Ondas Holdings Inc. — Q3 2021 Form 10-Q
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2021. Ondas operates through Ondas Networks, which sells private industrial wireless systems and related development services, and American Robotics, which offers automated drone and data-subscription solutions. American Robotics was acquired on August 5, 2021; reported results include its operations from August 6 through September 30.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $283,329 | $614,026 | $2,335,525 | $1,969,598 |
| Gross profit | $13,613 | $248,163 | $929,784 | $882,058 |
| Gross margin | About 5% | About 40% | About 40% | About 45% |
| Operating loss | $(4,913,351) | $(2,733,111) | $(10,933,044) | $(7,830,293) |
| Net loss | $(4,914,272) | $(3,325,880) | $(10,874,157) | $(9,353,706) |
| Basic and diluted loss per share | $(0.13) | $(0.17) | $(0.34) | $(0.47) |
- Q3 revenue declined approximately 54%; nine-month revenue increased approximately 19%. Development revenue drove the year-to-date growth, while product revenue fell substantially.
- Q3 gross margin compressed to about 5%, which management attributed to a greater mix of lower-margin development work versus product sales. Nine-month margin also declined year over year.
- Operating expenses were $4.93 million in Q3 and $11.86 million for the first nine months. Increases included acquisition-related professional fees, amortization of acquired intangibles, and higher research and development costs.
- Nine-month operating cash use was $11.62 million, compared with $4.88 million in 2020. Investing cash use was $8.68 million, including $8.53 million for the American Robotics acquisition, net of cash acquired. Financing provided $41.74 million, principally reflecting $47.52 million of net proceeds from the June 2021 stock offering, partly offset by debt repayment.
- At September 30, cash was $47.50 million, current assets $50.62 million, current liabilities $4.27 million, and stockholders’ equity $114.93 million. Borrowings were $300,000 long term, with no short-term borrowings; accrued interest was $40,607.
- Common shares outstanding rose to 40,788,681 from 26,540,769 at year-end 2020. The American Robotics consideration included 6.75 million common shares and warrants, in addition to cash consideration; further dilution may arise from equity awards and outstanding warrants.
Material changes and unusual items
- The American Robotics acquisition was valued at $69.27 million in preliminary purchase accounting, including $33.78 million of goodwill and $47.26 million of identifiable intangible assets. The acquired intangible assets create ongoing amortization expense; the purchase-price allocation remained preliminary.
- The company repaid the Steward Capital secured loan in June 2021, making a final payment of approximately $7.04 million. The nine-month results also included $666,091 of income from forgiveness of the PPP loan.
- Revenue was highly concentrated: two customers represented 92% of Q3 revenue and 100% of nine-month revenue, based on the filing’s rounded concentration percentages.
Outlook, risks, and contingencies
- No numerical revenue, earnings, or cash-flow guidance was provided. Management said the December 2020 and June 2021 equity offerings, together with expected revenue growth, were expected to fund operations for at least 12 months from the financial-statement issuance date. The company cautioned that revenue and cash generation may not meet its plan and that further financing may be needed.
- Management cited COVID-19-related disruption to customer visits and field deployments, supply constraints for critical parts, and difficulty attracting employees. The full future impact was described as uncertain.
- The company disclosed a material weakness in internal control over financial reporting, citing limited accounting staff and inadequate segregation of duties. Management said disclosure controls were ineffective and described plans to hire accounting personnel, use outside experts, and strengthen systems and controls. American Robotics control integration was ongoing.
- Three shareholder complaints alleging federal securities-law disclosure violations in connection with the acquisition were disclosed. The acquisition closed on August 5, 2021; the company said it believed the claims lacked merit and intended to defend them. No loss contingency was recorded.
- Subsequent events included a $500,000 investment for approximately 11% of Dynam.AI and an American Robotics lease signed in October for new Waltham, Massachusetts space, scheduled to commence in March 2022. The filing also highlights acquisition integration, customer and supplier disruption, dilution, goodwill/intangible impairment, regulatory, commercialization, and additional-financing risks.
Important facts for investors to verify
- Whether revenue converts into recurring product and subscription sales, and whether development work can support sustainable gross margins.
- Customer concentration, order pipeline, and customer deployment timing, including the commercial contribution expected from American Robotics and Siemens-related programs.
- Cash burn, the assumptions underlying management’s stated 12-month funding outlook, and whether additional capital may be required.
- Final American Robotics purchase-price allocation, integration progress, acquired-asset amortization, and potential goodwill or intangible impairment.
- Remediation of the material weakness, completion of American Robotics control integration, and developments in the shareholder litigation.
- Potential dilution from acquisition securities, warrants, and equity compensation, alongside progress toward commercialization and profitability.