Ondas Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; filed August 14, 2019. Ondas designs, develops, manufactures and sells FullMAX wireless networking systems and related services for mission-critical industrial communications. The statements are unaudited. Comparisons are year over year.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $193,157 | $16,444 | $225,451 | $45,826 |
| Gross profit | $142,511 | $5,303 | $169,503 | $33,717 |
| Gross margin | 74% | 32% | 75% | 74% |
| Operating expenses | $4,407,795 | $1,323,134 | $9,552,915 | $1,914,915 |
| Operating loss | $(4,265,284) | $(1,317,831) | $(9,383,412) | $(1,881,198) |
| Net loss | $(5,100,628) | $(1,829,893) | $(10,924,353) | $(3,401,362) |
| Net loss per share | $(0.10) | $(0.10) | $(0.22) | $(0.16) |
| Operating cash flow | Not presented quarterly | $(8,511,136) | $(2,326,989) |
- Revenue increased substantially from a low base, driven primarily by small product deployments and maintenance/service contracts; 2018 revenue was solely from maintenance and services. Product revenue was $138,760 in Q2 and $151,723 for the first half.
- Operating costs grew sharply as the company expanded staffing, sales and marketing, and research and development. Six-month sales and marketing expense was $3.55 million and R&D expense was $3.16 million.
- Six-month financing cash inflow of $8.28 million, principally secured borrowing, did not cover operating and investing outflows; cash declined by $549,703 to $590,902.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $590,902; total assets were $3.42 million; total liabilities were $29.14 million; and stockholders’ deficit was $25.72 million. Working capital deficit was approximately $7.4 million.
- Current notes payable were $4.08 million. Secured promissory notes were reported at $18.55 million long term, net of debt discount; an additional $300,000 convertible note was long term. The filing also reports accrued interest and lease liabilities.
- Cash used in investing activities was $321,217 for the first half, including $200,000 for wireless spectrum licenses. Cash provided by financing activities was $8,282,650, including $8.35 million of secured-note proceeds.
Material changes, outlook and risks
- Compared with the first half of 2018, revenue rose by $179,625, but operating expenses increased by $7.64 million and net loss widened by $7.52 million. Management attributed expense growth principally to added personnel and increased sales, marketing and product-development efforts.
- Management said profitability depends on completing second-generation products and beginning their manufacture, marketing and sales. It expected significant working-capital needs through the end of 2019 and beyond. The filing provides no quantified revenue or earnings guidance.
- Management estimated existing cash would fund anticipated operating needs only through September 30, 2019. It said the company lacked funds to repay approximately $3.8 million of debt due October 31, 2019, had no committed funding for repayment, and that these conditions raised substantial doubt about its ability to continue as a going concern through August 14, 2020.
- After quarter-end, the company drew $750,000 and $900,000 from Energy Capital. Certain lenders extended maturities, generally to October 31, 2019; one loan was extended to September 30, 2021. Certain lenders agreed to exchange debt for offering securities if an equity offering of at least $8 million met specified terms and Energy Capital also participated in extinguishing its debt.
- Unusual expenses included $259,926 impairment of an abandoned operating lease right-of-use asset and $270,632 of deferred offering and financing cost impairments in the first half. The Q2 statement includes $120,632 of the latter charge.
- Revenue was highly concentrated: four customers each represented at least 13% of Q2 revenue, and customer D represented all accounts receivable at quarter-end. Management reported disclosure controls were ineffective because of limited accounting staff and insufficient segregation of duties; identified control weaknesses remained unremediated.
- Management described market adoption of the IEEE 802.16s standard, product commercialization, access to financing, debt repayment, competition, and ability to develop and sell future products as significant risks. Its statements about market opportunity and anticipated adoption are forward-looking, not assured outcomes.
Investor verification priorities
- Confirm current cash, subsequent financing, and the status and terms of debt maturities and any proposed debt-for-equity exchange.
- Assess whether the company can fund operations beyond the stated September 30, 2019 cash runway and meet obligations without committed additional capital.
- Verify follow-through on second-generation product development, customer deployments, and conversion of pilots and managed-network activity into recurring revenue.
- Review customer concentration, collections from customer D, and the sustainability of the reported revenue growth and gross margins.
- Track remediation of internal-control weaknesses and the effect of subsequent senior-management severance arrangements disclosed in the filing.