Ondas Inc

Welcome to the Ondas Holdings Incorporated third quarter 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Before we begin, the company would like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect ONDIS's best current judgment, they're subject to risks and uncertainties that could cause actual results to differ materially from those implied by these forward-looking statements. These risk factors are discussed in ONDIS's periodic SEC filings and in the earnings press release issued today, which are both available on the company's website. ONDIS undertakes no obligation to revise or update any forward-looking statements to reflect future events or circumstances, except as required by law. Please note this event is being recorded. I'd now like to turn the presentation over to Eric Brock, Chairman and CEO. Please go ahead.

Well, good morning. It's a pleasure to welcome you to our conference call. I'm happy to be joined today by Derek Risefield, our President and CFO, Stuart Cantor, the Founder and President of OnDust Networks, and Reece Moser, American Robotics Founder and CEO. Let's begin with some opening remarks before we outline today's agenda. I want to start by emphasizing that business is on track at OnDust. The technology-based leadership positions we have established with customers in the critical infrastructure and services markets we target continues to strengthen. We expect this to create substantial shareholder value and are determined to deliver that value to our investors. This is a theme we will come back to. As our investors are well aware, we have invested substantial amounts in our technology platforms. If you look at Andes Networks, American Robotics, and now with Aerobotics, who we are in the process of acquiring, we have collectively invested well over $250 million in our businesses. This is a substantial sum, and quite clearly, our investors have not yet been rewarded for that investment and our hard work. Of course, I believe we will be rewarded, and it's my responsibility along with our management team to make sure that we deliver on our plan and earn our just rewards on your behalf. The ultimate measuring stick for the value creation we expect is clearly the revenue, profits, and cash flow that we can generate from the monetization of our platform technologies. This is always the case. We don't develop wireless network technology or autonomous drone and data capabilities for the oohs and ahhs they generate. Our purpose is not to impress engineers. Our purpose is to generate tangible financial rewards for you. Our management team is hugely focused on monetizing the substantial investments we have made by delivering that revenue and profit growth which we deserve. We believe the revenue ramp will start with on-dust networks where we continue to advance the 900 megahertz network with Siemens and the Class 1 rails. Pre-launch activity with the Class 1 has progressed, and the initial volume order from Siemens received in the third quarter illustrates that we are moving close to wide-scale adoption in a meaningful revenue ramp. At American Robotics, we continue to make progress with customers toward large revenue opportunities. We have learned a lot in the field in new verticals, including oil and gas and mining, and are engineering the scalable solutions by integrating new data capabilities with payloads and analytics development. We are defining these solutions hand-in-hand with customer input, and we are very optimistic in our ability to deliver here. Aerobotics is similarly progressing their plan while we and the Aerobotics team work closely on supporting the integration of the two companies. Aerobotics is seeing fleet demand build as their incredibly impressive and mature Optimus drone platform and field service capabilities are being recognized by customers via fleet adoption. We will provide more context during the call around the excitement for Aerobotics business prospects and the benefits of combining our drone platforms. I look forward to sharing more details on our business progress across OnDesk as we move through the presentation this morning. So with these opening remarks, I will now outline the agenda. I will start the call with some details and commentary on the funding we announced at the end of October. I will then provide a brief update on Aerobotics, focusing on the deal timeline and highlighting the integration activity between the two companies, as well as recent significant customer announcements. Then I will turn to Derek for the financial review before we provide updates on progress made on the business plans at OnDesk Networks and AR. And of course, Stuart and Reese will help lead that discussion. And I will wrap the call by focusing on the outlook before we take investor questions. Let's start by highlighting the recent move to strengthen our balance sheet. As we all know, the financial markets have been challenging for the better part of a year now, if not longer. In this environment, smaller emerging technology companies like Ondas have been under particular pressure from both a cost of capital and access to capital perspective. Meanwhile, we are positioning the company in huge markets in investing to drive significant platform adoption and revenue growth. In this difficult financial climate, we were able to secure $30 million from a convertible note offering. We raised this capital from a high-quality investor group. Proforma cash balances as of September 30th are $43 million, adjusting for the net proceeds of the note offering. I am very pleased with this outcome, including the key terms which we have included on this slide. I believe the overhang of an obvious funding need for ONDOS in a difficult equity market had been unduly pressuring the shares lower. So this event removes that overhang and allows us to execute our plan and deliver the growth that our investors are looking for and our management team is focused on. In addition to increasing our balance sheet liquidity, I want to highlight that we have access to additional potential sources of capital. The agreement for the notes offering has an option for an additional $30 million in gross proceeds and additional convertible notes under similar terms. The total $60 million of potential amounts available under the convertible notes transaction combined with the ATM we have in place represents incremental potential liquidity of over $90 million. Of course, we don't believe we need all that capital for our plan, and we will be prudent here. I highlight this because I believe our funding profile should alleviate any fears over ONDOS's support from investors in access to capital. To sum it up, we have secured an agreement for investment of up to $60 million in ONDOS, demonstrating, in my opinion, a strong belief in the value of our technology and markets and growth outlook across ONDOS networks, American Robotics, and soon, Aerobotics. Moving to Aerobotics. I would like to provide an update on the deal timeline and business progress. We feel good about the process and the timeline visibility. We expect to close the acquisition in the first quarter of 2023 and more specifically in January. The next key event will be the Aerobotics shareholder vote on December 18th. Major shareholders have communicated their support to ONDOS for this compelling combination. After the shareholder vote, the deal should move swiftly to close about a month later. Customers are responding very positively to this transaction. We have spent time with Aerobotics customers and partners, and they are very happy with the strength of the combined company, both from a balance sheet and technology standpoint. Similarly, our customers here in the U.S. with American Robotics are excited about the breadth of services we can offer in future product development roadmaps. We believe we will see significant interest in the United States for the Aerobotics Optimist platform from both commercial and government customers, as well as potential strategic partners. We look forward to sharing more specifics around the business plan after the deal closes. In the meantime, the integration work we have been doing positions us to hit the ground running when we do close the transactions. I want to also highlight the massive achievement announced last week by Aerobotics. In fact, I have to pound the table on this and congratulate the team at Aerobotics. Last Wednesday, Aerobotics announced that a UAE government agency in Dubai has placed a $2 million follow-on offer for two optimist-grown platforms. This order will build upon the two systems they have already deployed in Dubai and comes after extensive performance and reliability testing in 2021. Importantly, this order marks the initial rollout of a fleet of autonomous drones that will be deployed by Aerobotics with this customer throughout the city of Dubai. The Optimus drones will be used for public safety, homeland security, and smart city applications. It is entirely accurate to say this order is a landmark event for the drone industry. We believe this is the first true fleet deployment of autonomous drone systems in the world. What makes it even more noteworthy is that this deployment is in an urban environment. From a regulatory standpoint, operations of drones, both autonomous and piloted, have to pass regulations. passed an incredibly high bar in terms of reliability and safety to be widely deployed, and that bar is even higher for heavily populated environments. Very few industry observers have thought a citywide autonomous drone deployment was possible, but here we are. Aerobotics has proven their system provides customers highly valuable data and information services, And more importantly, a fleet of autonomous Optimus drones can be reliably and safely deployed in densely populated cities. We see additional fleet demand across the region and globally as well. This customer has publicly indicated that the initial Aerobotics Optimus fleet deployment is targeted for 24 systems based in strategic locations covering the city of Dubai. Again, this is a landmark deal, which we believe will lead to significant growth ahead. I will now hand the call over to our CFO, Derek Ricefield, to walk through our financial results in more detail. Derek?

Thanks, Eric. As I get started, I want to remind our investors that our financial statements reflect the investment and preparation for larger commercial rollouts within on-dust networks and American robotics, which we believe we will soon see. Revenues for the periods presented have been generated by Fullmax product sales and service revenues for customers, including Class 1 railroads, in addition to product development programs with Siemens. Of course, we believe this activity has served to establish the broader opportunity and will lead to significant growth in the Fullmax-based wireless systems and Scout deployments in the coming years. For the third quarter of 2022, revenues were $600,000. This was an increase from $300,000 during Q3 last year. Revenues during the recent quarter were generated by product sales in addition to services related to the Class 1 Federated Rail Lab shipped to MVX Rail in the third quarter. In addition, we advanced the HOT and European product development programs with Siemens. Gross margin improved significantly to 63.2% for the third quarter of 2022, compared with gross margin of 4.8% in the prior year period. As we have described in our prior calls, due to the historically lumpy nature of development programs and customer product sales and services, gross margins can be volatile on a quarterly basis. The margin improvement is primarily due to a larger proportion of high margin product sales and services revenue in the revenue mix during Q3 this year. Operating expenses increased to $13.9 million for the third quarter of 2022 as compared over the last 12 months to support customer activity and due to deal expenses incurred for the aerobatics acquisition. Non-cash expenses totaled $2.8 million for the third quarter of 2022. Stock-based compensation was approximately $1.5 million in the third quarter. That increased by approximately $1.2 million from the prior year. Appreciation and amortization expenses increased from 700,000 in the third quarter of 2021 to approximately 1.3 million in the third quarter of 2022. The bulk of the increase in non-cash expenses is related to the acquisition of American Robotics. Operating expenses in the third quarter of 2022 also included approximately 1.7 million in professional and advisory fees related to the aerobatics acquisition. We consider these acquisition-related expenses to be non-recurrent. Excluding non-cash expenses and non-recurring professional fees related to the aerobatics transaction, operating expenses were equal to approximately $9.5 million, which were higher than expected due to accelerated spending on customer-related activity at American Robotics. While our operating expenses were higher than initially expected, we believe the additional investments we made were prudent and necessary for the expansion of our services and capabilities to ultimately drive larger revenue opportunities over the longer term. The company realized an operating loss of approximately $13.5 million for the third quarter of 2022, as compared to $4.9 million for the third quarter of 2021. This loss includes the aforementioned non-cash and non-recurring expenses. As noted, the increase in both cash and non-cash expenses related to the business development activity and the addition of American Robotics operating expenses, which were not included in last year's full Q3 results, were the biggest driver of the year-over-year increase in operating losses. Now let's turn to the balance sheet. We ended the third quarter with approximately $15.3 million of cash. As Eric mentioned earlier, pro forma for the convertible notes offering, our cash position would have been approximately $43 million. Outside of the new convertible notes, we maintain minimal long-term debt and a $93.8 million equity position. Of course, our equity position reflects the substantial investments made in our Fulmax and Scout technology platforms. We feel good about our balance sheet and believe it supports our business plan. And now I will hand the call back to Eric.