Ondas Holdings Inc. — Q3 2018 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2018 are presented on a consolidated basis. On September 28, Zev Ventures completed a reverse acquisition of Ondas Networks, changed its name to Ondas Holdings, and discontinued its ticket-reselling business. Ondas Networks’ wireless radio systems business, including FullMAX, became the company’s sole business. Comparisons are to Ondas Networks’ corresponding 2017 results; they do not represent the former Zev Ventures business.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2018 / 2017 | $35,176 / $40,134 | $83,180 / $209,348 |
| Gross profit, 2018 / 2017 | $28,749 / $23,972 | $68,195 / $146,256 |
| Gross margin, 2018 / 2017 | 83% / 60% | 82% / 70% |
| Operating loss, 2018 / 2017 | $(2,072,459) / $(863,495) | $(3,953,657) / $(1,913,269) |
| Net loss, 2018 / 2017 | $(447,532) / $(1,036,433) | $(3,848,894) / $(2,407,167) |
| Net loss per share, 2018 / 2017 | $(0.02) / $(0.06) | $(0.18) / $(0.15) |
- Quarterly revenue declined about 12%; nine-month revenue declined about 60%, primarily due to lower product sales. Gross margin improved, which management attributed to product mix and lower product costs.
- Operating expenses rose to $2.10 million for the quarter and $4.02 million year to date. The largest increases were research and development and sales and marketing, reflecting product development work and added commercial staffing.
- Quarterly net loss was reduced by a $3.98 million noncash gain on debt conversion, partly offset by $2.38 million of interest expense. For the nine months, that gain and $953,000 of derivative fair-value expense contributed to total other income of $105,000; interest expense was $2.93 million.
- At September 30, cash was $516,251; total assets were $1.21 million; current liabilities were $10.80 million; and stockholders’ deficit was $9.90 million. Management reported a working-capital deficit of approximately $9.8 million and net borrowings of approximately $9.2 million.
- Nine-month operating cash outflow was $4.64 million, investing cash outflow was $186,000, and financing cash inflow was $4.88 million. Cash increased from approximately $460,000 to $516,000.
Material changes, liquidity and debt
- Compared with 2017, nine-month revenue and gross profit fell, while operating expenses more than doubled and operating loss widened. Net loss increased despite the debt-conversion gain.
- Approximately $3.9 million of debt was contractually due December 31, 2018, and the existing $5 million secured note was due in September 2019. The secured note bears interest at a rate based on a minimum 11.25% formula and is secured by substantially all company assets.
- After quarter end, the company issued a second $5 million secured note on October 9, 2018, under a facility of up to $10 million. It matures April 9, 2020 and is also secured by company assets. The MD&A says amounts under the facility cannot be used to repay existing indebtedness and describes earlier repayment triggers, including a qualifying capital raise.
- Management said available cash and the October borrowing were expected to fund operations through December 31, 2018, but the company did not have sufficient funds to repay the debt maturing that day. Additional financing was needed, with no assurance it could be obtained on acceptable terms or at all. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern through November 13, 2019.
Outlook, risks and unusual items
- Management expects substantial losses to continue for several years and expects research and development, sales and marketing, and administrative expenses to increase. It said expanded sales and service staffing could support more opportunities and revenue in 2019; achieving profitability depends on completing second-generation products and beginning their manufacture and sale.
- Key risks include financing and debt repayment, commercial acceptance of FullMAX and the IEEE 802.16s standard, product development and commercialization, competition, execution in international markets, and the ability to achieve meaningful revenue and profitability.
- Disclosure controls were reported ineffective as of September 30 because of a material weakness involving insufficient segregation of duties. Management intended to remediate it but gave no assurance of timely remediation.
- The company reported no material legal proceedings, no defaults under the secured loan agreement as of September 30, and no off-balance-sheet arrangements. A post-quarter sublease added approximately $28,600 monthly base rent beginning November 2018, subject to stated abatements and other costs.
Important facts for investors to verify
- Whether Ondas can obtain funds to repay the approximately $3.9 million due December 31, 2018, and how facility availability, collateral, interest, and acceleration terms affect liquidity.
- Whether the October $5 million borrowing and remaining facility capacity are available for planned operations, given the filing’s restrictions on using facility funds to repay existing debt.
- Progress, costs, and timing for second-generation FullMAX products, customer adoption, and the expected 2019 sales opportunity.
- The sustainability of reported margins and the extent to which reported earnings were affected by the one-time debt-conversion gain and derivative valuation.
- Remediation of the material weakness in internal controls and the implications of the reverse acquisition, share issuance, and 10-million-share equity incentive plan reserve.