Ondas Holdings Inc. (NASDAQ:ONDS) Q3 2023 Earnings Call Transcript

Ondas Holdings Inc. (NASDAQ:ONDS) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good day and welcome to the Ondas Holdings Inc, third quarter 2023 conference call. [Operator Instructions]. Before we begin, the company would like to remind you that this call may contain forward- looking statements. While these forward-looking statements reflect on this best current judgment, they are subject to risks and uncertainties that could cause actual results to differ materially from those implied by these forward-looking statements. These forward-looking statements are discussed in our latest periodic SEC filings and in the earnings press release issued today, which are both available on the company’s website. On this undertakes no obligation to revise or update any forward-looking statements to reflect future events or circumstances, except as required by law.

During this call. On this, we will refer to non certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is shown in our press release issued earlier today. Which is available at the Investor Relations section of our website. This non-GAAP information is provided as a supplement to not as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. However, management believes these non-GAAP measures provide investors with valuable information on the underlying trends of business. Please note this event is being recorded. I would now like to turn the presentation over to Mr. Eric Brock, Chairman, CEO, and Interim CFO.

Please go ahead, sir.

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Eric Brock: Thank you, operator, and good morning. I want to get started by welcoming everyone to our third quarter investor call. As always, we appreciate the time you’re spending with us and for your interest in our company. At the outset, I want to take a brief moment to share some opening remarks before we go through the typical cadence of our quarterly call. As I do that, I wanted to highlight that the value of our company in our world-class technology platforms has never been higher. This is the case today. We believe it will be true tomorrow, next month, next quarter in the years ahead. Every day we make progress towards wide-scale adoption in the value we are creating for our customers, employees and yes, this is a critical importance to me.

The value to our shareholders will increase. We are committed to this, and I believe we are succeeding, notwithstanding the pressures from the capital markets, specifically, the added challenges of having a low stock price in high cost of capital. We are seeing first hand through our Airobotics team in Israel, highly volatile and rapidly evolving geopolitical environment is impacting industry globally. I am happy to say today that our team in Israel is entirely accounted for as the guys like accomplish continues to present challenges. I cannot say, however, that they are safe because of courses this war being fought on their home front. But they are with us and working hard in a variety of capacities to ensure that their families in their country.

We are as safe as possible. I am proud of our team in Israel and how they are bravely rising to the challenges in how our team in the United States supporting our collective efforts. As I mentioned, the evolving geopolitical and volatile global economic situation is impacting industry, including demand for the industrial wireless technology in aerial security and data platforms on us provides. The increasing requirements for performance and resiliency of the defining trend in the critical services and industrial economy spanning from transportation and energy, to security and defense across the globe. These trends highlight the value we create for customers. Our partners in our ecosystems are supportive of Ondas long-term success. With the support of a strong global tailwinds, we are seeing growing opportunities for Ondas full max wireless connectivity platform in our optimism, iron drone, autonomous growth systems, which I will emphasize are now commercially ready and being adopted and deployed at an increasing rate.

Of course, we are offering these valuable solutions to law large, very sophisticated customers and ecosystem partners in mission critical environments. We are getting closer and closer and I believe our investors and of course, I am one of them will be rewarded. We look to demonstrate that to you on this call and more importantly, during the months and quarters ahead, I believe we are on the cost of great success. I’m joined today by some key members of our leadership team. You will hear from familiar faces in Stewart Kantor, Founder, President and CFO, Ondas Networks, and Meir Kliner, the Founder and CEO of Robotics and the President of and Ondas Autonomous Systems, in addition Tenne is joining us today for the first time. As you know, Tim was recently joined Ondas as American Robotics CEO.

We will properly introduce Tim later in the call as we share the update and outlook at OAS. On another note, as we announced last month, I stepped in as interim CFO in place, Yishay Curelaru, who has been called to serve in the Israel army. Yishay and other members of our team at robotics are performing their duties, great honour, of course, we expect Yishay in our other team members to return hopefully soon. For that point, we have had a number of employees who have been called to serve had done so and already return back to their homes in the workplace. Let’s turn to the agenda. We will start today’s call with some brief comments about the third quarter performance in the significant progress we’ve made in advancing the adoption of our technology platforms.

I will then provide a review of our third quarter financial performance in our balance sheet and liquidity position. Then we will transition and provide a business update Ondas Networks in our OAS business units for. I will ask Stewart and Meir to provide commentary around current business activity and the outlook for Q4. Here we will ask Tenne to introduce himself and share his thoughts on the opportunities ahead for OAS in American Robotics will then wrap the call and open the floor for investor questions. We had a strong quarter operationally in advance with customers across the board, Ondas Networks and Ondas Autonomous Systems. For the quarter, we generated $2.7 million in revenue, which brought us to $10.7 million of revenue year to date through the end of September, and Ondas Networks generated record revenues of $2.4 million in Q3.

We believe the substantial growth year-over-year put us on track for the $50 million revenue target we provided last quarter and demonstrates that we are driving adoption across our technology platforms. I also want to highlight the capital raise announced early in the third quarter, whereby we secured $25 million in funding from sophisticated private and institutional investors. As we highlighted on our last call, this capital raise reflects confidence in the value of our proprietary technology platforms in the end markets and customers we are targeting for growth. Ondas Networks field activity progress, we’re getting closer and closer to the breakout volume orders driven by success in the 900 megahertz network with the Class I Rails, we see deeper more intentional engagement with the railroad customers around the technical implementation of roll off strategies as FAA deadly lines near.

Stewart will share more details around our work with Siemens and the Class I Rail customers and the outlook for 900 megahertz deployments, in addition to other global rail markets. Yes. Despite the obvious challenges on the ground in Israel, we continue to perform for customers, we recently announced order from a governmental entity in Dubai demonstrates that fleet expansion continues in the city of Dubai, but the optimist public safety infrastructure. I will highlight again that we believe we are uniquely deploying autonomous drone set systems in urban settings, study the gold standard for performance, reliability and value with our optima system. This was further amplified by historic type certificate that we received in September from the FDA.

Ondas is just a second small UAS developer to receive a type certificate from the FDA. We believe we are the only certified drone designed for security and data collection applications. The validates a unique quality and reliability of our system and has been well received by customers as we expected will undoubtedly help shorten sales cycles for new customers, as we look ahead All, we continue to make progress with customers with the Optima system. We are very excited to highlight the opportunities we see with iron drone. As we announced yesterday, we have accelerated our development activity of the Raider, our AI-driven autonomous counter UAS platform. This activity is targeted at meeting specific requirements of the Israeli Defense Forces or IDF for an urgent need to protect critical locations and people from the threat of possible drones in Israel, the iron drone Raider is a proprietary counter-UAS system.

We believe the Raider unique capabilities are medium, large and rapidly growing market at the right time. Meir is going to share more details regarding this exciting work during the call and another significant development OAS, we announced that Tim Tenne has joined us as American Robotic CEO, to lead the expansion of our business in the United States. I am very excited to have him on board, he is the right person from great job at the right time. He has experienced talent and drive to continue to position Ondas in American Robotics as leaders in scaling drone technology solutions across industrial and government markets. We target you will hear from Tim a bit later on this call. In the United States, our customer pipeline is maturing and growing across industrial and government markets, both of which should accelerate with new leadership in as inventory becomes available in the US.

We will touch on this in the outlook sort of wrap up the introduction. We are now beginning to scale it both on Ondas Networks and yes, I am happy with how we are positioned to grow our business in the coming quarters, supported by our recently fortified balance sheet. We expect a strong finish for the year Q4 we continue to focus on driving order, customer adoption and revenue growth in addition to maintaining cost discipline as we work to drive down cash burn and move towards profitability. So let’s turn to the financial review. As I mentioned earlier, I will handle this section of the call in place of Yishay Curelaru, our Chief Financial Officer. Until he is able to return, we will start with the P&L. And as I get started, I want to remind our investors that our financial statements reflect the early stage of platform adoption for both Ondas Networks in OAS in the preparation for larger commercial rollouts, we expect significant operating leverage as revenues grow, so today’s revenue levels not yet cover our operating expenses.

We generated approximately $2.7 million of revenue in the third quarter of 2023, which was a four times increase over the $630,000 in revenue realized in the third quarter of 2022. Revenue growth was primarily the result of higher product shipments that on Ondas Networks. OAS revenue was modest in Q3, after we had recognized a large unit sale, the UAE and the second quarter of this year. We expect revenues in OAS to vary from quarter to quarter it’s a normalized into a more predictable pattern as we grow our customer base and more of these customers enter fleet programs and recurring service agreements in the United States and internationally. Gross profit in the third quarter of 2023 was approximately $550,000, up slightly from the $400,000 in the third quarter of 2022.

Gross margins were 20.8% in the third quarter of 2023, a decline from 63.2% in the third quarter of 2022. The margins decline is primarily due to costs, including labor for optimist, customer service operations related to units in service during a quarter when we recognized a comparatively low level of optimism related product and service revenues. Operating expense declined sharply year-over-year to approximately $6.5 million in the third quarter of 2023 as compared to $14 million in the prior year. Despite the larger business operations, which now include a full quarter of robotics expenses, operating expenses declined as a result of strong cost controls and lower cost costs from the integration of American Robotics and AI robotics under the OAS business units.

In addition, lower operating expenses were supported by a reversal of stock-based compensation charges due to executive departures at American Robotics. Cash operating expenses in the third quarter of 2023 or equal to approximately $7.5 million, which was lower than expectations. Cash operating expenses exclude non-cash, operate routing items, including $1.3 million in depreciation and amortization and $800,000 of non-cash interest expense offset by the reversal of stock-based compensation. Lower cash operating expenses reflect management’s focus on tight expense control as we invest and grow our business. Operating loss narrowed to five 56% to approximately $5.9 million for the third quarter of 2023 as compared to $13.5 million for the third quarter of 2022.

The decline in operating losses was primarily due to sharply lower operating expenses. Other expenses increased to $1.4 million for the three months ended 2023. The increase in other expenses was largely due to interest and amortization expenses related to the convertible notes, which we did not have last year. The company narratives EBITDA loss to $6.9 million, which was sharply lower than the EBITDA loss of $11 million in the third quarter of 2022. The EBITDA loss benefited from the aforementioned cost controls. Now let’s turn to the cash flow statement. We ended the third quarter was $21 million in cash, which was supported by the $25 million in gross proceeds raised from the previously announced financings that and Ondas Networks and Ondas holdings early in the third quarter.

Cash used in operations during the first nine months of 2023 reflects ongoing investment and the business. So the year-to-date burn was elevated due to certain one-off and non-recurring costs realized early in the year, which were related to the acquisition area, robotics and the integration of robotics and then American Robotics into the OAS business units. Operating cash flow included a cash use of approximately $5.1 million of investment in working capital year to date through 2023. In addition, as we mentioned in the second quarter, we had used of $5.5 million in cash for debt repayments in the first half of 2023. As discussed, the recent financings fortified our balance sheet help grow our cash balance and positions us to continue to execute our growth plans.

We ended the quarter with $21 million in cash between the original new convertible notes. We have approximately $30.4 million in outstanding debt. I want to also highlight that the convertible notes have maturities in April, 2025 in July, 2025, which means we have quite some time to manage the amortization and create conditions to equitize on a more favorable conditions. As previously discussed, it is our objective to equitize these notes as soon as we can by using shares to retire the notes you either via monthly amortization or to see these notes convert entirely to equity prior to maturity. I want to highlight two important features of the convertible that may not be widely understood by our investors. First, the investor is limited to only 4.9% of our outstanding shares.

So that limits the amount of amortization we can see in the notes when our stock price is low. Secondly, amortization of the note via payments of common shares or cash does not necessarily happen every month as a convertible note, investor has the option to defer amortization into the future. In practice, the convertible investor has done this is. The convertible has deferred amortization option from time to time at the end of the day the way to drive this equitization of the notes and by extension, a deleveraging of our balance sheet is through execution of our business plan and growing our market capitalization for the benefit of our investors. Let’s now move to discuss the financial outlook before turning to a review of our business units.

Firstly, I want to reiterate that 2023 has been a critically important year for Ondas, at the many years of hard work by our team in important support from our investors, we have now transitioned our business from platform development to market adoption and pulls on Ondas Networks and Ondas Autonomous Systems. This is demonstrated by the $10.7 million in revenue we have generated year to date, which is more than six times revenue growth as compared to the first nine months of 2022. In addition, we expect to generate approximately $4.2 to $4.4 in revenue during the fourth quarter of 2023, which means we expect to achieve our prior target of $50 million of revenue for the full year 2023. Want to also highlight that both business units have grown significantly in 2023, again reflecting that platform adoption is in motion.

Well Ondas Networks expected top line sales extended relative to our previous calls, our OAS business unit is expected to deliver its original growth targets presented at the time of the robotics acquisition. While we were proud of our strong growth in 2023 versus the prior year, we also now that we know that we have just scratched the surface of our potential large markets we are addressing there is much more to do. We’re not going to give specific outlook for 2024 at this time. However, I want to reiterate, we expect substantial growth that continue and both busy units next year. As we scale adoption and deliver revenue growth, we will remain focused on controlling expenses that we as we drive towards improved profitability. We expect cash operating expenses to be approximately $7 million for the fourth quarter of 2023.

We are continuing to manage Opex official discipline going forward. Now we will transition to a review of our business units and ask Stewart Kantor and Meir Kliner to share updates on recent activity in the field with customers and industry partners. We will also ask Tenne to share some comments regarding American Robotics and drill down a bit into the outlook for OAS in the United States. We will start with Stewart, who will update us on the current status with the rails on dot 16 adoption and focus on the work with customers in our preparations for volume deployments on a new 900 megahertz network. Stewart?

Stewart Kantor: Great. Thank you, Eric And Ondas Networks, we had another record revenue quarter driven by product shipments for customers. We delivered approximately $2.4 million in product and development revenue in the third quarter with a new record delivery in product shipments to Siemens, business coming off a strong second quarter of approximately $1.5 million in revenue, which was the prior record quarter for shipments. The continued growth demonstrates that we are growing our production capacity. Total revenue year to date through September 2023 was approximately $5.1 million, a 250% increase over the comparable period in 2022. We continue to be fully engaged with Siemens, the Class I Rails and now transit customers to further prepare for large-scale commercial deployments.

Furthermore, we continue our work with the AAR and our rail customers, which includes the development roadmap for a number of future products and additional networks beyond 900 megahertz. We continue to work hand in hand on deployments with key rail personnel with direct budget responsibility. Also several of the railroads are engaging us directly in the field with network migration, planning, testing and implementation services in order to accelerate deployment activity given the impending deadlines. We are in discussions with one of these customers that is seeking for a turnkey solution, which would include Ondas providing field services to deploy the system upgrade and execute the migration to the new 900 megahertz band to meet their deadline.

Our initial deployments are focused on critical network and high traffic locations as well as new vital communications such as railroad crossings. We believe this sport and the areas of focus reflect positively on how the rails have come to value the 900 megahertz network opportunity simultaneous to this field work, Siemens is actively negotiating purchase orders with select rails. MxV, which is the technical subsidiary of AAR, continues to be engaged on the dot16 network integration plans with an immediate focus on the new network controller and critical dot16 functionality, including high demand features like peer-to-peer networking. The network controller project and peer-to-peer development activity are advancing, and we are negotiating with MXV.

to proceed with the preliminary technical work on the next 160 megahertz network, which we expect to commence in Q1 of next year. On the production side, we’ve now solved most of supply chain challenges and no longer view parts components as a constraint. And in early October, alongside Siemens, we attended the railway system suppliers conference, where we continued our planning discussions with the Class I and engage with several new transit customers. As we have stated previously, we continue to move forward aggressively on securing new orders and now have the capabilities to meet our customers’ production needs. At the same time, we will continue to advance our existing development programs while new development programs continue to present themselves in our pipeline.

The Siemens on locomotive radio program for Europe continues to advance, and we are expecting here responses from the proposal we submitted on several major passenger and trends that communications upgrades. As we grow, we will pay close attention the spending levels on operating costs as we drive towards profitability has revenue and gross profits grow with increasing demand and shipments, we are focused on moving towards profitability as we move through the year and into 2024. Now I’ll hand the call back to Eric. Eric?

Eric Brock: Thank you, Stewart. I will now ask Meir Kliner to take the floor and update us on progress with customers that Ondas Autonomous Systems and provide some insight into recent developments at OAS and the outlook from here. Meir?

Meir Kliner: Thank you, Eric. Before providing the Q3 update before we as I would like to acknowledge the exceptional efforts of our team in Israel, some of whom have been core to serve in the Israeli Defense Forces doing because the conflict, our team has worked tremendously on as they always do, and I’m very grateful for their efforts and commitment, to our success through this commitment and regrets imports of our US based team Ondas Autonomous Systems, we are maintaining operations in Israel. Turning now in the third quarter update on Ondas Autonomous System continued to deliver our business plan for 2023 and maintain momentum in the global markets. In the Middle East, Fleet expansion in Dubai. UAE continues to advance, as evidenced by the recently announced $2.6 million order to fully meet the delivery of additional Optimus drone system from a local governmental entity.

No Optimus fleet expansion in Dubai illustrates the effectiveness of our optimal system in the field of public safety and environmental one applications and ongoing advancement of activity with existing customers. We have successfully deployed the Optimus one infrastructure in Haifa port in Israel and successfully completed and one rating proof of concept in Maritime security. The POC was conducted in complex port compound in Israel consisting of seven ports and corporations. The successful outcome paved the way for further deployment in Haifa port of area, marking a significant advancement in Maritime security technology for many other ports authorities and facilities worldwide OAS continues its expansion beyond you in Israel, creating in partnership, marketing and distribution agreements in the Kingdom of Saudi Arabia, India and Morocco, which we announced last week, Morocco, we have initiated a new relationship with Maghrebnet lending IT solution provider focus on North African markets.

Under the MOU, we will offer to Maghrebnet our advanced run infrastructure in North Africa. The agreement includes the potential for manufacture of optimum system in the Kingdom of Morocco in the Republic of Senegal as well as the establishment of joint center in Morocco. We also received run from the Israeli Innovation Authority IIA to advance the Iron Drone Raider, our AI-driven counter one system. The rent was approximately $450,000 and will be used for development of advanced features such as enhanced night vision and flying in GPS denied environments. The grant represent the level of innovation of the Iron Drone Raider and the interests of Israel in aerospace global leader in this innovative solution. The interest in Iron Drone Raider run rate of counter-UAS platform continues to increase in Israel and beyond.

We announced yesterday that we have accelerate our development timelines and are advancing specific system enhancements to meet the requirements of the Israeli Defense Forces to meet an urgent needs related to the conflict in NASA, we are working closely with Israel defense contractors to support system integration and in readiness for deployment. This work is further supported by the financial grant mentioned earlier that we received in almost from the IIA, we believe Iron Drone Raider is exception on system meeting a very large, meaning the market to protect people and both government and private sector critical infrastructure from the rapidly growing threats posed by Allstate drones. There are many public research reports pointing towards billions of dollars in the market opportunity for solutions such as the Iron Drone Raider.

We are happy to share these of this review, and we will continue to work out to deliver these urgently required solution for our customers. I look forward to keeping you informed of our progress. In the meantime, I encourage you to review our prior disclosures and Ondas. I wouldn’t want to visit our website Ondas.com for more information about the special capabilities of the system. As we announced in early September, our Optimus was well received and will in this type certification from the FAA. This is the second ever type certification granted by the FAA for a small drawn and first-of-its-kind, fully none air carrier fully automated one designed for security and another picture. With the Type Certification OAS will be able to improve with the FAA complicated unmanned aerial operations such as flying overloads and people, OAS is currently the only one manufacturer in the USA to all and FAA type certification for a drone design for security and data capture brewing operations.

The certification of Optimus one was achieved after four years of intensive engineering and agency review processes. We believe that this will support the ongoing business development activities of American Robotics in US commercial and governmental markets and reserve to accelerate demand and shorten sales cycles. In the US market and American Robotics, along with our customers, the Massachusetts Department of Transportation of American department will soon launch a pilot program we previously announced in June. The program will include the provisional demonstrations to relevant stakeholders such as government agency, showcasing our optimal system abilities for emergency response and critical infrastructure monitoring. We look forward to sharing more details on this launch soon.

In addition to launching the massive program, our customer pipeline is maturing and expanding, and we expect to secure additional engagement for the first quarter. Of course, we expect the addition of team Tenne, who is now leading the expansion in the US as American Robotics, CEO to have a significant impact to driving an expanded set of defense and commercial opportunities. I’m now going to ask Eric to introduce teams so we can share more comments on the medical robotics and the opportunities we see looking and we are excited to have team joined the OAS team as we continue to drive platform adoption globally. Eric?

Eric Brock: Thank you, Meir. I will now ask Tim Tenne to share a few words on why he joined us in on the opportunities we have it in America Robotics to drive industry leadership and growth in the United States. As I hand over the call, I wanted to emphasize that Tim is a major addition to our leadership team. I’ve known Tim for several years now, I’ve been incredibly impressed with his business acumen. In addition to is very obvious aviation, multimode, transportation operations and regulatory experience. He has a broad and deep understanding of UAS technologies and services and has extensive experience in developing end to end solutions for large sophisticated UAS customers in international markets ranging from industrial and government to military. I believe Tim will have a tremendous impact Ondas and thrilled to have him join our leadership team.+ Tim, I will now hand the floor to you.

Timothy Tenne: Thank you, Eric, and it’s great to attend my first investor call with and us. As Eric mentioned, I have spent a career that spans defense and commercial aviation and most importantly, drone technology. As a previous later at the Federal Aviation Administration, I led the stand-up of the UAS Tron integration office that was part of the initial cadre that developed the world’s first drone regulations, including the small UAS registration rule and the commercial UAS rule Part 107, which established requirements for commercial drone operators and led to a much wider adoption of drone services across the United States and beyond. I’m very familiar with Ondas Networks , American Robotics and Airobotics and for a long time, have been extremely impressed with the world-class technology platforms we bring to global markets, the automated data and information services provided by the drug in a box solutions defines what are the most important segment and the commercial drone industry.

Although there are multiple segments or categories in the drone sector, fully autonomous technologies are critical to scale it and driving growth throughout the spectrum of use cases with a long history as a leader in industrial markets in defense, I know what is required to meet and exceed customer expectations. And now as a leader supplying the same clients, I want to ensure we continue to develop scale and win in all segments across the market by developing the right talent, partnering with the right organizations and delivering on our own capabilities and solutions. The first order of business to drive it down option of Optimus and Iron Drone systems within the United States and Americas, we have a customer pipeline that is maturing and growing.

And given the FAA type certification of our unmanned aircraft, I believe the market potential is massive. This includes inspection security, safety, along with a multitude of defense applications. Given our advantage of being only the second company in the world and achieving the gold standard FAA type certification. I believe we are going to be very successful in driving adoption in garnering support and partnerships throughout the industry. I’m confident we will continue our positive success, continue to scale and expand our operations and services to exceed the demands of our clients due to having the specific expertise in a very complex and highly regulated market, developing world-class programs and offering the right mix of capabilities and solutions.

American Robotic is a strong and trusted provider of drones, services and data solutions, and we are committed to scaling it into a successful industry leader, uniquely capable of providing turnkey solutions for our customers. We also believe drove regulatory environment is rapidly improve moving, which will support accelerating growth within the drone sector. For example, we have seen a significant increase in the FAA approving beyond visual line of sight or BV loss waivers, which lead directly to an increase in drone revenue generating capability. We also see the new regulations advancing, including depending Part 108 rule, which will among other things should improve the scaling of drove field operations by allowing a single pilot to operate multiple autonomous drones simultaneously, while regulations grow increasingly supportive.

The FAA has also recently announced a new administrator that as much experience in advanced Air Mobility, including the integration of drones into the national airspace system. With the improving regulatory backdrop and continued advancement of our autonomous driving platform, I could have a more positive outlook on the ability of OAS and American Robotics ability to continue to drive market share by gaining and scaling with our clients to ensure our strategy meet expectations. We are rapidly developing our go-to-market plan that includes leveraging our growing partner ships, building on our current platforms and increasing our offerings and capabilities and solutions for our clients. These offerings will include comprehensive aviation and aerospace solutions.

I will now hand the call back to Meir, who will share the outlook for our OAS business unit.

Meir Kliner: Thank you, Tim. We expect a strong end to 2023 for Ondas Autonomous Systems. This is true despite the operational challenges presented by the Gaza conflict in Israel, as mentioned by public safety, Optimus infrastructure order was for immediate delivery, and we are working to fulfill that order in the fourth quarter. This position us to achieve the $8 million revenue target was established for the OAS at beginning of the robotics acquisition was closed. In addition our customer pipeline in the US is both maturing and growing, and we expect that to accelerate now with new leadership at the American Robotics. This activity is further supported by the type certificate we received for the optimist drone in the United States, we are in discussions for initial POCs with the number we have customers and distribution partners in security government as well as in oil and gas and other industrial markets.

The Gaza conflict in Israel is likely impacted our inventory delivery schedule. We expect our initial 10 of 15 systems to be available on the course of Q4 into Q1 2024. We have an ambition five system in the production queue and continue to expect to increase production order in 2024. We are pleased with the growth in 2023 and the other work with our team. This completes my formal remarks. Eric, I’m going to end the call back to you now.

Eric Brock: Thank you, Meir. This concludes our formal remarks. Before we turn the call over to Q&A, I want to reiterate that we remain bullish on the outlook for Ondas and believe our business is strengthening considerably. We are seeing growth, and I am optimistic when I look at our customer pipeline in both business units that we will finish 2023 strongly. Our visibility demand continues to improve, and I believe we are positioned for significant expansion across our businesses in 2024, with that said, let’s see if there are any questions. Operator?

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Q&A Session

Operator: [Operator Instructions]. And the first question will come from Timothy Horan with Oppenheimer. Please go ahead.

Timothy Horan: Hey, guys. Thanks for the time. The on the counter UAS systems here, including a $1 billion market in ’23, can you talk about what the competition looks like and how do you measure that $1 billion market? I guess is does anyone have a system like this and you don’t maybe how much intellectual property do you have a year? I know you have grown from $5 billion by 2030. Just a sense of, what percentage comes from the different ways to do counter-UAS systems? Like how important will be your type of functionality be in the growth of that market?

Eric Brock: Yeah sure. Hi, Tim, and thanks for the question. So if you look at the counter UAS market, this principally two types of technologies that are used to counter or hostile drones. So the first type is the jamming of radio frequencies, MGPS., which interferes with the operation of the drone. Those sorts of technologies have pluses and minuses one of the complications with deploying a jamming system is when you’re jamming radio frequencies, interfere with other, wireless communications and public safety implications. So for example, at an airport, you want to be really careful if you use in jamming technology. On the other hand, with the system, we have a capture type of strategy or platform, this system is fully autonomous.

So when we deploy this infrastructure, it’s typically going to be deployed at Borders at some important locations such as power plants, government buildings, places where people congregate like stadiums, for example, refineries, critical infrastructure. And these are places where jamming is not acceptable because when you jam radios frequencies, you have the risk of things falling from the sky in addition to the other drawbacks around public safety, wireless communications. So should we see a very significant market here. The market is for security there is the Homeland Security or defense aspect of it as well. And in terms of the market size, as we’ve looked at, we see, the public reports as well from various research groups. They all kind of point to very large markets that are growing rapidly.

Now we think about that sort of the value of the drone and why they’re growing rapidly, we can pick up the paper or any given day. And on the front pages talking, there’s talk about hostile drones, and that’s only something that we’re likely to see more of. So we think the demand for the security we can provide with Iron Drone Raider is very valuable and, we like where we’re positioned. Let me add another technology unique and I do think it is the autonomy. When we deploy these systems, we’re deploying them again in critical locations. To counteract the threat of a hostile grown, but it is fully autonomous. So the system there is typically integrated with a raider or other detect type of technology where we know where we can identify a hostile drop coming in and this system can autonomously react to that drone because, of course, when drones are moving the speed of reaction to neutralize the three that is of critical importance.

So when the drones are deployed, there’s several other civil drones that can be what we call high speed and we’re able to do. And this is really, really difficult. We’re able to firstly, when we launched the drones to the raider, but to identify the location but of course, this is a moving target. We’re able to autonomously once we launch the raider lock into that hostile drone and then, of course, apprehended with a net. So that’s autonomy around what we’re offering is unique so hopefully that was helpful.

Timothy Horan: That’s really helpful. So it’s fair to say majority of the market right now is GPS blocking I mean is there anyone else would assist the liqueurs on the market?

Eric Brock: Yes. So the majority is Jamming techniques, we’re aware of at least a couple of others that have a capture capability, but we don’t typically have the form factor, the cost point, and the autonomy that we’re delivering, which I think we’re uniquely capable and all those levels.

Timothy Horan: Yeah. Very interesting product. Good luck on a back on the rail side, can you give us maybe it’s just an update on how much you think the rails need to spend the next two years to, — existing spectrum and just rough idea on timing of when you expect big orders or big deliveries to occur and when they have to be finished? Thanks.

Eric Brock: Sure, sure. So the TAM that we’re addressing and starting in 900 megahertz doesn’t change calculate that based on the base station infrastructure or the coverage network and what we believe they need to deploy in terms of edge remote endpoints in the field, along the track across these, et cetera. So the TAM is still what we discussed in terms of where we are with the customer. As I said, restore the amplified we’re seeing a lot, very intentional work with the railroads, we’re very optimistic that we’re getting to that point where we’re going to see material orders and the deployments begin to scale across the industry. I’ll remind you that the most the bulk of our work for the first three called even four years with wireless constituted the WCC, which is a central group underneath the umbrella of the AAR.

Now they in March, the made the, statements that the 900 megahertz network, will use the dot16 technology. And at that point in time, we began to work with the folks in the field, specifically the communications that signaling group for CNS groups and we’re doing a lot of work with them. As it reminds you the CNS group, along with other field operating groups with the railroads, have the important responsibility to keep trains running. So what they’re doing with us is we’re going through the planning for going through the training and the implementation of how to deploy the system. Of course, then they have to operate, and they pay the network. And this is a system where they have just going through that whole process for the train operators has some complexity.

So we’re going through the blocking and tackling to make sure that all this activity when they are implementing a new modern system can be repeatable and scalable as they go through the deployment. So again, this is mission critical while they’re doing that. They need to keep the trains running. So we’re just doing that hard work we’re advancing so I can’t put a specific date on this Tim. But as I said, we’re getting very close. And we do think that the 2024 is going to be a really big year for growth we’re tracking orders now.

Timothy Horan: So I know it’s early, but it’s pretty important. I mean, can you give us some kind of range of revenue or how you’re thinking about revenue next year? Are you talking about 100% growth, 500% growth? I’m not looking for specify that you put any kind of thoughts on what the revenue you can do next year would be really helpful?

Eric Brock: Yeah. So without a doubt, when we’re looking at 2024 and before — we were going into 2024, we’re looking at multiples of what we’ve done this year. We’ve really just to get our production moving building that capacity and capability and start to provide inventory for the early activity. We have the railroad, so there’s going to be a significant growth next year.

Timothy Horan: And can you give us a sense of the breakdown between rail and drone on? And then secondly, can you give us a rough idea of what you’re thinking about for the gross margins next year? I mean, I know there’s a lot of moving parts.

Eric Brock: Sure. So we’re going to hear — So we are at the moment is getting back to the rail, want to highlight that we are planning now with Siemens and the customers for 2024 so. It’s a little early for me to be able to kind of give you some specificity around this on a drone side, we have a pipeline of we’re going to be expected to continue Fleet expansion in the UAE. As you know, we’ve also established some other partnerships with local partners in India and now Morocco as well as Saudi Arabia so we think we’re going to get traction there. And then, of course, with the maturation of our pipeline here in the United States, we’re going to see significant growth. So we’ve said in the past that we expect to be able to double our revenue across the businesses next year.

But I know I’d like to think that we can do even better than that. So, — but we’re going through the proper planning. And when we’re ready probably early next year, we’ll put more and more details around that. In terms of margins, we’re still look at our business for these technology platforms is providing a very attractive margins at these low volume levels. You’ll see some lumpiness. Our margins were down this quarter and to give you a sense. Is that a little bit more color on why, as I highlighted, we have sort of its kind of a fixed level of costs at the OAS business unit for field service operations. So we have people in the field who are tasked with from serving customers and also growing the business. It’s debatable whether this should be cost of sales or SG&A, and it will look at that next year.

But we had a cost or related to that sort of service operations in the field. And that was relative as compared to a very low revenue quarter for the drone business. So now when you look at the margins in the next year and beyond, we’re targeting at least 50% and as I believe as we get volumes and operating leverage, even on the gross margin line, we’re going to see some expansion from there.

Timothy Horan: Thank you.

Operator: For the next question will come from Matthew Galinko with Maxim Group. Please go ahead.

Matthew Galinko: Hey thanks, — Thanks for taking my questions. Can you touch on Stewart mentioned a opportunity to provide turnkey service to a Class I Rail around the 900 megahertz on deployment. Can you can you go into a little bit more detail around why that became a direct engagement and how that changes the scope of what you’re delivering?

Eric Brock: Sure. Actually, Stewart, I’ll let you take that.

Stewart Kantor: Sure. So what we’re starting to see is, as we’re getting closer to the deadline, the customers are looking to some of our expertise and deploying wireless network. So I would not say that it’s a solid trend right now, but it does open up new opportunities. And what we see also is their confidence in us is growing in terms of our capabilities, where historically a lot of the rails have managed tightly. And internally. They’re deployment processes, but we’re starting to see trust in our ability to assist and accelerate the deployment. So we think this does represent a new opportunity. We’re not forecasting it heavily at, but we do think it’s showing additional confidence in our capabilities.

Eric Brock: Yeah, I’ll amplify that. That’s a great point our expertise, as I alluded to, there’s a lot of complexity in terms of migrating while the trains are still running right migrating from legacy technologies, literally decades old to a new modern general IP network. And no, so it’s rightly saying the expertise we bring in their would demonstrate a daily basis is valued highly so that a minimum across the board will be strongly involved that advising and training folks, new systems and how we key deployments and operation of the network. But we are likely to be called on certain instances for even more significant services around that?

Matthew Galinko: Thank you. That’s helpful and then I apologize since it’s going to be a multipart follow up, but I think it’s all gone into the same point on you provide a little bit of color around the none — around the cash operating expenses, I think for Q4. Can you talk a little bit about again? I know I’m asking for color around 2024, but what can we kind of expect from Opex Looking into ’24 on by how do you think about can we kind of take your general gross margin run rate, supplier, Opex and sort of get to your burn rate? And thirdly, in reference to that opportunity on rail, around helping managing that complexity, is there a scenario where you’re staffing up around that time if it becomes more of a pronounced trend? Thank you.

Eric Brock: Yeah. Great question, Matt. So we’ll look at it a couple of different ways. So firstly, I’ll say our cash Opex, as we’re entering next year, shouldn’t be increasing dramatically. And we do believe we’re going to get a significant operating leverage across both businesses. Specifically around Ondas Networks, the operating leverage is going to be even more apparent because we’ve got a most of our FX that you see is really related to development of the technology platform and specific product segments in the railroad customers are desiring. And you know, to the extent we have to add more in terms of field service, as we were just discussing, that’s likely to be actually a creative to profitability because we’re going to be able to charge for those services.

So I don’t see a significant increase in Opex for Ondas Networks as we’re scaling with customers and generating revenue on the drone side, particularly with the US, you’ll probably see us expand. The team have built to service that growing business. But that’s not going to because you’re not going to be sort of a big shock to the to the headcount. For example, in advance, we’re going to be able to do that simultaneously and a lot of those field services actually can be contracted at least a transitional way with third parties on the are likely to see us actually establish the proper partnerships on the field services side for the OAS business unit.

Matthew Galinko: Thank you.

Operator: [Operator Instructions]. Our next question will come from Mike Latimore with Northland Capital Markets. Please go ahead.

Unidentified Analyst: Hey, guys, this is Luke on for Mike. Just wanted to touch on the $2.6 million to buy or are you going to be able to quantify how many units or how many drones this order was for?

Eric Brock: No, we’re not in where I guess I’ll say it is proprietary information for now. But I do think we’re getting into next year we’ll give you a sense as to what you sold basis. But I don’t want to kind of a public forum connect our pricing strategies, given the you know, all the customers we work with have to look at various levels of solutions. The systems are different so and I know that’s one of the summer services sums are somewhat purchases.

Unidentified Analyst: Okay, yeah, no, I totally get that is there any way you’d be able to quantify how many you’ve sold in total into the desire region?

Eric Brock: I don’t want to do that right now.

Unidentified Analyst: Okay. Fair enough or any sort of outlook in this in this region for 2024?

Eric Brock: So in the region, starting with the public safety, we there’s public comments from a customer that they intend to have a ’24 for more systems by 2025. We’ve seen similar statements from a kind of the customer and Abu Dhabi and of course as we’re expanding the partnerships and other markets such as Saudi Arabia, India, Morocco, and we have other conversations like that on the Fleet opportunities in those markets are as big or bigger than some of those are going to do. So are significantly larger than what we’re seeing at the outset in the

Unidentified Analyst: Got it. Thanks for that. And then just kind of pivoting here. Just could you provide what total employee head count is up to now and kind of a split between the networks and autonomous systems?

Eric Brock: Yes. So the number I don’t have it handy, but at some let’s say, we’re probably 95 or so and it’s about half-and-half, but I can get you more specific number I haven’t looked at for.

Unidentified Analyst: Yeah, that works for now. Thanks for taking the questions, guys, and congrats on the. Thank you.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Eric Brock for any closing remarks. Please go ahead, sir.

Eric Brock: Okay. Thank you, operator. I’m going to close the call by just thanking you again for attending as always, we have a lot of work ahead and we’re going to get right back at it. So I look forward to keeping you informed on our progress we will talk soon and have a great day.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.