Ondas Holdings Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed June 24, 2020. Ondas develops and sells FullMAX software-defined radio systems and related services for mission-critical industrial networks, including utilities, transportation, and unmanned aircraft applications. The filing reports unaudited consolidated results.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $200,198 | $32,294 |
| Gross profit / margin | $19,106 / 10% | $26,992 / 84% |
| Operating expenses | $2,350,534 | $5,145,120 |
| Operating loss | $(2,331,428) | $(5,118,128) |
| Net loss | $(2,807,285) | $(5,823,725) |
| Basic and diluted loss per share | $(0.05) | $(0.12) |
| Cash used in operating activities | $(1,973,754) | $(4,694,328) |
Revenue included $15,272 of product sales, $2,764 of service revenue, and $182,162 of development revenue. One customer represented 91% of Q1 2020 revenue; a different customer represented 80% in Q1 2019. Gross margin fell because development services carried higher associated costs.
At March 31, 2020, cash was $176,881, total current assets were $1.38 million, and current liabilities were $16.76 million. Working capital deficit was approximately $15.4 million and stockholders’ deficit was approximately $15.1 million. Debt included a $10 million secured note principal balance, with a September 9, 2020 maturity, and approximately $540,000 of other notes payable. The secured lender’s balance is subject to accrued interest, accreted charges, and debt discount.
Cash declined by $1.98 million during the quarter; investing activities used $2,393 and financing activities provided no cash. There was no formal revenue or earnings guidance. Management estimated available resources would cover operating needs only through July 2020, including funds received under the PPP after quarter-end, and stated that additional financing would be required.
Changes, outlook, and material risks
- Revenue increased by $167,904 year over year, largely due to development revenue. Despite higher sales, gross profit declined by $7,886 and gross margin fell from 84% to 10%.
- Operating expenses decreased 55%, or approximately $2.8 million, primarily reflecting lower headcount and compensation, travel, professional fees, and product-development spending. Operating loss and net loss improved year over year, but the company remained loss-making.
- Operating cash use fell by approximately $2.7 million, largely because of reduced headcount and development spending. Cash nevertheless fell from $2.15 million at December 31, 2019 to $176,881 at quarter-end.
- Management concluded substantial doubt existed about the company’s ability to continue as a going concern for the evaluation period through June 24, 2021. Financing plans were not finalized, and management’s potential cost reductions were not considered probable for accounting purposes.
- COVID-19 had not materially affected reported Q1 results, but management expected a more significant effect in Q2 and the rest of 2020 and could not estimate the impact. The company reported reducing operations to critical activities and furloughing 80% of its workforce at that time; potential operational disruption and debt-covenant compliance were identified as risks. CEO and CFO base salaries were reduced 90% for 60 days effective March 20.
- After quarter-end, the company received a $666,000 PPP loan, bearing 1% interest and potentially forgivable subject to eligibility and use requirements; forgiveness was not assured. Also after quarter-end, Ondas signed development and master-purchase agreements with Siemens Mobility for rail-market products. Commercial results from these arrangements were not quantified.
- The company reported a material weakness in internal control over financial reporting due to inadequate segregation of duties and limited accounting resources. Disclosure controls were deemed ineffective; management planned remediation, including adding accounting personnel and strengthening controls.
- Other notable items after quarter-end included warrants and options issued in May, deregistration of its China subsidiary in June, and appointment of a new president who received 3 million restricted stock units vesting over two years.
Important facts for investors to verify
- Whether Ondas obtained additional financing in time to address near-term liquidity needs and the September 2020 secured-note maturity.
- PPP loan eligibility, compliance with forgiveness conditions, and the amount ultimately forgiven or repayable.
- Progress, purchase commitments, delivery, and revenue from the Siemens arrangements and the planned UAS deployment.
- Customer concentration, development-contract economics, and whether gross margins can recover as revenue scales.
- COVID-19 effects on operations, workforce, customer orders, and compliance with debt covenants.
- Remediation of the reported material weakness and restoration of effective disclosure controls.