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 Ondas Holdings Inc. ("we", "our" or the
"Company"). This discussion should be read together with our condensed
consolidated financial statements and the notes included therein, which are
included in this Quarterly Report on Form 10-Q (the "Report"). This information
should also be read in conjunction with the information contained in our Annual
Report on Form 10-K for the year ended December 31, 2019, filed with the
Securities and Exchange Commission (the "SEC") on March 13, 2020, including the
audited consolidated financial statements and notes included therein as of and
for the year ended December 31, 2019. This discussion contains forward-looking
statements that involve risks and uncertainties. For a description of factors
that may cause our actual results to differ materially from those anticipated in
these forward-looking statements, please refer to the below section of this
Report titled "Cautionary Note Regarding Forward-Looking Statements." The
reported results will not necessarily reflect future results of operations or
financial condition. Unless otherwise defined herein, all initially capitalized
terms herein shall be as defined in our Annual Report on Form 10-K.
Overview
On September 28, 2018, we consummated a reverse acquisition transaction to
acquire a privately-held company, Ondas Networks Inc., and changed our name from
"Zev Ventures Incorporated" to "Ondas Holdings Inc." As a result, Ondas Networks
Inc. ("Ondas Networks") became our wholly owned subsidiary. We refer to this
transaction as the "Acquisition." In connection with the closing of the
Acquisition, we discontinued the prior business of Zev Ventures as a reseller of
sporting and concert tickets and our sole business became that of Ondas
Networks.
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 Institute of Electrical and Electronics
Engineers ("IEEE"), the leading worldwide standards body in data networking
protocols, and forms the core of the IEEE 802.16s standard. Ondas has taken a
leadership position in IEEE as it relates to wireless networking for industrial
markets given that standards-based communications solutions are preferred by our
mission-critical customers and ecosystem partners. As such, management believes
this standards-based approach supports the adoption of the Company's technology
across a burgeoning ecosystem of partners and end markets.
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, Dial-up Serial Data
Communications, and Advanced Train Control System - ATCS) while simultaneously
operating our state of the art MC-IoT protocols. This dual and multi-mode
software capability provides major industrial customers with a seamless
migration path to advanced internet-protocol-based networks. Over time, these
legacy functions, like Push to Talk Voice and ATCS, are transformed into just
several of many new data applications we can support.
Our business consists of a single segment of products and services, all of which
are sold and provided in the United States and certain international markets.
25
COVID-19
In December 2019, a novel strain of coronavirus ("COVID-19") was identified in
Wuhan, China, and has subsequently spread to other regions of the world, and has
resulted in increased travel restrictions, business disruptions and emergency
quarantine measures across the world including the United States.
The Company's business, financial condition and results of operations were
impacted from the COVID-19 pandemic during the three and nine months ended
September 30, 2020 as follows:
? 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 May 13, 2020,
we reopened our corporate headquarters and as of September 30, 2020 we have no
employees remaining on furlough. Of the 18 employees previously furloughed, 14
are currently employed by us.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the
"CARES Act") was enacted. The CARES Act is an approximately $2 trillion
emergency economic stimulus package in response to the Coronavirus outbreak,
which among other things contains numerous income tax provisions. Some of these
tax provisions are expected to be effective retroactively for years ending
before the date of enactment. The Company applied for, and received, funds under
the Paycheck Protection Program after the period end in the approximate amount
of $666,000. The application for these funds requires the Company to, in good
faith, certify that the current economic uncertainty made the loan request
necessary to support operations of the Company. This certification further
requires the Company to consider its current business activity and ability to
access other sources of liquidity sufficient to support ongoing operations in a
manner that is not significantly detrimental to the business. The receipt of
these funds, and the forgiveness of the loan related to these funds, is
dependent on the Company having initially qualified for the loan and qualifying
for the forgiveness of such loan based on our future adherence to the
forgiveness criteria.
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 FCC, the Drone Responders Public Safety
Alliance stated, (the) "current COVID-19 pandemic only emphasizes this need, as
remote methods of commercial delivery will only become more essential to serve
the public good. In light of the current COVID-19 crisis, UAS have the potential
to deliver payloads of medical equipment and supplies."
26
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.
27
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 Ondas software and through additional services provided to customers and
ecosystem partners. Customers deploy our connectivity and Fog-computing platform
in private networks that are designed for lifetimes of 10 - 15 years or even
longer. Our FullMAX platform is software-defined and offers customers
flexibility to expand capacity and evolve network utilization. Similarly, our
ecosystem partners often integrate our FullMAX software and wireless capability
into their own equipment and systems which their customers purchase and deploy
are also designed for long lifetimes. As such, we believe our software solutions
provide ongoing revenue opportunities and sales models both related to both
connectivity value and edge computing capability. Customers and ecosystem
partners will require ongoing FullMAX system and security enhancements and for
us to design additional features which create opportunities for additional,
recurring revenue and profit streams. Our monetization strategies include:
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 Ondas in the year following an initial installation. Software
maintenance licenses entitle the customer to ongoing software and security
upgrades as well as enabling the provision of additional system features.
Similarly, hardware maintenance programs provide customers extended equipment
warranty terms for an installed network. These SaaS maintenance arrangements
allow our customers to continue to maintain a modern, flexible and upgradeable
network over a long period of time. These agreements may extend for multiple
years given the long average life of the installed and growing network.
Licensing / Royalties: In certain system deployments, our ecosystem partners
will choose to embed FullMAX software into their own hardware and software
platforms providing Ondas with an ongoing per device multi-year revenue stream.
Licensing is an effective way for an ecosystem partner to jumpstart customer
activity. Alternatively, a partner may choose to develop software based on our
intellectual property generating royalty revenue.
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 April 2020, we entered into a strategic partnership with Siemens Mobility, a
separately managed company of Siemens AG (Siemens), to jointly develop wireless
communications products for the North American Rail Industry based on Siemens'
Advanced Train Control System (ATCS) protocol and our MC-IoT platform, for
availability in the second half of 2020. These dual-mode ATCS/MC-IoT radio
systems will support Siemens' extensive installed base of ATCS radios as well as
offer Siemens' customers the ability to support a host of new advanced rail
applications utilizing our MC-IoT wireless system. These new applications,
including Advanced Grade Crossing Activation and Monitoring, Wayside Inspection,
Railcar Monitoring and support for next generation signaling and train control
systems, are designed to increase railroad productivity, reduce costs and
improve safety. The new ATCS-compatible products will be introduced in two
phases, including a field-selectable ATCS or MC-IoT remote radio available in
the fourth quarter of 2020. Furthermore, Siemens has begun to market and sell
Siemens-branded MC-IoT wireless systems based on our technology platforms.
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 Ondas' frequency-agnostic SDR architecture to enable a
substantial capacity increase utilizing the railroad's existing wireless
infrastructure and dedicated Federal Communications Commission ("FCC") licensed
radio frequencies, as well as the flexibility to adapt to and take advantage of
future changes in spectrum availability.
We believe the Siemens partnership will accelerate the adoption of our wireless
technology in the North American Class I Railroad market. We believe Siemens has
both the sales and marketing reach and support to drive our technology to wide
scale acceptance. Siemens also brings Ondas access to the North American transit
market where our technology has broad potential. In addition to our strategic
partnership with Siemens Mobility, we expect to establish additional formal
sales and marketing partnerships and OEM relationships with other leading Tier 1
vendors of industrial equipment in 2020.
28
Our Products and Services
Ondas was founded in 2006 to develop a new type of radio platform specifically
to meet the evolving data needs of large industrial and government customers and
markets. These markets are differentiated from consumer markets in that the
customers assets are dispersed over very wide and remote geographies with
specific challenges to installation, maintenance, and upgrades. These
challenges led us to design a new type of software-based radio platform capable
of supporting a long useful life to the network hardware. Instead of using low
cost, off the shelf, dedicated communications chipsets ("ASICs"), we selected
powerful programmable embedded general-purpose processors, DSPs, and FPGAs, all
of which are software upgradable. Our software defined radio ("SDR")
architecture, with more than 12 years in development and supported by a team of
45 software engineers, allows us to customize almost any aspect of the air
interface protocol, the key components of which are patented and have been
incorporated into new IEEE wireless standards. The ability to constantly improve
customer networks and hosted software applications with flexible, over-the-air
software upgrade creates customer stickiness with high switching costs.
FullMAX Software: Our FullMAX SDR platform is designed to enable highly secure
and reliable industrial-grade connectivity for truly mission-critical
applications. An end-to-end FullMAX network consists of connected wireless base
stations, fixed and mobile edge radios and supporting technology all enabled by
critical software developed and owned by Ondas. The target customers for our
products operate in critical infrastructure sectors of the global economy.
Private wireless networks are typically the preferred choice of these large
industrial customers with business operations spanning large field areas.
Private networks provide enhanced protection against cyber terrorism, as well as
natural and man-made disasters, and the ability for the operator to maintain and
control their desired quality of service.
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 Ondas. FullMAX is an intelligent networking system which integrates
core network management systems with edge computing resources including
computing hardware and MC-IoT software applications. In the MC-IoT Fog enabled
by FullMAX, base stations are enabled with a highly configurable Quality of
Service algorithms which coordinate the data traffic within the Fog for both the
edge radio and the resident MC-IoT applications. The intelligent base stations
control and manage all network resources including the Ondas edge remotes;
dynamically allocating bandwidth, prioritizing data packets and managing edge
applications. The intelligent software-managed base stations determine whether
to process data at the edge, distribute data traffic across the Fog to other
edge remote radios or to transport information to the corporate Cloud. Ondas'
Edge remotes have embedded compute capability and are able to host MC-IoT
applications including those from third party vendors via virtualized software
systems managed in docker / container architectures and can also manage data
from intelligent equipment or sensor networks that interface with the edge
remotes in the field. The Ondas software-managed edge remotes offer security via
authentication, multi-layer encryption and virtual software firewalls which are
requirements for mission-critical data networks.
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
Base Station and Remote sites providing fixed and mobile data connectivity up to
30 miles from the tower site (see Figure 1 below). This results in up to 2,800
square miles of coverage from a single FullMAX tower compared with the 28 square
miles typically supported by other 4G technologies and three-square miles by 5G
technologies (see Figure 2 below). This dramatically reduces the infrastructure
cost of building and operating a private cellular network. For example, to cover
a territory of over 10,000 square miles may require only four FullMAX towers
compared with more than 350 typical 4G towers, depending on the topography of
the region.
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.
29
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 $614,026 for the three months ended September 30, 2020
compared to $88,132 for the three months ended September 30, 2019. Revenues
during the three months ended September 30, 2020 included $245,075 for products,
$16,410 for maintenance/service contracts, $351,248 for development services and
$1,293 for other revenues. Revenues during the same period in 2019 included
$61,182 for products and $26,950 for maintenance/service contracts.
Cost of goods sold
Our cost of sales was $365,863 for the three months ended September 30, 2020
compared to $15,185 for the three months ended September 30, 2019. The increase
in cost of sales was a result of costs related to products totaling
approximately $72,000, development services totaling approximately $273,000 and
maintenance/service contracts and other revenues totaling approximately $6,000.
Gross profit
Our gross profit increased by $175,216 for the three months ended September 30,
2020 compared to the three months ended September 30, 2019 based on the changes
in revenues and costs of sales as discussed above. Gross margin for the periods
in 2020 and 2019 was 40% and 83%, respectively.
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 %
30
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 September 30, 2020, with our continued reduction
in business development and the lingering impact of the COVID-19 disruptions, we
have reduced costs compared to the same period in 2019 as detailed in the table
above. These efforts to reduce spending resulted in a reduction in the major
components of our operating costs for the three months ended September 30, 2020
compared to the same period in 2019. The increase in stock-based compensation
during the three months ended September 30, 2020 is primarily a result of the
vesting of previously issued restricted stock units to Mr. Bushey.
Operating Loss
As a result of the foregoing, our operating loss decreased by $654,984, or 19%,
to $2,733,111 for the three months ended September 30, 2020, compared with
$3,388,095 for the three months ended September 30, 2019, primarily as a result
of reduced operating expenses and the increase in gross profit as discussed
above.
Other Income (Expense), net
Other income (expense), net decreased by $1,222,795, or 67%, to $(592,769) for
the three months ended September 30, 2020, compared with $(1,815,564) for the
three months ended September 30, 2019. During the three months ended September
30, 2020, compared to the same period in 2019, we reported a decrease in
interest expense of approximately $454,000, primarily a result of certain debt
instruments converted into common stock of the Company during the three months
ended September 30, 2019, and a decrease in the write-off of financing costs of
approximately $910,000, while interest and other income, net increased by
approximately $6,000. The Company also recorded a loss on the change of fair
value of a derivative liability of approximately $136,000 during the three
months ended September 30, 2020.
Net Loss
As a result of the net effects of the foregoing, net loss decreased by
$1,877,779, or 36%, to $3,325,880 for the three months ended September 30, 2020,
compared with $5,203,659 for the three months ended September 30, 2019. Net loss
per share of common stock, basic and diluted, was $(0.06) for the three months
ended September 30, 2020, compared with approximately $(0.10) for the three
months ended September 30, 2019.
31
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 $1,969,598 for the nine months ended September 30, 2020
compared to $313,583 for the nine months ended September 30, 2019. Revenues
during the nine months ended September 30, 2020 included $1,043,585 for
products, $53,500 for maintenance/service contracts, $866,119 for development
services and $6,394 for other revenues. Revenues during the same period in 2019
included $212,905 for products and $100,678 for maintenance/service contracts.
Cost of goods sold
Our cost of sales was $1,087,540 for the nine months ended September 30, 2020
compared to $71,133 for the nine months ended September 30, 2019. The increase
in cost of sales was primarily a result of costs related to products totaling
approximately $259,000, development services totaling approximately $735,000 and
maintenance/service contracts and other revenues totaling approximately $22,000.
Gross profit
Our gross profit increased by $639,608 for the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019 based on the changes
in revenues and costs of sales as discussed above. Gross margin for the periods
in 2020 and 2019 was 45% and 77%, respectively.
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 %
32
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 September 30, 2020, with our continued reduction in
business development and the lingering impact of the COVID-19 disruptions, we
have reduced costs compared to the same period in 2019 as detailed in the table
above. These efforts to reduce spending resulted in a reduction in the major
components of our operating costs for the nine months ended September 30, 2020
compared to the same period in 2019. The increase in stock-based compensation
during the nine months ended September 30, 2020 is primarily a result of the
vesting of previously issued restricted stock units to Mr. Bushey.
Operating Loss
As a result of the foregoing, our operating loss decreased by $4,941,214, or
39%, to $7,830,293 for the nine months ended September 30, 2020, compared with
$12,771,507 for the nine months ended September 30, 2019, primarily as a result
of reduced operating expenses and the increase in gross profit as discussed
above.
Other Income (Expense), net
Other income (expense), net decreased by $1,833,092, or 55%, to $(1,523,413) for
the nine months ended September 30, 2020, compared with $(3,356,505) for the
nine months ended September 30, 2019. During the nine months ended September 30,
2020, compared to the same period in 2019, we reported a decrease in interest
expense of approximately $975,000, primarily a result of certain debt
instruments converted into common stock of the Company during the nine months
ended September 30, 2019, a decrease in the write-off of financing costs of
approximately $997,000, while interest and other income, net increased by
approximately $3,000. The Company also recorded a loss on the change of fair
value of a derivative liability of approximately $136,000 during the three
months ended September 30, 2020.
Net Loss
As a result of the net effects of the foregoing, net loss decreased by
$6,774,306, or 42%, to $9,353,706 for the nine months ended September 30, 2020,
compared with $16,128,012 for the nine months ended September 30, 2019. Net loss
per share of common stock, basic and diluted, was $(0.16) for the nine months
ended September 30, 2020, compared with approximately $(0.32) for the nine
months ended September 30, 2019.
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
September 30, 2020 was to fund the Company's current expenses primarily related
to sales and marketing and research and development activities necessary to
allow us to service and support customers. The decrease in cash flows used in
operating activities of approximately $6,400,000 is primarily a result of a
reduced headcount, reduced travel and entertainment expense and lower product
development spending. Cash flows used in investing activities decreased by
approximately $400,000 primarily due to a reduction in capital spending. The
decrease in cash provided by financing activities of approximately $10,300,000
is a result of a reduction in funding activities partially offset by funds
provided by the Payroll Protection Program of $666,091 and the sale of Preferred
Stock, net of costs of $4,217,969, as described below.
In August 2020, the Company entered into securities purchase agreements with
certain purchasers, which provided for the sale of an aggregate of $4.435
million of the Company's Series A Preferred at a cash purchase price of $2.00
per share (the "Purchase Price") (the "2020 Offering"). Pursuant to the purchase
agreements, the Company issued an aggregate of 2,217,500 shares of Series A
Preferred to the investors. In connection with the 2020 Offering, Eric Brock,
the Company's Chief Executive Officer purchased 157,500 shares of Series A
Preferred. The aggregate gross proceeds to the Company from the 2020 Closing was
$4.435 million. After payment of offering expenses, the net proceeds to the
Company from the 2020 Closing was approximately $4.22 million.
33
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 September 30, 2020, we had a
stockholders' deficit of approximately $13,700,000. At September 30, 2020, we
had net short and long-term borrowings outstanding of approximately $11,800,000
and $600,000, respectively. As of September 30, 2020, we had available cash of
approximately $2,100,000 and a working capital deficit of approximately
$14,100,000.
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 March
31, 2021.
As of September 30, 2020, excluding operating lease liabilities, the outstanding
amount, including principal, accrued interest, accredited costs, net of debt
discount, of indebtedness was $12,527,453, summarized in the table below. See
NOTES 7 and 8 in the accompanying unaudited condensed consolidated financial
statements for further details.
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 November 6, 2021.
We anticipate that our current resources will be insufficient to meet our cash
requirements throughout the evaluation period, including funding anticipated
losses and scheduled debt maturities. We expect to seek additional funds from a
combination of dilutive and/or nondilutive financings in the future. Because
such transactions have not been finalized, receipt of additional funding is not
considered probable under current accounting standards. If we do not generate
sufficient cash flows from operations and obtain sufficient funds when needed,
we expect that we would scale back our operating plan by deferring or limiting
some, or all, of our capital spending, and/or eliminating planned headcount
additions, as well as other cost reductions to be determined. Because such
contingency plans have not been finalized (the specifics would depend on the
situation at the time), such actions are also not considered probable for
purposes of current accounting standards. Because, under current accounting
standards, neither future cash generated from operating activities, nor
management's contingency plans to mitigate the risk and extend cash resources
through the evaluation period, are considered probable, substantial doubt is
deemed to exist about the Company's ability to continue as a going concern. As
we continue to incur losses, our transition to profitability is dependent upon
achieving a level of revenues adequate to support our cost structure. We may
never achieve profitability, and unless and until doing so, we intend to fund
future operations through additional dilutive or non-dilutive financings. There
can be no assurances; however, that additional funding will be available on
terms acceptable to us, if at all.
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 September 30, 2020, we had no off-balance sheet arrangements.
Contractual Obligations
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are
not required to provide this information.
34
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 the United States (U.S. GAAP). The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities and expenses, as well as related
disclosures. We base our estimates and judgments on historical experience and
other assumptions that we believe to be reasonable at the time and under the
circumstances, and we evaluate these estimates and judgments on an ongoing
basis. Information concerning our critical accounting policies with respect to
these items is available in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in our Annual Report on Form
10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 13,
2020 (the "2019 Form 10-K"). There have been no significant changes in our
critical accounting polies since the filing of the Form 10-K.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible
Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"), which
simplifies an issuer's accounting for convertible instruments by reducing the
number of accounting models that require separate accounting for embedded
conversion features. ASU 2020-06 also simplifies the settlement assessment that
entities are required to perform to determine whether a contract qualifies for
equity classification and makes targeted improvements to the disclosures for
convertible instruments and earnings-per-share (EPS) guidance. This update will
be effective for the Company's fiscal years beginning after December 15, 2023,
and interim periods within those fiscal years. Early adoption is permitted, but
no earlier than fiscal years beginning after December 15, 2021, and interim
periods within those fiscal years. Entities can elect to adopt the new guidance
through either a modified retrospective method of transition or a fully
retrospective method of transition. The Company is currently evaluating the
impact of the pending adoption of the new standard on its financial statements
and intends to adopt the standard as of January 1, 2022.
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;
35
? 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 the United States and other countries; and
? 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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