Ondas Holdings Inc.

Welcome to the ONDIS Holdings, Inc. Second Quarter 2023 Conference Call. All participants will be in a listen-only mode. And should you need any assistance, please signal a conference specialist 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. And 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 ONIS's best current judgment, they are 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 ONIS's periodic SEC filings and in the earnings press release issued today, which are both available on the company's website. Honors undertakes no obligation to revise or update any forward-looking statements to reflect future events or circumstances, except as required by law. During this call, the company will refer to certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is shown in our press release issued earlier today, which is available at the Investor Relations section of our website. This non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. However, management believes these non-GAAP measures provide investors with valuable information on the underlying trends of our business. Please also note that this event is being recorded today. I would now like to turn the presentation over to Eric Brock, Chairman, CEO, and President. Please go ahead. Well, thank you, Operator, and good morning. I want to get started by welcoming everyone to our second quarter investor call. As always, we appreciate the time you're spending with us and your interest in our company. I'm happy to be joined today by Derek Risefield, our CFO, as well as Stuart Cantor, the founder, president, and CFO of OnDust Networks, and Mayor Kleiner, the founder and CEO of Aerobotics and the president of OnDust Autonomous Systems. Today we plan to review our financial performance and strategic progress for the recently completed second quarter, and discuss our outlook for the second half of 2023 and beyond. Now let's turn to the agenda. We will start today's call with some brief comments about the second quarter performance and the significant progress we have made in advancing the adoption of our technology platforms. I will also spend some time reviewing the recent financings we announced in July. I will then hand the call over to Derek for a detailed review of our second quarter financial performance. As part of the financial review, I will discuss our balance sheet and liquidity position, and then provide an update on our outlook for the rest of 2023. Then we will transition and provide a business unit update for OnDesk Networks in OnDesk Autonomous Systems, where I will ask Stuart and Mayor to provide commentary around current business activity. We will then wrap the call and open the floor for investor questions. As we move through the second quarter, we continue to pick up momentum with our customers at both Andas Networks and Andas Autonomous Systems. We are now driving platform adoption, which we expect to broaden with both existing customers and with new customers and ecosystem partners globally. This momentum was evidenced by top-line revenue reaching $5.5 million in the second quarter. This quarterly performance brings first-half revenue to $8 million, which is an eight-fold increase versus just $1 million for the first half of 2022. The momentum also allowed us to secure $25 million in additional funding from sophisticated private and institutional investors. I will discuss the financing in more detail shortly, though I will highlight that these investors have performed substantial diligence on our technology and market opportunity. In my opinion, this capital raise reflects confidence in the value of our proprietary technology platforms and the end markets and customers we are targeting for growth. Regarding these end markets, OnDepth Networks is now deep in field activity with specific rail customers in advance of what we believe is the beginning of major volume orders in the 900 megahertz network. This activity is focused on identifying locations and applications for initial volume deployments. In addition, Siemens is negotiating key terms with select rails for purchase agreements around pricing, volume, and build-out timelines. While this work is advancing, the migration of ATCS to the new 900 MHz frequency band is poised to be the first application deployed in 900, as migrating the ATCS systems from the legacy network is mission critical. Stuart will share more details around our work with Siemens and the Class 1 rail customers and the outlook for 900 MHz deployments. At OAS, fleet adoption continues to move along with the completion of the proof of concept in Abu Dhabi, and as Aerobotics executes commercial fleet orders for the Optimus system from additional customers and partners in the Gulf. We also announced expansion into two new large markets, that being firstly in India, where we entered into a partnership with Aero A to Z, a firm with deep local knowledge with a particular strength in government, security, and defense markets. We also announced a partnership in Saudi Arabia with Saudi Excellence, and I am particularly excited about this opportunity. Saudi Excellence is heavily involved in the Saudi Vision 2030 initiatives, which is helping to drive significant economic growth and transform the Saudi economy. The partnership with Saudi Excellence comes on the heels of our successes in the UAE and allows us to bring our Optimus system to a large, fast-growing Saudi market. Of course, since closing the aerobatics acquisition in January, we have invested time and energy to introduce the Optimus system to industrial and government markets here in the United States, with a particular focus on public safety, smart city, and oil and gas customers. As evidenced by our customer and partner announcements with MassDOT Aeronautical in critical infrastructure and Skyfire in public safety, these efforts in the U.S. are beginning to gain traction. As we increase Optimus Systems inventory, we expect additional customer announcements in the second half of 2023. Mayor will share details around the continued advances in fleet operations, the new partnerships in India and Saudi Arabia, and the progress we are making in the United States. So to wrap up the introduction, we are now beginning to scale at both OnDesk Networks and OAS. I am happy with how we are positioned to grow our business in the coming quarters, supported by our recently fortified balance sheet. We are continuing to focus on driving orders, customer adoption, and revenue growth, in addition to maintaining cost discipline as we work to drive down cash burn and move towards profitability. Before I hand the call to Derek to review our Q2 results, I want to take a moment to provide some details around the $25 million we raised in the two recently announced funding transactions. As I mentioned at the outset, in a difficult funding market, we were fortunate to be supported by two groups of well-funded investors, whereby we were able to firstly secure $15 million to deliver on the OnDust Networks growth plan, and then $10 million at the holding company to scale our drone platforms and fund public company costs. As we are all aware, these financings removed a significant overhang for the company as our need for capital was weighing on our shares. The Andes Networks investment was led by Charles and Potomac, and last Friday, we completed the final closing for their $15 million investment. The C&P groups include sophisticated investors, some with extensive senior-level wireless and rail backgrounds, and their investment was made after extensive independent diligence on our Fulmax wireless technology platform, the .16 standard, and the growth opportunity with the Class 1 rails. I believe that the C&P investment is a significant validation of the potential value creation ahead at OnDesk Networks as a C&P group is putting their own personal capital behind our company. Importantly, we believe this capital injection into OnDesk Networks will fully fund the growth plan there while allowing our shareholders to maintain control and benefit from the significant value creation we see over the next few years. In addition, the C&P Group may become a large investor in Adas Holdings, given the warrants they received as part of this transaction. This further aligns the incentives of our public shareholders with a large supportive financial partner. At the holding company, our existing convertible note investor exercised their right to invest another $10 million in gross proceeds from new convertible notes, which have a two-year maturity. I will provide additional details on the terms of the convertible note in a C&P Group investment when we discuss our balance sheet. Net-net, these financings put us on a much firmer ground, and I'm pleased with the outcome and excited about our ability to execute from here for our shareholders. I'm now going to hand the call to Derek for the financial review. Derek? Thanks, Eric. As I get started, I want to remind our investors that our financial statements reflect the early stage of platform adoption for both ONDAS networks and OAS and the preparation for larger commercial rollouts. We expect significant operating leverage as revenues grow, though today's revenue levels do not yet cover our operating expenses. Revenue for the periods presented have been generated by both ONDAS networks and the OAS business units and totaled approximately $5.5 million for the second quarter of 2023. which was a significant increase from the $600,000 of revenue generated in the second quarter of 2022. Quarter-over-quarter revenues also showed robust growth of more than 100% from the $2.6 million in revenue reported in the first quarter of 2023. Growth was primarily the result of both higher product shipments at on-desk networks and deployments of Optimus systems related to customer activity for OAS, in the UAE. Gross profit for the second quarter of 2023 was approximately $3.1 million, a tenfold increase from the same period in 2022 when gross profit was approximately $300,000. Operating expenses declined slightly to approximately $11.6 million in the second quarter of 2023 as compared to $11.7 million in the prior year. despite the larger business operations, which now includes a full quarter of aerobatics expenses. Cash operating expenses were equal to approximately $8.8 million, which was about in line with expectations. Over the next few quarters, we believe that we will realize additional benefits from the OAS integration on the cost side. Non-cash expenses, including stock-based compensation and depreciation and amortization totaled approximately 2.9 million for the second quarter of 2023. This is up slightly from the non-cash expenses of 2.6 million in the second quarter of 2022. The company realized an operating loss of approximately 8.5 million for the second quarter of 2023 as compared to 11.4 million for the second quarter of 2022. The decline in operating losses was primarily due to higher revenue and gross profit generated during this quarter. Excluding the non-cash expenses, the company generated an EBITDA loss of $5.6 million in the second quarter of 2023, which was an improvement compared with an $8.8 million EBITDA loss for the second quarter of 2022. The company realized a net loss of $9 million for the second quarter of 2023 as compared to a $11.4 million loss in the second quarter of 2022. The lower loss was due to higher revenues and gross profits during the quarter. Now let's turn to the balance sheet. We ended the first quarter with $3.1 million in cash prior to closing the $25 million funding transactions announced in July. Pro forma for the funding transactions on this cash balance was approximately $27.1 million. We will provide more details on the pro forma balance sheet in a moment. The cash burn in the first half reflects ongoing investment in the business. So, the burn was elevated due to certain one-off and non-restructuring costs related to the acquisition of aerobatics and the integration of aerobatics and American robotics into the OAS business unit. In addition to the integration costs, we used approximately $11.6 million of cash for working capital and debt repayment alone in the first half of 2023, which included approximately $6.1 million in working capital investment, including inventory and receivables in the first half and cash debt repayments of approximately $5.5 million related to the convertible note amortization and retirement of a loan at Aerobotics. As Eric will outline next, our businesses remain capital light from a CapEx perspective, and we believe that as we grow revenues and gross profits while controlling expenses, our cash burn will decline in the coming quarters. I will now hand the call back to Eric. Thank you, Derek. As described previously, the recent funding has substantially fortified our balance sheet and placed us on strong footing to execute our growth plan. Proforma for the funding on us had approximately $27.1 million in cash as of June 30th. Between the original and new convertible notes, we have approximately $31 million in outstanding loan balances that we will look to equitize as soon as we can. The way to drive equitization of the notes and, by extension, a deleveraging of our balance sheet is through execution of our business plan and growing our market capitalization for the benefit of our investors. Regarding the convertible notes, we and the investor also agreed to extend the maturity of the original convertible notes from October 2024 to April 2025. This works to reduce the monthly amortization of that original note. Note that the exchange price for the notes to convert into shares prior to maturity is is now approximately $1.45 per share. The convertible preferred shares at Andas Networks, which provide the C&P Group investors with an effective 28% equity interest in our Andas Networks subsidiary, are reflected as a minority interest in the consolidated balance sheet. Let's now move to discuss the financial outlook before turning to a review of our business units. Firstly, we are poised to have a very strong year at Andas, as both business units transition to generating revenue growth. In 2023, we are demonstrating real demand for our technology platforms and that they are commercially ready and scalable. We expect the growth this year to continue in 2024 and beyond, and we believe our expectations for substantial multi-year growth remain achievable. With that said, our trajectory can be lumpy and difficult to forecast, as our adoption curves are just beginning. For the full year 2023, we expect to fall short of the ambitious revenue targets we laid out to begin the year. This is largely the result of a slower production rate at Onus Networks, initially due to component availability challenges we identified on our last conference call, which were exacerbated by a tight working capital position that constrained our ability to make component purchase commitments. More recently, component availability has improved, and of course, with the recent financings, we have working capital to accelerate production. As such, we have launched plans to increase production activity from here. However, given six-month lead times from production to shipment, catching up on our original revenue targets via product shipments is going to be difficult. We will certainly try. With respect to OAS, our outlook remains unchanged as we execute with customers and drive additional order activity in both international markets as well as in the United States. Despite the shortfall, versus earlier targets, we still see significant growth in the second half of 2023 and into 2024 and 2025 across both business units. We expect to generate at least $7 million in revenue over the second half of 2023, which brings a new target for revenue to approximately 15 million for the full year. I want to reiterate, we are tracking meaningful volume orders with Siemens in the advancing field work and expect to share an update on the order front as available. As we scale adoption and deliver revenue growth, we will remain focused on controlling expenses as we drive towards improved profitability. We expect cash operating expenses to be approximately $9 million for the third quarter of 2023, which is consistent with targets in the recently completed quarter. We are continuing to manage OPEX efficiently, and we will look to maintain cost discipline going forward. Now we will transition to a review of our business units and ask Stuart Cantor and Mary Kleiner to share updates on recent activity in the field with customers and industry partners. We will start with Stuart who will update us on the current status with the rails on dot 16 adoption and focus on the work with customers in our preparations for volume deployment on the new 900 megahertz network. Stuart. Great.

Thank you, Eric. And on this networks, we had a record revenue quarter driven by shipments for customers. We delivered approximately $1.5 million in product and development revenue in the second quarter with a new record delivery in product shipments to Siemens. This is coming off a solid first quarter of approximately $1 million in revenue with a previous record amount of shipments. Moreover, we're fully engaged with Siemens and the Class 1 rails to further prepare for large-scale commercial deployments at 900 MHz. And with the adoption of the standard in March 2023, we see increasing amounts of deployment planning among the class ones. We are now working hand-in-hand on deployments with key rail personnel with direct budget responsibility. Specifically, in July, we commenced work with a major rail, visiting their critical ATCS locations and completing detailed site surveys in preparation of new ATCS installations. As we shared on our last call, The announcement by the American Association of Railroads in March that the DOT16 platform was chosen for deployment in the Greenfield 900 MHz network, combined with the approaching deadlines to retire the legacy 900 MHz network by September 2025, is advancing the formal activity of the rails around migrating the network. Our initial deployments are focused on critical network and high traffic locations. as well as new vital communications endpoints, such as rail crossings. We believe this work and the areas of focus reflect positively on how the rails have come to value the 900 megahertz opportunity. Simultaneously to this work, Siemens is actively negotiating purchase orders with select rails. In terms of development and standardization, MXV Rail, which is a subsidiary of the AAR, is thoroughly engaged on the DOT16 network integration plans with a continued focus on the new network controller and critical DOT16 functionality, including key high-demand features like peer-to-peer networking. We expect our activity with MXV to continue to expand as new use cases and additional frequency bands are targeted for 802.16 integration. On the production side, After early challenges in obtaining key components described earlier by Eric, we have alleviated many of the constraints which impacted our first two quarters of shipments. And our recent financing gives us the necessary working capital to continue to build inventory and transition to contract manufacturers, which will allow us to ramp production. And as we ramp production, Lead times may limit our ability to ship as much product as we had initially planned for, but we are making every effort to move faster. With the new capital secured, we intend to move forward aggressively on obtaining new orders and growing our production capabilities. We have recently engaged a new U.S. contract manufacturer who we believe is capable of allowing us to scale rapidly in front of the 900 megahertz migration. We see a need to build inventory with Siemens in front of what we continue to believe will be a significant network build-out across the Class 1 rails in 2024 and 2025. To be clear, we are seeing some migration on 900 megahertz this year as the rails begin to move, and that will drive revenue growth in the second half, tempered, of course, by the aforementioned early production bottlenecks. So despite the slower production ramp, we expect ONDIS networks will still grow revenue in Q3 and Q4. At the same time, we will continue to foster our existing and new development programs. The Siemens locomotive program previously announced for Europe is well advanced and has recently expanded in scope. And we have now responded to two major passenger and transit network proposals, which appear to be very promising. As we grow, we will pay close attention to spending levels on operating costs as we drive towards profitability. As revenue and gross profits grow with increasing demand and shipments, we expect to be increasingly self-funding as we move through the year and into 2024. Now I'll hand the call back to Eric. Eric?

Thank you, Stuart. I will now ask Mayor Kleiner to take the floor and update us on progress with customers at Andas Autonomous Systems and provide some insight into the outlook for the rest of 2023. Mayor?

Thank you, Eric. We continue to build momentum at Ondas Autonomous System in the second quarter, with revenue reaching $4 million, a substantial increase over Q1 revenues of $1.5 million. Our team continues to execute well, as evidenced by the successful completion of our proof of concept in Abu Dhabi, UAE and the ongoing advancement of activity with existing customers as well as new customers and partners globally. In Dubai, we are continuing to expand our relationship with the government. We secured an additional service agreement for our deployed systems and plan to expand OAS operation and footprint in the city later this year. We anticipate steady growth throughout 2023 and into 2024 with ongoing fleet expansion in Abu Dhabi, Dubai and other countries in the region as we welcome new customers. We provided investors an important update in July on our type certification activities with the FAA. As we approach receiving FAA type certification for the Optimus system, our focus is qualifying and acquiring customers in the United States. We have secured an agreement with the Massachusetts Department of Transportation, MassDOT, aeronautical department for proof of concept program. which includes demonstrations to relevant stakeholders across the state. These demonstrations may attract other government agencies from Massachusetts and beyond. We are excited to showcase our Optimus system, which is state-of-the-art capabilities and functionality, which can handle the various use cases desired by the public agency in charge of providing critical services to the state of Massachusetts. Additionally, we have made significant progress in our partnership with Skyfire, a leading consulting firm in the drone public safety field. By combining Skyfire's expertise in police drone programs in various states with our Type Certificate Optimus system, we have made game-changing advantage. We and Skyfire believe the market for drone first responder, or DFR, is very large and that spending on drone solutions in public safety markets is now growing rapidly. Again, we are very excited to bring Optimus to the US market where we see significant demand and firmly believe in the substantial opportunity to drive fleet adoption as one infrastructure. On the strategic side, as previously announced, the Optimus system has successfully completed its noise certification. which was the last test required by the FAA to obtain a type certificate for the system. Our dedicated team is currently finalizing the last reports and submissions to the FAA, and we can see this certification process coming to its conclusion soon. I would like to take a moment to explain why the type certification is such an important milestone for OAS. In the United States, anyone who wants to operate a drone for capturing data or parcel delivery purposes must comply with certain requirements. The most common one is flying the drone in line of sight of a pilot. Additionally, drones are not allowed to fly over people, at night, over sensitive infrastructure, and more. To conduct drone flights outside of these requirements, the operator must apply for a waiver for each specific area and time. And waivers are not always granted by the FAA. For a system like the Optimus, which can launch hundreds of flights every week with no human involvement, the FAA needs to understand the airworthiness level of the aircraft, just like in manned aircraft. The type certification process aims to establish solid criteria that the FAA can rely on to understand the engineering and concept of operations of the Optimus system. When the type certification process is completed, robotics will be able to work with the FAA on complex operations, similar to what we are conducting in the UAE. For example, flights for public safety and municipal use cases, which include flying over people, roads, critical infrastructure like government buildings and power plants, as well as other urban features. Based on the Optimus system and its new certification, American Robotics, along with our new partners in the US, will be able to offer one of the world's best solutions for automated, streamlined aerial data capture by drones. In addition to our growing efforts to enter the U.S. market, we have been working on OAS's global expansions to other regions. We announced our partnership with AeroA2Z, an Indian company specialized in security and defense systems, and presented the Optimus and Iron Run radar systems at the designated Expo in India, which stimulated significant interest from the local industry. We are optimistic that this partnership will produce growth opportunity. Additionally, we have initiated a new relationship with Saudi Excellence Corp., a leading Saudi company providing next-generation security and defense technologies to Saudi government and enterprises, according to the KSA. Together, we will work on establishing a local office in the Kingdom and a strategic alliance to offer our solutions in this growing market. We see numerous opportunities within the country in defense and homeland security, as well as in industrial and smart city applications. We expect to share more details on our entrance into the Indian and Saudi markets in the coming months. Lastly, Eric's appointment to the Board of Directors of the Commercial and Drone Alliance, CDA, was an important achievement for the company. The CDA is an important industry body that collaborates closely with the key policy makers at the FAA DOT, White House, and Congress to promote drone business in various industries in the USA. We continue to expect more fleet deployments during 2023 and anticipate achieving additional milestones related to the expansion of Optimus and Iron One in the US and other countries. Progressing as planned, we are successfully delivering on fleet deployments in the UAE and look forward to announcing additional orders in the country. In addition, we are actively advancing new market expansion with local partners in Saudi Arabia and India. We remain focused on accelerating U.S. business development by leveraging American robotics' U.S. footprint to penetrate public safety, smart city, construction, and other industrial markets. To achieve this, we are expanding our sales team and pre-sales activities to engage with a large number of customers and ecosystem partners. Additionally, we are building inventory and expect to complete manufacturing and deliver 10 new Optimus systems by the end of 2023. We have a total of 15 Optimus systems on order. As we look ahead, we firmly believe that what we are witnessing today in the U.S. drone market is only the tip of the iceberg. The concept of drone-in-a-box and substantial benefits of autonomous drones has become a consensus understanding, and many entities are seeking to remove drone operators from rooftops. As processes like type certification come together, we envision this market growing exponentially, and OES is well positioned to lead this revolution. This completes my formal remarks. Eric, I'm going to end the call back to you now.

Thank you, Mayor. Before we turn the call over to Q&A, I want to reiterate that we remain bullish on the outlook for OnDesk and believe our business is strengthening considerably. We have worked extremely hard to position for growth, though as we all know, we and our investors have had a bumpy 12 months. The challenges we have faced, which included extended timelines, particularly on the rail side with OnDesk networks, have been exacerbated by a more difficult funding backdrop for small emerging technology companies. Nonetheless, I believe we are clearly on the path to monetize the significant investments we have made in our Fulmax and Optimus platform technologies. Of course, this growth plan is now supported by our strength and balance sheet. The Class 1 rails are now engaged deeply in formal planning for the 900 MHz network migration, and we believe visibility in the big ramp ahead is improving dramatically. We will look for volume orders as we move through the fall and, in parallel, work to scale production to be prepared to meet the expected order ramp. At OAS, fleet deployments are validating the safety and reliability of our Optima system, as well as the value our automated drone services provide. This is driving faster engagement with a broader set of partners and customers across the globe, including in new markets such as India and Saudi Arabia, and, of course, in the United States as well. The broader engagement for both networks and OAS is exactly what you want to see when you're in the early stage of technology adoption, It is evidence that we are in the initial stage on the S-Turb of exponential growth. We expect to grow orders and deliveries in the second half, which will allow us to maintain the momentum we have built coming into 2023 with a significant ramp in 2024 and beyond. This growth combined with continued cost discipline will allow us to reward our shareholders. From here, I firmly believe the outlook for OnDesk is only getting better and better. With that said, let's see if there are any questions. Operator? We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using your speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will take our first question, which will come from Tim Horan with Oppenheimer. Please go ahead.

Hey, guys. Thanks for the time. Can you give us a sense of how... how much in orders you've received from the rails, and just trying to understand the process. Or maybe, you know, it seems like most of the orders have to come in in the next nine to 12 months if it's going to be, you know, six months to deliver. And then you just talk about the gross margins on the rail equipment. And, you know, I guess, you know, related to this, You know, if you can't talk about how many orders now, can you give us a sense of how much in orders you expect in the next 12 months? And then are you basically – can you talk about what you're anticipating? Like, are you starting to build the equipment in front of the orders? And can you talk about, you know, how much equipment you've ordered here? And then, you know, the working capital, is that still a problem, or do you think you've kind of, you know, totally solved that at this point? I know that's a mix of questions. Just trying to understand the whole process on the rails here from – You know, when you – what orders you receive, you know, when do you put in the – you know, when do you start making the equipment? And then basically, have you started making equipment in front of the orders since?

Great. Thanks, Tim. I'll start with the gross margin question first, and then we'll talk about the ordering process and expectations of how we'll build over the next few quarters. So gross margins on the OnBus Network's system side are targeted at 50% to 60%. You'll see that bounce around a little bit until we get into these bigger volumes. But, of course, you know, we do see the volumes ramping. But that's what it looks like on the margins. And, you know, we'll get more clarity on that as we get the volume revenue pull through. In terms of the order and inventory building process, what we're doing in the field today with customers is really working hand-in-hand with Siemens, discussing with customers locations, requirements in terms of what applications and equipment they want to hook up first. And in and around that, of course, we're talking about volumes and pricing, et cetera. Siemens is handling the bulk of the negotiations on that front. And what we do with Siemens is, in parallel, we're planning for production and capacity ramp. So, as we're moving through this year, we are targeting significant orders and having conversations with Siemens about the timing of our inventory production in front of that. So, the dynamic is with what we do expect to be a big build-out in 2024 and 2025 to meet deadlines, that we need to start ramping production now. And we're doing that in front of what we think is what we expect to receive in orders over the balance of the year. So we'll be building inventory for Siemens, and we think as we're turning into 2024, the demand for even more building will certainly increase.

Can you talk about, you know, the dollar amount of orders you've kind of placed in? if you're going to get like 200 million orders in the next, you know, 12 to 18 months, I mean, it would suggest you need like a hundred million in working capital, you know, at a 50% gross margin. Um, how do you kind of plan on, on funding that?

Uh, so we do have, uh, we, we are expecting to have a payment arrangement to Siemens to help us support component, uh, inventory bill. Uh, so that's, that's one aspect of it. And we also expect to have, um, uh, very, uh, attractive payment terms in terms of when we ship and, and bill and receive payments. So, so we think that's going to help us quite a bit on working capital. Was there another element of that question?

Great. And can you, Yeah, can you talk about how much, like the rough size of orders you've placed at this point?

So, yeah, I don't want to do that just yet. I mean, part of this conversation with Siemens and the railroads is we're negotiating. And we certainly, as you can understand, want to work to get to firm commitments on this up front to the extent where, you know, sort of signaling that we want to build inventory in front of that. I would not want to put a number on that. because that would delay some of the impetus on getting those firm commitments. So I want to sort of defer on that question at the moment.

And do you have a sense of when the orders will really start kicking in? Is it third quarter this year, fourth quarter, first quarter of next year? And then the revenues, I'm guessing, are six to nine months after the orders can kick in. But do you have a sense when the orders will really start flowing?

Yeah, so a couple of things. So the orders that Seaman secures then turns to us, we do expect over the balance of the year. And I think, you know, I'll say in the next few months, I don't want to put a specific timing on it, again, given where we are in these discussions from a competitive standpoint. But, of course, having the visibility we do on the expected ramp and knowing that we need equipment, we could start ramping now, and I think that we're going to be building capacity through the year. So I can't get any more granular than that at this point.

Okay, got it. But it seems like you're kind of expecting the orders really ramp in the fourth quarter and first quarter, and then the revenues really ramp second and third quarter of next year. Is that fair to say? Your best guess at this point?

It is fair to say when we think about the very large revenue numbers that we believe are ahead of us, but I do think that if we're moving through the year into Q1, I think Q1 will be a nice uptick as well.

So you kind of expect to receive revenues from these orders in Q1 will be a pretty good uptick? Okay, so can you give us a sense of how much you've received in order so far if you're expecting Q1? I know you had some guidance on bookings at the beginning of the year for this year. Can you give us a sense where you're tracking the bookings?

Yeah, so we didn't give guidance on bookings. We gave targets for revenues, and, of course, we've updated that today. And I don't want to go further on the booking side as we – As we're moving into the second half, we'll update you as we can. Okay, thank you.

Again, if you have a question, you may press star 1 to join the queue. Our next question will come from Matthew Galinka with Maxim Group. Please go ahead. Matthew Galenko, your line is open. Please check if it is muted.

Hey, good morning. Thanks for taking my question. I'll be brief. I wanted to maybe get a little bit more color on the contract manufacturer that you're engaged with now. You know, any fixed commitments there? And, you know, just to the extent that you do expect these volume orders from Rails in the next year or two, is Is this manufacturer in a place to meet that capacity, or do you expect to have to do more work to get to that point?

I'm going to ask Stuart to share more details. You know, on this contract manufacturer, this is a firm that we've been working with to qualify for quite some time now, and we've been doing that in parallel with Siemens. or what would you add to that?

Yeah, Matthew, so we, this is, the contract manufacturer in the U.S. is one we qualified with Siemens, and they support Siemens in many of their product lines, so we feel they're very capable, and as we secured the new working capital, we've now engaged them in have turned over some critical boards in our development that have been a bottleneck in the past. So they are prepared to ramp and are well qualified. We also have another manufacturer in Canada that's supporting us for some other key components. So I think we feel very confident with them.

Got it. Thank you. And maybe just on a – help me understand the type certification and how that factors into timing on the pipeline build and engagement, you know, with U.S. entities. And, you know, it doesn't seem like you've needed it to ramp up engagement, but just, you know, If you could help me understand a little bit better, you know, is it a question of, hey, we get the certification and you expect, you know, U.S. orders imminently or still several months post for, you know, additional evaluation before you get to, you know, something in volume in the U.S.? ?

Thanks, Matt. So the type certification itself, or lack thereof, we formally receive it, has not been a barrier to conversations with customers because there's other ways we can get out and receive approvals for flight operations. I think what you'll see is that in our marketing efforts, it's a lot easier to have these conversations, and it's easier for customers to engage more quickly when we have this level of quality that's being validated by things such as type certification, as well as the experience we're able to point to all the flight hours, for example, commercial deployments in urban environments in the UAE. So I think you can think of it as an accelerant of the activity with customers. Maybe it's going to be more efficient and the sales process will be shorter as a result. Mayor, would you add anything to that?

Yeah. So we finished the last test that we need to do with the FAA, and now we're waiting for the final approval. In our opinion, it's going to make a game-changer in the industry because this is the first time that anyone will get this approval to fly above people without the need with a specific waiver. And as Eric mentioned, it will give us the ability – to accelerate and scale the operate deal with clients more quickly because we will have this approval and we can open new markets in the United States to build one infrastructure in urban area and not only in remote area.

Got it. That's helpful. All right. I appreciate it. I'll come back in the queue.

Thank you, Matt. And again, if you have a question, you may press star then one to join the queue. Our next question will come from William Morrison with B. Riley. Please go ahead.

Good morning, Eric. How are you doing? Yeah, good. You wouldn't have to be particularly insightful to understand that there might be, you know, inventory shortages going out. So what exactly went wrong? Because, you know, like the last five times we've talked about this, it was under control. So what changed? Like who dropped the ball?

Yeah. Well, Bill, I'll refer back to our last conference call where we highlighted some of the component bottlenecks that we had been experiencing as we were really ramping up volume production for the first time. So we've done a lot of work to qualify suppliers for the components, but the first time you enter into these volume orders with them, Um, you know, they can catch them off guard. So, um, as Stuart had mentioned, we, we believe those, uh, specific bottlenecks, uh, and today we believe the supply chain is in pretty good shape for us. Um, we're going to be particularly active, um, you know, sort of focusing on advanced purchases for certain components, uh, in addition to, uh, qualifying other component vendors for diversification, but that's kind of how we've, we've dealt with it, but we did highlight this on the last call. I'd say a bigger issue has been, particularly as we're moving to the contract manufacturer, has been having the working capital base to make commitments to volume purchases of components to ramp production. And we, as you know, we completed a financing in July. We were trying to get that financing in a bit earlier, but, you know, these things can sometimes take some time. Uh, so we really have just started to ramp, um, as we described with the contract manufacturer and these other component orders, um, for higher volumes, uh, you know, after we announced the funding and given the lead times, the ability to pull that through the supply, um, you know, the production, uh, uh, is, um, you know, means that, uh, you know, some of that will, will go into Q1.

And how much of this is applicable to AOS supplies?

No, OAS is – we're talking specifically about on-dust networks related to the supply chain ramp. OAS has – we entered the year – as you recall, we closed the aerobotics acquisition in January – And at that time, we ordered 15 new Optima systems, and we were expecting to receive 10 in the second half of this year, and we're still on track for that. All right.

And then what about, you know, major fleet orders? We've been, you know, kind of looking for those for a while. Not like 10, but, you know, hundreds of systems. Okay.

I think we've got to give us a little time on hundreds per customer. When we came into the year with the Optimist system, we spoke of the activity in UAE. Those customers were furthest along in commercial adoption, fleet adoption. And we've targeted or we've highlighted that the customers have been publicly discussing in the UAE at least 50 units over the course of 2025. We still, we're kind of working with them to build that out. Elsewhere, when we're talking about new markets like India, Saudi Arabia, and of course in the United States, we've identified early customers and partners. We're going to work with them, but you'll see them sort of start to ramp in a more deliberate way, right? They take maybe a couple systems, up to five. They build those out, and then from there, we can scale more quickly as they get the experience that we do in terms of perfecting how we deliver the solution and gain the valuable experience. You know, I guess we'll see how – we do think we're on that path in the UAE, and as we're able to share with you customer activity with these other markets, especially in the U.S. as well, as we get busy with the customers, we'll give you more plans on what the appointments look like.

All right. Thanks.

Sure.

And with that, this will conclude our question and answer session. I'd like to turn the conference back over to Eric Brock for any closing remarks. Okay, thank you, Operator. I'm just going to close the call today by thanking you again for attending.

As always, we have a lot of work ahead, and we're going to get right back at it. And we look forward to staying in touch and keeping you informed on our progress. So have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.