Ondas Holdings Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Financial statements are unaudited. Ondas develops and sells FullMAX wireless networking systems and related services for mission-critical industrial connectivity. The business became the company’s focus following its September 2018 acquisition of Ondas Networks.
Key financial results
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $32,294 | $29,382 |
| Gross profit / margin | $26,992 / 84% | $28,414 / 97% |
| Operating expenses | $5,145,120 | $591,781 |
| Operating loss | $(5,118,128) | $(563,367) |
| Net loss | $(5,823,725) | $(1,571,469) |
| Net loss per share, basic and diluted | $(0.12) | $(0.09) |
| Operating cash flow | $(4,694,328) | $(878,166) |
| Cash and cash equivalents | $437,298 | $1,129,863 at Dec. 31, 2018 |
Amounts above are dollars, notwithstanding an inconsistent “000s” label in the MD&A comparison table. Revenue rose about 10%, but cost of sales increased with product deployments and gross margin declined. Revenue included $12,963 of product sales and $19,331 of services; prior-year revenue was entirely services. Two customers accounted for approximately 80% and 17% of Q1 revenue.
Financial position and liquidity
- Current assets were $1.22 million against current liabilities of $18.37 million, a working-capital deficit of approximately $17.2 million. Total liabilities were $23.48 million and stockholders’ deficit was $20.66 million.
- At March 31, short-term borrowings were approximately $14.1 million, including approximately $4.0 million due June 30, 2019 and $10.1 million due September 9, 2019. Long-term borrowings were approximately $4.4 million.
- Cash used in investing activities was $84,753; financing activities provided $4,086,516, principally from $4.1 million of secured-note advances. Cash fell by $692,565 during the quarter.
- Management said available cash and the remaining $5.9 million under the Energy Capital facility were expected to fund anticipated operating needs only through June 30, 2019. The company said it lacked funds to repay the approximately $4.0 million due then and had no committed financing for repayment. Management identified substantial doubt about the company’s ability to continue as a going concern through May 10, 2020.
Changes, outlook and notable items
- Operating expenses increased by approximately $4.55 million year over year, primarily reflecting added personnel, professional and consulting costs, and expanded sales, marketing and research and development activity. The quarter also included a $259,926 impairment of an abandoned operating-lease asset.
- Other expense included $557,178 of interest expense and a $150,000 write-off of prepaid financing costs. The prior-year quarter included an $869,129 loss from a derivative-liability fair-value change; that liability no longer existed after convertible debt conversion in 2018.
- Management’s path to revenue growth and profitability depends on completing second-generation products and beginning their manufacture and commercialization. The filing gives no numerical revenue or earnings guidance.
- After quarter-end, an April 2 amendment to the related-party Energy Capital facility increased permitted monthly advances to $1.5 million and extended the stated maturity date to September 30, 2020. The company also reported $1.5 million of additional April advances. These actions do not eliminate the need to assess facility availability, repayment terms, and cash requirements.
- Disclosure controls were deemed ineffective at March 31, 2019 because of limited accounting staff and inadequate segregation of duties. Management said the previously identified internal-control deficiencies remained unremediated and outlined plans to add qualified personnel and written procedures.
- The company reported no material legal proceedings, no recognized loss contingencies, and no off-balance-sheet arrangements. Its risks include financing and debt repayment, product commercialization and market adoption, competition, and execution of planned product development and growth.
Investor verification priorities
- Confirm the status and terms of financing available to meet the June 30, 2019 debt maturity and fund operations beyond the company’s stated June runway.
- Reconcile the secured-note balances, maturities, covenants, and post-quarter Energy Capital amendments and advances against the underlying agreements and subsequent filings.
- Track product deployments, second-generation product readiness, customer diversification, and conversion of customer interest into meaningful revenue.
- Assess whether spending growth can be sustained given the very low revenue base, quarterly operating cash burn, and deteriorating gross margin.
- Review remediation of the disclosed internal-control weaknesses and the company’s ability to maintain reliable financial reporting.