Ondas Holdings Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 14, 2019. Financial statements are unaudited. Ondas develops and sells FullMAX wireless networking systems and related services for mission-critical industrial communications, including utility, oil and gas, transportation, and public-safety applications.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $88,132 | $35,176 | $313,583 | $83,180 |
| Gross profit / margin | $72,947 / 83% | $28,749 / 82% | $242,450 / 77% | $68,195 / 82% |
| Operating expenses | $3,461,042 | $2,101,208 | $13,013,957 | $4,021,852 |
| Operating loss | $(3,388,095) | $(2,072,459) | $(12,771,507) | $(3,953,657) |
| Net loss | $(5,203,659) | $(3,729,035) | $(16,128,012) | $(7,130,397) |
| Basic and diluted loss per share | $(0.10) | $(0.16) | $(0.32) | $(0.34) |
| Cash used in operations | — | $(11,333,484) | $(4,642,626) | |
| Cash used in investing | — | $(341,863) | $(185,780) | |
| Cash provided by financing | — | $15,200,982 | $4,884,593 |
At September 30, cash was $4.65 million, total assets were $7.22 million, and stockholders’ deficit was $10.34 million. The balance sheet reports a $10.27 million current secured promissory note and $539,921 of long-term notes payable; accounts payable were $2.75 million. It reports current assets of $6.01 million and current liabilities of $16.58 million, implying a working-capital deficit of approximately $10.57 million.
Material changes and notable items
- Nine-month revenue rose to $313,583 from $83,180, but remained small relative to operating costs. Operating expenses increased 224%, mainly reflecting personnel, consulting, sales and marketing, and research and development as the company expanded its business.
- Nine-month gross margin declined to 77% from 82%; management attributed higher cost of sales primarily to product deployments.
- Operating cash use increased by $6.69 million year over year. Financing included $10 million of secured-note proceeds and approximately $5.27 million net proceeds from an equity offering.
- The September private placement sold 2.426 million units for $6.065 million gross proceeds (approximately $5.268 million net); units included common shares and warrants. The filing also reports conversion of debt obligations into units. Warrants outstanding at quarter-end totaled approximately 5.47 million shares.
- The company recorded $1.479 million of deferred offering and financing-cost impairments for the nine months, including expenses associated with canceled financing efforts. It also recorded a $259,926 impairment of an abandoned operating lease right-of-use asset.
- Customer concentration was substantial: one customer accounted for 85% of Q3 revenue and 100% of accounts receivable at September 30.
Outlook, liquidity, risks, and controls
- Management said existing cash at the time of filing was expected to fund operating needs only through December 2019. It stated that available resources, including proceeds from September and October placements, would not meet projected cash requirements through the one-year going-concern evaluation period ending November 14, 2020. The company expected to seek additional dilutive or nondilutive financing; availability and terms were uncertain.
- The filing concludes that substantial doubt exists about the company’s ability to continue as a going concern. Management said it might reduce capital spending, travel, or planned hiring if financing or operating cash is insufficient; these plans were not finalized.
- Second-generation product completion and the start of manufacturing, marketing, and sales were identified as important to revenue growth and profitability. The filing gives no quantified revenue or earnings guidance.
- Subsequent events include an October 30 closing of an additional 206,000 units for $515,000 gross proceeds, and an October 28 amendment extending certain Steward Capital payment dates. The company agreed to issue Steward Capital 120,000 shares by December 1, 2019.
- Disclosure controls were deemed ineffective at quarter-end due to limited accounting staffing and insufficient segregation of duties. Management said the identified deficiencies had not yet been remediated.
- Key risks include financing availability and debt repayment, commercialization and market acceptance, product development, customer concentration, competition, regulatory changes, and internal-control remediation.
Investor verification priorities
- Reconcile the filing’s working-capital figures: the balance sheet implies a deficit of about $10.57 million, while MD&A states approximately $0.3 million. The filing text does not explain this difference clearly.
- Confirm the classification and status of secured debt and the reported debt-for-equity conversions, including the quarter-end secured-note balance and subsequent payment obligations.
- Assess cash runway, scheduled debt maturities, and the amount and terms of additional financing needed to address the disclosed going-concern uncertainty.
- Track customer concentration, receivable collection, product deployments, and whether second-generation products translate into material recurring revenue.
- Monitor equity and warrant dilution, registration-statement timing and potential liquidated damages, and remediation of ineffective disclosure controls.