Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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
Ondas Holdings is a leading
provider of private wireless, drone, and automated data solutions through its wholly owned subsidiaries Ondas Networks Inc. (“Ondas
Networks”) and American Robotics, Inc. (“American Robotics” or “AR”). Ondas Networks and American Robotics
together provide users in rail, energy, mining, agriculture, and critical infrastructure markets with improved connectivity, and data
collection capabilities and automated decision making to improve operations. Ondas operates these two subsidiaries as separate business
segments, and the following is a discussion of each segment.
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Ondas Networks Segment
Ondas Networks provides wireless
connectivity solutions enabling mission-critical Industrial Internet applications and services. We refer to these applications as the
Mission-Critical Internet of Things (“MC-IoT”). Our wireless networking products are applicable to a wide range of MC-IoT
applications, which are most often located at the very edge of large industrial networks. These applications require secure, real-time
connectivity with the ability to process large amounts of data at the edge of large industrial networks. Such applications are required
in all of the major critical infrastructure markets, including rail, electric grids, drones, oil and gas, and public safety, homeland
security and government, where secure, reliable and fast operational decisions are required in order to improve efficiency and ensure
a high degree of safety and security.
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 Institute of Electrical and Electronics Engineers (“IEEE”), the leading worldwide
standards body in data networking protocols, and forms the core of the IEEE 802.16s standard. Because standards-based communications solutions
are preferred by our mission-critical customers and ecosystem partners, we have taken a leadership position in IEEE as it relates to wireless
networking for industrial markets. As such, management believes this standards-based approach supports the adoption of our technology
across a burgeoning ecosystem of global partners and end markets.
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.
We sell our products and
services globally through a direct sales force and value-added sales partners to critical infrastructure providers including major rail
operators, commercial and industrial drone operators, electric and gas utilities, water and wastewater utilities, oil and gas producers
and pipeline operators, and for other critical infrastructure applications in areas such as homeland security and defense, and transportation.
We continue to develop our value-added reseller relationships which today include a major strategic partnership with Siemens Mobility
(“Siemens”) for the development of new types of wireless connectivity for the global rail markets. In addition, Ondas and
JVCKenwood, a global supplier of Land Mobile Radio (LMR) systems, have jointly responded to a request from the rail industry for the
design and delivery of a next generation data and voice platform. We believe our Siemens Mobility partnership and our joint effort
with JVCKenwood are indicative of the potential for additional Tier 1 partnerships in our other vertical markets including securing reseller
relationships with major suppliers to the worldwide government and homeland security markets. These partnerships are being driven by
the flexibility of our FullMAX software to support legacy industrial protocols (e.g., Push to Talk Voice, Dial-up Serial Data Communications,
and Advanced Train Control System – ATCS) while simultaneously operating our state-of-the-art MC-IoT protocols. This dual and multi-mode
software capability provides major industrial customers with a seamless migration path to advanced internet-protocol-based networks.
Over time, these legacy functions, like Push to Talk Voice and ATCS, are transformed into just several of many new data applications
we can support.
The
Global Rail Markets and our Siemens Mobility Partnership
The North American Rail Network
is vast in scale, consisting of 140,000 miles of track, 25,000 locomotives, and 1.6 million railcars. Within this large footprint, we
believe there are 200,000 highway crossings, with at least 65,000 of the crossings equipped with electronic systems today, a number which
is expected to increase in the coming years. We believe a significant portion of the communications infrastructure has been in operation
for more than 20 years and now requires a technological upgrade to support new applications and increased capacity requirements. Our MC-IoT
platform offers an excellent migration path for these applications. We believe the Class I Rails value the ability of Ondas’ frequency-agnostic
SDR architecture to enable a substantial capacity increase utilizing the railroad’s existing wireless infrastructure and dedicated
FCC licensed radio frequencies, as well as the flexibility to adapt to and take advantage of future changes in spectrum availability.
The Class 1 Rails operate four separate nationwide networks, all of which are addressable by our FullMAX platform. Ondas is targeting
the 900 MHz network for the initial adoption of its wireless platform by the Class 1 Rails, who were awarded greenfield spectrum in the
900 MHz band by the FCC in 2020.
35
Siemens
Partnership, ATCS Development Program
In
April 2020, we entered a strategic partnership with Siemens, to jointly develop wireless communications products for the North American
Rail Industry based on Siemens’ Advanced Train Control System (“ATCS”) protocol and our MC-IoT platform. At the same
time, we entered into an agreement to allow Siemens to sell Ondas’ 802.16 MC-IoT standardized products to the North American Rails
under the Siemens’ brand name “Airlink”. The dual-mode ATCS/MC-IoT radio system was designed to support Siemens’
extensive installed base of ATCS radios as well as offer Siemens’ customers the ability to support a host of new advanced rail applications
utilizing our MC-IoT wireless system. These new applications, including Advanced Grade Crossing Activation and Monitoring, Wayside Inspection,
Railcar Monitoring, and support for next generation signaling and train control systems, are designed to increase railroad productivity,
reduce costs, and improve safety. Siemens formally launched the dual mode ATCS / MC-IoT radio products along with the Siemens branded
Airlink radios in September 2021 at the Railway Systems Suppliers (RSSI) conference in Indianapolis. In November 2021, Siemens secured
its first commercial 900 MHz rail order for a major Class I Railroad for delivery by year-end. Ondas delivered this initial order as requested
in December 2021.
Multiple
New Joint Development Programs
In
January of 2021, Ondas Networks and Siemens signed a Letter of Intent (“LOI”) for the development of a next generation radio
product for the global rail markets including support for our first onboard locomotive radio. The formal agreement, referred to as the
Next Generation Radio Board, was signed by the parties in July 2021 with a targeted completion date in first quarter 2022. Also in July
2021, Ondas Networks received a purchase order from Siemens Mobility for the development of a new industrial radio to support rail safety.
This program was completed as requested by September 2021. In October 2021, Siemens substantially expanded the Next Generation Radio Board
development program by issuing to Ondas Networks four new purchase orders which included customized hardware and software solutions for
Head of Train (HOT) locomotive applications for the North American market and for a major Asian Rail customer. The expanded program reprioritized
the July 2021 agreement deliverables with a Q2 2022 delivery of completed products to the Asian Rail customer.
802.16
(“dot16”) Rail Lab
In
December 2021, we received an order from Siemens for the implementation of the “dot16” North American Rail Lab ("Rail
Lab"). The Rail Lab, hosted at Ondas Networks headquarters facility in Sunnyvale, CA, serves multiple purposes including interoperability
and coexistence testing of 802.16 compliant wireless systems, customization and optimization of different network rail configurations,
and next generation rail application testing. Importantly, the lab is focused on multiple frequency bands and networks beyond the 900
MHz that Ondas is targeting for commercial deployment.
To
summarize, since announcing our strategic partnership in April 2020, Ondas and Siemens have completed our first major joint development
program for ATCS / MC-IoT 900 MHz radios for the North American market and have secured and delivered on initial orders of these products
to a Class I railroad. In July 2021, we entered into our second major joint development program for a global onboard locomotive radio
and this program was significantly expanded in October 2021 to incorporate specific locomotive protocols with initial delivery of completed
products in Q2 2022. In September 2021, Siemens launched their Siemens-branded MC-IoT wireless systems under brand name ‘Airlink’.
And in December 2021, Siemens together with Ondas secured the Rail Lab order from the North American railroads which will allow the companies
to support the deployment of multiple North American rail communications networks based on the 802.16 standard.
Ondas
believes the Siemens strategic partnership validates our wireless connectivity solutions and will serve as the foundation for the continued
adoption of our wireless technology in the global rail markets.
36
UAS, Drones and AURA Network
Systems
In December 2019, Ondas Networks
received a purchase order for FullMAX base stations and remote radios from AURA Networks Systems (“AURA”), a privately held
company deploying a nationwide network for the command and control of commercial drones. AURA’s key differentiator is its exclusive
ownership of dedicated, licensed Air-to-Ground frequencies. We believe that operators of large, fast-moving, and high-flying drones, including
those used for inspection and security applications as well as those for the Urban Air Mobility market (also known as “flying cars”),
will require a secure command and control network like that planned by AURA. This command and control (C2) network will be designed to
meet FAA requirements in order to fly long distances beyond visual line of site (BVLOS) of a drone operator.
In July 2020, we completed
delivery of AURA’s first purchase order for the ground infrastructure. AURA has now installed its initial nationwide infrastructure
based on our FullMAX technology in order to satisfy their FCC license requirements. In January 2021, AURA achieved another major milestone
with approval from the FCC to use their frequencies for UAS/Drone operation. Based on this approval and other advances in the network,
AURA placed a new purchase order in the first quarter of 2021 for continued system development related to the optimization of FullMAX
base station and remote radio equipment for customer testing and demonstration networks. We have completed this project as of December
2021.
Additional Critical Markets
In the coming quarters we
expect to launch additional initiatives to take our MC-IoT connectivity and ecosystem partnering strategy into other critical infrastructure
markets. As evidence of this, in February 2021, we announced a new partnership with Rogue Industries to target opportunities in US Government
and DoD markets. Rogue is an agile, focused marketing organization with significant expertise in bringing new technologies to these critical
markets along with significant governmental procurement expertise. This expertise would otherwise require significant expense and time
for Ondas to develop internally. Our agreement with Rogue is another example of Ondas leveraging what we refer to our “Ecosystem
Flywheel” with our capital-light business model.
American Robotics Segment
American Robotics designs, develops and manufactures autonomous drone
systems, providing high-fidelity, ultra-high-resolution aerial data to enterprise customers. We provide our customers turnkey data solutions
designed to meet their unique requirements in the field. We do this via our internally developed Scout SystemTM, an industrial drone
platform which provides commercial and government customers with the ability to continuously digitize, analyze, and monitor their assets
and field operations in near real-time.
The Scout SystemTM 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, the Scout SystemTM provides efficiencies as a drone solution for commercial use. Once installed
in the field at customer locations, a fleet of connected Scout Systems remain indefinitely in an area of operation, automatically collecting
data each day, self-charging, and seamlessly delivering data analysis regularly and reliably. AR markets the Scout SystemTM under
a Robot-as-a-Service (“RaaS”) business model, whereby our drone platform aggregates customer data and provides the data analytics
meeting customer requirements in return for an annual subscription fee.
The Scout SystemTM
consists of (i) ScoutTM, a highly automated, AI-powered drone with advanced imaging payloads (ii) the ScoutBaseTM, a ruggedized
weatherproof base station for housing, charging, data processing, and cloud transfer, and (iii) ScoutViewTM, 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. Using a suite of proprietary technologies, including Detect-and-Avoid (“DAA”)
and other proprietary intelligent safety systems, we achieved the first and only Federal Aviation Administration (“FAA”) approval
for automated operations without a human on-site in the United States on January 15, 2021. As a result, American Robotics currently has
the unique ability to serve markets which require automated drone technology to enable scalable drone operations, which the Company estimates
to be 90% of all commercial drone applications.
37
American Robotics sells its
products and services nationally through a direct sales force to large enterprises that operate in the agriculture, industrial and critical
infrastructure verticals that include major rail operators, electric and gas utilities, oil and gas producers, large agricultural input
manufacturers, large agricultural coops, and for other critical infrastructure applications in areas such as homeland security and defense,
and transportation.
As of December 31, 2021, American
Robotics had signed subscription agreements of varying contract lengths with customers in multiple industries including agriculture, oil
and gas and materials management
COVID-19
In December 2019, a novel
strain of coronavirus (“COVID-19”) was identified and has resulted in increased travel restrictions, business disruptions
and emergency quarantine measures across the world including the United States.
The Company’s business,
financial condition and results of operations were impacted from the COVID-19 pandemic for the years ended December 31, 2021 and 2020
as follows:
In the first quarter of 2020,
we reduced our business activity to critical operations only, and furloughed 80% of our workforce. Per orders issued by the Health Officer
of the County of Santa Clara, our corporate offices and facilities were closed, except for functions related to the support of remote
workers and product support related to the essential transportation sector. On May 13, 2020, we reopened our offices and facilities and
as of December 31, 2020 we had no employees remaining on furlough. Of the 18 employees previously furloughed, 14 are currently employed
by us.
The Company expects its business,
financial condition and results of operations will be impacted from the COVID-19 pandemic during 2022, primarily due to the slowdown of
customer activity during 2020 and 2021, ongoing supply chain constraints for certain critical parts, and difficulties in attracting employees.
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 COVID-19 and its variants. 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 conditions,
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 could further adversely
impact the Company’s business, financial condition and results of operations during 2022.
American Robotics Acquisition
Merger Agreement
On May 17, 2021, the Company
entered into an Agreement and Plan of Merger (the “Agreement”) with Drone Merger Sub I Inc., a Delaware corporation and a
direct wholly owned subsidiary of the Company (“Merger Sub I”), Drone Merger Sub II Inc., a Delaware corporation and a direct
wholly owned subsidiary of the Company (“Merger Sub II”), American Robotics, and Reese Mozer, solely in his capacity as the
representative of American Robotics’ Stockholders (as defined in the Agreement). American Robotics is a company focused on designing,
developing, and marketing industrial drone solutions for rugged, real-world environments. AR’s Scout SystemTM is a highly automated,
AI-powered drone system capable of continuous, remote operation and is marketed as a “drone-in-a-box” turnkey data solution
service under a Robot-as-a-Service (RAAS) business model. The Scout SystemTM is the first drone system approved by the FAA for automated
operation beyond-visual-line-of-sight (BVLOS) without a human operator on-site.
On August 5, 2021 (the “Closing
Date”), the Company’s stockholders approved the issuance of shares of the Company’s common stock, including shares of
common stock underlying Warrants (as defined below), in connection with the acquisition of American Robotics.
On the 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 American Robotics, Inc.
38
Pursuant to the Agreement,
American Robotics stockholders and certain service providers received (i) cash consideration in an amount equal to $7,500,000, less certain
indebtedness, transaction expenses and other expense amounts as described in the Agreement; (ii) 6,750,000 shares of the Company’s
common stock (inclusive of 26 fractional shares paid in cash as set forth in the Agreement); (iii) warrants exercisable for 1,875,000
shares of the Company’s common stock (the “Warrants”) (inclusive of 24 fractional shares paid in cash and the equivalent
of Warrants for 309,320 shares representing the value of options exercisable for 211,038 shares issued under the Company’s incentive
stock plan and reducing the aggregate amount of Warrants as set forth in the Agreement); and (iv) the cash release from the PPP Loan Escrow
Amount (as defined in the Agreement). Each of the Warrants entitle the holder to purchase a number of shares of the Company’s common
stock at an exercise price of $7.89. Each of the Warrants shall be exercisable in three equal annual installments commencing on the one-year
anniversary of the Closing Date and shall have a term of ten years. 59,544 of the stock options were issued fully vested to employees
who did not exercise their American Robotics options prior to the Closing Date and had no ongoing service requirements and were included
in the purchase consideration. The remaining 151,494 stock options issued vest over four years and are contingent on ongoing employment
by the Company and are recorded as compensation expense over the service period.
Also on the 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 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 Closing Date.
The Company’s Consolidated
Financial Statements for the year ended December 31, 2021 include results of operations of American Robotics for the period from the Closing
Date to December 31, 2021.
See Note 5 to the accompanying Consolidated Financial Statements for
further information regarding the American Robotics acquisition.
Results of Operations
Year ended December 31, 2021 compared to year
ended December 31, 2020
Revenues
Year Ended December 31,
Revenue, net
Revenue increased to $2,906,771
for the year ended December 31, 2021 from $2,163,719 for the year ended December 31, 2020. Revenues during the year ended December 31,
2021 included $405,569 for products, $96,934 for maintenance, service, support, and subscriptions, $2,401,474 for development agreements
with Siemens Mobility and AURA Networks, and $2,794 for other revenues. Revenues during the same period in 2020 included $1,151,557 for
products, $62,410 for maintenance/service contracts, $943,357 for development agreements, and $6,395 for other revenues.
39
Cost of goods sold
Year Ended December 31,
Cost of goods sold
Cost of goods sold increased
to $1,810,942 for the year ended December 31, 2021 from $1,236,051 for the year ended December 31, 2020. The increase in cost of goods
sold was the result of additional development costs being allocated to development agreements in line with the increased revenue.
Gross profit
Year Ended December 31,
Gross Profit (Loss)
Our gross profit increased
by $168,161 for the year ended December 31, 2021 compared to the year ended December 31, 2020 based on the changes in revenues and costs
of sales as discussed above. Gross margin for the periods in 2021 and 2020 was 38% and 43%, respectively. This decrease in gross margin
is due to a higher mix of development projects with lower margins as compared to higher margin product sales in the prior year period.
Operating Expenses
Year Ended December 31,
Operating expenses:
Our principal operating costs
include the following items as a percentage of total expense.
Year Ended December 31,
Human resource costs, including benefits 36 % 51 %
Travel and entertainment 1 % 1 %
Other general and administration costs:
Professional fees and consulting expenses 30 % 31 %
Facilities and other expenses 15 % 11 %
Depreciation and amortization 7 % 1 %
40
Operating expenses increased
by $6,617,892 as a result of the following items:
Human resource costs, including benefits $ 423
Travel and entertainment 141
Other general and administration costs:
Professional fees and consulting costs 1,871
Facilities and other expenses 1,479
Depreciation and amortization 1,347
The increase in operating expenses
was primarily due to an increase of approximately $1,871,000 in professional fees, of which approximately $1,644,000 related to the American
Robotics acquisition, increase of $1,479,000 in facilities and other expenses including insurance due to acquisition of American Robotics,
increase of approximately $1,347,000 in depreciation and amortization expense due to amortization of American Robotics intangible assets,
and an increase of approximately $1,285,000 in R&D development expenses for the year ended December 31, 2021. Human resource costs
increased by approximately $423,000 in 2021 compared to 2020 due to addition of American Robotics payroll and increased headcount at Ondas
Networks, partially offset by a decrease of approximately $1,423,000 in stock-based compensation.
Operating Loss
Year Ended
December 31,
As a result of the foregoing,
our operating loss increased by $6,449,731 to $17,973,617 for the year ended December 31, 2021, compared with $11,523,886 for the year
ended December 31, 2020. The operating loss increased primarily as a result of an increase in operating expenses of approximately $6,618,000
primarily associated with the American Robotics acquisition as described above.
Other Income (Expense), net
Year Ended
December 31,
Other expense, decreased by $1,981,787 to other income of $27,793 for
the year ended December 31, 2021, compared to other expense of $1,953,994 for the year ended December 31, 2020. During the year ended
December 31, 2021, compared to the year ended December 31, 2020, we reported a decrease in interest expense of $1,361,162 due to payoff
of the Steward Capital note payable in the second quarter of 2021 as well as $571,691 increase in other income primarily due to the PPP
loan forgiveness of $666,091.
Net Loss
Year Ended
December 31,
As a result of the net effects
of the foregoing partially offset by the provision for income tax benefit reported in the amount of $2,921,982, net loss increased by
$1,545,962 to $15,023,842 for the year ended December 31, 2021, compared with $13,477,880 for the year ended December 31, 2020. Net loss
per share of common stock, basic and diluted, was $(0.44) for the year ended December 31, 2021, compared with approximately $(0.66) for
the year ended December 31, 2020. The income tax benefit resulted from the release of valuation allowance against Ondas net operating
loss carryforwards to offset the deferred liability acquired as part of the American Robotics acquisition.
41
Summary of (Uses) and Sources of Cash
Year Ended December 31,
The principal use of cash in operating
activities for the year ended December 31, 2021 was to fund the Company’s current expenses primarily related to both sales and marketing
and research and development activities necessary to allow us to service and support customers. The increase in cash flows used in operating
activities of approximately $9,361,000 was primarily due to reduction in payables and accruals and increase in expenses related to acquisition
of American Robotics. Cash flows used in investing activities increased by approximately $10,194,000 primarily due to the acquisition
of American Robotics, investment in Dynam A.I., purchase of lab equipment, and a security deposit on our lease renewal in Sunnyvale, CA.
The increase in cash provided by financing activities of approximately $10,402,000 was due to the 2021 Public Offering which raised approximately
$47,524,000 compared to 2020 Public offering that raised approximately $31,254,000, partially offset by repayment of the Steward Capital
Loan and proceeds from sale of preferred stock in 2020.
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 December 31, 2021, we had stockholders’
equity of approximately $112,233,000. On December 31, 2021, we had net long-term borrowings outstanding of approximately $300,000 and
no short-term borrowings. On December 31, 2021, we had cash of approximately $40,815,000 and working capital of approximately $40,032,000.
In December 2020, the Company
completed a registered public offering of its common stock, generating net proceeds of approximately $31,254,000. In June 2021, the Company
completed another registered public offering of its common stock, generating net proceeds of approximately $47,524,000. We believe the
funds raised in the December 2020 and June 2021 equity offerings, in addition to growth in revenue expected as the Company executes its
business plan, will fund its operations for at least the next twelve months from the issuance date of the accompanying financial statements.
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 December 31, 2021, we
had no off-balance sheet arrangements.
Critical Accounting Estimates
The preparation of financial
statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers
an accounting estimate to be critical if:
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.
42
Share-Based Compensation
Expense. We calculate share-based compensation expense for option awards and certain warrant issuances (“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. We have not included
an estimate for forfeitures due to our limited history and we revise based on actual forfeitures each period. 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. 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.
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 in the accompanying Notes to 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.
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
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2019, the FASB
issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions for recognizing
deferred taxes for investments, performing intra-period tax allocation and calculating income taxes in interim periods. ASU 2019-12 is
applicable to all entities subject to income taxes. ASU 2019-12 provides guidance to minimize complexity in certain areas by introducing
a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and
guides whether to relate a step-up tax basis to a business combination or separate transaction. ASU 2019-12 changes the current guidance
of making an intraperiod allocation, determining when a tax liability is recognized after a foreign entity investor transition to or from
equity method of accounting, accounting for tax law changes and year-to-date losses in interim periods, and determining how to apply income
tax guidance to franchise taxes. The amendments from ASU 2019-12 are effective for all public business entities for fiscal years beginning
after December 15, 2020 and include interim periods. The guidance is effective for all other entities for fiscal years beginning after
December 15, 2021 and for interim periods beginning after December 15, 2022. Early adoption was permitted. The adoption of this pronouncement
during the year ended December 31, 2021 had no impact on our accompanying consolidated financial statements.
43
Recently Issued Accounting Pronouncements
In October 2021, the FASB
issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,
which requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and
measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated
the contracts. The new guidance creates an exception to the general recognition and measurement principles of ASC 805, Business Combinations.
The new guidance should be applied prospectively and is effective for all public business entities for fiscal years beginning after December
15, 2022 and include interim periods. The guidance is effective for all other entities for fiscal years beginning after December 15, 2023,
including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects of the
adoption of ASU No. 2021-08 on its consolidated financial statements.
In May 2021, the Financial
Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) 2021-04—Earnings Per Share
(Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges
of Freestanding Equity-Classified Written Call Options, to clarify and reduce diversity in an issuer’s accounting for modifications
or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification
or exchange. The amendments in this ASU are effective for public and nonpublic entities for fiscal years beginning after December 15,
2021, and interim periods with fiscal years beginning after December 15, 2021. Early adoption is permitted, including adoption in an interim
period. The Company is currently evaluating the effects of the adoption of ASU No. 2021-04 on its consolidated financial statements.
In August 2020, the FASB issued
ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which
simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate
accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform
to determine whether a contract qualifies for equity classification and makes targeted improvements to the disclosures for convertible
instruments and earnings-per-share (EPS) guidance. This update will be effective for the Company’s fiscal years beginning after
December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning
after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a
modified retrospective method of transition or a fully retrospective method of transition. The Company is currently evaluating the impact
of the pending adoption of the new standard on its financial statements and intends to adopt the standard as of January 1, 2024.
In June 2016, FASB issued
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces
the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”)
methodology. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans
and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for
changes in expected lifetime credit losses. This model replaces the multiple existing impairment models previously used under U.S. generally
accepted accounting principles, which generally require that a loss be incurred before it is recognized. The new standard also applies
to financial assets arising from revenue transactions such as contract assets and accounts receivables. For public business entities that
meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC, ASU No. 2016-13 is effective for fiscal
years beginning after December 15, 2019. All other entities, ASU No. 2016-13 is effective for fiscal years beginning after December 15,
2022. The Company is currently evaluating the effects of the adoption of ASU No. 2016-13 on its consolidated financial statements.
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule
229.10(f)(1) and are not required to provide information under this item.
Item 8. Financial Statements and
Supplementary Data.
Financial statements begin on page F-1
following this Report.
44
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firms [PCAOB No. 89] F-2
Consolidated Balance Sheets as of December 31, 2021 and 2020 F-3
Notes to the Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM (PCAOB ID 89)
To the Board of Directors and
Stockholders of Ondas Holdings Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Ondas Holdings Inc. (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2021, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and
its cash flows for each of the years in the two years period ended December 31, 2021, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below
are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to
the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions
on the critical audit matters or on the accounts or disclosures to which they relate.
Business Combinations – Valuation of
Acquired Intangible Assets
As described in Note 5 to the consolidated financial
statements, on August 5, 2021, the Company acquired American Robotics, Inc. for purchase consideration of approximately $69.3 million.
The Company accounted for the acquisition in accordance with ASC Topic 805, Business Combinations, which required the Company to
exercise judgment and make estimates and assumptions based on available information regarding the fair values of intangible assets as
of the date of the acquisition.
We identified the fair values of certain identifiable
intangible assets, primarily developed technology, trademarks and FAA waiver, as critical audit matters. The principal considerations
for our determination included the following: (i) changes in the key assumptions could have a significant impact on the fair value of
the intangible assets acquired, (ii) subjectivity and judgment required to determine significant unobservable inputs and assumptions utilized
by the Company in determining the fair value of the intangible assets, specifically projected revenue growth rates, expected cash flow,
royalty rates and discount rates and (iii) the appropriateness of the use of various valuation models to determine the fair value of the
developed technology, trademarks and FAA waiver acquired. Auditing these factors involved especially challenging and subjective auditor
judgment due to the nature and extent of audit effort required to address the matters, including the extent of specialized skill or knowledge
needed.
The primary procedures we performed to address
this critical audit matter included:
/s/ Rosenberg Rich Baker Berman, P.A.
We served as the Company’s auditor since
2017.
Somerset, NJ
March 22, 2022
F-2
ONDAS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
Current Assets:
Other Assets:
Long-term equity investment 500,000 -
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Long-Term Liabilities:
Operating lease liabilities, net of current 241,677 -
Commitments and Contingencies (Note 14)
Stockholders’ Equity
The
accompanying footnotes are an integral part of these consolidated financial statements.
F-3
ONDAS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
Operating expenses:
Other income
Change in fair value of derivative liability - (37,607 )
Benefit from income taxes 2,921,982 -
Net loss per share - basic and diluted $ (0.44 ) $ (0.66 )
The accompanying footnotes are an integral part
of these consolidated financial statements.
F-4
ONDAS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Additional
Preferred Stock Common Stock Paid in Accumulated
Shares Amount Shares Amount Capital Deficit Total
Reclassification of derivative - - - - 70,513 - 70,513
Forgiveness of accrued officer’s salary - - - - 150,002 - 150,002
Restricted stock units issued - - 152,410 15 (15 ) - -
Forgiveness of accrued officer’s salary - - - - 135,103 - 135,103
The accompanying footnotes are an integral part
of these consolidated financial statements.
F-5
ONDAS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITES
Provision for obsolete inventory 100,254 -
PPP Loan forgiveness (666,091 ) -
Deferred income taxes, release of valuation allowance (2,921,982 ) -
Change in fair value of derivative liability - 37,607