Ondas Holdings Inc. — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed March 13, 2020. This is an annual report, not a standalone fourth-quarter filing. Ondas Holdings’ business is the development and sale of FullMAX private wireless systems for mission-critical industrial networks.
Business context and operating developments
FullMAX is a software-defined radio platform designed for licensed, wide-area networks serving utilities, rail, oil and gas, security, and other critical infrastructure. Revenue remained small and primarily came from pilot programs and limited deployments. The company reported pilot activity with freight railroads, utilities, oil and gas customers, and a maritime security customer. It received an order in late 2019 for equipment intended for a planned commercial drone-control network.
In June 2019, Ondas acquired 2 MHz of licensed 700 MHz spectrum for service in Alaska and Gulf Coast markets. In the fourth quarter, it discontinued direct marketing and manufacturing efforts in China and began dissolving its China-affiliated subsidiaries. Management expected UAS equipment deployment to begin in the second quarter of 2020 and anticipated additional customer orders, but provided no quantified revenue or earnings guidance.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $320,383 | $190,029 |
| Gross profit / gross margin | $241,257 / 75% | $150,664 / 79% |
| Operating expenses | $15.61 million | $8.59 million |
| Operating loss | $(15.37) million | $(8.44) million |
| Net loss | $(19.39) million | $(12.10) million |
| Basic and diluted loss per share | $(0.37) | $(0.42) |
| Cash used in operating activities | $(14.66) million | $(8.52) million |
| Cash and cash equivalents at year-end | $2.15 million | $1.13 million |
Revenue increased about 68%, but operating expenses rose about 82%, reflecting expanded sales and marketing, research and development, and administrative spending. R&D expense was $5.42 million, up from $3.08 million. Gross margin declined approximately four percentage points. Net loss increased about 60%; loss per share narrowed as weighted-average shares outstanding increased substantially.
Other expense was $4.02 million, including $2.93 million of interest expense, a $920,000 impairment of deferred offering and financing costs associated with canceled financing efforts, and a $183,000 loss on disposal of fixed assets. The company reported no income tax provision.
Liquidity, debt, and financing
At December 31, 2019, cash was $2.15 million, current assets were $3.30 million, and current liabilities were $16.06 million, implying a working-capital deficit of approximately $12.76 million. Stockholders’ deficit was $12.43 million. The balance sheet reported a $10.11 million current secured promissory note, net of debt discount, and $539,921 of long-term notes payable.
During 2019, the company raised $7.214 million gross, or $6.110 million net, in a private placement. It also converted approximately $14.50 million of debt and accrued interest into equity units. Cash from financing activities was $16.04 million, which offset much, but not all, of operating cash burn.
Management said cash available at filing was expected to fund operations only through March 2020. It stated that additional financing would be required to continue operations and repay debt, and that no such funding was committed. Management concluded substantial doubt existed about the company’s ability to continue as a going concern through March 13, 2021. The auditor’s report includes a going-concern paragraph but gives an unqualified opinion on the financial statements.
Outlook, risks, and controls
- Management expected continued losses and substantial investment in product development, sales, and market expansion; it cautioned that revenue timing is unpredictable and may be deferred.
- Customer concentration was pronounced: three customers accounted for approximately 45%, 36%, and 18% of FY2019 revenue. Long sales cycles, pilot-to-deployment conversion, and dependence on customer references could constrain growth.
- Key risks include limited adoption of the newly published IEEE 802.16s standard, competition, product development and field-performance challenges, licensed-spectrum and regulatory requirements, reliance on contract manufacturers, and the need for additional capital.
- The company identified a material weakness in internal control over financial reporting arising from limited accounting resources and inadequate segregation of duties. Management concluded disclosure controls were ineffective at year-end and planned to add accounting personnel, strengthen controls, and use outside specialists.
- The filing discusses potential COVID-19 effects on workforce, delivery, demand, and the wider economy; the impact was uncertain when filed.
- Potentially dilutive securities included approximately 4.77 million warrants and 675,000 options at year-end; common shares outstanding rose from 50.46 million to 59.27 million during 2019.
Most important facts for investors to verify
- Financing obtained after filing, cash runway, and the company’s ability to meet debt maturities and other obligations.
- The secured-loan maturity date and total repayment amount: the filing gives September 9, 2020 in the loan note but elsewhere refers to September 19, 2020; it also describes additional fees and accrued interest.
- Whether rail, utility, oil and gas, security, and UAS pilots converted into material orders and revenue, including the planned UAS deployment timing.
- Progress in remediating the material weakness and improving financial-reporting controls.
- Customer concentration, dilution from warrants and future fundraising, and the status of China-subsidiary dissolution and spectrum-service commercialization.