ONDAS HOLDINGS INC. General
The following discussion and analysis provide information which our management
believes to be relevant to an assessment and understanding of the results of
operations and financial condition of
Overview
On
Ondas Networks provides wireless connectivity solutions enabling
mission-critical Industrial Internet applications and services. We refer to
these applications as the Mission-Critical Internet of Things ("MC-IoT"). The
Company's wireless networking products are applicable to a wide range of MC-IoT
applications which are most often located at the very edge of large industrial
networks. These applications require secure, real time connectivity with the
ability to process large amounts of data at the edge. Such applications are
required in all of the major critical infrastructure markets including rail,
electric grids, drones, oil and gas, and public safety and government, where
secure, reliable and fast operational decisions are required in order to improve
efficiency and ensure a high degree of safety and security. We design, develop,
manufacture, sell and support FullMAX, our patented, Software Defined Radio
("SDR") platform for secure, licensed, private, wide-area broadband networks.
Our customers install FullMAX systems in order to upgrade and expand their
legacy wide-area network ("WAN") infrastructure. Our MC-IoT intellectual
property has been adopted by the
Our FullMAX SDR platform is an important and timely upgrade solution for privately-owned and operated wireless WANs, leveraging Internet Protocol-based communications to provide more reliability and data capacity for our mission-critical infrastructure customers. Critical infrastructure markets throughout the globe have reached an inflection point where legacy serial and analog based protocols and network transport systems no longer meet industry needs. In addition to offering enhanced data throughput, FullMAX is an intelligent networking platform enabling the adoption of sophisticated operating systems and equipment supporting next-generation MC-IoT applications over wide field areas. These new MC-IoT applications and related equipment require more processing power at the edge and the efficient utilization of network capacity and scarce bandwidth resources which can be supported by the "Fog-computing" capability integrated in our end-to-end network platform. Fog-computing utilizes management software to enable edge compute processing and data and application prioritization in the field enabling our customers more reliable, real-time operating control of these new, intelligent MC-IoT equipment and applications at the Edge.
We sell our products and services globally through a direct sales force and
value-added sales partners to critical infrastructure providers including major
rail operators, commercial and industrial drone operators, electric and gas
utilities, water and wastewater utilities, oil and gas producers and pipeline
operators, and for other critical infrastructure applications in areas such as
homeland security and defense, and transportation. We continue to develop our
value-added reseller relationships which today include a major strategic
partnership with Siemens Mobility for the development of new types of wireless
connectivity for the North American Rail. We believe our Siemens' partnership is
indicative of the potential for additional Tier 1 partnerships in our other
vertical markets including securing reseller relationships with major suppliers
to the worldwide government and homeland security markets. These partnerships
are being driven by the flexibility of our FullMAX software to support legacy
industrial protocols (e.g. Push to Talk Voice,
Our business consists of a single segment of products and services, all of which
are sold and provided in
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COVID-19
In
The Company's business, financial condition and results of operations were
impacted from the COVID-19 pandemic during the three and nine months ended
? sales and marketing efforts were disrupted as our business
development team was unable to travel to visit customers and
customers were unable to receive visitors for on-location meetings;
? field activity for testing and deploying our wireless systems was
delayed due to the inability for our field service team to install
and test equipment for our customers;
? supply chain disruptions led to component shortages and
inefficiencies in and delays in producing and delivering equipment
for certain purchase orders; and
? delays in fulfilling purchase orders reduced our cash flow from operations.
In the first quarter of 2020, we reduced our business activity to critical
operations only, and furloughed 80% of our workforce. Per orders issued by the
Health Officer of the County of Santa Clara, our corporate headquarters were
closed, except for functions related to the support of remote workers and
product support related to the essential transportation sector. On
On
The Company expects its business, financial condition and results of operations will be impacted from the COVID-19 pandemic for the remainder of 2020 primarily due to the deferral of customer activity from the first half of the year. Further, the COVID-19 pandemic is ongoing and remains an unknown risk for the foreseeable future. The extent to which the coronavirus may impact our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus. As a result, the Company is unable to reasonably estimate the full extent of the impact from the COVID-19 pandemic on its future business, financial condition and results of operations. The Company may also be unable to comply with the financial and other material covenants under its debt agreements and may not be able to negotiate waivers or amendments to such debt agreements in order to maintain ongoing compliance. In addition, if the Company were to experience any new impact to its operations, or incur additional unanticipated costs and expenses as a result of the COVID-19 pandemic, such operational delays and unanticipated costs and expenses there could be a further adverse impact on the Company's business, financial condition and results of operations in 2020 and 2021.
Although COVID-19 has had an immediate near-term impact on our business
operations, we also believe the one outcome of the pandemic will be to reinforce
the need for more reliable private commercial and industrial communications.
This can be seen specifically in the need for new Unmanned Aerial Systems
solutions including the safe command and control of drones as remote delivery
method. In a recent filling at the
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Our Strategy
Our goal is to be a global leader in providing secure wireless connectivity solutions enabling high-bandwidth, mission-critical Industrial Internet applications and services. We intend to leverage our patented FullMAX technology and the IEEE 802.16s standard to achieve this goal. We have adopted a "Deep and Wide" marketing strategy designed to drive adoption of our mission-critical connectivity solutions into global critical infrastructure end markets. Our strategy is to deeply penetrate the Class 1 Freight Rail, government and aviation markets while continuing the expansion of our distribution and support capabilities alongside ecosystem partners such as Siemens into adjacent vertical end markets such as oil and gas, electric, gas and water utilities and military sectors.
The key elements of our growth strategy include the following:
? Deliver on sales pipeline opportunities. Our marketing efforts
have generated the potential for significant sales in our targeted
end markets. Our sales activity in the North American Class 1
Railroad sector has resulted in several pilot programs for
multiple railroad operators. Once we successfully complete field
testing, we expect to work with our customers to design and
develop a network deployment strategy which we expect to lead to
purchase orders for equipment and services. We have similar field
testing and initial system deployments planned in the UAS markets,
security, electric and gas utilities, and oil and gas markets.
? Secure additional marketing partnerships and OEM relationships. We
service blue chip customers in critical infrastructure sectors
with standards-based, mission-critical connectivity solutions.
Those customers value the experience and resources provided by
additional ecosystem partners that help support the growth of the
MC-IoT end markets. As we have done with Siemens Mobility, we
intend to pursue marketing and OEM partnership agreements with
other Tier 1 global industrial and communications equipment
suppliers that have extensive reach and domain expertise in our
targeted end markets. These relationships will offer customers
greater choice, expanded levels of after-market support and
services, and the potential for greater product integration with
intelligent equipment, and systems that are increasingly being
deployed by our critical infrastructure customers.
? Develop new products and features to continuously improve our
customer value. We introduced our Mercury remote radio in the
first quarter of 2020 in order to address the expanding MC-IoT
market for high volume, lower cost endpoint radios. Our Mercury
radios are integrated into our existing FullMAX private network
solutions, are compliant with IEEE 802.16s and can be utilized in
both Tier 1 and Tier 2 network configurations. We will continue to
enhance our SDR capabilities to aggregate non-contiguous channels
with a focus on traditional licensed LMR frequency bands to
provide IP data networking solutions in historically analog
push-to-talk (PTT) bands. We will also work with ecosystem
partners to develop dual-mode products to assist in the migration
from legacy networks to our next-generation FullMAX platform.
? Expand our MC-IoT capabilities via partnerships, joint ventures,
or acquisitions. In addition to internal investment and
development, we will actively pursue external opportunities to
enhance our product offerings and solutions for our critical
infrastructure customers via joint ventures, partnerships, and
acquisitions. This activity will be focused on companies with
complementary technologies or product offerings or synergistic
distribution strategies.
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In executing our go-to-market strategy, we intend to monetize our software-based
intellectual property and grow revenue and cash flow with embedded FullMAX
software sales, Software-as-a-Service ("SaaS") arrangements, IP royalties based
on
Systems sales: Our FullMAX deployments are typically large, mission-critical wide-area networks deployed and privately operated by our industrial and government customers. These end-to-end system deployments involve sales consisting of both base stations and edge radio end points with embedded FullMAX software and network management software and tools.
Software and hardware maintenance agreements: Our customers contract for
extended software and hardware maintenance which provide them with critical
ongoing support for their installed network. These SaaS contracts provide
revenue to
Licensing / Royalties: In certain system deployments, our ecosystem partners
will choose to embed FullMAX software into their own hardware and software
platforms providing
Other Services: We provide ancillary services directly related to the sale of our wireless communications products which include wireless network design, systems engineering, radio frequency planning, software configuration, product training, installation, and onsite support. Furthermore, we also provide engineering and product development services to ecosystem partners who are interested in integrating their intelligent equipment with our FullMAX SDR platform and need our expertise to do so.
The Siemens Partnership
In
The North American Rail Network is vast in scale, consisting of 140,000 miles of
track, 25,000 locomotives, 1.6 million railcars and 200,000 highway crossings. A
significant portion of the communications infrastructure has been in operation
for more than 20 years and now requires a technological upgrade to support new
applications and increased capacity requirements. Our MC-IoT platform offers an
excellent migration path for these applications. The Class I Railroads value the
ability of the
We believe the Siemens partnership will accelerate the adoption of our wireless
technology in the
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Our Products and Services
In many of our industrial end markets, the adoption of low-cost Edge computing and increased penetration of "smart machinery" and sensors is driving demand for higher bandwidth, next-generation networks for IoT applications such as those powered by FullMAX. These new technologies often require Fog-computing capabilities to maximize their utility to customers. The Fog-computing capability integrated in our end-to-end FullMAX SDR platform is valued by our customers and ecosystem partners as they seek to leverage the value of MC-IoT applications for improved safety, efficiency, and profitability. Our IEEE 802.16s compliant equipment is designed to optimize performance of unused or underutilized low frequency licensed radio spectrum and narrower channels. We do this through various patented software algorithms including via "spectrum harvesting" techniques which aggregate narrowband channels to create increased broadband network capacity. Our channel aggregation algorithms include the ability to aggregate hard to utilize, non-contiguous narrowband channels and are a hallmark feature of a FullMAX broadband system. Consequently, a FullMAX wireless network is significantly less expensive to build compared to traditional LTE and 5G networks given its ability to optimize the performance of lower cost, low frequency radio spectrum and provide much greater coverage and capacity.
The critical software algorithms powering our end-to-end FullMAX wireless SDR
platform and related Fog-computing architecture have been developed by and are
owned by
Our FullMAX Software Defined Radio platform:
? offers a dedicated private network for industrial applications which
safeguards critical assets and information and protects against
cyberattacks;
? has frequency agility with the capability to operate in any frequency
between 70 MHz and 6 GHz;
? may be deployed in a wide variety of narrow and broadband channel
sizes and can aggregate non-contiguous channels; and
? implements standard and enhanced versions of the IEEE 802.16 protocol,
the new 802.16s amendment, and the planned 802.16t enhancements
FullMAX System: FullMAX base stations and edge radios are deployed by our customers to create wide-area wireless communication networks. A FullMAX network provides end-to-end IP connectivity, allowing critical infrastructure providers to extend their secure corporate networks into the far reaches of their service territories. A FullMAX network also provides more data capacity allowing our customers to transition legacy applications such critical Push-to-Talk Voice operating in legacy LMR networks to Voice over IP data networks which provide network capacity for other data requirements alongside voice. We refer to these networks as Land Mobile Data Radio (LMDR) systems.
FullMAX radios can operate at high transmit power (up to 100 watts) at both the
We also provide a variety of services associated with the sale of our FullMAX products including network design, RF planning, product training and spectrum consulting. We provide customers with technical support, extended hardware warranties, and software.
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Results of Operations
Three months ended September 30, 2020 compared to three months ended September
30, 2019
Three Months Ended
September 30,
2020 2019 Change
Revenue $ 614,026 $ 88,132 $ 525,894
Cost of goods sold 365,863 15,185 350,678
Gross profit 248,163 72,947 175,216
Operating expenses:General and administrative 1,823,336 1,036,013 787,323
Sales and marketing 253,560 1,174,293 (920,733 ) Research and development 904,378 1,250,736 (346,358 ) Total operating expense 2,981,274 3,461,042 (479,768 ) Operating loss (2,733,111 ) (3,388,095 ) (654,984 ) Other income (expense) (592,769 ) (1,815,564 ) (1,222,795 ) Net loss (3,325,880 ) (5,203,659 ) (1,877,779 ) Foreign currency translation - (21,655 ) 21,655 Comprehensive loss$ (3,325,880 ) $ (5,225,314 ) $ (1,899,434 ) Revenues
Our revenues were
Cost of goods sold
Our cost of sales was
Gross profit
Our gross profit increased by
Operating Expenses
Our principal operating costs include the following items as a percentage of
total expense.
Three Months Ended
September 30,
2020 2019
Human resource costs, including benefits 36 % 32 %
Stock-based compensation 19 % 14 %
Travel and entertainment - % 3 %
Other general and administration costs:
Professional fees and consulting expenses 25 % 31 %
Other expense 12 % 10 %
Depreciation and amortization 2 % 1 %
Other research and deployment costs, excluding human resources and travel and entertainment
6 % 6 %
Other sales and marketing costs, excluding human resources
and travel and entertainment - % 3 %
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Operating expenses decreased by approximately $480,000 , or 14% as a result of
the following items:
(000s)
Human resource costs, including benefits $ (535 )
Stock-based compensation 595
Travel and entertainment (93 )
Other general and administration costs:
Professional fees and consulting costs (342 ) Other expense 16 Depreciation and amortization 24
Other research and deployment costs, excluding human resources and travel and entertainment
(40 )
Other sales and marketing costs, excluding human resources and travel
and entertainment (105 )
$ (480 ) During the three months ended
Operating Loss
As a result of the foregoing, our operating loss decreased by
Other Income (Expense), net
Other income (expense), net decreased by
Net Loss
As a result of the net effects of the foregoing, net loss decreased by
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Nine months ended September 30, 2020 compared to nine months ended September 30,
2019
Nine Months Ended
September 30,
2020 2019 Change
Revenue $ 1,969,598 $ 313,583 $ 1,656,015
Cost of goods sold 1,087,540 71,133 1,016,407
Gross profit 882,058 242,450 639,608
Operating expenses:
General and administrative 5,222,180 3,874,186 1,347,994
Sales and marketing 934,948 4,728,505 (3,793,557 )
Research and development 2,555,223 4,411,266 (1,856,043 )
Total operating expense 8,712,351 13,013,957 (4,301,606 )
Operating loss (7,830,293 ) (12,771,507 ) (4,941,214 )
Other income (expense) (1,523,413 ) (3,356,505 ) (1,833,092 )
Net loss (9,353,706 ) (16,128,012 ) (6,774,306 )
Foreign currency translation - (7,755 ) 7,755
Comprehensive loss $ (9,353,706 ) $ (16,135,767 ) $ (6,782,061 )
Revenues
Our revenues were
Cost of goods sold
Our cost of sales was
Gross profit
Our gross profit increased by
Operating Expenses
Our principal operating costs include the following items as a percentage of
total expense.
Nine Months Ended
September 30,
2020 2019
Human resource costs, including benefits 21 % 42 %
Stock-based compensation 28 % 4 %
Travel and entertainment 1 % 5 %
Other general and administration costs:
Professional fees and consulting expenses 33 % 28 % Other expense 11 % 10 % Depreciation and amortization 1 % 1 %
Other research and deployment costs, excluding human resources and travel and entertainment
5 % 5 %
Other sales and marketing costs, excluding human resources
and travel and entertainment - % 5 %
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Operating expenses decreased by approximately $4,302,000 , or 33% as a result of
the following items:
(000s)
Human resource costs, including benefits $ (3,727 )
Stock-based compensation 1,964
Travel and entertainment (525 )
Other general and administration costs:
Professional fees and consulting costs (705 ) Other expense (393 ) Depreciation and amortization 11
Other research and deployment costs, excluding human resources and travel and entertainment
(301 )
Other sales and marketing costs, excluding human resources and travel
and entertainment (626 )
$ (4,302 ) During the nine months ended
Operating Loss
As a result of the foregoing, our operating loss decreased by
Other Income (Expense), net
Other income (expense), net decreased by
Net Loss
As a result of the net effects of the foregoing, net loss decreased by
Summary of (Uses) and Sources of Cash
Nine Months Ended
September 30,
2020 2019
Net cash used in operating activities $ (4,875,137 ) $ (11,333,484 )
Net cash used in investing activities (13,606 ) (341,863 )
Net cash provided by financing activities 4,884,060 15,200,982
Increase (decrease) in cash, cash equivalents and restricted cash (4,683 ) 3,525,635 Effect of foreign currency transaction on cash
- (5,180 )
Cash and cash equivalents, beginning of period 2,153,028 1,129,863
Cash, cash equivalents and restricted cash, end of period $ 2,148,345 $ 4,650,318 The principal use of cash in operating activities for the nine months ended
In
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For a summary of our outstanding short-term and long-term loans, see NOTES 7 and 8 in the accompanying unaudited condensed consolidated financial statements.
Liquidity and Capital Resources
We have incurred losses since inception and have funded our operations primarily
through debt and the sale of capital stock. At
Our future capital requirements will depend upon many factors, including
progress with developing, manufacturing and marketing our technologies, the time
and costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other proprietary rights, our ability to establish
collaborative arrangements, marketing activities and competing technological and
market developments, including regulatory changes and overall economic
conditions in our target markets. Our ability to generate revenue and achieve
profitability requires us to successfully market and secure purchase orders for
our products from customers currently identified in our sales pipeline as well
as new customers. We also will be required to efficiently manufacturer and
deliver equipment on those purchase orders. These activities, including our
planned research and development efforts, will require significant uses of
working capital through the end of 2020 and beyond. Based on our current
operating plans, we believe that our existing cash at the time of this filing
will only be sufficient to meet our anticipated operating needs through
As of
Outstanding Amount as of September 30,
2020
Paycheck Protection Program $ 666,091
Steward Capital Holdings, LP 11,525,891
Convertible Promissory Note 335,471
$ 12,527,453
Accounting standards require management to evaluate the Company's ability to
continue as a going concern for a period of one year subsequent to the date of
the filing of this Form 10-Q ("evaluation period"). As such, we have evaluated
if cash on hand and cash generated through operating activities would be
sufficient to sustain projected operating activities through
The financial information contained in these financial statements have been prepared on a basis that assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This financial information and these financial statements do not include any adjustments that may result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
As of
Contractual Obligations
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide this information.
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Critical Accounting Estimates
Management's discussion and analysis of financial condition and results of
operations is based upon our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in
Recent Accounting Pronouncements
In
Aside from ASU 2020-06, there have been no material changes to our significant accounting policies as summarized in NOTE 2 of our 2019 Form 10-K. We do not expect that the adoption of any recent accounting pronouncements will have a material impact on our accompanying unaudited condensed consolidated financial statements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, that relate to future events or to our future operations or financial performance. Any forward-looking statement involves known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statement. Forward-looking statements include statements, other than statements of historical fact, about, among other things:
? our plans to further develop our FullMAX system of wireless base stations;
? our plans to further develop remote radios;
? the adoption by our target industries of the new IEEE 802.16s standard for
private cellular networks;
? any outbreak or worsening of an outbreak of contagious diseases, or other
adverse public health developments, could have a material and adverse effect
on our business operations, financial condition and results of operations;
? our future development priorities;
? our estimates regarding the size of our potential target markets;
? our expectations about the impact of new accounting standards;
? our future operations, financial position, revenues, costs, expenses, uses of
cash, capital requirements, our need for additional financing or the period for
which our existing cash resources will be sufficient to meet our operating
requirements; or
? our strategies, prospects, plans, expectations, forecasts or objectives.
Words such as, but not limited to, "believe," "expect," "anticipate," "estimate," "forecast," "intend," "may," "plan," "potential," "predict," "project," "targets," "likely," "will," "would," "could," "should," "continue," "scheduled" and similar expressions or phrases, or the negative of those expressions or phrases, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that these statements are based on our estimates or projections of the future that are subject to known and unknown risks and uncertainties and other important factors that may cause our actual results, level of activity, performance, experience or achievements to differ materially from those expressed or implied by any forward-looking statement. Actual results, level of activity, performance, experience or achievements may differ materially from those expressed or implied by any forward-looking statement as a result of various important factors, including our critical accounting policies and risks and uncertainties relating, among other things, to:
? our ability to obtain additional financing on reasonable terms, or at all;
? our ability to repay our indebtedness;
? the accuracy of our estimates regarding expenses, costs, future revenues, uses
of cash and capital requirements;
? the market acceptance of our wireless connection products and the IEEE 802.16s
standard and IEEE 802.16t standard;
? our ability to develop future generations of our current products;
? our ability to generate significant revenues and achieve profitability;
? our ability to successfully commercialize our current and future products,
including their rate and degree of market acceptance;
? our ability to attract and retain key scientific or management personnel and to
expand our management team;
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? our ability to establish licensing, collaboration or similar arrangements on
favorable terms and our ability to attract collaborators with development,
regulatory and commercialization expertise;
? our ability to manage the growth of our business;
? the success of our strategic partnerships with third parties;
? expenditures not resulting in commercially successful products;
? our outreach to global markets;
? our commercialization, marketing and manufacturing capabilities and strategy;
? our ability to expand, protect and maintain our intellectual property position;
? the success of competing third-party products;
? our ability to fully remediate our identified internal control material
weaknesses;
? the impact from the COVID-19 pandemic on our business, financial
condition and results of operating:
? regulatory developments in
? our ability to comply with regulatory requirements relating to our business,
and the costs of compliance with those requirements, including those on data
privacy and security.
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