The accompanying footnotes are an integral
part of these condensed consolidated financial statements.
The accompanying footnotes are an integral
part of these condensed consolidated financial statements.
The accompanying footnotes are an integral
part of these condensed consolidated financial statements.
The accompanying footnotes are an integral
part of these condensed consolidated financial statements.
The accompanying footnotes are an integral
part of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION
OF BUSINESS AND BASIS OF PRESENTATION
The Company
Ondas
Holdings Inc. (the "Company") was originally incorporated in Nevada on December 22, 2014 under the name of Zev Ventures
Incorporated. On September 28, 2018, we closed the Acquisition (see below), changed our name to Ondas Holdings Inc., and Ondas
Networks Inc., a Delaware corporation ("Ondas Networks"), became our sole focus and wholly owned subsidiary. The corporate
headquarters for Ondas Holdings Inc. and operational headquarters for Ondas Networks Inc. is located in Sunnyvale, California.
Unless otherwise stated or unless the context otherwise requires, the description of our business set forth below is provided on
a combined basis, taking into account our subsidiary, Ondas Networks. Ondas Networks was originally incorporated in Delaware on
February 16, 2006 under the name of Full Spectrum Inc. On August 10, 2018, the name was changed to Ondas Networks Inc.
Ondas Networks’
wireless networking products are applicable to a wide range of mission critical functions that require secure communications over
large geographic areas. We provide 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).
We design, develop,
manufacture, sell and support FullMAX, our multi-patented, state-of-the-art, point-to-multipoint, Software Defined Radio (SDR)
system for secure, licensed, private, wide-area broadband networks. Our customers purchase FullMAX system solutions to deploy wide-area
intelligent networks (WANs) for smart grids, smart pipes, smart fields and any other mission critical network that needs internet
protocol connectivity. We intend to sell our products and services globally through a direct sales force and value-added sales
partners to critical infrastructure providers including electric utilities, water and wastewater utilities, oil and gas producers,
and for other critical infrastructure applications in areas such as homeland security and defense, and transportation.
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 business consists
of a single segment of products and services all of which are sold and provided in the United States and certain international
markets.
The Acquisition
On
September 28, 2018, we entered into the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with
Zev Merger Sub, Inc. and Ondas Networks to acquire Ondas Networks. The transactions contemplated by the Merger Agreement were consummated
on September 28, 2018 (the “Closing”), and pursuant to the terms of the Merger Agreement, all outstanding shares of
common stock of Ondas Networks, $0.00001 par value per share, (the “Ondas Networks Share(s)”), were exchanged for shares
of our common stock, $0.0001 par value per share (the “Company Shares”). Accordingly, Ondas Networks became our wholly-owned
subsidiary and its business became the business of the Company.
At
the Closing, each Ondas Networks Share outstanding immediately prior to the Closing was converted into 3.823 Company Shares (the
“Exchange Ratio”), with all fractional shares rounded down to the nearest whole share. Accordingly, we issued an aggregate
of 25,463,732 Company Shares for all of the then-outstanding Ondas Networks Shares.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In connection with
the Closing, we amended and restated our articles of incorporation, effective September 28, 2018 to (i) change our name to Ondas
Holdings Inc. and (ii) increase our authorized capital to 360,000,000 shares, consisting of 350,000,000 shares of common stock,
par value $0.0001 per share, and 10,000,000 shares of “blank check” preferred stock, par value $0.0001 per share. In
connection with the Acquisition, our trading symbol changed to “ONDS” effective at the opening of business on October
5, 2018.
Also in connection
with the Closing, (i) our sole director appointed additional individuals, who previously were members of the board of directors
of Ondas Networks and its chief executive officer, to serve on our board of directors, and our board of directors subsequently
appointed executive officers; (ii) the former holders of the Ondas Networks Shares executed lock-up agreements (the “Lock-Up
Agreements”), which provide for an initial 12-month lock-up period followed by a subsequent 12-month limited sale period,
commencing with the date of the Closing; (iii) we entered into a Common Stock Repurchase Agreement with Energy Capital, LLC, a
current stockholder of the Company ("Energy Capital"), pursuant to which the entity sold an aggregate of 32.6 million
Company Shares (the “Repurchase Shares”) to us at $0.0001 per share, for an aggregate consideration of $3,260. The
Repurchase Shares were canceled and returned to our authorized but unissued shares; (iv) our board of directors approved, and our
stockholders adopted, the 2018 Incentive Stock Plan (the “2018 Plan”) pursuant to which 10 million Company Shares has
been reserved for issuance to employees, including officers, directors and consultants; and (v) we entered into a Loan and Security
Agreement with Energy Capital, pursuant to which Energy Capital agreed to lend us an aggregate principal amount of up to $10 million,
subject to specified conditions.
In accordance with
ASC 805-40,
Reverse Acquisitions
, the historical capital stock account of Ondas Networks immediately prior to the Closing
was carried forward and retroactively adjusted to reflect the par value of the outstanding stock of the Company, including the
number of shares issued in the Closing as we are the surviving legal entity. Additionally, retained earnings of Ondas Networks
have been carried forward after the Closing. All share and per share amounts in the condensed consolidated financial statements
and related notes have been retrospectively adjusted to reflect the one for 3.823 exchange of shares of common stock in connection
with the Acquisition.
Liquidity
We have incurred losses
since inception and have funded our operations primarily through debt and the sale of capital stock. At March 31, 2019, we had
an accumulated deficit of approximately $38,200,000 and short-term borrowings outstanding of approximately $14,100,000, of which
approximately $4,000,000, is due on June 30, 2019 and approximately $10,100,000 is due on September 9, 2019. At March 31, 2019
we had long-term borrowings outstanding of $4,400,000. As of March 31, 2019, we had cash and cash equivalents of approximately
$400,000 and a working capital deficit of approximately $17,200,000.
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.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Our
ability to generate revenue and achieve profitability depends on our completion of our second-generation products and commencing
the manufacture, marketing and sales of those products. These activities, including our planned research and development efforts,
will require significant uses of working capital through the end of 2019 and beyond. Based on our current operating plans, we believe
that our existing cash and cash equivalents, as well as the $5.9 million in borrowings available under the Energy Capital Loan
and Security Agreement (see NOTE 8 for additional details), will be sufficient to meet our anticipated operating needs through
June 30, 2019. We currently do not have sufficient funds to repay certain debt obligations totaling approximately $4 million on
maturity on June 30, 2019 and must secure additional equity or debt capital in order to repay those obligations. At the present
time we have no commitments for any such funding and no assurance can be provided that we will be able to raise the needed funds
on commercially acceptable terms or at all. These factors raise substantial doubt about our ability to continue as a going concern
through May 10, 2020. The financial information contained in these financial statements have been prepared on a basis that assumes
that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. This financial information and these financial statements do not include any adjustments
that may result from the outcome of this uncertainty.
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, 2018 (“2018 Form 10-K”).
The Company’s accounting policies are described in the “
Notes to Consolidated Financial Statements
” in
the 2018 Form 10-K and are updated, as necessary, in this Form 10-Q. The year-end condensed consolidated balance sheet data presented
for comparative purposes was derived from the audited financial statements but does not include all disclosures required by U.S.
GAAP. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the operating results
for the full year or for any other subsequent interim period.
Principles
of Consolidation
The consolidated financial
statements include the accounts of the Company and our wholly owned subsidiaries Ondas Networks and FS Partners (FS Partners has
not begun operations) and our majority owned subsidiaries, Full Spectrum Holding and Ondas Network Limited (both have not begun
operations). All significant inter-company accounts and transactions between these entities have been eliminated in these condensed
consolidated financial statements.
Use
of Estimates
The process of preparing
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements. Such management
estimates include those relating to revenue recognition, inventory write-downs to reflect net realizable value, assumptions used
in the valuation of stock-based awards and warrants, and valuation allowances against deferred tax assets. Actual results could
differ from those estimates.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Inventory
Inventories, which
consist solely of equipment components, 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 March 31, 2019 and December 31, 2018, we determined that no such reserves were necessary.
Inventory consist
of the following:
|
|
March
31,
2019
|
|
|
December
31,
2018
|
|
Raw Material
|
|
$
|
321,598
|
|
|
$
|
307,947
|
|
Finished Goods
|
|
|
33,830
|
|
|
|
39,998
|
|
TOTAL INVENTORY
|
|
$
|
355,428
|
|
|
$
|
347,945
|
|
Stock-Based Compensation
The Company follows
the fair value recognition provisions in ASC 718,
Stock Compensation
(“ASC 718”) and the provisions of ASC
505 (“ASC 505”) for stock-based transactions with non-employees. Stock based compensation expense recognized during
the year includes compensation expense for all share-based payments based on a grant date fair value estimated in accordance with
the provisions in the FASB guidance for stock compensation. The grant date is the date at which an employer and employee reach
a mutual understanding of the key terms and conditions of a share-based payment award.
Fair Value of Financial Instruments
Our financial instruments
consist primarily of receivables, accounts payable, accrued expenses and short and long-term debt. The carrying amount of receivables,
accounts payable and accrued expenses approximates fair value because of the short-term maturity of such instruments. We have elected
not to carry our debt instruments at fair value. The carrying amount of our debt approximates fair value. Interest rates that are
currently available to us for issuance of short and long-term debt with similar terms and remaining maturities are used to estimate
the fair value of our short and long-term debt.
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.
At March 31, 2019 and
December 31, 2018, we had no instruments requiring a fair value determination.
The following table
provides a summary of changes in fair value associated with the Level 3 liabilities for three months ended March 31, 2019 and for
the year ended December 31, 2018:
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
Three Months
Ended
March 31, 2019
|
|
|
Year ended
December 31,
2018
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
-
|
|
|
$
|
(166,093
|
)
|
Issuances of derivative liability
|
|
|
-
|
|
|
|
-
|
|
Reclassification to additional paid in capital
|
|
|
-
|
|
|
|
1,141,995
|
|
Change in fair value of derivative liability
|
|
|
-
|
|
|
|
(975,902
|
)
|
Balance, end of period
|
|
$
|
-
|
|
|
$
|
-
|
|
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The above table of
Level 3 liabilities begins with the prior period balance and adjusts the balance for changes that occurred during the current period.
The ending balance of the Level 3 financial instrument presented above represent our best estimates and may not be substantiated
by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.
Deferred Offering Costs
The Company capitalizes
certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings
as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded
in stockholders’ deficit as a reduction of additional paid-in capital generated as a result of the offering. Should a planned
equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the
consolidated statement of operations.
Debt Issuance Costs
Debt issuance
costs represent costs incurred for the issuance of debt. Once the associated debt instrument is issued, these costs would be
recorded as a debt discount and amortized using the effective interest method over the term of the related debt instrument.
Upon abandonment of a pending financing transaction, the related deferred financing costs are charged to interest expense. In
accordance with this policy during the three months ended March 31, 2019, the Company expensed $150,000 of financing costs in
accordance with this policy.
Foreign Currency
Our functional currency
is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency for each foreign
subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect
at the applicable reporting date. Our condensed consolidated statements of income are translated at the weighted average rate of
exchange during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of
accumulated other comprehensive income (loss) in stockholders’ equity. Realized and unrealized transaction gains and losses
generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded
in other income (loss) in the period in which they occur.
ASC 606, Revenue from Contracts with Customers
On January 1, 2018,
we adopted ASC 606
, Revenue from Contracts with Customers
(“ASC 606”), using the modified retrospective method
with respect to all non-completed contracts. ASC 606 outlines a single comprehensive model for entities to use in accounting for
revenue arising from contracts with customers and supersedes nearly all existing revenue recognition guidance, including industry-specific
guidance. The new guidance is based on the principle that an entity should recognize revenue to depict the transfer of products
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those products or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgment and changes in judgments and assets recognized
from costs incurred to fulfill a contract. The adoption of ASC 606 did not have a material effect on our financial position, results
of operations, or internal controls over financial reporting.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Under ASC 606, the
Company recognizes revenue when the customer obtains control of promised products or services, in an amount that reflects the consideration
which is expected to be received in exchange for those products or services. The Company recognizes revenue following the five-step
model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and
(v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model
to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the products
or services it transfers to the customer.
At contract inception,
once the contract is determined to be within the scope of ASC 606, the Company assesses the products or services promised within
each contract and determines those that are performance obligations and assesses whether each promised product or service is distinct.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation
when (or as) the performance obligation is satisfied. To the extent the transaction price includes variable consideration, we estimate
the amount of variable consideration that should be included in the transaction price utilizing the expected value method. Variable
consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative
revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated
amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical,
current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are
excluded from revenue. For the three months ended March 31, 2019 and 2018, none of our contracts with customers included variable
consideration.
Contracts that are
modified to account for changes in contract specifications and requirements are assessed to determine if the modification either
creates new or changes the existing enforceable rights and obligations. Generally, contract modifications are for products or services
that are not distinct from the existing contract due to the inability to use, consume or sell the products or services on their
own to generate economic benefits and are accounted for as if they were part of that existing contract. The effect of a contract
modification on the transaction price and measure of progress for the performance obligation to which it relates, is recognized
as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. For the three
months ended March 31, 2019 and 2018, there were no modifications to contract specifications.
The Company is engaged
in the development, marketing and sale of wireless radio systems for secure, wide area mission-critical business-to-business networks.
We generate revenue primarily from the sale of the FullMAX System and the delivery of related services.
Product revenue is
comprised of sales of the Company’s software defined base station and remote radios, its network management and monitoring
system, and accessories. The Company’s software and hardware is sold with a limited one-year basic warranty included in the
price. The limited one-year basic warranty is an assurance-type warranty, is not a separate performance obligation, and thus no
transaction price is allocated to it. The nature of tasks under the limited one-year basic warranty only provide for remedying
defective product(s) covered by the warranty. Product revenue is generally recognized when the customer obtains control of our
product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of
a contract, or upon installation when the combined performance obligation is not distinct within the context of the contract.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Service revenue is
comprised of separately priced extended warranty sales, network support and maintenance, remote monitoring, as well as ancillary
services directly related to the sale of the Company’s wireless communications products including wireless network design,
systems engineering, radio frequency planning, software configuration, product training, installation, and onsite support. The
extended warranty sold by the Company provides a level of assurance beyond the coverage for defects that existed at the time of
a sale or against certain types of covered damage. The extended warranty includes 1) factory hardware repair or replacement, at
our election, of the base station and remote radios, 2) software upgrades, bug fixes and new features of the radio software and
NMS, 3) deployment and network architecture support, and 4) technical support by phone and email. Extended warranty, network support
and maintenance, and remote monitoring revenues are recognized ratably over the term of the service contract. 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.
If the customer contract
contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. We enter
into certain contracts that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery
of other performance obligations. We allocate the transaction price based on the estimated relative standalone selling prices of
the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price
at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions,
we estimate the standalone selling price considering available information such as market conditions and internally approved pricing
guidelines related to the performance obligations. Revenue is then allocated to the performance obligations using the relative
selling prices of each of the performance obligations in the contract.
Our payment terms vary
and range from Net 15 to Net 30 days from the date of the invoices.
Disaggregation of Revenue
The following tables present our disaggregated
revenues by Type of Revenue and Timing of Revenue:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Type of Revenue
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
12,963
|
|
|
$
|
-
|
|
Service revenue
|
|
|
19,331
|
|
|
|
29,382
|
|
Total revenue
|
|
$
|
32,294
|
|
|
$
|
29,382
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Timing of Revenue
|
|
|
|
|
|
|
|
|
Revenue recognized point in time
|
|
$
|
18,307
|
|
|
$
|
4,967
|
|
Revenue recognized over time
|
|
|
13,987
|
|
|
|
24,415
|
|
Total
|
|
$
|
32,294
|
|
|
$
|
29,382
|
|
Contract Assets and Liabilities
We recognize a receivable
or contract asset when we perform a service or transfer a good in advance of receiving consideration. A receivable is recorded
when our right to consideration is unconditional and only the passage of time is required before payment of that consideration
is due. A contract asset is recorded when our right to consideration in exchange for good or services that we have transferred
to a customer is conditional on something other than the passage of time. We did not have any contract assets recorded at March
31, 2019.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 three months ended March 31, 2019, and the balance at March 31, 2019 and is included in other current liabilities
the Company’s condensed consolidated balance sheet.
|
|
Three Months
Ended
March 31,
2019
|
|
Balance at beginning of period
|
|
$
|
20,631
|
|
Additions
|
|
|
20,826
|
|
Transfer to revenue
|
|
|
(13,987
|
)
|
Balance at end of period
|
|
$
|
27,470
|
|
Warranty Reserve
We provide a limited
one-year assurance-type warranty on our software and hardware products. The assurance-type warranty covers defects in material
and workmanship only. If a warranted software or hardware component is determined to be defective after being tested by the Company,
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 at March 31, 2019 is immaterial to the Company’s financial
statements.
Accounting Standard Update 2016-02,
Leases
Under Topic 842,
operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily
consisting of office space with remaining lease terms of 21 months to 50 months. Current facility leases include our offices
in Sunnyvale, CA and Chengdu, Sichuan Province, People’s Republic of China. Lease costs were $160,802 for the three
months ended March 31, 2019. There was no sublease rental income for the three months ended March 31, 2019.
Leases with an initial
term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the
adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right of use (“ROU”)
assets.
Our lease agreements
generally do not provide an implicit borrowing rate, therefore an internal incremental borrowing rate is determined based on information
available at lease commencement date for purposes of determining the present value of lease payments. We used the incremental borrowing
rate on December 31, 2018 for all leases that commenced prior to that date.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Lease Costs
|
|
Three Months
Ended
March 31, 2019
|
|
Components of total lease costs:
|
|
|
|
|
Operating lease expense
|
|
$
|
148,085
|
|
Short-term lease costs
(1)
|
|
|
12,717
|
|
Total lease costs
|
|
$
|
160,802
|
|
(1)
Represents short-term leases
which are immaterial.
Lease Positions as of March 31, 2019
ROU lease assets and
lease liabilities for our operating leases were recorded in the condensed consolidated balance sheet as follows:
|
|
March 31, 2019
|
|
Assets
|
|
|
|
|
Other assets
|
|
$
|
875,873
|
|
Total assets
|
|
$
|
875,873
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating lease liabilities
|
|
$
|
550,467
|
|
Operating lease liabilities,
net of current
|
|
|
705,859
|
|
Total lease liability
|
|
$
|
1,256,326
|
|
Lease Terms and Discount Rate
Weighted average remaining lease term (in years) – operating lease
|
|
|
2.77
|
|
Weighted average discount rate – operating lease
|
|
|
14
|
%
|
Cash Flows
|
|
Three Months
Ended
March 31,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
77,164
|
|
Supplemental non-cash amounts of lease liabilities arising from obtaining
|
|
|
|
|
ROU assets
|
|
$
|
1,315,161
|
|
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Undiscounted Cash Flows
Future lease payments
included in the measurement of lease liabilities on the condensed consolidated balance sheet as of March 31, 2019, for the following
five years and thereafter are as follows:
Years ending December 31,
|
|
|
|
2019 (9 months)
|
|
$
|
492,937
|
|
2020
|
|
|
645,248
|
|
2021
|
|
|
173,545
|
|
2022
|
|
|
116,392
|
|
2023
|
|
|
67,895
|
|
Total future minimum lease payments
|
|
|
1,496,017
|
|
Lease imputed interest
|
|
|
239,691
|
|
Total
|
|
$
|
1,256,326
|
|
At March 31, 2019,
one of our long-term operating leases was abandoned and the likelihood of entering into a sublease agreement for the property was
minimal, therefore, the Right to Use Asset value of $259,926 was considered impaired and the amount was charged to asset impairment
on the accompanying condensed consolidated financial statements.
Net Loss Per Common Share
Net loss per share
for all periods presented is based on the equity structure of the legal acquirer, which assumes common stock is outstanding and
is reflected on a retrospective basis for all periods presented. Basic net loss per share is computed by dividing net loss by the
weighted average shares of common stock outstanding for each period. Diluted net loss per share is the same as basic net loss per
share since the Company has net losses for each period presented.
Potentially dilutive
securities related to convertible debt for the three months ended March 31, 2019 and 2018 totaled 140,678 and 1,541,485, respectively,
and have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been
anti-dilutive.
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. During the three months ended March 31, 2019, two customers accounted for approximately $25,700 and $5,600
of our revenue or 80% and 17%, respectively. No other customers provided more than 10% of our revenue during the three months ended
March 31, 2019. During the three months ended March 31, 2018, two customers accounted for approximately $19,000 and $6,800 of our
revenue or 65% and 23%, respectively. No other customers provided more than 10% of our revenue during the three months ended March
31, 2018.
Recent Accounting Pronouncements
In
August 2018, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”),
2018-13 that eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities
to disclose certain new information and modifies some disclosure requirements. The FASB developed the amendments to Accounting
Standards Codification (“ASC”) 820 as part of its broader disclosure framework project, which aims to improve the effectiveness
of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information
to users of the financial statements. The new guidance is effective for all entities for fiscal years beginning after December
15, 2019 and for interim periods within those fiscal years. An entity is permitted to early adopt either the entire standard or
only the provisions that eliminate or modify requirements. We are currently evaluating the effect of this guidance on our disclosures.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In June 2018, the
FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting (“ASU 2018-07”). The amendments in ASU 2018-07 expand the scope of Topic 718 to include share-based
payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company has elected
to early adopt ASU 2018-07 effective as of October 1, 2018.
In July 2017, the FASB
issued ASU 2017-11 (“ASU 2017-11”), Earnings Per Share (“Topic 260”),
Distinguishing Liabilities from
Equity
(“Topic 480”), and
Derivatives and Hedging
(“Topic 815”). ASU 2017-11 is intended to
simplify the accounting for financial instruments with characteristics of liabilities and equity. Among the issues addressed are:
(i) determining whether an instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing liabilities
from equity for mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily redeemable
non-controlling interests. ASU 2017-11 is effective for the Company on January 1, 2019. The adoption of this pronouncement had
no impact on our accompanying condensed consolidated financial statements.
NOTE 3 – OTHER CURRENT ASSETS
Other current assets
consist of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Advances for raw material purchases
|
|
$
|
201,105
|
|
|
$
|
-
|
|
Prepaid marketing costs
|
|
|
79,600
|
|
|
|
125,525
|
|
Other prepaid expenses
|
|
|
71,822
|
|
|
|
40,654
|
|
Prepaid insurance
|
|
|
43,018
|
|
|
|
102,743
|
|
Deposits
|
|
|
31,965
|
|
|
|
31,965
|
|
Miscellaneous receivables
|
|
|
3,080
|
|
|
|
44,294
|
|
Prepaid financing costs
|
|
|
-
|
|
|
|
188,300
|
|
TOTAL OTHER CURRENT ASSETS
|
|
$
|
430,590
|
|
|
$
|
533,481
|
|
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment
consist of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Leasehold improvements
|
|
$
|
267,779
|
|
|
$
|
256,920
|
|
Vehicle
|
|
|
149,916
|
|
|
|
143,560
|
|
Furniture and fixtures
|
|
|
134,872
|
|
|
|
132,088
|
|
Computer Equipment
|
|
|
108,435
|
|
|
|
87,087
|
|
Software
|
|
|
61,287
|
|
|
|
61,287
|
|
Test Equipment
|
|
|
5,059
|
|
|
|
-
|
|
|
|
|
727,348
|
|
|
|
680,942
|
|
Less: accumulated depreciation
|
|
|
(211,497
|
)
|
|
|
(178,796
|
)
|
TOTAL PROPERTY AND EQUIPMENT
|
|
$
|
515,851
|
|
|
$
|
502,146
|
|
Depreciation expense
for the three months ended March 31, 2019 and 2018 was $32,701 and $2,635, respectively.
NOTE 5 – INTANGIBLE ASSETS
Our intangible assets
include patent costs totaling $86,796 less amortization of patent costs of $310 at March 31, 2019. Our intangible assets include
patent costs totaling $53,482 less amortization of patent costs of $194 at December 31, 2018.
Estimated amortization
expense for the next five years for the patent cost currently being amortized is as follows:
Year Ending
December 31,
|
|
Estimated
Amortization
|
|
2019(9 months)
|
|
$
|
349
|
|
2020
|
|
$
|
465
|
|
2021
|
|
$
|
465
|
|
2022
|
|
$
|
465
|
|
2023
|
|
$
|
465
|
|
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6 – OTHER CURRENT LIABILITIES
Accrued expenses and
other current liabilities consist of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Accrued payroll and other benefits
|
|
$
|
1,642,775
|
|
|
$
|
1,659,577
|
|
Accrued professional fees
|
|
|
167,826
|
|
|
|
126,384
|
|
Accrued interest
|
|
|
188,013
|
|
|
|
138,605
|
|
Accrued rent and facilities costs
|
|
|
99,965
|
|
|
|
160,544
|
|
Deferred revenue
|
|
|
27,470
|
|
|
|
20,631
|
|
Other accrued expenses
|
|
|
21,704
|
|
|
|
30,000
|
|
D&O insurance financing payable
|
|
|
-
|
|
|
|
52,530
|
|
TOTAL OTHER CURRENT LIABILITIES
|
|
$
|
2,147,753
|
|
|
$
|
2,188,271
|
|
NOTE 7 – NOTES PAYABLE AND OTHER FINANCING AGREEMENTS
Loan Agreements
In October 2007, Ondas
Networks entered into a 6% per annum loan agreement, as amended, with an entity in the amount of $550,000 in connection with the
issuance of common stock of Ondas Networks (the “October 2007 Loan”); however, the October 2007 Loan was not memorialized.
The original maturity date of the October 2007 Loan was September 30, 2011. On February 11, 2016, the entity and Ondas Networks
entered into a Loan Amendment to amend the October 2007 Loan to (i) extend the maturity date to April 1, 2017 and (ii) clear and
waive any existing defaults. On November 30, 2017, the entity and Ondas Networks entered into a Loan Modification Agreement to
further amend the October 2007 Loan to (i) transfer all accrued and unpaid interest ($17,310) as of December 31, 2017 to principal
in January 2018, (ii) extend the maturity date to December 31, 2018, (iii) clear and waive any existing defaults, and (iv) amend
the interest rate to 10% per annum effective January 1, 2018. On October 1, 2018, the entity entered into an Assignment and Assumption
Agreement to assign all of its rights and obligations including all principal and interest owing under the October 2007 Loan to
an unaffiliated third party. On March 30, 2019, Ondas Networks entered into an Amendment to further amend the October 2007 Loan
to transfer all accrued and unpaid interest through March 30, 2019 in the amount of $14,183 to principal and to extend the maturity
date to June 30, 2019. At March 31, 2019 and December 31, 2018, the outstanding balance of the October 2007 Loan was $581,493 and
$567,310, respectively.
On December 31, 2013,
Ondas Networks entered into a 10% per annum Promissory Note, as amended, with an entity in the amount of $250,000, of which $25,000
was repaid in February 2015 (the "December 2013 Note"). The original maturity of the December 2013 Note was December
31, 2014. On November 1, 2014, Ondas Networks entered into a Loan Agreement, as amended, with the same entity in the amount of
$210,000. (the “November 2014 Loan”). The original maturity of the November 2014 Loan was March 16, 2015. The interest
through the original maturity date of the November 2014 Loan was a fixed amount of $16,800. Subsequent to the original maturity
date, the November 2014 Loan accrued interest at a rate of 18% per annum. On September 15, 2015, Ondas Networks and the entity
verbally agreed to amend the November 2014 Loan to decrease the interest rate to 10% per annum. On April 1, 2016, the entity and
Ondas Networks entered into a Loan Amendment to amend the December 2013 Note and November 2014 Loan to (i) extend the maturity
date to April 1, 2017, and (ii) clear and waive any existing defaults. On November 30, 2017, the entity and Ondas Networks entered
into a Loan Modification Agreement to further amend the December 2013 Note and November 2014 Loan to (i) transfer all accrued and
unpaid interest on the December 2013 Note and November 2014 Loan ($60,679 and $49,170, respectively, as of December 31, 2017) to
principal, (ii) extend the maturity dates to December 31, 2018, and (iii) clear and waive any existing defaults. On March 30, 2019,
Ondas Networks entered into an Amendment to further amend the December 2013 Note and November 2014 Loan to transfer all accrued
and unpaid interest through March 30, 2019 in the amount of $7,142 and $6,479, respectively, to principal and to extend the maturity
date to June 30, 2019. At March 31, 2019 and December 31, 2018, the outstanding balance of the December 2013 Note was $292,820
and $285,679, respectively. At March 31, 2019 and December 31, 2018, the outstanding balance of the November 2014 Loan was $265,649
and $259,170, respectively.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
On April 1, 2015, Ondas
Networks entered into a 10% per annum Loan Agreement, as amended, with two individuals in the amount of $50,000 (the “April
2015 Note”). The original maturity of the April 2015 Note was July 1, 2015. The accrued interest on the April 2015 Note through
the original maturity date was $4,000. Subsequent to the original maturity date, the April 2015 Note accrued interest at a rate
of 10% per annum. On February 11, 2016, the individuals and Ondas Networks entered into a Loan Amendment to amend the April 2015
Note to (i) extend the maturity date to April 1, 2017 and (ii) clear and waive any existing defaults. On November 30, 2017, the
individuals and Ondas Networks entered into a Loan Modification Agreement to further amend the April 2015 Note to (i) transfer
all accrued and unpaid interest ($16,511) as of December 31, 2017 to principal, (ii) extend the maturity date to December 31, 2018
and (iii) clear and waive any existing defaults. On March 30, 2019, Ondas Networks entered into an Amendment to further amend the
April 2015 Note to transfer all accrued and unpaid interest through March 30, 2019 in the amount of $1,663 to principal and to
extend the maturity date to June 30, 2019. At March 31, 2019 and December 31, 2018, the outstanding balance of the April 2015 Note
was $68,174 and $66,511, respectively.
Financing Agreement
On November 3, 2016,
Ondas Networks entered into a Purchase Order Financing Agreement with an accompanying 20% per annum Promissory Note, as amended,
with an individual in the amount of $250,000 (the “November 2016 Note”). The original maturity of the November 2016
Note was the earlier of the payment of the purchase order for which the loan was advanced or 180 days after issuance. On December
20, 2016, Ondas Networks entered into a second Purchase Order Financing Agreement with an accompanying 10% per annum Promissory
Note, as amended, with the same individual in the amount of $100,000 (the “December 2016 Note”). The original maturity
of the December 2016 Note was the earlier of the payment of the purchase order for which the loan was advanced or 180 days after
issuance. On November 30, 2017, the individual and Ondas Networks entered into a Loan Modification Agreement to amend the November
and December 2016 Notes to (i) transfer all accrued and unpaid interest on the November and December 2016 Notes ($47,000 and $5,591,
respectively) as of December 31, 2017 to principal, (ii) extend the maturity dates to December 31, 2018, and (iii) clear and waive
any existing defaults. On March 30, 2019, Ondas Networks entered into an Amendment to further amend the November and December 2016
Notes to transfer all accrued and unpaid interest through March 30, 2019 in the amount of $7,425 and $2,640, respectively. to principal
and to extend the maturity date to June 30, 2019. At March 31, 2019 and December 31, 2018, the outstanding balance of the November
2016 Note was $304,425 and $297,000, respectively. At March 31, 2019 and December 31, 2018, the outstanding balance of the December
2016 Note was $108,231 and $105,591, respectively.
On February 28, 2014,
Ondas Networks entered into a Purchase Order Financing Agreement, as amended, (the “Financing Agreement”) with an entity.
Interest on the Financing Agreement accrued at 30% per annum for the first 104 days and at 51% per annum thereafter. Between June
2014 and January 2015, Ondas Networks received an aggregate of $660,000 of which $285,000 was repaid. At December 31, 2015, the
principal outstanding totaled $375,000 and accrued interest totaled $223,393. During 2016, and for the period from January 1, 2017
through November 17, 2017, additional interest was accrued totaling $191,250 and $168,282, respectively. On November 17, 2017,
the entity and Ondas Networks entered into an Amendment to Purchase Order Financing Agreement and agreed to (i) transfer all accrued
and unpaid interest to principal, (ii) reduce the per annum interest rate to 10%, (iii) set the maturity date at December 31, 2018,
and (iv) combine the Purchase Order Financing Agreements into a single loan ("November 2017 Loan"). On March 30 and April
30, 2019, Ondas Networks entered into Amendments to further amend the February 2014 Financing Agreement to transfer all accrued
and unpaid interest through March 30 and April 30, 2019 in the amount of $23,948 and $8,182, respectively, to principal and to
extend the maturity date to April 30 and subsequently June 30, 2019. At March 31, 2019 and December 31, 2018, the outstanding balance
of the February 2014 Financing Agreement was $981,873 and $957,925, respectively.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Promissory Notes
On December 14, 2015,
Ondas Networks approved a private placement offering, as amended, ("Private Placement") seeking to sell to investors
certain 10% promissory notes in the aggregate face amount of $750,000, which amount was later increased to $1,250,000, with a term
of 18 months ("Private Placement Notes"). In connection with the Private Placement Notes, each investor (the "Private
Placement Noteholders") received warrants to purchase shares of common stock of Ondas Networks ("Private Placement Warrants"),
equal to 25% of the principal amount of the Private Placement Notes, exercisable at the lower of (i) $2.00 per share or (ii) 40%
of the selling price of Ondas Networks’ shares in its proposed initial public offering.
In December 2015, pursuant
to the terms of Security Purchase Agreements, Ondas Networks completed the sale of an aggregate of $325,000 in Private Placement
Notes to Private Placement Noteholders, of which $25,000 was repaid during 2017, and issued them Private Placement Warrants to
purchase an aggregate of 81,250 shares of common stock of Ondas Networks, with a term of ten years, at exercise price of $2.00
and a fair value of $63,398. As of January 1, 2018, the Private Placement Warrants for the 81,250 shares were surrendered to Ondas
Networks in exchange for participation in a private placement of Ondas Networks' shares dated April 13, 2018.
Between February and
July 2016, pursuant to the terms of Security Purchase Agreements, Ondas Networks completed the sale of an aggregate of $925,000
in Private Placement Notes to Private Placement Noteholders and issued them Private Placement Warrants to purchase an aggregate
of 231,250 shares of Ondas Networks common stock, with a term of ten years, an exercise price of $2.00 and a fair value of $168,678.
As of January 1, 2018, the Private Placement Warrants for the 231,250 shares of Ondas Networks of common stock was surrendered
to Ondas Networks in exchange for participation in a private placement of Ondas Networks' shares dated April 13, 2018.
On November 30, 2017,
the Private Placement Noteholders and Ondas Networks entered into Loan Modification Agreements to amend the Private Placement Notes
to (i) transfer all accrued and unpaid interest ($118,682) as of December 31, 2017 to principal, (ii) extend the maturity date
to December 31, 2018 and (iii) clear and waive any existing defaults.
On March 30, 2019,
Ondas Networks entered into Amendments to further amend the Private Placement Notes to transfer all accrued and unpaid interest
through March 30, 2019 in the amount of $33,592 to principal and to extend the maturity dates to June 30, 2019. At March 31, 2019
and December 31, 2018, the outstanding balances of the Private Placement Notes were $1,377,274 and $1,343,682, respectively.
Convertible Promissory Notes
During 2017, Ondas
Networks and certain entities and individuals entered into convertible promissory notes defined herein as (i) notes with mutual
conversion preferences (“Group 1 Notes”) and (ii) notes with unilateral conversion preferences (“Group 2 Notes”).
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
On July 11, 2018, the
Ondas Networks board of directors, by written consent, approved certain changes to the outstanding convertible promissory notes.
The action approved changes to the Group 2 Notes to match the Group 1 Notes and authorized the issuance of a Security Holder Consent
Agreement wherein each Group 2 Note holder would agree to the change. The changes modified the conversion option for the Group
2 Notes which resulted in a loss on extinguishment of debt in the amount of $44,348 and caused the derivative liability related
to the Group 2 Notes to cease to exist and be classified as additional paid in capital at its fair value on July 11, 2018 in the
amount of $1,141,995.
On September 28, 2018,
in conjunction with the Merger Agreement discussed in NOTE 1, the Group 1 Note noteholders and all but one Group 2 Note noteholders
converted their outstanding convertible promissory notes into an aggregate of 2,017,416 Company Shares. At both March 31, 2019
and December 31, 2018, the total outstanding balance of the remaining convertible promissory note (the “Note”) was
$300,000. The maturity date of the Note is based on the payment of 0.6% of quarterly gross revenue until 1.5 times the amount of
the Note is paid,
Notes payable and other
financing consists of:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Short Term:
|
|
|
|
|
|
|
|
|
Loan Agreements
|
|
$
|
1,208,136
|
|
|
$
|
1,178,670
|
|
Financing Agreement
|
|
|
1,394,530
|
|
|
|
1,360,516
|
|
Promissory Notes
|
|
|
1,377,274
|
|
|
|
1,343,682
|
|
|
|
$
|
3,979,940
|
|
|
$
|
3,882,868
|
|
|
|
|
|
|
|
|
|
|
Long Term:
|
|
|
|
|
|
|
|
|
Convertible Promissory Notes
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
NOTE 8 –SECURED PROMISSORY
NOTES
Steward Capital Holdings LP
On March 9, 2018, we
entered into a Loan and Security Agreement (the “Agreement”) with Steward Capital Holdings LP (the “Steward Capital”)
wherein Steward Capital made available to us a loan in the aggregate principal amount of up to $10,000,000 (the “Loan”).
On March 9, 2018, the Company and Steward Capital entered into a Secured Term Promissory Note for $5,000,000, having a maturity
date of September 9, 2019 (“Tranche A”). The Note bears interest at a per annum rate equal to the greater of (a) 11.25%
or (b) 11.25% plus the Prime Rate, less, 3.25%. The Agreement also includes payments of $25,000 in loan commitment fees and $100,000
(1%) of the funding in loan facility charges. The loan commitment fees and $50,000 in loan facility charges associated with Tranche
A were recorded as debt discount and amortized ratably over the life of the loan. There is also an end of term charge of $250,000.
The end of term charge is being recorded as accreted costs over the term of the loan. The Note is secured by substantially all
of the assets of the Company.
On October 9, 2018,
the Company and Steward Capital entered into a second Secured Term Promissory Note for $5,000,000 having a maturity date of April
9, 2020 (the “Second Note”) to complete the Agreement for $10,000,000. The Second Note bears interest at a per annum
rate equal to the greater of (a) 11.25% or (b) 11.25% plus the Prime Rate, less, 3.25%. Pursuant to the terms of the Agreement,
the Company is required to pay a $50,000 loan facility charge.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The Agreement also
contains covenants which include certain restrictions with respect to subsequent indebtedness, liens, loans and investments, asset
sales and share repurchases and other restricted payments, subject to certain exceptions. The Agreement also contains financial
reporting obligations. An event of default under the Agreement includes, but is not limited to, breach of covenants, insolvency,
and occurrence of any default under any agreement or obligation of the Company. In addition, the Agreement contains a customary
material adverse effect clause which states that in the event of a material adverse effect, an event of default would occur and
the lender has the option to accelerate and demand payment of all or any part of the loan. A material adverse effect is defined
in the Agreement as a material change in our business, operations, properties, assets or financial condition or a material impairment
of its ability to perform all obligations under its Agreement. We were not in default of any conditions under the Loan and Security
Agreements as of March 31, 2019. As of March 31, 2019, the principal balance was $10,000,000, net of debt discount of $46,310 and
accreted cost totaled $176,229.
Energy Capital, LLC
On
January 29, February 11, February 27, March 14 and March 28, 2019, we drew down advances of $1,000,000, $650,000, $750,000, $900,000
and $800,000, respectively, available under a loan and security agreement (the “Loan and Security Agreement”) with
Energy Capital entered into on October 1, 2018 (the “Loan Agreement”) by the Company and Energy Capital (the “Loan”).
The advance proceeds will be utilized primarily for operating capital. The principal amount outstanding under the Loan bears interest
at
a per annum rate equal to the greater of (a) 11.25% or (b) 11.25% plus the Prime Rate (as published by the Wall Street
Journal (National Edition)), less 3.25%. The Loan Agreement contains customary events of default and affirmative and negative covenants
for transactions of this nature. Upon an event of default, Energy Capital has the right to require the Company to prepay the outstanding
principal amount of the Loan plus all accrued and unpaid interest. All amounts outstanding under the Loan are secured by a lien
on the Company’s assets, subject to terms of outstanding debt obligations, and become due and payable on the earlier to occur
of September 30, 2019
or the completion by the Company of a capital raise with minimum proceeds
to the Company of $20 million.
On April 2, 2019, the Company and Energy Capital entered into a First Amendment to Loan and
Security Agreement (the "First Amendment") to (i) amend the notice provisions of an Advance Request under the Loan Agreement
from at least five (5) business days to at least one (1) business day before the Advance Date, (ii) increase the amount of the
Advance from up to $1,000,000 a month to up to $1,500,000 a month, and (iii) change the definition of the term Maturity Date from
the earlier of September 30, 2019 or 10 business days following the date of an Underwritten Public Offering to September 30, 2020.
NOTE 9 – STOCKHOLDERS’
EQUITY
Equity Incentive Plan
In connection with the
Closing, our board of directors approved, and our stockholders adopted, the 2018 Equity Incentive Plan (the “2018 Plan”)
pursuant to which 10 million Company Shares have been reserved for issuance to employees, including officers, directors and consultants.
The 2018 Plan shall be administered by the Board, provided however, that the Board may delegate such administration to the Committee.
Subject to the provisions of the 2018 Plan, the Board and/or the Committee shall have authority to grant, in its discretion, incentive
stock options, or non-statutory options, stock awards or restricted stock purchase offers.
As
of March 31, 2019, the Board has not approved any equity grants pursuant to the 2018 Plan.
During 2019,
the Company entered into an agreement where 378,478 stock awards with deferred distribution (“RSUs”) were
promised to a consultant for the Company pursuant to the 2018 Plan. For the three months ended March 31, 2019, $20,239 in
related stock compensation expense has been recorded and is included in the accompanying condensed consolidated financial
statements. The Company has not yet executed the RSU agreement with the consultant.
During 2019, the
Company entered into agreements where an aggregate of 408,478 restricted stock units pursuant to the 2018 Plan were promised
to employees for services provided during 2019. Accordingly, the Company has recorded expense of $26,784 for the three months
ended March 31, 2019 with respect to such awards which is included in the accompanying condensed consolidated financial
statements. The Company has not yet executed RSU agreements with the employees.
The total amount of non-vested restricted units awarded as of March 31, 2019 is 590,218 shares. The weighted
average grant-date fair value for the restricted stock awards is $0.25. The weighted average vesting period of the restricted stock awards is 2.0 years. As of March 31, 2019, unrecognized compensation expense related to the unvested portion
of the Company’s restricted stock awards was $150,237, which is expected to be recognized over a weighted average period
of 1.75 years.
The Company recognizes
stock compensation expense generally upon the grant date and over the period of vesting or period that services will be provided.
Compensation associated with shares 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 aggress to grant shares in exchange for the services to be provided.
ONDAS HOLDINGS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 10 – COMMITMENTS AND CONTINGENCIES
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 March 31, 2019.
NOTE 11 – RELATED PARTY TRANSACTIONS
At the Closing, we
entered into a Loan and Security Agreement with Energy Capital, a greater than 10% stockholder of the Company, pursuant to which
Energy Capital agreed to lend an aggregate principal amount of up to $10 million, subject to specified conditions. For further
details, see NOTES 8 and 12.
NOTE 12 – SUBSEQUENT EVENTS
On April 2, 2019, the
Company and Energy Capital entered into a First Amendment to Loan and Security Agreement (the "First Amendment") to (i)
amend the notice provisions of an Advance Request under the Loan Agreement from at least five (5) business days to at least one
(1) business day before the Advance Date, (ii) increase the amount of the Advance from up to $1,000,000 a month to up to $1,500,000
a month, and (iii) change the definition of the term Maturity Date from the earlier of September 30, 2019 or 10 business days following
the date of an Underwritten Public Offering to September 30, 2020.
On
April 11 and April 24, 2019, we drew down advances of $600,000 and $900,000, respectively, available under the Loan and Security
Agreement with Energy Capital entered into on October 1, 2018 by the Company and Energy Capital (see NOTE 8 for further details
of the terms). The advance proceeds will be utilized primarily for operating capital.
On April 30, 2019,
we enterer into a Loan Extension Agreement to further amend the February 2014 Financing Agreement, discussed in NOTE 8, to transfer
all accrued and unpaid interest through April 30, 2019 to principal, and to extend the maturity date to the earlier of (i) the
closing of an underwritten offering of shares of the Company’s common stock pursuant to a registration statement on Form
S-1, or (ii)June 30, 2019.