Ondas: One-on-One with CEO (Q1 2021) CML

We spoke with the CEO of Ondas again and have transcribed that conversation below.

Since the company’s quarter-to-quarter earnings are far less relevant to the future than these updates, we cover the company and share our analysis in the CEO interview format, rather than an earning review dossier.

You can read the establishing dossier which goes into rather deep detail here:
The Pick-axe to the Private Network Edge Cloud.

Preface
Ondas (ONDS) is one of our newest Top Picks, added on 1-13-21 for $10.40.

As we stated in its establishing dossier, the risk that Ondas goes away and the stock price goes to zero is the most pressing risk and it’s a non-trivial possibility.

This is by far the riskiest entity we have ever written about and the smallest as well.

The risk alert will stand until such point that the company delivers meaningful revenue (above $25 million).

The company is most appropriately recognized at ‘venture’ or even ‘pre-revenue’ stage and as anyone who has invested in venture stage firms can tell you, most don’t make it out.

As a Top Pick, the company sits in the outer most circle of this logic diagram.

We have spoken with the CEO multiple times and those are available on the Top Picks Tab, under ticker ONDS.

Caution
It’s not the price today that we’re after, it is the possibilities that exist over the next several years that has our interest, and a stock price today means very little to us, as we focus on the stock price in 5-years.

This is a small company and as such can see truly large stock gyrations making it possibly totally inappropriate for some investors.

As I presented so transparently in the year end webinar for 2020, we do not believe the version of the investing world that existed in 2020 will subsist into 2021 and beyond.

Investors will need patience and that patience will lead to perspective. It’s not going to happen as quickly as it has happened in the recent past.

This is a company reported less than $3 million in total annual revenue for 2020 and as of a few months ago was an over-the-counter stock, and only recently moved to the NASDAQ National Market (NNM).

The risk is so great and the liquidity so small, that there is no other way to invest in such an entity without patience.

This is a decade long story, and there is substantial risk that this company never makes it to the two-year mark.

To have a fear of missing out is to have a mindset that is antithetical to everything that CML Pro stands for — perspective and long-term thematics which in turn lead to higher a investing IQ.

Analysis
Ondas (ONDS) is one of three Top Picks that we introduced this year as a sort of “lease to own.”

(The other two are AcuityAds (ACUIF) and CuriosityStream (CURI).)

Of the three, Ondas was marked immediately as the riskiest due to existential risk.

But we too marked it as having the greatest upside potential.

It does fit into our thematics and certainly fits as an infrastructure investment and an aspirational platform.

As we have seen with our best performing Top Picks, the infrastructure investments that realize platform status tend to be rather outsized winners.

The two Top Picks that have scaled those dual walls are Spotlights Nvidia (NVDA) and Shopify (SHOP), up 1915% and 1769%, respectively.

We have three other Top Picks that are infrastructure investments that are aspiring platforms, namely Fastly (FSLY), Jumia (JMIA), and now Ondas (ONDS).

But, unlike the other four in this grouping, Ondas is virtually pre-revenue.

So, while the companies listed above are all Spotlights, with Fastly and Jumia as numbered Spotlights, we have Ondas on risk alert and only placed as an undesignated Top Pick.

But this is our rational for the pick.

We knew (and said and wrote) that 2021 would not be like 2020, but we did not vacillate from our ethos — to find underappreciated opportunities, which tautologically means we expect uneven results for some time until the underappreciation is remedied, or we feel that the investment is no longer worthy of a Top Pick designation.

Ondas is in the ‘uneven’ part with unmatched risk to any other Top Pick.

So, in that vein, when we speak with CEO Eric Brock, we must focus on the strength of its aspiring platform, the likelihood that the aspiring platform can in fact realize platform status, and the verticals that would drive this move.

For Ondas, we know to look at rails (as in railroads) and drones.

We started the conversation with rails and asked about imminent larger scale revenue opportunities that could be realized in 2021.

Eric said:

… we … believe there’s going to be commercial adoption on this platform. And the build out, essentially, will start in the second half.It’s really hard to give you a date because I don’t know for sure what that date is, but I feel confident that we’re going to get there, and that once we start building it, it’s a really significant project.

I also pressed on the type of revenue — that is actual production revenue versus pilot test revenue to which he said:

We’ll start to see product sales in the second half that are, again, commercial.Not pilots, not tests, not lab environment.

He did note that 2022 and 2023 are the years that he anticipates the inflection point in revenue.

I think next year will be a much bigger rollout and deployment.

I then asked about the type of revenue, to which he reiterated the recurring portion of it:

We’re going to be charging an annual fee for that, and we’re targeting 18% on the install base. And we start billing a year later.

But the true power of a platform, as always, lies in the network, and this is where our conversation become more compelling. Here’s a bit of a lengthy snippet, and it refers to both rail and drones (our emphasis is added).

There’s a truism about networks, and you’re an investor in these technology markets, that you know, is that the network never shrinks.I’ll give you an example. When you first put your Wi-Fi system up in your home, you did it because you wanted your computer to be carried around your house, and you wanted internet access.

Once you did that, you densified the network, so you put more control points.

And then you put more end points on it, too. You put a thermostat, you put a watch, you put two more computers and five phones.

Everything became connected because the network never shrinks and that’s the same thing that’s going to happen. You have the bandwidth; they figure out ways to use it.

We spoke at great length about drones and the recent acquisition of American Robotics (AR), the first and only company approved by the FAA to operate its drones beyond visual line of sight without a human operator on the ground.

First, he touched on the importance:

We have to bring complete solutions to the customers. These are complex industrial environments, and the customers are not able to do it themselves. They don’t have the expertise.… it has to be a best of breed, a company like Ondas to disrupt these markets and create the end-to-end solution.

… we have that with our network

And then I asked about the importance of AR’s first mover advantage, to which he said:

We take American Robotics, and I’m going to tell you how special and unique that FAA approval is.It is a massive game changer and differentiator.

Eric also shared how competitive the bidding was for AR:

I’ll tell you; it was competitive. And there was really significant interest from brand name companies, let me put it that way.But what they saw with us was the ability to fill the big business. They didn’t want to cash out.

As far as material revenue, Eric seemed to have the same vision — that the back half of 2021 would seed a ramp.

… the revenue ramp here, post regulatory approval or FAA approval, I believe it should be substantial.In 2021, and I really don’t want to give guidance, but we will have deployments.

I think we can say that confidently. And as a result, they will be generating revenue on those deployments, for sure.

Eric reiterated the infrastructure and aspirational platform status of Ondas when he was speaking about drones:

… what I’m describing is a very diverse infrastructure environment, the picks and shovels as I described it, diverse use cases.We’re like Qualcomm putting our software in the drone.

Finally, we touched on the balance sheet to which Eric said:

I feel comfortable with our balance sheet and our cash position. We do have a focus.Our objective is to get to self-funding at Ondas networks as soon as possible.

The conversation was appropriately long, winding into various elements of the business, myopic in some respects and broad in others.

Our takeaway is the same as we had when we added Ondas in January of this year: it’s one of the few young infrastructure aspirational platforms that we can identify and that brings with it tremendous risk for the trade-off of large potentialupside.

Ondas is not an ‘all-in’ company for us — that’s why it sits as the only infrastructure aspirational platform not designated as a Spotlight.

But we will go where the others will not — we always have. And while we have had to drop Top Picks for lack of execution, in the end, as a diversified portfolio of a wide range of market cap companies focused on cutting edge technology, we’re over whelming pleased with the results while remaining equally humble.

The past does us no favors — so we look forward.

Ondas is a look forward company more so than perhaps any other Top Pick, for better or worse.

Please enjoy our one-on-one conversation with the chief executive.

One-on-One with the CEO of Ondas (ONDS)

Ophir Gottlieb:
I saw you or heard you a little bit earlier this morning.

Eric Brock (CEO Ondas):
Thanks. I appreciate you tuning it.

The reason we held the call was American Robotics (AR) is really an outstanding business and company.

And as we were going through the deal to sign the acquisition, we were running into our quarter in our 10-Q. So, we’re going to have to make some disclosures about where we’re at.

So yeah, it just made sense to sign it up and announce it on that day.

But the flip side of it meant it was just rushed into the market.

We announced it an hour before our call and said, “Hey, by the way, we got this cool thing. And if you’re around and happen to get on the call, we’ll tell you about it.”

So, I thought it was important to build more awareness and really dig in deeper into the business.

I think it was good. Smart. We need to make sure investors know what we’re doing.

OG:
Yeah. Any calls like that are super appreciated, I think. I think CEOs should do more of it.

All right. So, I have a list of questions as usual, and I know what we’re going to end up spending most of our time on, but I’m going to start with Rail.

Can you give me your view of Ondas’ potential to drive meaningful revenue in 2021 in the Rail segment?

This would be like Siemens Airlink, but also if you want to decouple Rail revenue, Ondas’ Rail revenue from Siemens’ Airlink revenue with Ondas, that’s fine too.

Just however you want to talk about it, I’d love to know about it.

EB:
Let’s talk about the Rail, and obviously the 900-megahertz network is a big one today, and that’s what most of our energy has been focused on, and that’s same as Siemens.

That’s where they’re building their first product and integrating with us.

The ball’s moving forward, and we continue to be well-positioned.

If I think about the cadence of the opportunity, we still believe there’s going to be commercial adoption on this platform. And the build out, essentially, will start in the second half.

It’s really hard to give you a date because I don’t know for sure what that date is, but I feel confident that we’re going to get there, and that once we start building it, it’s a really significant project.

And then if you think about how we’re going to the market with Siemens as our partner, both Siemens and Ondas can and sell what we call the catalogue product, and Siemens will be branding it Airlink.

Siemens could sell that ATCS [Advanced Train Control System] product because that’s something we built and designed specifically for them.

It’s not just a, edge radio, it’s actually a train control system with our technology embedded.

We’ll start to see product sales in the second half that are, again, commercial. Not pilots, not tests, not lab environment.

And then you think about what’s likely to happen. I think Siemens is really going to stand in the front of the line because they’ve got these big purchasing agreements and the distribution and support.

We’re likely to see Siemens get the bulk of the orders, which is going to be fine for us because we have an agreement with Siemens on pricing. And it’s great.

Siemens will be marking up a bit for their additional services or value they add to the Rails, and that’s all well understood by the customers and obviously Siemens and Ondas.

OG:
Okay. So, I just want to try and get an understanding of how if revenue comes in this year, how it would look, not the size.

I’m going to say something, you just correct me.

This is Siemens comes in. They’re like, all right, we’re ready to start. It seems like for 2021, this would be some substantial amount of revenue that would be about building out things for Siemens before the actual recurring revenue starts, or do I just misunderstand that?

EB:
No, you’re right.

If you think about our network and the platform, we describe it as an end-to-end system.

And what that means is we have bay station infrastructure, and then we had the edge devices, which are remote radios that are either plugged into the equipment, so you can monitor your Rail systems and command and control them, or it’s embedded in the Rail equipment like we’re doing with Siemens with ATCS.

So again, it’s an end-to-end system.

The bay station infrastructure gets laid out first, and then they deploy the edge devices to have that end-to-end link.

And the rollout will probably to major operating sections of track. There’ll be big chunks that they start to deploy in chunks, I think is a good way to think about it.

OG:
I’m just going to make up numbers.

Let’s say it’s $100 of revenue. For this initial build- out of the bay stations, like you’re saying, probably the high trafficked ones, the ones that have the greatest impact.

Okay. And then that’s going to continue — the idea is that eventually, they’re going to want to cover everything.

For that $100 of high trafficked bay stations, next year, what does that turn into? Just this one part.

I know there’s going to be an expansion. This cannot happen overnight.

EB:
Yeah. Yeah. That’s a good question.

So, the other thing you have to think about in terms of the deployments, it will be bay station heavy at the beginning.

And the prices on a bay station is significantly higher than edge device and edge remote.

So, if on every $100 of orders, gosh, I’m going to say at least half, probably more than half would be bay station revenue.

OG:
And then what happens next year with that? Is that then done unless there’s upgrades?

EB:
No, no, no.

I think next year will be a much bigger rollout and deployment. It’ll still be bay station heavy, but they’re going to have a lot more edge device built as well.

OG:
And then for the bay station devices that are going to be in there, the ones that are going to be installed the following year, there’s going to be essentially a service revenue for Ondas?

EB:
Okay. Yeah. So, this is what we get system and software maintenance.

So, a year after we deploy equipment, we agree to service it for free. That’s part of the initial purchase, but then, if you want to get the system maintenance, you want to get the software maintenance, the additional security, we’re always making the system better, and I’ll come back to that.

We’re going to be charging an annual fee for that, and we’re targeting 18% on the install base. And we start billing a year later.

So, I’ll give you an example.

We, we talk about having this MC-IoT Rail lab, and in that lab that we’re going to continue over time to make the network better, to develop specific functionality that the Rails request, and that’s something they paid for. And that’s part of that recurring revenue.

OG:
Okay. A hardware sale with ongoing services. That’s a business model that certainly has been well-developed.

EB:
Yeah. And let me also add, if you think about the network… These are great questions.

And so okay, if you build it and it’s big, that’s great.

Getting that recurring revenue is perfect as well, but you got to remember the first… when we build this network, the first thing of all these private industrial companies do, or the industrial will do on the private network is they link their legacy equipment. So, we have to do that.

And they say, there’s planning around this, but they say, “Okay, we’ve got a lot of bandwidth. Now we get extra capacity. We want to adopt new applications so we can run the business more efficiently and productively, more profitably, and we can do it more safely.”

And the drone is a great example.

First, you hook up all the legacy end points as we call them. Then you start to sell new equipment for the new advanced applications. And again, drones are one example.

But they’ll put sensor networks out there. The sensor networks will have to be integrated with our network as well.

There’s a truism about networks, and you’re an investor in these technology markets, that you know, is that the network never shrinks. I’ll give you an example. When you first put your wifi system up in your home, probably 15 years ago, you did it because you wanted your computer to be carried around your house, and you wanted internet access.

Once you did that, you densified the network, so you put more control points.

And then you put more end points on it, too. You put a thermostat, you put a watch, you put two more computers and five phones.

Everything became connected because the network never shrinks and that’s the same thing that’s going to happen. You have the bandwidth; they figure out ways to use it.

OG:
That’s right. Thank you for that, Eric.

Let’s talk about the Aura relationship and if possible, let’s hold off on the AR news. I know it’s almost impossible, but let’s just try.

So, let’s just update the Aura relationship pre the AR acquisition, like in a vacuum. Again, this question is directed at the revenue potential for 2021.

And of course, the partnership is more than about just a year, but what guidance can you give me colloquially speaking about that?

EB:
Well, so this remains a huge opportunity for us and Aura is bringing a lot of value to these unmanned aerial systems, UAS market [inaudible] that FAA problem.

I’ll just step back.

If you recall, in 2020 we built the nationwide network, which was basically, to be frank, the bare bones system to satisfy the FCC license for the 450-megahertz band.

So, the FCC says, if you have a spectrum you have to use it. You’ve got to put up a network. We did that.

And then we immediately turned to two things. Aura needed to get an FCC waiver so that their aviation spectrum, it’s known as Air-to-Ground or A2G spectrum.

They needed to get that aviation spectrum, which was first permitted in the 90s, they needed to modernize it for drone applications.

So, they needed to become not aviation spectrum, but drone spectrum.

And they got that waiver in January.

And that really keyed off the next phase with us, which was to, and we announced this, we have a contract this year in the first half [inaudible].

It’s $1.4 million, but it’s obviously strategically important because we’re optimizing our current product portfolio.

So that’s the Venus radio and the Mercury radio for mobility in the aerial use in the 450-megahertz band so that we can provide testing equipment in demonstration networks to Aura’s customers.

Okay. So, we’re finishing that contract this quarter and then we have the product that Aura is going to distribute to their customers.

And they’re going to have the biggest and most important and a huge number of aerospace defense companies, drone OEMs, who are going to want to buy this system because Aura is solving a big problem for them.

They don’t want to buy the testing equipment in demonstration networks or solving that problem.

And when you’re in their seat, you’re trying to put a drone business together as an operator, there’s 100 things you need to do.

Aura can check that box with a reliable, high quality [system].

Then you’ve basically had Aura solve the problem, which Ondas is there.

So, we expect equipment sales to build through the summer into the second half, or obviously beyond that, but it doesn’t stop there.

That radio network, and if you remember, it is an end-to-end system as well, we have bay station infrastructure, right?

So, that’s in the tower, but then we have to embed the radio in the drone. And essentially that’s putting our software technology in the drone and we have to work on what we call the FAA commercialization.

So, that’s the next phase of the project.

And that’s something that we’re, I would say in the late-stage conversation around an expanded partnership or joint venture type structure, we mentioned this on the call. And with that will become a more development revenue, but more significant than we’ve seen so far.

And we’ll start realizing that very soon, certainly in the second half.

And again, we refer to that as the FAA Commercial [inaudible] project, where we’re doing things like miniaturizing our Mercury radio.

So that radio, we take the enclosure, we just take the printed circuit board, we make it into a credit card sized module that gets slotted in the drone.

Our software is loaded on it, and we have to do that. Obviously, we may have other partners, aerospace partners who are very highly experienced in this help us more work a way as well.

OG:
Okay. And for the ongoing revenue from Aura, do they pay you a recurring revenue fee to use the network? Or how does that work?

EB:
So, I’ve described their business as Aura being the Verizon for drones.

So, they’re providing a managed service, which is basically the connectivity of the drone. And they’re doing that with our bay station infrastructure in drone technology.

Now they charge their customers a recurring fee and what we have on our bay station equipment is the same arrangement.

We’ll have the same arrangement that we have for the railroads.

The bay stations, there’s a very big margin when we deployed the bay station and that’s typical in this industry.

So, it’s a great upfront sale and it’s per unit dollar with nice margins.

And then we get recurring revenue because we’re going to keep making their system better, and so we get the recurrent.

In the drone, we get a license or we get paid to put our own Ondas radio in the drone, but it really is a software sale.

And that needs to be continuously enhanced as well. So, we’re going to get recurring revenue there.

And then I think the next question, I’ll anticipate it, is okay, so when does the commercialization happen and when do we start seeing a lot of drones fly? And what does that rollout look like?

Now, I hope very soon we’re going to be working with Aura to publicize or be able to share the calendar, right? A timeline.

We’re in a rush here because there’s a need in the markets there.

We’ve got to solve this problem for our customers. It was just the FAA problem.

So, I think it’s, if we think about 2021 and much of 22 being the commercialization works, so there’s a lot of development revenue.

In 2022, you’ll see us start to densify networks because we’re going to be doing a lot of FAA testing with the biggest and best aerospace companies you know. And then with the idea that we get the system certified with the FAA sometime shortly thereafter.

So, you are going to see revenue build, gradually move from development to systems build out, and then by 23 you should see that nationwide build out, which is significant.

And then that build out has to happen.

Again, the high dollar value bay stations have to be deployed before any drones fly.

So, we’ll start building a bay station infrastructure, then we’ll start seeing a lot of drones in the sky with our technology.

OG:
Got it. All right. Let’s talk about American Robotics.

I think you did this really well on the call, but I’m going to relay this to investors.

I’m going to ask you to repeat yourself a little bit.

Can you tell me the overarching goal with the acquisition and how important it is that AR is the first and only company approved by the FAA to operate its drones beyond visual line of sight without a human operator on the ground?

EB:
Yep. I’ll do that.

So, the goal of the acquisition is really, it’s core to the company, core to Ondas.

We have to bring complete solutions to the customers. These are complex industrial environments, and the customers are not able to do it themselves. They don’t have the expertise.

The large vendors like Siemens, they also don’t have the expertise. They don’t have the comms, experiments we have, and they don’t have the ability to spread that investment in developing the systems over the number of customers and industries that we have.

So, it has to be a best of breed, a company like Ondas to disrupt these markets and create the end-to-end solution.

So, we have that with our network, right?

Our network is a mission critical network meaning broadband capacity, meaning performance and flexibility, so they can layer on more intelligence through their operations.

At the same time, the drone is a really big challenge because it’s got the regulatory aspect to it as well.

The FAA says, “Hey, the drones, it’s our mandate to protect federal airspace. That we have to protect other aircraft, we have to protect people, property and that’s not negotiable.”

So, safety is an issue, regulatory problems there.

We take American Robotics, and I’m going to tell you how special and unique that FAA approval is.

It is a massive game changer and differentiator.

I’ll come back to that.

But if we can take American Robotics and marry it to that mission critical wireless network, we’re solving the biggest problem they have, right?

So, today they’re trying to figure out, first we have pilots, okay. We’re running networks today. We’re doing all these legacy applications.

We’re running out of bandwidth; we need a better network.

At the same time, they see all the value from the drones and they’re spending a lot of money, but that’s not scaling because they have the pilot problem, right?

It’s expensive, it’s cumbersome, it’s hard to manage. And they still have not solved that FAA problem, even pilots, right?

When the pilot and a drone, if they’re going to go beyond visual line of sight, they have to have spotters, right? People have to be in the field watching the drone and making sure there’s no danger, right? There’s no other aircraft in the vicinity. So, it doesn’t scale.

So, if we can come in and say, “Hey, we got the FAA approved system and by the way, you don’t have to worry about a different network. We’ll back it up to your network.”

It’s really hard to overstate how valuable that is because we had a valuable system before, but now we’re solving this other big problem at the same time.

OG:
Okay. Does, I don’t know if you’ve disclosed this, does American Robotics have revenue?

EB:
So, we did disclose the revenue and all the financials today in an 8-K.

The direct answer is, very modest revenue today.

You can think of American Robotics, I said this on a call, kind of like a biotech.

The biotech’s doing the really hard work, the research and then develop and put the drug together, right? They have to go through an FDA process.

Now, if they’re trying to cure cancer or some other major disease, you know there’s a huge market for the product, but they got to get through that FDA.

They got to get the regulatory approval.

And when they do, it’s a whole different ball game.

Their customers can buy what they have.

And that’s where American Robotics is. Their market is limited, they didn’t want to try to push this system before that FAA approval, because it’s not scalable.

The customer’s like, “Oh, this is great. But if FAA is giving me a headache, I really can’t do much with it.”

So, American Robotics received their FAA approval just this January. It was announced, and it was really widely covered because it was a special, an important day for the drone industry when that was achieved.

So, as soon as they got that, they said, “Okay, we have to now build…” It’s like getting that FDA approval.

They get the regulatory thumbs up. They say, “We have to build our team. We have to put the infrastructure in to support deployments and we have to build inventory.” And of course, that takes capital.

So, they went through a process to raise capital and, or sell the company. And in that process and I’ll tell you, it was competitive. And there was really significant interest from brand name companies, let me put it that way.

But what they saw with us was the ability to fill the big business. They didn’t want to cash out.

So, they’re building a big business with us and that’s the point.

So, where we’re at with American Robotics is, we did give them a loan in connection with the merger because we want to get them started right away.

We see the demand. We want them to have the capacity to start getting systems out in commercial system in the second half.

And we’ll close the deal in August and we’ll put a lot more detail on the growth plan that we have together.

I’ll stop there. That’s the answer. So, the revenue ramp here, post regulatory approval or FAA approval, I believe it should be substantial.

OG:
And do you believe that even in 2021, that there will be a revenue ramp?

EB:
Oh yeah. In 2021, and I really don’t want to give guidance, but we will have deployments. I think we can say that confidently. And as a result, they will be generating revenue on those deployments, for sure.

Let me just leave it at that. In terms of our production goals this year, next year, that’s stuff that we’ll leave for that later data instead on the call.

OG:
Okay. So, trying to draw them together. How does the American Robotics acquisition impact conversations with Aura? Or does it not?

EB:
We have a terrific relationship with Aura and you can think that it’s, this only makes Ondas stronger, which makes us a better partner.

Aura is supportive of this.

In fact, there’s a path here to potentially run the American Robotics on the Aura network, but we’ll kind of put that to the side for a moment.

Let me talk about the drone market, because the drone market is emerging.

And what you’re finding is that there’s all different sizes, shapes and applications for the drone. There’s very big drones. There’s very small drones. There’s medium sized drones.

The American Robotics drone is what they call an SUAS or small UAS, it’s up to 55 pounds.

That’s kind of, to me, a medium drone, but it’s small, but we’re not talking about the Wi-Fidrone you might use in the beach or your backyard.

This is a serious, ruggedized, industrial drone.

There are drones that are X-wing and they’re designed and they’re big and heavy. And they’re designed to travel extremely long distances, 30, 50, 100 miles or more.

There are other drones that are smaller, like the Scout System for American Robotics that are rotor based.

And that’s where you get the VTOL, V-T-O-L, the vertical take-off and landing. That’s a different class of drone.

And then you get drones that fly at high altitudes and others that fly at low altitudes. And all of this is connected into FAA policy and FAA, or regulations, I should say, in networks.

So, Aura’s sweet spot is those big, heavy, fast moving drones that go long distances.

So, you can think about those big inspection drones that Collins Aerospace and AeroVironment are going to sell, General Atomics.

You can think about those big air taxis and the flying cars, they call it Urban Air Mobility, UAM.

Those are going to need that navigation link like Aura provides.

And that’s a very high value market, long distance market.

Aura’s network with us is going to be very versatile. They can go to lower altitudes, but there’s also the private networks.

So, as I said earlier, the railroads today are running some drone programs, mostly pilot type stuff, but meaningful size on their legacy 900 network.

So, the drone on a private network is what I’m talking about. That’s a big market. We’re in that.

So, we have Aura with a big nationwide system, we have the private network, and then we have the Scout drone.

That’s a standalone system that can just be deployed in the field and doesn’t have to be on private network.

The network there is the bay station or the box to the drone. It might go three, four or five miles.

We can put our technology in that.

So, what I’m describing is a very diverse infrastructure environment, the picks and shovels as I described it, diverse use cases.

And what American Robotics does is it really adds even more scale on the network side with what we do.

And I think, as we’re getting our technology integrated with AR, we’re getting integrated with the rails and other private networks, we’re doing the work with Aura, I think the ability for us to get into those high-volume markets with those small drones is really significant.

So, there’s that added benefit of the business becoming, we called it the backbone or the nervous system, for potentially all drone applications.

OG:
Okay. Is there a shareholder vote to approve the acquisition or is it a formality or is there some risk to it falling through?

EB:
Well, it wouldn’t be responsible for me to call it a formality. So, I won’t.

We will be having a shareholder vote. There’s a proxy statement that, as a result, we’ll be filing sometime soon and we expect the shareholder vote to happen in Q3.

OG:
So, I’m going to try and take the pessimist view for a second.

EB:
Okay.

OG:
One could argue that a software defined radio, SDR, software defined radio by itself is a commodity, or it will be commoditized. So, unless there’s a first mover advantage that’s really profound, which may be the case with AR, what are the barriers to entry for competitors other than obviously regulatory approval and what are the barriers to exit for customers that you will acquire?

EB:
Okay. So let me tackle the software defined radio.

I would say there’s no element of the markets we’re attacking where our software defined radio is a commodity.

So, take Aura, for example, there’s no radio network for them in their 450 band. We’re going through a development process, and building a very sophisticated radio for Aura to meet the FAA requirements and customer requirements, the use case.

This is very difficult. There’s not going to be multiple vendors there.

Now what we will do, however, is we will be willing to have other hardware players in this market and license to them. But it will be our platform.

And that’s why I made this analogy.

If you think about Aura as a Verizon for industrial drones, there’s a bay station business here. We can have partners there.

We’re like Qualcomm putting our software in the drone.

We can make the drone radio. We’re talking to Aura about that. We probably will, but we’ll probably have other vendors who say, “We want to make the radio,” without naming names. That’d be fine for us, because the margin is in the software.

OG:
All right. Let’s do some financial stuff.

I’ll start with the balance sheet.

It looks like cash burn, I know it’s a non-GAAP measure, will be between 1 and 2 million for Q2 based on what was disclosed on the earnings call for Q1.

How do you look at the current balance sheet?

What I mean to ask is … Obviously you need to make strategic moves that may not be public yet, and certainly things pop up that you don’t even know about yet, like acquiring AR.

But, as of now, does Ondas feel that it can turn cash flow positive with its current cash position? Has the inclusion of an AR team and their expenses … Has that changed anything there?

EB:
I feel comfortable with our balance sheet and our cash position. We do have a focus.

Our objective is to get to self-funding at Ondas networks as soon as possible.

That’s going to be connected in a big way to the commercial roll out in the 900 [MHz] network.

We have the ability to make the payment, so there’s a $7.5 million cash payment with the deal. I’ll just say I’m comfortable with our balance sheet.

OG:
Okay. You have filed a shelf, right?

EB:
Right.

Yeah, we did shelf. I’d just refer you to the filings, but I believe we put the shelf in place in early January. Full flexibility.

OG:
Can you tell me how many fully diluted shares Ondas has as of the acquisition, or whatever the most recent public announcement is?

EB:
I can give you … Is it okay, because I don’t have it in front of me, a round number?

OG:
Yeah. Sure. Of course.

EB:
Okay. We have about 26.5 million shares outstanding right now.

OG:
Does that include whatever happened with the other portion of the AR acquisition?

EB:
No, it doesn’t. Bear with me, I’ll pull up … We put out some pro forms today, and the 8-K.

I want to make sure I’m quoting it accurately.

Pro forma for the deal, there’s 9.2 million shares going to AR, essentially.

OG:
Okay. That would give us 35 million in total?

EB:
35 million.

OG:
Okay. That explains pretty much everything to me. I think you guys are making great progress. I think we’re all, I’m sure you are too, ready to see some of these deals materially drive revenue.

Instead of the 1 to 3 million, the 5, 10, 15, 20, 25 million, all in due time.

As far as I know, Eric, Ondas has not given a 2021 revenue guidance. Is that right? I’m not missing that?

EB:
No, we haven’t. There are some estimates up the street.

It is hard to model, and I understand that.

I’m trying to do my best to make it easier.

I think once we have that inflection point of the beginning of the 900 build, it will be.

I want to be careful if I can’t give you some specific guidance, I want to frame the opportunity.

At the same time, not just frame it, but what we try to do is, along the way, show the pieces of a puzzle that fit to validate what we’re doing.

Siemens coming back to their second product, for example. This lab that [inaudible] established.

It’s the stuff like that that I think is important and shows that it’s coming.

OG:
Yeah. I’m looking at the two analysts who cover you, and while you can always look at the mean, I like to look at the high and low in particular when it’s two analysts, because it’s just two guys.

The spread is pretty wide. Then you start getting to 2022, and the spread is quite tight. Then, 2023, it’s even tighter. Or not even tighter, but equally tight in percentage terms.

They’re starting to model some clearly, between the two of them, they’re landing somewhere near the same place for 2022 and ’23, and ’21 is a little bit up in the air.

Which, I think 2021 is up in the air, so that’s accurate.

EB:
Yeah. It is. It’s just tossing the cap, put the stake in the ground.

OG:
Yeah. For sure. All right.

EB:
Yeah. I guess at that point, is we’re seeing you as you’re analyzing it, just, must feel like the visibility is currently a lot greater for the next year. We’re slugging it out every day. This is an important … It’s not just important to us, I do believe the rails.

OG:
Yeah. This year, 2021, the first five months, almost six months, five months, have been very, very busy, all leading up to what I think most people are hoping for, a back 2021 where we see this jump in revenue relative to Ondas’ history.

But you also do have to recognize that December 31st is actually not that different than January 4th, it’s just the end of this fiscal year. It’s sort of both ways.

Those are all the questions I have, Eric.

Is there anything that I didn’t ask that you think I should have? Or is there something you want to say that you haven’t said? I want to give you the last word.

EB:
No, I think we covered it. You know the story, so … You’re tracking, I think, the right things.

OG:
All right, Eric.

I appreciate the time. Congratulations on the AR win. Sounds like it was competitive, and you got them, so nice job. I will talk to you next quarter.

Eric Brock:
All right. Awesome. Thanks, Ophir.

Risk
It’s difficult to know where to start a conversation about risk with a company this size.

Is product-market fit the largest risk, or is it the thematic?

Is it management’s unproven track record, or is it the industry’s legacy history of poor innovation?

While those are all risks, in truth, for a company this size the risk is far more existential and far less wide ranging — the risk, first and foremost, is that this company may not be a going concern in a month, a year, or two-years.

* That is, will this company have a stock price above $0?

* Will the company deliver bookings not just at the $40 million – $50 million level in two-years (a 20-fold from 2020), but at the level that for most of the world is considered table stakes to be a public company — $100 million?

The risk appetite in the market for all things technology has become so ravenous that now through SPACs we see companies going public with far smaller revenue bases than $100 million, but even then, the growth rates are immense and a path to legitimacy is clear.

With Ondas, the path is less clear to outsiders, and even if the path is traversed, we are looking at two years to just reach a semblance of legitimacy of even $50 million in revenue.

Then, certainly, we must consider the risk of better funded and connected competitors, product-market fit, and management’s ability to execute.

* Can Ondas execute on its visions to work with massive partners in these verticals?

* Cash crunch — it’s quite apparent that sales cycles are very long for this business and delays could put Ondas in a serious cash crunch looking to raise capital again with no revenue.

* Customer adoption — will the legacy rails and other industrial users be willing to upgrade? The ROI is apparent as are some FCC mandates, but adoption could still be slow.

* Competition — if the market looks too good for Ondas, then better funded competitors could arise just at the time Ondas looks to close make or break deals for revenue.

These are all legitimate risks and each is substantially elevated in a company so small.

One could argue with veracity that a company this size has no business being public.

But here it is, and here we are, writing about it for Top Picks.

For a single sentence to umbrella risk, I say this:

The risk that Ondas goes away and the stock price goes to zero is the most pressing risk and it’s a non-trivial possibility.

Conclusion
Today we maintain our Top Pick status on Ondas (ONDS) fully aware of a long road ahead, one which may well end up in a dead end.

Certainly, our CEO conversations help us keep track of the moving parts, but in the end, investors need revenue, not conversations.

Thanks for reading, friends. Stay safe.

The author is long shares of Ondas at the time of this writing.

The author is long shares of Nvidia, Shopify, Jumia, and Fastly of the other companies mentioned.

Please read the legal disclaimers below and as always, remember, we are not making a recommendation or soliciting a sale or purchase of any security ever. We are not licensed to do so, and we wouldn’t do it even if we were. We’re sharing my opinions, and provide you the power to be knowledgeable to make your own decisions.

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