Ondas 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?