Business Context and Reporting Period
Ondas Holdings Inc. filed this Form 8-K on March 13, 2019, to announce a restatement of its previously issued quarterly and year-to-date unaudited condensed consolidated financial statements for the period ended September 30, 2018. The restatement addresses errors in recording a debt conversion on September 28, 2018, and the omission of recognizing a debt modification on July 11, 2018.
Key Financial Metrics and Restatement Impact
The filing details significant adjustments to the financial statements for the three and nine months ended September 30, 2018. Cash flow metrics remained unchanged by the restatement.
| Metric | Period | As Previously Reported | As Restated | Adjustment |
|---|---|---|---|---|
| Net Loss | 3 Months Ended Sep 30, 2018 | $(447,532) | $(3,729,035) | $(3,281,503) |
| Net Loss | 9 Months Ended Sep 30, 2018 | $(3,848,894) | $(7,130,397) | $(3,281,503) |
| Net Loss Per Share (Basic/Diluted) | 3 Months Ended Sep 30, 2018 | $(0.02) | $(0.16) | $(0.14) |
| Net Loss Per Share (Basic/Diluted) | 9 Months Ended Sep 30, 2018 | $(0.18) | $(0.34) | $(0.16) |
| Additional Paid-in Capital | Balance Sheet Sep 30, 2018 | $14,334,570 | $17,616,073 | $3,281,503 |
| Accumulated Deficit | Balance Sheet Sep 30, 2018 | $(24,233,372) | $(27,514,875) | $(3,281,503) |
| Total Assets | Balance Sheet Sep 30, 2018 | $1,206,063 | $1,206,063 | $0 |
| Total Liabilities | Balance Sheet Sep 30, 2018 | $11,101,777 | $11,101,777 | $0 |
Material Changes Versus Prior Period
The primary material change is the reclassification of a previously recorded gain on debt conversion into equity and the recognition of a loss on debt extinguishment.
- Debt Modification (July 11, 2018): The company failed to record a loss on extinguishment of debt of $44,348 and failed to reclassify a derivative liability of $1,141,995 to additional paid-in capital.
- Debt Conversion (September 28, 2018): A gain of $3,976,992 was originally recorded but should have been recorded as common stock and additional paid-in capital due to the prior debt modification.
- Operating Results: Gross profit and operating loss figures remained unchanged. The restatement impacted "Other income (expense)" significantly, turning a reported net gain in other income into a substantial net expense.
Management Commentary, Risks, and Contingencies
Management and the Audit Committee determined that a material weakness existed in the Company's internal control over financial reporting as of September 30, 2018, and through December 31, 2018. Consequently, the CEO and CFO concluded that disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2018, and December 31, 2018. Internal control over financial reporting was deemed ineffective as of December 31, 2018. These matters were discussed with the independent registered public accounting firm, Rosenberg Rich Baker Berman, P.A.
Key Facts for Investor Verification
- Verify the accuracy of the restated net loss figures, which increased by approximately $3.28 million for both the three and nine-month periods ended September 30, 2018.
- Confirm the status of the material weakness in internal controls and any remediation plans implemented after December 31, 2018.
- Review the treatment of the derivative liability and debt modification to ensure future compliance with accounting standards regarding debt extinguishment and conversion.
- Note that while net income and equity balances were significantly adjusted, total assets, total liabilities, and cash flow figures remained unchanged.