Item 1A. Risk Factors
Investing
in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the following
risks, as well as general economic and business risks, and all of the other information contained in this Form 10-K. Any of the following
risks could harm our business, operating results and financial condition and cause the trading price of our common stock to decline, which
would cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information
contained in this Form 10-K including our financial statements and the related notes thereto.
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Risks Related to Our
Business and Industry
We have incurred
significant operating losses since inception and cannot assure you that we will ever achieve or sustain profitability.
Since
our inception, we have incurred significant net losses. As of December 31, 2024 and December 31, 2023, we had an accumulated
deficit of approximately $236 million and $198 million, respectively. To date, we have financed our operations primarily through
sales of our equity securities and debt financing.
We
expect our operating expenses to increase significantly as we pursue our growth strategy, including expending substantial resources for
research, development and marketing. The extent of our future operating losses and the timing of profitability are highly uncertain, and
we expect to continue incurring significant expenses and operating losses over the next several years. Any additional operating losses
may have an adverse effect on our stockholders’ equity and the price of our common stock, and we cannot assure you that we will
ever be able to achieve profitability.
Even
if we achieve profitability, we may not be able to sustain or increase such profitability. Additionally, our costs may increase in future
periods and we may expend substantial financial and other resources on, among things, sales and marketing, the hiring of additional officers,
employees, contractors and other service providers, and general administration, which may include a significant increase in legal and
accounting expenses related to public company compliance, continued compliance and various regulations applicable to our business or arising
from the growth and maturity of our company. Our failure to become and remain profitable would depress the value of our company and could
impair our ability to raise capital, expand our business, maintain our development efforts, obtain regulatory approvals, diversify our
product and service offerings or continue our operations, and may cause the price of our common stock to decline.
The adoption of
the IEEE 802.16t wireless broadband standard, an evolution of the IEEE 802.16s standard published in 2017, by customers in our target
critical infrastructure sectors is uncertain.
Ondas
Networks is currently developing technology compatible with the proposed wireless broadband standard known as IEEE 802.16t, which is an
evolution of the EEE 802.16s wireless broadband standard published in October 2017. We believe we are currently the only manufacturer
of IEEE 802.16s compliant wireless solutions and are likely to be the only manufacturer of IEEE 802.16t compliant wireless solutions when
that standard is formally ratified. The benefits of the standard to buyers of our equipment are greater when there exists a large, deep
market in terms of the number of customers. A large market benefits from the scale provided such that many vendors can compete on service,
price and quality of solution driving improved value for customers. If a large end market does not develop and customers do not see the
related benefits from the standard, we may not be able to grow our business.
15
Our growth depends
in part on the success of our strategic partnerships with third parties such as Siemens Mobility, who are also customers, as well as on
our ability to establish a broad range of additional ecosystem partner and customer relationships with leading global industrial vendors.
In
order to grow our business, we depend on partnerships with market leading technology and industrial companies such as Siemens Mobility,
who are also customers of Ondas Networks, in order to accelerate the adoption of our wireless technology. If we are unsuccessful in maintaining
our partnership and customer relationships with third parties, including Siemens Mobility, or if our partnerships do not provide us the
anticipated benefits, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results may
suffer. In addition, adoption of our FullMAX wireless platform, Optimus SystemTM, and Iron Drone RaiderTM requires us to establish
additional ecosystem relationships with leading global industrial vendors and customers. Even if we are successful in executing these
partnerships and integrating with additional ecosystem vendors, we cannot assure you that these partnerships and relationships will result
in increased adoption of our technology or increased revenue.
If the commercial
UAS markets do not experience significant growth, if we cannot expand our customer base or if our products and services do not achieve
broad acceptance, then we may not be able to achieve our anticipated level of growth.
We
cannot accurately predict the future growth rates or sizes of the markets for our products and services. Demand for our products and services
may not increase, or may decrease, either generally or in specific markets, for particular types of products and services or during particular
time periods. We believe the market for commercial UAS is nascent and the expansion of the market for our products and services in particular,
depends on a number of factors, including the following:
● customer satisfaction with these types of systems as solutions;
● obtaining timely regulatory approvals for new customer deployments; and
● marketing efforts and publicity regarding these types of systems and services.
Even
if commercial UAS gain wide market acceptance, our products and services may not adequately address market requirements and may not continue
to gain market acceptance. If these types of systems generally, or our products and services specifically, do not gain wide market acceptance,
then we may not be able to achieve our anticipated level of growth and our revenue and results of operations would decline.
Negative customer perception regarding the
commercial UAS industry or the Company’s automated data solutions could have a material adverse effect on the demand for the Company’s
products and the business, results of operations, financial condition and cash flows of the Company.
The Company believes the commercial
UAS industry is highly dependent upon customer perception regarding the safety, efficacy, and quality of the commercial UAS system deployed.
Customer perception of these products can be significantly influenced by scientific research or findings, regulatory investigations, litigation,
media attention, and other publicity. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation,
media attention, or other research findings or publicity will be favorable to the UAS market. Future research reports, findings, regulatory
proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research
reports, findings or publicity could have a material adverse effect on the demand for the Company’s products and the business, results
of operations, financial condition and cash flows of the Company. The dependence upon customer perceptions means that adverse scientific
research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit,
could have a material adverse effect on the Company, the demand for the Company’s products, and the business, results of operations,
financial condition and cash flows of the Company.
Failure to manage
our planned growth could place a significant strain on our resources.
Our
ability to successfully implement our business plan requires an effective plan for managing our future growth. We plan to increase the
scope of our operations. Current and future expansion efforts will be expensive and may significantly strain our managerial and other
resources and ability to manage working capital. To manage future growth effectively, we must manage expanded operations, integrate new
personnel and maintain and enhance our financial and accounting systems and controls. If we do not manage growth properly, it could harm
our business, financial condition or results of operations and make it difficult for us to satisfy our debt obligations.
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We
may be unsuccessful in achieving our organic growth strategies, which could limit our revenue growth or financial performance. Our ability
to generate organic growth will be affected by our ability to, among other things:
● attract new customers;
● increase the number of products purchased from customers;
● maintain profitable gross margins in the sale and maintenance of our products;
● increase the number of projects performed for existing customers;
● achieve the estimated revenue we announced from new customer contracts;
● hire and retain qualified employees;
● expand geographically, including internationally; and
Many
of the factors affecting our ability to generate organic growth may be beyond our control, and we cannot be certain that our strategies
for achieving internal growth will be attempted, realized or successful.
If we fail to retain
our existing customers or do not acquire new customers in a cost-effective manner, our revenue may decrease and our business, financial
condition or results of operations may be harmed.
We
believe that our success is dependent on our ability to continue identifying and anticipating the needs of our customers, to retain our
existing customers and to add new customers. For example, our business plan is designed to penetrate large, critical infrastructure end
markets with our wireless and UAS driven data solutions and have expanded our dedicated sales resources and field personnel to broaden
our marketing and field support efforts into new industries and sectors. As a result, we have significantly increased customer engagement
in the transportation, security and UAS end markets with Ondas Networks and in the industrial, public safety and government markets with
OAS. We expect that our qualified customer pipeline will increase in other additional strategic end markets. However, as we become larger
through organic growth, the growth rates for customer engagement, project volume and average spend per customer may slow, even if we continue
to add customers on an absolute basis. In addition, the costs associated with customer retention may be substantially lower than costs
associated with the acquisition of new customers. Therefore, our failure to retain existing customers, even if such losses are offset
by an increase in revenue resulting from the acquisition of new customers, could have an adverse effect on our business, financial condition
or results of operations.
Additionally,
while a key part of our business strategy is to add customers in our existing geographic markets, we expect to expand our operations into
new geographic markets. In doing so, we may incur losses or otherwise fail to enter new markets successfully. Our expansion into new markets
may place us in unfamiliar and competitive environments and involve various risks, including the need to invest significant resources
and the possibility that returns on such investments will not be achieved for several years or at all.
The Company faces uncertainty and adverse
changes in the economy.
Adverse changes in the economy
could negatively impact the Company’s business. Future economic distress may result in a decrease in demand for the Company’s
products, which could have a material adverse impact on the Company’s operating results and financial condition. Uncertainty and
adverse changes in the economy could also increase costs associated with developing and publishing products, increase the cost and decrease
the availability of sources of financing, and increase the Company’s exposure to material losses from bad debts, any of which could
have a material adverse impact on the financial condition and operating results of the Company.
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We have significant dependence on a small
number of customers, and the loss of such customers or a decrease in business conducted with such customers could materially harm our
business, financial condition or results of operations.
Because
we have only recently invested in our customer service and support organization, a small number of customers have accounted for a substantial
amount of our revenue. During the year ended December 31, 2024, three customers accounted for approximately $3,763,000, $1,902,000, and
$745,000 of our revenue or approximately 52%, 26%, and 10%, respectively. During the year ended December 31, 2023, three customers accounted
approximately $6,703,000, $5,127,000, and $3,395,000 of our revenue or approximately 43%, 33%, and 22%, respectively. The loss of the
2024 customers or a decrease in the business conducted with such customers could have a material adverse impact on our business, financial
condition or results of operations.
Project performance
delays or difficulties, including those caused by third parties, or certain contractual obligations may result in additional costs to
us, reductions in revenues or the payment of liquidated damages.
Many
projects involve challenging engineering, construction or installation phases that may occur over extended time periods. We may encounter
difficulties as a result of delays or changes in designs, engineering information or materials provided by our customer or a third party,
delays or difficulties in equipment and material delivery, schedule changes, delays from our customer’s failure to timely obtain
permits or meet other regulatory requirements including the securing of necessary FCC certifications or FAA approvals, weather-related
delays and other factors, many of which are beyond our control, that impact our ability to complete the project in accordance with the
original delivery schedule. In addition, we contract with third-party subcontractors to assist us with the completion of contracts. Any
delay or failure by suppliers or by subcontractors in the completion of their portion of the project may be beyond our control and may
result in delays in the overall progress of the project or may cause us to incur additional costs, or both. Delays and additional costs
may be substantial, and, in some cases, we may be required to compensate the customer for such delays. Delays may also disrupt the final
completion of our contracts as well as the corresponding recognition of revenues and expenses therefrom. In certain circumstances, we
guarantee project completion by a scheduled acceptance date or achievement of certain acceptance and performance testing levels; failure
to meet any of our guarantees, schedules or performance requirements could also result in additional costs or penalties to us, including
obligations to pay liquidated damages, and such amounts could exceed expected project profit. In extreme cases, the above-mentioned factors
could cause project cancellations, and we may be unable to replace such projects with similar projects or at all. Such delays or cancellations
may impact our reputation, brand or relationships with customers, adversely affecting our ability to secure new contracts.
We do not control
certain aspects of the manufacturing process.
Our
reliance on a small number of third party contractors to complete manufacturing, certain research and development and deployment functions
reduces our control over the manufacturing process, exposing us to risks, including reduced control over quality assurance, product costs
and product supply including delays in transportation and delivery. Any manufacturing disruption by our usual contractors could impair
our ability to fulfill orders. We may be unable to manage our relationships with our usual contractors effectively as they may experience
delays, disruptions, capacity constraints or quality control problems in their manufacturing operations, customer concerns about the contractor
or our failure to extend existing task orders or issue new task orders, or otherwise fail to meet our future requirements for timely delivery.
Similarly, to the extent that our usual contractors procure materials on our behalf, we may not benefit from any warranties received by
our usual contractors from the suppliers or otherwise have recourse against the original supplier of the materials or even the manufacturer.
In such circumstances, if the original supplier were to provide us or our usual contractors with faulty materials, we might not be able
to recover the costs of such materials or be compensated for any damages that arise as a result of the inclusion of the faulty components
in our products.
If
any of our contractors fail to deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services, then our ability
to fulfill our obligations may be jeopardized. In addition, the absence of qualified contractors with whom we have a satisfactory relationship
could adversely affect the quality of our service and our ability to perform under some of our contracts. One or more of our usual contractors
may suffer an interruption in its business, or experience delays, disruptions or quality control problems in its manufacturing operations,
or seek to terminate its relationship with us, or we may choose to change or add additional contractors for other reasons. Additionally,
we do not have long-term supply agreements with our usual contractors. As a result, we may be unable to renew or extend our agreement
on terms favorable to us, if at all. Although the manufacturing services required to manufacture and assemble our products may be readily
available from a number of established manufacturers, it may be risky, time consuming and costly to qualify and implement new manufacturer
relationships.
Any
of these risks could have a material adverse effect on our business, financial condition and results of operations.
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Material delays
or defaults in customer payments could leave us unable to cover expenditures related to such customer’s projects, including the
payment of our subcontractors.
Because
of the nature of most of our contracts, we commit resources to projects prior to receiving payments from our customers in amounts sufficient
to cover expenditures as they are incurred. In certain cases, these expenditures include paying our contractors and purchasing parts.
If a customer defaults in making its payments on a project or projects to which we have devoted significant resources, it could have a
material adverse effect on our business, financial condition or results of operations.
Certain of our
officers, employees, contractors and other service providers may work on projects that are inherently dangerous, and a failure to maintain
a safe worksite could result in significant losses.
Certain
of our project sites can place our officers, employees, contractors and other service providers and others, including third
parties, in difficult or dangerous environments, and may involve difficult and hard to reach terrain, high elevation, or locations near
large or complex equipment, moving vehicles, high voltage or other safety hazards or dangerous processes. Safety is a primary focus of
our business and maintaining a good reputation for safety is critical to our business. Many of our customers require that we meet certain
safety criteria to be eligible to bid on contracts. We maintain programs with the primary purpose of implementing effective health, safety
and environmental procedures throughout our company. Maintaining such programs involves variable costs which may increase as governmental,
regulatory and industry safety standards evolve, and any increase in such costs may materially affect our business, financial condition
or results of operations. Further, if we fail to implement appropriate safety procedures or if our procedures fail, our officers,
employees, contractors and other service providers, including third parties, may suffer injuries. Failure to comply with such procedures,
client contracts or applicable regulations, or the occurrence of such injuries, could subject us to material losses and liability and
may adversely impact our ability to obtain projects in the future or to hire and retain talented officers, employees, contractors,
and other services providers, therefore materially adversely affecting our business, financial condition or results of operations.
Our products are
subject to a lengthy sales cycle and our customers may cancel or change their product plans after we have expended substantial time and
resources in the design of their products.
Many
of our customers are conservative in their decision-making process. Sales cycles for new customers can vary from one to three years depending
on the complexity of the customer’s network, whether the customer is subject to state regulations, and annual budget cycles. During
this lengthy sales cycle, our potential customers may cancel or change their product plans. Customers may also discontinue products incorporating
our devices at any time or they may choose to replace our products with lower cost semiconductors. In addition, we are working with leading
customers in our target markets to define our future products. If customers cancel, reduce or delay product orders from us, or choose
not to release products that incorporate our devices after we have spent substantial time and resources developing products or assisting
customers with their product design, our revenue levels may be less than anticipated and our business, results of operations and financial
condition may be materially adversely affected.
Our marketing efforts
depend significantly on our ability to receive positive references from our existing customers.
Our
marketing efforts depend significantly on our ability to call on our current and past customers to provide positive references to new,
potential customers. A material portion of our current pipeline activity is concentrated in the transportation and aviation sectors as
well as in the United Arab Emirates (UAE). Given our limited number of customers, the loss or dissatisfaction of any customer could substantially
harm our brand and reputation, inhibit the market acceptance of our products and services, and impair our ability to attract new customers
and maintain existing customers. Further, as we expand into new vertical and geographic end markets, references from existing customers
could be similarly important. Any of these consequences could have a material adverse effect on our business, financial condition and
results of operations.
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If our products
contain defects or otherwise fail to perform as expected, we could be liable for damages and incur unanticipated warranty claims, recall
and other related expenses, our reputation could be damaged, we could lose market share and, as a result, our financial condition or
results of operations could suffer.
Our
products rely on complex avionics, sensors, user-friendly interfaces and tightly integrated, electromechanical designs to accomplish their
missions. Our products may contain defects or experience failures due to any number of issues in design, materials, manufacture, deployment
and/or use. If any of our products contain a defect, compatibility or interoperability issue or other error, we may have to devote significant
time and resources to find and correct the issue. Such efforts could divert the attention of our management team and other relevant personnel
from other important tasks. A product recall or a significant number of product returns could (i) be expensive; (ii) damage our reputation
and relationships with utilities and other third-party vendors; (iii) result in the loss of business to competitors; and (iv) result in
litigation against us. Costs associated with field replacement labor, hardware replacement, re-integration with third-party products,
handling charges, correcting defects, errors and bugs, or other issues could be significant and could materially harm our financial results.
As
a manufacturer of UAV products, and with aircraft and aviation sector companies under increased scrutiny, claims could be brought against
us if use or misuse of one of our UAV products causes, or merely appears to have caused, personal injury or death. In addition, defects
in our products may lead to other potential life, health and property risks. Any claims against us, regardless of their merit, could severely
harm our financial condition, strain our management and other resources.
The
existence of any defects, errors, or failures in our products or the misuse of our products could also lead to product liability claims
or lawsuits against us. A defect, error or failure in one of our products could result in injury, death or property damage and significantly
damage our reputation and support for our products in general. We anticipate this risk will grow as our products begin to be used in U.S.
domestic airspace and urban areas.
Although
we maintain insurance policies, we cannot provide assurance that this insurance will be adequate to protect us from all material judgments
and expenses related to potential future claims or that these levels of insurance will be available in the future at economical prices
or at all. A successful product liability claim could result in substantial cost to us. Even if we are fully insured as it relates to
a claim, the claim could nevertheless diminish our brand and divert management’s attention and resources, which could have a negative
impact on our business, financial condition and results of operations.
We generally warrant our manufactured products, including hardware
and software, for a period of one year from the date of receipt of the product by the customer. After the first year, the customer can
pay for extended hardware warranty and software maintenance and upgrades on an annual basis in advance. Estimated future product warranty
claims are based on the expected number of field failures over the warranty commitment period, the term of the product warranty period,
and the costs for repair, replacement and other associated costs. Our warranty obligations are affected by product failure rates, claims
levels, material usage and product re-integration and handling costs. While costs that we have incurred historically under our warranty
obligations have not been material, the costs associated with such warranties, including any warranty related legal proceedings, are variable
and could have a material adverse effect on our business, financial condition or results of operations.
Because
our products are relatively new and we do not yet have the benefit of long-term experience observing products’ performance in the
field, our estimates of a product’s lifespan and incidence of claims may be inaccurate. Should actual product failure rates, claims
levels, material usage, product re-integration and handling costs, defects, errors, bugs or other issues differ from the original estimates,
we could end up incurring materially higher warranty or recall expenses than we anticipate.
Our Optimus SystemTM
makes use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally been observed to catch
fire or vent smoke and flames. If such events occur with our products, we could face liability associated with our warranty, for damage
or injury, adverse publicity and a potential safety recall, any of which would adversely affect our business, prospects, financial condition
and operating results.
The
battery packs in our OptimusTM drone use lithium-ion cells, which have been used for years in laptop computers and cell phones. On
occasion, if not appropriately managed and controlled, lithium-ion cells can rapidly release the energy they contain by venting smoke
and flames in a manner that can ignite nearby materials. Highly publicized incidents of laptop computers and cell phones bursting into
flames have focused consumer attention on the safety of these cells. These events also have raised questions about the suitability of
these lithium-ion cells for automotive applications. There can be no assurance that a field failure of our battery packs will not occur,
which would damage the vehicle or lead to personal injury or death and may subject us to lawsuits. Furthermore, there is some risk of
electrocution if individuals who attempt to repair battery packs on our vehicles do not follow applicable maintenance and repair protocols.
Any such damage or injury would likely lead to adverse publicity and potentially a safety recall. Any such adverse publicity could adversely
affect our business, prospects, financial condition and operating results.
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Due to the volatile
and flammable nature of certain components of our products and equipment, fires or explosions may disrupt our business or cause significant
injuries, which could adversely affect our financial results.
The
development and manufacture of certain of our products involves the handling of a variety of explosive and flammable materials as well
as high power equipment. From time to time, these activities may result in incidents that could cause us to temporarily shut down or otherwise
disrupt some manufacturing processes, causing production delays and resulting in liability for workplace injuries and/or fatalities. We
have safety and loss prevention programs that require detailed reviews of process changes and new operations, along with routine safety
audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies, however our
insurance coverage may be inadequate to cover all claims and losses related to such incidents. We may experience such incidents in the
future, which could result in production delays or otherwise have a material adverse effect on our business and financial condition.
Our technology,
products and services have only been developed in the last several years and we have had only limited opportunities to deploy and assess
their performance in the field at full scale.
The current generation of our FullMAX, Optimus SystemTM and Iron
Drone RaiderTM technology platforms have only been developed in the last several years and will continue to evolve. Deploying and
operating our technology is complex and, until recently, had been done primarily by a small number of customers. As the size, complexity
and scope of our deployments grow we have been able to test product performance at a greater scale and in a variety of new geographic
settings and environmental conditions. As the number, size and complexity of our deployments grow and we deploy our technology platforms
for new applications in new critical infrastructure industries, we may encounter unforeseen operational, technical and other challenges,
some of which could cause significant delays, trigger contractual penalties, result in unanticipated expenses, and/or damage to our reputation,
each of which could materially and adversely affect our business, financial condition and results of operations.
If we fail to respond
to evolving technological changes, our products and services could become obsolete or less competitive.
We
operate in highly competitive industries characterized by new and rapidly evolving technologies, standards, regulations, customer requirements,
as well as frequent product introductions and revisions. Accordingly, our operating results depend upon our ability to develop and introduce
new products and services, our ability to reduce production costs of our existing products. The process of developing new technologies
and products is complex, and if we are unable to develop enhancements to, and new features for, our existing products and services or
acceptable new products and services that keep pace with technological developments or industry standards, our products may become obsolete,
less marketable and less competitive and our business, financial condition or results of operations could be significantly harmed.
We depend on our
ability to develop new products and to enhance and sustain the quality of existing products.
Our
growth and future success will depend, in part, on our ability to continue to design and manufacture new competitive products and to enhance
and sustain the quality and marketability of our existing products. As such, we have made, and expect to continue to make, substantial
investments in technology development. In the future, we may not have the necessary capital, or access to capital on acceptable terms,
to fund necessary levels of research and development. Even with adequate capital resources, we may nonetheless experience unforeseen problems
in the development or performance of our technologies or products. In addition, we may not meet our product development schedules and,
even if we do, we may not develop new products fast enough to provide sufficient differentiation from our competitors’ products,
which may be more successful.
We expect to incur
substantial research and development costs and devote significant resources to identifying and commercializing new products and services,
which could significantly reduce our profitability and may never result in revenue to us.
Our future growth depends on penetrating new markets, adapting existing
products to new applications and new environments, and introducing new products and services that achieve market acceptance. We plan to
incur substantial research and development costs as part of our efforts to design, develop and commercialize new products and services
and enhance existing products. For example, we will incur research and development costs to improve the functionality of our acoustic
DAA solution configuration in certain environments, in addition to integrating new payloads to broaden the functionality of our Optimus
SystemTM and Iron Drone RaiderTM. Further, our research and development programs may not produce successful results, and our
new products and services may not achieve market acceptance, create additional revenue or become profitable, which could materially harm
our business, prospects, financial results and liquidity.
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If our products
do not interoperate with our customers’ other systems, the purchase or deployment of our products and services may be delayed or
cancelled.
Our
products are designed to interface with our customers’ other systems, each of which may have different specifications and utilize
multiple protocol standards and products from other vendors. Our products will be required to interoperate with many or all of these products
as well as future products in order to meet our customers’ requirements. If we find errors in the existing software or defects in
the hardware used in our customers’ systems, we may need to modify our products or services to fix or overcome these errors so that
our products will interoperate with the existing software and hardware, which could be costly and negatively affect our business, financial
condition, and results of operations. In addition, if our products and services do not interoperate with our customers’ systems,
customers may seek to hold us liable, demand for our products could be adversely affected or orders for our products could be delayed
or cancelled. This could hurt our operating results, damage our reputation or brand, and seriously harm our prospects, business, financial
condition or results of operations.
The Company operates in a competitive market.
The
Company faces competition and new competitors will continue to emerge throughout the world. Services offered by the Company’s competitors
may take a larger share of customer spending than anticipated, which could cause revenue generated from the Company’s products and
services to fall below expectations. It is expected that competition in these markets will intensify. If competitors of the Company develop
and market more successful products or services, offer competitive products or services at lower price points, or if the Company does
not produce consistently high-quality and well-received products and services, revenues, margins, and profitability of the Company will
decline.
The Company’s ability
to compete effectively will depend on, among other things, the Company’s pricing of services and equipment, quality of customer
service and field support, development of new and enhanced products and services in response to customer demands and changing technology,
reach and quality of sales and distribution channels and capital resources. Competition could lead to a reduction in the rate at which
the Company adds new customers, a decrease in the size of the Company’s market share and a decline in its customers.
We rely on our
management team and need additional personnel to grow our business, and the loss of one or more key officers, employees, contractors and
other service providers or our inability to attract and retain qualified personnel could harm our business, financial condition or results
of operations.
We depend, in part, on the performance of Eric Brock, our Chief Executive
Officer and President, Neil Laird, our Interim Chief Financial Officer, Treasurer and Secretary, Markus Nottelmann, Chief Executive Officer
of Ondas Networks, Menashe Shahar, the Chief Technology Officer of Ondas Networks, Oshri Lugassi the Co-Chief Executive Officer of OAS,
Meir Kliner the President of OAS and Yishay Curelaru the Chief Financial Officer of Airobotics to operate and grow our business. The loss
of any of Messrs. Brock, Laird, Nottelmann, Shahar, Lugassi, Kliner or Curelaru could negatively impact our ability to execute our business
strategies. Although we have entered into employment agreements with Messrs. Brock, Nottelmann, Shahar, Lugassi, Kliner and Curelaru,
we may be unable to retain them or replace any of them if we lose their services for any reason.
Our
future success will also depend on our ability to attract, retain and motivate highly skilled management, product development, operations,
sales, technical and other personnel in the United States and abroad. Even in today’s economic climate, competition for these types
of personnel is intense, particularly in Silicon Valley. Given the lengthy sales cycles with utilities and deployment periods of our networking
platform and solutions, the loss of key personnel at any time could adversely affect our business, financial condition or results of operations.
22
Cyberattacks through
security vulnerabilities could lead to disruption of business, reduced revenue, increased costs, liability claims, or harm to our reputation
or competitive position.
Security
vulnerabilities may arise from our hardware, software, employees, contractors or policies we have deployed, which may result in external
parties gaining access to our networks, datacenters, cloud datacenters, corporate computers, manufacturing systems, and or access to accounts
we have at our suppliers, vendors, and customers. They may gain access to our data or our users’ or customers’ data or attack
the networks causing denial of service or attempt to hold our data or systems in ransom. The vulnerability could be caused by inadequate
account security practices such as failure to timely remove employee access when terminated. To mitigate these security issues, we have
implemented measures throughout our organization, including firewalls, backups, encryption, employee information technology policies and
user account policies. However, there can be no assurance these measures will be sufficient to avoid cyberattacks. If any of these types
of security breaches were to occur and we were unable to protect sensitive data, our relationships with our business partners and customers
could be materially damaged, our reputation could be materially harmed, and we could be exposed to a risk of litigation and possible significant
liability.
Further,
if we fail to adequately maintain our infrastructure, we may have outages and data loss. Excessive outages may affect our ability to timely
and efficiently deliver products to customers or develop new products and solutions. Such disruptions and data loss may adversely impact
our ability to fulfill orders, patent our intellectual property or protect our source code, and interrupt other processes. Delayed sales
or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.
Unauthorized
use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our systems,
breach of the systems of our suppliers or vendors by an unauthorized party, or through employee or contractor error, theft or misuse,
or otherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal information was to occur,
our operations could be seriously disrupted, and we could be subject to demands, claims and litigation by private parties, and investigations,
related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying affected persons
and entities and otherwise complying with the multitude of foreign, federal, state and local laws and regulations relating to the unauthorized
access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to, or use or disclosure
of, such information could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact
on our business, financial condition and results of operations.
We do not control
certain aspects of the manufacturing process.
Our
reliance on a small number of manufacturers reduces our control over the manufacturing process, exposing us to risks, including reduced
control over quality assurance, product costs and product supply including delays in transportation and delivery. Any manufacturing disruption
by our usual manufacturers could impair our ability to fulfill orders. We may be unable to manage our relationships with our usual manufacturers
effectively as they may experience delays, disruptions, capacity constraints or quality control problems in their manufacturing operations
or otherwise fail to meet our future requirements for timely delivery. Similarly, to the extent that our usual manufacturers procure materials
on our behalf, we may not benefit from any warranties received by our usual manufacturers from the suppliers or otherwise have recourse
against the original supplier of the materials or even the manufacturer. In such circumstances, if the original supplier were to provide
us or our usual manufacturers with faulty materials, we might not be able to recover the costs of such materials or be compensated for
any damages that arise as a result of the inclusion of the faulty components in our products.
One
or more of our usual manufacturers may suffer an interruption in its business, or experience delays, disruptions or quality control problems
in its manufacturing operations, or seek to terminate its relationship with us, or we may choose to change or add additional manufacturers
for other reasons. Additionally, we do not have long-term supply agreements with our usual manufacturers. As a result, we may be unable
to renew or extend our agreement on terms favorable to us, if at all. Although the manufacturing services required to manufacture and
assemble our products may be readily available from a number of established manufacturers, it may be risky, time consuming and costly
to qualify and implement new manufacturer relationships.
Any
of these risks could have a material adverse effect on our business, financial condition and results of operations.
23
If critical components
or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur
delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business.
In
order to produce our Optimus SystemTM and Iron Drone RaiderTM and related safety systems, we obtain certain hardware
components, as well as subsystems and systems from a limited group of suppliers, some of which are sole source suppliers. We do not
have long-term agreements with any of these suppliers that obligate them to continue to sell components, subsystems, systems or
products to us. Our reliance on these suppliers involves significant risks and uncertainties, including whether our suppliers will
provide an adequate supply of required components, subsystems, or systems of sufficient quality, will increase prices for the
components, subsystems or systems and will perform their obligations on a timely basis.
In
addition, certain raw materials and components used in the manufacturing of our products and in our development programs, are periodically
subject to supply shortages, and our business is subject to the risk of price increases and periodic delays in delivery. Particularly,
the market for electronic components is experiencing increased demand and a global shortage of semiconductors, creating substantial uncertainty
regarding our suppliers’ continued production of key components for our products. If any additional shortages occur and we are unable
to obtain components from third party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable
prices, then we may not be able to timely complete development programs or deliver our products on a timely or cost effective basis to
our customers, which could cause customers to terminate their contracts with us, increase our costs and seriously harm our business, results
of operations and financial condition. Moreover, if any of our suppliers become financially unstable, or otherwise unable or unwilling
to provide us with raw materials or components, then we may have to find new suppliers. It may take several months to locate alternative
suppliers, if required, or to redesign our products to accommodate components from different suppliers. We may experience significant
delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish
alternative sources of supply if we lose any of these sources or are required to redesign our products.
We currently do
not have long-term supply contracts with guaranteed pricing which exposes us to fluctuations in component, materials and equipment prices.
Substantial increases in these prices would increase our operating costs and could adversely affect our business, prospects, financial
condition and operating results.
Because we currently do not have long-term supply contracts with guaranteed
pricing, we are subject to fluctuations in the prices of the raw materials, parts and components and equipment we use in the production
of our Optimus SystemTM and Iron Drone RaiderTM. Substantial increases in the prices for such raw materials, components and
equipment would increase our operating costs and could reduce our margins if we cannot recoup the increased costs through increased prices.
Any attempts to increase prices of our automated data solutions in response to increased costs could be viewed negatively by our customers
and could adversely affect our business, prospects, financial condition and operating results.
We may pursue additional strategic transactions
in the future, which could be difficult to implement, disrupt our business or change our business profile significantly.
We intend to consider additional
potential strategic transactions, which could involve acquisitions of businesses or assets, joint ventures or investments in businesses,
products or technologies that expand, complement or otherwise relate to our current or future business. We may also consider, from time
to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments.
Should our relationships fail to materialize into significant agreements, or should we fail to work efficiently with these companies,
we may lose sales and marketing opportunities and our business, results of operations and financial condition could be adversely affected.
These activities, if successful,
create risks such as, among others: (i) the need to integrate and manage the businesses and products acquired with our own business and
products; (ii) additional demands on our resources, systems, procedures and controls; (iii) disruption of our ongoing business; (iv) potential
unknown or unquantifiable liabilities associated with the target company; and (v) diversion of management’s attention from other
business concerns. Moreover, these transactions could involve: (a) substantial investment of funds or financings by issuance of debt or
equity securities; (b) substantial investment with respect to technology transfers and operational integration; and (c) the acquisition
or disposition of product lines or businesses. Also, such activities could result in one-time charges and expenses and have the potential
to either dilute the interests of our existing shareholders or result in the issuance of, or assumption of debt. Such acquisitions, investments,
joint ventures or other business collaborations may involve significant commitments of financial and other resources. Any such activities
may not be successful in generating revenue, income or other returns, and any resources we committed to such activities will not be available
to us for other purposes. Moreover, if we are unable to access the capital markets on acceptable terms or at all, we may not be able to
consummate acquisitions, or may have to do so on the basis of a less than optimal capital structure. Our inability to take advantage of
growth opportunities or address risks associated with acquisitions or investments in businesses may negatively affect our operating results.
Additionally, any impairment
of goodwill or other intangible assets acquired in an acquisition or in an investment, or charges to earnings associated with any acquisition
or investment activity, may materially reduce our earnings. Future acquisitions or joint ventures may not result in their anticipated
benefits, and we may not be able to properly integrate acquired products, technologies or businesses with our existing products and operations
or successfully combine personnel and cultures. Failure to do so could deprive us of the intended benefits of those acquisitions.
24
If the Company
is required to write down goodwill and other intangible assets, the Company’s financial condition and results could be negatively
affected.
Goodwill impairment arises
when there is deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of the goodwill dips below
its book value. The Company is required to review its goodwill for impairment at least annually. Events that may trigger goodwill impairment
include deterioration in economic conditions, increased competition, loss of key personnel, and regulatory action. Should any of these
occur, an impairment of goodwill could have a negative effect on the assets of the Company.
In December 2024, the Company bypassed the qualitative analysis and
proceeded directly to a quantitative analysis. The Company engaged a third-party service provider to carry out a valuation of the OAS
reporting unit. Using a discounted cash flow model and market approach model with updated forecasts for revenue and cash flows, it was
determined that the fair value of the reporting unit was higher than the carrying value as of December 31, 2024, and no further impairment
to goodwill was necessary as of December 31, 2024. See Note 5 – Goodwill and Business Acquisition of the accompanying Consolidated
Financial Statements for further information regarding the impairment of goodwill.
War, terrorism,
and other acts of violence may affect the markets in which we operate, our clients and our product and service delivery.
Our business may be adversely
affected by regional or global instability, disruption or destruction, regardless of cause, including war, terrorism, riot, civil
insurrection or social unrest. For example, the war in Israel and the significant military action against Ukraine launched by Russia may
affect the markets in which we operate. Such events may cause clients to delay their decisions on spending for the products and services
provided by us and give rise to sudden significant changes in regional and global economic conditions and cycles. These events pose risks
which could materially adversely affect our financial results.
Since Airobotics is located in Israel, the Company has considered various
ongoing risks relating to the military operation and related matters. All of the Company’s workforce in Israel returned to work
and inventory production restraints have eased. The Company is closely monitoring how the military operation and related activities could
adversely affect its anticipated milestones and its Israel-based activities to support future operations, including the Company’s
ability to import materials that are required to construct the Optimus SystemTM and the Iron Drone RaiderTM and to ship them
outside of Israel. To date, we have not had material disruptions to our ability to produce, manage and deliver products and services to
customers as our U.S. teams have supported our ongoing operations in Israel and the Middle East; however, a prolonged war or an escalation
of the current conditions in Israel could materially adversely affect our business, financial condition, and results of operations. Due
to the ongoing and evolving nature of these events, the extent of the adverse effect on our business operations is still unknown.
We may not be able
to secure adequate insurance policies, or secure insurance policies at reasonable prices.
We maintain general liability
insurance, aviation flight testing insurance, aircraft liability coverage, directors and officers insurance, and other insurance policies
and we believe our level of coverage is customary in the industry and adequate to protect against claims. However, there can be no assurance
that it will be sufficient to cover potential claims or that present levels of coverage will be available in the future at a reasonable
cost. Further, we expect our insurance needs and costs to increase as we grow our commercial operations and expand into new markets and
it is uncertain if such insurance will be available on commercially reasonable terms.
The Company will be affected by operational
risks and may not be adequately insured for certain risks.
The Company will be affected
by a number of operational risks and the Company may not be adequately insured for certain risks, including: labor disputes; catastrophic
accidents; fires; blockades or other acts of social activism; changes in the regulatory environment; impact of non-compliance with laws
and regulations; natural phenomena, such as inclement weather conditions, floods, earthquakes and ground movements. There is no assurance
that the foregoing risks and hazards will not result in damage to, or destruction of, the Company’s technologies, personal injury
or death, environmental damage, adverse impacts on the Company’s operation, costs, monetary losses, potential legal liability and
adverse governmental action, any of which could have an adverse impact on the Company’s future cash flows, earnings and financial
condition. Furthermore, the unmanned aerial systems industry lacks a formative insurance market. As a result, the Company may be subject
to or affected by liability or sustain loss for certain risks and hazards against which the Company cannot insure or which the Company
may elect not to insure because of the cost. This lack of insurance coverage could have an adverse impact on the Company’s future
cash flows, earnings, results of operations and financial condition.
Litigation may
adversely affect our business, financial condition, and results of operations.
From
time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material
to our financial condition as a whole or may negatively affect our operating results if changes to our business operations are required.
The cost to defend such litigation may be significant and may require a significant diversion of our resources, and there is no guarantee
that we will be able to successfully defend against any such litigation regardless of particular merits. There also may be adverse publicity
associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are
valid or whether we are ultimately found liable. Insurance may not be available on favorable terms, at all, or in sufficient amounts to
cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any
claims could adversely affect our business, financial condition and the results of our operations.
25
Our cash could
be adversely affected if the financial institutions in which we hold our cash fail.
The
Company maintains domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks. The domestic bank
deposit balances may exceed the FDIC insurance limits. Also, in the foreign markets we serve, we also maintain cash deposits in foreign
banks, some of which are not insured or partially insured by the FDIC or other similar agency. These balances could be impacted if one
or more of the financial institutions in which we deposit monies fails or is subject to other adverse conditions in the financial or credit
markets.
Risks Related to Regulatory
Requirements
We and our customers
operate in a highly regulated business environment and changes in regulation could impose costs on us or make our products less economical.
Our
products and services and our utility customers are subject to federal, state, local and foreign laws and regulations. Laws and regulations
applicable to us and our products govern, among other things, the manner in which our products communicate, and the environmental impact
and electrical reliability of our products. Additionally, our critical infrastructure customers are often regulated by national, state
and/or local bodies, including public utility commissions, the Department of Energy, the Federal Energy Regulatory Commission, the FAA,
the FCC, Federal Rail Association, Israeli Defense Export Controls Agency of the Ministry of Defense and other bodies. Prospective customers
may be required to gain approval from any or all of these organizations prior to implementing our products and services, including specific
permissions related to the cost recovery of these systems. Regulatory agencies may impose special requirements for implementation and
operation of our products, which may result in unforeseen delays. We may incur material costs or liabilities in complying with government
regulations applicable to us or our utility customers. In addition, potentially significant expenditures could be required in order to
comply with evolving regulations and requirements that may be adopted or imposed on us or our utility customers in the future. Such costs
could make our products less economical and could impact our utility customers’ willingness to adopt our products, which could materially
and adversely affect our revenue, results of operations and financial condition.
Furthermore,
changes in the underlying regulatory conditions that affect critical infrastructure industries could have a potentially adverse effect
on our customers’ interest or ability to implement our technologies. Many regulatory jurisdictions have implemented rules that provide
financial incentives for the implementation of energy efficiency and demand response technologies, often by providing rebates or through
the restructuring of utility rates. If these programs were to cease, or if they were restructured in a manner inconsistent with the capabilities
enabled by our products and services, our business, financial condition and results of operations could be significantly harmed.
Failure to obtain necessary regulatory approvals
from the FAA or other governmental agencies, or limitations put on the use of small UAS in response to public privacy and other concerns,
may prevent us from expanding the sales of our drone solutions to industrial and government customers in the United States.