UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2024

 

or

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from________ to ___________

 

Commission File Number: 001-39761

 

ONDAS HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Nevada   47-2615102
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

One Marina Park Drive, Suite 1410, Boston, MA 02210

(Address of principal executive offices) (Zip Code)

 

(888) 350-9994

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock par value $0.0001   ONDS   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No 

 

The number of shares outstanding of the issuer’s Common Stock as of November 11, 2024, was 77,292,559.

 

 

 

 

 

ONDAS HOLDINGS INC.

INDEX TO FORM 10-Q

 

    Page
     
PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Condensed Consolidated Balance Sheets as of September 30, 2024 (Unaudited) and December 31, 2023 1
     
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited) 2
     
  Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (Unaudited) 4
     
  Notes to the Unaudited Condensed Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 53
     
Item 4. Controls and Procedures 54
     
PART II - OTHER INFORMATION 55
     
Item 1. Legal Proceedings 55
     
Item 1A. Risk Factors 55
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 55
     
Item 3. Defaults Upon Senior Securities 55
     
Item 4. Mine Safety Disclosures 55
     
Item 5. Other Information 55
     
Item 6. Exhibits 56

 

i

 

 

ONDAS HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2024     2023  
    (Unaudited)        
ASSETS            
Current Assets:            
Cash   $ 2,832,550     $ 14,979,436  
Restricted cash     40,736       42,564  
Accounts receivable, net     2,876,087       3,429,974  
Inventory, net     8,878,734       2,186,646  
Other current assets     2,540,740       2,967,619  
Total current assets     17,168,847       23,606,239  
                 
Property and equipment, net     2,734,321       4,175,958  
                 
Other Assets:                
Goodwill, net of accumulated impairment charges     27,751,921       27,751,921  
Intangible assets, net     28,222,161       31,329,182  
Lease deposits and other assets     482,392       599,517  
Operating lease right of use assets     3,799,014       4,701,865  
Total other assets     60,255,488       64,382,485  
Total assets   $ 80,158,656     $ 92,164,682  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current Liabilities:                
Accounts payable   $ 4,021,804     $ 5,177,022  
Operating lease liabilities     771,943       685,099  
Accrued expenses and other current liabilities     3,517,164       3,587,877  
Notes payable, net of unamortized issuance costs of $558,785 and $0, respectively, related party     891,215       -  
Convertible notes payable, net of unamortized debt discount and issuance cost of $13,153 and $0, respectively, related party     1,486,847       -  
Convertible notes payable, net of unamortized debt discount and issuance cost of $965,066 and $1,968,411, respectively     27,824,724       25,692,505  
Government grant liability     548,219       520,657  
Deferred revenue     447,720       276,944  
Total current liabilities     39,509,636       35,940,104  
                 
Long-Term Liabilities:                
Notes payable     300,000       300,000  
Convertible notes payable, net of current, net of unamortized debt discount and issuance cost of $0 and $391,718, respectively     -       2,812,156  
Accrued interest     21,249       26,844  
Government grant liability, net of current     1,895,434       2,229,047  
Operating lease liabilities, net of current     5,254,623       5,800,710  
Other liabilities     82,500       -  
Total long-term liabilities     7,553,806       11,168,757  
Total liabilities     47,063,442       47,108,861  
                 
Commitments and Contingencies (Note 11)    
 
     
 
 
                 
Temporary Equity                
Redeemable noncontrolling interest     18,176,422       11,920,694  
                 
Stockholders’ Equity                
Preferred stock - par value $0.0001; 5,000,000 shares authorized at September 30, 2024 and December 31, 2023, respectively, and none issued or outstanding at September 30, 2024 and December 31, 2023, respectively     -       -  
Preferred stock, Series A - par value $0.0001; 5,000,000 shares authorized at September 30, 2024 and December 31, 2023, respectively, and none issued or outstanding at September 30, 2024 and December 31, 2023, respectively     -       -  
Common Stock - par value $0.0001; 300,000,000 shares authorized; 75,297,311 and 61,940,878 issued and outstanding, respectively September 30, 2024 and December 31, 2023, respectively     7,530       6,194  
Additional paid in capital     240,943,416       231,488,999  
Accumulated deficit     (226,032,154 )     (198,360,066 )
Total stockholders’ equity     14,918,792       33,135,127  
Total liabilities and stockholders’ equity   $ 80,158,656     $ 92,164,682  

 

The accompanying footnotes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

1

 

 

ONDAS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2024   2023   2024   2023 
                 
Revenues, net  $1,480,792   $2,665,190   $3,063,652   $10,730,145 
Cost of goods sold   1,433,232    2,110,312    3,601,969    6,076,595 
Gross profit (loss)   47,560    554,878    (538,317)   4,653,550 
                     
Operating expenses:                    
General and administration   4,114,986    2,563,319    12,177,062    13,347,278 
Sales and marketing   1,410,944    1,224,144    4,040,798    4,205,217 
Research and development   3,182,345    2,701,436    9,335,323    14,184,420 
Total operating expenses   8,708,275    6,488,899    25,553,183    31,736,915 
                     
Operating loss   (8,660,715)   (5,934,021)   (26,091,500)   (27,083,365)
                     
Other income (expense), net                    
Other income (expense), net   (1,786)   (124,636)   (3,853)   (136,066)
Change in fair value of government grant liability   (86,307)   (295,094)   462,710    (213,277)
Interest income   121,608    379    306,385    7,724 
Interest expense   (871,335)   (893,951)   (2,357,497)   (3,197,600)
Foreign exchange gain (loss), net   (27,733)   (45,138)   11,667    (83,514)
Total other income (expense), net   (865,553)   (1,358,440)   (1,580,588)   (3,622,733)
                     
Loss before income taxes   (9,526,268)   (7,292,461)   (27,672,088)   (30,706,098)
                     
Provision for income taxes   
-
    
-
    
-
    
-
 
                     
Net loss   (9,526,268)   (7,292,461)   (27,672,088)   (30,706,098)
Less preferred dividends attributable to noncontrolling interest   390,000    212,208    1,114,138    212,208 
Less deemed dividends attributable to accretion of redemption value   755,644    410,322    2,112,784    410,322 
Net loss attributable to common stockholders  $(10,671,912)  $(7,914,991)  $(30,899,010)  $(31,328,628)
                     
Net loss per share - basic and diluted  $(0.15)  $(0.15)  $(0.46)  $(0.62)
                     
Weighted average number of common shares outstanding, basic and diluted   70,741,662    53,892,848    66,732,781    50,923,225 

 

The accompanying footnotes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

2

 

 

ONDAS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023

(Unaudited)

 

   Redeemable
Noncontrolling
Interest
   Common Stock   Additional
Paid in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
Balance, January 1, 2023   -   $-    44,108,661   $4,411   $211,733,690   $(153,515,194)  $58,222,907 
Issuance of shares in connection with acquisition of Airobotics, Ltd.   -    -    2,844,291    284    5,261,654    -    5,261,938 
Issuance of shares in connection with acquisition of the assets of Iron Drone, Ltd.   -    -    46,129    5    85,795    -    85,800 
Assumption of vested stock options in connection with acquisition of Airobotics, Ltd.   -    -    -    -    700,690    -    700,690 
Delivery of shares for restricted stock units   -    -    4,090    -    -    -    - 
Issuance of shares for payment on convertible debt   -    -    2,104,988    211    3,004,583    -    3,004,794 
Stock-based compensation   -    -    -    -    1,263,356    -    1,263,356 
Net loss   -    -    -    -    -    (14,455,551)   (14,455,551)
Balance, March 31, 2023   -   $-    49,108,159   $4,911   $222,049,768   $(167,970,745)  $54,083,934 
Issuance of shares for payment on convertible debt   -    -    3,341,704    334    2,751,041    -    2,751,375 
Issuance of shares upon exercise of options   -    -    1,539    -    701    -    701 
Stock-based compensation   -    -    -    -    1,639,869    -    1,639,869 
Net loss   -    -    -    -    -    (8,958,086)   (8,958,086)
Balance, June 30, 2023   -   $-    52,451,402   $5,245   $226,441,379   $(176,928,831)  $49,517,793 
Sale of redeemable preferred stock in Ondas Networks, net of issuance costs   429,123    10,406,949    -    -    (307,665)   -    (307,665)
Issuance of warrants in connection with the sale of redeemable preferred stock in Ondas Networks   -    -    -    -    4,593,051    -    4,593,051 
Preferred dividends attributable to redeemable noncontrolling interest   -    212,208    -    -    (212,208)   -    (212,208)
Accretion of redeemable preferred stock in Ondas Networks   -    410,322    -    -    (410,322)   -    (410,322)
Issuance of shares for payment on convertible debt   -    -    1,984,918    198    1,563,917    -    1,564,115 
Issuance of shares upon exercise of options   -    -    21,940    2    10,088    -    10,090 
Delivery of shares for vesting of restricted stock units   -    -    726,363    73    (73)   -    - 
Stock-based compensation   -    -    -    -    (2,266,875)   -    (2,266,875)
Net Loss   -    -                   (7,292,461)   (7,292,461)
Balance, September 30, 2023   429,123   $11,029,479    55,184,623   $5,518   $229,411,292   $(184,221,292)  $45,195,518 
                                    
Balance, January 1, 2024   429,123   $11,920,694    61,940,878   $6,194   $231,488,999   $(198,360,066)  $33,135,127 
Sale of redeemable preferred stock in Ondas Networks, net of issuance costs   108,925    3,028,806    -    -    (124,965)   -    (124,965)
Issuance of warrants in connection with the sale of redeemable preferred stock in Ondas Networks   -    -    -    -    1,471,194    -    1,471,194 
Preferred dividends attributable to redeemable noncontrolling interest   -    334,138    -    -    (334,138)   -    (334,138)
Accretion of redeemable preferred stock in Ondas Networks   -    638,646    -    -    (638,646)   -    (638,646)
Sale of common stock, net of issuance costs   -    -    3,616,071    362    2,904,295    -    2,904,657 
Issuance of warrants in Ondas Autonomous Systems, in connection with sale of common stock   -    -    -    -    954,737    -    954,737 
Issuance of shares upon exercise of options   -    -    4,535    -    2,217    -    2,217 
Delivery of shares for vesting of restricted stock units   -    -    3,000    -    -    -    - 
Stock-based compensation   -    -    -    -    269,553    -    269,553 
Net Loss   -    -    -    -    -    (9,876,084)   (9,876,084)
Balance, March 31, 2024   538,048   $15,922,284    65,564,484   $6,556   $235,993,246   $(208,236,150)  $27,763,652 
Issuance of shares for payment on convertible debt   -    -    340,855    34    250,153    -    250,187 
Preferred dividends attributable to redeemable noncontrolling interest   -    390,000    -    -    (390,000)   -    (390,000)
Accretion of redeemable preferred stock in Ondas Networks   -    718,494    -    -    (718,494)   -    (718,494)
Settlement of development agreement   -    -    320,026    32    342,396    -    342,428 
Warrant conversion   -    -    46,893    5    1,402    -    1,407 
Issuance of shares upon exercise of options   -    -    9,660    1    5,077    -    5,078 
Delivery of shares for restricted stock units   -    -    268,794    27    (27)   -    - 
Stock-based compensation   -    -    -    -    407,997    -    407,997 
Net Loss   -    -    -    -    -    (8,269,736)   (8,269,736)
Balance, June 30, 2024   538,048   $17,030,778    66,550,712   $6,655   $235,891,750   $(216,505,886)  $19,392,519 
Issuance of shares for payment on convertible debt   -    -    3,367,431    337    1,828,851    -    1,829,188 
Preferred dividends attributable to redeemable noncontrolling interest   -    390,000    -    -    (390,000)   -    (390,000)
Accretion of redeemable preferred stock in Ondas Networks   -    755,644    -    -    (755,644)   -    (755,644)

Sale of common stock and warrants, net of issuance costs

   -    -    5,333,334    533    3,467,407    -    

3,467,940

 
Issuance of warrants in Ondas Networks, in connection with note payable   -    -    -    -    589,924    -    589,924 
Delivery of shares for restricted stock units   -    -    45,834    5    (5)   -    - 
Stock-based compensation   -    -    -    -    311,133    -    311,133 
Net Loss   -    -    -    -    -    (9,526,268)   (9,526,268)
Balance, September 30, 2024   538,048   $18,176,422    75,297,311   $7,530   $240,943,416   $(226,032,154)  $14,918,792 

 

The accompanying footnotes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

3

 

 

ONDAS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended 
   September 30, 
   2024   2023 
         
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss  $(27,672,088)  $(30,706,098)
Adjustments to reconcile net loss to net cash flows used in operating activities:          
Depreciation   424,637    648,624 
Amortization of debt discount   1,502,657    2,438,462 
Amortization of intangible assets   3,161,729    3,103,591 
Amortization of right of use asset   902,851    715,041 
Loss on disposal of equipment   1,578    7,757 
Loss on intellectual property   
-
    12,223 
Stock-based compensation   988,683    636,350 
Change in fair value of government grant liability   (605,889)   161,764 
Changes in operating assets and liabilities:          
Accounts receivable   553,887    (4,677,726)
Inventory   (4,402,549)   1,087,558 
Other current assets   426,879    767,152 
Deposits and other assets   117,125    (370,684)
Accounts payable   (482,249)   1,536,991 
Deferred revenue   170,776    (1,323,025)
Operating lease liability   (459,243)   (710,546)
Accrued expenses and other current liabilities   (71,933)   (1,436,178)
Other liabilities   82,500    
-
 
Net cash flows used in operating activities   (25,360,649)   (28,108,744)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Patent costs   (22,030)   (62,281)
Purchase of equipment   (1,606,358)   (94,972)
Proceeds from sale of equipment   1,700    33,568 
Purchase of software intangible   (32,678)   
-
 
Cash paid for Iron Drone asset acquisition   
-
    (135,000)
Cash acquired on the acquisition of Airobotics Ltd.   
-
    1,049,454 
Cash paid for Field of View LLC asset acquisition   
-
    (145,833)
Net cash flows provided by (used in) investing activities   (1,659,366)   644,936 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from sale of noncontrolling interest in Ondas Networks, net of issuance costs   4,375,035    14,692,335 
Proceeds from sale of common stock, net of issuance costs   7,327,334    
-
 
Proceeds from exercise of options and warrants   8,702    10,791 
Proceeds from government grant   299,838    189,752 
Proceeds from convertible notes, net of issuance costs   1,482,868    9,309,513 
Proceeds from notes payable, net of issuance costs   1,377,524    
 
 
Payments on convertible notes payable   
-
    (4,354,911)
Payments on government grant liability   
-
    (6,576)
Payments on loan payable   
-
    (1,140,301)
Net cash flows provided by financing activities   14,871,301    18,700,603 
           
Decrease in cash, cash equivalents, and restricted cash   (12,148,714)   (8,763,205)
Cash, cash equivalents, and restricted cash, beginning of period   15,022,000    29,775,096 
Cash, cash equivalents, and restricted cash, end of period  $2,873,286   $21,011,891 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid for interest  $16,845   $163,418 
Cash paid for income taxes  $
-
   $
-
 
           
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Common Stock and warrants issued in relation to acquisition of Airobotics, Ltd.  $
-
   $5,962,628 
Common Stock issued in relation to acquisition of the assets of Iron Drone, Ltd.  $
-
   $85,800 
Common stock issued in exchange for debt repayment  $2,079,375   $7,320,284 
Noncash consideration for settlement of development agreement payable  $342,428   $
-
 
Warrants in Ondas Autonomous Systems, in relation to sale of common stock  $954,737   $
-
 
Warrants in Ondas Holdings, in relation to sale of common stock  $2,198,559   $
-
 
Warrants in relation to sale of redeemable preferred stock in Ondas Networks  $1,471,194   $12,683,549 
Warrants in Ondas Networks, in relation to note payable  $589,924   $
-
 
Preferred dividends attributable to redeemable noncontrolling interest  $1,114,138   $21,208 
Accretion of redeemable preferred stock in Ondas Networks  $2,112,784   $410,322 
Transfer of equipment into inventory  $2,289,539   $
-
 
Operating leases right-of-use assets obtained in exchange of lease liabilities  $
-
   $105,950 

 

The accompanying footnotes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

4

 

 

ONDAS HOLDINGS INC.

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 (“Old Ondas Networks”), and changed our name to Ondas Holdings Inc. On August 5, 2021, we acquired American Robotics, Inc. (“American Robotics” or “AR”), a Delaware corporation. On January 23, 2023, we acquired Airobotics, Ltd. (“Airobotics”), an Israeli-based developer of autonomous drone systems. See Note 5 – Goodwill and Business Acquisition. On December 6, 2023, the Company formed Ondas Autonomous Holdings Inc., a Nevada corporation, as an intermediate holding company which now wholly-owns American Robotics and Airobotics. On August 8, 2024, the Company filed a certificate of amendment with the Secretary of State of the State of Nevada, amending Ondas Autonomous Holdings Inc.’s name to Ondas Autonomous Systems Inc. (“OAS”). On August 7, 2024, the Company formed Ondas Networks Texas Inc., a Texas corporation and wholly owned subsidiary of the Company (“Texas Networks”). Pursuant to a certain Agreement and Plan of Merger, dated August 19, 2024, Old Ondas Networks merged with and into Texas Networks (the “Merger”) with Texas Networks being the surviving entity resulting from the Merger and shall continuing to exist and being governed by the laws of the State of Texas under the corporate name “Ondas Networks Inc.” (“Ondas Networks”).

 

As a result, Ondas Networks, OAS, American Robotics and Airobotics became our subsidiaries. Ondas’ corporate headquarters are located in Boston, Massachusetts. Ondas Networks has offices and facilities in Sunnyvale, California, American Robotics’ offices and facilities are located in Sparks, Maryland, and Airobotics’ offices and facilities are located in Petah Tikva, Israel.

 

Business Activity

 

Ondas is a leading provider of private wireless, drone, and automated data solutions through its subsidiaries Ondas Networks, OAS, Airobotics, and American Robotics. Ondas Networks provides wireless connectivity solutions. OAS provides drone and automated data solutions through its subsidiaries Airobotics and American Robotics. Ondas Networks and OAS together provide users in rail, energy, mining, public safety and critical infrastructure and government markets with improved connectivity, data collection capabilities, and data collection and information processing capabilities. We operate Ondas Networks and OAS as separate business segments, and the following is a discussion of each segment.

 

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 infrastructure. We have targeted the North American freight rail operators for the initial adoption of our FullMAX platform. These rail operators currently operate legacy communications systems utilizing serial-based narrowband wireless technologies for voice and data communications. These legacy wireless networks have limited data capacity and are unable to support the adoption of new, intelligent train control and management systems. 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 802.16 standard. Because standards-based communications solutions are preferred by our mission-critical customers and ecosystem partners, we continue to take a leadership position in IEEE as it relates to wireless networking for industrial markets. As such, management believes this standards-based approach supports the adoption of our technology across a burgeoning ecosystem of global partners and end markets.

 

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Our software-based FullMAX platform is an important and timely upgrade solution for privately-owned and operated wireless wide-area networks, leveraging Internet Protocol-based communications to provide more reliability and data capacity for our mission-critical infrastructure customers. We believe industrial and critical infrastructure markets throughout the globe have reached an inflection point where legacy serial and analog based protocols and network transport systems no longer meet industry needs. In addition to offering enhanced data throughput, FullMAX is an intelligent networking platform enabling the adoption of sophisticated operating systems and equipment supporting next-generation MC-IoT applications over wide field areas. These new MC-IoT applications and related equipment require more processing power at the edge of large industrial networks and the efficient utilization of network capacity and scarce bandwidth resources which can be supported by the “Fog-computing” capability integrated in our end-to-end network platform. Fog-computing utilizes management software to enable edge compute processing and data and application prioritization in the field enabling our customers more reliable, real-time operating control of these new, intelligent MC-IoT equipment and applications at the edge.

 

Ondas Autonomous Systems (OAS)

 

Our OAS business unit develops and integrates drone-based solutions focusing on high-performance critical applications for government and Tier-1 commercial enterprises. Ondas is marketing comprehensive drone-based solutions to address the needs of governmental and commercial customers based on its commercially available platforms: the Optimus System™, a fully autonomous drone platform capable of continuous and multipurpose aerial data capturing and analytics, and the Iron Drone Raider™, a fully autonomous interceptor drone designed to neutralize small hostile drones. Airobotics acquired the assets of Iron Drone on March 6, 2023.

 

Our unique, fully autonomous platforms enable cutting-edge aerial capabilities and are designed to serve and protect critical infrastructure and operations. Our business focuses on end-user entities in Public Safety, Defense, Homeland Security, Smart City, Port Authorities, State Departments, and other governmental entities together with commercial customers of industrial sensitive facilities such as Oil & Gas, Seaports, Mining, and Heavy Construction. For these industries, OAS provides specialized real-time aerial data capturing and aerial protection solutions in the most complex environments such as urban areas, sensitive and critical facilities and field area operations, and high-priority projects. In addition, we offer a wide suite of supplementary, enabling services for successful implementation such as AI data analytics, data automation, IT implementation, safety planning, certification, training, and maintenance, handling all the complex aspects of such high-performance drone operations.

 

Our portfolio companies, American Robotics and Airobotics, form a unique, powerful, and synergistic combination covering all the aspects required for successful Aerospace business together with data technologies and services for digital transformation industries. Our companies are specialized in addressing all the challenges arising along these types of product lifecycles including research and development, manufacturing, certification, and ongoing support.

 

OAS and its portfolio companies have already gained a track record of industry-leading regulatory successes including the securing of the first-of-its-kind Type Certification (“TC”) from the Federal Aviation Administration (“FAA”) for the Optimus 1-EX UAV on September 25, 2023, becoming the first autonomous security data capture UAV to achieve this distinction. TC, recognized as the highest echelon of Airworthiness Certification, streamline operational approvals for broad flight operations over people and infrastructure. The certification verifies the compliance of the system’s design with the required FAA airworthiness and noise standards, ensuring safe operation within the US National Airspace System (NAS) thereby significantly broadening the range of operational scenarios and scaling up of operations for automated UAS. Achieving FAA Type Certification will enable drone operations beyond-visual-line-of-sight (BVLOS) without a human operator on-site. With a strong footprint in the US market and worldwide, we believe that OAS is well-positioned with proven technology, a unique offering, and strong capabilities to strategically transform critical operations with our cutting-edge drone tech and capabilities.

 

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Liquidity  

 

We have incurred losses since inception and have funded our operations primarily through debt and the sale of capital stock. As of September 30, 2024, we had an accumulated deficit of approximately $226,032,000. As of September 30, 2024, we had net long-term borrowings outstanding of approximately $2,217,000 net of debt discount and issuance costs of $0 and short-term borrowings outstanding of approximately $30,751,000, net of debt discount and issuance cost of approximately $1,537,000 and a working capital deficit of approximately $22,341,000.

 

In 2023, we raised approximately $14,692,000 of net proceeds from the sale of redeemable preferences shares in Ondas Networks and warrants in Ondas Holdings to third parties, and approximately $9,310,000 from a second convertible debt agreement. In the first nine months of 2024, we raised net proceeds of approximately $4,375,000 from the sale of additional redeemable preferred shares in Ondas Networks and warrants in Ondas Holdings to third parties, approximately $7,327,000 in net proceeds from issuing common stock, par value $0.0001 per share (“Common Stock”), of Ondas Holdings and warrants in OAS, approximately $2,860,000 in net proceeds from issuance of a secured note and convertible note in Ondas Networks, and approximately $300,000 in government grant loans issued to Airobotics. On November 9, 2024, we entered into an agreement with Klear Inc., which provides for financing of accounts receivable, and we have financed approximately $500,000 so far at Ondas Networks.

 

We expect to fund our operations for the next twelve months from the filing date of this Quarterly Report on Form 10-Q from the cash on hand as of September 30, 2024, proceeds from the 2024 financing activities discussed above, gross profits generated from revenue growth, potential prepayments from customers for purchase orders, potential proceeds from warrants issued and outstanding, and additional funds that we may seek through equity or debt offerings and/or borrowings under additional notes payable, lines of credit or other sources. There is substantial doubt that the funding plans will be successful and therefore the conditions discussed above have not been alleviated. As a result, there is substantial doubt about the Company’s ability to continue as a going concern for one year from November 12, 2024, the date the unaudited Condensed Consolidated Financial Statements were issued.

 

Our future capital requirements will depend upon many factors, including progress with developing, manufacturing and marketing our technologies, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, our ability to establish collaborative arrangements, marketing activities and competing technological and market developments, including regulatory changes and overall economic conditions in our target markets. Our ability to generate revenue and achieve profitability requires us to successfully market and secure purchase orders for our products and services from customers currently identified in our sales pipeline as well as new customers. We also will be required to efficiently manufacture and deliver equipment on those purchase orders. These activities, including our planned research and development efforts, will require significant uses of working capital. There can be no assurance that we will generate revenue and cash as expected in our current business plan. We may seek additional funds through equity or debt offerings and/or borrowings under additional notes payable, lines of credit or other sources. We do not know whether additional financing will be available on commercially acceptable terms or at all, when needed. If adequate funds are not available or are not available on commercially acceptable terms, our ability to fund our operations, support the growth of our business or otherwise respond to competitive pressures could be significantly delayed or limited, which could materially adversely affect our business, financial conditions, or results of operations. 

 

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, 2023 (“2023 Form 10-K”). The Company’s accounting policies are described in the “Notes to Consolidated Financial Statements” in the 2023 Form 10-K and are updated, as necessary, in this Form 10-Q. The December 31, 2023 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 nine months ended September 30, 2024, are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

 

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The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and our wholly owned subsidiaries, Ondas Networks, American Robotics, and Airobotics. All inter-company accounts and transactions between these entities have been eliminated in these unaudited Condensed Consolidated Financial Statements. The functional currency of the Company and all of our subsidiaries is the U.S. dollar.

 

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 consolidated balance sheets. Subsequent changes to the fair value of contingent consideration liabilities are recognized in other income (expense) in the Consolidated Statements of Operations. 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. 

 

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, software 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 3 years for software; 10 years for patents; 3-10 years for developed technology, 10 years for licenses, trademarks, marketing-related assets 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 OAS 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 allocation of consideration for business combinations to identifiable tangible and intangible assets, 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.

 

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Cash, Cash Equivalents, and Restricted Cash

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. As of September 30, 2024 and December 31, 2023, we had no cash equivalents. Restricted cash includes cash that is not readily available for use in the Company’s operating activities. Restricted cash is attributable to minimum cash reserve requirements for Airobotics’ credit cards. The Company periodically monitors its positions with, and the credit quality of, the financial institutions with which it invests. Periodically, throughout the nine months ended, and as of September 30, 2024, the Company has maintained balances in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. As of September 30, 2024, the Company was $1,981,898 in excess of FDIC insured limits.

 

Accounts Receivable

 

Accounts receivable are stated at a gross invoice amount less an allowance for credit losses as well as net of any discounts or other forms of variable consideration. 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 September 30, 2024 and December 31, 2023.

 

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. As of September 30, 2024 and December 31, 2023 such reserves were $100,254.

 

Inventory consists of the following:

 

   September 30,
2024
   December 31,
2023
 
Raw Material  $4,146,010   $1,499,727 
Work in Process   351,068    782,770 
Finished Goods   4,481,910    4,403 
Less Inventory Reserves   (100,254)   (100,254)
Total Inventory, net  $8,878,734   $2,186,646 

 

As of September 30, 2024, the Company reclassed $2,289,539 of docking stations and drones, net into inventory, as OAS has shifted their focus from service revenue, selling a data subscription service to its customers based on the information collected by their autonomous systems, to product revenue, primarily selling their Optimus System™ and Iron Drone Raider™.

 

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) 3 to 7 years for computer equipment, (ii) 5 years for vehicles and docking stations and drones, (iii) 717 years for furniture and fixtures, (iv) 5 to 7 years for development equipment, and (v) 3 years for machinery and equipment. 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.

   

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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 September 30, 2024 and December 31, 2023, 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 are 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. There was no impairment of long-lived assets for the three and nine months ended September 30, 2024 and 2023, respectively.

 

Research and Development

 

Costs for research and development are expensed as incurred except for research and development equipment with alternative future use. Research and development expenses consist primarily of salaries, salary related expenses and costs of contractors and materials.

 

Fair Value of Financial Instruments

 

Our financial assets and liabilities measured at fair value on a recurring basis 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. Our financial assets measured at fair value on a nonrecurring basis include right of use assets, goodwill and intangibles, which are adjusted to fair value whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. Our estimate of the fair value of right of use assets, goodwill and intangibles is based on expected future cash flows and actual results may differ from those estimates.

 

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.

 

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The Company had no Level 3 assets that are required to be valued at fair value as of September 30, 2024. The Company had Level 3 assets that are required to be valued at fair value as of December 31, 2023, see Note – 2 Summary of Significant Account Policies, Leases, and Note 4 – Property and Equipment.

 

The Company had Level 3 liabilities that are required to be valued at fair value as of September 30, 2024 and December 31, 2023. The fair value of the government grant liability is determined as the sum of 3% royalty payments on forecasted future sales, discounted using the effective interest method. As of September 30, 2024 and December 31, 2023, the Company made the following assumptions: (i) royalty payments will be made on future sales through 2027, and (ii) the effective interest rate is a range of 17-19%. The following table provides a reconciliation of the beginning and ending balances for the Level 3 government grant liability measured at fair value using significant unobservable inputs: 

 

   Government
Grant
Liability
 
Balance as of December 31, 2023  $2,749,704 
Net loss on change in fair value of liability   74,393 
Balance as of March 31, 2024   2,824,097 
Government grant proceeds received, adjusted to fair value   156,659 
Net gain on change in fair value of liability   (623,410)
Balance as of June 30, 2024   2,357,346 
Net loss on change in fair value of liability   86,307 
Balance as of September 30, 2024  $2,443,653 

 

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 Condensed Consolidated Statements of Operations.

 

Government Grants

 

The Government grant liability was assumed through the acquisition of Airobotics and asset purchase of Iron Drone. Airobotics and Iron Drone received government grants from the Israel Innovation Authority (formerly: the Office of the Chief Scientist in Israel, “the IIA”), and the grant funds are repayable to the extent that future economic benefits are expected from the research project that will result in royalty-bearing sales. A liability for grants received is first measured at fair value using a discount rate that reflects a market rate of interest. The difference between the amount of the grant received and the fair value of the liability is accounted for as a government grant and recognized as a reduction of research and development expenses.

 

At each reporting date, the Company evaluates whether there is reasonable assurance that the liability recognized, in whole or in part, will not be repaid (since the Company will not be required to pay royalties) based on the best estimate of future sales and using the original effective interest rate, which is 17-19%, and if so, the appropriate amount of the liability is derecognized through other income (expense). Amounts paid as royalties are treated as a reduction of the liability. Royalty payments are due every nine months. There is no maturity date. The liability exists until it is paid in full through royalty payments or the Company reports to the IIA there will be no further sales, as per the terms of the agreement. 

 

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Redeemable Noncontrolling Interests

 

In 2023 and 2024, Ondas Networks Inc. entered into multiple agreements with a third party for the sale of redeemable preferred stock in Ondas Networks (see Note 10 – Redeemable Noncontrolling Interest). The preferred stock accrues dividends at the rate per annum of eight percent (8%) of the original issue price and can be redeemed at the request of the Holder at any time after the fifth anniversary as follows:

 

(i)In respect of the 2023 investments, for the greater of two times the initial investment plus accrued dividends or the amount that would be due if the Preferred Stock was converted into Common Stock.

 

(ii)In respect of the 2024 investment, for the greater of one times the initial investment plus accrued dividends or the amount that would be due if the Preferred Stock was converted into Common Stock.

 

The applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. As a result, the Company recorded the noncontrolling interest as redeemable noncontrolling interest and classified it in temporary equity within its consolidated balance sheet initially at its acquisition-date estimated redemption value or fair value. In addition, the Company has elected to accrete the redeemable noncontrolling interest to the full redemption value as of the earliest redemption date by accruing dividends at 8% per annum and accreting the redemption value to two and one times the initial investment, respectively, using the effective interest rate method.

 

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 U.S. 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.

 

Stock-Based Compensation

 

We calculate stock-based compensation expense for option awards (“Stock-based Award(s)”) based on the estimated grant/issue date fair value using the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) and recognize the expense on a straight-line basis over the vesting period. We account for forfeitures as they occur.

 

The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the vesting period in determining the fair value of Stock-based Awards. The expected term is based on the “simplified method”, due to the Company’s limited option exercise history. Under this method, the term is estimated using the weighted average of the service vesting period and contractual term of the option award. As the Company does not yet have sufficient history of its own volatility, the Company has identified several public entities of similar size, complexities and industry and calculates historical volatility based on the volatilities of these companies. Although we believe our assumptions used to calculate stock-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.

 

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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 Cost of goods sold on the accompanying Condensed Consolidated Statements of Operations.

 

Advertising and Promotional Expenses

 

We expense advertising and promotional costs as incurred. We recognized expense of $19,542 and $87,073 for the three months ended September 30, 2024 and 2023, respectively, and expense of $61,303 and $145,504 for the nine months ended September 30, 2024 and 2023, respectively. These costs are included in Sales and marketing on the accompanying Consolidated Statements of Operations.

 

Post-Retirement Benefits:

 

We have one 401(k) Savings Plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under this 401(k) Plan, matching contributions are based upon the amount of the employees’ contributions subject to certain limitations. We recognized expense of $56,325 and $60,684 for the three months ended September 30, 2024 and 2023, respectively, and $199,811 and $246,281 for the nine months ended September 30, 2024 and 2023, respectively.

 

Airobotics’ post-employment benefits are usually funded by deposits with insurance companies and are classified as defined deposit plans or defined benefit plans. Airobotics’ has defined deposit plans, in accordance with Section 14 of Severance Compensation Israeli Law, 1963, according to which Airobotics regularly makes its payments without having a legal or implied obligation to make additional payments even if the fund has not accumulated sufficient amounts to pay all employee benefits, in the current period and in previous periods. Deposits to a defined benefit plan for severance pay or benefits, are recognized as an expense when deposited with the plan in parallel with receiving work services from the employee. All of Airobotics’ employees in Israel are subject to Section 14 of Severance Compensation Israeli Law. We recognized expense of $211,392 and $154,862 for the three months ended September 30, 2024 and 2023, respectively, $583,890 for the nine months ended September 30, 2024 and $420,945 for the period of January 24, 2023 through September 30, 2023 related to these post-employment benefits.

 

Revenue Recognition

 

We derive our revenue from product sales, services, and development arrangements. We determine revenue recognition in accordance with ASC 606, Revenue from Contracts with Customers through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract (where revenue is allocated on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation); and (5) recognition of revenue when, or as, we satisfy 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.

 

Ondas has two business segments that generate revenue: Ondas Networks and OAS. 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. OAS generates revenue through the sales of their Optimus System™, the Iron Drone Raider™, and separately priced support, maintenance and ancillary services directly related to the sale of the Optimus System™ and the Iron Drone Raider™.

 

13

 

 

Product Sales Revenue

 

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 Networks’ software and hardware, and OAS’ Optimus System™ and Iron Drone Raider™, are 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.

 

Service and Subscription Revenue

 

Service revenue is comprised of separately priced support and maintenance sales, as well as ancillary services, directly related to product sales, including product training, installation, and onsite support. 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 based on the stand-alone selling prices of these performance obligations, which are stated in our contracts.

 

OAS also generates service revenue by selling a data subscription service to its customers based on the information collected by their autonomous systems. The customer pays for a monthly, annual, or multi-annual subscription service to remotely access the data collected by their autonomous systems. Data subscription service 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 their autonomous systems, it is held in deferred revenue and recognized after operation commences over the length of the subscription service.

 

Development Revenue

 

Development revenue is comprised primarily of non-recurring engineering service contracts to develop software and hardware applications for various customers. For Ondas Networks, in 2024 and 2023, a significant portion of this revenue is generated from one parent customer 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 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.

 

Payment Terms

 

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. OAS’s payment terms vary and range from Net 30 days to Net 60 days from the date of the invoices for product and services related revenue. Payment terms for the majority of development related revenue carry milestone-related payment obligations which span the contract life. For milestone-based development contracts, the customer reviews the completed milestone and once approved, makes payment pursuant to the applicable contract.

 

14

 

   

Contracts with Multiple Performance Obligations

 

Our contracts may contain more than one of the products and services listed above, each of which is separately accounted for as a distinct performance obligation. We account for multiple agreements with a single customer as a single contract if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract. We allocate the total transaction price to each distinct performance obligation in a multiple performance obligations arrangement on a relative standalone selling price basis. The standalone selling price reflects the price we would charge for a specific product or service if it were sold separately in similar circumstances and to similar customers. 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. If a contract contains a single performance obligation, no allocation is required.

 

Contract Modification

 

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 nine months ended September 30, 2024 and 2023, there were no modifications to contract specifications.

 

Disaggregation of Revenue

 

The following tables present our disaggregated revenues by type of revenue, timing of revenue, and revenue by country:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2024   2023   2024   2023 
Type of Revenue:                
Product revenue  $150,668   $2,180,472   $175,426   $8,880,309 
Service and subscription revenue   887,747    234,236    1,495,887    1,289,642 
Development revenue   442,377    250,482    1,392,339    560,194 
Total revenue  $1,480,792   $2,665,190   $3,063,652   $10,730,145 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2024   2023   2024   2023 
Timing of Revenue:                
Revenue recognized point in time  $881,004   $2,296,035   $1,172,969   $9,818,302 
Revenue recognized over time   599,788    369,155    1,890,683    911,843 
Total revenue  $1,480,792   $2,665,190   $3,063,652   $10,730,145 

 

15

 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2024   2023   2024   2023 
Country of Revenue, based on location services were provided or product was shipped to:                
United States  $567,838   $2,430,954   $1,319,585   $5,081,152 
United Arab Emirates   346,438    85,268    598,525    5,320,792 
United Kingdom   45,323    
-
    311,206    
-
 
Israel   521,193    148,968    824,336    328,201 
India   
-
    
-
    10,000    
-
 
Total revenue  $1,480,792   $2,665,190   $3,063,652   $10,730,145 

  

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 we have recognized revenue over time in accordance with meeting our performance obligation but are unable to invoice the customer yet based on the contractual invoicing terms. The contract asset is reclassified to a receivable when the right to consideration becomes unconditional. The table below details the activity in our contract assets during the nine months ended September 30, 2024 and the year ended December 31, 2023. Contract assets are included in Other current assets on the Condensed Consolidated Balance Sheet.

 

   Nine Months Ended
September 30,
2024
   Year Ended
December 31,
2023
 
Balance at beginning of period  $819,107   $
-
 
Contract assets recognized   214,145    928,995 
Reclassification to Accounts receivable, net   (641,043)   (109,888)
Balance at end of period  $392,209   $819,107 

 

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 nine months ended September 30, 2024 and the year ended December 31, 2023.

 

   Nine Months Ended
September 30,
2024
   Year Ended
December 31,
2023
 
Balance at beginning of period  $276,944   $61,508 
Additions, net   1,262,451    2,438,655 
Transfer to revenue   (1,091,675)   (2,223,219)
Balance at end of period  $447,720   $276,944 

 

Revenue recognized during the nine months ended September 30, 2024 that was included in the contract liability opening balance was $159,400.

 

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 September 30, 2024, or December 31, 2023 are immaterial to the Company’s unaudited Condensed Consolidated Financial Statements.

 

16

 

 

Leases

 

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. During the year ended December 31, 2023, the Company’s operating leases consisted of office spaces in Sunnyvale, CA, Marlborough, MA (the “American Robotics Lease”), Waltham, MA (the “Waltham Lease”), and Petah Tikva, Israel (the “Airobotics Leases”).

 

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 April 1, 2023, the Company amended the 2021 Gibraltar Lease to extend the lease through September 30, 2023, wherein the base rate is $65,676 per month. On November 6, 2023, the Company amended the 2021 Gibraltar Lease, as amended to further extend the lease through June 30, 2024, wherein the base rate is $68,959 per month.

 

On August 7, 2023, Ondas Networks entered into a 72-month lease agreement with the owner and landlord of office space in Sunnyvale, CA (the “Oakmead Lease”). The Oakmead Lease commenced on October 1, 2023, and is an operating lease through September 30, 2029. Base rent is $77,533 per month, increasing approximately 3% annually, with a security deposit due in the amount of $269,428. Base rent is abated during the first twelve months of the term of the lease.

 

On August 5, 2021, the Company acquired American Robotics and the American Robotics Lease, located in Marlborough, Massachusetts, 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 the American Robotics 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 31, 2024. On November 10, 2023, American Robotics amended the American Robotics Lease, as amended to extend the existing lease term from January 31, 2024 to January 31, 2026 and to relinquish a portion of the leased outdoor space. The annual base rent is $14,586 per month starting February 1, 2024, with an annual increase of 3.5% through January 2026. Effective September 30, 2024, the lease was terminated. The Company wrote off the remaining operating lease liability and right of use asset and recognized a gain on lease termination of $12,256, which is included in Other income (expense), net in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 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.

 

On January 15, 2024, American Robotics entered into an agreement to sublet their full leased space, leasehold improvements, and remaining furniture and fixtures in Waltham, Massachusetts through April 30, 2029, the remaining lease term, for $22,920 per month from May 1, 2024 through April 30, 2025, then $41,250 per month from May 1, 2025 through April 30, 2029. The sublease is an operating lease. This event indicated that the carrying amount of the right of use asset, leasehold improvements, and remaining furniture and fixtures in Waltham, Massachusetts (the “Asset Group”) may not be recoverable. The Asset Group was tested for recoverability as of December 31, 2023 using the undiscounted cash flows from the sublease and the Company found the Asset Group to be impaired. The Company determined the Level 3 fair value of the Asset Group using the sum of future cash flows from the sublease, discounted to the present value using an assumed discount rate of 10.5%. Based on this valuation, the Company recognized an impairment charge of $1,383,536 related to the right of use asset associated with this Asset Group in Operating expenses in the Consolidated Statements of Operations for the year ended December 31, 2023, included in our 2023 Form 10-K. There was no indication of impairment for the nine months ended September 30, 2024.

 

17

 

 

On January 23, 2023, the Company acquired Airobotics and the Airobotics Leases, which includes office space in Petah Tikva, Israel leased according to three different lease agreements. Each agreement is with respect to different sections of the entire leased area and are in effect through December 31, 2023, February 28, 2024, and November 30, 2024 wherein the base rate of the entire leased area is approximately $20,500 per month. The expired leases are being accounted for on a month-to-month basis.

  

We determine if an arrangement is a lease, or contains a lease, at the inception of the arrangement. If we determine that 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 Costs

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2024   2023   2024   2023 
Components of total lease costs:                
Operating lease expense  $263,714   $224,126   $803,026   $787,833 
Common area maintenance expense   106,013    38,242    401,296    129,348 
Short-term lease costs (1)   152,504    248,494    719,826    548,465 
Total lease costs  $522,231   $510,862   $1,924,148   $1,465,646 

 

  (1) Represents short-term leases with an initial term of 12 months or less, which are immaterial.

 

Lease Positions as of September 30, 2024 and December 31, 2023

 

ROU lease assets and lease liabilities for our operating leases were recorded in the unaudited condensed consolidated balance sheet as follows:

 

   September 30,
2024
   December 31,
2023
 
Assets:        
Operating lease assets  $3,799,014   $4,701,865 
Total lease assets  $3,799,014   $4,701,865 
           
Liabilities:          
Operating lease liabilities, current  $771,943   $685,099 
Operating lease liabilities, net of current   5,254,623    5,800,710 
Total lease liabilities  $6,026,566   $6,485,809 

 

18

 

 

Other Leases Information

 

   Nine Months Ended
September 30,
 
   2024   2023 
Operating cash flows for operating leases  $684,668   $799,305 
           
Weighted average remaining lease term (in years) – operating lease   4.72    5.13 
Weighted average discount rate – operating lease   9.93%   5.76%

  

Undiscounted Leases Cash Flows

 

Future lease payments included in the measurement of lease liabilities on the unaudited condensed consolidated balance sheet as of September 30, 2024, for the following five years and thereafter are as follows:  

 

Years ending December 31,(1)    
2024 (3 months)  $87,876 
2025   1,618,215 
2026   1,638,859 
2027   1,568,688 
2028   1,616,022 
Thereafter   999,204 
Total future minimum lease payments  $7,528,864 
Less imputed interest   (1,502,298)
Total  $6,026,566 

 

(1) Remaining non-cancellable sublease proceeds for the years ending December 31, 2024, 2025, 2026 - 2028, and 2029 of $68,760, $412,515, $495,000, and $165,000, respectively, are not included in the table above.

  

Net Loss Per Common Share

 

Basic net loss per share is computed by dividing net loss available to common stockholders (the numerator) by the weighted average number of shares of Common Stock outstanding for each period (the denominator). Income available to common stockholders shall be computed by deducting the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from net income.

 

The computation of diluted net loss per share is similar to the computation of basic net loss per share except that the numerator may have to adjust for any dividends and income or loss associated with potentially dilutive securities that are assumed to have resulted in the issuance of shares of Common Stock, and the denominator may have to adjust to include the number of additional shares of Common Stock that would have been outstanding if the dilutive potential shares of Common Stock had been issued during the period to reflect the potential dilution that could occur from shares of Common Stock issuable through stock options, warrants, restricted stock units, or convertible preferred stock. For purposes of determining diluted earnings per common share, the treasury stock method is used for stock options, warrants, and restricted stock units, and the if-converted method is used for convertible preferred stock as prescribed in ASC Topic 260. Because of the net loss for the nine months ended September 30, 2024 and 2023, the impact of including this in our computation of diluted net loss per share was anti-dilutive.

 

The following potentially dilutive securities for the three and nine months ended September 30, 2024 and 2023 have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.

 

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   Three and Nine Months Ended
September 30,
 
   2024   2023 
Warrants to purchase Common Stock   26,490,210    12,566,092 
Options to purchase Common Stock   4,687,865    4,845,049 
Potential shares issuable under 2022 Convertible Promissory Notes   56,958,660    29,319,723 
Potential shares issuable under 2023 Additional Notes   29,787,651    28,908,377 
Restricted stock units   118,419    175,064 
Total potentially dilutive securities   118,042,805    75,814,305 

  

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk consist of cash and accounts receivable. Cash is deposited with a limited number of financial institutions. The balances held at any one financial institution may be in excess of FDIC insurance limits. As of September 30, 2024, the Company was $1,981,898 in excess of FDIC insured limits.

 

Credit is extended to customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for credit losses.

  

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. Revenue from significant customers, those representing 10% or more of total revenue, was composed of three customers accounting for 30%, 27%, and 23% of the Company’s revenue for the three month period ended September 30, 2024, respectively. Revenue from significant customers was composed of four customers accounting for 45%, 19%, 13% and 12% of the Company’s revenue for the nine month period ended September 30, 2024, respectively. Revenue was composed of one customer accounting for 91% of the Company’s revenue for the three month period ended September 30, 2023, respectively. Revenue from significant customers was composed of three customers accounting for 47%, 31% and 18% of the Company’s revenue for the nine month period ended September 30, 2023, respectively.

 

Accounts receivable from significant customers, those representing 10% or more of the total accounts receivable, were composed of four customers accounting for 38%, 21%, 18%, and 16%, respectively, of the Company’s accounts receivable balance as of September 30, 2024. Three customers accounted for 61%, 22% and 12%, respectively, of the Company’s accounts receivable balance as of December 31, 2023.

 

Recently Adopted Accounting Pronouncements

 

On September 30, 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (ASU) No. 2022-03, which (1) clarifies existing guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and (2) introduces new disclosure requirements for equity securities subject to contractual sale restrictions. The ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security. Instead, the contractual sale restriction is a characteristic of the reporting entity. Accordingly, an entity should not consider the contractual sale restriction when measuring the equity security’s fair value. Additionally, the ASU clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The adoption of this pronouncement as of January 1, 2024 did not have a material impact on our accompanying unaudited Condensed Consolidated Financial Statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In October 2023, the FASB issued ASU No. 2023-06, which incorporates 14 of the 27 disclosures referred to by the SEC in their SEC Release No. 33-10532, Disclosure Update and Simplification, issued on August 17, 2018. The amendments in this ASU modify the disclosure or presentation requirements of a variety of Topics in the Codification and apply to all reporting entities within the scope of the affected Topics unless otherwise indicated. The amendments in this ASU should be applied prospectively. For public business entities, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company has evaluated the effects of the adoption of ASU No. 2022-03, and it is not expected to have an impact on the Company’s unaudited Condensed Consolidated Financial Statements.

 

20

 

 

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which amends and enhances the disclosure requirements for reportable segments. All disclosure requirements under this standard will also be required for public entities with a single reportable segment. The new standard will be effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within fiscal years beginning after December 15, 2024. The Company is currently assessing the impact of adopting this standard on the Company’s unaudited Condensed Consolidated Financial Statements.

  

In December 2023, the FASB issued ASU No. 2023-08, “Accounting for and Disclosure of Crypto Assets”, which amends and enhances the disclosure requirements for crypto assets. The new requirements will be effective for public business entities for fiscal periods beginning after December 15, 2024. The Company has evaluated the effects of the adoption of ASU No. 2022-08, and it is not expected to have an impact on the Company’s unaudited Condensed Consolidated Financial Statements

 

In December 2023, the FASB issued ASU No. 2023-09, “Improvements to Income Tax Disclosures”, which requires companies to provide disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The new requirements will be effective for public business entities for fiscal periods beginning after December 15, 2024. The Company is currently assessing the impact of adopting this standard on the Company’s unaudited Condensed Consolidated Financial Statements.

 

NOTE 3 – OTHER CURRENT ASSETS

 

Other current assets consist of the following:

 

   September 30,
2024
   December 31,
2023
 
Prepaid insurance  $709,289   $1,035,071 
Advance to vendors   671,818    442,727 
Contract asset   392,209    819,107 
VAT Input Credit   202,162    232,048 
Sublease receivable   173,053    
-
 
Receivables from employees   
-
    40,117 
Other prepaid expenses and current assets   392,209    398,549 
Total other current assets  $2,540,740   $2,967,619 

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

   September 30,
2024
   December 31,
2023
 
Vehicles  $149,916   $149,916 
Computer equipment   423,501    363,141 
Furniture and fixtures   334,580    332,804 
Leasehold improvements   3,625,399    2,534,014 
Development equipment   456,686    294,288 
Docking stations and drones   1,012,946    3,928,958 
Machinery and equipment   67,821    60,321 
Construction in progress   
-
    395,340 
Total property and equipment   6,070,849    8,058,782 
Less: accumulated depreciation   (3,336,528)   (3,882,824)
Net property and equipment  $2,734,321   $4,175,958 

 

21

 

 

Depreciation expense for the three months ended September 30, 2024 and 2023 was $190,332 and $235,999, respectively. Depreciation expense for the nine months ended September 30, 2024 and 2023 was $424,637 and $648,624, respectively. As of September 30, 2024, there was $619,793 of net property and equipment located in Israel.

 

As of September 30, 2024, the Company reclassed $2,289,539 of docking stations and drones, net into inventory, as OAS has shifted their focus from service revenue, selling a data subscription service to its customers based on the information collected by their autonomous systems, to product revenue, primarily selling their Optimus System™ and Iron Drone Raider™.

 

In connection with the American Robotics sublease effective January 15, 2024, see Note – 2 Summary of Significant Account Policies, Leases, the Company recorded an impairment charge of $1,127,769, related to the Leasehold improvements and Furniture and fixtures associated with the Asset Group, was recognized in Operating expenses in the Consolidated Statements of Operations for the year ending December 31, 2023, included in our 2023 Form 10-K. There was no indication of impairment for the nine months ended September 30, 2024.

  

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.

 

Airobotics Transaction

 

On January 23, 2023, the Company, completed the acquisition of Airobotics, pursuant to the Agreement of Merger, dated as of August 4, 2022 (the “Original Airobotics Agreement”), and that certain Amendment to Agreement of Merger, dated November 13, 2022 (the “Airobotics Amendment,” and together with the Original Airobotics Agreement, the “Airobotics Agreement”), by and among the Company, Talos Sub Ltd., an Israeli company and a wholly owned subsidiary of the Company (“Merger Sub”), and Airobotics. In accordance with the terms of the Airobotics Agreement, Merger Sub merged with and into Airobotics (the “Merger”), with Airobotics continuing as the surviving company of the Merger and as a wholly owned subsidiary of the Company.

 

At the effective time of the Merger (the “Effective Time”), each ordinary share of Airobotics, par value NIS 0.01 per share (the “Airobotics Ordinary Shares”), issued and outstanding (other than shares owned by Airobotics or its subsidiaries (dormant or otherwise) or by the Company or Merger Sub) was converted into, and exchanged for 0.16806 (the “Exchange Ratio”) fully paid and nonassessable shares of Common Stock 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 have otherwise been issued to a holder of Airobotics Ordinary Shares as part of the Merger Consideration were rounded up to the nearest whole share based on the total number of shares of the Company’s Common Stock issued to such holder of Airobotics Ordinary Shares. Holders of Airobotics Ordinary Shares received approximately 2.8 million shares as consideration (excluding approximately 1.7 million shares underlying equity awards to be outstanding following the Merger).

 

As provided in the Airobotics Agreement, each outstanding option, warrant or other right, whether vested or unvested, to purchase Airobotics Ordinary Shares (each, an “Airobotics Stock Option,” and collectively, the “Airobotics Stock Options”) issued pursuant to the Airobotics Ltd. 2015 Israeli Share Option Plan and 2020 Incentive Equity Plan (the “Airobotics Plans”), was assumed by Ondas and converted as of the Effective Time into an option, warrant or right, as applicable, to purchase shares of Company Common Stock. Subject to the terms of the relevant Airobotics Stock Option, each Airobotics Stock Option is deemed to constitute an option, warrant, or other right, as applicable, to purchase, on substantially the same terms and conditions as were applicable under such Airobotics Stock Option, a number of shares of Company Common Stock equal to the number of shares of Company Common Stock (rounded up to the nearest whole share) that the holder of such Airobotics Stock Option would have been entitled to receive pursuant to the Merger had such holder exercised such option, warrant, or right to purchase full Airobotics Ordinary Shares immediately prior to the Effective Time at a price per share of Company Common Stock (rounded down to the nearest whole cent) equal to (i) the former per share exercise price for Airobotics Ordinary Shares otherwise purchasable pursuant to such Airobotics Stock Option, divided by (ii) the Exchange Ratio.

 

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As a result of the Merger, the Company is dual listed on The Nasdaq Stock Market and the Tel Aviv Stock Exchange (“TASE”). The first trading day of the Company’s shares on TASE was January 26, 2023. On February 8, 2024, the Company took steps to voluntarily delist the Company’s Common Stock from trading on TASE. Pursuant to Israeli law, the delisting of the Company’s Common Stock is expected to take effect three months following the date of the Company’s request to the TASE to delist the Company’s Common Stock, which occurred on February 8, 2024. The Company’s Common Stock was voluntarily delisted from the TASE on May 9, 2024. The Company’s Common Stock will continue to be listed for trading on Nasdaq, and all of the shares traded on the TASE are expected to be transferred to Nasdaq where they can continue to be traded. See the Current Report on Form 8-K filed with the SEC on February 8, 2024 for further details.

 

The following table summarizes the consideration paid for Airobotics and the preliminary allocation of the purchase consideration to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date.

 

Purchase price consideration:    
Common Stock – 2,844,291 Shares  $5,261,938 
Vested Stock Options – 605,349 Shares   700,690 
Warrants – 586,440 Warrants to purchase shares   
-
 
Total purchase price consideration  $5,962,628 
      
Estimated fair value of assets acquired:     
Cash and cash equivalents and restricted cash  $1,049,454 
Accounts receivable   112,245 
Inventory   1,494,707 
Other current assets   835,664 
Property and equipment   3,015,602 
Right of use asset   339,104 
Intangible assets   5,977,926 
Other long-term assets   62,851 
Total estimated fair value of assets acquired   12,887,553 
      
Estimated fair value of liabilities assumed:     
Accounts payable   969,242 
Customer Prepayments   1,602,535 
Government grant liability   1,783,403 
Other loans   1,140,301 
Other payables   1,156,057 
Lease liabilities   385,450 
Loan from related party   2,032,875 
Total estimated fair value of liabilities assumed   9,069,863 
      
Net Assets Acquired  $3,817,690 
      
Goodwill  $2,144,938 

 

The exercise price of the warrants included in the purchase price consideration far exceeded the Company’s stock price at the date of acquisition, thus the value of warrants was deemed de minimis.

 

The intangible assets acquired include the developed technology, marketing-related assets, and customer relationships (see Note 6 – Intangible Assets). The final purchase price allocation has changed from the preliminary allocation because of changes in the valuation of property and equipment and intangibles. During the year ended December  31, 2023, measurement period adjustments were made of (1) $68,483 to reduce the estimated fair value of property and equipment and increase goodwill, respectively, and (2) $80,000 to reduce the valuation of the customer relationships intangible asset and increase goodwill, respectively.

 

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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.

 

Our results for the nine months ended September 30, 2023, include results from Airobotics between January 24, 2023 and September 30, 2023. The following unaudited pro forma information presents the Company’s results of operations as if the acquisition of Airobotics had occurred on January 1, 2023. 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, 2023 or what the Company’s operating results will be in future periods.

 

   (Unaudited)
Nine months ended
September 30,
 
   2024   2023 
Revenue, net  $3,063,652   $10,762,181 
Net loss  $(25,579,810)  $(31,133,911)
Basic Earnings Per Share  $(0.41)  $(0.61)
Diluted Earnings Per Share  $(0.41)  $(0.61)

  

Goodwill Impairment

 

The Company has recognized goodwill as part of the American Robotics acquisition in 2021 and Airobotics acquisition in 2023. The changes in the carrying amount of goodwill for the nine months ended September 30, 2024 and year ended December 31, 2023, are as follows:

 

    OAS  
Balance as of January 1, 2023   $ 25,606,983  
Goodwill acquired     2,144,938  
Balance as of December 31, 2023 and September 30, 2024   $ 27,751,921  

 

 

Goodwill is tested for impairment in the fourth quarter after the annual forecasting process. In December 2023, the Company bypassed the qualitative analysis and proceeded directly to a quantitative analysis. The Company engaged a third-party service provider to carry out a valuation of the OAS reporting unit. Using a discounted cash flow analysis and updated forecasts for revenue and cash flows, it was determined that the fair value of the OAS reporting unit was higher than the carrying value as of December 31, 2023, and no impairment to goodwill was necessary as of December 31, 2023.

 

NOTE 6 – INTANGIBLE ASSETS

 

The components of intangible assets, all of which are finite lived, were as follows:

 

   September 30, 2024   December 31, 2023     
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Useful
Life
 
                             
Patents  $162,718   $(52,896)  $109,822   $117,810   $(43,153)  $74,657    10 
Patents in process   119,361    
-
    119,361    142,239    
-
    142,239    N/A 
Licenses   241,909    (108,000)   133,909    241,909    (89,859)   152,050    10 
Software   244,089    (196,778)   47,311    211,411    (167,412)   43,999    3 
Trademarks   3,230,000    (1,018,478)   2,211,522    3,230,000    (776,235)   2,453,765    10 
FAA waiver   5,930,000    (1,869,838)   4,060,162    5,930,000    (1,425,101)   4,504,899    10 
Developed technology   27,977,331    (7,831,419)   20,145,912    27,977,331    (5,632,170)   22,345,161    3 - 10 
Non-compete agreements   840,000    (840,000)   
-
    840,000    (840,000)   
-
    1 
Marketing-related assets   890,000    (149,290)   740,710    890,000    (82,540)   807,460    10 
Customer relationships   1,010,000    (356,548)   653,452    1,010,000    (205,048)   804,952    5 
   $40,645,408   $(12,423,247)  $28,222,161   $40,590,700   $(9,261,518)  $31,329,182      

 

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Amortization expense for the three months ended September 30, 2024 and 2023 was $1,056,141 and $1,064,798, respectively. Amortization expense for the nine months ended September 30, 2024 and 2023 was $3,161,729 and $3,103,591, respectively. 

 

On August 31, 2022, the Company entered into an asset purchase agreement with Field of View LLC, a North Dakota limited liability company. The total purchase consideration consisted of $250,000 of cash payable in monthly instalments over twelve months, and $75,520 of shares of the Company’s Common Stock, representing 16,000 shares (“FOV Consideration Shares”). The asset purchase agreement restricted the holder from transferring the FOV Consideration Shares for 180 days from the closing date, subject to certain exceptions. The Company acquired computer and research and development equipment amounting to $18,506 and intangibles for developed technology for $307,014. As of December 31, 2023, the cash was paid and equity was issued in full.

 

On October 19, 2022, Airobotics entered into an Asset Purchase Agreement, as amended, to acquire all of the intellectual property, technical systems, and operations of Iron Drone Ltd. (“Iron Drone”), an Israeli-based company specializing in the development of autonomous counter-drone systems (the “Iron Drone Transaction”). The consideration for the Iron Drone Transaction was (i) $135,000 in cash, (ii) 46,129 shares of the Company’s Common Stock, (iii) warrants exercisable for 26,553 shares of the Company’s Common Stock with an exercise price of $11.95, which shall be exercisable if, during the 48 month period following the closing, the average price per share of the Company’s Common Stock exceeds $52.38 for a period of at least 90 consecutive trading days, (iv) a right to acquire 35,377 shares of the Company’s Common Stock if during the 48 month period after the closing, the average price per share of the Company’s Common Stock exceeds $18.25 for a period of at least 90 consecutive trading days, and (v) a right to acquire 70,753 shares of the Company’s Common Stock if during the 48 month period after the closing, the average price per share of Company’s Common Stock exceeds $20.27 for a period of at least 90 consecutive trading days. On March 6, 2023, the Company completed the Iron Drone Transaction. The Company acquired intangibles for developed technology for $576,717. As of December 31, 2023, the cash was paid and equity was issued in full. 

 

Estimated amortization expense for the next five years for the intangible assets currently being amortized is as follows:

  

Year Ending December 31,  Estimated
Amortization
 
2024 (3 months)  $1,055,457 
2025  $4,165,035 
2026  $4,081,308 
2027  $4,067,058 
2028  $3,792,280 
Thereafter  $11,061,023 
Total  $28,222,161 

 

NOTE 7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of the following:  

 

   September 30,
2024
   December 31,
2023
 
Accrued payroll and other benefits  $1,748,093   $2,423,709 
Accrued professional fees   184,308    315,863 
Accrued interest   1,377,790    652,631 
Accrued purchases   74,207    78,987 
Other accrued expenses and payables   132,766    116,687 
Total accrued expenses and other current liabilities  $3,517,164   $3,587,877 

 

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NOTE 8 – NOTES PAYABLE

 

2017 Convertible Promissory Note

 

On September 14, 2017, the Company and an individual entered into a convertible promissory note with unilateral conversion preferences by the individual (the “2017 Convertible Promissory Note”). On July 11, 2018, the Company’s Board approved certain changes to the 2017 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 September 30, 2024 and December 31, 2023, the total outstanding balance of the 2017 Convertible Promissory Note was $300,000. The maturity date of the 2017 Convertible Promissory Note is based on the payment of 0.6% of quarterly gross revenue until 1.5 times the amount of the 2017 Convertible Promissory Note is paid. Accrued interest on September 30, 2024, and December 31, 2023 was $21,249 and $26,844, respectively. Interest expense for the three and nine months ended September 30, 2024 and 2023 was $3,750 and $11,250, respectively. 

  

2022 Convertible Exchange Notes

 

On October 28, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors pursuant to which we issued convertible notes (“2022 Convertible Promissory Notes”) in the principal amount of $34.5 million, with a debt discount of $4.5 million and issuance costs of $2.3 million. The net amount of proceeds to us from the 2022 Convertible Promissory Notes after deducting the placement agent’s fees and transaction expenses (issuance costs) were approximately $27,703,000. The Company has used the net proceeds of the 2022 Convertible Promissory Notes for general corporate purposes, including funding capital, expenditures, or the expansion of its business and providing working capital.

 

On January 20, 2023, the Company entered into an Amendment No. 1 to Securities Purchase Agreement (“Amended SPA”) to that certain Purchase Agreement. The Amended SPA amends the notes attached as exhibits to the Purchase Agreement. Amendment No.1 was accounted for as a modification of the Purchase Agreement,

 

Pursuant to the terms of the Purchase Agreement, on January 20, 2023, the Company exchanged the 2022 Convertible Promissory Notes, on a dollar-for-dollar basis, into 3% Senior Convertible Notes Due 2024 (the “2022 Convertible Exchange Notes”).

 

The 2022 Convertible Exchange Notes are identical in all material respects to the 2022 Convertible Promissory Notes, except that they (i) are issued pursuant to the Base Indenture (as defined below) and the First Supplemental Indenture (as defined below); (ii) have a maturity date of October 28, 2024; (iii) allow for the Acceleration of Installment Amounts (as defined in the 2022 Convertible Exchange Notes) not to exceed eight (8) times the Installment Amount (as defined in the 2022 Convertible Exchange Notes) with respect to the Installment Date (as defined in the 2022 Convertible Exchange Notes) related to the Current Acceleration (as defined in the 2022 Convertible Exchange Notes); and (iv) modify the Acceleration Conversion Price (as defined in the 2022 Convertible Exchange Notes).

 

The 2022 Convertible Exchange Notes were issued pursuant to the first supplemental indenture (the “First Supplemental Indenture”), dated as of January 20, 2023, between the Company and Wilmington Savings Fund Society, FSB, as trustee (the “Trustee”). The First Supplemental Indenture supplements the indenture entered into by and between the Company and the Trustee, dated as of January 20, 2023 (the “Base Indenture” and, together with the First Supplemental Indenture, the “Initial Indenture”). The Initial Indenture has been qualified under the Trust Indenture Act of 1939, and the terms of the 2022 Convertible Exchange Notes include those set forth in the Initial Indenture and those made part of the Initial Indenture by reference to the Trust Indenture Act.

 

26

 

 

On July 21, 2023, the Company entered into an agreement and waiver with the holder of the 2022 Convertible Exchange Notes (the “Agreement and Waiver,” together with the Purchase Agreement and Amended SPA, the “SPA”) that included (i) extending the Maturity Date to from October 28, 2024 to April 28, 2025; (ii) waive the last sentence of Section 8(e) of the Notes (such that last sentence of Section 8(e) of the Notes shall have no further force and effect) (the “Acceleration Waiver”); (iii) reduce the Conversion Price of the 2022 Convertible Exchange Notes to the lower of (A) the Conversion Price then in effect and (B) the greater of (x) the Floor Price (as defined in the Notes) then in effect and (y) 125% of the lowest volume weighted average price (“VWAP”) of the Common Stock during the five (5) consecutive Trading Day period ending and including the Trading Day immediately prior to the effective date; provided, that, in addition, during the period commencing on the effective date through and including September 30, 2023, the conversion price of the Notes, solely with respect to voluntary conversions of such aggregate Conversion Amount of the Notes not in excess of such aggregate Current Installment Amounts of such applicable period (or otherwise eligible to be converted in one or more Accelerations during such applicable period), shall be further lowered to the Installment Conversion Price (as defined in the Existing Note) in effect for the Installment Date (as defined in the Existing Note) of the Existing Note of July 3, 2023; (iv) to extend the Additional Closing Expiration Date to April 28, 2026; and (v) increase the aggregate principal amount of Notes issuable in one or more Additional Closings to $46,000,000. This agreement was accounted for as a modification.

 

A full summary of the Agreement and Waiver, including a full text of the related agreements, are available on the Current Report on Form 8-K filed with the SEC on July 28, 2023.

 

The 2022 Convertible Exchange Notes bear interest at the rate of 3% per annum. The 2022 Convertible Exchange Notes are payable in monthly installments beginning on November 1, 2022 through the maturity date of April 28, 2025 (each such date, an “Installment Date”). On each Installment Date, we will make monthly payments by converting the applicable “Installment Amount” (as defined below) into shares of our Common Stock (an “Installment Conversion”), subject to satisfaction of certain equity conditions, including a minimum $1.50 share price, $500,000 minimum daily volume, and maintaining continued Nasdaq listing requirements among other conditions. If these conditions are not met, installments can be requested in cash. For the nine months ended September 30, 2024 and 2023, we issued 3,708,286 and 7,431,610 common shares as a result of Installment Conversion, respectively. At each Installment Date the note holder may defer some or all of the amount due until the subsequent Installment Date. In between Installment Dates, the note holder also has the option to accelerate certain portions of principal due. At each Installment Date the price used to exchange outstanding notes into Common Stock is based on the lower of (A) 92% of the lowest VWAP of the respective previous five trading days; and (B) the Floor Price ($0.32 as of December 31, 2023). The maximum conversion price is $1.50 per share.

 

The “Installment Amount” will equal:

 

  (i) for all Installment Dates other than the maturity date, the lesser of (x) the Holder Pro Rata Amount of $1,437,500 and (y) the principal amount then outstanding under the Note; and

 

  (ii) on the maturity date, the principal amount then outstanding under the Note.

 

Each month, the note holders may accelerate a portion of the note due up to eight times the minimum Installment Amount of $1,437,500.

 

27

 

 

2023 Additional Notes

 

On July 24, 2023, pursuant to the terms of the Purchase Agreement, as amended, an Investor elected to purchase 3% Series B-2 Senior Convertible Notes in the aggregate original principal amount of $11.5 million (the “2023 Additional Notes,” together with the 2022 Convertible Exchange Notes, the “Notes”), which 2023 Additional Notes are convertible into shares of Common Stock under certain conditions more fully described in the 2023 Additional Notes. The 2023 Additional Notes have an original issue discount of approximately thirteen percent (13%) resulting in gross proceeds to the Company of $10.0 million. The Company currently intends to use the net proceeds for general corporate purposes, which includes funding capital expenditures and working capital. The 2023 Additional Notes have a maturity date of July 25, 2025. The 2023 Additional Notes were issued pursuant to the second supplemental indenture, dated as of July 25, 2023, between the Company and the Trustee (the “Second Supplemental Indenture,” and together with the Base Indenture, the “Second Indenture”). The Second Supplemental Indenture supplements the Base Indenture. The Second Indenture has been qualified under the Trust Indenture Act of 1939, and the terms of the Additional Notes include those set forth in the Second Indenture and those made part of the Indenture by reference to the Trust Indenture Act.

  

The 2023 Additional Notes bear interest at the rate of 3% per annum. The 2023 Additional Notes are payable in monthly installments beginning on August 1, 2023 through the maturity date of July 24, 2025 (each such date, an “Installment Date”). On each Installment Date, we will make monthly payments by converting the applicable Installment Amount (as defined above under the 2022 Convertible Exchange Notes) into shares of our Common Stock (an “Installment Conversion”), subject to satisfaction of certain equity conditions, including a minimum $1.50 share price, $500,000 minimum daily volume, and maintaining continued Nasdaq listing requirements among other conditions. If these conditions are not met, installments can be requested in cash. For the nine months ended September 30, 2024, we made no cash payments and issued no common shares as a result of Installment Conversion. At each Installment Date the note holder may defer some or all of the amount due until the subsequent Installment Date. In between Installment Dates, the note holder also has the option to accelerate certain portions of principal due. At each Installment Date the price used to exchange outstanding notes into Common Stock is based on the greater of (x) the Floor Price ($0.40 as of December 31, 2023) and (y) 92% of the lowest VWAP of the prospective five trading days. The maximum conversion price is $1.45 per share.

  

On July 25, 2023, the 2023 Additional Notes were offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-252571) filed with the SEC on January 29, 2021 (as such registration statement became effective on February 5, 2021. On July 25, 2023, the Company filed a prospectus supplement with the SEC in connection with the sale and issuance of the 2023 Additional Notes. Oppenheimer & Co. Inc. served as the sole placement agent for the transaction pursuant to the terms of a placement agent agreement, dated October 26, 2022.

 

On February 23, 2024, the Company and the Investor entered into an Agreement and Waiver (the “Waiver”) with respect to certain terms of the Notes. Pursuant to the Waiver, the Company and the Investor agreed that:

 

  the Investor shall waive Section 4(q) of the SPA, solely with respect to the Offerings;

 

  the Investor shall waive any right to adjust the Conversion Price (as defined in the Notes) of the Notes pursuant to Section 7 of the Notes and any Additional Notes that may be issued from time as a result of the consummation of all or any portion of the Offerings; and

 

  the Investor shall waive any applicable provisions of the SPA or the Notes, including, without limitation, Section 13(f) of the Notes, Section 5(a) of the Notes, and Section 4(m)(iii) of the Purchase Agreement (but, in the case of Section 4(m)(iii) and in the interest of clarity, only with respect to issuances of securities of Networks) such that the Company or any of its subsidiaries, including any “significant subsidiaries” (as defined in Rule 1-02 of Regulation S-X) (“Company Subsidiaries” and each a “Company Subsidiary”) may, directly or indirectly, including through Affiliates (as defined in the Notes) or otherwise, in one or more transactions (including pursuant to a merger), sell, assign, transfer, convey or otherwise dispose of (x) any of (including all or substantially all of) the properties or assets of Networks, or (y) any equity interests (including a controlling equity interest) in Networks, in each case as would otherwise have required the affirmative consent or approval of Investor but for this waiver (each a “Waiver Transaction”), provided that, as consideration for any Waiver Transaction, the Company receives (whether directly or via a distribution from a Company Subsidiary) an amount in cash equal to no less than 125% of the principal and interest under the Notes and any Additional Notes then outstanding as of the date Company gives written notice to Investor of such Waiver Transaction.

 

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As of September 30, 2024, the total outstanding principal on the Notes was $27,824,724, net of debt discount and issuance costs of $965,066. As of December 31, 2023, the total outstanding principal on the Notes was $28,504,661, net of debt discount and issuance costs of $2,360,129. Accrued interest as of September 30, 2024 and December 31, 2023 was $1,352,042 and $652,631, respectively, and is included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.

 

For the three months ended September 30, 2024, we recognized interest expense of $229,125, amortization expense of $264,961 related to the debt discount, and amortization expense of $135,397 related to the issuance costs. For the nine months ended September 30, 2024, we recognized interest expense of $703,786, amortization expense of $922,689 related to the debt discount, and amortization expense of $472,374 related to the issuance costs. For the three months ended September 30, 2023, we recognized interest expense of $233,493, amortization expense of $426,996 related to the debt discount, and amortization expense of $226,051 related to the issuance costs. For the nine months ended September 30, 2023, we recognized interest expense of $780,485, amortization expense of $1,609,104 related to the debt discount, and amortization expense of $829,357 related to the issuance costs. The remaining unamortized debt discount of $648,050 and issuance costs of $317,016 as of September 30, 2024, will be amortized via the effective interest method under ASC 835. Interest expense and amortization expense of the debt discount and issuance costs are included in Interest expense on the Condensed Consolidated Statements of Operations.

 

Networks Convertible Notes

 

On July 8, 2024 and July 23, 2024, Charles & Potomac Capital, LLC, (“C&P”), an entity affiliated with Joseph Popolo, a director of the Company, elected to purchase Convertible Notes in the aggregate original principal amount of $700,000 and $800,000, respectively, (the “Networks Convertible Notes”). Networks Convertible Notes are convertible into shares of Networks Common Stock (as defined below) or Preferred Stock under certain conditions. The Company currently intends to use the net proceeds for general corporate purposes, which includes funding capital expenditures and working capital. The Networks Convertible Notes bear interest at the rate of 6% per annum and have a maturity date of July 8, 2025 and July 23, 2025, respectively. In the event Ondas Networks consummates the next round of equity financing prior to the maturity date, the principal balance and unpaid accrued interest on the Networks Convertible Notes will be convertible at the option of the Investor into conversion shares upon closing of the next round of equity financing.

 

As of September 30, 2024, the total outstanding principal on the Networks Convertible Notes was $1,486,847, net of issuance costs of $13,153. Accrued interest as of September 30, 2024 was $18,493 and is included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2024, we recognized interest expense of $18,493 and amortization expense of $3,979 related to the issuance costs. The remaining unamortized issuance costs of $13,153 as of September 30, 2024, will be amortized straight line over the term of the loan, as there was no material difference when compared to amortization via the effective interest method under ASC 835. Interest expense and amortization expense related to issuance costs are included in Interest expense on the Condensed Consolidated Statements of Operations.

 

Networks Secured Note

 

On September 3, 2024, Networks entered into a Security Note Agreement (the “Security Agreement”) with C&P, in which, Networks may draw, and C&P shall loan Networks, up to $1,500,000 (the “Networks Secured Loan”). Any additional draw following the Initial Draw (as defined below) shall be entirely subject to C&P’s sole discretion. Pursuant to the Security Agreement, Networks issued C&P a secured note in the amount of $1,500,000, which amount may be increased or decreased by the mutual written agreement of the parties thereto (the “Networks Secured Note”). The Networks Secured Note (i) bears interest at a rate of 8% per annum, (ii) has a maturity date of February 28, 2025, and (iii) is secured by all assets of Networks. On September 3, 2024, Networks issued a request for draw in the principal amount of One Million Dollars ($1,000,000) (the “Initial Draw”). As of September 30, 2024, Networks has drawn a total of $1,450,000 on the Networks Secured Note.

 

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Pursuant to the Security Agreement, Networks issued C&P a warrant to purchase $1,000,000 in shares of preferred stock of Networks, $0.00001 par value per share, at an exercise price of $20.65 per share. The number of warrants exercisable under the Security Agreement is calculated by $1,000,000 divided by the Conversion Price, which is the amount equal to the price per share of Networks’ most senior series of Preferred Stock issued to investors in Networks’ next equity financing date, or if none, then $41.3104. The warrants are exercisable commencing September 3, 2024 through September 3, 2029. The Company engaged a third-party service provider to carry out an appraisal of the warrants, who ran a Black-Scholes Model to determine the fair value of the warrants as of September 3, 2024, which was $589,924. The fair value of the warrants was recorded as debt discount.

 

As of September 30, 2024, the total outstanding principal on the Networks Secured Notes was $891,215, net of debt discount of $497,646 and issuance costs of $61,139. Accrued interest as of September 30, 2024 was $7,255 and is included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2024, we recognized interest expense of $7,255 and amortization expense of $92,278 related to debt discount and $11,337 related to the issuance costs. The remaining unamortized debt discount of $497,646 and issuance costs of $61,139 as of September 30, 2024, will be amortized straight line over the term of the loan, as there was no material difference when compared to amortization via the effective interest method under ASC 835. Interest expense and amortization expense related to debt discount and issuance costs are included in Interest expense on the Condensed Consolidated Statements of Operations.

 

Government Grant Liability

 

Airobotics has received grants from the IIA to finance its research and development programs in Israel, through which Airobotics received IIA participation payments in the aggregate amount of $3.7 million through September 30, 2024. All of these are royalty-bearing grants. In return, Airobotics is committed to pay IIA royalties at a rate of 3% of future sales of the developed products, up to 100% of the amounts of grants received plus interest at LIBOR. Through September 30, 2024, approximately $460,000 in royalties have been paid to the IIA. The Company made royalty payments of $0 and $6,576 during the nine months ended September 30, 2024 and 2023, respectively.

 

The Company’s royalty liability to the IIA as of September 30, 2024 and December 31, 2023, including grants received by Airobotics and the associated LIBOR interest on all such grants, was $2,443,653 and $2,749,704, respectively. The (increase) and decrease in fair value of the government grant liability, including LIBOR interest expense accrued, for the three and nine months ended September 30, 2024 was $(86,307) and $462,710, respectively. The (increase) and decrease in fair value of the government grant liability, including LIBOR interest expense accrued, for the three months ended September 30, 2023 and period of January 24, 2023 through September 30, 2023 was $(295,094) and $(213,277), respectively.

 

NOTE 9 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

As of September 30, 2024 and December 31, 2023, the Company had 300,000,000 shares of Common Stock authorized for issuance, of which 75,297,311 and 61,940,878 shares of our Common Stock were issued and outstanding, respectively.

 

Preferred Stock

 

As of September 30, 2024 and December 31, 2023, 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,” together with the Series A Preferred, the “Preferred Shares”) shares. As of September 30, 2024 and December 31, 2023, the Company had no preferred stock outstanding.

 

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 “Prior 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 Prior Form S-3 was declared effective by the SEC on February 5, 2021. In accordance with SEC rules, the Prior Form S-3 expired on February 5, 2024, the three-year anniversary of the date on which it was declared effective.

 

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On February 2, 2024, the Company initially filed with the SEC a new shelf Registration Statement on Form S-3 for up to $175,000,000, which represents $150,000,000 under the Prior Form S-3 and an additional $25,000,000 (the “New 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 New Form S-3 was declared effective by the SEC on February 15, 2024.

 

Stock Issued for Convertible Debt

 

During the nine months ended September 30, 2024, the Company issued 3,708,286 shares of its Common Stock to the lenders in lieu of cash payments for $4,375 of outstanding interest and $2,075,000 of outstanding principal on the 2022 Convertible Exchange Notes.

 

During the nine months ended September 30, 2023, the Company issued 7,431,610 shares of its Common Stock to the lenders in lieu of cash payments for $164,054 of outstanding interest and $7,148,447 of outstanding principal on the 2022 Convertible Exchange Notes (See Note 8 – Notes Payable for further details).

 

Sale of Common Stock in Ondas Holdings and Warrants to Purchase Common Stock of OAS

 

On February 26, 2024, the Company entered into a Securities Purchase Agreement (the “Ondas Agreement”) with certain purchasers named therein (the “Ondas Purchasers”) for the purchase and sale of (i) an aggregate of 3,616,071 shares (the “Holdings Shares”) of Common Stock and (ii) warrants to purchase an aggregate of 3,616,071 shares of OAS’ common stock $0.0001 par value per share, at an exercise price of 80% of the lowest price of Common Shares of OAS issued in a subsequent financing of at least $10,000,000 to the Company, and exercisable commencing ninety days following the date of issuance through the fifth anniversary of the date of issuance (the “OAS Warrants,” and together with the Holdings Shares, the “Ondas Offering Securities”), for gross proceeds of $4,050,000 (the “Ondas Offering”). The purchase price paid by the Ondas Purchasers for the Holdings Shares was $1.12 per share.

 

The Company engaged a third-party service provider to carry out an appraisal of the OAS Warrants, who ran a Monte Carlo simulation to determine the fair value of the OAS Warrants as of February 26, 2024, which is $1,561,532. The initial valuation was assigned to the Holdings Shares and the OAS Warrants based on their relative fair values, with the initial valuation of the Holdings Shares being $3,095,263 and OAS Warrants being $954,737.

 

The Ondas Offering was consummated on February 26, 2024. The Holdings Shares were offered and sold, and were issued, pursuant to the Prospectus Supplement, dated February 26, 2024, to the Prospectus included in the New Form S-3. The Company intends to use the net proceeds from the sale of the Ondas Offering Securities for general working capital purposes.

 

The issuance of the OAS Warrants was exempt from registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) of such Securities Act and Regulation D promulgated thereunder based upon the representations of each of the Ondas Purchasers that it was an “accredited investor” (as defined under Rule 501 of Regulation D) and that it was purchasing such securities without a present view toward a distribution of the securities. In addition, there was no general advertisement conducted in connection with the sale of the OAS Warrants. See the Current Report on Form 8-K filed with the SEC on February 26, 2024 for further details.

 

Sale of Common Stock and Warrants in Ondas Holdings

 

On August 28, 2024, the Company entered into a Securities Purchase Agreement, (the “Purchase Agreement”) with an institutional investor (the “Investor”), pursuant to which the Company agreed to issue and sell, in a registered direct offering by the Company directly to the Investor an aggregate of 5,333,334 shares of Common Stock (the “Holdings Shares”), together with Series A warrants (“Series A Warrants”) to purchase up to 5,333,334 shares of Common Stock and Series B warrants (“Series B Warrants,” and together with the Series A Warrants, the “Warrants”) to purchase up to 5,333,334 shares of Common Stock. The Series A Warrants have an exercise price of $0.8073 per share and are exercisable at any time from February 28, 2025 through March 1, 2027. The Series B Warrants have an exercise price of $0.8073 per share and are exercisable at any time from February 28, 2025 through February 28, 2030.

 

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Each share of Common Stock and accompanying Series A Warrant and Series B Warrant were sold together at a combined offering price of $0.75, for gross proceeds of $4,000,000 before deducting the placement agent’s fees and related offering expenses, which totaled $532,060. The offering closed on August 30, 2024.

 

The Company used the Black-Scholes-Merton option model (the “Black-Scholes Model”) to determine the fair value of warrants to purchase Common Stock of the Company, which is $4,881,775. See table below for the assumptions used in the Black-Scholes Model. The initial valuation was assigned to the Holdings Shares and the Warrants based on their relative fair values, with the initial valuation of the Holdings Shares being $1,801,442 and Warrants being $2,198,559.

 

Warrants to Purchase Preferred Stock of Networks

 

On September 3, 2024, in connection with the Networks Secured Note, pursuant to the Agreement, Networks issued C&P a warrant to purchase $1,000,000 in shares of preferred stock of Networks, $0.00001 par value per share, at an exercise price of $20.65 per share. The number of warrants exercisable under the Agreement is calculated by $1,000,000 divided by the Conversion Price, which is the amount equal to the price per share of Networks’ most senior series of Preferred Stock issued to investors in Networks’ next equity financing date, or if none, then $41.3104. The warrants are exercisable commencing September 3, 2024 through September 3, 2029. The Company engaged a third-party service provider to carry out an appraisal of the warrants, who ran a Black-Scholes Model to determine the fair value of the warrants as of September 3, 2024, which was $589,924. The fair value of the warrants was recorded as debt discount. (See Note 8 – Notes Payable for further details).

 

Warrants to Purchase Common Stock of the Company

 

We use 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.

  

On February 26, 2024, the Company issued warrants to purchase 3,015,000 shares of the Company’s Common Stock, at an exercise price of $1.26 per share, and with a relative fair value of $1,471,194, in connection with the sale of redeemable preferred stock in Ondas Networks. See Note 10 – Redeemable Noncontrolling Interest.

 

On June 3, 2024, the Company issued warrants to purchase 662,723 shares of the Company’s Common Stock, at an exercise price of $0.72 per share, and with a fair value of $193,250, in consideration of consulting services for the Company.

 

On June 3, 2024, the Company issued warrants to purchase 15,391 shares of Ondas Networks Common Stock in consideration of consulting services for the Company. The Company engaged a third-party service provider to carry out a valuation of Ondas Networks’ Common Stock to determine its fair value as of May 31, 2024 and has recorded stock-based compensation of $84,992 during the nine months ended September 30, 2024 based on the preliminary valuation.

 

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The assumptions used in the Black-Scholes Model are set forth in the table below.

 

    Nine Months Ended
September 30, 2024
 
    Ondas
Holdings
 
Stock price     $0.72-1.40    
Risk-free interest rate     3.71-4.62%  
Volatility     56.15-82.03%  
Expected life in years     2.00-5.00  
Dividend yield     0.00%  

 

A summary of our Warrants activity for the three and nine months ended September 30, 2024 and related information follows:

 

   Number of
Shares
Under
Warrant
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Life
 
Balance as of January 1, 2024   12,566,092   $2.22    4.71 
Granted   14,435,301    0.90      
Exercised   (46,893)   0.03      
Cancelled   (464,290)   9.32      
Balance as of September 30, 2024   26,490,210   $1.38    4.09 

 

Total stock-based compensation expense for warrants for the three and nine months ended September 30, 2024 was $105,934 and $254,699, respectively, and is recorded in General and administrative expense on the Condensed Consolidated Statements of Operations. There was no stock-based compensation expense for warrants for the three and nine months ended September 30, 2023.

 

Stock Options to Purchase Common Stock

 

The Company awards stock options to certain employees, directors, and consultants, which represent the right to purchase common shares on the date of exercise at a stated exercise price. Stock options granted to employees generally vest over a two to four-year period and are contingent on ongoing employment. Compensation expenses related to these awards is recognized straight-line over the applicable vesting period. Stock options granted to consultants are subject to the attainment of pre-established performance conditions. 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.

 

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A summary of our Option activity for the nine months ended September 30, 2024 and related information follows:

 

   Number of
Shares
Under
Option
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Life
 
Balance as of January 1, 2024   4,854,507   $4.59    7.34 
Granted   804,500    1.07      
Exercised   (14,195)   0.75      
Forfeited   (258,109)   1.75      
Canceled   (698,838)   6.86      
Balance as of September 30, 2024   4,687,865   $3.82    7.63 
Vested and Exercisable as of September 30, 2024   2,533,038   $5.19    6.69 

  

As of September 30, 2024, total unrecognized compensation expense related to non-vested stock options was $1,504,756, which is expected to be recognized over a weighted average period of 2.61 years.

 

Total stock-based compensation expense for stock options for the three and nine months ended September 30, 2024 and 2023 is as follows:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2024   2023   2024   2023 
General and administrative  $67,656   $1,843   $207,016   $209,313 
Sales and marketing   40,021    126,868    191,987    385,455 
Research and development   30,219    103,962    109,717    235,564 
Cost of goods sold   18,293    16,144    55,341    35,166 
Total stock-based expense related to options  $156,189   $248,817   $564,061   $865,498 

 

Restricted Stock Units

 

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 nine months ended September 30, 2024:

 

   RSUs   Weighted
Average
Grant
Date Fair
Value
   Weighted
Average
Vesting
Period
(Years)
 
Unvested balance as of January 1, 2024   554,466   $1.14    0.66 
Vested   (436,047)   1.35      
Unvested balance as of September 30, 2024   118,419   $0.38    0.00 

 

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As of September 30, 2024, the unrecognized compensation expense for RSUs was $533.

 

In 2023, three employees with restricted stock unit awards separated from the Company. As part of their separation agreements, the employees were granted accelerated vesting on some of their restricted stock unit awards, which was accounted for as a modification of their awards. The result of the modification was a reversal of approximately $2,800,000 of previously recognized stock-based compensation expense during the three and nine months ended September 30, 2023. Total stock-based compensation expense for restricted stock units for the three and nine months ended September 30, 2024 and 2023 is as follows:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2024   2023   2024   2023 
General and administrative  $49,010   $(1,751,531)  $155,644   $(278,224)
Sales and marketing   -    62,403    13,564    81,296 
Research and development   -    (826,564)   715    (32,220)
Total stock-based expense related to restricted stock units  $49,010   $(2,515,692)  $169,923   $(229,148)

 

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 have been reserved for issuance to employees, including officers, directors and consultants. The 2018 Plan is administered by the Board, provided however, that the Board may delegate such administration to the compensation committee of the Board of the Company (the “Compensation Committee”). Subject to the provisions of the 2018 Plan, the Board and/or the Compensation Committee has the authority to grant, in its discretion, incentive stock options, or non-statutory options, stock awards or restricted stock purchase offers (“Equity Awards”). As of September 30, 2024, the balance available to be issued under the 2018 Plan was 1,100,904.

 

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 “2021 Plan”). The Compensation Committee of the Board of Directors of the Company adopted the 2021 Plan on September 30, 2021, subject to stockholder approval. The purpose of the 2021 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 2021 Plan provides for the issuance of awards including stock options, stock appreciation rights, restricted stock, restricted stock units, and performance awards. On October 31, 2023, stockholders of the Company approved an amendment to the 2021 Plan to increase the number of shares of the Company’s Common Stock authorized for issuance under the 2021 Plan from 6,000,000 to 8,000,000 shares. As of September 30, 2024, the balance available to be issued under the 2021 Plan was 3,686,745.

 

NOTE 10 – REDEEMABLE NONCONTROLLING INTEREST

 

Networks Series A-1 Preferred Stock

 

On July 9, 2023, Ondas Networks entered into a Preferred Stock Purchase Agreement with an initial purchaser named therein (the “Initial Purchaser”) to purchase preferred stock of Ondas Networks, $0.00001 par value per share (the “Networks Series A-1 Preferred Stock”) and the issuance of warrants to purchase 10,200,000 shares of Ondas Holdings (the “Original Networks Agreement”).

 

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The Preferred Stock accrues dividends at the rate per annum of eight percent (8%) of the original issue price, of $34.955 per share (the “2023 Original Issue Price”). Such dividends are payable in cash or additional shares of Networks Series A-1 Preferred Stock, with such valuation based on the 2023 Original Issue Price. Each share of Networks Series A-1 Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of Networks Common Stock (as defined below) as is determined by dividing the 2023 Original Issue Price by the conversion price in effect at the time of conversion, which initially is set at $34.955. In lieu of any fractional shares to which the holder would otherwise be entitled, the number of shares of Networks Common Stock to be issued upon conversion of the Networks Series A-1 Preferred Stock shall be rounded to the nearest whole share. The Networks Series A-1 Preferred Stock can be redeemed at the request of the holder at any time after the fifth anniversary for the greater of two times the initial investment plus accrued dividends or the amount that would be due if the Networks Series A-1 Preferred Stock was converted into Networks Common Stock as described above.

 

On July 21, 2023, Ondas Networks entered into a certain Amendment to the Preferred Stock Purchase Agreement (the “Networks Amendment,” together with the Original Networks Agreement, the “2023 Networks Agreement”). Pursuant to the Networks Amendment, in exchange for an initial sale of shares of Networks Series A-1 Preferred Stock, the Initial Purchaser acquired the following (the “Initial Networks Closing”), for gross proceeds to Ondas Networks of $11,508,517: (i) 329,238 shares of Networks Series A-1 Preferred Stock, at a purchase price of $34.955 per share (the “Per Share Price”), convertible into shares of Common Stock of Ondas Networks, $0.00001 par value per share (the “Networks Common Stock”) and (ii) warrants to purchase 7,825,792 shares of the Company Common Stock, at an exercise price of $0.89 per share, exercisable commencing ninety days following the date of issuance through the fifth anniversary of the date of issuance (the “Initial Warrants”). Also, pursuant to the Networks Amendment, the Initial Purchaser agreed to purchase, and Ondas Networks agreed to sell and issue to the Initial Purchaser, an additional 99,885 shares of Networks Series A-1 Preferred Stock, at the Per Share Price (the “Second Initial Purchaser Closing”) and warrants to purchase 2,374,208 shares of Company Common Stock, at an exercise price of $0.89 per share, exercisable commencing ninety days following the date of issuance through the fifth anniversary of the date of issuance (the “Second Initial Purchaser Warrants”), within thirty days of the Initial Networks Closing.

 

Ondas Networks used the proceeds from the sale of the Networks Series A-1 Preferred Stock for working capital and other general corporate purposes, including fees related to the transactions contemplated by the 2023 Networks Agreement. No portion of the proceeds will be distributed to the Company.

 

Also on July 21, 2023, Ondas Networks completed the Initial Networks Closing. In connection with the Initial Networks Closing, the Company issued the Initial Warrants. Also, in connection with the Initial Closing, the parties entered into an indemnification agreement, investors’ rights agreement, right of first refusal agreement, and voting agreement. Forms of each of these agreements are attached to Exhibit 10.1 to Form 8-K filed on July 28, 2023.

  

On August 11, 2023, Ondas Networks completed the Second Initial Purchaser Closing. In connection with the Second Initial Purchaser Closing, the Company issued Second Initial Purchaser Warrants. Following the Second Initial Purchaser Closing, the Initial Purchaser had invested an aggregate of $15.0 million and owned a minority interest of approximately 28% of Ondas Networks.

 

The Company assessed the Networks Series A-1 Preferred Stock in accordance with ASC 480 and determined that it should be recorded as temporary equity and not as a liability. The initial valuation was assigned to the Networks Series A-1 Preferred Stock and the Warrants based on relative fair values, with the initial valuation of the noncontrolling interest being $10,406,949 and warrants being $4,593,051. It is being accreted using the effective interest rate method over the five-year period to achieve the redemption value of $30,000,000 plus accrued dividends.

 

Networks Series A-2 Preferred Stock

 

On February 26, 2024, Ondas Networks entered into a second Preferred Stock Purchase Agreement (the “Networks Agreement”) for an investment of $4.50 million in Ondas Networks (the “Networks Offering”). The Networks Agreement was entered into with the Networks Purchasers for the sale of shares of preferred stock for a purchase of $4.50 million. The Networks Offering was consummated on February 26, 2024.

 

Pursuant to the Networks Agreement, the Networks Purchasers acquired the following in the Networks Offering for gross proceeds to Ondas Networks of $4.5 million: (i) 108,925 shares of preferred stock of Networks Series A-2 Preferred Stock, at a purchase price of $41.3104 per share (the “Per Share Price”), convertible into shares of Common Stock, $0.00001 par value per share of Networks Common Stock and (ii) warrants to purchase 3,015,000 shares of the Company’s Common Stock, at an exercise price of $1.26 per share, exercisable commencing ninety days following the date of issuance through the fifth anniversary of the date of issuance (the “Holdings Warrants,” and together with the Networks Series A-2 Preferred Stock, the “Networks Offering Securities”).

 

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The Networks Series A-2 Preferred Stock accrues dividends at the rate per annum of eight percent (8%) of the original issue price, of $41.3104 per share (the “Original Issue Price”). Dividends shall be payable only when, as, and if declared by the board of directors of Ondas Networks and Ondas Networks shall be under no obligation to pay such dividends. Such dividends are payable in cash or additional shares of Networks Series A-2 Preferred Stock, with such valuation based on the Original Issue Price. Each share of Networks Series A-2 Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of Networks Common Stock as is determined by dividing the Original Issue Price by the conversion price in effect at the time of conversion, which initially is set at $41.3104. In lieu of any fractional shares to which the holder would otherwise be entitled, the number of shares of Networks Common Stock to be issued upon conversion of the Networks Series A-2 Preferred Stock shall be rounded to the nearest whole share. The Networks Series A-2 Preferred Stock can be redeemed as the request of the Holder at any time after the fifth anniversary for the greater of the initial investment plus accrued dividends or the amount that would be due if the Networks Series A-2 Preferred Stock was converted into Networks Common Stock as described above.

 

Pursuant to the Networks Agreement, the Company entered into a registration rights agreement with the purchasers to register the resale of the Company’s Common Stock underlying the Holdings Warrants pursuant to a registration statement to be filed no later 180 days following the closing of the Networks Offering. Also, pursuant to the Networks Agreement, the Networks Purchasers became parties to those certain investors’ rights agreement, right of first refusal agreement, and voting agreement, dated July 21, 2023.

 

Ondas Networks used the proceeds from the sale of the Networks Offering Securities to immediately redeem an amount of shares of Networks Common Stock at the Per Share Price held by the Company that was equivalent to the amount of proceeds raised in the sale of the Networks Offering Securities.

 

The issuance of the Networks Offering Securities was exempt from registration requirements of the Securities Act pursuant to Section 4(2) of such Securities Act and Regulation D promulgated thereunder based upon the representations of each of the Networks Purchasers that it was an “accredited investor” (as defined under Rule 501 of Regulation D) and that it was purchasing such securities without a present view toward a distribution of the securities. In addition, there was no general advertisement conducted in connection with the sale of the Networks Offering Securities. See the Current Report on Form 8-K filed with the SEC on February 26, 2024 for further details.

 

The Company assessed the Networks Series A-2 Preferred Stock in accordance with ASC 480 and determined that it should be recorded as temporary equity and not as a liability. The initial valuation was assigned to the Networks Series A-2 Preferred Stock and the Warrants based on relative fair values, with the initial valuation of the noncontrolling interest being $3,028,806 and warrants being $1,471,194. It is being accreted using the effective interest rate method over the five-year period to achieve the redemption value of $4,500,000 plus accrued dividends.

 

The Company recorded accrued dividends of $1,114,138 and accretion of $2,112,784 for the nine months ended September 30, 2024, in aggregate. The Company recorded accrued dividends of $212,208 and accretion of $410,322 for the nine months ended September 30, 2023, in aggregate.

 

NOTE 11 – 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 September 30, 2024.

 

On June 6, 2024, Airobotics filed a Notice of Non-Payment with the Abu Dhabi Civil Courts in connection with a customer’s lack of payment relating to a purchase order and breach of a settlement agreement in relation to such purchase order. A performance order was filed on July 11, 2024, and rejected on July 17, 2024 by the Abu Dhabi Civil Courts. On July 30, 2024, Airobotics appealed the rejection of the performance order. On August 28, 2024, the Abu Dhabi Civil Court of Appeals accepted the appeal and appointed an expert to review the case. On October 9, 2024, the Abu Dhabi Civil Court of Appeals ruled in favor of Airobotics for the full amount of the initial purchase order less amounts paid to date by the customer (without taking into consideration the terms of the settlement agreement breached by the customer), which resulted in a total award of $2,138,945 plus interest and expenses. Airobotics will continue to pursue the collection of such award. However, the Company cannot guarantee a successful outcome in collecting any of the funds owed to Airobotics.

 

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NOTE 12 – 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 OAS, as the CODM reviews financial information for these two businesses separately. The Company has no inter-segment sales. The following table presents segment information for three and nine months ended September 30, 2024 and 2023:

 

   Three Months Ended   Three Months Ended 
   September 30, 2024   September 30, 2023 
   Ondas
Networks
   OAS   Total   Ondas
Networks
   OAS   Total 
Revenue, net  $445,288   $1,035,504   $1,480,792   $2,430,954   $234,236   $2,665,190 
Depreciation and amortization   78,462    1,168,011    1,246,473    36,131    1,264,666    1,300,797 
Interest income   13,024    108,584    121,608    379    
-
    379 
Interest expense   451,834    419,501    871,335    448,448    445,503    893,951 
Stock based compensation   149,579    161,554    311,133    291,324    (2,558,199)   (2,266,875)
Net loss   (3,895,946)   (5,630,322)   (9,526,268)   (3,840,184)   (3,452,277)   (7,292,461)
Goodwill   
-
    27,751,921    27,751,921    
-
    27,671,921    27,671,921 
Capital expenditure   100,650    158,736    259,386    39,451    55,521    94,972 
Total assets  $11,328,087   $68,830,569   $80,158,656   $21,842,344   $78,802,674   $100,645,018 

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2024   September 30, 2023 
   Ondas
Networks
   OAS   Total   Ondas
Networks
   OAS   Total 
Revenue, net  $1,416,418   $1,647,234   $3,063,652   $5,079,652   $5,650,493   $10,730,145 
Depreciation and amortization   136,193    3,450,173    3,586,366    112,659    3,639,556    3,752,215 
Interest income   142,874    163,511    306,385    4,058    3,666    7,724 
Interest expense   1,194,017    1,163,480    2,357,497    1,628,151    1,569,449    3,197,600 
Stock based compensation   477,673    511,010    988,683    839,834    (203,484)   636,350 
Net loss   (12,586,123)   (15,085,965)   (27,672,088)   (11,998,183)   (18,707,915)   (30,706,098)
Goodwill   
-
    27,751,921    27,751,921    
-
    27,671,921    27,671,921 
Capital expenditure   1,058,032    548,326    1,606,358    39,451    55,521    94,972 
Total assets  $11,328,087   $68,830,569   $80,158,656   $21,842,344   $78,802,674   $100,645,018 

 

NOTE 13 – INCOME TAXES

 

The Company had a net deferred tax asset of $68.9 million as of December 31, 2023, including a tax benefit of $62.6 million from net operating loss carry-forwards. A valuation allowance of $68.9 million was provided against this asset resulting in deferred assets, net of valuation allowance of $0.

 

As of December 31, 2023, the Company and Ondas Networks had Federal NOLs of approximately $1 million and $15 million, respectively, generated in 2007 to 2017 which will begin to expire in 2027 through 2037. Additionally, as of December 31, 2023, the Company and Ondas Networks had Federal NOLs of $59 million and $50 million, respectively, generated in 2018 through 2023 that have no expiration. As of December 31, 2023, the Company and Ondas Networks had State NOLs available to offset future taxable income of $43 million and $92 million, respectively, expiring from 2038 through 2043. As of December 31, 2023, the Company had approximately $127 million of Israeli NOL’s. The Company’s Federal income tax returns for the 2020 to 2022 tax years remain open to examination by the IRS. Upon utilization of Federal NOLs in the future, the IRS may examine records from the year the loss occurred, even if outside the three-year statute of limitations. The Company’s State tax returns also remain open to examination. The Company’s Israeli income tax returns for the 2019 to 2022 tax years remain open to examination.

 

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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.

 

The Company applies the FASB’s provisions for uncertain tax positions. The Company utilizes the two-step process to determine the amount of recognized tax benefit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the Consolidated Financial Statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties associated with uncertain tax positions as a component of income tax expense.

 

As of September 30, 2024 and December 31, 2023, 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 14 – RELATED PARTY TRANSACTIONS

 

As of September 30, 2024 and December 31, 2023, the Company owed $37,500 and $22,500 to independent directors, respectively, related to accrued compensation, which is included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.

 

Networks Convertible Notes (See Note 8 – Notes Payable)

 

On July 8, 2024 and July 23, 2024, C&P elected to purchase Convertible Notes in the aggregate original principal amount of $700,000 and $800,000, respectively, (the “Networks Convertible Notes”). Joseph Popolo, a director of the Company, is the sole control person of C&P.

 

As of September 30, 2024, the total outstanding principal on the Networks Convertible Notes was $1,486,847, net of issuance costs of $13,153. Accrued interest as of September 30, 2024 was $18,493 and is included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2024, we recognized interest expense of $18,493 and amortization expense of $3,979 related to the issuance costs. Interest expense and amortization expense related to issuance costs are included in Interest expense on the Condensed Consolidated Statements of Operations. No principal or interest has been paid since the Networks Convertible Notes were issued.

 

Networks Secured Note (See Note 8 – Notes Payable)

 

On September 3, 2024, Networks entered into a Security Note Agreement (the “Security Agreement”) with C&P, in which Networks may draw, and C&P shall loan Networks, up to $1,500,000. Pursuant to the Security Agreement, Networks issued C&P a secured note in the amount of $1,500,000, which amount may be increased or decreased by the mutual written agreement of the parties thereto (the “Networks Secured Note”). As of September 30, 2024, Networks has drawn a total of $1,450,000 on the Networks Secured Note. Pursuant to the Agreement, Networks issued C&P 24,207 warrants to purchase $1,000,000 in shares of preferred stock of Networks, $0.00001 par value per share, at an exercise price of $20.65 per share, valued at $589,924. The warrants are exercisable commencing September 3, 2024 through September 3, 2029. Joseph Popolo, a director of the Company, is the sole control person of C&P.

 

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As of September 30, 2024, the total outstanding principal on the Networks Secured Notes was $891,215, net of debt discount of $497,646 and issuance costs of $61,139. Accrued interest as of September 30, 2024 was $7,255 and is included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. No principal or interest has been paid since the Networks Secured Note was issued.

 

Sale of Common Stock in Ondas Holdings and Warrants to Purchase Common Stock of OAS (See Note 9 – Stockholders’ Equity)

 

On February 26, 2024, the Company completed a direct registered offering with certain purchasers with respect to the sale of (i) an aggregate of 3,616,071 shares Common Stock of the Company and (ii) warrants to purchase an aggregate of 3,616,071 shares of OAS’s common stock $0.0001 par value per share, at an exercise price of $1.29 for gross proceeds of $4,050,000 (the “2024 Direct Registered Offering”). See Note 9 – Stockholders’ Equity, Sale of Common Stock in Ondas Holdings and Warrants to Purchase Common Stock of OAS, for further details. In connection with the 2024 Direct Registered Offering, C&P paid $2,000,000 for 1,785,714 shares of Common Stock of the Company and warrants to purchase 1,785,714 shares of OAS common stock. Joseph Popolo, a director of the Company, is the sole control person of C&P.

 

Networks Series A-1 Preferred Stock (See Note 10 – Redeemable Noncontrolling Interest)

 

On July 21, 2023 and August 11, 2023, Ondas Networks completed the first and second tranche of a private placement with Stage 1 Growth Fund LLC (Series WAVE, Class A) (the “SPV”), respectively. See Note 10 – Redeemable Noncontrolling Interest, Networks Series A-1 Preferred Stock, for further details.

 

C&P is the proxy for the members of the SPV, and the manager of the SPV must act in accordance with C&P’s direction with respect to exercise and voting of the issuer’s securities and derivative securities held by the SPV. Joseph Popolo, a director of the Company, is the sole control person of C&P.

 

Networks Series A-2 Preferred Stock (See Note 10 – Redeemable Noncontrolling Interest)

 

On February 26, 2024, Ondas Networks completed a private placement with certain purchasers with respect to the sale of (i) 108,925 shares of preferred stock of Ondas Networks, $0.00001 par value per share (“Networks Preferred Stock”), at a purchase price of $41.3104 per share convertible into shares of Networks Common Stock and (ii) warrants to purchase 3,015,000 shares of Common Stock of the Company, at an exercise price of $1.26 per share for gross proceeds to Ondas Networks of $4,500,000 (the “2024 Private Placement”). See Note 10 – Redeemable Noncontrolling Interest, Networks Series A-2 Preferred Stock, for further details. In connection with the 2024 Private Placement, C&P paid $250,000 for 6,051 shares of Networks Preferred Stock and warrants to purchase 167,500 shares of Common Stock of the Company. Joseph Popolo, a director of the Company, is the sole control person of C&P.

 

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NOTE 15 – SUBSEQUENT EVENTS 

 

Management has evaluated subsequent events as of November 12, 2024, the date the unaudited Condensed Consolidated Financial Statements were issued according to the requirements of ASC topic 855.

 

Subsequent to September 30, 2024, the Company issued 1,995,248 shares as a result of Installment Conversions on the 2022 Convertible Exchange Notes.

 

Subsequent to September 30, 2024, Networks drew the remaining $50,000 available under the Networks Secured Note. (See Note 8 – Notes Payable for further details).

 

On November 9, 2024, we entered into an agreement with Klear Inc., which provides for financing of accounts receivable, and we have financed approximately $500,000 so far at Ondas Networks.

 

Additional Government Grant

 

On November 7, 2024, Airobotics was awarded additional grant proceeds of approximately $1,000,000 from the IIA to support further enhancements of the Iron Drone Raider™, receivable over the next twelve months.

 

Additional Warrants to Purchase Preferred Stock of Networks

 

On October 7, 2024, in connection with the Networks Secured Note, pursuant to the Agreement, Networks issued C&P a warrant to purchase $500,000 in shares of preferred stock of Networks, $0.00001 par value per share, at an exercise price of $20.65 per share. The number of warrants exercisable under the Agreement is calculated by $500,000 divided by the Conversion Price, which is the amount equal to the price per share of Networks’ most senior series of Preferred Stock issued to investors in Networks’ next equity financing date, or if none, then $41.3104. The warrants are exercisable commencing October 7, 2024 through October 7, 2029. The Company engaged a third-party service provider to carry out an appraisal of the warrants, who ran a Black-Scholes Model to determine the fair value of the warrants as of October 7, 2024, which was $294,950. The fair value of the warrants will be recorded as debt discount. (See Note 8 – Notes Payable for further details).

 

OAS Convertible Notes

 

On October 10, 2024, OAS entered into a Securities Purchase Agreement (the “OAS SPA”), for an aggregate investment of $3,500,000 in OAS. The OAS SPA was entered into by and among OAS and a private investor group, including (i) Privet Ventures LLC, an entity affiliated with Eric Brock, Chairman and Chief Executive Officer of the Company and OAS, and (ii) C&P, an entity affiliated with Joseph Popolo, a director of the Company, for the sale of convertible promissory notes in the aggregate amount of $3,500,000 (the “OAS Notes”). The OAS Notes will (i) bear an interest rate of 5% per annum, (ii) have a maturity date of September 30, 2025, and (iii) be convertible into equity securities of OAS upon the closing of the next equity financing, if it occurs prior to the maturity date.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

General

 

The following discussion and analysis provide information which our management believes to be relevant to an assessment and understanding of the results of operations and financial condition of Ondas Holdings Inc. (“Ondas,” “we” or the “Company”). This discussion should be read together with our unaudited Condensed Consolidated Financial Statements and the notes included therein, which are included in this Quarterly Report on Form 10-Q (the “Report”). This information should also be read in conjunction with the information contained in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2024, including the audited consolidated financial statements and notes included therein as of and for the year ended December 31, 2023 (“2023 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. For a description of factors that may cause our actual results to differ materially from those anticipated in these forward-looking statements, please refer to the below section of this Report titled “Cautionary Note Regarding Forward-Looking Statements.” The reported results will not necessarily reflect future results of operations or financial condition.

 

Overview

 

Ondas Holdings Inc. (“Ondas Holdings,” “Ondas,” the “Company,” “we” or “our”) is a leading provider of private wireless, drone, and automated data solutions through its subsidiaries Ondas Networks Inc., a Texas corporation (“Ondas Networks”) and Ondas Autonomous Systems Inc., a Nevada corporation (“OAS”), which wholly-owns Airobotics, Ltd., an Israeli company (“Airobotics”), and American Robotics, Inc., a Delaware corporation (“Amer