Ondas Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 17, 2020. Ondas develops and sells FullMAX wireless networking systems and related services for mission-critical industrial communications. In Q2, the platform also began deployment for drone command-and-control applications.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1.16 million | $193,000 | $1.36 million | $225,000 |
| Gross profit / margin | $615,000 / 53% | $143,000 / 74% | $634,000 / 47% | $170,000 / 75% |
| Operating loss | $(2.77) million | $(4.27) million | $(5.10) million | $(9.38) million |
| Net loss | $(3.22) million | $(5.10) million | $(6.03) million | $(10.92) million |
| Net loss per share, basic and diluted | $(0.05) | $(0.10) | $(0.10) | $(0.22) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(2.77) million | $(8.51) million |
- At June 30, cash and cash equivalents were $44,000; restricted cash was $19,000. Current assets were $1.66 million versus current liabilities of $17.95 million, a working-capital deficit of approximately $16.30 million. Stockholders’ deficit was $16.40 million.
- Debt included a $10.0 million secured note, with $70,981 of unamortized debt discount, plus approximately $1.21 million of accrued interest and related current accrued interest liabilities. The secured note was due September 9, 2020. The company also reported approximately $947,000 of long-term notes payable and a $666,000 PPP loan.
- Six-month investing cash use was $9,000; financing provided $666,000, primarily from the PPP loan. Cash declined $2.11 million during the six months.
Changes versus comparable periods
- Revenue rose about fivefold year over year in both Q2 and the first half. Growth reflected product sales and development revenue, including $333,000 of Q2 development revenue; no development revenue was reported in the comparable 2019 periods.
- Gross margin declined to 53% for Q2 and 47% for the first half, from 74% and 75%. Management attributed the first-half decline to development services.
- Operating expenses fell 23% in Q2 and 40% for the first half, reflecting earlier headcount and spending reductions, COVID-related furloughs, reduced travel, and lower product-development spending. Lower expenses and higher gross profit narrowed operating and net losses.
- Six-month operating cash use improved year over year, but the company remained loss-making and had very limited cash. Customer concentration remained high: two customers represented 99% of first-half 2020 revenue; those same customers accounted for 80% and 20% of receivables at June 30.
Outlook, risks and unusual items
- Going concern: Management stated that cash available under its operating plan was expected to cover needs only through September 8, 2020, and that available resources were insufficient for the one-year evaluation period. The filing concludes substantial doubt exists about the company’s ability to continue as a going concern. Additional financing was expected, but not assured; possible cost reductions were described as contingency measures, not finalized plans.
- Subsequent financing: On August 14, 2020, the company issued $3.0 million of Series A convertible preferred stock for approximately $2.9 million net proceeds. Conversion may begin after six months; the shares carry certain liquidation preferences and include provisions that may affect future dilution. This financing occurred after quarter-end.
- Debt and covenant exposure: The secured note’s September 9, 2020 maturity and accrued interest are significant liquidity risks. The filing also warns that COVID-related disruption could impair covenant compliance and that waivers or amendments might not be obtained.
- COVID-19: Management cited impeded customer visits, delayed field testing and installations, component shortages, production and delivery delays, and reduced operating cash flow. It expected effects to continue through the rest of 2020 but could not estimate the full impact. The company furloughed 80% of its workforce; its headquarters reopened May 13, with five employees still furloughed as described in the filing. Senior executives temporarily accepted 90% base-salary reductions from March 20 through May 19.
- Commercial developments: Siemens Mobility agreements cover joint development and Siemens-branded rail communications products; a field-selectable radio was expected to be available in Q4 2020. The company began shipping to a UAS customer in Q2; the customer was expected to complete an initial network deployment in Q3 2020. These are forward-looking expectations, not reported completed outcomes.
- Equity compensation: Q2 stock-based compensation was substantial, including a $1.05 million charge associated with 3.0 million restricted stock units granted to the president. At June 30, 2.625 million of those units were nonvested, with $7.35 million of unrecognized compensation expense.
- Controls: Management concluded disclosure controls were ineffective because of a material weakness arising from inadequate segregation of duties and limited accounting resources. Remediation was in progress. Management nevertheless stated the filed financial statements fairly present the company’s financial condition and results.
- The company discontinued China operations; the Chinese subsidiary was deregistered in June 2020, and dissolution of two related entities was expected by the end of September. No material legal proceedings or recognized loss contingencies were reported.
Most important facts for investors to verify
- Whether the $3.0 million preferred-stock financing and any additional funding were sufficient to address the going-concern shortfall and the secured note’s September 2020 maturity.
- Current debt status, accrued interest, covenant compliance, and any lender extensions, waivers, or defaults.
- Subsequent cash burn, customer collections, order fulfillment, and the extent to which COVID-related delays persisted.
- Whether Siemens and UAS deployment milestones were achieved, and whether new deployments translate into recurring or scalable revenue.
- Customer concentration, gross margins by revenue type, and the dilution and compensation-cost effects of preferred shares, options, warrants, and restricted stock units.
- Progress in remediating the material weakness in internal controls.