Ondas Holdings Inc. - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from________ to ___________

Commission File Number: 001-39761

ONDAS HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Nevada		47-2615102
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

411 Waverley Oaks Road, Suite 114, Waltham, MA 02452

(Address of principal executive offices) (Zip Code)

(888) 350-9994

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock par value $0.0001		ONDS		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the issuer’s Common Stock as of November 13, 2023, was 58,311,317.

ONDAS HOLDINGS INC.

INDEX TO FORM 10-Q

		Page

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	1

	Condensed Consolidated Statements of Operations for the Three and Nine months Ended September 30, 2023 and 2022 (Unaudited)	2

	Condensed Consolidated Statements of Stockholders’ Equity and Temporary Equity for the Three and Nine months Ended September 30, 2023 and 2022 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2023 and 2022 (Unaudited)	4

	Notes to the Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	51

PART II - OTHER INFORMATION		52

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5.	Other Information	53

Item 6.	Exhibits	54

Item 1. Financial Statements

ONDAS HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2023			2022
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	20,971,982		$	29,775,096
Restricted cash		39,909			-
Accounts receivable, net		4,894,247			104,276
Inventory, net		2,580,166			2,173,017
Note receivable		-			2,000,000
Other current assets		1,785,250			1,749,613
Total current assets		30,271,554			35,802,002

Property and equipment, net		5,443,910			3,023,285

Other Assets:
Goodwill, net		27,671,921			25,606,983
Intangible assets, net		32,444,883			28,863,773
Long-term equity investment		1,500,000			1,500,000
Deposits and other assets		651,741			218,206
Operating lease right of use assets		2,661,009			2,930,996
Total other assets		64,929,554			59,119,958
Total assets	$	100,645,018		$	97,945,245

LIABILITIES, TEMPORARY EQUITY, AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	5,472,062		$	2,965,829
Operating lease liabilities		564,878			580,593
Accrued expenses and other current liabilities		2,640,357			3,268,993
Convertible note payable, net of unamortized debt discount and issuance cost of $2,532,734 and $2,303,664, respectively		26,065,390			15,849,445
Government grant liability		471,276			-
Deferred revenue		341,018			61,508
Total current liabilities		35,554,981			22,726,368

Long-Term Liabilities:
Notes payable		300,000			300,000
Convertible notes payable, net of current, net of unamortized debt discount and issuance cost of $528,713 and $948,201, respectively		4,262,954			14,198,690
Accrued interest		36,218			40,965
Government grant liability, net of current		2,012,984			-
Operating lease liabilities, net of current		2,252,884			2,456,315
Total long-term liabilities		8,865,040			16,995,970
Total liabilities		44,420,021			39,722,338

Commitments and Contingencies (Note 12)

Temporary Equity
Redeemable noncontrolling interest		11,029,479			-

Stockholders’ Equity
Preferred stock - par value $0.0001; 5,000,000 shares authorized at September 30, 2023 and December 31, 2022, respectively, and none issued or outstanding at September 30, 2023 and December 31, 2022, respectively		-			-
Preferred stock, Series A - par value $0.0001; 5,000,000 shares authorized at September 30, 2023 and December 31, 2022, respectively, and none issued or outstanding at September 30, 2023 and December 31, 2022, respectively		-			-
Common Stock - par value $0.0001; 116,666,667 shares authorized; 55,184,623 and 44,108,661 issued and outstanding, respectively September 30, 2023 and December 31, 2022, respectively		5,518			4,411
Additional paid in capital		229,411,292			211,733,690
Accumulated deficit		(184,221,292	)		(153,515,194	)
Total stockholders’ equity		45,195,518			58,222,907
Total liabilities, temporary equity, and stockholders’ equity	$	100,645,018		$	97,945,245

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

ONDAS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022

Revenues, net	$	2,665,190		$	632,489		$	10,730,145		$	1,646,905
Cost of goods sold		2,110,312			233,001			6,076,595			806,571
Gross profit		554,878			399,488			4,653,550			840,334

Operating expenses:
General and administration		2,563,319			7,362,274			13,347,278			18,727,626
Sales and marketing		1,224,144			792,613			4,205,217			2,210,021
Research and development		2,701,436			5,793,345			14,184,420			14,815,852
Total operating expenses		6,488,899			13,948,232			31,736,915			35,753,499

Operating loss		(5,934,021	)		(13,548,744	)		(27,083,365	)		(34,913,165	)

Other income (expense), net
Other expense, net		(419,730	)		(21,392	)		(349,343	)		(32,655	)
Interest income		379			-			7,724			-
Interest expense		(893,951	)		(8,205	)		(3,197,600	)		(34,345	)
Foreign exchange loss, net		(45,138	)		-			(83,514	)		-
Total other income (expense)		(1,358,440	)		(29,597	)		(3,622,733	)		(67,000	)

Net loss		(7,292,461	)		(13,578,341	)		(30,706,098	)		(34,980,165	)
Less preferred dividends attributable to noncontrolling interest		212,208			-			212,208			-
Less deemed dividends attributable to accretion of redemption value		410,322			-			410,322			-
Net loss attributable to shareholders		(7,914,991	)		(13,578,341	)		(31,328,628	)		(34,980,165	)

Net loss per share - basic and diluted	$	(0.15	)	$	(0.32	)	$	(0.62	)	$	(0.83	)

Weighted average number of common shares outstanding, basic and diluted		53,892,848			42,661,607			50,923,225			41,946,041

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

ONDAS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Unaudited)

	Common Stock				Additional Paid in		Accumulated			Total Stockholders’
	Shares		Amount		Capital		Deficit			Deficit
Balance, January 1, 2022		40,990,604	$	4,099	$	192,502,122	$	(80,273,389	)	$	112,232,832
Stock-based compensation		-		-		1,328,395		-			1,328,395
Net loss		-		-		-		(10,010,399	)		(10,010,399	)
Balance, March 31, 2022		40,990,604	$	4,099	$	193,830,517	$	(90,283,788	)	$	103,550,828
Issuance of shares in connection with acquisition of intangible asset from Ardenna, Inc.		780,000		78		5,943,522		-			5,943,600
Stock-based compensation		-		-		1,555,184		-			1,555,184
Shares issued as per ATM agreement (Net of offering costs)		852,679		85		6,039,020		-			6,039,105
Net loss		-		-		-		(11,391,425	)		(11,391,425	)
Balance, June 30, 2022		42,623,283	$	4,262	$	207,368,243	$	(101,675,213	)	$	105,697,292
Shares issued as per ATM agreement (Net of offering costs)		11,995		1		61,662		-			61,663
Issuance of Shares in connection with acquisition of asset from Field of View LLC		16,000		2		74,018		-			74,020
Shares issued in exercise of options		31,057		3		64,906		-			64,909
Stock-based compensation		-		-		1,483,155		-			1,483,155
Net Loss		-		-		-		(13,578,341	)		(13,578,341	)
Balance, September 30, 2022		42,682,335	$	4,268	$	209,051,984	$	(115,253,554	)	$	93,802,698

	Redeemable Noncontrolling Interest				Common Stock				Additional Paid in			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital			Deficit			Deficit
Balance, January 1, 2023		-	$	-		44,108,661	$	4,411	$	211,733,690		$	(153,515,194	)	$	58,222,907
Issuance of shares in connection with acquisition of Airobotics, Ltd.		-		-		2,844,291		284		5,261,654			-			5,261,938
Issuance of shares in connection with acquisition of the assets of Iron Drone, Ltd.		-		-		46,129		5		85,795			-			85,800
Assumption of vested stock options in connection with acquisition of Airobotics, Ltd.		-		-		-		-		700,690			-			700,690
Delivery of shares for restricted stock units		-		-		4,090		-		-			-			-
Issuance of shares for payment on convertible debt		-		-		2,104,988		211		3,004,583			-			3,004,794
Stock-based compensation		-		-		-		-		1,263,356			-			1,263,356
Net loss		-		-		-		-		-			(14,455,551	)		(14,455,551	)
Balance, March 31, 2023		-	$	-		49,108,159	$	4,911	$	222,049,768		$	(167,970,745	)	$	54,083,934
Issuance of shares for payment on convertible debt		-		-		3,341,704		334		2,751,041			-			2,751,375
Issuance of shares upon exercise of options		-		-		1,539		-		701			-			701
Stock-based compensation		-		-		-		-		1,639,869			-			1,639,869
Net loss		-		-		-		-		-			(8,958,086	)		(8,958,086	)
Balance, June 30, 2023		-	$	-		52,451,402	$	5,245	$	226,441,379		$	(176,928,831	)	$	49,517,793
Sale of redeemable preferred stock in Ondas Networks, net of issuance costs		429,123		10,406,949		-		-		(307,665	)		-			(307,665	)
Issuance of warrants in connection with the sale of redeemable preferred stock in Ondas Networks		-		-		-		-		4,593,051			-			4,593,051
Preferred dividends attributable to redeemable noncontrolling interest		-		212,208		-		-		(212,208	)		-			(212,208	)
Accretion of redeemable preferred stock in Ondas Networks		-		410,322		-		-		(410,322	)		-			(410,322	)
Issuance of shares for payment on convertible debt		-		-		1,984,918		198		1,563,917			-			1,564,115
Issuance of shares upon exercise of options		-		-		21,940		2		10,088			-			10,090
Delivery of shares for vesting of restricted stock units		-		-		726,363		73		(73	)		-			-
Stock-based compensation		-		-		-		-		(2,266,875	)		-			(2,266,875	)
Net Loss		-		-		-		-		-			(7,292,461	)		(7,292,461	)
Balance, September 30, 2023		429,123	$	11,029,479		55,184,623	$	5,518	$	229,411,292		$	(184,221,292	)	$	45,195,518

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

ONDAS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2023			2022

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(30,706,098	)	$	(34,980,165	)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation		648,624			280,195
Amortization of debt discount		2,438,462			-
Amortization of intangible assets		3,103,591			2,726,295
Amortization of right of use asset		715,041			633,110
Loss on intellectual property		12,223			11,095
Loss on disposal of equipment		7,757			-
Stock-based compensation		636,350			4,366,734
Change in fair value of government grant liability		161,764			-
Changes in operating assets and liabilities:
Accounts receivable		(4,677,726	)		392,036
Inventory		1,087,558			(253,471	)
Other current assets		767,152			(244,800	)
Deposits and other assets		(370,684	)		-
Accounts payable		1,536,991			987,392
Deferred revenue		(1,323,025	)		(168,453	)
Operating lease liability		(710,546	)		(451,542	)
Accrued expenses and other current liabilities		(1,436,178	)		502,901
Net cash flows used in operating activities		(28,108,744	)		(26,198,673	)

CASH FLOWS FROM INVESTING ACTIVITIES
Patent costs		(62,281	)		(29,678	)
Purchase of equipment		(94,972	)		(3,525,724	)
Proceeds from sale of equipment		33,568			-
Cash paid for Ardenna Inc. asset acquisition		-			(900,000	)
Cash paid for Iron Drone asset acquisition		(135,000	)		-
Cash acquired from the acquisition of Airobotics Ltd.		1,049,454			-
Investment in Dynam AI		-			(1,000,000	)
Cash paid for Field of View LLC asset acquisition		(145,833	)		(41,667	)
Net cash flows provided by (used in) investing activities		644,936			(5,497,069	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible notes payable, net of issuance costs		9,309,513			-
Proceeds from sale of shares under ATM agreement		-			6,099,267
Proceeds from exercise of options and warrants		10,791			64,909
Proceeds from government grant		189,752			-
Proceeds from sale of redeemable preferred stock in Ondas Networks, net of issuance costs		14,692,335			-
Payments on convertible notes payable		(4,354,911	)		-
Payments on government grant liability		(6,576	)		-
Payments on loan payable		(1,140,301	)		-
Net cash flows provided by financing activities		18,700,603			6,164,176

Decrease in cash, cash equivalents, and restricted cash		(8,763,205	)		(25,531,566	)
Cash, cash equivalents, and restricted cash, beginning of period		29,775,096			40,815,123
Cash, cash equivalents, and restricted cash, end of period	$	21,011,891		$	15,283,557

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	163,418		$	12,920
Cash paid for income taxes	$	-		$	-

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Common Stock and warrants issued in relation to acquisition of Airobotics, Ltd.	$	5,962,628		$	-
Common Stock issued in relation to acquisition of the assets of Iron Drone, Ltd.	$	85,800		$	-
Common stock issued in exchange for debt repayment	$	7,320,284		$	-
Warrants issued in relation to the sale of redeemable preferred stock in Ondas Networks	$	12,683,549		$	-
Preferred dividends attributable to redeemable noncontrolling interest	$	212,208		$	-
Accretion of redeemable preferred stock in Ondas Networks	$	410,322		$	-
Noncash consideration for purchase of intangibles asset	$	-		$	6,019,120
Operating leases right-of-use assets obtained in exchange of lease liabilities	$	105,950		$	2,928,911

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

ONDAS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

The Company

Ondas Holdings Inc. (“Ondas Holdings”, “Ondas”, the “Company,” “we,” or “our”) was originally incorporated in Nevada on December 22, 2014, under the name of Zev Ventures Incorporated. On September 28, 2018, we acquired Ondas Networks Inc., a Delaware corporation (“Ondas Networks”), and changed our name to Ondas Holdings Inc. On August 5, 2021, we acquired American Robotics, Inc. (“American Robotics” or “AR”), a Delaware corporation. On January 23, 2023, we acquired Airobotics, Ltd. (“Airobotics”), an Israeli-based developer of autonomous drone systems. See Note 5 – Goodwill and Business Acquisition.

As a result of these acquisitions, Ondas Networks, American Robotics and Airobotics became our subsidiaries. These three subsidiaries are now Ondas’ primary focus. Ondas’ corporate headquarters are located in Waltham, Massachusetts. Ondas Networks’ offices and facilities are located in Sunnyvale, California, American Robotics’ offices and facilities are located in Waltham, Massachusetts and Marlborough, Massachusetts, and Airobotics’ offices and facilities are located in Petah Tikva, Israel.

Business Activity

Ondas is a leading provider of private wireless, drone, and automated data solutions through its subsidiaries Ondas Networks, American Robotics, and Airobotics.

On February 14, 2023, the Company announced the formation of Ondas Autonomous Systems, a new business unit to manage the combined drone operations of subsidiaries American Robotics and Airobotics. Ondas Networks and Ondas Autonomous Systems together provide users in rail, energy, mining, agriculture, public safety and critical infrastructure and government markets with improved connectivity, data collection capabilities, and data collection and information processing capabilities. We operate Ondas Networks and Ondas Autonomous Systems as separate business segments.

Ondas Networks

Ondas Networks provides wireless connectivity solutions enabling mission-critical Industrial Internet applications and services. We refer to these applications as the Mission-Critical Internet of Things (“MC-IoT”). Our wireless networking products are applicable to a wide range of MC-IoT applications, which are most often located at the very edge of large industrial networks. These applications require secure, real-time connectivity with the ability to process large amounts of data at the edge of large industrial networks. Such applications are required in all of the major critical infrastructure markets, including rail, electric grids, drones, oil and gas, and public safety, homeland security and government, where secure, reliable and fast operational decisions are required in order to improve efficiency and ensure a high degree of safety and security.

We design, develop, manufacture, sell and support FullMAX, our patented, Software Defined Radio (“SDR”) platform for secure, licensed, private, wide-area broadband networks. Our customers install FullMAX systems in order to upgrade and expand their legacy wide-area network infrastructure. Our MC-IoT intellectual property has been adopted by the Institute of Electrical and Electronics Engineers (“IEEE”), the leading worldwide standards body in data networking protocols, and forms the core of the IEEE 802.16s standard. Because standards-based communications solutions are preferred by our mission-critical customers and ecosystem partners, we have taken a leadership position in IEEE as it relates to wireless networking for industrial markets. As such, management believes this standards-based approach supports the adoption of our technology across a burgeoning ecosystem of global partners and end markets.

Our software-based FullMAX platform is an important and timely upgrade solution for privately-owned and operated wireless wide-area networks, leveraging Internet Protocol-based communications to provide more reliability and data capacity for our mission-critical infrastructure customers. We believe industrial and critical infrastructure markets throughout the globe have reached an inflection point where legacy serial and analog based protocols and network transport systems no longer meet industry needs. In addition to offering enhanced data throughput, FullMAX is an intelligent networking platform enabling the adoption of sophisticated operating systems and equipment supporting next-generation MC-IoT applications over wide field areas. These new MC-IoT applications and related equipment require more processing power at the edge of large industrial networks and the efficient utilization of network capacity and scarce bandwidth resources which can be supported by the “Fog-computing” capability integrated in our end-to-end network platform. Fog-computing utilizes management software to enable edge compute processing and data and application prioritization in the field enabling our customers more reliable, real-time operating control of these new, intelligent MC-IoT equipment and applications at the edge.

Ondas Autonomous Systems

Our Ondas Autonomous Systems business unit designs, develops, and markets commercial drone solutions via the Optimus System™ and Scout System™ (the “Autonomous Drone Platforms”).

The Autonomous Drone Platforms are highly automated, AI-powered drone systems capable of continuous, remote operation and are marketed as “drone-in-a-box” turnkey data solution services. They are deployed for critical industrial and government applications where data and information collection and processing are required. These use cases include public safety, security and smart city deployments where routine, high-resolution automated emergency response, mapping, surveying, and inspection services are highly valued, in addition to industrial markets such as oil & gas, rail and ports which emphasize security and inspection solutions. The Autonomous Drone Platforms are typically provided to customers under a Data-as-a-Service (DaaS) business model, while some customers will choose to purchase and own and operate an Optimus Systems™.

American Robotics and Airobotics have industry leading regulatory successes which include having the first drone system approved by the Federal Aviation Administration (“FAA”) for automated operation beyond-visual-line-of-sight (BVLOS) without a human operator on-site.

In addition to the Autonomous Drone Platforms, Ondas Autonomous Systems offers a counter-drone system called the Raider™. The Raider™ was developed by Iron Drone and is deployed by government and enterprise customers to provide security and protect critical infrastructure, assets and people from the threat of hostile drones. Airobotics acquired the assets of Iron Drone on March 6, 2023.

Autonomous Drone Platforms

We design, develop and manufacture autonomous drone systems, providing high-fidelity, ultra-high-resolution aerial data to enterprise and government customers. We currently prioritize the marketing of our Optimus System™ which provides customers with a turnkey data and information solution and the ability to continuously digitize, analyze, and monitor their assets and field operations in real-time or near real-time. We believe the market opportunity for our Scout System™ remains significant. As we drive market adoption with the Optimus platform, we anticipate re-introducing the Scout platform including newly enhanced versions to help segment the market for different use cases and price points.

The Optimus System™ has been designed from the ground up as an end-to-end product capable of continuous unattended operations in the real world. Powered by innovations in robotics automation, machine vision, edge computing, and AI, the Optimus System™ provides efficiencies as a drone solution for commercial use. Once installed in the field at customer locations, a fleet of connected Optimus Systems™, which are often deployed as networked drone infrastructure, which we refer to as Urban Drone Infrastructure, remains indefinitely in an area of operation, automatically collecting and seamlessly delivering data and information regularly and reliably.

We market the Optimus System™ under a DaaS business model, whereby our drone platform aggregates customer data and provides the data analytics meeting customer requirements in return for an annual subscription fee. Some customers purchase Optimus Systems™ to own and operate themselves. We also engage distributors to assist in the sales and marketing of our Optimus System™ in geographic markets where its more cost effective to identify and service potential customers by engaging local third parties. These distribution agreements can include joint ventures, where Ondas Autonomous Systems will provide technical expertise to support the joint venture partner in the provision of aerial data services to customers.

The Optimus System™ consists of (i) Optimus™, a highly automated, AI-powered drone with advanced imaging payloads (ii) the Airbase™, a ruggedized weatherproof base station for housing, battery swapping, battery charging, payload swapping, data processing, and cloud transfer, and (iii) Insightful™, a secure web portal and API which enables remote interaction with the system, data, and resulting analytics anywhere in the world. These major subsystems are connected via a host of supporting technologies. Airbase™ has internal robotic systems that enable the automated swapping of batteries and payloads. Automated battery swapping allows for 24/7 operation of the Optimus as the Optimus drone can immediately be redeployed after returning to the dock for a battery swap. Similarly, the ability to autonomously swap sensors and advanced payloads without human intervention allows for the Optimus System™ to provide multiple applications and use cases from a single location.

American Robotics and Airobotics have industry leading regulatory successes which include having the first drone system approved by the FAA for automated operation BVLOS without a human operator or visual observer on-site. American Robotics’ FAA approvals were enabled by integrating a suite of proprietary technologies, including Detect-and-Avoid (“DAA”) and other proprietary intelligent safety systems into its autonomous drone platform, which we plan to integrate into the Optimus System™. On September 6, 2023, Airobotics received approval for Type Certification (“TC”) from the FAA for the Optimus UAV. TC approval enables expanded operation for the Optimus System™ in the United States including flight operations in populated areas.

The Raider™

The Raider™ is a counter-drone system, which was designed and developed by Iron Drone, that we are marketing to government and enterprise customers who can utilize the system for security and the protection of critical infrastructure, assets and people from the threat of hostile drones. A typical Raider™ deployment location would include sensitive locations such as borders, stadiums or schools, or near critical assets such as power plants and military bases, and for high profile locations such as amusement parks or where public events are held.

The Raider™ is designed to detect, track and intercept unauthorized, or hostile unmanned aircraft and is most often sold with three small UAVs that are housed in a docking station. The Raider UAV has live video capability and a payload containing a net that can be deployed to intercept a hostile drone. Upon detection of an unauthorized drone, one or more Raider™ UAVs can be autonomously deployed at high speeds to track the unauthorized aircraft. If the unauthorized aircraft is deemed hostile, the Raider™ UAV can deploy the netting to physically intercept the aircraft. A parachute integrated with the netting allows the intercepted drone to safely fall to the ground for collection by our customer.

Liquidity

We have incurred losses since inception and have funded our operations primarily through debt and the sale of capital stock. On September 30, 2023, we had an accumulated deficit of approximately $184,221,000. On September 30, 2023, we had net long-term borrowings outstanding of approximately $6,576,000, net of debt discount and issuance costs of approximately $529,000, and short-term borrowings outstanding of approximately $26,537,000, net of debt discount and issuance costs of approximately $2,533,000. On September 30, 2023, we had total cash and restricted cash of approximately $21,012,000 and a working capital deficit of approximately $5,283,000.

In July and August 2023, the Company raised $15,000,000 in gross proceeds from the sale of redeemable preferred stock in Ondas Networks and warrants to purchase shares of Common Stock (as defined below) in Ondas Holdings and approximately $9,310,000 in net proceeds from the sale of convertible debt. These amounts are included in the total cash and restricted cash of approximately $21,012,000 as of September 30, 2023.

We expect to fund our operations for the next twelve months from the filing date of this Quarterly Report on Form 10-Q from gross profits generated from revenue growth, potential prepayments from customers for purchase orders, potential proceeds from warrants issued and outstanding, and additional funds that we may seek through equity or debt offerings and/or borrowings under additional notes payable, lines of credit or other sources. There is substantial doubt that the funding plans will be successful and therefore the conditions discussed above have not been alleviated.

Our future capital requirements will depend upon many factors, including progress with developing, manufacturing and marketing our technologies, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, our ability to establish collaborative arrangements, marketing activities and competing technological and market developments, including regulatory changes and overall economic conditions in our target markets. Our ability to generate revenue and achieve profitability requires us to successfully market and secure purchase orders for our products and services from customers currently identified in our sales pipeline as well as new customers. We also will be required to efficiently manufacture and deliver equipment on those purchase orders. These activities, including our planned research and development efforts, will require significant uses of working capital. There can be no assurance that we will generate revenue and cash as expected in our current business plan. We may seek additional funds through equity or debt offerings and/or borrowings under additional notes payable, lines of credit or other sources. We do not know whether additional financing will be available on commercially acceptable terms or at all, when needed. If adequate funds are not available or are not available on commercially acceptable terms, our ability to fund our operations, support the growth of our business or otherwise respond to competitive pressures could be significantly delayed or limited, which could materially adversely affect our business, financial conditions, or results of operations.

Inflation Reduction Act of 2022 and Tax Cuts and Jobs Act of 2017

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA includes a 15% Corporate Alternative Minimum Tax (“Corporate AMT”) for tax years beginning after December 31, 2022. We do not expect the Corporate AMT to have a material impact on our consolidated financial statements. Additionally, the IRA imposes a 1% excise tax on net repurchases of stock by certain publicly traded corporations. The excise tax is imposed on the value of the net stock repurchased or treated as repurchased. The new law applies to stock repurchases occurring after December 31, 2022.

Under the Tax Cuts and Jobs Act of 2017, we are required to capitalize R&D expenses for tax purposes and amortize over five years for domestic based expenses and fifteen years for foreign expenses. Given our tax net operating loss carryforward position we do not expect this change to have a material impact on our financial statements.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial statements for interim periods in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). The Company’s accounting policies are described in the “Notes to Consolidated Financial Statements” in the 2022 Form 10-K and are updated, as necessary, in this Quarterly Report on Form 10-Q. The December 31, 2022 consolidated balance sheet data presented for comparative purposes was derived from the audited financial statements but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

The condensed consolidated financial statements include the accounts of the Company and our subsidiaries, Ondas Networks, American Robotics, and Airobotics. All inter-company accounts and transactions between these entities have been eliminated in these unaudited condensed consolidated financial statements. The functional currency of the Company and all of our subsidiaries is the U.S. dollar.

Business Combinations

We utilize the purchase method of accounting for business combinations. This method requires, among other things, that results of operations of acquired companies are included in Ondas’ results of operations beginning on the respective acquisition dates and that assets acquired, and liabilities assumed are recognized at fair value as of the acquisition date. Any excess of the fair value of consideration transferred over the fair value of the net assets acquired is recognized as goodwill. Contingent consideration liabilities are recognized at the estimated fair value on the acquisition date; these are recorded in either other accruals within current liabilities (for expected payments in less than a year) or other non-current liabilities (for expected payments in greater than a year), both on our consolidated balance sheets. Subsequent changes to the fair value of contingent consideration liabilities are recognized in other income (expense) in the Consolidated Statements of Operations. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows. The fair value of assets acquired, and liabilities assumed in certain cases, may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and whether it is necessary to perform goodwill impairment process. The impairment of Goodwill was $19,419,600 for the year ended December 31, 2022, see Note 5 – Goodwill and Business Acquisition, for further details.

Intangible assets represent patents, licenses, software and allocation of purchase price to identifiable intangible assets of an acquired business. The Company estimates the fair value of its reporting units using the fair market value measurement requirement. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.

We amortize our intangible assets with a finite life on a straight-line basis, over 3 years for software; 10 years for patents; 3-10 years for developed technology, 10 years for licenses, trademarks, marketing-related assets and the FAA waiver; 5 years for customer relationships; and 1 year for non-compete agreements.

Segment Information

Operating segments are defined as components of an entity for which discrete financial information is available and is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in making decisions regarding resource allocation and performance assessment. The Company’s CODM is its Chief Executive Officer. The Company determined it has two reportable segments: Ondas Networks and Ondas Autonomous Systems as the CODM reviews financial information for these two businesses separately. The Company has no inter-segment sales.

Use of Estimates

The process of preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements. Such management estimates include those relating to allocation of consideration for business combinations to identifiable tangible and intangible assets, revenue recognition, inventory write-downs to reflect net realizable value, assumptions used in the valuation of stock-based awards and valuation allowances against deferred tax assets. Actual results could differ from those estimates.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. On September 30, 2023 and December 31, 2022, we had no cash equivalents. Restricted cash includes cash that is not readily available for use in the Company’s operating activities. Restricted cash is attributable to minimum cash reserve requirements for Airobotics’ credit cards. The Company periodically monitors its positions with, and the credit quality of, the financial institutions with which it invests. Periodically, throughout the three months ended, and as of September 30, 2023, the Company has maintained balances in excess of federally insured limits. As of September 30, 2023, the Company was $20,053,245 in excess of federally insured limits.

Accounts Receivable

Accounts receivable are stated at a gross invoice amount less an allowance for credit losses as well as net of any discounts or other forms of variable consideration. We estimate allowance for credit losses by evaluating specific accounts where information indicates our customers may have an inability to meet financial obligations, such as customer payment history, credit worthiness and receivable amounts outstanding for an extended period beyond contractual terms. We use assumptions and judgment, based on the best available facts and circumstances, to record an allowance to reduce the receivable to the amount expected to be collected. These allowances are evaluated and adjusted as additional information is received. We had no allowance for credit losses as of September 30, 2023 and December 31, 2022.

Inventory

Inventories, which consist solely of raw materials, work in process and finished goods, are stated at the lower of cost (first-in, first-out) or net realizable value, net of reserves for obsolete inventory. We continually analyze our slow-moving and excess inventories. Based on historical and projected sales volumes and anticipated selling prices, we established reserves. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates its estimate of future demand. Products that are determined to be obsolete are written down to net realizable value.

Inventory consists of the following:

	September 30, 2023			December 31, 2022
Raw Material	$	2,053,114		$	2,041,776
Work in Process		378,416			89,080
Finished Goods		248,890			142,415
Less Inventory Reserves		(100,254	)		(100,254	)
Total Inventory, Net	$	2,580,166		$	2,173,017

Property and Equipment

All additions, including improvements to existing facilities, are recorded at cost. Maintenance and repairs are charged to expense as incurred. Depreciation of property and equipment is principally recorded using the straight-line method over the estimated useful lives of the assets. The estimated useful lives typically are (i) 3 to 7 years for computer equipment, (ii) 5 years for vehicles and docking stations and drones, (iii) 7 years for furniture and fixtures, (iv) 5 to 7 years for development equipment, and (v) 3 years for machinery and equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Upon the disposal of property, the asset and related accumulated depreciation accounts are relieved of the amounts recorded therein for such items, and any resulting gain or loss is recorded in operating expenses in the year of disposition.

Software

Costs incurred internally in researching and developing a software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue over the estimated life of the products. As of September 30, 2023 and December 31, 2022, the Company had no internally developed software.

Impairment of Long-Lived Assets

Long-lived assets are evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. Such indicators include significant technological changes, adverse changes in market conditions and/or poor operating results. The carrying value of a long-lived asset group is considered impaired when the projected undiscounted future cash flows are less than its carrying value. The amount of impairment loss recognized is the difference between the estimated fair value and the carrying value of the asset or asset group. Fair market value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved. The impairment of long-lived assets was $0 for the three months ended September 30, 2023 and 2022 and $12,223 and $11,095 for the nine months ended September 30, 2023 and 2022, respectively.

Research and Development

Costs for research and development are expensed as incurred except for research and development equipment with alternative future use. Research and development expenses consist primarily of salaries, salary related expenses and costs of contractors and materials.

Fair Value of Financial Instruments

Our financial assets and liabilities measured at fair value on a recurring basis consist primarily of receivables, accounts payable, accrued expenses and short- and long-term debt. The carrying amount of receivables, accounts payable and accrued expenses approximate our fair value because of the short-term maturity of such instruments. Our financial assets measured at fair value on a nonrecurring basis include goodwill and intangibles, which are adjusted to fair value whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed.

We have categorized our assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy in accordance with U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).

Assets and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs, as follows:

	Level 1 --	Unadjusted quoted prices in active markets for identical assets or liabilities.

	Level 2 --	Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

	Level 3 --	Unobservable inputs for the asset or liability.

The Company had no assets that are required to be valued at fair value as of September 30, 2023 and December 31, 2022. The Company had Level 3 liabilities that are required to be valued at fair value as of September 30, 2023. The fair value of the government grant liability is determined as the sum of 3% royalty payments on forecasted future sales, discounted using the effective interest method. As of September 30, 2023, the Company made the following assumptions: (i) royalty payments will be made on future sales through 2026, and (ii) the effective interest rate is a range of 17-19%. The following table provides a reconciliation of the beginning and ending balances for the Level 3 government grant liability measured at fair value using significant unobservable inputs:

	Government Grant Liability
Balance as of January 24, 2023	$	1,783,403
Net (Gain)/Loss on change in fair value of liability		36,077
Repayment on liability		(6,576	)
Balance as of March 31, 2023		1,812,904
Government grant liability assumed from Iron Drone asset purchase		307,122
Net (Gain)/Loss on change in fair value of liability		(108,458	)
Balance as of June 30, 2023		2,011,568
Government grant proceeds received, adjusted to fair value		128,803
Fair value adjustment to government grant liability assumed from Iron Drone asset purchase		48,795
Net (Gain)/Loss on change in fair value of liability		295,094
Balance as of September 30, 2023	$	2,484,260

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financing as deferred offering costs until such financing is consummated. After consummation of equity financing, these costs are recorded in stockholders’ equity as a reduction of additional paid-in capital generated as a result of the offering. Should the planned equity financing be abandoned, the deferred offering costs are expensed immediately as a charge to other income (expense) in the consolidated statement of operations.

On July 11, 2023, the Company and the Sales Agent (as defined below), mutually agreed to terminate the ATM Agreement (as defined below), and the Company expensed the remaining deferred offering costs of $151,431 for the three and nine months ended September 30, 2023. For the three and nine months ended September 30, 2022, the Company recorded a reduction in proceeds received of $2,824 and $25,489, respectively, related to the ATM Offering (See Note 10 – Stockholders’ Equity). For the three and nine months ended September 30, 2022, the Company expensed offering costs of $0. The deferred offering costs outstanding as of September 30, 2023 and December 31, 2022, were $0 and $145,293, respectively.

Government Grants

The Government liability was assumed through the acquisition of Airobotics and asset purchase of Iron Drone. Airobotics and Iron Drone received government grants from the Israel Innovation Authority (formerly: the Office of the Chief Scientist in Israel, “the IIA”), and the grant funds are repayable to the extent that future economic benefits are expected from the research project that will result in royalty-bearing sales. A liability for grants received is first measured at fair value using a discount rate that reflects a market rate of interest. The difference between the amount of the grant received and the fair value of the liability is accounted for as a government grant and recognized as a reduction of research and development expenses.

At each reporting date, the Company evaluates whether there is reasonable assurance that the liability recognized, in whole or in part, will not be repaid (since the Company will not be required to pay royalties) based on the best estimate of future sales and using the original effective interest method, which is 17-19%, and if so, the appropriate amount of the liability is derecognized through other income (expense). Amounts paid as royalties are treated as a reduction of the liability. Royalty payments are due every nine months. There is no maturity date. The liability exists until it is paid in full through royalty payments or the Company reports to the IIA there will be no further sales, and they accept this.

Redeemable Noncontrolling Interests

On July 9, 2023, Ondas Networks Inc. entered into an Agreement with a third party for the sale of redeemable preferred stock in Ondas Networks. The preferred stock accrues dividends at the rate per annum of eight percent (8%) of the original issue price and can be redeemed at the request of the Holder at any time after the fifth anniversary for the greater of two times the initial investment plus accrued dividends or the amount that would be due if the Preferred Stock was converted into Common Stock (see Note 11 – Redeemable Noncontrolling Interest). The applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. As a result, the Company recorded the noncontrolling interest as redeemable noncontrolling interest and classified it in temporary equity within its condensed consolidated balance sheet initially at its acquisition-date estimated redemption value or fair value. In addition, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument by accruing dividends at 8% per annum and accreting the redemption value to two times the initial investment over five years using the effective interest rate method.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. In accordance with U.S. GAAP, we recognize the effect of uncertain income tax positions only if the positions are more likely than not of being sustained in an audit, based on the technical merits of the position. Recognized uncertain income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which those changes in judgment occur. We recognize both interest and penalties related to uncertain tax positions as part of the income tax provision.

Share-Based Compensation

We calculate share-based compensation expense for option awards (“Share-based Award(s)”) based on the estimated grant/issue date fair value using the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) and recognize the expense on a straight-line basis over the vesting period. We account for forfeitures as they occur. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the vesting period in determining the fair value of Share-based Awards. The expected term is based on the “simplified method”, due to the Company’s limited option exercise history. Under this method, the term is estimated using the weighted average of the service vesting period and contractual term of the option award. As the Company does not yet have sufficient history of its own volatility, the Company has identified several public entities of similar size, complexities and industry and calculates historical volatility based on the volatilities of these companies. Although we believe our assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.

We recognize restricted stock unit expense over the period of vesting or period that services will be provided. Compensation associated with shares of the Company’s common stock, par value $0.0001 (the “Common Stock”), issued or to be issued to consultants and other non-employees is recognized over the expected service period beginning on the measurement date, which is generally the time the Company and the service provider enter into a commitment whereby the Company agrees to grant shares in exchange for the services to be provided.

Shipping and Handling

We expense all shipping and handling costs as incurred. These costs are included in Cost of goods sold on the accompanying Consolidated Statements of Operations.

Advertising and Promotional Expenses

We expense advertising and promotional costs as incurred. We recognized expense of $87,073 and $32,586 for the three months ended September 30, 2023, and 2022, respectively, and expense of $145,504 and $63,867 for the nine months ended September 30, 2023, and 2022, respectively. These costs are included in Sales and marketing on the accompanying Consolidated Statements of Operations.

Post-Retirement Benefits

We have one 401(k) Savings Plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under this 401(k) Plan, matching contributions are based upon the amount of the employees’ contributions subject to certain limitations. We recognized expense of $60,684 and $106,190 for the three months ended September 30, 2023, and 2022, respectively, and $246,281 and $221,305 for the nine months ended September 30, 2023, and 2022, respectively.

Revenue Recognition

Ondas has two business segments that generate revenue: Ondas Networks and Ondas Autonomous Systems. Ondas Networks generates revenue from product sales, services, and development projects. Ondas Autonomous Systems, which includes American Robotics and Airobotics, generates revenue from product sales, services, and data subscription services.

Ondas Networks is engaged in the development, marketing, and sale of wireless radio systems for secure, wide area mission-critical, business-to-business networks. Ondas Networks generates revenue primarily from the sale of our FullMAX System and the delivery of related services, along with non-recurring engineering (“NRE”) development projects with certain customers.

Airobotics generates revenue through the sales of their Optimus system and separately priced support, maintenance and ancillary services directly related to the sale of the Airobotics’ Optimus system. Airobotics also generates service revenue by selling a data subscription service to its customers based on the information collected by their autonomous systems.

Revenue for development projects is typically recognized over time using a percentage of completion input method, whereby revenues are recorded on the basis of the Company’s estimates of satisfaction of the performance obligation based on the ratio of actual costs incurred to total estimated costs. The input method is utilized because management considers it to be the best available measure of progress as the performance obligations are completed.

Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Impacts from changes in estimates of revenue and cost of revenue are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods base in the performance completed to date.

Subscription revenue is recognized on straight line basis over the length of the customer subscription agreement. If a subscription payment is received prior to installation and operation of their autonomous systems, it is held in deferred revenue and recognized after operation commences over the length of the subscription service.

Collaboration Arrangements Within the Scope of ASC 808, Collaborative Arrangements

The Company’s development revenue includes contracts where the Company and the customer work cooperatively to develop software and hardware applications. The Company analyzes these contracts to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and are therefore within the scope of ASC Topic 808, Collaborative Arrangements (“ASC 808”). This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements that are deemed to be within the scope of ASC 808, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and therefore within the scope of ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company’s policy is generally to recognize amounts received from collaborators in connection with joint operating activities that are within the scope of ASC 808 as a reduction in research and development expense. As of September 30, 2023, the Company has not identified any contracts with its customers that meet the criteria of ASC 808.

Arrangements Within the Scope of ASC 606, Revenue from Contracts with Customers

Under ASC 606, the Company recognizes revenue when the customer obtains control of promised products or services, in an amount that reflects the consideration which is expected to be received in exchange for those products or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the products or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the products or services promised within each contract and determines those that are performance obligations and assesses whether each promised product or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the expected value method. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales and other taxes collected on behalf of third parties are excluded from revenue. For the nine months ended September 30, 2023 and 2022, none of our contracts with customers included variable consideration.

Contracts that are modified to account for changes in contract specifications and requirements are assessed to determine if the modification either creates new or changes the existing enforceable rights and obligations. Generally, contract modifications are for products or services that are not distinct from the existing contract due to the inability to use, consume or sell the products or services on their own to generate economic benefits and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. For the nine months ended September 30, 2023 and 2022, there were no modifications to contract specifications.

Product revenue is comprised of sales of the Ondas Networks’ software defined base station and remote radios, its network management and monitoring system, and accessories. Ondas Networks’ software and hardware is sold with a limited one-year basic warranty included in the price. The limited one-year basic warranty is an assurance-type warranty, is not a separate performance obligation, and thus no transaction price is allocated to it. The nature of tasks under the limited one-year basic warranty only provides for remedying defective product(s) covered by the warranty. Product revenue is generally recognized when the customer obtains control of our product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract, or upon installation when the combined performance obligation is not distinct within the context of the contract.

Service revenue is comprised of separately priced extended warranty sales, network support and maintenance, remote monitoring, as well as ancillary services directly related to the sale of the Ondas Networks’ wireless communications products including wireless network design, systems engineering, radio frequency planning, software configuration, product training, installation, and onsite support. The extended warranty Ondas Networks sells provides a level of assurance beyond the coverage for defects that existed at the time of a sale or against certain types of covered damage. The extended warranty includes 1) factory hardware repair or replacement of the base station and remote radios, at our election, 2) software upgrades, bug fixes and new features of the radio software and network management systems (“NMS”), 3) deployment and network architecture support, and 4) technical support by phone and email. Ancillary service revenues are recognized at the point in time when those services have been provided to the customer and the performance obligation has been satisfied. The Company allocates the transaction price to the service and extended warranty based on the stand-alone selling prices of these performance obligations, which are stated in our contracts. Revenue for the extended warranty is recognized over time.

Development revenue is comprised primarily of non-recurring engineering service contracts to develop software and hardware applications for various customers. For Ondas Networks, in 2022, a significant portion of this revenue is generated from one parent customer whereby Ondas Networks is to develop such applications to interoperate within the customers infrastructure. For these contracts, Ondas Networks and the customers work cooperatively, whereby the customers’ involvement is to provide technical specifications for the product design, as well as, to review and approve the project progress at various markers based on predetermined milestones. The products developed are not able to be sold to any other customer and are based in part upon existing Ondas Networks and customer technology. Development revenue is either recognized at the point in time when those services have been provided to the customer and the performance obligation has been satisfied recognized, or as services are provided over the life of the contract as Ondas Networks has an enforceable right to payment for services completed to date and there is no alternative use of the product, depending on the contract.

If the customer contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. We enter into certain contracts within our service revenues that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. We allocate the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Revenue is then allocated to the performance obligations using the relative selling prices of each of the performance obligations in the contract.

Ondas Networks’ payment terms vary and range from Net 15 to Net 30 days from the date of the invoices for product and services related revenue. Ondas Networks’ payment terms for the majority of their development related revenue carry milestone-related payment obligations which span the contract life. For milestone-based contracts, the customer reviews the completed milestone and once approved, makes payment pursuant to the applicable contract.

American Robotics generates revenue by selling a data subscription service to its customers based on the information collected by their autonomous systems. The customer pays for a monthly, annual, or multi-annual subscription service to remotely access the data collected by their autonomous systems. American Robotics’ payment terms vary and range from Net 30 to Net 60 days from the date of the invoices for product and services related revenue.

Airobotics’ product revenue is comprised of sales of the Airobotics’ Optimus system which includes a drone, docking station, different flown sensors (payloads), communications system, batteries, and others. Airobotics’ Optimus system is sold with a limited one-year basic warranty included in the price. The limited one-year basic warranty is an assurance-type warranty, is not a separate performance obligation, and thus no transaction price is allocated to it. The nature of tasks under the limited one-year basic warranty only provides for remedying defective product(s) covered by the warranty. Product revenue is generally recognized when the customer obtains control of our product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract, or upon installation when the combined performance obligation is not distinct within the context of the contract.

Airobotics’ service revenue is comprised of separately priced support and maintenance sales, as well as ancillary services directly related to the sale of the Airobotics’ Optimus system including product training, installation, and onsite support. Airobotics also generates service revenue by selling a data subscription service to its customers based on the information collected by their autonomous systems. The customer pays for a monthly, annual, or multi-annual subscription service to remotely access the data collected by their autonomous systems. Ancillary service revenues are recognized at the point in time when those services have been provided to the customer and the performance obligation has been satisfied. The Company allocates the transaction price to the service based on the stand-alone selling prices of these performance obligations, which are stated in our contracts.

Airobotics’ payment terms vary and range from Net 30 days to Net 60 days from the date of the invoices for product and services related revenue. Airobotics’ payment terms for the majority of their development related revenue carry milestone-related payment obligations which span the contract life. For milestone-based contracts, the customer reviews the completed milestone and once approved, makes payment pursuant to the applicable contract.

Disaggregation of Revenue

The following tables present our disaggregated revenues by type of revenue, timing of revenue, and revenue by country:

	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Type of Revenue
Product revenue	$	2,180,472	$	101,502	$	8,880,309	$	673,184
Service and subscription revenue		234,236		174,375		1,289,642		318,247
Development revenue		250,482		356,612		560,194		655,474
Total revenue	$	2,665,190	$	632,489	$	10,730,145	$	1,646,905

	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Timing of Revenue
Revenue recognized point in time	$	2,296,035	$	251,502	$	9,818,302	$	823,184
Revenue recognized over time		369,155		380,987		911,843		823,721
Total revenue	$	2,665,190	$	632,489	$	10,730,145	$	1,646,905

	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Country of Revenue, based on location services were provided or product was shipped to:
United States	$	2,430,954	$	632,489	$	5,081,152	$	1,646,905
United Arab Emirates		85,268		-		5,320,792		-
Israel		148,968		-		328,201		-
Total revenue	$	2,665,190	$	632,489	$	10,730,145	$	1,646,905

Contract Assets and Liabilities

We recognize a receivable or contract asset when we perform a service or transfer a good in advance of receiving consideration. A receivable is recorded when our right to consideration is unconditional and only the passage of time is required before payment of that consideration is due. A contract asset is recorded when we have recognized revenue over time in accordance with meeting our performance obligation but are unable to invoice the customer yet based on the contractual invoicing terms. The contract asset is reclassified to a receivable when the right to consideration becomes unconditional. The table below details the activity in our contract assets during the nine months ended September 30, 2023. We did not have any contract assets recorded as of December 31, 2022.

	Nine Months Ended September 30, 2023
Balance at beginning of period	$	-
Contract assets recognized		109,888
Reclassification to Accounts receivable, net		-
Balance at end of period	$	109,888

We recognize a contract liability when we receive consideration, or if we have the unconditional right to receive consideration, in advance of satisfying the performance obligation. A contract liability is our obligation to transfer goods or services to a customer for which we have received consideration, or an amount of consideration is due from the customer. The table below details the activity in our contract liabilities during the nine months ended September 30, 2023, and the year ended December 31, 2022.

	Nine Months Ended September 30, 2023			Year Ended December 31, 2022
Balance at beginning of period	$	61,508		$	512,397
Additions, net		1,962,112			527,268
Transfer to revenue		(1,944,612	)		(978,157	)
Balance at end of period	$	341,018		$	61,508

Warranty Reserve

For our software and hardware products, we provide a limited one-year assurance-type warranty and for our development service, we provide no warranties. The assurance-type warranty covers defects in material and workmanship only. If a software or hardware component is determined to be defective after being tested by the Company within the one-year, the Company will repair, replace or refund the price of the covered hardware and/or software to the customer (not including any shipping, handling, delivery or installation charges). We estimate, based upon a review of historical warranty claim experience, the costs that may be incurred under our warranties and record a liability in the amount of such estimate at the time a product is sold. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liability and adjust the accrual as claims data and historical experience warrants. The Company has assessed the costs of fulfilling its existing assurance-type warranties and has determined that the estimated outstanding warranty obligation on September 30, 2023, or December 31, 2022 are immaterial to the Company’s condensed consolidated financial statements.

Leases

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. During the nine months ended September 30, 2023, the Company’s operating leases consisted of office space in Sunnyvale, CA (the “Gibraltar Lease”), Marlborough, MA (the “American Robotics Lease”), Waltham, MA (the “Waltham Lease”), and Petah Tikva, Israel (the “Airobotics Leases”).

On January 22, 2021, we entered into a 24-month lease (effective April 1, 2021) with the owner and landlord (the “2021 Gibraltar Lease”), wherein the base rate is $45,000 per month, with a security deposit in the amount of $90,000. On April 1, 2023, the Company amended their lease to extend the lease through September 30, 2023, wherein the base rate is $65,676 per month. On November 6, 2023, the Company amended their lease to further extend the lease through June 30, 2024, wherein the base rate is $68,959 per month.

On August 5, 2021, the Company acquired American Robotics and the American Robotics Lease, wherein the base rate is $15,469 per month, with an annual increase of 3% through January 2024, with a security deposit of $24,166. On August 19, 2021, American Robotics amended their lease to reduce their space to approximately 10,450 square feet. The amendment reduced their annual base rent to $8,802 per month, with an annual increase of 3% through January 2024.

On October 8, 2021, American Robotics entered into an 86-month operating lease for space in Waltham, Massachusetts. The Waltham Lease commenced on March 1, 2022, and is scheduled to terminate on April 30, 2029, wherein the base rate is $39,375 per month, increasing 3% annually, with a security deposit due in the amount of $104,040. These facilities also serve as Ondas’ corporate headquarters.

On January 23, 2023, the Company acquired Airobotics and the Airobotics leases, which includes office space in Petah Tikva, Israel leased according to three different lease agreements. Each agreement is with respect to different sections of the entire leased area and are in effect through December 31, 2023, February 28, 2024, and November 30, 2024 wherein the base rate of the entire leased area is approximately $20,500 per month.

On August 7, 2023, Ondas Networks entered into a 72-month lease agreement with the owner and landlord of office space in Sunnyvale, CA. The lease commences October 1, 2023, and is an operating lease. Base rent is $77,533 per month, increasing approximately 3% annually, with a security deposit due in the amount of $269,428. Base rent shall be abated during the first twelve months of the term of the lease.

We determine if an arrangement is a lease, or contains a lease, at the inception of the arrangement. If we determine the arrangement is a lease, or contains a lease, at lease inception, we then determine whether the lease is an operating lease or finance lease. Operating and finance leases result in recording a right-of-use (“ROU”) asset and lease liability on our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. For purposes of calculating operating lease ROU assets and operating lease liabilities, we use the non-cancellable lease term plus options to extend that we are reasonably certain to take. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Our leases generally do not provide an implicit rate. As such, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. This rate is generally consistent with the interest rate we pay on borrowings under our credit facilities, as this rate approximates our collateralized borrowing capabilities over a similar term of the lease payments. We have elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases for any class of underlying assets. We have elected not to separate lease and non-lease components for any class of underlying asset.

Lease Costs

	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Components of total lease costs:
Operating lease expense	$	224,126	$	287,862	$	787,833	$	779,873
Common area maintenance expense		38,242		41,045		129,348		101,022
Short-term lease costs ⁽¹⁾		248,494		38,967		548,465		117,064
Total lease costs	$	510,862	$	367,874	$	1,465,646	$	997,959

⁽¹⁾	Represents short-term leases with an initial term of 12 months or less, which are immaterial.

Lease Positions as of September 30, 2023 and December 31, 2022

ROU lease assets and lease liabilities for our operating leases were recorded in the unaudited condensed consolidated balance sheet as follows:

	September 30, 2023		December 31, 2022
Assets:
Operating lease assets	$	2,661,009	$	2,930,996
Total lease assets	$	2,661,009	$	2,930,996

Liabilities:
Operating lease liabilities, current	$	564,878	$	580,593
Operating lease liabilities, net of current		2,252,884		2,456,315
Total lease liabilities	$	2,817,762	$	3,036,908

Future lease payments included in the measurement of lease liabilities on the unaudited condensed consolidated balance sheet as of September 30, 2023, for the following five years and thereafter are as follows:

Years ending December 31,
2023(3 months)	$	225,221
2024		641,913
2025		559,343
2026		559,616
2027		545,250
Thereafter		752,490
Total future minimum lease payments	$	3,283,833
Less imputed interest		(466,071	)
Total	$	2,817,762

Other Leases Information

	Nine Months Ended September 30,
	2023			2022
Operating cash flows for operating leases	$	799,305		$	598,304
Weighted average remaining lease term (in years) – operating lease		5.13			5.87
Weighted average discount rate – operating lease		5.76	%		6.00	%

Net Loss Per Common Share

Basic net loss per share is computed by dividing net loss by the weighted average shares of Common Stock outstanding for each period. Diluted net loss per share is the same as basic net loss per share since we have net losses for each period presented.

The following potentially dilutive securities for the three months ended September 30, 2023 and 2022 have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.

	Nine months ended September 30,
	2023		2022
Warrants to purchase Common Stock		12,566,092		1,901,802
Options to purchase Common Stock		4,845,049		2,462,786
Potential shares issuable under 2022 Convertible Exchange Notes		29,319,723		-
Potential shares issuable under Additional Notes		28,908,377		-
Restricted stock units		175,064		1,960,622
Total potentially dilutive securities		75,814,305		6,325,210

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist of cash and accounts receivable. Cash is deposited with a limited number of financial institutions. The balances held at any one financial institution may be in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. As of September 30, 2023, the Company was $20,053,245 in excess of federally insured limits.

Credit is extended to customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for credit losses as needed based on our evaluation each reporting period.

Concentration of Customers

Because we have only recently invested in our customer service and support organization, a small number of customers have accounted for a substantial amount of our revenue. Revenue from significant customers, those representing 10% or more of total revenue, was composed of one customer accounting for 91% of the Company’s revenue for the three-month period ended September 30, 2023. Revenue from significant customers was composed of three customers accounting for 47%, 31% and 18% of the Company’s revenue for the nine-month period ended September 30, 2023, respectively. One customer accounted for 92% and 88% of the Company’s revenue for the three-month period and nine-month period ended September 30, 2022, respectively.

Accounts receivable from significant customers, those representing 10% or more of the total accounts receivable, were composed of two customers accounting for 64% and 24%, respectively, of the Company’s accounts receivable balance as of September 30, 2023. Two customers accounted for 67% and 33%, respectively, of the Company’s accounts receivable balance as of December 31, 2022.

Recently Adopted Accounting Pronouncements

In May 2021, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) 2021-04—Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU are effective for public and nonpublic entities for fiscal years beginning after December 15, 2021, and interim periods with fiscal years beginning after December 15, 2021. Early adoption was permitted, including adoption in an interim period. The adoption of this pronouncement during the year ended December 31, 2022 had no impact on our accompanying condensed consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification and makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance. This update will be effective for the Company’s fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company has elected to adopt the standard early using the modified retrospective method of transition with effect from January 1, 2022. At the time of adoption this did not have a material impact on the consolidated financial statements. However, ASU 2020-06 precluded the Company from having to record a derivative liability for convertible notes entered into during the year ended December 31, 2022.

As of January 1, 2023, the Company adopted the following ASUs, and the adoption had no impact on our accompanying condensed consolidated financial statements:

ASU 2022-02, Financial Instruments—Credit Losses: Troubled Debt Restructurings and Vintage Disclosures, as an amendment to ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers; and

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

On September 29, 2022, FASB issued Accounting Standards Update (ASU) No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances the transparency about the use of supplier finance programs for investors and other allocators of capital. Under the new ASU, a company that uses a supplier finance program in connection with the purchase of goods or services will be required to disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. ASU No. 2022-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022, except for the roll forward of the supplier finance program obligations, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The adoption of this pronouncement as of January 1, 2023 did not have a material impact on our accompanying condensed consolidated financial statements.

Recently Issued Accounting Pronouncements and SEC Rules Not Yet Adopted

On September 30, 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-03, which (1) clarifies existing guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and (2) introduces new disclosure requirements for equity securities subject to contractual sale restrictions. The ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security. Instead, the contractual sale restriction is a characteristic of the reporting entity. Accordingly, an entity should not consider the contractual sale restriction when measuring the equity security’s fair value. Additionally, the ASU clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company has evaluated the effects of the adoption of ASU No. 2022-03, and it is not expected to have an impact on the Company’s consolidated financial statements.

In July 2023, the SEC adopted the final rule under SEC Release No. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, requiring disclosure of material cybersecurity incidents on Form 8-K and periodic disclosure of a registrant’s cybersecurity risk management, strategy and governance in annual reports. Regulation S-K Item 6 disclosure requirements under this rule will be effective for our fiscal year ending on December 31, 2023. Incident disclosure requirements in Form 8-K will be effective for us on June 15, 2024. The Company is still evaluating for any impact on the Company’s consolidated financial statement disclosures from the adoption of this final rule.

In October 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-06, which incorporates 14 of the 27 disclosures referred to by the SEC in their SEC Release No. 33-10532, Disclosure Update and Simplification, issued on August 17, 2018. The amendments in this ASU modify the disclosure or presentation requirements of a variety of Topics in the Codification and apply to all reporting entities within the scope of the affected Topics unless otherwise indicated. The amendments in this ASU should be applied prospectively. For public business entities, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company has evaluated the effects of the adoption of ASU No. 2022-03, and it is not expected to have an impact on the Company’s consolidated financial statements.

NOTE 3 – OTHER CURRENT ASSETS

Other current assets consist of the following:

	September 30, 2023		December 31, 2022
Prepaid insurance	$	763,174	$	782,538
Advance to vendors		172,858		323,698
Deferred offering costs		-		145,293
Contract assets		109,888		-
VAT Input Credit		185,103		-
Other prepaid expenses and current assets		554,227		498,084
Total other current assets	$	1,785,250	$	1,749,613

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	September 30, 2023			December 31, 2022
Vehicles	$	149,916		$	149,916
Computer equipment		384,321			348,408
Furniture and fixtures		665,349			461,352
Leasehold improvements		3,291,689			2,093,812
Development equipment		350,691			342,142
Docking stations and drones		3,023,364			-
Machinery and equipment		60,321			-
Construction in progress		361,444			330,541
Total property and equipment		8,287,095			3,726,171
Less: accumulated depreciation		(2,843,185	)		(702,886	)
Net property and equipment	$	5,443,910		$	3,023,285

Depreciation expense for the three months ended September 30, 2023 and 2022 was $235,999 and $153,159, respectively. Depreciation expense for the nine months ended September 30, 2023 and 2022 was $648,624 and $280,195, respectively. As of September 30, 2023, there was $2,772,501 of net property and equipment located in Israel.

NOTE 5 – GOODWILL AND BUSINESS ACQUISITION

We account for acquisitions in accordance with FASB ASC 805, “Business Combinations” (“ASC 805”), and goodwill in accordance with ASC 350, “Intangibles — Goodwill and Other” (“ASC 350”). The excess of the purchase price over the estimated fair value of net assets acquired in a business combination is recorded as goodwill.

Airobotics Transaction

On January 23, 2023, the Company, completed the acquisition of Airobotics, pursuant to the Agreement of Merger, dated as of August 4, 2022 (the “Original Airobotics Agreement”), and that certain Amendment to Agreement of Merger, dated November 13, 2022 (the “Airobotics Amendment,” and together with the Original Airobotics Agreement, the “Airobotics Agreement”), by and among the Company, Talos Sub Ltd., an Israeli company and a wholly owned subsidiary of the Company (“Merger Sub”), and Airobotics. In accordance with the terms of the Airobotics Agreement, Merger Sub merged with and into Airobotics (the “Merger”), with Airobotics continuing as the surviving company of the Merger and as a wholly owned subsidiary of the Company.

At the effective time of the Merger (the “Effective Time”), each ordinary share of Airobotics, par value NIS 0.01 per share (the “Airobotics Ordinary Shares”), issued and outstanding (other than shares owned by Airobotics or its subsidiaries (dormant or otherwise) or by the Company or Merger Sub) was converted into, and exchanged for 0.16806 (the “Exchange Ratio”) fully paid and nonassessable shares of Common Stock of the Company Common Stock, without interest and subject to applicable tax withholdings (“Merger Consideration”). All fractional shares of the Company Common Stock that would have otherwise been issued to a holder of Airobotics Ordinary Shares as part of the Merger Consideration were rounded up to the nearest whole share based on the total number of shares of the Company’s Common Stock issued to such holder of Airobotics Ordinary Shares. Holders of Airobotics Ordinary Shares received approximately 2.8 million shares as consideration (excluding approximately 1.7 million shares underlying equity awards to be outstanding following the Merger).

As provided in the Airobotics Agreement, each outstanding option, warrant or other right, whether vested or unvested, to purchase Airobotics Ordinary Shares (each, an “Airobotics Stock Option,” and collectively, the “Airobotics Stock Options”) issued pursuant to the Airobotics Ltd. 2015 Israeli Share Option Plan and 2020 Incentive Equity Plan (the “Airobotics Plans”), was assumed by Ondas and converted as of the Effective Time into an option, warrant or right, as applicable, to purchase shares of Company Common Stock. Subject to the terms of the relevant Airobotics Stock Option, each Airobotics Stock Option is deemed to constitute an option, warrant, or other right, as applicable, to purchase, on substantially the same terms and conditions as were applicable under such Airobotics Stock Option, a number of shares of Company Common Stock equal to the number of shares of Company Common Stock (rounded up to the nearest whole share) that the holder of such Airobotics Stock Option would have been entitled to receive pursuant to the Merger had such holder exercised such option, warrant, or right to purchase full Airobotics Ordinary Shares immediately prior to the Effective Time at a price per share of Company Common Stock (rounded down to the nearest whole cent) equal to (i) the former per share exercise price for Airobotics Ordinary Shares otherwise purchasable pursuant to such Airobotics Stock Option, divided by (ii) the Exchange Ratio.

As a result of the Merger, the Company is dual listed on The Nasdaq Stock Market and the Tel Aviv Stock Exchange (“TASE”). The first trading day of the Company’s shares on TASE was January 26, 2023.

The following table summarizes the consideration paid for Airobotics and the preliminary allocation of the purchase consideration to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date.

Purchase price consideration
Common Stock – 2,844,291 Shares	$	5,261,938
Vested Stock Options – 605,349 Shares		700,690
Warrants – 586,440 Warrants to purchase shares		-
Total purchase price consideration	$	5,962,628

Estimated fair value of assets acquired:
Cash and cash equivalents and restricted cash	$	1,049,454
Accounts receivable		112,245
Inventory		1,494,707
Other current assets		835,664
Property and equipment		3,015,602
Right of use asset		339,104
Intangible assets		6,057,926
Other long-term assets		62,851
Total estimated fair value of assets acquired		12,967,553

Estimated fair value of liabilities assumed:
Accounts payable		969,242
Customer Prepayments		1,602,535
Government grant liability		1,783,403
Other loans		1,140,301
Other payables		1,156,057
Lease liabilities		385,450
Loan from related party		2,032,875
Total estimated fair value of liabilities assumed		9,069,863

Net Assets Acquired	$	3,897,690

Goodwill	$	2,064,938

The exercise price of the warrants included in the purchase price consideration far exceeded the Company’s stock price at the date of acquisition, thus the value of warrants was deemed de minimis.

The intangible assets acquired include the developed technology, marketing-related assets, and customer relationships (see Note 6 – Intangible Assets). The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation. The final allocation may include (1) changes in fair values of property, plant and equipment, (2) changes in valuation of intangible assets such as developed technology, marketing-related assets, and customer relationships, as well as goodwill and (3) other changes to assets and liabilities. During the three and nine months ended September 30, 2023, an adjustment of $0 and $68,483 was made to reduce the estimated fair value of property and equipment and increase goodwill, respectively.

The goodwill represents the assembled workforce, acquired capabilities, and future economic benefits resulting from the acquisition. No portion of the goodwill is deductible for tax purposes.

Our results for the nine months ended September 30, 2023 include results from Airobotics between January 24, 2023 and September 30, 2023. The following unaudited pro forma information presents the Company’s results of operations as if the acquisition of Airobotics had occurred on January 1, 2022. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions had occurred on January 1, 2022 or what the Company’s operating results will be in future periods.

	(Unaudited)
	Three months ended September 30, 2022			Nine months ended September 30, 2023			Nine months ended September 30, 2022
Revenue, net	$	736,656		$	10,762,181		$	2,294,821
Net loss	$	(16,819,177	)	$	(31,133,911	)	$	(43,372,673	)
Net Loss Per Share – basic and diluted	$	(0.37	)	$	(0.61	)	$	(0.97	)

Goodwill Impairment

The Company has recognized goodwill as part of the American Robotics acquisition in 2021 and Airobotics acquisition in 2023. The changes in the carrying amount of goodwill for the nine months ended September 30, 2023 and year ended December 31, 2022, are as follows:

	Ondas Autonomous Systems
Balance as of January 1, 2022	$	45,026,583
Impairment loss		(19,419,600	)
Balance as of December 31, 2022		25,606,983
Goodwill acquired		2,064,938
Balance as of September 30, 2023	$	27,671,921

Goodwill is tested for impairment in the fourth quarter after the annual forecasting process. The Company initially carried out a qualitative analysis and determined that because of changes in market conditions as well as a slower increase in revenue than previously forecast, it was more likely than not that goodwill was impaired. The Company engaged a third-party service provider to carry out a valuation of the American Robotics entity. Using a discounted cash flow analysis and revised forecasts for revenue and cash flows that are lower than the previous valuation, it was determined that the fair value of the entity was lower than the carrying value as of December 31, 2022, and an impairment of $19,419,600 was recognized in operating expenses in the Consolidated Statements of Operations for the year ending December 31, 2022, included in our 2022 Form 10-K.

NOTE 6 – INTANGIBLE ASSETS

The components of intangible assets, all of which are finite lived, were as follows:

	September 30, 2023							December 31, 2022
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Useful Life

Patents	$	105,148	$	(38,403	)	$	66,745	$	82,431	$	(27,331	)	$	55,100		10
Patents in process		147,101		-			147,101		119,760		-			119,760		N/A
Licenses		241,909		(83,808	)		158,101		241,909		(65,665	)		176,244		10
Software		211,411		(158,698	)		52,713		161,284		(84,682	)		76,602		3
Trademarks		3,230,000		(695,488	)		2,534,512		3,230,000		(453,242	)		2,776,758		10
FAA waiver		5,930,000		(1,276,856	)		4,653,144		5,930,000		(832,113	)		5,097,887		10
Developed technology		27,977,331		(4,899,088	)		23,078,243		23,270,614		(2,752,353	)		20,518,261		3 - 10
Non-compete agreements		840,000		(840,000	)		-		840,000		(840,000	)		-		1
Marketing-related assets		890,000		(60,290	)		829,710		-		-			-		10
Customer relationships		1,090,000		(165,386	)		924,614		60,000		(16,839	)		43,161		5
	$	40,662,900	$	(8,218,017	)	$	32,444,883	$	33,935,998	$	(5,072,225	)	$	28,863,773

Amortization expense for the three months ended September 30, 2023 and 2022 was $1,064,798 and $904,059, respectively. Amortization expense for the nine months ended September 30, 2023 and 2022 was $3,103,591 and $2,726,295, respectively.

On March 20, 2022, the Company entered into a Purchase Agreement to acquire the assets of Ardenna, Inc., a leading provider of image processing and machine learning software solutions for rail infrastructure monitoring and inspections. The consideration for the acquisition was $900,000 in cash and 780,000 shares of the Company’s Common Stock (the “Ardenna Consideration Shares”). In connection of the acquisition, the parties entered into a Registration Rights and Lock-Up Agreement, which required the Company to file a resale registration statement covering the resale of the Ardenna Consideration Shares no later than ninety (90) days after the closing date and restricted the holder from transferring the Ardenna Consideration Shares for 180 days from the closing date, subject to certain exceptions. On April 5, 2022, the Company completed the acquisition. As a result of this transaction, the Company recognized developed technology in the amount of $6,843,600. The Company filed the registration statement Form S-3 on July 1, 2022, and it was declared effective on July 15, 2022.

On August 31, 2022, the Company entered into an asset purchase agreement with Field of View LLC, a North Dakota limited liability company. The total purchase consideration consisted of $250,000 of cash payable in monthly instalments over twelve months, and $75,520 of shares of the Company’s Common Stock, representing 16,000 shares (“FOV Consideration Shares”). The asset purchase agreement restricted the holder from transferring the FOV Consideration Shares for 180 days from the closing date, subject to certain exceptions. The Company acquired computer and research and development equipment amounting to $18,506 and intangibles for developed technology for $307,014. As of September 30, 2023, the cash was paid and equity was issued in full.

On October 19, 2022, Airobotics entered into an Asset Purchase Agreement, as amended, to acquire all of the intellectual property, technical systems, and operations of Iron Drone Ltd. (“Iron Drone”), an Israeli-based company specializing in the development of autonomous counter-drone systems (the “Iron Drone Transaction”). The consideration for the Iron Drone Transaction was (i) $135,000 in cash, (ii) 46,129 shares of the Company’s Common Stock, (iii) warrants exercisable for 26,553 shares of the Company’s commons stock with an exercise price of $11.95, which shall be exercisable if, during the 48 month period following the closing, the average price per share of the Company’s Common Stock exceeds $52.38 for a period of at least 90 consecutive trading days, (iv) a right to acquire 35,377 shares of the Company’s Common Stock if during the 48 month period after the closing, the average price per share of the Company’s Common Stock exceeds $18.25 for a period of at least 90 consecutive trading days, and (v) a right to acquire 70,753 shares of the Company’s Common Stock if during the 48 month period after the closing, the average price per share of Company’s Common Stock exceeds $20.27 for a period of at least 90 consecutive trading days. On March 6, 2023, the Company completed the Iron Drone Transaction. The Company acquired intangibles for developed technology for $576,717. As of September 30, 2023, the cash was paid and equity was issued in full.

Estimated amortization expense for the next five years for the intangible assets currently being amortized is as follows:

Year Ending December 31,	Estimated Amortization
2023 (3 months)	$	1,055,821
2024	$	4,221,472
2025	$	4,164,693
2026	$	4,080,964
2027	$	4,073,803
Thereafter	$	14,848,130
Total	$	32,444,883

NOTE 7 – LONG-TERM EQUITY INVESTMENT

On October 5, 2021, Ondas Holdings irrevocably subscribed and agreed to purchase 3,141,098 shares of Series A-1 Preferred Stock of Dynam.AI, Inc. (“Dynam”), a tech-enabled services provider for critical or complex artificial intelligence and machine learning projects, par value $0.00001 for the aggregate price of $500,000 representing subscription price of $0.15918 per share by way of a non-brokered private placement for approximately 11% ownership in Dynam. In addition to the equity investment, Ondas Holdings’ subsidiary, American Robotics, entered into a development, services and marketing agreement with Dynam on October 1, 2021. The agreement allows American Robotics to expand and enhance its IP library and analytics capabilities with artificial intelligence using physics-based algorithms and allows Dynam to further the development of Vizlab™, Dynam’s proprietary AI/ML platform, an advanced developer toolkit for data scientists.

On July 15, 2022, Ondas Holdings irrevocably subscribed and agreed to purchase 3,357,958 shares of Series Seed Preferred Stock of Dynam for the aggregate price of $1,000,000 representing a subscription price of $0.2978 per share by way of a non-brokered private placement for approximately 8% ownership in Dynam. This brings Ondas Holdings investment in Dynam to 6,499,056 shares or approximately 19% ownership.

This long-term equity investment consists of an equity investment in a private company through preferred shares, which are not considered in-substance Common Stock, that is accounted for at cost, with adjustments for observable changes in prices or impairments, and is classified as long-term equity investment on our consolidated balance sheets with adjustments recognized in other (expense) income, net on our consolidated statements of operations. The Company has determined that the equity investment does not have a readily determinable fair value and elected the measurement alternative. Therefore, the equity investment’s carrying amount will be adjusted to fair value at the time of the next observable price change for the identical or similar investment of the same issuer or when an impairment is recognized. Each reporting period, the Company performs a qualitative assessment to evaluate whether the investment is impaired. The assessment includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. If the investment is impaired, the Company writes it down to its estimated fair value. As of September 30, 2023 and December 31, 2022 the long-term equity investment had a carrying value of $1,500,000 and $1,500,000, respectively.

Our CEO Eric Brock is a director of Dynam and has invested an aggregate of $25,000 in Dynam as of September 30, 2023.

NOTE 8 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

	September 30, 2023		December 31, 2022
Accrued payroll and other benefits	$	1,640,302	$	390,698
D&O insurance financing payable		96,044		516,619
Accrued professional fees		-		792,367
Accrued purchase consideration		-		145,833
Accrued interest		409,638		176,629
Other accrued expenses and payables		494,373		1,246,847
Total accrued expenses and other current liabilities	$	2,640,357	$	3,268,993

NOTE 9 – LONG-TERM NOTES PAYABLE

2017 Convertible Promissory Note

On September 14, 2017, the Company and an individual entered into a convertible promissory note with unilateral conversion preferences by the individual (the “2017 Convertible Promissory Note”). On July 11, 2018, the Company’s Board approved certain changes to the 2017 Convertible Promissory Note wherein the conversion feature was changed from unilateral to mutual between the individual and the Company.

The Company may at any time on or after a qualified public offering convert any unpaid repayment at the IPO conversion price. The conversion price is the lesser of the (i) price per share of Common Stock sold in the Qualified Public Offering, discounted by 20%, and (ii) the price per share of Common Stock based on a pre-money Company valuation of $50 million on a Fully Diluted Basis.

On both September 30, 2023, and December 31, 2022, the total outstanding balance of the 2017 Convertible Promissory Note was $300,000. The maturity date of the 2017 Convertible Promissory Note is based on the payment of 0.6% of quarterly gross revenue until 1.5 times the amount of the 2017 Convertible Promissory Note is paid. Accrued interest on September 30, 2023, and December 31, 2022 was $36,218 and $40,965, respectively. Interest expense for the three months ended September 30, 2023 and 2022 was $3,750. Interest expense for the nine months ended September 30, 2023 and 2022 was $11,250.

2022 Convertible Exchange Notes

On October 28, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors pursuant to which we issued convertible notes (“2022 Convertible Promissory Notes”) in the principal amount of $34.5 million, with a debt discount of $4.5 million and issuance costs of $2.3 million. The net amount of proceeds to us from the 2022 Convertible Promissory Notes after deducting the placement agent’s fees and transaction expenses (issuance costs) were approximately $27,703,000. The Company intends to use the net proceeds of the 2022 Convertible Promissory Notes for general corporate purposes, including funding capital, expenditures, or the expansion of its business and providing working capital.

On January 20, 2023, the Company entered into an Amendment No. 1 to Securities Purchase Agreement (“Amended SPA”) to that certain Purchase Agreement. The Amended SPA amends the notes attached as exhibits to the Purchase Agreement.

Pursuant to the terms of the Purchase Agreement, on January 20, 2023, the Company exchanged the 2022 Convertible Promissory Notes, on a dollar-for-dollar basis, into 3% Senior Convertible Notes Due 2024 (the “2022 Convertible Exchange Notes”).

The 2022 Convertible Exchange Notes are identical in all material respects to the 2022 Convertible Promissory Notes, except that they (i) are issued pursuant to the Base Indenture (as defined below) and the First Supplemental Indenture (as defined below); (ii) have a maturity date of October 28, 2024; (iii) allow for the Acceleration of Installment Amounts (as defined in the 2022 Convertible Exchange Notes) not to exceed eight (8) times the Installment Amount (as defined in the 2022 Convertible Exchange Notes) with respect to the Installment Date (as defined in the 2022 Convertible Exchange Notes) related to the Current Acceleration (as defined in the 2022 Convertible Exchange Notes); and (iv) modify the Acceleration Conversion Price (as defined in the 2022 Convertible Exchange Notes).

The 2022 Convertible Exchange Notes were issued pursuant to the first supplemental indenture (the “First Supplemental Indenture”), dated as of January 20, 2023, between the Company and Wilmington Savings Fund Society, FSB, as trustee (the “Trustee”). The First Supplemental Indenture supplements the indenture entered into by and between the Company and the Trustee, dated as of January 20, 2023 (the “Base Indenture” and, together with the First Supplemental Indenture, the “Initial Indenture”). The Initial Indenture has been qualified under the Trust Indenture Act of 1939, and the terms of the 2022 Convertible Exchange Notes include those set forth in the Initial Indenture and those made part of the Initial Indenture by reference to the Trust Indenture Act.

On July 21, 2023, the Company entered into an agreement and waiver with the holder of the 2022 Convertible Exchange Notes (the “Agreement and Waiver”) that included (i) extending the Maturity Date to from October 28, 2024 to April 28, 2025; (ii) waive the last sentence of Section 8(e) of the Notes (such that last sentence of Section 8(e) of the Notes shall have no further force and effect) (the “Acceleration Waiver”); (iii) reduce the Conversion Price of the 2022 Convertible Exchange Notes to the lower of (A) the Conversion Price then in effect and (B) the greater of (x) the Floor Price (as defined in the Notes) then in effect and (y) 125% of the lowest volume weighted average price (“VWAP”) of the Common Stock during the five (5) consecutive Trading Day period ending and including the Trading Day immediately prior to the effective date; provided, that, in addition, during the period commencing on the effective date through and including September 30, 2023, the conversion price of the Notes, solely with respect to voluntary conversions of such aggregate Conversion Amount of the Notes not in excess of such aggregate Current Installment Amounts of such applicable period (or otherwise eligible to be converted in one or more Accelerations during such applicable period), shall be further lowered to the Installment Conversion Price (as defined in the Existing Note) in effect for the Installment Date (as defined in the Existing Note) of the Existing Note of July 3, 2023; (iv) to extend the Additional Closing Expiration Date to April 28, 2026; and (v) increase the aggregate principal amount of Notes issuable in one or more Additional Closings to $46,000,000.

A full summary of the Agreement and Waiver, including a full text of the related agreements, are available on the Current Report on Form 8-K filed with the SEC on July 28, 2023.

The 2022 Convertible Exchange Notes bear interest at the rate of 3% per annum. The 2022 Convertible Exchange Notes are payable in monthly installments beginning on November 1, 2022 through the maturity date of April 28, 2025 (each such date, an “Installment Date”). On each Installment Date, we will make monthly payments by converting the applicable “Installment Amount” (as defined below) into shares of our Common Stock (an “Installment Conversion”), subject to satisfaction of certain equity conditions, including a minimum $1.50 share price, $500,000 minimum daily volume, and maintaining continued Nasdaq listing requirements among other conditions. If these conditions are not met, installments can be requested in cash. For the nine months ended September 30, 2023, we issued 7,431,610 common shares as a result of Installment Conversion. At each Installment Date the note holder may defer some or all of the amount due until the subsequent Installment Date. In between Installment Dates, the note holder also has the option to accelerate certain portions of principal due. At each Installment Date the price used to exchange outstanding notes into Common Stock is based on the lower of (A) 92% of the lowest VWAP of the respective previous five trading days; and (B) the Floor Price ($0.76 as of September 30, 2023). The maximum conversion price is $1.50 per share.

The “Installment Amount” will equal:

(i)

for all Installment Dates other than the maturity date, the lesser of (x) the Holder Pro Rata Amount of $1,437,500 and (y) the principal amount then outstanding under the Note; and

(ii)

on the maturity date, the principal amount then outstanding under the Note.

Each month, the note holders may accelerate a portion of the note due up to eight times the minimum Installment Amount of $1,437,500.

Additional Notes

On July 24, 2023, pursuant to the terms of the Purchase Agreement, as amended, an Investor elected to purchase 3% Series B-2 Senior Convertible Notes in the aggregate original principal amount of $11.5 million (the “Additional Notes”), which Additional Notes are convertible into shares of Common Stock under certain conditions more fully described in the Additional Notes. The Additional Notes have an original issue discount of approximately thirteen percent (13%) resulting in gross proceeds to the Company of $10.0 million. The Company currently intends to use the net proceeds for general corporate purposes, which includes funding capital expenditures and working capital. The Additional Notes have a maturity date of July 25, 2025. The Additional Notes were issued pursuant to the second supplemental indenture, dated as of July 25, 2023, between the Company and the Trustee (the “Second Supplemental Indenture,” and together with the Base Indenture, the “Second Indenture”). The Second Supplemental Indenture supplements the Base Indenture. The Second Indenture has been qualified under the Trust Indenture Act of 1939, and the terms of the Additional Notes include those set forth in the Second Indenture and those made part of the Indenture by reference to the Trust Indenture Act.

The Additional Notes bear interest at the rate of 3% per annum. The Additional Notes are payable in monthly installments beginning on August 1, 2023 through the maturity date of July 24, 2025 (each such date, an “Installment Date”). On each Installment Date, we will make monthly payments by converting the applicable Installment Amount (as defined above under the 2022 Convertible Exchange Notes) into shares of our Common Stock (an “Installment Conversion”), subject to satisfaction of certain equity conditions, including a minimum $1.50 share price, $500,000 minimum daily volume, and maintaining continued Nasdaq listing requirements among other conditions. If these conditions are not met, installments can be requested in cash. For the nine months ended September 30, 2023, we made no cash payments and issued no common shares as a result of Installment Conversion. At each Installment Date the note holder may defer some or all of the amount due until the subsequent Installment Date. In between Installment Dates, the note holder also has the option to accelerate certain portions of principal due. At each Installment Date the price used to exchange outstanding notes into Common Stock is based on the greater of (x) the Floor Price ($0.40 as of September 30, 2023) and (y) 92% of the lowest VWAP of the prospective five trading days. The maximum conversion price is $1.45 per share.

On July 25, 2023, the Additional Notes were offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-252571) filed with the SEC on January 29, 2021 (as such registration statement became effective on February 5, 2021. On July 25, 2023, the Company filed a prospectus supplement with the SEC in connection with the sale and issuance of the Additional Notes. Oppenheimer & Co. Inc. served as the sole placement agent for the transaction pursuant to the terms of a placement agent agreement, dated October 26, 2022.

As of September 30, 2023, the total outstanding principal on the 2022 Convertible Exchange Notes and Additional Notes was $30,328,344, net of debt discount and issuance costs of $3,061,446. As of December 31, 2022, the total outstanding principal on the 2022 Convertible Promissory Notes was $30,048,135, net of debt discount and issuance costs of $3,251,865. Accrued interest on September 30, 2023, and December 31, 2022 was $409,638 and $176,629, respectively, and is included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.

For the three months ended September 30, 2023, we recognized interest expense of $233,493, amortization expense of $426,996 related to the debt discount, and amortization expense of $226,051 related to the issuance costs. For the nine months ended September 30, 2023, we recognized interest expense of $780,485, amortization expense of $1,609,104 related to the debt discount, and amortization expense of $829,357 related to the issuance costs. The remaining unamortized debt discount of $2,032,025 and issuance costs of $1,029,422 as of September 30, 2023 will be amortized via the interest method under ASC 835. Interest expense and amortization expense of the debt discount and issuance costs are included in Interest expense on the Consolidated Statements of Operations.

At the 2023 Annual Meeting of Stockholders held on October 31, 2023, the stockholders approved an amendment to the Floor Price of the 2022 Convertible Exchange Notes and the Additional Notes as the greater of (x) $0.32 and (y) such price that would result in such Conversion Floor Price Condition (as defined in the respective note) not to have occurred with respect to such applicable conversion of the respective note.

Government Grant Liability

Airobotics has received grants from the Israel Innovation Authority (“IIA”) to finance its research and development programs in Israel, through which Airobotics received IIA participation payments in the aggregate amount of $3.1 million through September 30, 2023. All of these are royalty-bearing grants. In return, Airobotics is committed to pay IIA royalties at a rate of 3% of future sales of the developed products, up to 100% of the amounts of grants received plus interest at LIBOR. Through September 30, 2023, approximately $460,000 in royalties have been paid to the IIA. The Company’s royalty liability to the IIA as of September 30, 2023, including grants received by Airobotics and the associated LIBOR interest on all such grants, was $2,011,568. The increase in fair value of the government grant liability, including LIBOR interest expense accrued, was $234,144 for the three months ending September 30, 2023 and $161,764 for the period of January 23, 2023 - September 30, 2023, which is included in Other income (expense), net on the Condensed Consolidated Statements of Operations.

NOTE 10 – STOCKHOLDERS’ EQUITY

Common Stock

On September 30, 2023 and December 31, 2022, the Company had 116,666,667 shares of Common Stock, par value $0.0001 (the “Common Stock”), authorized for issuance, of which 55,184,623 and 44,108,661 shares of our Common Stock were issued and outstanding, respectively. On October 31, 2023, stockholders of the Company approved an amendment to the Company’s Amended and Restated Articles of Incorporation to increase the number of authorized shares of Common Stock from 116,666,667 to 300,000,000.

Preferred Stock

At September 30, 2023 and December 31, 2022, the Company had 10,000,000 shares of preferred stock, par value $0.0001, authorized, of which 5,000,000 shares are designated as Series A Convertible Preferred Stock (“Series A Preferred”) and 5,000,000 shares are non-designated (“blank check”) shares. As of September 30, 2023, and December 31, 2023, the Company had no preferred stock outstanding.

The Company evaluated its Series A Preferred to determine if those instruments or embedded components of those instruments qualify as derivatives to be accounted for separately. The Preferred Shares include an embedded contingent automatic conversion option which is bifurcated from the Preferred Shares and recorded separately as a derivative liability, creating a discount to the Preferred Shares. The fair value of the embedded derivative is recorded as a liability and marked-to-market each balance sheet date, with the change in fair value recorded as other income (expense) in the Company’s accompanying consolidated statement of operations. The discount arising from the identification of the embedded conversion feature will not be accreted or amortized as the Series A Preferred has been classified in equity.

Form S-3

On January 29, 2021, the Company filed a shelf Registration Statement on Form S-3 for up to $150,000,000 with the SEC (the “Form S-3”) for shares of its Common Stock; shares of its preferred stock, which the Company may issue in one or more series or classes; debt securities, which the company may issue in one or more series; warrants to purchase its Common Stock, preferred stock or debt securities; and units. The Form S-3 was declared effective by the SEC on February 5, 2021.

ATM Offering

On March 22, 2022, the Company, entered into an Equity Distribution Agreement (the “ATM Agreement”) with Oppenheimer (the “Sales Agent”). Pursuant to the terms of the ATM Agreement, the Company may offer and sell (the “ATM Offering”) from time to time through the Sales Agent, as the Company’s sales agent, up to $50 million of shares of Common Stock, (the “ATM Shares”). Sales of the ATM Shares, if any, may be made in sales deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act. The Sales Agent is not required to sell any specific number or dollar amount of ATM Shares but will act as a sales agent using commercially reasonable efforts consistent with its normal trading and sales practices and applicable state and federal laws, rules, and regulations and the rules of the Nasdaq Stock Market, on mutually agreed terms between the Sales Agent and the Company. The Sales Agent will receive from the Company a commission of 3.0% of the gross proceeds from the sales of ATM Shares by the Sales Agent pursuant to the terms of the ATM Agreement. Net proceeds from the sale of the ATM Shares will be used for general corporate purposes.

On October 26, 2022, Ondas entered into Amendment No. 1 to the Equity Distribution Agreement with the Sales Agent (“Amendment No. 1”). Amendment No. 1 provides for the reduction of the aggregate offering price from up to $50 million to up to $40 million of shares of its Common Stock.

The offering of ATM Shares pursuant to the ATM Agreement will terminate upon the earliest of (i) the sale of all ATM Shares subject to the ATM Agreement, and (ii) the termination of the ATM Agreement pursuant to its terms.

The ATM Shares are issued pursuant to the Form S-3 and the prospectus supplement thereto dated March 22, 2022.

In April 2022 the Company sold 343,045 ATM Shares through the Sales Agent at an average price of $7.49 with the net proceeds of $2.50 million. In connection with the sale of these ATM Shares, the compensation paid by the Company to the Sales Agent was $77,421.

In May 2022 the Company sold 171,775 ATM Shares through the Sales Agent at an average price of $7.19 with the net proceeds of $1.20 million. In connection with the sale of these ATM Shares, the compensation paid by the Company to the Sales Agent was $37,242.

In June 2022 the Company sold 337,859 ATM Shares through the Sales Agent at an average price of $7.12 with the net proceeds of $2.36 million. In connection with the sale of these ATM Shares, the compensation paid by the Company to the Sales Agent was $110,428.

In July 2022 the Company sold 11,995 ATM Shares through the Sales Agent at an average price of $5.62 with the net proceeds of $0.65 million. In connection with the sale of these ATM Shares, the compensation paid by the Company to the Sales Agent was $1,844.

There were no shares sold during the nine months ended September 30, 2023.

On July 11, 2023, the Company and the Sales Agent, mutually agreed to terminate the ATM Agreement. As a result, the Company suspended and terminated the prospectus related to the Company’s Common Stock issuable pursuant to the terms of the ATM Agreement (the “ATM Prospectus”). The termination of the ATM Agreement and ATM Prospectus is effective as of July 11, 2023, at which time the Company expensed the remaining deferred offering costs outstanding of $151,431 related to the ATM Agreement.

Stock Issued for Convertible Debt

The Company issued 1,984,918 and 7,431,610 shares of its Common Stock during the three and nine months ended September 30, 2023, respectively, to the lenders in lieu of cash payments for $164,053 of outstanding interest and $7,148,447 of outstanding principal on the 2022 Convertible Exchange Notes (See Note 9 – Long-term Notes Payable for further details).

Warrants to Purchase Common Stock

We use the Black-Scholes-Merton option model (the “Black-Scholes Model”) to determine the fair value of warrants to purchase Common Stock of the Company. The Black-Scholes Model is an acceptable model in accordance with U.S GAAP. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average term of the warrant.

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the warrants. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the award. Our estimated volatility is an average of the historical volatility of peer entities whose stock prices were publicly available over a period equal to the expected life of the awards. We used the historical volatility of peer entities due to the lack of sufficient historical data of our stock price.

As of December 31, 2022, we had Warrants outstanding to purchase an aggregate of 1,901,802 shares of Common Stock with a weighted-average contractual remaining life of approximately 7.47 years, and exercise prices ranging from $0.03 to $7.89 per share, resulting in a weighted average exercise price of $7.63 per share.

On January 23, 2023, the Company issued warrants to purchase an aggregate of 586,440 shares of Common Stock with exercise prices ranging from $9.26 to $12.35 per share, resulting in a weighted average exercise price of $9.95 per share, as consideration in the acquisition of Airobotics.

On July 21, 2023 and August 11, 2023, the Company issued warrants to purchase an aggregate of 7,825,792 and 2,374,208 shares of Common Stock in Ondas Holdings, respectively, with an exercise price of $0.89 per share, in connection with the sale of redeemable preferred stock in Ondas Networks.

The assumptions used in the Black-Scholes Model are set forth in the table below.

	Nine months ended,
	September 30, 2023
Stock price	$	1.14-2.00
Risk-free interest rate		4.09-4.70	%
Volatility		50.64-55.34	%
Expected life in years		0.12-5.00
Dividend yield		0.00	%

A summary of our Warrants activity for the nine months ended September 30, 2023 and related information follows:

						Weighted
				Weighted		Average
	Number of			Average		Remaining
	Shares Under			Exercise		Contractual
	Warrant			Price		Life
Balance on January 1, 2023		1,901,802		$	7.63		7.47
Issued		586,440		$	9.95
Expired		(122,150	)	$	12.35
Balance on June 30, 2023		2,366,092		$	7.96		5.78
Issued		10,200,000		$	0.89
Balance on September 30, 2023		12,566,092		$	2.22		4.96

As of September 30, 2023, we had warrants outstanding to purchase an aggregate of 12,566,092 shares of Common Stock with a weighted average contractual remaining life of approximately 4.96 years, and exercise prices ranging from $0.03 to $12.35 per share, resulting in a weighted average exercise price of $2.22 per share.

Equity Incentive Plan

In 2018, our stockholders adopted the 2018 Equity Incentive Plan (the “2018 Plan”) pursuant to which 3,333,334 shares of our Common Stock have been reserved for issuance to employees, including officers, directors and consultants. The 2018 Plan shall be administered by the Board, provided however, that the Board may delegate such administration to the compensation committee (the “Committee”). Subject to the provisions of the 2018 Plan, the Board and/or the Committee shall have authority to grant, in its discretion, incentive stock options, or non-statutory options, stock awards or restricted stock purchase offers (“Equity Awards”). As of September 30, 2023, the balance available to be issued under the 2018 Plan was 1,052,373.

At the 2021 Annual Meeting of Stockholders of the Company held on November 5, 2021, stockholders of the Company approved, among other matters, the Ondas Holdings Inc. 2021 Stock Incentive Plan (the “2021 Plan”). The Committee adopted the 2021 Plan on September 30, 2021, subject to stockholder approval. The purpose of the 2021 Plan is to enable the Company to attract, retain, reward, and motivate eligible individuals by providing them with an opportunity to acquire or increase a proprietary interest in the Company and to incentivize them to expend maximum efforts for the growth and success of the Company, so as to strengthen the mutuality of the interests between the eligible individuals and the shareholders of the Company. The 2021 Plan provides for the issuance of awards including stock options, stock appreciation rights, restricted stock, restricted stock units, and performance awards. The 2021 Plan provides for a reserve of 6,000,000 shares of the Company’s Common Stock. As of September 30, 2023, the balance available to be issued under the 2021 Plan was 2,329,444. On October 31, 2023, stockholders of the Company approved an amendment to the 2021 Plan to increase the number of shares of the Company’s Common Stock authorized for issuance under the 2021 Plan from 6,000,000 to 8,000,000 shares.

Stock Options to Purchase Common Stock

The Company awards stock options to certain employees, directors, and consultants, which represent the right to purchase common shares on the date of exercise at a stated exercise price. Stock options granted to employees generally vest over a two to four-year period and are contingent on ongoing employment. Compensation expenses related to these awards is recognized straight-line over the applicable vesting period. Stock options granted to consultants are subject to the attainment of pre-established performance conditions. The actual number of shares subject to the award is determined at the end of the performance period and may range from zero to 100% of the target shares granted depending upon the terms of the award. Compensation expenses related to these awards is recognized when the performance conditions are satisfied.

On January 23, 2023, in connection with the acquisition of Airobotics, the Company granted stock options to purchase 1,064,946 shares of Common Stock, of which 773,244 options were vested and the remaining 291,702 vest monthly through November 13, 2025. The vested options have a weighted average contractual remaining life of approximately 6.08 years, an exercise price ranging from $0.49 to $12.35 per share, resulting in a weighted average exercise price of $5.43 per share, and a grant date fair value ranging from $0 to $1.48 per share. The unvested options have a weighted average contractual remaining life of approximately 7.52 years, an exercise price ranging from $0.49 to $24.70 per share, resulting in a weighted average exercise price of $15.80 per share, and a grant date fair value ranging from $0 to $1.45 per share.

On February 9, 2023, the Committee of the Board granted an aggregate of 317,625 stock options to purchase shares of the Company’s Common Stock to certain employees. The stock options vest over a four-year period and are contingent on ongoing employment. They are included in compensation expenses.

On March 16, 2023, the Committee of the Board granted an aggregate of 1,793,000 stock options to purchase shares of the Company’s Common Stock to certain employees. The stock options vest over a four-year period and are contingent on ongoing employment. They are included in compensation expenses.

On March 16, 2023, the Committee of the Board also granted an aggregate of 31,250 stock options to purchase shares of the Company’s Common Stock to certain non-employees. 6,250 stock options vested on the grant date, and 25,000 vest on December 31, 2023. They are included in compensation expenses.

The assumptions used in the Black-Scholes Model are set forth in the table below.

	Nine months ended,
	September 30, 2023
Stock price	$	1.46-2.06
Risk-free interest rate		3.61-4.82	%
Volatility		49.83-58.92	%
Expected life in years		0.12-6.25
Dividend yield		0.00	%

A summary of our Option activity for the three and nine months ended September 30, 2023 and related information follows:

						Weighted
				Weighted		Average
	Number of			Average		Remaining
	Shares Under			Exercise		Contractual
	Option			Price		Life
Balance on January 1, 2023		2,412,286		$	5.77		7.58
Granted		3,206,821		$	3.80
Forfeited		(153,709	)	$	5.01
Balance on March 31, 2023		5,465,398		$	4.64		8.47
Exercised		(1,539	)	$	0.49
Forfeited		(368,224	)	$	3.59
Balance on June 30, 2023		5,095,635		$	4.71		7.59
Exercised		(21,940	)	$	0.49
Forfeited		(116,396	)	$	4.49
Expired		(112,250	)	$	4.62
Balance on September 30, 2023		4,845,049		$	4.74		7.34
Vested and Exercisable at September 30, 2023		2,225,405		$	6.43		5.21

As of September 30, 2023, total unrecognized compensation expense related to non-vested stock options was $2,026,874 which is expected to be recognized over a weighted average period of 2.86 years.

Total stock-based compensation expense for stock options for the three and nine months ended September 30, 2023 and 2022 is as follows:

	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
General and administrative	$	1,843	$	134,989	$	209,313	$	340,453
Sales and marketing		126,868		123,796		385,455		386,343
Research and development		103,962		186,169		235,564		582,216
Cost of goods sold		16,144		-		35,166		-
Total stock-based expense related to options	$	248,817	$	444,954	$	865,498	$	1,309,012

Restricted Stock Units

On February 9, 2023, the Committee approved the grant of 3,000 restricted stock units to an employee. The restricted stock units vest in two successive equal annual installments with the first vesting date commencing on the first anniversary of the award date and are contingent on continuing employment.

On February 9, 2023, the Committee also approved the grant of 66,000 restricted stock units to two employees. The restricted stock units vest as follows: 20% on September 13, 2023, 40% on January 10, 2024, and 40% on February 21, 2024 and are contingent on continuing employment.

On July 6, 2023, the Committee approved the grant of 180,000 restricted stock units to three employees. The restricted stock units vested in July 2023.

The Company recognizes restricted stock unit expense over the period of vesting or period that services will be provided. Compensation associated with shares of Common Stock issued or to be issued to consultants and other non-employees is recognized over the expected service period beginning on the measurement date, which is generally the time the Company and the service provider enter into a commitment whereby the Company agrees to grant shares in exchange for the services to be provided.

The following is a summary of restricted stock unit activity for the three and nine months ended September 30, 2023:

	RSUs			Weighted Average Grant Date Fair Value		Weighted Average Vesting Period (Years)
Unvested balance at January 1, 2023		1,110,027		$	6.89		1.52
Granted		69,000		$	2.06
Vested		(43,040	)	$	2.45
Cancelled		(14,800	)	$	7.19
Unvested balance at March 31, 2023		1,121,187		$	6.76		1.25
Vested		(47,490	)	$	2.40
Cancelled		(412,500	)	$	7.78
Unvested balance at June 30, 2023		661,197		$	6.43		0.35
Granted		180,000		$	0.88
Vested		(737,907	)	$	5.67
Cancelled		(27,800	)	$	2.06
Unvested balance at September 30, 2023		75,490		$	2.27		0.34

As of September 30, 2023, there were 99,574 restricted stock units that were vested but not yet released due to administrative timing.

In 2023, three employees with restricted stock unit awards separated from the Company. As part of their separation agreements, the employees were granted accelerated vesting on some of their restricted stock unit awards, which was accounted for as a modification of their awards. The result of the modification was a reversal of approximately $2,800,000 of previously recognized stock-based compensation expense during the three and nine months ended September 30, 2023. Total stock-based compensation expense for restricted stock units for the three and nine months ended September 30, 2023 and 2022 is as follows:

	Three months ended September 30,					Nine months ended September 30,
	2023			2022		2023			2022
General and administrative	$	(1,751,531	)	$	662,201	$	(278,224	)	$	1,965,195
Sales and marketing		62,403			9,603		81,296			15,031
Research and development		(826,564	)		366,397		(32,220	)		1,077,496
Total stock-based expense related to restricted stock units	$	(2,515,692	)	$	1,038,201	$	(229,148	)	$	3,057,722

NOTE 11 – REDEEMABLE NONCONTROLLING INTEREST

On July 9, 2023, Ondas Networks Inc. entered into an Agreement with a third party to purchase Redeemable Preferred Stock in Ondas Networks and the issuance of warrants to purchase 10,200,000 shares of Ondas Holdings.

The Preferred Stock accrues dividends at the rate per annum of eight percent (8%) of the original issue price, of $34.955 per share (the “Original Issue Price”). Such dividends are payable in cash or additional shares of Preferred Stock, with such valuation based on the Original Issue Price. Each share of Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of Networks Common Stock (as defined below) as is determined by dividing the Original Issue Price by the conversion price in effect at the time of conversion, which initially is set at $34.955. In lieu of any fractional shares to which the holder would otherwise be entitled, the number of shares of Networks Common Stock to be issued upon conversion of the Preferred Stock shall be rounded to the nearest whole share. The Preferred Stock can be redeemed at the request of the Holder at any time after the fifth anniversary for the greater of two times the initial investment plus accrued dividends or the amount that would be due if the Preferred Stock was converted into Common Stock as described above.

On July 21, 2023, Ondas Networks entered into a certain Amendment to Preferred Stock Purchase Agreement (the “Networks Amendment,” together with the Original Networks Agreement, the “Networks Agreement”). Pursuant to the Networks Amendment, in exchange for an initial sale of shares of preferred stock of Ondas Networks, $0.00001 par value per share (the “Networks Preferred Stock”), the Initial Purchaser acquired the following (the “Initial Networks Closing”), for gross proceeds to Ondas Networks of $11,508,517: (i) 329,238 shares of Networks Preferred Stock, at a purchase price of $34.955 per share (the “Per Share Price”), convertible into shares of Common Stock of Ondas Networks, $0.00001 par value per share (the “Networks Common Stock”) and (ii) warrants to purchase 7,825,792 shares of the Company Common Stock, at an exercise price of $0.89 per share, exercisable commencing ninety days following the date of issuance through the fifth anniversary of the date of issuance (the “Initial Warrants”). Also, pursuant to the Networks Amendment, the Initial Purchaser agreed to purchase, and Ondas Networks agreed to sell and issue to the Initial Purchaser, an additional 99,885 shares of Networks Preferred Stock, at the Per Share Price (the “Second Initial Purchaser Closing”) and warrants to purchase 2,374,208 shares of Company Common Stock, at an exercise price of $0.89 per share, exercisable commencing ninety days following the date of issuance through the fifth anniversary of the date of issuance (the “Second Initial Purchaser Warrants”), within thirty days of the Initial Networks Closing.

Ondas Networks will use the proceeds from the sale of the Networks Preferred Stock for working capital and other general corporate purposes, including fees related to the transactions contemplated by the Networks Agreement. No portion of the proceeds will be distributed to the Company.

Also on July 21, 2023, Ondas Networks completed the Initial Closing. In connection with the Initial Networks Closing, the Company issued the Initial Warrants. Also, in connection with the Initial Closing, the parties entered into an indemnification agreement, investors’ rights agreement, right of first refusal agreement, and voting agreement. Forms of each of these agreements are attached to Exhibit 10.1 to Form 8-K filed on July 28, 2023.

On August 11, 2023, Ondas Networks completed the Second Initial Purchaser Closing. In connection with the Second Initial Purchaser Closing, the Company issued Second Initial Purchaser Warrants. Following the Second Initial Purchaser Closing, the Initial Purchaser has invested an aggregate of $15.0 million and owns a minority interest of approximately 28% of Ondas Networks.

The Company assessed the Preferred Stock in accordance with ASC 480 and determined that it should be recorded as temporary equity and not as a liability. The initial valuation was assigned to the Preferred stock and the warrants issued in connection with this transaction based on relative fair values, with the initial valuation of the noncontrolling interest being $10,406,949. It is being accreted using the effective interest rate method over the five-year period to achieve the redemption value of $30,000,000 plus accrued dividends.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There are no such loss contingencies that are included in the financial statements as of September 30, 2023.

War and Hostilities in Israel

On October 7, 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Following the attacks, the Security Cabinet of the State of Israel declared a state of war in Israel. Since Airobotics is located in Israel, the war has impacted the availability of our workforce in Israel, as approximately 17% of our workforce in Israel, have been called to active duty. To date, we have not had material disruptions to our ability to produce, manage and deliver products and services to customers as our U.S. teams have supported our ongoing operations in Israel and the Middle East; however, a prolonged war or an escalation of the current conditions in Israel could materially adversely affect our business, financial condition, and results of operations. Due to the recency of these events, and their ongoing and evolving nature, the extent of the adverse effect on our business operations is still unknown. There are no commitments or loss contingencies related to business operations in Israel that are included in the financial statements as of September 30, 2023.

NOTE 13 – SEGMENT INFORMATION

Operating segments are defined as components of an entity for which discrete financial information is available and is regularly reviewed by the CODM in making decisions regarding resource allocation and performance assessment. The Company’s CODM is its Chief Executive Officer. The Company determined it has two reportable segments: Ondas Networks and Ondas Autonomous Systems as the CODM reviews financial information for these two businesses separately. The Company has no inter-segment sales. The following table presents segment information for three and nine months ended September 30, 2023:

	Three Months Ended September 30, 2023
	Ondas Networks			Ondas Autonomous Systems			Total
Revenue, net	$	2,430,954		$	234,236		$	2,665,190
Depreciation and amortization		36,131			1,264,666			1,300,797
Interest income		379			-			379
Interest expense		448,448			445,503			893,951
Stock-based compensation		291,324			(2,558,199	)		(2,266,875	)
Net loss		(3,840,184	)		(3,452,277	)		(7,292,461	)
Goodwill		-			27,671,921			27,671,921
Capital expenditures		39,451			55,521			94,972
Total assets	$	21,842,344		$	78,802,674		$	100,645,018

	Nine months Ended September 30, 2023
	Ondas Networks			Ondas Autonomous Systems			Total
Revenue, net	$	5,079,652		$	5,650,493		$	10,730,145
Depreciation and amortization		112,659			3,639,556			3,752,215
Interest income		4,058			3,666			7,724
Interest expense		1,628,151			1,569,449			3,197,600
Stock-based compensation		839,834			(203,484	)		636,350
Net loss		(11,998,183	)		(18,707,915	)		(30,706,098	)
Goodwill		-			27,671,921			27,671,921
Capital expenditures		39,451			55,521			94,972
Total assets	$	21,842,344		$	78,802,674		$	100,645,018

NOTE 14 – INCOME TAXES

The Company had a net deferred tax asset of $35.9 million as of December 31, 2022, including a tax benefit from approximately $79 million of net operating loss carry-forwards of $27.5 million. A valuation allowance of $35.9 million was provided against this asset resulting in deferred assets, net of valuation allowance of $0.

Airobotics Ltd. had a tax benefit of approximately $23.1 million as of December 31, 2022, resulting from Israeli tax loss carry-forwards of $110.0 million. These losses are available to offset future profits of Airobotics Ltd. As of the acquisition date of January 23, 2023, the Company estimated that Airobotics had a deferred tax liability of $1.4 million resulting from the acquisition accounting of amortizable intangibles assets. This liability together with a valuation allowance of $21.7 million results in deferred assets, net of valuation allowance of $0, relating to Airobotics.

In assessing the realizability of deferred tax assets, including the net operating loss carry forwards, the Company assesses the positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize its existing deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period when those temporary differences become deductible. Based on its assessment, the Company has provided a full valuation allowance against its deferred tax assets since their future utilization remains uncertain at this time.

In accordance with Section 382 of the Internal Revenue Code, the usage of the Company’s net operating loss carry forwards could be limited in the event a change of control has occurred. As of December 31, 2021, the Company completed an analysis and determined that there were multiple ownership changes. Provided sufficient taxable income is generated the annual base limitation plus increased limitation calculated pursuant to IRS Notice 2003-65 will allow the Company to utilize all existing losses within the carryover periods.

As of September 30, 2023 and December 31, 2022, management does not believe the Company has any material uncertain tax positions that would require it to measure and reflect the potential lack of sustainability of a position on audit in its financial statements. The Company will continue to evaluate its uncertain tax positions in future periods to determine if measurement and recognition in its financial statements is necessary. The Company does not believe there will be any material changes in its unrecognized tax positions over the next year.

NOTE 15 – RELATED PARTY TRANSACTIONS

The Company has a long-term equity investment in Dynam with a carrying value of $1,500,000 as of September 30, 2023 and December 31, 2022. See Note 7 – Long-Term Equity Investment. Our CEO Eric Brock is a director of Dynam, and he has invested an aggregate of $25,000 in Dynam as of September 30, 2023.

In addition to the equity investment, the Company paid Dynam for services of $0 and $1,734,560 during the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023 and December 31, 2022, the Company owed $17,500 and $359,159 to independent directors, respectively, which is included in Accrued expenses and other current liabilities.

NOTE 16 – SUBSEQUENT EVENTS

Management has evaluated subsequent events as of November 14, 2023, the date the condensed consolidated financial statements were available to be issued according to the requirements of ASC topic 855.

On October 31, 2023, stockholders of the Company approved an amendment to the Company’s Amended and Restated Articles of Incorporation to increase the number of authorized shares of Common Stock from 116,666,667 to 300,000,000.

On October 31, 2023, stockholders of the Company approved an amendment to the 2021 Plan to increase the number of shares of the Company’s Common Stock authorized for issuance under the 2021 Plan from 6,000,000 to 8,000,000 shares.

On November 6, 2023, the Company amended the 2021 Gibraltar Lease to further extend the lease through June 30, 2024, wherein the base rate is $68,959 per month.

Subsequent to September 30, 2023, the Company issued approximately 3,127,000 shares as a result of Installment Conversion on the 2022 Convertible Exchange Notes.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

The following discussion and analysis provide information which our management believes to be relevant to an assessment and understanding of the results of operations and financial condition of Ondas Holdings Inc. (“Ondas,” “we” or the “Company”). This discussion should be read together with our condensed consolidated financial statements and the notes included therein, which are included in this Quarterly Report on Form 10-Q (the “Report”). This information should also be read in conjunction with the information contained in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2023, including the audited consolidated financial statements and notes included therein as of and for the year ended December 31, 2022 (“2022 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. For a description of factors that may cause our actual results to differ materially from those anticipated in these forward-looking statements, please refer to the below section of this Report titled “Cautionary Note Regarding Forward-Looking Statements.” The reported results will not necessarily reflect future results of operations or financial condition.

Overview

Ondas Holdings is a leading provider of private wireless, drone, and automated data solutions through its subsidiaries Ondas Networks Inc. (“Ondas Networks”), American Robotics, Inc. (“American Robotics” or “AR”) and Airobotics, Ltd. (“Airobotics”). Ondas Holdings acquired Airobotics, an Israeli-based developer of autonomous drone systems on January 23, 2023. American Robotics and Airobotics are operated together, under a separate business unit called Ondas Autonomous Systems. Ondas Networks and Ondas Autonomous Systems together provide users in rail, energy, mining, agriculture, public safety and critical infrastructure and government markets with improved connectivity, data collection capabilities, and data collection and information processing capabilities. We operate Ondas Networks and Ondas Autonomous Systems as separate business segments, and the following is a discussion of each segment. See Note 1 and Note 2 of the accompanying Consolidated Financial Statements for further information regarding our segments.

Ondas Networks Segment

Our Partnership with Siemens Mobility

In April 2020, Ondas Networks entered into a strategic partnership with Siemens Mobility (“Siemens”), a worldwide leader in seamless, sustainable, reliable and secure transportation solutions for more than 160 years, to both market our FullMAX-based networking technology and services and to jointly develop wireless communications products for the North American Rail Industry based on Siemens’ Advanced Train Control System (“ATCS”) protocol and our FullMAX MC-IoT platform.

We believe Siemens has both the sales and marketing reach and support to drive our technology to wide scale acceptance across the global rail market beginning with the North American Class I Railroad market. In the third quarter of 2021 we completed the development of our first jointly-developed product with Siemens – the dual-mode ATCS/MC-IoT radio systems. Siemens is now marketing and selling these proprietary systems under the brand name Airlink to our railroad customers. The dual-mode ATCS radio systems support Siemens’ extensive installed base of ATCS radios as well as offer Siemens’ customers the ability to support a host of new advanced rail applications utilizing our MC-IoT wireless system. These new applications, including Advanced Grade Crossing Activation and Monitoring, Wayside Inspection, Railcar Monitoring and next generation signaling and train control systems, are designed to increase railroad productivity, reduce costs and improve safety. In addition, Siemens markets and sells Ondas Networks’ standalone MC-IoT 802.16 products under the Siemens Airlink brand.

Our relationship with Siemens has expanded significantly since entering into the partnership both with (i) the wider marketing of our wireless technology platform and (ii) multiple additional joint-product programs. Siemens has expanded its marketing reach of Ondas Networks products with identified opportunities in North American Passenger and Transit Rail as well as in European and Asian Rail markets. We believe our technology has broad potential in these large, newly targeted markets.

In November 2021, Siemens secured its first commercial 900 MHz rail order for a major Class I Railroad in the United States which was delivered in December 2021. In August 2022, we announced that we had secured an initial volume order from Siemens for the Class I Rail 900 MHz Network consisting of both ATCS compatible products along with Ondas’ catalog products. In September 2022, we received government authorization to sell ATCS radios in Canada. In March 2023 the Association of American Railroads (“AAR”) formally announced that IEEE 802.16 standard would be the wireless platform for the greenfield 900 MHz network. The AAR also confirmed they have agreed with the Federal Communications Committee to retire the legacy 900 MHs band by September 2025 and that the wireless network in the new 900 MHz band would be substantially built by April 2026.

Additional Critical Markets

We have launched additional initiatives to take our MC-IoT connectivity and ecosystem partnering strategy into other critical infrastructure markets. In June 2022, we announced the first successful installation of our technology into an Integrated Coastal Surveillance System (ICSS) in the Caribbean with a global defense contractor. In the fourth quarter of 2022, we received and delivered on a new ICSS order for the defense contractor to be deployed in India. We expect additional orders from this defense vendor for the ICSS application in 2023. We believe our FullMAX technology’s licensed frequency flexibility, reliability, and long communications range over ocean surfaces, is broadening the scale of our technology in this emerging market for homeland security.

Ondas Autonomous Systems Segment

Our Ondas Autonomous Systems business unit designs, develops, and markets commercial drone solutions via the Optimus System™ and Scout System™ (the “Autonomous Drone Platforms”).

In addition to the Autonomous Drone Platforms, we also offer a counter-drone system called the Raider™. The Raider™ was developed by Iron Drone Ltd. (“Iron Drone”), an Israeli-based company specializing in the development of autonomous counter-drone systems, and is deployed by government and enterprise customers to provide security and protect critical infrastructure, assets and people from the threat of hostile drones. Ondas Holdings acquired the assets of Iron Drone on March 6, 2023.

Autonomous Drone Platforms

The Optimus System™ has been designed from the ground up as an end-to-end product capable of continuous unattended operations in the real world. Powered by innovations in robotics automation, machine vision, edge computing, and AI. Once installed in the field at customer locations, a fleet of connected Optimus Systems™, which are often deployed as networked drone infrastructure, which we refer to as Urban Drone Infrastructure, remains indefinitely positioned in an area of operation, automatically collecting and seamlessly delivering data and information regularly and reliably.

We market the Optimus System™ under a DaaS business model, whereby our drone platform aggregates customer data and provides the data analytics meeting customer requirements in return for an annual subscription fee. Some customers purchase Optimus Systems™ to own and operate themselves. We also engage distributors to assist in the sales and marketing of our Optimus System™ in geographic markets where it is more cost effective to identify and service potential customers by engaging local third parties. These distribution agreements can include joint ventures, where Ondas Autonomous Systems will provide technical expertise to support the joint venture partner in the provision of aerial data services to customers.

The Optimus System™ consists of (i) Optimus™, a highly automated, AI-powered drone with advanced imaging payloads, (ii) the Airbase™, a ruggedized weatherproof base station for housing, battery swapping, battery charging, payload swapping, data processing, and cloud transfer, and (iii) Insightful™, a secure web portal and API which enables remote interaction with the system, data, and resulting analytics anywhere in the world. These major subsystems are connected via a host of supporting technologies. Airbase™ has internal robotic systems that enable the automated swapping of batteries and payloads. Automated battery swapping allows for 24/7 operation of Optimus as the Optimus drone can immediately be redeployed after returning to the dock for a battery swap. Similarly, the ability to autonomously swap sensors and advanced payloads without human intervention allows for the Optimus System to provide multiple applications and use cases from a single location.

American Robotics and Airobotics have industry leading regulatory successes which include having the first drone system approved by the FAA for automated operation BVLOS without a human operator or visual observer on-site. American Robotics’ FAA approvals were enabled by integrating a suite of proprietary technologies, including Detect-and-Avoid (“DAA”) and other proprietary intelligent safety systems into its autonomous drone platform, which we plan to integrate into the Optimus System™. Airobotics is in the advanced stages of receiving approval for Type Certification (“TC”) from the FAA for the Optimus UAV. TC approval will enable expanded operation for the Optimus System™ in the United States including flight operations in populated areas.

The Raider™

War in Israel

Inflation Reduction Act of 2022 and Tax Cuts and Jobs Act of 2017

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA includes a 15% Corporate Alternative Minimum Tax (“Corporate AMT”) for tax years beginning after December 31, 2022. We do not expect the Corporate AMT to have a material impact on our consolidated financial statements. Additionally, the IRA imposes a 1% excise tax on net repurchases of stock by certain publicly traded corporations. The excise tax is imposed on the value of the net stock repurchased or treated as repurchased. The new law will apply to stock repurchases occurring after December 31, 2022.

Results of Operations

Three months ended September 30, 2023 compared to three months ended September 30, 2022

	Three Months Ended September 30,
							Increase
	2023			2022			(Decrease)
Revenue, net	$	2,665,190		$	632,489		$	2,032,701
Cost of goods sold		2,110,312			233,001			1,877,311
Gross profit		554,878			399,488			155,390
Operating expenses:
General and administrative		2,563,319			7,362,274			(4,798,955	)
Sales and marketing		1,224,144			792,613			431,531
Research and development		2,701,436			5,793,345			(3,091,909	)
Total operating expenses		6,488,899			13,948,232			(7,459,333	)
Operating loss		(5,934,021	)		(13,548,744	)		(7,614,723	)
Other income (expense), net		(1,358,440	)		(29,597	)		1,328,843
Net loss	$	(7,292,461	)	$	(13,578,341	)	$	(6,285,880	)

Revenues

	Three Months Ended September 30,
	2023		2022		Increase
Revenue, net
Ondas Networks	$	2,430,954	$	583,114	$	1,847,840
Ondas Autonomous Systems		234,236		49,375		184,861
Total	$	2,665,190	$	632,489	$	2,032,701

Our revenues increased by $2,032,701 to $2,665,190 for the three months ended September 30, 2023, compared to $632,489 for the three months ended September 30, 2022. Revenues during the three months ended September 30, 2023, included $2,180,472 for products, $234,236 for maintenance, service, support, and subscriptions, and $250,482 for development agreements with Siemens. Revenues during the three months ended September 30, 2022, included $235,172 for products, $190,705 for maintenance, service and support and $206,612 for development agreements with Siemens. The increase in our revenues were primarily the result of an increase of approximately $1,800,000 in product sales to Siemens and acquiring Airobotics, which had $234,236 of revenue during the three months ended September 30, 2023.

Cost of goods sold

Our cost of goods sold increased by $1,877,311 to $2,110,312 for the three months ended September 30, 2023, compared to $233,001 for the three months ended September 30, 2022. The increase in cost of goods sold was primarily a result of an increase in Ondas Networks’ product revenue, which resulted in an increase in cost of goods sold of approximately $1,309,000, and acquiring Airobotics, which resulted in an increase of approximately $592,000, offset by a decrease of approximately $24,000 in American Robotics.

Gross profit

Our gross profit increased by $155,390 for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, based on the changes in revenues and costs of goods sold as discussed above. Gross margin for the three months ended September 30, 2023 and 2022 was 21% and 63%, respectively. The decrease in gross margin was primarily a result of fixed manufacturing costs combined with lower revenue at Airobotics, and the increase in product sales at Ondas Networks, which was primarily made up of lower margin products for the three months ended September 30, 2023.

Operating Expenses

	Three Months Ended September 30,
					Increase
	2023		2022		(Decrease)
Operating expenses:
General and administrative	$	2,563,319	$	7,362,274	$	(4,798,955	)
Sales and marketing		1,224,144		792,613		431,531
Research and development		2,701,436		5,793,345		(3,091,909	)
Total	$	6,488,899	$	13,948,232	$	(7,459,333	)

Our principal operating costs include the following items as a percentage of total expense.

	Three Months Ended September 30,
	2023			2022
Human resource costs, including benefits		11	%		38	%
Travel and entertainment		2	%		3	%
Other general and administration costs:
Professional fees and consulting expenses		20	%		17	%
Other expense		11	%		9	%
Depreciation and amortization		21	%		7	%
Other research and deployment costs, excluding human resources and travel and entertainment		31	%		25	%
Other sales and marketing costs, excluding human resources and travel and entertainment		4	%		1	%

Operating expenses decreased by $7,459,333, or 53%, as a result of the following items:

	Three Months Ended September 30, 2023
Human resource costs, including benefits	$	(4,564,031	)
Travel and entertainment		(233,307	)
Other general and administration costs:
Professional fees and consulting costs		(1,114,049	)
Other expense		(476,559	)
Depreciation and amortization		309,145
Other research and development costs, excluding human resources and travel and entertainment		(1,460,682	)
Other sales and marketing costs, excluding human resources and travel and entertainment		80,150
	$	(7,459,333	)

The decrease in operating expenses was primarily due to: (i) a decrease of approximately $4,564,000 in human resource costs, of which approximately $3,778,000 relates to a decrease in stock-based compensation due to employee separations during the period and approximately $786,000 relates to a net decrease in headcount in the Ondas Autonomous Systems segment; (ii) a decrease in travel and entertainment of approximately $233,000 as a result of synergies achieved by integrating American Robotics and Airobotics; (iii) a decrease of approximately $1,114,000 in professional fees and consulting costs, of which approximately $800,000 relates to professional fees in connection with the acquisition of Airobotics and approximately $314,000 relates to synergies achieved by integrating American Robotics and Airobotics; (iv) a decrease of approximately $477,000 in other expense as a result of synergies achieved by integrating American Robotics and Airobotics; (v) an increase in depreciation and amortization of approximately $309,000 related to the acquisition of Airobotics and the assets of Iron Drone; (vi) a decrease of approximately $1,461,000 in other research and development costs, excluding human resources and travel and entertainment, which relates to synergies achieved by integrating American Robotics and Airobotics; and (vii) an increase of approximately $80,000 in other sales and marketing costs, excluding human resources and travel and entertainment, of which relates to the acquisition of Airobotics.

Operating Loss

	Three Months Ended
	September 30,
	2023			2022			Decrease
Operating loss	$	(5,934,021	)	$	(13,548,744	)	$	(7,614,723	)

As a result of the foregoing, our operating loss decreased by $7,614,723, or 56%, to $5,934,021 for the three months ended September 30, 2023, compared with $13,548,744 for the three months ended September 30, 2022. Operating loss decreased primarily as a result of the decreased operating expenses as discussed above.

Other Income (Expense), net

	Three Months Ended
	September 30,
	2023			2022			Increase
Other income (expense), net	$	(1,358,440	)	$	(29,597	)	$	(1,328,843	)

Other expense, net increased by $1,328,843, to $1,358,440 for the three months ended September 30, 2023, compared with the other expense, net of $29,597 for the three months ended September 30, 2022. During the three months ended September 30, 2023, we reported (i) an increase in interest expense of approximately $233,000, amortization of debt discount of approximately $427,000, and amortization of debt issuance costs of approximately $226,000 for the 2022 Convertible Exchange Notes and Additional Notes; (ii) an increase in impairment of deferred offering costs of approximately $116,000 related to the termination of the ATM Agreement; (iii) an increase in loss on foreign exchange of approximately $45,000 at Airobotics; and (iv) an increase in other expense of approximately $295,000 due to change in fair value of government grant liability.

Net Loss

	Three Months Ended
	September 30,
	2023			2022			Decrease
Net Loss	$	(7,292,461	)	$	(13,578,341	)	$	(6,285,880	)

As a result of the net effects of the foregoing, net loss decreased by $6,285,880, or 46%, to $7,292,461 for the three months ended September 30, 2023, compared with $13,578,341 for the three months ended September 30, 2022. Net loss per share of Common Stock, basic and diluted, was $(0.15) for the three months ended September 30, 2023, compared with $(0.32) for the three months ended September 30, 2022.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

	Nine Months Ended September 30,
							Increase
	2023			2022			(Decrease)
Revenue, net	$	10,730,145		$	1,646,905		$	9,083,240
Cost of goods sold		6,076,595			806,571			5,270,024
Gross profit		4,653,550			840,334			3,813,216
Operating expenses:
General and administrative		13,347,278			18,727,626			(5,380,348	)
Sales and marketing		4,205,217			2,210,021			1,995,196
Research and development		14,184,420			14,815,852			(631,432	)
Total operating expenses		31,736,915			35,753,499			(4,016,584	)
Operating loss		(27,083,365	)		(34,913,165	)		(7,829,800	)
Other income (expense), net		(3,622,733	)		(67,000	)		3,555,733
Net loss	$	(30,706,098	)	$	(34,980,165	)	$	(4,274,067	)

Revenues

	Nine Months Ended September 30,
	2023		2022		Increase
Revenue, net
Ondas Networks	$	5,079,652	$	1,453,658	$	3,625,994
Ondas Autonomous Systems		5,650,493		193,247		5,457,246
Total	$	10,730,145	$	1,646,905	$	9,083,240

Our revenues increased by $9,083,240 to $10,730,145 for the nine months ended September 30, 2023, compared to $1,646,905 for the nine months ended September 30, 2022. Revenues during the nine months ended September 30, 2023, included $8,880,309 for products, $1,289,642 for maintenance, service, support, and subscriptions, and $560,194 for development agreements with Siemens. Revenues during the nine months ended September 30, 2022, included $673,184 for products, $318,247 for maintenance, service, support, and subscriptions and $655,474 for development agreements with Siemens. The increase in our revenues were primarily the result of increased product sales to Siemens, and acquiring Airobotics, which had $5,648,993 of revenue from January 24, 2023 through September 30, 2023.

Cost of goods sold

Our cost of goods sold increased by $5,270,024 to $6,076,595 for the nine months ended September 30, 2023, compared to $806,571 for the nine months ended September 30, 2022. The increase in cost of goods sold was primarily a result of acquiring Airobotics, which resulted in an increase of approximately $3,050,000, and an increase in Ondas Networks’ product revenue, which resulted in an increase in cost of goods sold of approximately $2,220,000.

Gross profit

Our gross profit increased by $3,813,216 for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, based on the changes in revenues and costs of goods sold as discussed above. Gross margin for the nine months ended September 30, 2023 and 2022 was 43% and 51%, respectively. The decrease in gross margin was primarily a result of the sale of lower margin products at Ondas Networks.

Operating Expenses

	Nine Months Ended September 30,
					Increase
	2023		2022		(Decrease)
Operating expenses:
General and administrative	$	13,347,278	$	18,727,626	$	(5,380,348	)
Sales and marketing		4,205,217		2,210,021		1,995,196
Research and development		14,184,420		14,815,852		(631,432	)
Total	$	31,736,915	$	35,753,499	$	(4,016,584	)

Our principal operating costs include the following items as a percentage of total expense.

	Nine Months Ended September 30,
	2023			2022
Human resource costs, including benefits		37	%		41	%
Travel and entertainment		2	%		3	%
Other general and administration costs:
Professional fees and consulting expenses		11	%		12	%
Other expense		8	%		10	%
Depreciation and amortization		12	%		8	%
Other research and deployment costs, excluding human resources and travel and entertainment		27	%		25	%
Other sales and marketing costs, excluding human resources and travel and entertainment		3	%		1	%

Operating expenses decreased by $4,016,584, or 11%, as a result of the following items:

	Nine Months Ended September 30, 2023
Human resource costs, including benefits	$	(3,063,914	)
Travel and entertainment		(337,653	)
Other general and administration costs:
Professional fees and consulting costs		(609,642	)
Other expense		(886,291	)
Depreciation and amortization		900,042
Other research and development costs, excluding human resources and travel and entertainment		(590,630	)
Other sales and marketing costs, excluding human resources and travel and entertainment		571,504
	$	(4,016,584	)

The increase in operating expenses was primarily due to: (i) a decrease of approximately $3,064,000 in human resource costs, of which approximately $2,953,000 relates to the added headcount from the Airobotics acquisition, an increase of approximately $750,000 related to an increase in headcount at Ondas Networks, offset by a decrease of approximately $6,693,000 for a decrease in headcount and stock-based compensation at American Robotics and a decrease of approximately $74,000 at Ondas Holdings for a decrease in bonus compensation; (ii) a decrease in travel and entertainment of approximately $338,000 as a result of synergies achieved by integrating American Robotics and Airobotics; (iii) a decrease of approximately $610,000 in professional fees and consulting costs, of which approximately $367,000 relates to professional fees in connection with the acquisition of Airobotics and approximately $243,000 is a result of synergies achieved by integrating American Robotics and Airobotics; (iv) a decrease of approximately $886,000 in other expense, of which approximately $845,000 is a result of synergies achieved by integrating American Robotics and Airobotics, and approximately $167,000 relates to a reduction in Directors and Officers insurance at Ondas Holdings, offset by an increase of approximately $126,000 in rent expense at Ondas Networks; (v) an increase of approximately $900,000 in depreciation and amortization expense related to the acquisition of Airobotics and the assets of Iron Drone; (vi) an decrease of approximately $591,000 in other research and development costs, excluding human resources and travel and entertainment, of which $1,485,000 relates to synergies achieved by integrating American Robotics and Airobotics, offset by an increase of approximately $894,000 in research and development contractor costs at Ondas Networks as we continue to invest in our technology; and (vii) an increase of approximately $572,000 in other sales and marketing costs, excluding human resources and travel and entertainment, of which approximately $695,000 relates to the acquisition of Airobotics, net of synergies achieved by integrating American Robotics and Airobotics, offset by a decrease of approximately $123,000 at Ondas Networks.

Operating Loss

	Nine Months Ended
	September 30,
	2023			2022			Decrease
Operating loss	$	(27,083,365	)	$	(34,913,165	)	$	(7,829,800	)

As a result of the foregoing, our operating loss decreased by $7,829,800, or 22%, to $27,083,365 for the nine months ended September 30, 2023, compared with $34,913,165 for the nine months ended September 30, 2022. Operating loss decreased primarily as a result of increased gross profit and a decrease in operating expenses described above, for the nine months ended September 30, 2023.

Other Income (Expense), net

	Nine Months Ended
	September 30,
	2023			2022			Increase
Other income (expense), net	$	(3,622,733	)	$	(67,000	)	$	3,555,733

Other expense, net increased by $3,555,733, to $3,622,733 for the nine months ended September 30, 2023, compared with the other expense, net of $67,000 for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, we reported (i) an increase in interest expense of approximately $780,000, amortization of debt discount of approximately $1,609,000, and amortization debt issuance costs of approximately $829,000 for the 2022 Convertible Exchange Notes and Additional Notes; (ii) an increase in impairment of deferred offering costs of approximately $116,000 related to the termination of the ATM Agreement; (iii) an increase in loss on foreign exchange of approximately $84,000 at Airobotics; and (iv) an increase in other expense of approximately $213,000 due to change in fair value of government grant liability.

Net Loss

	Nine Months Ended
	September 30,
	2023			2022			Increase
Net Loss	$	(30,706,098	)	$	(34,980,165	)	$	(4,274,067	)

As a result of the net effects of the foregoing, net loss decreased by $4,274,067, or 12%, to $30,706,098 for the nine months ended September 30, 2023, compared with $34,980,165 for the nine months ended September 30, 2022. Net loss per share of Common Stock, basic and diluted, was $(0.62) for the nine months ended September 30, 2023, compared with $(0.83) for the nine months ended September 30, 2022.

Summary of (Uses) and Sources of Cash

	Nine Months Ended September 30,
	2023			2022
Net cash flows used in operating activities	$	(28,108,744	)	$	(26,198,673	)
Net cash flows provided by (used in) investing activities		644,936			(5,497,069	)
Net cash flows provided by financing activities		18,700,603			6,164,176
Decrease in cash and cash equivalents		(8,763,205	)		(25,531,566	)
Cash, cash equivalents, and restricted cash, beginning of period		29,775,096			40,815,123
Cash, cash equivalents, and restricted cash, end of period	$	21,011,891		$	15,283,557

The principal use of cash in operating activities for the nine months ended September 30, 2023, was to fund the Company’s current expenses primarily related to operating activities necessary to allow us to service and support customers. The increase in cash flows used in operating activities of $1,910,071 was primarily due to changes in operating assets and liabilities resulting in a cash outflow of approximately $5,890,000, offset by a decrease in net loss of approximately $4,274,000, of which approximately $294,000 related to non-cash and credits, including depreciation, amortization of debt discount, amortization of intangibles assets and right of use asset, and stock-based compensation. For a summary of our outstanding operating leases, see Note 2 – Summary of Significant Accounting Policies in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

The increase in cash flows provided by investing activities of $6,142,005, relates to $1,049,454 cash acquired with Airobotics acquisition, combined with a decrease of approximately $661,000 in cash paid for asset acquisitions, a decrease of approximately $1,000,000 in cash paid for an investment in Dynam AI and a decrease of approximately $3,431,000 in cash paid for purchase of equipment and patent costs.

The cash flows provided by financing activities increased $12,536,427 primarily due to proceeds of approximately $9,310,000 from issuance of Additional Notes, proceeds of approximately $14,692,000 from sale of noncontrolling interest in Ondas Networks, offset by cash payments of approximately $4,355,000 on the 2022 Convertible Exchange Notes, and cash payments of $1,147,000 for Airobotics related debt. For a summary of our outstanding Long-Term Notes Payable, see Note 9 in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements. The cash flows provided by financing activities for the nine months ended September 30, 2022 includes proceeds from the sale of shares under the ATM Offering, amounting to approximately $6,099,000.

Liquidity and Capital Resources

Our future capital requirements will depend upon many factors, including progress with developing, manufacturing and marketing our technologies, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, our ability to establish collaborative arrangements, marketing activities and competing technological and market developments, including regulatory changes and overall economic conditions in our target markets. Our ability to generate revenue and achieve profitability requires us to successfully market and secure purchase orders for our products from customers currently identified in our sales pipeline as well as new customers. We also will be required to efficiently manufacture and deliver equipment on those purchase orders. These activities, including our planned research and development efforts, will require significant uses of working capital. There can be no assurances that we will generate revenue and cash flow as expected in our current business plan. We may seek additional funds through equity or debt offerings and/or borrowings under additional notes payable, lines of credit or other sources. We do not know whether additional financing will be available on commercially acceptable terms or at all, when needed. If adequate funds are not available or are not available on commercially acceptable terms, our ability to fund our operations, support the growth of our business or otherwise respond to competitive pressures could be significantly delayed or limited, which could materially adversely affect our business, financial condition or results of operations.

Off-Balance Sheet Arrangements

As of September 30, 2023, we had no off-balance sheet arrangements.

Critical Accounting Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, as well as related disclosures. We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable at the time and under the circumstances, and we evaluate these estimates and judgments on an ongoing basis. Information concerning our critical accounting policies with respect to these items is available in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2022 Form 10-K. There have been no significant changes in our critical accounting policies since the filing of the 2022 Form 10-K.

Recent Accounting Pronouncements

There have been no material changes to our significant accounting policies as summarized in Note 2 of our 2022 Form 10-K, except for the addition of Airobotics accounting policies related to revenue recognition and government grants. We do not expect that the adoption of any recent accounting pronouncements will have a material impact on our accompanying condensed consolidated financial statements.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are neither historical facts nor assurances of future performance. These forward-looking statements are based on our current, reasonable expectations and assumptions, which expectations and assumptions are subject to risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in 2022 Form 10-K, which was filed with the SEC on March 14, 2023, and the risks discussed under the caption “Risk Factors” included in this Quarterly Report on Form 10-Q. Given these risks and uncertainties, readers are cautioned not to place undue reliance on forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company as defined by Rule 229.10(f)(1) and are not required to provide information under this item.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 30, 2023. Based on that evaluation, the Company’s Chief Executive Officer and the Company’s Interim Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of September 30, 2023.

Changes in Internal Control Over Financial Reporting

Except for the controls added as a result of acquiring and integrating Airobotics, there were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently involved in any legal proceeding or investigation by a governmental agency that we believe will have a material adverse effect on our business, financial condition or operating results.

Item 1A. Risk Factors.

Our business, financial condition, operating results, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our Annual Report on Form 10-K for the year ended December 31, 2022, the occurrence of any one of which could have a material adverse effect on our actual results.

There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, except as set forth below.

The price of our common stock does not meet the requirements for continued listing on The Nasdaq Stock Market LLC (“Nasdaq”). If we fail to regain compliance with the minimum listing requirements, our common stock will be subject to delisting. Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if our common stock is delisted.

On October 3, 2023, we received a letter (the “Nasdaq Staff Deficiency Letter”) from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, for the last thirty (30) consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided an initial period of 180 calendar days, or until April 1, 2024, to regain compliance. The Nasdaq Staff Deficiency Letter states that the Nasdaq staff will provide written notification that we have achieved compliance with Rule 5550(a)(2) if at any time before April 1, 2024 (the “Compliance Period”), the bid price of our common stock closes at $1.00 per share or more for a minimum of ten (10) consecutive business days. The Nasdaq Staff Deficiency Letter has no immediate effect on the listing or trading of our common stock. However, if we do not regain compliance with Rule 5550(a)(2) within the Compliance Period, we may be eligible for an additional 180 calendar day compliance period. To qualify, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, with the exception of the bid price requirement, and would need to provide written notice of its intention to cure the deficiency during the second compliance period, for example, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq would notify us that our securities would be subject to delisting. In the event of such a notification, we may appeal the Nasdaq staff’s determination to delist our securities. There can be no assurance that we will be eligible for the additional 180 calendar day compliance period, if applicable, or that the Nasdaq staff would grant our request for continued listing subsequent to any delisting notification. Delisting of our common stock from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock.

We may experience disruptions to our business operations as a result of war and hostilities in Israel.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.		Name of Document
4.1		Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2023).
10.1		Preferred Stock Purchase Agreement, dated July 9, 2023, between Ondas Networks Inc. and the Initial Purchaser (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed by the Company with the SEC on July 10, 2023).
10.2		Amendment to Preferred Stock Purchase Agreement, dated July 21, 2023, between Ondas Networks Inc. and Initial Purchaser (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed by the Company with the SEC on July 24, 2023).
10.3		Registration Rights Agreement, dated August 11, 2023, between the Company and Initial Purchaser (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2023).
10.4+		Release Agreement, dated September 21, 2023, by and between Ondas Holdings Inc. and Derek Reisfield (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 21, 2023).
10.5+		Employment Agreement, between Airobotics and Yishay Curelaru, dated November 28, 2017.
10.6+		Amendment to Employment Agreement, between Airobotics and Yishay Curelaru, dated February 15, 2023.
10.7+		Amendment to Employment Agreement, dated September 27, 2023 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2023).
31.1		Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a) dated November 14, 2023*
31.2		Certification of Interim Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a) dated November 14, 2023*
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 dated November 14, 2023**
32.2		Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350 dated November 14, 2023**
101.SCH		Inline XBRL Taxonomy Extension Schema Document.*
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*	Filed herewith.

This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

+	Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: November 14, 2023

	ONDAS HOLDINGS INC.

	By:	/s/ Eric A. Brock
		Eric A. Brock
		Chairman, President, Chief Executive Officer, and Interim Chief Financial Officer
		(Principal Executive Officer Principal Financial Officer Principal Accounting Officer)