Ondas Holdings Inc. — Q3 2020 Form 10-Q
Business and reporting period. The unaudited report covers the three and nine months ended September 30, 2020. Ondas Holdings’ operating business, Ondas Networks, develops and sells FullMAX software-defined radio systems and related services for mission-critical industrial wireless networks. The company discontinued its China operations and was winding down the related entities.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $614,026 | $88,132 | $1,969,598 | $313,583 |
| Gross profit / margin | $248,163 / 40% | $72,947 / 83% | $882,058 / 45% | $242,450 / 77% |
| Operating expenses | $2,981,274 | $3,461,042 | $8,712,351 | $13,013,957 |
| Operating loss | $(2,733,111) | $(3,388,095) | $(7,830,293) | $(12,771,507) |
| Net loss | $(3,325,880) | $(5,203,659) | $(9,353,706) | $(16,128,012) |
| Basic and diluted loss per share | $(0.06) | $(0.10) | $(0.16) | $(0.32) |
- Revenue rose sharply from the low prior-year base. Q3 revenue included $351,248 of development revenue and $245,075 of product revenue; nine-month revenue included $866,119 of development and $1,043,585 of product revenue.
- Gross margins declined year over year as cost of goods sold increased with product and development activity. Operating expenses fell 14% in Q3 and 33% for the nine months, primarily reflecting lower staffing, travel, sales and marketing, and R&D spending. Stock-based compensation partially offset those savings.
- Cash and cash equivalents were $2.129 million at September 30, 2020, with $19,332 of restricted cash. Nine-month operating cash use was $4.875 million; investing cash use was $13,606; financing provided $4.884 million. Cash, cash equivalents and restricted cash totaled $2.148 million at period end.
- Total assets were $4.815 million and total liabilities were $18.561 million; stockholders’ deficit was $13.745 million. Current liabilities of $17.929 million exceeded current assets of $3.871 million. Management reported a working capital deficit of approximately $14.1 million.
- Debt and borrowings were substantial: the Steward Capital secured note had a stated principal balance of $11.254 million, with a September 2021 maturity after amendment; PPP debt was approximately $666,000; and a convertible promissory note plus accrued interest totaled $335,471. The company reported total indebtedness of $12.527 million including accrued interest, accreted costs and net debt discount.
Changes, outlook and material risks
- Compared with 2019: revenue increased, while net loss narrowed by $1.878 million in Q3 and $6.774 million for the nine months. Lower operating costs and other expense helped offset the weaker gross margin. The prior-year comparison included $1.479 million of financing-cost impairment for the nine-month period; none was recorded in 2020.
- Liquidity and going concern: management said available cash under current operating plans was expected to fund operations only through March 31, 2021, and resources were insufficient to cover requirements through the one-year going-concern evaluation period ending November 6, 2021. The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Additional financing was expected to be needed, but was not finalized or considered probable; proposed cost reductions were also not finalized.
- Financing and dilution: the company raised gross proceeds of approximately $4.7 million through Series A preferred stock, including debt exchanged for preferred shares. The preferred is initially convertible one-for-one into common stock beginning nine months after closing, subject to terms and adjustments. In October, the company filed an S-1 proposing a common-stock offering of up to $25 million; it was not effective, and completion was not assured. A 1-for-3 reverse stock split was approved after quarter end, effective November 13, 2020.
- Business outlook: no numerical revenue or earnings guidance was provided. Management’s strategy centers on converting pilots and sales-pipeline opportunities into orders, expanding Tier 1 partnerships, and developing FullMAX products and services. The Siemens Mobility agreements provide for joint development and Siemens-branded sales for North American rail, but adoption, orders and resulting revenue are not assured.
- COVID-19: travel restrictions, delayed field testing and deployments, component shortages and delivery delays disrupted sales and cash flow. The company furloughed 80% of its workforce in Q1; all furloughs had ended by September 30, and 14 of 18 previously furloughed employees were then employed. Management expected pandemic effects to continue through the remainder of 2020 and said the full impact could not be estimated.
- Concentration and execution risks: two customers accounted for 87% of nine-month 2020 revenue, and one customer represented 99% of accounts receivable at September 30. The filing also cites long sales cycles, dependence on strategic partners, product commercialization and financing risks, and potential debt-covenant compliance issues.
- Unusual items and controls: Q3 included a $136,323 loss from remeasurement of a derivative liability. Stock-based compensation was $3.048 million for the nine months, including expense related to executive restricted stock units. Management identified a material weakness in financial reporting controls due to limited accounting resources and inadequate segregation of duties; disclosure controls were deemed ineffective. No material legal proceeding or recorded loss contingency was reported.
Key facts for investors to verify
- Whether the proposed public offering or other financing was completed, on what terms, and whether it adequately addressed the stated cash runway and going-concern uncertainty.
- Steward Capital debt maturity, repayment terms, covenants and the effect of the October 2020 offering-related repayment arrangement; also verify PPP loan forgiveness status.
- Whether Siemens-related development and sales translate into field deployments, purchase orders and recurring revenue, and whether customer concentration changes.
- The potential dilution from preferred-stock conversion, warrants, options, restricted stock units and the reverse split.
- Whether COVID-related supply, deployment and customer delays eased, and whether management remediated the disclosed material weakness in internal controls.