positive work environment and engendering loyalty among our employees and customers.
Innovative use of both third-party and in-house fulfillment centers and carriers to reach end-user customers faster.  We utilize both third-party and in-house fulfillment centers in strategic locations in California and other states, and in the UK, Mexico, Canada, and Hong Kong. We typically airfreight smaller electronic accessories and drones/UAS, while accessories and packaging are typically shipped via ocean freighter from our manufacturers in China to our fulfillment centers, where the products are packaged for retail sale. Managers monitor inventory levels to ensure the optimum balance. This strategy allows us to reach customers faster, reduce shipping costs, improve shipment accuracy, reduce custom levies, customize products for local markets, and reduce inventory levels. It also allows us to improve flexibility, allowing us to act faster, and reduce labor costs while enhancing customer satisfaction.

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Expanding distribution worldwide.  We have worked over the years, and will continue to pursue, increasing our distribution base from a relatively small number of e-commerce platforms to major distribution channels such as Ingram Micro, SYNNEX, D&H and others in key markets worldwide. This strategy will enable us to increase demand for our products and deepens brand loyalty due to localized sales and support.
Preserve our agility and flexibility.  Our organization is designed from ground-up to be adaptable. This adaptability has allowed us to conform as customer demands change over time. We are able to respond rapidly to evolving markets and deliver new products quickly, efficiently and affordably. We believe that this ability helps us to strengthen our relationships with customers and be able to identify market needs faster and better. We intend to maintain our agility, adaptability, and flexibility, which we believe to be important sources of differentiation when we compete against larger and better-funded competitors. See “Business — Competitive Advantages” below.

Risks Affecting Our Business

Below is a summary of some of the principal risks that affect our business:

We operate in rapidly evolving markets, which makes it difficult to plan product strategy;
We face competition from other companies, many of which have substantially greater resources that we do;
Failure to obtain any necessary regulatory approvals or new restrictions imposed on drone users by either domestic or international agencies may inhibit sales;
Our growth strategy for our drones and consumer electronics products is dependent on expanding into new customer categories and gaining broad consumer recognition and acceptance, and we may not be able to successfully implement this strategy;
If critical components of our products that we currently purchase from a small number of suppliers, or raw materials used to manufacture our products, become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products, which could damage our business; and
If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.

Focus on Unmanned Aerial Systems

We have recently shifted our primary focus to consumer drones and commercial unmanned aviation systems. MOTA has initially created two lines of drones: consumer drones (under our JETJAT brand) and UAS platforms for commercial applications (under our Pro Live and GIGA brands). Many of our drones are capable of delivering real-time video, tracking and geographic data, which increases flexibility in planning and execution. We have a large customer base, from individual consumers to large corporations and government entities.

Current events and the need for cost-effective aerial surveillance in business, commercial and government agencies have significantly increased UAS utilization, resulting in greater demand for not only new systems, but also for spares, repairs and refurbishment. We also believe that the military’s growing need for aerial platforms will be a long-term driver of demand.

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The MOTA UAS Differentiators

We believe that our drones offer highly competitive functionality. JETJAT Nano addresses the large and growing new market of consumer drone ownership. Our MOTA GIGA and Pro Live models have advanced operational capabilities to commercial UAS, including but not limited to quality aerial photography, videography, GPS navigation, one click take-off/landing, and “auto-follow” features.

Coverage of All Markets: Mass Market/High-End/Hobby/Commercial.  Our products cover high end markets and the mass market. The JETJAT family of drones was released in November 2015, and approximately 12,000 units were sold through June 30, 2016. Between July 1, 2016 and December 31, 2016, we sold approximately 28,500 drones, an approximate increase of 230%. It currently consists of four drones from very basic to hobbyist and they have an average of 4.5 Amazon star rating. It has received enthusiastic reviews from major news media such as WIRED magazine and coverage on Fox News, Bloomberg, CNBC, BBC, NBC, CCTV, and other major news media. JETJAT makes drone ownership broadly affordable and practical. Consumers can now buy multiple drones as inexpensive toys with a particularly high “play value”, both for fun as well as the ability to record photos and videos from vantage points previously unavailable to drones JETJAT’s size. We began selling commercial sign drones in June 2016.
Advanced Proprietary Technology for Commercial UAS.  We believe that our DRONE HANDSTM Flight Management System technology, which is under development will help make our high-end drones one of the most advanced in the industry. We anticipate that development may take up to approximately twelve months. It is designed to enhance our drones’ capabilities by enabling a fully programmable robotic function for autonomous flight and operation, such as package delivery. In effect it makes a drone an airborne robot and will be eyes, ears and hands in the sky.
Existing Interest by Major Retailers.  MOTA has received numerous requests for product placement in major retailers, both online and brick-and-mortar. This existing relationship allows quick product distribution across the channels.
Distinguishing Design.  MOTA products enjoy high brand recognition, distinguishable by our products’ sleek design and innovative capabilities, deepening customer engagement and loyalty.

Commercial/Military UAS

Our commercial UAS line of products includes the following models and features:

[GRAPHIC MISSING]

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Recreational UAS

Our recreational UAS line of products includes the following models and features:

[GRAPHIC MISSING]

(Drones not shown to scale)

We believe that the underlying demand for drones and UAS will continue to grow as existing users continue to deploy them and as new customers adopt aerial technology. The ability of drones/UAS to provide real-time visual information over long distances and in inaccessible areas in a relatively quick and efficient manner creates significant potential for a very wide array of applications. Domestically, we expect the commercial UAS market to develop, driven by businesses and by government agencies for applications such as border surveillance, police and fire detection of heat and infrared, and infrastructure monitoring such as for agriculture and energy, and real estate marketing. We expect individual consumer drones to generate more sales on unit basis than the commercial UAS market.

We have performed multiple commercial demonstrations to date and, based on the interest of major retailers in stocking our drones and our own comprehensive competitive analysis, we believe they significantly outperform the competition.

Consumer Electronics

In addition to our UAS offerings, MOTA has engineered solutions designed to fulfill consumer electronics needs for easy-to-use devices with high functionality. These include a unique wireless portable charger for GoPro cameras, a full line of stylish smartphone battery cases, power banks and card chargers, smart wearable, and other products. Our current consumer products includes the following:

Drones, UAS
Smart wearables and watches
Activity trackers
Household automation including automatic pet feeders
Mobile accessories
 
Toys for most ages including robotics, vehicles, remote, and learning toys
Pet accessories
Portable power and wireless chargers
Cables, adapters, and similar products
Other consumer electronics

Sales and Marketing

Our marketing strategy is to increase awareness of our brand among key target market segments and to associate our brand with innovation, flexibility, agility and the ability to deliver new technology solutions. Our reputation for innovation is a key component of our brand and has been acknowledged through a variety of awards and recognized in numerous articles in domestic and international publications. We have 15 registered and pending trademark applications for our brands including MOTA, TAMO, JET JAT, PICO, DRONE

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HANDS, WHERE DRONES LIVE, MR ELEPHANT, SIN, MYWARMPET, RAPIDFAST, WORLD'S FRIENDLIEST DRONE, DRONE HANDS, REMOTE HANDS, NANO, UNORTH, PRO LIVE, ULTRA, and GIGA.

The majority of our marketing is performed in-house by our staff members who are familiar with our company’s culture and products, using freelancers to handle peaks in activity and some specialized project functions. Our marketing team is proficient in a wide variety of digital tools and resources for advertising, design, direct response, events, product and lifestyle, photography, press and market analyst relations, printing and production of collateral, manuals, packaging and marketing output, social media influencer engagement and promotion, videography, web content and writing, for ourselves and our partners.

Our marketing programs are focused on engaging consumers by exposing them to compelling MOTA content that leads them to imagine using our products. We believe this approach enhances our brands while demonstrating the performance and versatility and fun nature of our products. By achieving a presence in consumers’ minds, we accelerate and initiate the buying decision. Our marketing and advertising efforts span a wide range of consumer segments and demographics worldwide.

We also integrate MOTA users’ own content, whenever appropriate, into advertising campaigns across various platforms, including television commercials, print, online, billboards and other advertising, and at tradeshows. Consumers seeing other consumers having fun with a product is a powerful marketing tool. In-store channel marketing includes POP displays and other in-store marketing to capture users’ interest as they enter the store.

We sell our products both through distributors and direct sales. We make that determination depending on the size and location of the customers, payment risk factor, order size, and other factors. We sometimes maintain direct relationships with the customers while the actual fulfillment is done by a distributor.

We are focused on building close relationships with our retailers and distributors, educating our partners’ sales forces about our products’ value and selling points, working with them to merchandise our products in a compelling manner in-store, as well as providing consumers with informative and convenient ecommerce experiences at retail partner websites.

Retail Sales.  We also sell to retailers and stores in North America, Europe, South America, and Asia through our retail and e-commerce channels. Due to the unique method of our sales process, we can drop-ship, thereby eliminating inventory at remote locations. This has greatly increased demand for our products since customers’ orders can still be fulfilled while they are out of stock by having us fulfill the product for them.

Sales Agents.  We also utilize a network of location-based independent manufacturer representatives to sell our products to both independent and big box retailers. Our representatives provide highly personalized service to these retailers, including assisting with product mix planning, channel marketing and in-store merchandising. We also have an internal, regionally focused sales team that provides additional outreach as well as a secondary level of service to both the manufacturer representatives and the independent specialty retailers. Independent specialty retailers generally carry our higher-end products, targeting their core customers who we believe tend to be early adopters of new technologies.

Big box retailers.  We sell to large retailers with a national presence, including Amazon, Best Buy, Staples, Office Depot, Groupon, and Wal-Mart. We support these retailers with a dedicated and experienced sales management team. We believe this enables us to build close relationships with these retailers and to reduce channel conflict. These retailers generally carry a varied subset of our products targeting their particular end-user customers. This helps us maintain in-store product differentiation between sales channels and protects our brand image in our core specialty retail markets.

Mid-market retailers.  We sell to retailers with a large regional or national presence, often focused on specific verticals such as consumer electronics, sporting goods, military, hunting and fishing and motor sports. We refer to these retailers as our “mid-market” channel, which includes Fry’s Electronics and more. We sell directly to these retailers through our independent sales agents assigned to particular accounts and regions. Mid-market retailers generally carry a smaller subset of our products targeted toward their end-user customers.

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E-commerce.  We sell our full line of products directly to consumers around the world through our online store at mota.com and other websites. We drive consumers to our website through online and offline advertising, as well as marketing promotions carried out at tradeshows and sponsored events. Customers may also order our products over the phone.

Distributors

In addition to direct sale to large retailers, we also sell our products through major distribution channels such as Ingram Micro, D&H, and SYNNEX/New Age Electronics. We also have presence in international markets through various direct and indirect distributors such as Kondor Europe, Tama Japan, Ingram Micro Europe, New Zealand, Australia, and Asia.

The sales team targets large entities with the potential for domestic and international enterprise adoption of our solutions. As of now, our sales team is understaffed and there is the possibility some opportunities are being missed. We plan to use the proceeds to hire additional sales staff. We believe that our dealers are well suited to address large numbers of worldwide customers.

In the second half of fiscal year 2016 and after CES Asia in Shanghai in May 2016, we discovered significant interest in our products by international retailers and distributors in Asia and Europe and therefore we started the engagement process for such large distribution networks around the world including but not limited to Ingram Micro Europe, Aquipa, Kondor, Emitak Tama Japan, Amazon China, JD, SYNNEX Canada and Japan, and Amazon Europe. We expect that the proceeds of this offering will enable us to significantly expand our international channels. Distributors generally enter into non-exclusive agreements with us for the purchase and redistribution of our products in specific territories.

We have dedicated sales personnel focused on providing a high level of service to these distributors, including assisting with product mix planning, channel marketing and in-store merchandising, development of marketing materials, order assistance and educating the distributors’ sales personnel about MOTA products.

We believe pricing strategy is critical to sustain our brand. The majority of our innovative products, including our drones and wearables, are marketed using minimum advertised prices (MAP). Customers that want to carry our MAP products go through an authorization process.

We participate in co-sponsored events with our customers and industry trade shows, such as the Consumer Electronics Show and Toy Fair in North America, CES Asia in China, and IFA in Europe. We participate in these events and trade shows in order to develop new relationships with potential customers and maintain relationships with our existing customers. We have participated with major brands such as WIRED/Conde Nast in pop-up stores, with PepsiCo/Mountain Dew in customer marketing communications, and with over-the-air tech radio shows for product promotion. We also intend to fund cooperative advertising campaigns with our customers, develop custom products promotions and cooperate with our retailers to use point-of-sale and mail-in rebate promotions to increase sales of our products. We also intend to utilize sales circulars to obtain regional and national exposure for our products and our brands. We believe that these marketing efforts will help generate additional shelf space and visibility for our products at major retailers, promote retail traffic and sales of our products, and enhance our goodwill with these retailers.

Manufacturing and Operations

We pursue a common manufacturing strategy across our product lines, focusing on rapid prototyping, supply chain management, final assembly, quality systems and testing, and worldwide logistics and shipping. Using concurrent engineering techniques within an integrated product team structure, we rapidly prototype design concepts and products to produce products at reduced cost and optimize our designs for manufacturing requirements, mission capabilities and customer specifications. Within this framework, we develop our products with feedback and input from manufacturing, supply chain management, key suppliers, logistics personnel and customers. We rapidly incorporate this feedback and input into the design before tooling is finalized and full-rate production begins. As a result, we believe that we have significantly reduced the time required to move a product from design phase to full-rate production deliveries with high reliability, quality and yields, and that this is a significant competitive advantage for us.

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We outsource certain production activities, such as the fabrication of structures and the manufacture of subassemblies, to qualified suppliers with whom we have built long-term relationships. This outsourcing enables us to focus on quality and marketing of our products, ensuring high levels of quality and reliability. We believe that our highly efficient supply chain is a significant strength of our manufacturing strategy. We have forged strong relationships with our key suppliers that we believe will allow us to continue to grow our manufacturing capabilities and execute our growth plans. We continue to expand upon our suppliers’ expertise to improve our existing products and develop new solutions. We rely on both single and multiple suppliers for certain components and subassemblies. See “Risk Factors — If critical components of our products that we currently purchase from a small number of suppliers or raw materials used to manufacture our products become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products, which could damage our business.”

While we make most product decisions in our United States locations, we currently outsource a significant majority of our manufacturing to manufacturers located in China. Our operations team includes managers based in San Jose, California, Shenzhen, China, and Hong Kong who coordinate with our manufacturers’ engineering, manufacturing and quality control personnel to develop the requisite test and manufacturing processes and oversee manufacturing activities and worldwide shipping. We believe that using outsourced manufacturing enables greater scale and flexibility at far lower cost than establishing our own manufacturing facilities. We periodically evaluate the need and advisability of adding manufacturers to support our operations.

We work with both third-party and in-house fulfillment centers in California, Nevada, Arizona, UK, Canada, and Hong Kong. These facilities are either full-service centers (both light assembly and warehouse/fulfillment) or warehouse/fulfillment-only centers. Smaller electronic accessories and drones/UAS are typically air freighted while accessories and packaging are typically shipped via ocean freighter from our manufacturers in China to these fulfillment centers, where the products are packaged for retail sale. This postponement strategy allows us to reduce shipping costs, reduce custom levies, customize products for local languages and improve inventory flexibility.

Competition

Our industry is characterized by intense competition, supply shortages or oversupply, rapid technological change, evolving industry standards, declining average selling prices and rapid product obsolescence.

We believe that the principal competitive factors in the markets for our products and services include customer loyalty, “coolness” and “buzz,” product performance, features, acquisition cost, and lifetime operating cost, including maintenance and support, ease of use, integration with existing equipment, quality, reliability, customer support, brand and reputation.

The market for drones/UAS is evolving rapidly and subject to changing technologies, shifting customer needs and expectations and the potential introduction of new products. We believe that a number of established domestic and international defense contractors have developed or are developing drones/UAS that have and will continue to compete directly with our products. These competitors may have significantly more financial and other resources than us. Our current principal drone/small UAS competitors include 3DR, DJI, Parrot, Yuneec, and potentially GoPro, some of which have longer operating history and greater name recognition, may have substantially greater financial, technical, marketing and other resources. As a result, these competitors may be able to better absorb price declines, ensure more stable supply, adapt more quickly to new or emerging technologies or devote greater resources to the promotion and sale of their products than us. Ultimately, this may lead to a decrease in our sales and market share and have a material adverse effect on our business, financial condition and results of operations.

We do not view large UAS manufacturers such as AAI Corporation, AeroVironment, General Atomics, Northrop Grumman Corporation, and The Boeing Company as direct competitors because they are weapons and extended-flight surveillance platforms, tend to be much higher priced, and are not hand launched and locally controlled. We cannot be certain that these platforms may not be direct competitors in the future.

In our consumer electronics markets, we expect to face competition from existing or future competitors that design and market similar or alternative products that may be less costly and/or provide additional

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features. If a manufacturer of consumer electronics products develops products with similar features, our revenues would decline, which would result in a material adverse effect on or business.

Competitive Advantages

Mota’s greatest asset is its employees. We hire very selectively and nurture employees’ talents to achieve high levels of retention. This creates an atmosphere where our employees can focus on customer service.

Our business is flexible and we are able to adapt to rapid changes in consumer preferences quickly. We have a large customer base that uses the products that we sell on daily basis, and, unlike some of our competitors, we focus on the general direction of industry and adapt to it. Because of our customer base, the variety of our products that they use and our flexible inventory maintenance model, we are able to quickly change the type and variety of products we sell to take advantage of situations that our less nimble competitors would be unable to deal with. Since our customers are used to using a variety of the products that we sell, it is easy for them to see themselves buying a new product from us. In addition, because we order only a limited amount of product at any time, we are able to switch manufacturers quickly without interrupting our delivery time to customers. Our products have been featured on television shows such as Fox and Friends and on the Hallmark channel. Owning our fulfillment centers while also utilizing third-party and distribution. Our strategic business model, utilizing cost direct, and third-party distribution centers, allows us to respond rapidly to market opportunities and changes in our supply chain, shipping and other costs, and other conditions. It also allows coverage for customers of all sizes, specifically, we tend to ship to the small-medium sized customers via third party distribution and large ones through direct distribution.

Warranties

Because the design and manufacturing process for our products can be highly complex, it is possible that our products may contain defects or are otherwise not compatible with end uses. In accordance with industry practice, we generally provide a limited warranty that our products are in compliance with our specifications existing at the time of delivery. Under our general terms and conditions of sale, liability for certain failures of products during a stated warranty period is usually limited to repair or replacement of defective items or return of, or a credit with respect to, amounts paid for such items. Under certain circumstances, we may provide more extensive limited warranty coverage than that provided under our general terms and conditions. Some of our products, especially in our toy lines, cover only “defective replacement.”

Seasonality

Historically, we have experienced the highest levels of revenue in the fourth calendar quarter of the year, coinciding with the holiday shopping season in the United States and Europe. Accordingly, we have historically introduced our newest generation of product offerings and demand generation such as advertising just prior to this peak season. Given the significant seasonality of our sales, timely and effective product introductions and forecasting for this season are critical to our operations.

Backlog

Given the always-changing nature of the consumer electronics market, customers are reluctant to enter into long-term, fixed-price contracts. Accordingly, new order volumes for our products do, and are expected to continue to, fluctuate significantly. We typically forecast the orders with major customers and accept orders with acknowledgment that the terms may be adjusted to reflect market conditions at the date of shipment. For these reasons, we do not believe that our order backlog as of any particular date is a reliable indicator of actual sales for any succeeding period.

Intellectual Property

Intellectual property is an important aspect of our business, and our policy is to seek protection for our intellectual property when appropriate.

Our trademarks, including “MOTA”, are an important component of the value of our business. We have two patents, four provisional patents, and 14 filed patent applications relating to drones, consumer electronics, and toys. We cannot be certain that our patent applications will be issued or that any issued patents will

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provide us with any competitive advantage or will not be challenged by third parties. Our issued U.S. patents will expire between 2026 and 2030. We continually review our developments efforts to assess the existence and patentability of new intellectual property.

In addition to these protections, we generally control access to and use of our proprietary and other confidential information through the use of internal and external controls, including contractual nondisclosure agreements with employees, contract manufacturers, distributors, freelancers and others. Despite these protections, we may be unable to prevent third parties from using our intellectual property without our authorization, breaching any such nondisclosure agreements with us, or independently developing products that are similar to ours, particularly in those countries where the laws do not protect our proprietary and intellectual property rights as fully as in the North America and Europe.

Research and Development

We have not made major material expenditures on research and development activities relating to the development of new products. However, we realize that to compete in this industry, we must continue to offer technologically advanced products. To develop a product, we generally identify the components that need to be integrated in the product, then solicit specific manufacturers of such components, and ultimately arrange for assembly and final configuration of the product. Sometimes such coordination can be made from the final assembly point. This method has proven to be a considerable reduction in cost for us since we would not need to consistently maintain and fund an independent research and development unit, however, we may decide to have our own research and development facility in the future if it is determined to be beneficial for us. We believe our relationship with our contract manufacturers and suppliers allows us to enhance and expand our product offerings with existing and new technologies that such third parties develop internally and avoid the costs associated with an in-house research and development team. Our efforts are directed at the evaluation of new products and enhancements to existing products. We monitor market and industry trends to understand and identify new technologies and plan for new product offerings.

Regulation

Our products are designed to meet or exceeds regulatory standards in United States, Canada, and many other countries, including those regulated by Federal Communications Commission, American Standard of Toy Safety, Consumer Product Safety Commission, and others. As we expand to other countries, we intend to continue complying with appropriate regulatory standards.

For drones/UAS products, while our operations are not necessarily impacted by direct governmental regulation, users of our drone/UAS products are experiencing an evolving regulatory environment. Regulations promulgated by the Federal Aviation Administration for drone use in United States airspace currently do not affect any of our JETJAT consumer (toy/hobby) drones and we do not foresee that they will. On the commercial side, the extent and impact of these regulations cannot fully be assessed at the current time, but we believe commercial drone operators and entities using drones will consider them a routine cost of doing business as they do now for commercial aircraft operations. While currently the only regulation by FAA is on the actual customer side (and not on the seller or manufacturer), there can be no assurance that regulations in addition to those described below will not be considered by the relevant aviation authorities, product safety regulators or environmental protection agencies. We intend to fully abide by the regulations in U.S. and other jurisdictions. We currently work toward informing consumers the best way to fly drones in safe and compliant manner via a Fly Safely! educational campaign with free downloadable resources for consumers and drone operators. We believe this outreach will help further increase our market presence and contribute to our brand being perceived as the drone industry leader.

United States Regulation of Unmanned Aircraft

Federal Regulation

Effective December 21, 2015, owners of an unmanned aircraft weighing more than 250 grams (8.8 oz.) and less than 55 pounds are required to register with the Federal Aviation Administration’s unmanned aircraft system online registry before the drone’s first operation. The owner must be 13 years of age or older (although if the owner is less than 13 years of age, a person 13 years of age or older may register the small unmanned aircraft) and a U.S. citizen or legal permanent resident. UAS weighing more than 55 pounds cannot

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use this registration process and must register using the FAA’s full “Aircraft Registry” process, or if they intend to fly their unmanned aircraft outside of the United States, which under Presidential Proclamation 5928, includes the territorial sea of the United States, and consequently its territorial airspace, extending to twelve nautical miles from the baselines of the United States determined in accordance with international law.

People who previously operated their UAS must register by February 19, 2016. Owners who do not register may face civil and criminal penalties.

Under the Special Rule for Model Aircraft, recreational UAS must be operated in accordance with several requirements, including a community-based set of safety guidelines and within the programming of a nationwide community-based organization such as the Academy of Model Aeronautics (AMA).

On June 21, 2016, the Federal Aviation Administration announced Part 107 of the Federal Aviation Regulations for non-recreational drone operations. Effective as of August 2016, Part 107 sets clear standards and requirements for non-recreational UAS operations. It is designed to take the place of a time-consuming case-by-case exemption process for all non-recreational operations. That process, known as a Section 333 exemption, required a prospective non-recreational drone operator to petition the FAA for permission to operate. At the time of the Part 107 announcement, there was a backlog of several thousand Section 333 petitions awaiting FAA review. Part 107 will eliminate the petition process except for a limited number of applications.

Part 107 defines small UAS as “an unmanned aircraft weighing less than 55 pounds with equipment necessary for the safe and efficient operation of that aircraft.” It requires the person flying a drone for non-recreational operations to be at least 16 years old and have a remote pilot certificate with a small UAS rating, or be directly supervised by someone with such a certificate. To qualify for a remote pilot certificate, an individual must either pass an initial aeronautical knowledge test at an FAA-approved knowledge testing center or have an existing non-student Part 61 pilot certificate. The TSA will conduct a security background check of all remote pilot applications prior to issuance of a certificate. An FAA airworthiness certification for the small UAS is not required but the remote pilot will have to perform a preflight visual and operational check of the small UAS to ensure that safety-pertinent systems are functioning property. This includes checking the communications link between the control station and the UAS. The rule limits small UAS to daylight and civil twilight operations with appropriate collision lighting, confined areas of operation, and visual-line-of-sight operations. It includes a waiver mechanism to allow individual operations to deviate from most of the operational restrictions of the rule if the FAA finds that the proposed operation can safely be conducted under the terms of a certificate of waiver.

The announcement of Part 107 was heralded by drone manufacturers and others as unlocking a wide field of drone innovation and commercial use, especially in realizing the potential of UAS to make airborne tasks safer, easier, and less expensive. Examples of such tasks include image and data gathering; inspection of infrastructure, manufacturing, and industrial processes; sensing crop data and/or applying agricultural chemicals; real estate; police, fire and first-responder actions; assisting in disaster relief, and more.

State and Municipal Regulation

According to the National Conference of State Legislatures, in 2015, 45 states considered 168 bills related to drones. Common issues addressed in the legislation include defining what a UAS, or drone is, how they can be used by law enforcement or other state agencies, how they can be used by the general public and regulations for their use in hunting game.

Of these, twenty states — Arkansas, California, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Michigan, Mississippi, Nevada, New Hampshire, North Carolina, North Dakota, Oregon, Tennessee, Texas, Utah, Virginia and West Virginia — passed 26 pieces of legislation. Five other states — Alaska, Georgia, New Mexico, Pennsylvania and Rhode Island — adopted resolutions related to drones. Georgia’s resolution established a House study committee on the use of drones and New Mexico adopted memorials in the house and senate requiring a study on protecting wildlife from drones. Pennsylvania’s resolution directs the Joint State Government Commission to conduct a study on the use of UAS by state and local agencies and Rhode Island’s resolution created a legislative commission to study and review regulation of UAS. Additionally,

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Virginia’s governor signed an executive order establishing a commission on unmanned systems. Florida and Kentucky have pre-filed bills for the 2016 legislative session.

International Regulation of Unmanned Aircraft by the International Civil Aviation Organization (ICAO)

Legislation related to the use of UAS outside of the United States is currently being revised or drawn up, generally in view of the recommendations of the ICAO. In relevant part, Article 8 of the Convention on International Civil Aviation, signed at Chicago on December 7, 1944 and amended by the ICAO Assembly (Doc 7300) (the “Chicago Convention”) stipulates that: “No aircraft capable of being flown without a pilot shall be flown without a pilot over the territory of a contracting State without special authorization by that State and in accordance with the terms of such authorization. Each contracting State undertakes to insure that the flight of such aircraft without a pilot in regions open to civil aircraft shall be so controlled as to obviate danger to civil aircraft.” Article 8 also details conditions for operating a “pilotless” aircraft over the territory of a contracting state, which is understood to include UAS.

Assembly Resolution A36-13, Appendix G, Certificates of airworthiness, certificates of competency and licenses of flight crews (clause 2) of the ICAO also notes that participating countries shall recognize the validity of certificates and licenses issued by other participating countries when international standards for certain categories of aircraft or classes of airmen have not yet been developed. The ICAO has noted that, while it is developing Standards and Recommended Practices (“SARPs”) for UAS, participating countries are encouraged to develop national regulations that will facilitate mutual recognition of certificates for unmanned aircraft, thereby providing the means to authorize flight over their territories, including landings and take-offs by new types and categories of aircraft. The ICAO also believes that an update to Assembly Resolution A36-13 may be necessary to include mutual recognition of licenses of remote operators and other members of the remote crew.

ICOA believes that development of the complete regulatory framework for UAS will be a lengthy effort, lasting many years. As individual subjects and technologies reach maturity, ICOA expects that the pertinent SARPs will be adopted by participating countries. It is envisioned that this will be an evolutionary process, with SARPs being added gradually. Non-binding guidance material is expected to be provided in advance of the SARPs for use by participating countries that face UAS operations in the near term. ICOA is recommending close adherence to the guidance material to facilitate later adoption of SARPs and create harmonization across national and regional boundaries during the development phase.

Employees

As of December 31, 2016, we had 28 full time employees. None of our employees is represented by a union or is party to a collective bargaining agreement, and we have not experienced any work stoppages. We believe we have good relations with our employees.

Properties

Our principal executive offices are located in San Jose, California. We lease the following properties:

     
Description   Location   Expiration of Lease   Use of Property
Lease   60 South Market St, Suite 1100,
San Jose, CA 95113
  February 2021   Business office
Lease   1670 Las Plumas Ave,
San Jose, CA 95133
  December 2018   Warehouse
Lease   1600 E Desert Inn Rd, #280,
Las Vegas, NV 89169
  Monthly   Business office
Lease   Shenzhen Chuangzhi Space
118 Sha Jing Street Road, #607
Bao An District, Shenzhen
People’s Republic of China
  June 2017   Business office

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Legal Proceedings

There is no material litigation currently pending or threatened against us or, to our knowledge, any of our officers or directors in their capacity as such.

Emerging Growth Company Status

We qualify as an “emerging growth company” as defined in the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. In addition, for so long as we are an “emerging growth company,” we will not be required to:

engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “say-on-golden parachutes;” or
disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparison of the chief executive officer’s compensation to median employee compensation.

In addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying with new or revised accounting standards.

We will remain an “emerging growth company” until the earliest to occur of:

our reporting $1 billion or more in annual gross revenues;
our issuance, in a three year period, of more than $1 billion in non-convertible debt;
the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; and
December 31, 2021.

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MANAGEMENT

The following table sets forth certain information about our executive officers and directors as of December 31, 2015.

   
Name   Age   Position
Michael Faro   37   Chairman of the Board of Directors, President and
Chief Executive Officer
Dianne P. Dubois   56   Chief Financial Officer
Lily Q. Ju   36   Vice President, Chief Product Officer, Director
Marjorie Bailey   60   Director Nominee
Alexander Ruckdaeschel   45   Director Nominee

The following is a brief account of the business experience during the past five years (and, in some instances, for prior years) of each director and executive officer of our Company.

Michael Faro, our founder, has been our Chairman, President and Chief Executive Officer and a director since August 2014, and managing member of the Company since founding in March 2003. Mr. Faro’s experience includes working in Fortune 500 companies including Intel Corporation and Siemens AG; from November 2001 to March 2011, as Solution Architect, responsible for managing various infrastructures in the organization. Mr. Faro is member of FAA’s Unnamed Aircraft Safety Team Panel, in charge of working with FAA to develop Drone Safety Regulations. His experiences cover wide variety of sectors including Negotiation, Manufacturing, Government, Strategic Planning, Supply Chain Management, Overseeing the Industry Growth, and Foreseeing Changes in Consumer demand. Mr. Faro has over a decade of experience in the financial industry, including trading various instruments in markets around the world and has publications in a number of areas, and speaks regularly to the public news media and at tradeshows. Mr. Faro attended Northwestern University School of Law where he studied Juris Doctor.

Dianne P. Dubois became our Chief Financial Officer in April 2017. Ms. Dubois has over 30 years of senior financial experience in a variety of public and privately held companies, with extensive experience in operations, customer service, sales, IT, and finance and accounting. She served as Chief Financial Officer for a number of companies through her own consulting firm from January 2008 to April 2017. From February 2004 to June 2007, she was the Chief Financial Officer and Chief Operating Officer at The Olivia Companies. Ms. Dubois served as the Chief Financial Officer of LookSmart, Inc (NASDAQ: LOOK, ASX: LOK), a publicly traded internet search marketing company, from May 2001 to November 2003. Ms. Dubois is a CPA, and received her BBA from the University of Wisconsin-Madison in Accounting in June 1983.

Lily Ju has been the Chief Product Officer and a director since September 2012. Prior to becoming a director, Ms. Ju worked as the Vice President of our Human Resources department. From November 2008 to December 2011, Ms. Ju owned and operated a consulting firm called China Made Easy, which provided companies with product research and consulting and assisted companies of various sizes with the import, export, and outsourcing of products from Asia to the United States. Ms. Ju worked as a CPA at Williams Associates PLC, a financial firm, from February 2008 to July 2008. From May 1996 to November 1998, Ms. Ju started a modeling company called Christmas Modeling and was responsible for its operation which was sold in 1998. Ms. Ju received a BA in Accounting from Buena Vista University in 2008.

Marjorie Bailey is expected to be elected to serve as a member of our board of directors and audit committee chair subject to and effective as of the closing of this offering. Ms. Bailey served as an audit partner at Marcum LLP from June 2004 to October 2013. She has been an adjunct professor at UC Berkley Extension since September 2013, Chief Financial Officer of Elder Care Alliance Senior Living since November 2013, and Audit Committee Chair of the League of Women Voters of the United States since October 2016 and California since November 2011. Ms. Bailey received her BS in Accounting from San Jose State University in 1984.

Alexander Ruckdaeschel is expected to be elected to serve as a member of our board of directors subject to and effective as of the closing of this offering. Since March 2001, he has worked in the financial industry in the United States and Europe as well as having been a co-founder and/or partner in senior management of various companies. He co-founded Herakles Capital Management and AMK Capital Advisors in 2008 and is

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currently the Chief Financial Officer of PainQX. From 2002 to 2006, he was a partner with Alpha Plus Advisors and with Nanostart AG, an European investment company specializing in clean tech and small-cap equities worldwide. Mr. Ruckdaeschel also serves as a member of board of directors of Electronic Recyclers international, Inc., Nuviant Medical, Inc., and Vuzix Corporation (NASDAQ: VUZI). Mr. Ruckdaeschel also has significant experience as manager of the DAC Nanotech Fund and DAC Biotech Fund where he worked from 2002 to 2006. Prior to that, he was a research assistant at Dunmore Management, focusing on intrinsic value in identifying companies that were undervalued and had global scale potential.