NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The
Company
Ondas
Holdings Inc. (“Ondas Holdings,” “Ondas,” the “Company,” “we,” or “our”)
was originally incorporated in Nevada on December 22, 2014, under the name of Zev Ventures Incorporated. On September 28, 2018, we acquired
Ondas Networks Inc., a Delaware corporation (“Ondas Networks”), and changed our name to Ondas Holdings Inc. On August 5,
2021, we acquired American Robotics, Inc., a Delaware corporation (“American Robotics” or “AR”). As a result
of these acquisitions, Ondas Networks and American Robotics became our wholly owned subsidiaries. These two wholly owned subsidiaries
are now Ondas’ primary focus. Ondas’ corporate headquarters are located in Waltham, Massachusetts. Ondas Networks has offices
and facilities in Sunnyvale, California, and American Robotics’ offices and facilities are located in Waltham, Massachusetts and
Marlborough, Massachusetts.
Ondas
has a third wholly owned subsidiary, FS Partners (Cayman) Limited, a Cayman Islands limited liability company (“FS Partners”),
and one majority owned subsidiary, Full Spectrum Holding Limited, a Cayman Islands limited liability company (“FS Holding”).
FS Partners and Ondas Network Limited were both formed for the purpose of operating in China. As of December 31, 2019, we revised our
business strategy, and discontinued all operations in China. Both FS Partners and FS Holdings had no operations for the six months ended
June 30, 2022 and 2021, and we are in the process of dissolving them and expect the process to be completed by the end of 2022.
Business
Activity
Ondas
is a leading provider of private wireless, drone and automated data solutions through its wholly owned subsidiaries, Ondas Networks and
American Robotics. We operate our two subsidiaries as separate business segments.
Ondas
Networks
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 (“WAN”) 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.
American
Robotics
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 System™, 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.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The
Scout System™ has been designed from the ground up as an end-to-end product capable of continuous unattended operations in the
real world. Powered by innovations in robotics automation, machine vision, edge computing, and AI, the Scout System™ 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 System™ 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 System™ consists of (i) Scout™, 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.
Liquidity
We have incurred losses since
inception and have funded our operations primarily through debt and the sale of capital stock. On June 30, 2022, we had stockholders’
equity of $105,697,292, net short and long-term borrowings outstanding of $0 and $300,000, respectively, cash and cash equivalents of
$28,014,077 and working capital of $25,809,024.
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 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 condition or results of operations.
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 three and six
months ended June 30, 2022 and the year ended December 31, 2021 as follows:
|
● |
sales
and marketing efforts were disrupted as our business development team was unable to travel to visit customers and customers were
unable to receive visitors for on-location meetings; |
|
● |
field
activity for testing and deploying our wireless systems was delayed due to the inability for our field service team to install and
test equipment for our customers; and |
|
● |
manufacturing
and sales were disrupted due to ongoing supply chain constraints for certain critical parts. |
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The
Company expects its business, financial condition and results of operations will continue to be impacted from the COVID-19 pandemic during
2022, primarily due to the slowdown of customer activity during 2021 and 2020, 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.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
In the opinion of management,
the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the Company’s financial statements for interim periods in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”). The information included in this quarterly report on Form 10-Q should
be read in conjunction with the audited consolidated financial statements and the accompanying notes included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”). The Company’s accounting policies are described
in the “Notes to Consolidated Financial Statements” in the 2021 Form 10-K and are updated, as necessary, in this Form
10-Q. The December 31, 2021 condensed consolidated balance sheet data presented for comparative purposes was derived from the audited
financial statements but does not include all disclosures required by U.S. GAAP. The results of operations for the three and six months
ended June 30, 2022, are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.
The condensed consolidated
financial statements include the accounts of the Company and our wholly owned subsidiaries, Ondas Networks, American Robotics, and FS
Partners, and our majority owned subsidiary, FS Holding. All significant inter-company accounts and transactions between these entities
have been eliminated in these unaudited condensed consolidated financial statements.
Business Combinations
We utilize the purchase method of accounting for business combinations.
This method requires, among other things, that results of operations of acquired companies are included in Ondas' results of operations
beginning on the respective acquisition dates and that assets acquired, and liabilities assumed are recognized at fair value as of the
acquisition date. Any excess of the fair value of consideration transferred over the fair values of the net assets acquired is recognized
as goodwill. Contingent consideration liabilities are recognized at the estimated fair value on the acquisition date; these are recorded
in either other accruals within current liabilities (for expected payments in less than a year) or other non-current liabilities (for
expected payments in greater than a year), both on our condensed consolidated balance sheets. Subsequent changes to the fair value of
contingent consideration liabilities are recognized in other income (expense) in the consolidated statements of income. Contingent consideration
payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent
consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing
activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported
as operating activities in the consolidated statements of cash flows. The fair value of assets acquired and liabilities assumed in certain
cases may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months
from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed
when incurred.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Goodwill
and Intangible Assets
Goodwill
represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests
goodwill for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such
impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a
reporting unit is less than its carrying value and whether it is necessary to perform goodwill impairment process.
Intangible
assets represent patents, licenses, and allocation of purchase price to identifiable intangible assets of an acquired business. The Company
estimates the fair value of its reporting units using the fair market value measurement requirement. Intangible assets are evaluated
for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.
We
amortize our intangible assets with a finite life on a straight-line basis, over 10 years for patents; 10 years for developed technology,
10 years for licenses, trademarks, and the FAA waiver; 5 years for customer relationships; and 1 year for non-compete agreements.
Segment
Information
Operating
segments are defined as components of an entity for which discrete financial information is available and is regularly reviewed by the
Chief Operating Decision Maker (“CODM”) in making decisions regarding resource allocation and performance assessment. The
Company’s CODM is its Chief Executive Officer. The Company determined it has two reportable segments: Ondas Networks
and American Robotics as the CODM reviews financial information for these two businesses separately. The Company has no inter-segment
sales.
Use
of Estimates
The
process of preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements. Such
management estimates include those relating to revenue recognition, inventory write-downs to reflect net realizable value, assumptions
used in the valuation of stock-based awards and valuation allowances against deferred tax assets. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
The Company considers all
highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. On June 30, 2022 and December
31, 2021, we had no cash equivalents. The Company periodically monitors its positions with, and the credit quality of the financial institutions
with which it invests. Periodically, throughout the six months ended, and as of June 30, 2022, the Company has maintained balances in
excess of federally insured limits. As of June 30, 2022, the Company was $27,506,372 in excess of federally insured limits.
Accounts
Receivable
Accounts
receivable are stated at a gross invoice amount less an allowance for credit losses. We estimate allowance for credit losses by evaluating
specific accounts where information indicates our customers may have an inability to meet financial obligations, such as customer payment
history, credit worthiness and receivable amounts outstanding for an extended period beyond contractual terms. We use assumptions and
judgment, based on the best available facts and circumstances, to record an allowance to reduce the receivable to the amount expected
to be collected. These allowances are evaluated and adjusted as additional information is received. We had no allowance for credit losses
as of June 30, 2022 and December 31, 2021.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Inventory
Inventories,
which consist solely of raw materials, work in process and finished goods, are stated at the lower of cost (first-in, first-out) or net
realizable value, net of reserves for obsolete inventory. We continually analyze our slow-moving and excess inventories. Based on historical
and projected sales volumes and anticipated selling prices, we established reserves. Inventory that is in excess of current and projected
use is reduced by an allowance to a level that approximates its estimate of future demand. Products that are determined to be obsolete
are written down to net realizable value.
Inventory
consists of the following:
| |
June
30, 2022 | | |
December 31,
2021 | |
Raw
Material | |
$ | 1,181,941 | | |
$ | 1,153,254 | |
Work
in Process | |
| 123,449 | | |
| 65,192 | |
Finished
Goods | |
| 64,612 | | |
| 60,153 | |
Less
Inventory Reserves | |
| (100,254 | ) | |
| (100,254 | ) |
Total
Inventory, Net | |
$ | 1,269,748 | | |
$ | 1,178,345 | |
Property
and Equipment
All
additions, including improvements to existing facilities, are recorded at cost. Maintenance and repairs are charged to expense as incurred.
Depreciation of property and equipment is principally recorded using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives typically are (i) three to seven years for computer equipment and software, (ii) five years for vehicles
and base stations, (iii) five to seven years for furniture and fixtures and test equipment, and (iv) two years for drones. Leasehold
improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Upon
the disposal of property, the asset and related accumulated depreciation accounts are relieved of the amounts recorded therein for such
items, and any resulting gain or loss is recorded in operating expenses in the year of disposition.
Software
Costs
incurred internally in researching and developing a software product are charged to expense until technological feasibility has been
established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available
for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We
have determined that technological feasibility for our software products is reached after all high-risk development issues have been
resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization
of these costs is included in cost of revenue over the estimated life of the products. As of June 30, 2022, and December 31, 2021, the
Company had no internally developed software.
Impairment
of Long-Lived Assets
Long-lived
assets are evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful
life has changed. Such indicators include significant technological changes, adverse changes in market conditions and/or poor operating
results. The carrying value of a long-lived asset group is considered impaired when the projected undiscounted future cash flows is less
than its carrying value. The amount of impairment loss recognized is the difference between the estimated fair value and the carrying
value of the asset or asset group. Fair market value is determined primarily using the projected future cash flows discounted at a rate
commensurate with the risk involved. The impairments of long-lived assets were $11,095 and $70,895 for the six months ended June 30,
2022, and 2021, respectively. The impairments of long-lived assets were $6,929 and $36,716 for the three months ended June 30, 2022,
and 2021, respectively.
Research
and Development
Costs
for research and development are expensed as incurred. Research and development expenses consist primarily of salaries, salary related
expenses and costs of contractors and materials.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Fair
Value of Financial Instruments
Our
financial instruments consist primarily of receivables, accounts payable, accrued expenses and short- and long-term debt. The carrying
amount of receivables, accounts payable and accrued expenses approximate our fair value because of the short-term maturity of such instruments.
We
have categorized our assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy
in accordance with U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets
and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).
Assets
and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs, as follows:
|
Level
1 -- |
Unadjusted
quoted prices in active markets for identical assets or liabilities. |
|
|
|
|
Level
2 -- |
Quoted
prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly
or indirectly through market corroboration, for substantially the full term of the financial instrument. |
|
|
|
|
Level
3 -- |
Unobservable
inputs for the asset or liability. |
The
Company had no financial instruments that are required to be valued at fair value as of June 30, 2022 and December 31, 2021.
Deferred
Offering Costs
The
Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity
financing as deferred offering costs until such financing is consummated. After consummation of equity financing, these costs are recorded
in stockholders’ equity as a reduction of additional paid-in capital generated as a result of the offering. Should the planned
equity financing be abandoned, the deferred offering costs are expensed immediately as a charge to other income (expense) in the consolidated
statement of operations.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized when the rate change is enacted. Valuation allowances are recorded to reduce deferred
tax assets to the amount that will more likely than not be realized. In accordance with US GAAP, we recognize the effect of uncertain
income tax positions only if the positions are more likely than not of being sustained in an audit, based on the technical merits of
the position. Recognized uncertain income tax positions are measured at the largest amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the period in which those changes in judgment occur. We recognize both interest
and penalties related to uncertain tax positions as part of the income tax provision.
Share-Based
Compensation
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. 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 expected term of the Share-based Award in determining the fair value of Share-based Awards. In determining the expected term,
the Company uses the simplified method due the lack of sufficient exercise history. 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.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
We
recognize restricted stock unit expense over the period of vesting or period that services will be provided. Compensation associated
with shares of Common Stock issued or to be issued to consultants and other non-employees is recognized over the expected service period
beginning on the measurement date, which is generally the time the Company and the service provider enter into a commitment whereby the
Company agrees to grant shares in exchange for the services to be provided.
Shipping
and Handling
We
expense all shipping and handling costs as incurred. These costs are included in the cost of goods sold on the accompanying consolidated
financial statements.
Revenue
Recognition
Development
projects
Ondas
has two business segments that generate revenue: Ondas Networks and American Robotics. Ondas Networks generates revenue from product
sales, services, and development projects. American Robotics generates revenue through data subscription services and development projects.
Ondas
Networks is engaged in the development, marketing, and sale of wireless radio systems for secure, wide area mission-critical, business-to-business
networks. Ondas Networks generates revenue primarily from the sale of our FullMAX System and the delivery of related services, along
with non-recurring engineering (“NRE”) development projects with certain customers.
American
Robotics generates revenue by selling a data subscription service to its customers based on the information collected by the Scout System.
The Scout System consists of the Scout drone and the ScoutBaseTM and is owned, installed, and maintained on the customer premises
by American Robotics. The customer pays for a monthly, annual, or multi-annual subscription service to access the data collected by the
Scout System. The customer accesses its data remotely through ScoutViewTM, AR’s secure web portal for displaying, analyzing,
and storing customer information and captured image data. American Robotics also generates revenue from development projects for customers
who are interested in customized solutions.
Revenue
for development projects is typically recognized over time using a percentage of completion input method, whereby revenues are recorded
on the basis of the Company’s estimates of satisfaction of the performance obligation based on the ratio of actual costs incurred
to total estimated costs. The input method is utilized because management considers it to be the best available measure of progress as
the performance obligations are completed.
Revenue
and cost estimates are regularly monitored and revised based on changes in circumstances. Impacts from changes in estimates of revenue
and cost of revenue are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the
changes on current and prior periods base in the performance completed to date.
As
of August 5, 2021, American Robotics had signed subscription agreements of varying contract lengths with customers in multiple industries
including agriculture, oil and gas and materials management. Subscription revenue is recognized on straight line basis over the length
of the customer subscription agreement. If a subscription payment is received prior to installation and operation of the Scout System,
it is held in deferred revenue and recognized after operation commences over the length of the subscription service. American Robotics
also provides customized data solutions for certain customers and receives development revenue for those services.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Collaboration
Arrangements Within the Scope of ASC 808, Collaborative Arrangements
The
Company’s development revenue includes contracts where the Company and the customer work cooperatively to develop software and
hardware applications. The Company analyzes these contracts to assess whether such arrangements involve joint operating activities performed
by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial
success of such activities and are therefore within the scope of ASC Topic 808, Collaborative Arrangements (“ASC 808”). This
assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For
collaboration arrangements that are deemed to be within the scope of ASC 808, the Company first determines which elements of the collaboration
are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and therefore within
the scope of ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company’s policy is generally to recognize
amounts received from collaborators in connection with joint operating activities that are within the scope of ASC 808 as a reduction
in research and development expense. As of June 30, 2022, the Company has not identified any contracts with its customers that meet the
criteria of ASC 808.
Arrangements
Within the Scope of ASC 606, Revenue from Contracts with Customers
Under
ASC 606, the Company recognizes revenue when the customer obtains control of promised products or services, in an amount that reflects
the consideration which is expected to be received in exchange for those products or services. The Company recognizes revenue following
the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in
the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract;
and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to
contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the products or services
it transfers to the customer.
At
contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the products or services
promised within each contract and determines those that are performance obligations and assesses whether each promised product or service
is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance
obligation when (or as) the performance obligation is satisfied. To the extent the transaction price includes variable consideration,
we estimate the amount of variable consideration that should be included in the transaction price utilizing the expected value method.
Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of
cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated
amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current
and forecasted) that is reasonably available. Sales and other taxes collected on behalf of third parties are excluded from revenue. For
the three and six months ended June 30, 2022 and 2021, none of our contracts with customers included variable consideration.
Contracts
that are modified to account for changes in contract specifications and requirements are assessed to determine if the modification either
creates new or changes the existing enforceable rights and obligations. Generally, contract modifications are for products or services
that are not distinct from the existing contract due to the inability to use, consume or sell the products or services on their own to
generate economic benefits and are accounted for as if they were part of that existing contract. The effect of a contract modification
on the transaction price and measure of progress for the performance obligation to which it relates, is recognized as an adjustment to
revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. For the three and six months ended June
30, 2022 and 2021, there were no modifications to contract specifications.
Product
revenue is comprised of sales of the Ondas Networks’ software defined base station and remote radios, its network management and
monitoring system, and accessories. Ondas Networks’ software and hardware is sold with a limited one-year basic warranty included
in the price. The limited one-year basic warranty is an assurance-type warranty, is not a separate performance obligation, and thus no
transaction price is allocated to it. The nature of tasks under the limited one-year basic warranty only provides for remedying defective
product(s) covered by the warranty. Product revenue is generally recognized when the customer obtains control of our product, which occurs
at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract, or upon installation
when the combined performance obligation is not distinct within the context of the contract.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Service
revenue is comprised of separately priced extended warranty sales, network support and maintenance, remote monitoring, as well as ancillary
services directly related to the sale of the Ondas Networks’ wireless communications products including wireless network design,
systems engineering, radio frequency planning, software configuration, product training, installation, and onsite support. The extended
warranty Ondas Networks sells provides a level of assurance beyond the coverage for defects that existed at the time of a sale or against
certain types of covered damage. The extended warranty includes 1) factory hardware repair or replacement of the base station and remote
radios, at our election, 2) software upgrades, bug fixes and new features of the radio software and network management systems (“NMS”),
3) deployment and network architecture support, and 4) technical support by phone and email. Ancillary service revenues are recognized
at the point in time when those services have been provided to the customer and the performance obligation has been satisfied. The Company
allocates the transaction price to the service and extended warranty based on the stand-alone selling prices of these performance obligations,
which are stated in our contracts. Revenue for the extended warranty is recognized over time.
Development
revenue is comprised primarily of non-recurring engineering service contracts to develop software and hardware applications for various
customers. For Ondas Networks, a significant portion of this revenue is generated through four contracts with two customers whereby Ondas
Networks is to develop such applications to interoperate within the customers’ infrastructure. For these contracts, Ondas Networks
and the customers work cooperatively, whereby the customers’ involvement is to provide technical specifications for the product
design, as well as, to review and approve the project progress at various markers based on predetermined milestones. The products developed
are not able to be sold to any other customer and are based in part upon existing Ondas Networks and customer technology. Development
revenue is recognized as services are provided over the life of the contract as Ondas Networks has an enforceable right to payment for
services completed to date and there is no alternative use of the product.
If
the customer contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
We enter into certain contracts within our service revenues that have multiple performance obligations, one or more of which may be delivered
subsequent to the delivery of other performance obligations. We allocate the transaction price based on the estimated relative standalone
selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based
on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions,
we estimate the standalone selling price considering available information such as market conditions and internally approved pricing
guidelines related to the performance obligations. Revenue is then allocated to the performance obligations using the relative selling
prices of each of the performance obligations in the contract.
Ondas
Networks’ payment terms vary and range from Net 15 to Net 30 days from the date of the invoices for product and services related
revenue. Ondas Networks’ payment terms for the majority of their development related revenue carry milestone-related payment obligations
which span the contract life. For milestone-based contracts, the customer reviews the completed milestone and once approved, makes payment
pursuant to the applicable contract.
American
Robotics generates revenue by selling a data subscription service to its customers based on the information collected by the Scout System.
The customer pays for a monthly, annual, or multi-annual subscription service to access the data collected by the Scout System. The customer
accesses its data remotely through ScoutViewTM, AR’s secure web portal for displaying, analyzing, and storing customer
information and captured image data. American Robotics also generates development revenue from customers who are interested in customized
solutions.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Disaggregation
of Revenue
The
following tables present our disaggregated revenues by type of revenue and timing of revenue:
| |
Three
months ended June 30, | | |
Six
months ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Type
of Revenue | |
| | |
| | |
| | |
| |
Product
revenue | |
$ | 422,413 | | |
$ | 71,400 | | |
$ | 571,683 | | |
$ | 89,000 | |
Service
and subscription revenue | |
| 83,755 | | |
| 14,107 | | |
| 143,872 | | |
| 22,317 | |
Development
revenue | |
| 98,051 | | |
| 801,237 | | |
| 298,862 | | |
| 1,939,377 | |
Other
revenue | |
| - | | |
| 688 | | |
| - | | |
| 1,502 | |
Total
revenue | |
$ | 604,219 | | |
$ | 887,432 | | |
$ | 1,014,417 | | |
$ | 2,052,196 | |
| |
Three
months ended June 30, | | |
Six
months ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Timing
of Revenue | |
| | |
| | |
| | |
| |
Revenue
recognized point in time | |
$ | 422,413 | | |
$ | 72,088 | | |
$ | 571,683 | | |
$ | 90,502 | |
Revenue
recognized over time | |
| 181,806 | | |
| 815,344 | | |
| 442,734 | | |
| 1,961,694 | |
Total
revenue | |
$ | 604,219 | | |
$ | 887,432 | | |
$ | 1,014,417 | | |
$ | 2,052,196 | |
Contract
Assets and Liabilities
We
recognize a receivable or contract asset when we perform a service or transfer a good in advance of receiving consideration. A receivable
is recorded when our right to consideration is unconditional and only the passage of time is required before payment of that consideration
is due. A contract asset is recorded when our right to consideration in exchange for goods or services that we have transferred or provided
to a customer is conditional on something other than the passage of time. We did not have any contract assets recorded at June 30, 2022
and December 31, 2021.
We
recognize a contract liability when we receive consideration, or if we have the unconditional right to receive consideration, in advance
of satisfying the performance obligation. A contract liability is our obligation to transfer goods or services to a customer for which
we have received consideration, or an amount of consideration is due from the customer. The table below details the activity in our contract
liabilities during the six months ended June 30, 2022, and the year ended December 31, 2021.
| |
Six
Months Ended June 30, 2022 | | |
Year
Ended December 31, 2021 | |
Balance
at beginning of period | |
$ | 512,397 | | |
$ | 165,035 | |
Additions,
net | |
| 130,000 | | |
| 2,238,137 | |
Transfer
to revenue | |
| (442,734 | ) | |
| (1,890,775 | ) |
Balance
at end of period | |
$ | 199,663 | | |
$ | 512,397 | |
Warranty
Reserve
For
our software and hardware products, we provide a limited one-year assurance-type warranty and for our development service, we provide
no warranties. The assurance-type warranty covers defects in material and workmanship only. If a software or hardware component is determined
to be defective after being tested by the Company within the one-year, the Company will repair, replace or refund the price of the covered
hardware and/or software to the customer (not including any shipping, handling, delivery or installation charges). We estimate, based
upon a review of historical warranty claim experience, the costs that may be incurred under our warranties and record a liability in
the amount of such estimate at the time a product is sold. Factors that affect our warranty liability include the number of units sold,
historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty
liability and adjust the accrual as claims data and historical experience warrants. The Company has assessed the costs of fulfilling
its existing assurance-type warranties and has determined that the estimated outstanding warranty obligation on June 30, 2022 or December
31, 2021 are immaterial to the Company’s financial statements.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Leases
Under
Topic 842, operating lease expense is generally recognized evenly over the term of the lease. During the three months ended March 31,
2022, the Company’s operating leases consisted of office space in Sunnyvale, CA (the “Gibraltar Lease”), Marlborough,
MA (the “American Robotics Lease”), and Waltham, MA (the “Waltham Lease”).
On
January 22, 2021, we entered into a 24-month lease (effective April 1, 2021) with the owner and landlord (the “2021 Gibraltar Lease”),
wherein the base rate is $45,000 per month, with a security deposit in the amount of $90,000.
On
August 5, 2021, the Company acquired American Robotics and the American Robotics Lease, wherein the base rate is $15,469 per month, with
an annual increase of 3% through January 2024, with a security deposit of $24,166. On August 19, 2021, American Robotics amended their
lease to reduce their space to approximately 10,450 square feet. The amendment reduced their annual base rent to $8,802 per month, with
an annual increase of 3% through January 2024.
On
October 8, 2021, American Robotics entered into an 86-month operating lease for space in Waltham, Massachusetts. The Waltham Lease commenced
on March 1, 2022, and is scheduled to terminate on April 30, 2029, wherein the base rate is $39,375 per month, increasing 3% annually,
with a security deposit due in the amount of $104,040. These facilities also serve as Ondas’ corporate headquarters.
We
determine if an arrangement is a lease, or contains a lease, at the inception of the arrangement. If we determine the arrangement is
a lease, or contains a lease, at lease inception, we then determine whether the lease is an operating lease or finance lease. Operating
and finance leases result in recording a right-of-use (“ROU”) asset and lease liability on our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present
value of lease payments over the lease term. For purposes of calculating operating lease ROU assets and operating lease liabilities,
we use the non-cancellable lease term plus options to extend that we are reasonably certain to take. Lease expense for operating lease
payments is recognized on a straight-line basis over the lease term. Our leases generally do not provide an implicit rate. As such, we
use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease
payments. This rate is generally consistent with the interest rate we pay on borrowings under our credit facilities, as this rate approximates
our collateralized borrowing capabilities over a similar term of the lease payments. We have elected not to recognize ROU assets and
lease liabilities that arise from short-term (12 months or less) leases for any class of underlying assets. We have elected not to separate
lease and non-lease components for any class of underlying asset.
Lease Positions as of June 30, 2022, and December 31, 2021
ROU
lease assets and lease liabilities for our operating leases were recorded in the unaudited condensed consolidated balance sheet as follows:
| |
June
30, 2022 | | |
December 31,
2021 | |
Assets: | |
| | |
| |
Operating
lease assets | |
$ | 3,443,315 | | |
$ | 836,025 | |
Total
lease assets | |
$ | 3,443,315 | | |
$ | 836,025 | |
| |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Operating
lease liabilities, current | |
$ | 811,607 | | |
$ | 550,525 | |
Operating
lease liabilities, net of current | |
| 2,684,997 | | |
| 241,677 | |
Total
lease liabilities | |
$ | 3,496,604 | | |
$ | 792,202 | |
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other
Information
| |
Six
Months Ended June 30, | |
| |
2022 | | |
2021 | |
Operating
cash flows for operating leases | |
$ | 362,980 | | |
$ | 220,730 | |
Weighted
average remaining lease term (in years) – operating lease | |
| 5.78 | | |
| 1.75 | |
Weighted
average discount rate – operating lease | |
| 6.4 | % | |
| 14 | % |
Net
Loss Per Common Share
Basic
net loss per share is computed by dividing net loss by the weighted average shares of common stock outstanding for each period. Diluted
net loss per share is the same as basic net loss per share since we have net losses for each period presented.
The
following potentially dilutive securities for the six months ended June 30, 2022 and 2021 have been excluded from the computation of
diluted net loss per share because the effect of their inclusion would have been anti-dilutive.
| |
Six
months ended June 30, | |
| |
2022 | | |
2021 | |
Warrants
to purchase common stock | |
| 3,258,961 | | |
| 1,694,972 | |
Options
to purchase common stock | |
| 1,819,241 | | |
| 643,006 | |
Restricted
stock purchase offers | |
| 1,397,000 | | |
| 643,660 | |
Total
potentially dilutive securities | |
| 6,475,202 | | |
| 2,981,638 | |
Concentration
of Customers
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.
The table below sets forth the Company’s customers that accounted
for greater than 10% of its revenues for the three- and six-month periods ended June 30, 2022, and 2021, respectively:
| |
Three
months ended | | |
Six
months ended | |
| |
June
30, | | |
June
30, | |
Customer | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
A | |
| 86 | % | |
| 57 | % | |
| 85 | % | |
| 71 | % |
B | |
| 0 | % | |
| 43 | % | |
| 0 | % | |
| 29 | % |
Customer
A accounted for 77% of the Company’s accounts receivable balance at June 30, 2022.
Recently
Adopted Accounting Pronouncements
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 was
permitted, including adoption in an interim period. The adoption of this pronouncement had no impact on our accompanying consolidated
financial statements.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
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.
Reclassification
Certain
amounts reported in the prior year financial statements have been reclassified to conform to the current year’s presentation.
NOTE
3 – OTHER CURRENT ASSETS
Other
current assets consist of the following:
| |
June
30, 2022 | | |
December 31,
2021 | |
Prepaid
insurance | |
$ | 630,969 | | |
$ | 1,026,212 | |
Other
prepaid expenses | |
| 829,254 | | |
| 423,398 | |
Total
other current assets | |
$ | 1,460,223 | | |
$ | 1,449,610 | |
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
| |
June
30, 2022 | | |
December 31,
2021 | |
Vehicles | |
$ | 149,916 | | |
$ | 149,916 | |
Computer
equipment | |
| 282,538 | | |
| 183,869 | |
Furniture
and fixtures | |
| 254,733 | | |
| 141,053 | |
Software | |
| 128,714 | | |
| 88,284 | |
Leasehold
improvements | |
| 1,926,158 | | |
| 37,401 | |
Development
equipment | |
| 77,274 | | |
| 56,275 | |
Base
stations | |
| 239,380 | | |
| 117,850 | |
Drones | |
| 172,611 | | |
| 54,969 | |
Construction
in progress | |
| 838,181 | | |
| 627,044 | |
| |
| 4,069,265 | | |
| 1,456,661 | |
Less:
accumulated depreciation | |
| (551,698 | ) | |
| (424,662 | ) |
Total
property and equipment | |
$ | 3,517,567 | | |
$ | 1,031,999 | |
Depreciation
expenses for the three months ended June 30, 2022 and 2021 were $87,401 and $25,130, respectively. Depreciation expenses for the six
months ended June 30, 2022 and 2021 were $127,036 and $50,272, respectively.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 – GOODWILL AND BUSINESS ACQUISITION
We
account for acquisitions in accordance with FASB ASC 805, “Business Combinations” (“ASC 805”), and goodwill in
accordance with ASC 350, “Intangibles — Goodwill and Other” (“ASC 350”). The excess of the purchase price
over the estimated fair value of net assets acquired in a business combination is recorded as goodwill. On May 17, 2021, the Company
entered into an Agreement and Plan of Merger (the “AR 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 AR Agreement).
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 (“Merger 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”
and, together with Merger I, the “Mergers”), 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.
Pursuant
to the AR 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 AR 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 AR 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 AR Agreement); and (iv)
the cash release from the PPP Loan Escrow Amount (as defined in the AR 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 instalments 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 therefore they 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 employee 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 compensation expense recognized in the three- and six- month periods ended June 30, 2022 in respect of
these restricted stock units was $889,016 and $1,761,750, respectively, and as of June 30, 2022 the unrecognized compensation expense
was $7,483,365.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Lock-Up
and Registration Rights Agreement
On
May 17, 2021, the Company entered into a lock-up and registration rights agreement, by and among the Company and the directors and officers
of American Robotics (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement (i) the Company
agreed to file a resale registration statement for the Registrable Securities (as defined in the Registration Rights Agreement) no later
than 90 days following the closing of the Mergers, and to use commercially reasonable efforts to cause it to become effective as promptly
as practicable following such filing, (ii) the directors and officers and other American Robotics stockholders who sign a joinder to
such agreement were granted certain piggyback registration rights with respect to registration statements filed subsequent to the closing
of the Mergers, and (iii) the directors and officers of American Robotics agreed, subject to certain customary exceptions, not to sell,
transfer or dispose of an aggregate of 2,583,826 shares of Company common stock for a period of 180 days from the closing of the Mergers.
In connection with the Mergers, the stockholders of American Robotics entered into a Joinder to Lock-Up and Registration Rights Agreement.
The
following table summarizes the consideration paid for American Robotics and the final allocation of the purchase consideration to the
estimated fair value of the assets acquired and liabilities assumed at the acquisition date.
Consideration:
Fair
value of total consideration transferred | |
$ | 69,311,577 | |
Fair
value of assets acquired: | |
| | |
Cash | |
$ | 920,011 | |
Other
current assets | |
| 148,043 | |
Property
and equipment | |
| 61,430 | |
Intangible
assets | |
| 26,180,000 | |
Right
of use asset | |
| 463,252 | |
Other
long-term assets | |
| 87,217 | |
Total
assets acquired | |
| 27,859,953 | |
Fair
value of liabilities assumed: | |
| | |
Accounts
payable | |
| 129,541 | |
Deferred
revenue | |
| 32,992 | |
Accrued
payroll and rent | |
| 42,617 | |
Lease
liabilities | |
| 447,827 | |
Deferred
tax liability | |
| 2,921,982 | |
Total
liabilities assumed | |
| 3,574,959 | |
Total
net assets acquired | |
| 24,284,994 | |
Goodwill | |
| 45,026,583 | |
Total | |
$ | 69,311,577 | |
Our results for the three- and six- months ended June 30, 2022, include
results from American Robotics. The following unaudited pro forma information presents the Company’s results of operations as if
the acquisition of American Robotics had occurred on January 1, 2021. The pro forma results do not purport to represent what the Company’s
results of operations actually would have been if the transactions had occurred on January 1, 2021 or what the Company’s operating
results will be in future periods.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| |
(Unaudited) | |
| |
Three
months ended June 30,
2021 | | |
Six
months ended June 30,
2021 | |
Revenue,
net | |
$ | 887,432 | | |
$ | 2,102,196 | |
Net
loss | |
$ | (5,913,496 | ) | |
$ | (11,372,118 | ) |
Basic
Earnings Per Share | |
$ | (0.16 | ) | |
$ | (0.31 | ) |
Earnings Per Share Diluted | |
$ | (0.16 | ) | |
$ | (0.31 | ) |
The
intangible assets acquired include the trademarks, FAA waiver, developed technology, non-compete agreements, and customer relationships
(see Note 6). The deferred tax liability represents the tax effected timing differences relating to the acquired intangible assets to
the extent they are not offset by acquired deferred tax assets.
The
goodwill represents the assembled workforce, acquired capabilities, and future economic benefits resulting from the acquisition. No portion
of the goodwill is deductible for tax purposes.
NOTE
6 – INTANGIBLE ASSETS
The
components of intangible assets, all of which are finite lived, were as follows:
| |
June
30, 2022 | | |
December
31, 2021 | | |
| |
| |
Gross
Carrying Amount | | |
Accumulated
Amortization | | |
Net
Carrying Amount | | |
Gross
Carrying Amount | | |
Accumulated
Amortization | | |
Net
Carrying Amount | | |
Useful
Life | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Patents | |
$ | 77,810 | | |
$ | (19,166 | ) | |
$ | 58,644 | | |
$ | 75,266 | | |
$ | (13,077 | ) | |
$ | 62,189 | | |
| 10 | |
Patents
in process | |
| 101,681 | | |
| - | | |
| 101,681 | | |
| 89,767 | | |
| - | | |
| 89,767 | | |
| N/A | |
Licenses | |
| 241,909 | | |
| (53,568 | ) | |
| 188,341 | | |
| 241,909 | | |
| (41,471 | ) | |
| 200,438 | | |
| 10 | |
Trademarks | |
| 3,230,000 | | |
| (291,741 | ) | |
| 2,938,259 | | |
| 3,230,000 | | |
| (130,242 | ) | |
| 3,099,758 | | |
| 10 | |
FAA
waiver | |
| 5,930,000 | | |
| (535,613 | ) | |
| 5,394,387 | | |
| 5,930,000 | | |
| (239,113 | ) | |
| 5,690,887 | | |
| 10 | |
Developed
technology | |
| 22,963,600 | | |
| (1,570,060 | ) | |
| 21,393,540 | | |
| 16,120,000 | | |
| (650,000 | ) | |
| 15,470,000 | | |
| 10 | |
Non-compete
agreements | |
| 840,000 | | |
| (758,709 | ) | |
| 81,291 | | |
| 840,000 | | |
| (338,710 | ) | |
| 501,290 | | |
| 1 | |
Customer
relationships | |
| 60,000 | | |
| (10,840 | ) | |
| 49,161 | | |
| 60,000 | | |
| (4,839 | ) | |
| 55,161 | | |
| 5 | |
| |
$ | 33,445,000 | | |
$ | (3,239,697 | ) | |
$ | 30,205,303 | | |
$ | 26,586,942 | | |
$ | (1,417,452 | ) | |
$ | 25,169,489 | | |
| | |
Amortization
expenses for the three months ended June 30, 2022 and 2021 were $966,918 and $6,867, respectively. Amortization expenses for
the six months ended June 30, 2022 and 2021 were $1,822,244 and $19,617, respectively.
We
recognized losses on intellectual property amounting to $11,095 and $70,895 for the six months ended June 30, 2022 and 2021, respectively.
On
March 20, 2022, the Company entered into a Purchase Agreement to acquire the assets of Ardenna, Inc., a leading provider of image processing
and machine learning software solutions for rail infrastructure monitoring and inspections. The consideration for the acquisition is
$900,000 in cash and 780,000 shares of the Company’s common stock (the “Ardenna Consideration Shares”). In connection
with the acquisition, the parties have entered into a Registration Rights and Lock-Up Agreement, which requires the Company to file a
resale registration statement covering the resale of the Ardenna Consideration Shares no later than ninety (90) days after the closing
date and restricts the holder from transferring the Ardenna Consideration Shares for 180 days from the closing date, subject to certain
exceptions. On April 5, 2022, the Company completed the acquisition. As a result of this transaction, the Company recognized developed
technology in the amount of $6,843,600.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Estimated
amortization expense for the next five years for the intangible assets currently being amortized is as follows:
Year
Ending December 31, | |
Estimated
Amortization | |
2022
(6 months) | |
$ | 1,709,110 | |
2023 | |
$ | 3,255,640 | |
2024 | |
$ | 3,255,363 | |
2025 | |
$ | 3,255,363 | |
2026 | |
$ | 3,250,525 | |
Thereafter | |
$ | 15,377,621 | |
Total | |
$ | 30,103,622 | |
NOTE
7 – LONG-TERM EQUITY INVESTMENT
On
October 5, 2021, Ondas Holdings irrevocably subscribed and agreed to purchase 3,141,098 shares of Series A-1 Preferred Stock of Dynam.AI,
Inc. (“Dynam”), a tech-enabled services provider for critical or complex artificial intelligence and machine learning projects,
par value $0.00001 for the aggregate price of $500,000 representing subscription price of $0.15918 per share by way of a non-brokered
private placement for approximately 11% ownership in Dynam. In addition to the equity investment, Ondas Holdings’ wholly owned
subsidiary, American Robotics, Inc., entered into a development, services and marketing agreement with Dynam.AI on October 1, 2021. The
agreement allows American Robotics to expand and enhance its IP library and analytics capabilities with artificial intelligence using
physics-based algorithms and allows Dynam to further the development of Vizlab™, Dynam’s proprietary AI/ML platform, an advanced
developer toolkit for data scientists.
This
long-term equity investment consists of an equity investment in a private company through preferred shares, which are not considered
in-substance common stock, that is accounted for at cost, with adjustments for observable changes in prices or impairments, and is classified
as long-term equity investment on our consolidated balance sheets with adjustments recognized in other (expense) income, net on our consolidated
statements of operations. The Company has determined that the equity investment does not have a readily determinable fair value and elected
the measurement alternative. Therefore, the equity investment’s carrying amount will be adjusted to fair value at the time of the
next observable price change for the identical or similar investment of the same issuer or when an impairment is recognized. Each reporting
period, the Company performs a qualitative assessment to evaluate whether the investment is impaired. The assessment includes a review
of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. If the
investment is impaired, the Company writes it down to its estimated fair value. As of June 30, 2022 and December 31, 2021 the long-term
equity investment had a carrying value of $500,000.
Our
CEO Eric Brock is a director of Dynam.
NOTE
8 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following:
| |
June
30, 2022 | | |
December
31, 2021 | |
Accrued
payroll and other benefits | |
$ | 1,154,132 | | |
$ | 269,725 | |
D&O
insurance financing payable | |
| 332,386 | | |
| 719,313 | |
Accrued
professional fees | |
| 196,058 | | |
| 117,008 | |
Other
accrued expenses | |
| 129,837 | | |
| 43,861 | |
Total
accrued expenses and other current liabilities | |
$ | 1,812,413 | | |
$ | 1,149,907 | |
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – SECURED PROMISSORY NOTES
Steward
Capital Holdings LP
On
March 9, 2018, we entered into a loan and security agreement (the “Agreement”) with Steward Capital Holdings LP (the “Steward
Capital”) wherein Steward Capital made available to us a loan in the aggregate principal amount of up to $10,000,000 (the “Loan”).
On March 9, 2018, the Company and Steward Capital, pursuant to the Agreement, entered into a Secured Term Promissory Note for $5,000,000,
having a maturity date of September 9, 2019 (“Tranche A”). The Note bore interest at a per annum rate equal to the greater
of (a) 11.25% or (b) 11.25% plus the Prime Rate, less 3.25%. The Agreement also included payments of $25,000 in loan commitment fees
and $100,000, one percent (1%) of the funding in loan facility charges. The loan commitment fees and $50,000 in loan facility charges
associated with Tranche A were recorded as debt discount and amortized over the life of the Loan. There was also an end of term charge
of $250,000. The end of term charge was being recorded as accreted costs over the term of the Loan. The Note was secured by substantially
all of the assets of the Company.
On
October 9, 2018, the Company and Steward Capital, pursuant to the Agreement, entered into a second Secured Term Promissory Note for $5,000,000
having a maturity date of April 9, 2020 (the “Second Note”) to complete the Agreement for $10,000,000. The Second Note bore
interest at a per annum rate equal to the greater of (a) 11.25% or (b) 11.25% plus the Prime Rate, less 3.25%. Pursuant to the terms
of the Agreement, the Company was required to pay a $50,000 loan facility charge.
On
June 18, 2019, the Company and Steward Capital entered into a letter of agreement to amend the Agreement (the “First Amendment”)
to (i) extend and amend the maturity date, as defined in Section 1.1 of the Agreement, to read in its entirety “means September
9, 2020” (the “Maturity Date”); (ii) waive the repayment requirement to Steward Capital under Section 2.3 of the Agreement,
in connection with the then proposed public offering of the Company as described in the Company’s Registration Statement on Form
S-1, as amended, originally filed on April 12, 2019, and (iii) waive the restriction by Steward Capital on the prepayment of Indebtedness
under Section 7.4 of the Agreement. In connection with the waivers, extension and amendment, the Company agreed to pay to Steward Capital,
upon the earlier of (a) the completion of the public offering as set forth in Section 2.3 of the Agreement and (b) ten (10) days following
the Company’s receipt of Steward’s written demand therefor, a fee equal to three percent (3%) of the current outstanding
principal balance of the Loan (as defined in the Agreement), neither of which have occurred at the time of this filing. The Company concluded
that the modifications created by the First Amendment resulted in a troubled debt restructuring under Accounting Standard Codification—Debt
(Topic 470) as it was determined that a concession was granted by Steward Capital. However, as the future payments to be made subsequent
to the modification were greater than the carrying value at the time of the modification, no gain or loss was required to be recognized
on the troubled debt restructuring. As the difference between the effective interest rate method and the straight-line method was deemed
immaterial, the Company continued to amortize the deferred loan costs using the straight-line method over the remaining term of the Loan.
On
October 28, 2019, the Company and Steward Capital entered into a letter of agreement to amend the Agreement, as amended (the “Second
Amendment”) wherein the parties agreed to (i) extend and amend the due date for all accrued and unpaid interest starting September
2, 2019 to the Maturity Date and (ii) extend and amend the due date for the 3% fee payable to Steward Capital in connection with the
First Amendment and waiver dated June 2019 to be payable on the Maturity Date. In connection with the extensions and amendments, the
Company issued Steward Capital 120,000 shares of the Company’s common stock valued at $300,000 on December 15, 2019. The value
was recorded as debt discount and amortized over the life of the Loan. The Company concluded that the modifications created by the Second
Amendment resulted in a troubled debt restructuring under Accounting Standard Codification—Debt (Topic 470) as it was determined
that a concession was granted by Steward Capital. However, as the future payments to be made subsequent to the modification were greater
than the carrying value at the time of the modification, no gain or loss was required to be recognized on the troubled debt restructuring.
As the difference between the effective interest rate method and the straight-line method was deemed immaterial, the Company continued
to amortize the deferred loan costs using the straight-line method over the remaining term of the Loan.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Agreement also contained covenants which included certain restrictions with respect to subsequent indebtedness, liens, loans and investments,
asset sales and share repurchases and other restricted payments, subject to certain exceptions. The Agreement also contained financial
reporting obligations. An event of default under the Agreement included, but was not limited to, breach of covenants, insolvency, and
occurrence of any default under any agreement or obligation of the Company. In addition, the Agreement contained a customary material
adverse effect clause which stated that in the event of a material adverse effect, an event of default would occur, and the lender had
the option to accelerate and demand payment of all or any part of the loan. A material adverse effect was defined in the Agreement as
a material change in our business, operations, properties, assets or financial condition or a material impairment of its ability to perform
all obligations under its Agreement.
On
September 4, 2020, the Company and Steward Capital entered into the Second Amendment to the Loan and Security Agreement (the “Second
Amendment”) to (i) extend the Maturity Date to September 9, 2021 (the “Extended Maturity Date”) and agree to convert
all accrued interest into the note, resulting in a new principal balance of $11,254,236, (ii) make all accrued and unpaid interest from
September 9, 2020 through the date of maturity due on the Extended Maturity Date, (iii) on or before October 1, 2020, Company were to
issue 40,000 shares of Company’s stock to Steward valued at $9.75 per share, or total of $390,000 (issued on September 30, 2020)
and (iv) make the fee of 3% of the outstanding principal balance of the loan, or $300,000 (as defined in the First Amendment) due at
the updated maturity date of September 9, 2021. The Company concluded that the modifications created by the Second Amendment resulted
in a troubled debt restructuring under Accounting Standard Codification—Debt (Topic 470) as it was determined that a concession
was granted by Steward Capital. However, as the future payments to be made subsequent to the modification were greater than the carrying
value at the time of the modification, no gain or loss was required to be recognized on the troubled debt restructuring.
On
April 14, 2021, the Company requested Steward Capital’s waiver of Section 7 (Covenants of Borrower), in connection with the acquisition
of American Robotics, Inc (“American Robotics”). In connection with the waiver, the Company agreed to, upon consummation
of the proposed acquisition, pay Steward Capital an additional $280,000, and upon the consummation of the proposed acquisition, Steward
and the Company would amend the Agreement to modify the defined term “collateral” to include the intellectual property of
American Robotics; however, the Company made a final payment to Steward Capital before closing of the acquisition.
On
June 25, 2021, the Company made a final payment of $7,044,750 to Steward Capital, applying $6,574,278 to principal, $404,729 in interest
and other fees, and $65,743 in early payment penalties. The agreement was terminated on July 1, 2021.
NOTE
10 – LONG-TERM NOTES PAYABLE
Convertible
Promissory Notes
On
September 14, 2017, the Company and an individual entered into a convertible promissory note with unilateral conversion preferences by
the individual (the “Convertible Promissory Note”). On July 11, 2018, the Company’s Board approved certain changes
to the Convertible Promissory Note wherein the conversion feature was changed from unilateral to mutual between the individual and the
Company.
The
Company may at any time on or after a qualified public offering convert any unpaid repayment at the IPO conversion price. The conversion
price is the lesser of the (i) price per share of Common Stock sold in the Qualified Public Offering, discounted by 20%, and (ii) the
price per share of Common Stock based on a pre-money Company valuation of $50 million on a Fully Diluted Basis.
On
both June 30, 2022, and December 31, 2021, the total outstanding balance of the Convertible Promissory Note was $300,000. The maturity
date of the Convertible Promissory Note is based on the payment of 0.6% of quarterly gross revenue until 1.5 times the amount of the
Convertible Promissory Note is paid. Accrued interest on June 30, 2022 and December 31, 2021 was $37,708 and $40,152, respectively. Interest
expense for the three and six months ended June 30, 2022 was $3,750 and $7,500, respectively. Interest expense for the three
and six months ended June 30, 2021 was $3,750 and $7,500, respectively.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Paycheck
Protection Program Loan
On
May 4, 2020, the Company applied for a loan pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”), as administered by the U.S. Small Business Administration (the “SBA”). The loan,
in the principal amount of $666,091 (the “PPP Loan”), was disbursed by Wells Fargo Bank, National Association (“Lender”)
on May 6, 2020, pursuant to a Paycheck Protection Program Promissory Note and Agreement (the “Note and Agreement”).
The
program was later amended by the Paycheck Protection Flexibility Act of 2020 whereby debtors were granted a minimum maturity date of
the five-year anniversary of the funding date and a deferral of ten months from the end of the covered period. The PPP Loan bore interest
at a fixed rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed
below), were to commence after the sixteen-month anniversary of the funding date. The Company did not provide any collateral or guarantees
for the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The Note and Agreement provided for customary events
of default, including those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects.
The Company could prepay the principal of the PPP Loan at any time without incurring any prepayment charges.
All
or a portion of the PPP Loan could be forgiven by the SBA upon application to the Lender by the Company within 10 months after the last
day of the covered period. The Lender would have 90 days to review borrower’s forgiveness application and the SBA had an additional
60 days to review the Lender’s decision as to whether the borrower’s loan could be forgiven. Under the CARES Act, loan forgiveness
was available for the sum of documented payroll costs, covered rent payments, and covered utilities, and certain covered mortgage interest
payments during the twenty-four-week period beginning on the date of the first disbursement of the PPP Loan. For purposes of the CARES
Act, payroll costs excluded compensation of an individual employee earning more than $100,000, prorated annually. Not more than 40% of
the forgiven amount could be for non-payroll costs. Forgiveness was reduced if full-time headcount declines, or if salaries and wages
for employees with salaries of $100,000 or less annually were reduced by more than 25%. On May 4, 2021, the Company submitted an application
to the lender with supporting detail requesting forgiveness of the loan. On May 26, 2021, the Company received full forgiveness for both
the principal and accrued interest, which was included in other income on the Company’s accompanying consolidated statements of
operations.
NOTE
11 – STOCKHOLDERS’ EQUITY
Common
Stock
On
June 30, 2022 the Company had 116,666,667 shares of common stock, par value $0.0001 (the “Common Stock”), authorized for
issuance, of which 42,623,283 shares of our Common Stock were issued and outstanding.
Preferred
Stock
At
June 30, 2022 and December 31, 2021, the Company had 10,000,000 shares of preferred stock, par value $0.0001, authorized, of which 5,000,000
shares are designated as Series A Convertible Preferred Stock (“Series A Preferred”) and 5,000,000 shares are non-designated
(“blank check”) shares. As of June 30, 2022 and December 31, 2021, the Company had no preferred stock outstanding.
The
Company evaluated its Series A Preferred to determine if those instruments or embedded components of those instruments qualify as derivatives
to be accounted for separately. The Preferred Shares include an embedded contingent automatic conversion option which is bifurcated from
the Preferred Shares and recorded separately as a derivative liability, creating a discount to the Preferred Shares. The fair value of
the embedded derivative is recorded as a liability and marked-to-market each balance sheet date, with the change in fair value recorded
as other income (expense) in the Company’s accompanying consolidated statement of operations. The discount arising from the identification
of the embedded conversion feature will not be accreted or amortized as the Series A Preferred has been classified in equity.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Form
S-3
On
January 29, 2021, the Company filed a shelf Registration Statement on Form S-3 for up to $150,000,000 with the SEC (the “Form S-3”)
for shares of its Common Stock; shares of its preferred stock, which the Company may issue in one or more series or classes; debt securities,
which the company may issue in one or more series; warrants to purchase its Common Stock, preferred stock or debt securities; and units.
The Form S-3 was declared effective by the SEC on February 5, 2021.
2021
Public Offering
On
June 8, 2021, the Company entered into an underwriting agreement (the “2021 Underwriting Agreement”) with Oppenheimer &
Co. Inc., acting as the representative for the underwriters identified therein (the “Underwriters”), relating to the Company’s
public offering (the “2021 Public Offering”) of 6,400,000 shares (the “2021 Firm Shares”) of the Company’s
Common Stock. Pursuant to the 2021 Underwriting Agreement, the Company also granted the Underwriters a 30-day option to purchase up to
an additional 960,000 shares of Common Stock (the “2021 Option Shares,” and together with the 2021 Firm Shares, the “2021
Shares”) to cover over-allotments.
The
Underwriters agreed to purchase the 2021 Firm Shares from the Company with the option to purchase the 2021 Option Shares at a price of
$6.51 per share. The 2021 Shares were offered, issued, and sold pursuant to the Form S-3 and accompanying prospectus filed with the SEC
under the Securities Act of 1933 as amended (“Securities Act”).
On
June 11, 2021, pursuant to the 2021 Public Offering, the Company issued 7,360,000 shares of Common Stock (2021 Firm Shares and 2021 Option
Shares) at a public price of $7.00 for net proceeds to the Company of $47,523,569 after deducting the underwriting discount and offering
fees and expenses payable by the Company.
The
Underwriting Agreement included customary representations, warranties, and agreements by the Company, customary conditions to closing,
indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act, other obligations
of the parties and termination provisions. The representations, warranties and covenants contained in the 2021 Underwriting Agreement
were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to the agreement and
were subject to limitations agreed upon by the contracting parties.
The
table below details the net proceeds of the 2021 Public Offering.
Gross
Proceeds: | |
| |
Initial
Closing | |
$ | 44,800,000 | |
Over-allotment
Closing | |
| 6,720,000 | |
| |
| 51,520,000 | |
Offering
Costs: | |
| | |
Underwriting
discounts and commissions | |
| (3,806,400 | ) |
Other
offering costs | |
| (190,031 | ) |
Net
Proceeds | |
$ | 47,523,569 | |
The
Company will use the net proceeds of the 2021 Public Offering for working capital and general corporate purposes, which includes further
technology development, increased spending on marketing and advertising and capital expenditures necessary to grow the Ondas Holdings
business.
ATM
Offering
On
March 22, 2022, the Company, entered into an Equity Distribution Agreement (the “ATM Agreement”) with Oppenheimer & Co.
Inc. (the “Sales Agent”). Pursuant to the terms of the ATM Agreement, the Company may offer and sell (the “ATM Offering”)
from time to time through the Sales Agent, as the Company’s sales agent, up to $50 million of shares of the Company’s common
stock, par value $0.0001 per share (the “ATM Shares”). Sales of the ATM Shares, if any, may be made in sales deemed to be
“at the market offerings” as defined in Rule 415 promulgated under the Securities Act. The Sales Agent is not required to
sell any specific number or dollar amount of ATM Shares, but will act as a sales agent using commercially reasonable efforts consistent
with its normal trading and sales practices and applicable state and federal laws, rules, and regulations and the rules of the Nasdaq
Stock Market, on mutually agreed terms between the Sales Agent and the Company. The Sales Agent will receive from the Company a commission
of 3.0% of the gross proceeds from the sales of ATM Shares by the Sales Agent pursuant to the terms of the Agreement. Net proceeds from
the sale of the ATM Shares will be used for general corporate purposes.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
offering of ATM Shares pursuant to the ATM Agreement will terminate upon the earliest of (i) the sale of all ATM Shares subject to the
ATM Agreement, and (ii) the termination of the ATM Agreement pursuant to its terms.
The
ATM Shares are issued pursuant to the Company’s shelf registration statement (the “Registration Statement”) on Form
S-3 (File No. 333-252571) filed on January 29, 2021, which became effective on February 5, 2021, and the prospectus supplement thereto
dated March 22, 2022.
In
April 2022 the Company sold 343,045 ATM Shares through the Sales Agent at an average price of $7.49 with the net proceeds of $2.50 million.
In connection with the sale of these ATM Shares, the compensation paid by the Company to the Sales Agent was $77,421.
In May 2022 the Company sold 171,775 ATM Shares through the Sales Agent at an average price of $7.19 with the net proceeds of $1.20 million.
In connection with the sale of these ATM Shares, the compensation paid by the Company to the Sales Agent was $37,242.
In
June 2022 the Company sold 337,859 ATM Shares through the Sales Agent at an average price of $7.12 with the net proceeds of $2.36 million.
In connection with the sale of these ATM Shares, the compensation paid by the Company to the Sales Agent was $110,428.
In
July 2022 the Company sold 11,995 ATM Shares through the Sales Agent at an average price of $5.62 with the net proceeds of $0.65 million.
In connection with the sale of these ATM Shares, the compensation paid by the Company to the Sales Agent was $1,844.
Warrants
to Purchase Common Stock
We
use the Black-Scholes-Merton option model (the “Black-Scholes Model”) to determine the fair value of warrants to purchase
Common Stock of the Company. The Black-Scholes Model is an acceptable model in accordance with U.S GAAP. 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 weighted
average term of the warrant.
The
risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is
appropriate for the term of the warrants. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate
each year during the expected life of the award. Our estimated volatility is an average of the historical volatility of peer entities
whose stock prices were publicly available over a period equal to the expected life of the awards. We used the historical volatility
of peer entities due to the lack of sufficient historical data of our stock price.
As
of June 30, 2022, we had warrants outstanding to purchase an aggregate of 3,305,854 shares of Common Stock with a weighted average
contractual remaining life of approximately 4.75 years, and a weighted average exercise price of $8.53 per share. No new warrants
were issued, exercised, or expired in the six months ended June 30, 2022.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Equity
Incentive Plan
In
2018, our stockholders adopted the 2018 Equity Incentive Plan (the “2018 Plan”) pursuant to which 3,333,334 shares of our
Common Stock has been reserved for issuance to employees, including officers, directors and consultants. The 2018 Plan shall be administered
by the Board, provided however, that the Board may delegate such administration to the compensation committee (the “Committee”).
Subject to the provisions of the 2018 Plan, the Board and/or the Committee shall have authority to grant, in its discretion, incentive
stock options, or non-statutory options, stock awards or restricted stock purchase offers (“Equity Awards”).
At
the 2021 Annual Meeting of Stockholders of the Company held on November 5, 2021, stockholders of the Company approved, among other matters,
the Ondas Holdings Inc. 2021 Stock Incentive Plan (the “Plan”). The Compensation Committee of the Board of the Company adopted
the Plan on September 30, 2021, subject to stockholder approval. The purpose of the Plan is to enable the Company to attract, retain,
reward, and motivate eligible individuals by providing them with an opportunity to acquire or increase a proprietary interest in the
Company and to incentivize them to expend maximum efforts for the growth and success of the Company, so as to strengthen the mutuality
of the interests between the eligible individuals and the shareholders of the Company. The Plan provides for the issuance of awards including
stock options, stock appreciation rights, restricted stock, restricted stock units, and performance awards. The Plan provides for a reserve
of 6,000,000 shares of the Company’s common stock.
Stock
Options to Purchase Common Stock
On
May 9, 2022, the Compensation Committee of the Board granted an aggregate of 216,500 stock options to purchase shares of the Company’s
Common Stock to certain employees. The stock options vest over a fouryear period and are contingent on ongoing employment. They are
included in compensation expenses.
On
March 18, 2022, the Compensation Committee of the Board granted an aggregate of 135,000 stock options to purchase shares of the Company’s
Common Stock to certain employees. The stock options vest over a fouryear period and are contingent on ongoing employment. They are
included in compensation expenses.
On
March 18, 2022, the Compensation Committee of the Board granted an aggregate of 65,000 stock options to purchase shares of the Company’s
Common Stock to certain non-employees. The stock options vest on December 31, 2022. They are included in compensation expenses.
On
March 18, 2022, the Compensation Committee of the Board granted an aggregate of 210,000 performance-based stock options to purchase shares
of the Company’s Common Stock to two non-employees that are subject to the attainment of pre-established performance conditions
in the year ending December 31, 2022. The actual number of shares subject to the award is determined at the end of the performance period
and may range from zero to 100% of the target shares granted depending upon the terms of the award. Compensation
expenses related to these awards is recognized when the performance conditions are satisfied.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
February 7, 2022, the Compensation Committee of the Board granted an aggregate of 1,248,000 stock options to purchase shares of the Company’s
Common Stock to certain employees. The stock options vest over a two-year period and are contingent on ongoing employment. They are included
in compensation expenses.
The
assumptions used in the Black-Scholes Model are set forth in the table below.
| |
Six months
ended, |
|
| |
June
30, 2022 |
|
Stock
price | |
$ | 4.99-6.55 |
|
Risk-free
interest rate | |
| 1.82-3.00 |
% |
Volatility | |
| 46.42-56.81 |
% |
Expected
life in years | |
| 2.9-6.3 |
|
Dividend
yield | |
| 0.00 |
% |
A
summary of our Option activity and related information follows:
| |
| | |
| | |
Weighted | |
| |
| | |
Weighted | | |
Average | |
| |
Number of | | |
Average | | |
Remaining | |
| |
Shares Under | | |
Exercise | | |
Contractual | |
| |
Option | | |
Price | | |
Life | |
Balance on December 31, 2021 | |
| 687,448 | | |
$ | 6.79 | | |
| 8.2 | |
Granted | |
| 1,658,000 | | |
$ | 5.12 | | |
| 9 | |
Expired | |
| (3,015 | ) | |
| - | | |
| | |
Terminated | |
| - | | |
| - | | |
| | |
Canceled | |
| - | | |
| - | | |
| | |
Balance on March 31, 2022 | |
| 2,342,433 | | |
$ | 5.62 | | |
| 8.6 | |
Granted | |
| 216,500 | | |
| 6.79 | | |
| 9.9 | |
Exercised | |
| | | |
| | | |
| | |
Terminated | |
| (131,090 | ) | |
| 2.09 | | |
| | |
Canceled | |
| | | |
| | | |
| | |
Balance on June 30, 2022 | |
| 2,427,843 | | |
| 5.90 | | |
| 8.7 | |
Vested and Exercisable at June 30, 2022 | |
| 598,046 | | |
$ | 7.77 | | |
| 7.4 | |
At June 30, 2022, total
unrecognized estimated compensation expense related to non-vested options issued prior to that date was $3,612,189, which is
expected to be recognized over a weighted average period of 4.74 years. For the three months ended June 30, 2022 and 2021, $531,450
and $190,357, respectively, was recorded in stock-based compensation in the accompanying unaudited condensed consolidated financial
statements. For the six months ended June 30, 2022 and 2021, $864,093 and $287,519, respectively, was recorded in stock-based
compensation in the accompanying unaudited condensed consolidated financial statements.
Restricted
Stock Units
On
May 9, 2022, the Compensation Committee approved the grant of 13,900 restricted stock units to three employees. The restricted stock
units vest in two successive equal annual installments with the first vesting date commencing on the first anniversary of the award date
and are contingent on continuing employment. The compensation expense recognized in the three months ended June 30, 2022 in respect of
these restricted stock units was $5,723, and as of June 30, 2022 the unrecognized compensation expense was $74,619.
On
March 22, 2022, the Compensation Committee approved the grant of 14,800 restricted stock units to an employee. The restricted stock units
vest in four successive equal annual installments with the first vesting date commencing on the first anniversary of the award date and
are contingent on continuing employment. The compensation expense recognized in the three- and six-months ended June 30, 2022 in respect
of these restricted stock units was $6,633 and $7,288, and as of June 30, 2022 the unrecognized compensation expense was $99,124.
On
November 5, 2021, the Compensation Committee approved the grants of 6,362 restricted stock units for each of Ondas’ directors (Messrs.
Cohen, Reisfield, Silverman, Seidl, Bushey and Sood). Each restricted stock unit represents a contingent right to receive one share of
common stock of the Company. These restricted stock units vest in four successive equal quarterly installments with the first vesting
date commencing on the first day of the next calendar quarter, provided that such director is a director of the Company on the applicable
vesting dates. The compensation expense recognized in the three- and six-months ended June 30, 2022 in respect of these restricted stock
units was $90,563 and $181,126, and as of June 30, 2022 the unrecognized compensation expense was $181,126.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
August 5, 2021, the Company entered into employment agreements and awarded 1,375,000 restricted stock units pursuant to the 2018 Plan
to key members of American Robotics’ management. Each restricted stock unit represents a contingent right to receive one share
of common stock of the Company. The restricted stock units vest in three successive equal annual installments with the first vesting
date commencing on the first anniversary of the award date and are contingent on continuing employment. The compensation expense recognized
in the three- and six-months ended June 30, 2022 in respect of these restricted stock units was $889,016 and $1,761,750, and as of June
30, 2022 the unrecognized compensation expense was $7,483,365.
On
January 25, 2021, the Compensation Committee approved the following grants: (a) for Messrs. Cohen, Reisfield and Silverman (i) 5,000
restricted stock units pursuant to the 2018 Plan, and (b) for Mr. Seidl and Ms. Sood (i) 5,000 restricted stock units pursuant to
the 2018 Plan, and (ii) 10,000 restricted stock units pursuant to the 2018 Plan. Each restricted stock unit represents a contingent right
to receive one share of common stock of the Company. The 5,000 restricted stock units granted to each of Messrs. Cohen, Reisfield, Silverman
and Seidl and Ms. Sood vest in four successive equal quarterly installments with the first vesting date commencing on the first
day of the next calendar quarter, provided that such director is a director of the Company on the applicable vesting dates. The 10,000
restricted stock units granted to Mr. Seidl and Ms. Sood vest in eight successive equal quarterly installments with the first vesting
date commencing on the first day of the next calendar quarter, provided that such director is a director of the Company on the applicable
vesting dates. All restricted stock units granted to these directors shall vest in full immediately upon a change in control. The Company
recognized stock-based compensation of $31,800 and $63,600 for the three- and six-months ended June 30, 2022. As of June 30, 2022, the
unrecognized compensation expense was $63,600.
The
Company recognizes restricted stock unit expense over the period of vesting or period that services will be provided. Compensation associated
with shares of Common Stock issued or to be issued to consultants and other non-employees is recognized over the expected service period
beginning on the measurement date, which is generally the time the Company and the service provider enter into a commitment whereby the
Company agrees to grant shares in exchange for the services to be provided.
The
following is a summary of restricted stock unit activity for the three- and six-months ended June 30, 2022:
| |
| | |
Weighted | |
| |
| | |
Average | |
| |
Shares | | |
Grant Date Fair Value | |
Unvested balance on December 31, 2021 | |
| 1,385,000 | | |
$ | 7.82 | |
Granted | |
| 14,800 | | |
$ | 7.19 | |
Vested | |
| (12,043 | ) | |
| 10.16 | |
Unvested balance on March 31, 2022 | |
| 1,387,757 | | |
$ | 7.96 | |
Granted | |
| 13,900 | | |
| 5.78 | |
Vested | |
| (12,043 | ) | |
| 10.16 | |
Unvested balance on June 30, 2022 | |
| 1,389,614 | | |
| 8.10 | |
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
We
may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to
many uncertainties, and outcomes are not predictable with assurance. There are no such loss contingencies that are included in the financial
statements as of June 30, 2022.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13 – SEGMENT INFORMATION
Operating
segments are defined as components of an entity for which discrete financial information is available and is regularly reviewed by the
CODM in making decisions regarding resource allocation and performance assessment. The Company’s CODM is its Chief Executive Officer.
The Company determined it has two reportable segments: Ondas Networks and American Robotics as the CODM reviews financial information
for these two businesses separately The Company has no inter-segment sales. Our segment structure presented below represents a
change from the prior year for the inclusion of our American Robotics segment, which the Company acquired on August 5, 2021. The following
table presents segment information for three- and six-months ended June 30, 2022:
| |
Six Months Ended | |
| |
June 30, 2022 | |
| |
Ondas Networks | | |
American Robotics | | |
Total | |
Revenue, net | |
$ | 870,545 | | |
$ | 143,872 | | |
$ | 1,014,417 | |
Depreciation and amortization | |
| 300,677 | | |
| 2,048,965 | | |
| 2,349,642 | |
Interest expense | |
| 16,820 | | |
| 9,320 | | |
| 26,140 | |
Stock based compensation | |
| 809,243 | | |
| 2,074,336 | | |
| 2,883,579 | |
Net loss | |
| (6,636,152 | ) | |
| (14,765,673 | ) | |
| (21,401,824 | ) |
Goodwill | |
| - | | |
| 45,026,583 | | |
| 45,026,583 | |
Total assets | |
| 46,598,686 | | |
| 81,733,939 | | |
| 128,332,625 | |
| |
Three Months Ended | |
| |
June 30, 2022 | |
| |
Ondas Networks | | |
American Robotics | | |
Total | |
Revenue, net | |
$ | 520,464 | | |
$ | 83,755 | | |
$ | 604,219 | |
Depreciation and amortization | |
| 153,907 | | |
| 1,131,431 | | |
| 1,285,338 | |
Interest expense | |
| 2,146 | | |
| 9,320 | | |
| 11,466 | |
Stock based compensation | |
| 507,240 | | |
| 1,047,944 | | |
| 1,555,184 | |
Net loss | |
| (3,344,306 | ) | |
| (8,047,121 | ) | |
| (11,391,425 | ) |
Goodwill | |
| - | | |
| 45,026,583 | | |
| 45,026,583 | |
Total assets | |
| 46,598,686 | | |
| 81,733,939 | | |
| 128,332,625 | |
NOTE
14 – INCOME TAXES
The
Company had a net deferred tax asset of $14,528,920 as of December 31, 2021, including a tax benefit from net operating loss carry-forwards
of $17,577,952. A valuation allowance of $14,528,920 was provided against this asset resulting in deferred assets, net of valuation
allowance of $0.
ONDAS
HOLDINGS INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
assessing the realizability of deferred tax assets, including the net operating loss carry forwards, the Company assesses the positive
and negative evidence to estimate if sufficient future taxable income will be generated to utilize its existing deferred tax assets.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period when those
temporary differences become deductible. Based on its assessment, the Company has provided a full valuation allowance against its deferred
tax assets since their future utilization remains uncertain at this time.
In
accordance with Section 382 of the Internal Revenue Code, the usage of the Company’s net operating loss carry forwards could be
limited in the event a change of control has occurred. As of December 31, 2021, the Company completed an analysis and determined that
there were multiple ownership changes. Provided sufficient taxable income is generated the annual base limitation plus increased limitation
calculated pursuant to IRS Notice 2003-65 will allow the Company to utilize all existing losses within the carryover periods.
As
of June 30, 2022 and December 31, 2021, management does not believe the Company has any material uncertain tax positions that would require
it to measure and reflect the potential lack of sustainability of a position on audit in its financial statements. The Company will continue
to evaluate its uncertain tax positions in future periods to determine if measurement and recognition in its financial statements is
necessary. The Company does not believe there will be any material changes in its unrecognized tax positions over the next year.
NOTE
15 – RELATED PARTY TRANSACTIONS
Between
June 2 and December 31, 2020, we accrued $115,385 for salary owed to Thomas V. Bushey, then President of the Company. On January
19, 2021, Mr. Bushey waived the accrued payroll amounts in the amount of $115,385. Pursuant to the terms of a Separation Agreement and
General Release (the “Separation Agreement”) dated January 19, 2021 (the “Effective Date”), between Mr. Bushey
and the Company, Mr. Bushey agreed to waive his entitlement to accrued salary in the amount of $125,256 and accrued vacation
in the amount of $9,846 as of the Effective Date. At the time of Mr. Bushey’s resignation as President in January 2021,
Mr. Bushey had the right to receive 500,000 RSU Shares (375,000 vested as of December 31, 2020 and 125,000 of
which the Compensation Committee accelerated vesting), which will be issued on June 3, 2022 pursuant to Mr. Bushey’s
deferral election. The remaining 500,000 RSU Shares were canceled. As part of the Separation Agreement, Mr. Bushey
and the Company entered into a Consulting Agreement dated January 19, 2021 (the “Consulting Agreement”). Pursuant to
the Consulting Agreement, Mr. Bushey provided services to the Company at the direction of the Company’s Chief Executive Officer.
The Consulting Agreement terminated on July 19, 2021. Mr. Bushey was paid $7,500 per month for these services.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 16 – SUBSEQUENT EVENTS
On August
4, 2022, the Company entered into an Agreement of Merger (the “Agreement”) with Talos Ltd. (or such other name as shall be
approved by the Israeli Registrar of Companies), an Israeli company in formation as a wholly owned subsidiary of the Company (“Merger
Sub”), and AIROBOTICS Ltd., an Israeli publicly traded company on the Tel Aviv Stock Exchange and a leading Israeli developer of
autonomous unmanned aircraft systems and automated data analysis and visualization platforms (“Airobotics”).
The Agreement
provides that, upon the terms and subject to the conditions set forth in the Agreement, and in accordance with the Companies Law 5759-1999
of the State of Israel (together with the rules and regulations thereunder), Merger Sub shall be merged with and into Airobotics, and
Airobotics will continue as a wholly owned subsidiary of the Company (the “Merger”). At the closing of the Merger, upon the
terms and subject to the conditions set forth in the Agreement, each ordinary share of Airobotics issued and outstanding immediately prior
to the closing of the Merger (other than shares owned by Airobotics or its subsidiaries (dormant or otherwise) or by the Company or Merger
Sub) shall be exchanged for and converted into the right to receive 0.16806 of a fully paid and nonassessable share of the Company common
stock without interest and subject to applicable tax withholdings ("Merger Consideration"). All fractional shares of the Company
common stock that would otherwise be issued to a holder of Airobotics ordinary shares as part of the Merger Consideration will be rounded
up to the nearest whole share based on the total number of shares of the Company's common stock to be issued to such holder of Airobotics
ordinary shares.
Each
of the Company, Merger Sub, and Airobotics has provided customary representations, warranties and covenants in the Agreement. The completion
of the Merger is subject to various closing conditions, including (a) the requisite regulatory approvals being obtained; (b) the absence
of any applicable order (whether temporary, preliminary or permanent) in effect which prohibits the consummation of the Merger; (c) the
absence of any law of any governmental authority of competent jurisdiction prohibiting the consummation of the Merger; and (d) Airobotics
obtaining the requisite stockholder approval. The Agreement contains customary termination rights for both the Company and Airobotics.
Both the Company and Airobotics have the right to terminate the Agreement if the closing of the Merger does not occur on or before January
15, 2023.
The
Merger is expected to close in the second half of 2022.
On July 14, 2021, Ondas Holdings irrevocably
subscribed and agreed to purchase 3,357,958 shares of Series Seed Preferred Stock of Dynam.AI, Inc. (“Dynam”), a tech-enabled
services provider for critical or complex artificial intelligence and machine learning projects, par value $0.00001 for the aggregate
price of $1,000,000 representing a subscription price of $0.2978 per share by way of a non-brokered private placement for approximately
8% ownership in Dynam. This brings Ondas Holdings investment in Dynam to 6,499,056 shares or approximately 19% ownership.
Management has evaluated subsequent events as
of August 9, 2022, the date the consolidated financial statements were available to be issued according to the requirements of ASC topic
855.