ONDAS HOLDINGS INC. General
You should read the following discussion and analysis in conjunction with our consolidated financial statements and the notes to those financial statements included elsewhere in this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements." Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
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Ondas Networks Segment
We design, develop, manufacture, sell and support FullMAX, our patented,
Software Defined Radio ("SDR") platform for secure, licensed, private, wide-area
broadband networks. Our customers install FullMAX systems in order to upgrade
and expand their legacy wide-area network infrastructure. Our MC-IoT
intellectual property has been adopted by the
Our software-based FullMAX platform is an important and timely upgrade solution for privately-owned and operated wireless wide-area networks, leveraging Internet Protocol-based communications to provide more reliability and data capacity for our mission-critical infrastructure customers. We believe industrial and critical infrastructure markets throughout the globe have reached an inflection point where legacy serial and analog based protocols and network transport systems no longer meet industry needs. In addition to offering enhanced data throughput, FullMAX is an intelligent networking platform enabling the adoption of sophisticated operating systems and equipment supporting next-generation MC-IoT applications over wide field areas. These new MC-IoT applications and related equipment require more processing power at the edge of large industrial networks and the efficient utilization of network capacity and scarce bandwidth resources which can be supported by the "Fog-computing" capability integrated in our end-to-end network platform. Fog-computing utilizes management software to enable edge compute processing and data and application prioritization in the field enabling our customers more reliable, real-time operating control of these new, intelligent MC-IoT equipment and applications at the edge.
Our Partnership with
In
We believe Siemens has both the sales and marketing reach and support to drive
our technology to wide scale acceptance across the global rail market beginning
with the
Our relationship with Siemens has expanded significantly since entering into the
partnership both with (i) the wider marketing of our wireless technology
platform and (ii) multiple additional joint-product programs. Siemens has
expanded its marketing reach of
In
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Additional Critical Markets
We have launched additional initiatives to take our MC-IoT connectivity and
ecosystem partnering strategy into other critical infrastructure markets. In
Ondas Autonomous Systems Segment
Our Ondas Autonomous Systems business unit designs, develops, and markets commercial drone solutions via the Optimus System™ and Scout System™ (the "Autonomous Drone Platforms").
The Autonomous Drone Platforms are highly automated, AI-powered drone systems capable of continuous, remote operation and are marketed as "drone-in-a-box" turnkey data solution services. They are deployed for critical industrial and government applications where data and information collection and processing are required. These use cases include public safety, security and smart city deployments where routine, high-resolution automated emergency response, mapping, surveying, and inspection services are highly valued, in addition to industrial markets such as oil & gas, rail and ports which emphasize security and inspection solutions. The Autonomous Drone Platforms are typically provided to customers under a Data-as-a-Service (DaaS) business model, while some customers will choose to purchase and own and operate an Optimus Systems™.
American Robotics and Airobotics have industry leading regulatory successes
which include having the first drone system approved by the
In addition to the Autonomous Drone Platforms, we also offer a counter-drone
system called the Raider™. The Raider™ was developed by Iron Drone and is
deployed by government and enterprise customers to provide security and protect
critical infrastructure, assets and people from the threat of hostile drones.
Autonomous Drone Platforms
We design, develop and manufacture autonomous drone systems, providing high-fidelity, ultra-high-resolution aerial data to enterprise and government customers. We currently prioritize the marketing of our Optimus System™ which provides customers with a turnkey data and information solution and the ability to continuously digitize, analyze, and monitor their assets and field operations in real-time or near real-time. We believe the market opportunity for our Scout System™ remains significant. As we drive market adoption with the Optimus platform, we anticipate re-introducing the Scout platform including newly enhanced versions to help segment the market for different use cases and price points.
The Optimus System™ has been designed from the ground up as an end-to-end product capable of continuous unattended operations in the real world. Powered by innovations in robotics automation, machine vision, edge computing, and AI. Once installed in the field at customer locations, a fleet of connected Optimus Systems™, which are often deployed as networked drone infrastructure, which we refer to as Urban Drone Infrastructure, remains indefinitely positioned in an area of operation, automatically collecting and seamlessly delivering data and information regularly and reliably.
We market the Optimus System™ under a DaaS business model, whereby our drone platform aggregates customer data and provides the data analytics meeting customer requirements in return for an annual subscription fee. Some customers purchase Optimus Systems™ to own and operate themselves. We also engage distributors to assist in the sales and marketing of our Optimus System™ in geographic markets where its more cost effective to identify and service potential customers by engaging local third parties. These distribution agreements can include joint ventures, where Ondas Autonomous Systems will provide technical expertise to support the joint venture partner in the provision of aerial data services to customers.
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The Optimus System™ consists of (i) Optimus™, a highly automated, AI-powered drone with advanced imaging payloads, (ii) the Airbase™, a ruggedized weatherproof base station for housing, battery swapping, battery charging, payload swapping, data processing, and cloud transfer, and (iii) Insightful™, a secure web portal and API which enables remote interaction with the system, data, and resulting analytics anywhere in the world. These major subsystems are connected via a host of supporting technologies. Airbase™ has internal robotic systems that enable the automated swapping of batteries and payloads. Automated battery swapping allows for 24/7 operation of Optimus as the Optimus drone can immediately be redeployed after returning to the dock for a battery swap. Similarly, the ability to autonomously swap sensors and advanced payloads without human intervention allows for the Optimus System to provide multiple applications and use cases from a single location.
American Robotics and Airobotics have industry leading regulatory successes
which include having the first drone system approved by the
The Raider™
The Raider™ is a counter-drone system, which was designed and developed by Iron Drone, that we are marketing to government and enterprise customers who can utilize the system for security and the protection of critical infrastructure, assets and people from the threat of hostile drones. A typical Raider™ deployment location would include sensitive locations such as borders, stadiums or schools, or near critical assets such as power plants and military bases, and for high profile locations such as amusement parks or where public events are held.
The Raider™ is designed to detect, track and intercept unauthorized, or hostile unmanned aircraft and is most often sold with three small UAVs that are housed in a docking station. The Raider UAV has live video capability and a payload containing a net that can be deployed to intercept a hostile drone. Upon detection of an unauthorized drone, one or more Raider™ UAVs can be autonomously deployed at high speeds to track the unauthorized aircraft. If the unauthorized aircraft is deemed hostile, the Raider™ UAV can deploy the netting to physically intercept the aircraft. A parachute integrated with the netting allows the intercepted drone to safely fall to the ground for collection by our customer.
COVID-19
In
The Company's business, financial condition and results of operations were
impacted from the COVID-19 pandemic for the years ended
? sales and marketing efforts were disrupted as our business development
team was unable to travel to visit customers and customers were unable
to receive visitors for on-location meetings;
? field activity for testing and deploying our wireless systems was
delayed due to the inability for our field service team to install and
test equipment for our customers;
? supply chain disruptions led to component shortages and inefficiencies
in and delays in producing and delivering equipment for certain
purchase orders; and
? delays in fulfilling purchase orders reduced our cash flow from operations.
The Company expects its business, financial condition and results of operations
will be impacted from the COVID-19 pandemic during 2023, primarily due to supply
chain disruptions due to pandemic-related plant and port shutdowns,
transportation delays, government actions and other factors, which may be beyond
our control. The global shortage of certain components such as semiconductor
chips, strains on production or extraction of raw materials, cost inflation, and
labor and equipment shortages, could escalate in future quarters. Labor
shortages have led and may continue to lead to difficult conditions for hiring
and retention of employees, and increased labor costs. Further, the COVID-19
pandemic is ongoing and remains an unknown risk for the foreseeable future. The
extent to which the coronavirus may impact our business will depend on future
developments, which are highly uncertain and cannot be predicted, including new
information which may emerge concerning the severity of the coronavirus. As a
result, the Company is unable to reasonably estimate the full extent of the
impact from the COVID-19 pandemic on its future business, financial condition
and results of operations. In addition, if the Company were to experience any
new impact to its operations or incur additional unanticipated costs and
expenses as a result of the COVID-19 pandemic, such operational delays and
unanticipated costs and expenses there could be a further adverse impact on the
Company's business, financial condition and results of operations during the
year ended
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Inflation Reduction Act of 2022 and Tax Cuts and Jobs Act of 2017
On
Under the Tax Cuts and Jobs Act of 2017, we are required to capitalize R&D expenses for tax purposes and amortize over five years for domestic based expenses and fifteen years for foreign expenses. Given our tax net operating loss carryforward position we do not expect this change to have a material impact on our financial statements.
American Robotics Acquisition Merger Agreement
On
On
On the AR Closing Date, American Robotics merged with and into Merger Sub I,
with American Robotics continuing as the surviving entity, and American Robotics
then subsequently and immediately merged with and into Merger Sub II ("Merger
II"), with Merger Sub II continuing as the surviving entity and as a direct
wholly owned subsidiary of the Company. Simultaneously with Merger II, Merger
Sub II was renamed
Pursuant to the AR Agreement, American Robotics stockholders and certain service
providers received (i) cash consideration in an amount equal to
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Also on the AR Closing Date, the Company entered into employment agreements and issued 1,375,000 restricted stock units ("RSUs) under the Company's incentive stock plan to key members of American Robotics' management. These RSUs vest in equal installments on the next three anniversaries of the AR Closing Date and vesting is contingent on the individuals remaining employed by the Company. These RSUs are not included in purchase consideration and are expensed ratably over the service period. They were valued at the closing market price on the AR Closing Date.
The Company's Consolidated Financial Statements for the year ended
See Note 5 -
Airobotics Transaction
On
Results of Operations
Year ended
Revenues
Year Ended
December 31,
Increase
2022 2021 (Decrease)
Revenue, net
Total$ 2,125,817 $ 2,906,771 $ (780,954 )
Revenue decreased to
Cost of goods sold
Year Ended
December 31,
Increase
2022 2021 (Decrease)
Cost of goods sold
Total$ 1,016,654 $ 1,810,942 $ (794,288 ) 46
Cost of goods sold decreased to
Gross profit
Year Ended
December 31,
Increase
2022 2021 (Decrease)
Gross Profit
Ondas Networks $ 1,017,065 $ 1,057,121 $ (40,056 )
American Robotics 92,098 38,708 53,390
Total $ 1,109,163 $ 1,095,829 $ 13,334 Our gross profit increased by
Operating Expenses
Year Ended
December 31,
2022 2021 Increase (Decrease)
Operating expenses:
General and administrative $ 23,618,823 $ 11,781,503 $ 11,837,320
Sales and marketing 3,456,257 1,487,394 1,968,456
Research and development 24,044,005 5,800,549 18,243,533
Goodwill impairment 19,419,600 - 19,419,600
Total $ 70,538,685 $ 19,069,446 $ 51,469,329
Our principal operating costs include the following items as a percentage of
total expense.
Year Ended
December 31,
2022 2021
Human resource costs, including benefits 28 % 36 %
Travel and entertainment 2 % 1 %
Other general and administration costs:
Professional fees and consulting expenses 12 % 30 %
Facilities and other expenses 9 % 15 %
Depreciation and amortization 6 % 7 %
Other research and deployment costs, excluding human resources and travel and entertainment
15 % 10 %
Other sales and marketing costs, excluding human resources
and travel and entertainment - % 1 %
Goodwill impairment 28 % - %
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Operating expenses for the year ended
Human resource costs, including benefits$ 12,910,965 Travel and entertainment 1,004,877 Other general and administration costs: Professional fees and consulting costs 2,974,047 Facilities and other expenses 3,609,599 Depreciation and amortization 2,448,538Goodwill impairment 19,419,600
Other research and deployment costs, excluding human resources and travel and entertainment
8,883,674
Other sales and marketing costs, excluding human resources and travel
and entertainment 217,939
$ 51,469,239 The increase in operating expenses was primarily due to an increase of
approximately
Operating Loss
Year Ended
December 31,
2022 2021 Increase
Operating loss $ (69,429,522 ) $ (17,973,617 ) $ 51,455,905 As a result of the foregoing, our operating loss increased by
Other Income (Expense), net
Year Ended
December 31,
Increase
2022 2021 (Decrease)
Other income (expense), net
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Other income (expense), net, increased by
Net Loss
Year Ended
December 31,
Increase
2022 2021 (Decrease)
Net Loss $ (73,241,805 ) $ (15,023,842 ) $ 58,217,963 As a result of the net effects of the foregoing, partially offset by the
provision for income tax benefit reported in the amount of
Summary of (Uses) and Sources of Cash
Year Ended
December 31,
2022 2021
Net cash used in operating activities $ (37,963,076 ) $ (16,895,416 )
Net cash used in investing activities (6,934,568 ) (10,210,631 )
Net cash provided by financing activities 33,857,617 41,860,437
(Decrease) Increase in cash and cash equivalents (11,040,027 ) 14,754,390 Cash and cash equivalents, beginning of period 40,815,123 26,060,733 Cash and cash equivalents, end of period
$ 29,775,096 $ 40,815,123
The principal use of cash in operating activities for the year ended
The increase in cash flows used in operating activities of approximately
Cash flows used in investing activities decreased by approximately
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The decrease in cash provided by financing activities of approximately
Liquidity and Capital Resources
We have incurred losses since inception and have funded our operations primarily
through debt and the sale of capital stock. On
In
Our future capital requirements will depend upon many factors, including progress with developing, manufacturing and marketing our technologies, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, our ability to establish collaborative arrangements, marketing activities and competing technological and market developments, including regulatory changes and overall economic conditions in our target markets. Our ability to generate revenue and achieve profitability requires us to successfully market and secure purchase orders for our products and services from customers currently identified in our sales pipeline as well as new customers. We also will be required to efficiently manufacture and deliver equipment on those purchase orders. These activities, including our planned research and development efforts, will require significant uses of working capital. There can be no assurance that we will generate revenue and cash as expected in our current business plan. We may seek additional funds through equity or debt offerings and/or borrowings under additional notes payable, lines of credit or other sources. We do not know whether additional financing will be available on commercially acceptable terms or at all, when needed. If adequate funds are not available or are not available on commercially acceptable terms, our ability to fund our operations, support the growth of our business or otherwise respond to competitive pressures could be significantly delayed or limited, which could materially adversely affect our business, financial conditions, or results of operations.
Off-Balance Sheet Arrangements
As of
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in
? requires assumptions to be made that were uncertain at the time the estimate
was made, and
? changes in the estimate or different estimates that could have been selected
could have a material impact on our results of operations or financial
condition.
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We base our estimates and judgments on our experience, our current knowledge, our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following accounting policies and estimates as those that we believe are most critical to our financial condition and results of operations and that require management's most subjective and complex judgments in estimating the effect of inherent uncertainties: share-based compensation expense, income taxes, complex derivative financial instruments and impairment of long-lived assets including intangible assets acquired in business combinations.
Share-Based Compensation Expense. We calculate share-based compensation expense for option awards ("Share-based Award(s)") based on the estimated grant/issue date fair value using the Black-Scholes-Merton option pricing model ("Black-Scholes Model") and recognize the expense on a straight-line basis over the vesting period. We account for forfeitures as they occur. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the vesting period of the Share-based Award in determining the fair value of Share-based Awards. The expected term is based on the "simplified method." Under this method, the term is estimated using the weighted average of the service vesting period and contractual term of the option award. As the Company does not yet have sufficient history of its own volatility, the Company has identified several public entities of similar complexities and industry and calculates historical volatility based on the volatilities of these companies. Although we believe our assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.
We recognize restricted stock unit expense over the period of vesting or period that services will be provided. Compensation associated with shares of Common Stock issued or to be issued to consultants and other non-employees is recognized over the expected service period beginning on the measurement date, which is generally the time the Company and the service provider enter into a commitment whereby the Company agrees to grant shares in exchange for the services to be provided.
Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. Our provision for income taxes is determined using the asset and liability approach to account for income taxes. A current liability is recorded for the estimated taxes payable for the current year. Deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which the timing differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates or tax laws are recognized in the provision for income taxes in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more-likely-than-not to be realized. Changes in valuation allowances will flow through the statement of operations unless related to deferred tax assets that expire unutilized or are modified through translation, in which case both the deferred tax asset and related valuation allowance are similarly adjusted. Where a valuation allowance was established through purchase accounting for acquired deferred tax assets, any future change will be credited or charged to income tax expense. See Note 13 - Income Taxes in the accompanying Consolidated Financial Statements for discussion related to Tax Reform.
The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. In the ordinary course of our business, there are transactions and calculations for which the ultimate tax determination is uncertain. In spite of our belief that we have appropriate support for all the positions taken on our tax returns, we acknowledge that certain positions may be successfully challenged by the taxing authorities. We determine the tax benefits more likely than not to be recognized with respect to uncertain tax positions. Although we believe our recorded tax assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty; therefore, our assessments can involve both a series of complex judgments about future events and rely on estimates and assumptions. Although we believe these estimates and assumptions are reasonable, the final determination could be materially different than that which is reflected in our provision for income taxes and recorded tax assets and liabilities.
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Complex Derivative Financial Instruments. From time to time, we sell common stock, and we issue convertible debt, both with common stock purchase warrants, which may include terms requiring conversion price or exercise price adjustments based on subsequent issuance of securities at prices lower than those in the agreements of such securities. In these situations, the instruments may be accounted for as liabilities and recorded at fair value each reporting period. Due to the complexity of the agreement, we use an outside expert to assist in providing the mark to market fair valuation of the liabilities over the reporting periods in which the original agreement was in effect. It was determined that a Binomial Lattice option pricing model using a Monte Carlo simulation would provide the most accuracy given all the potential variables encompassing a future dilutive event. This model incorporated transaction assumptions such as our stock price, contractual terms, maturity, risk free rates, as well as estimates about future financings, volatility, and holder behavior. Although we believe our estimates and assumptions used to calculate the fair valuation liabilities and related expense were reasonable, these assumptions involved complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.
Impairment of Long-Lived Assets. Carrying values of property and equipment and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. If impairment indicators are present, we determine whether an impairment loss should be recognized by testing the applicable asset or asset group's carrying value for recoverability. This assessment requires the exercise of judgment in assessing the future use of and projected value to be derived from the eventual disposal of the assets to be held and used. Assessments also consider changes in asset utilization, including the temporary idling of capacity and the expected timing for placing this capacity back into production. If the carrying value of the assets are not recoverable, then a loss is recorded for the difference between the assets' fair value and respective carrying value. The fair value of the assets is determined using an "income approach" based upon a forecast of all the expected discounted future net cash flows associated with the subject assets. Some of the more significant estimates and assumptions include: market size and growth, market share, projected selling prices, manufacturing cost and discount rate. Our estimates are based upon historical experience, commercial relationships, market conditions and available external information about future trends.
Recently Adopted Accounting Pronouncements
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