| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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, 2018 (“2018 Form 10-K”).
The Company’s accounting policies are described in the “ Notes to Consolidated Financial Statements Principles
of Consolidation The consolidated financial
statements include the accounts of the Company and our wholly owned subsidiaries, Ondas Networks and FS Partners, and our majority
owned subsidiaries, Full Spectrum Holding and Ondas Network Limited. All significant inter-company accounts and transactions between
these entities have been eliminated in these unaudited condensed consolidated financial statements. 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 revenue recognition, inventory write-downs to reflect net realizable value, assumptions used
in the valuation of stock-based awards and warrants, and valuation allowances against deferred tax assets. Actual results could
differ from those estimates. Inventory Inventories, which consist
solely of equipment components, 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. As of September 30, 2019 and December 31, 2018, we determined that no such reserves were necessary. Inventory consists of the following:
September 30, December 31,
Raw Material $ 376,417 $ 307,947
Finished Goods 46,792 39,998
TOTAL INVENTORY $ 423,209 $ 347,945 Stock-Based Compensation The Company follows the
fair value recognition provisions in ASC 718, Compensation – Stock Compensation Improvements to Nonemployee Share-Based Payment Accounting Fair Value of Financial Instruments Our financial instruments
consist primarily of receivables, accounts payable, accrued expenses and short and long-term debt. The carrying amount of receivables,
accounts payable and accrued expenses approximates fair value because of the short-term maturity of such instruments. We have elected
not to carry our debt instruments at fair value. The carrying amount of our debt approximates fair value. Interest rates that are
currently available to us for issuance of short and long-term debt with similar terms and remaining maturities are used to estimate
the fair value of our short and long-term debt. 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 Level 2 Level 3 At September 30, 2019 and
December 31, 2018, we had no instruments requiring a fair value determination. The following table provides
a summary of changes in fair value associated with the Level 3 liabilities for the nine months ended September 30, 2019 and for
the year ended December 31, 2018:
Fair Value Measurements Using Significant Unobservable Inputs
Nine Months Ended 2019
Year ended December 31, 2018
Balance, beginning of period $ - $ (166,093 )
Issuances of derivative liability - -
Reclassification to additional paid in capital - 1,141,995
Change in fair value of derivative liability - (975,902 )
Balance, end of period $ - $ - The above table of Level
3 liabilities begins with the prior period balance and adjusts the balance for changes that occurred during the current period.
The ending balance of the Level 3 financial instrument presented above represent our best estimates and may not be substantiated
by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Deferred Offering Costs The Company capitalizes
certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings
as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded
in stockholders’ deficit as a reduction of additional paid-in capital generated as a result of the offering. Should a planned
equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the
consolidated statement of operations. In accordance with this policy, for the three and nine months ended September 30, 2019, the
Company expensed financing costs of $644,228 and $764,860, respectively. Debt Issuance Costs Debt issuance costs represent
costs incurred for the issuance of debt. Once the associated debt instrument is issued, these costs would be recorded as a debt
discount and amortized using the effective interest method over the term of the related debt instrument. Upon abandonment of a
pending financing transaction, the related deferred financing costs are charged to interest expense. In accordance with this policy,
in June 2019 the Company expensed $150,000 of deferred offering costs. Foreign Currency Our functional currency
is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency for each foreign
subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect
at the applicable reporting date. Our condensed consolidated statements of income are translated at the weighted average rate of
exchange during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of
accumulated other comprehensive income (loss) in stockholders’ equity. Realized and unrealized transaction gains and losses
generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded
in other income (loss) in the period in which they occur. ASC 606, Revenue from Contracts with Customers On January 1, 2018, we
adopted 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 Company 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, value add, and other taxes collected on behalf of third parties are
excluded from revenue. For the nine months ended September 30, 2019 and 2018, 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, 2019 and 2018, there were no modifications to contract specifications. The Company is engaged
in the development, marketing and sale of wireless radio systems for secure, wide area mission-critical business-to-business networks.
We generate revenue primarily from the sale of the FullMAX System and the delivery of related services. Product revenue is comprised
of sales of the Company’s software defined base station and remote radios, its network management and monitoring system,
and accessories. The Company’s 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 provide 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 Company’s wireless communications products including wireless network design, systems
engineering, radio frequency planning, software configuration, product training, installation, and onsite support. The extended
warranty sold by the Company 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, at our election,
of the base station and remote radios, 2) software upgrades, bug fixes and new features of the radio software and NMS, 3) deployment
and network architecture support, and 4) technical support by phone and email. Extended warranty, network support and maintenance,
and remote monitoring revenues are recognized ratably over the term of the service contract. 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. 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 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. Our payment terms vary
and range from net 15 to net 30 days from the date of the invoices. Disaggregation of Revenue The following tables present our disaggregated
revenues by Type of Revenue and Timing of Revenue:
Three Months Ended Nine Months Ended
2019 2018 2019 2018
Type of Revenue
Product revenue $ 61,182 $ 23,323 $ 212,905 $ 29,913
Service revenue 26,950 11,853 100,459 46,699
Other revenue - - 219 6,568
Total revenue $ 88,132 $ 35,176 $ 313,583 $ 83,180
Three Months Ended September 30,
Nine Months Ended September 30,
2019 2018 2019 2018
Timing of Revenue
Revenue recognized point in time $ 79,166 $ 28,310 $ 281,333 $ 44,356
Revenue recognized over time 8,966 6,866 32,250 38,824
Total revenue $ 88,132 $ 35,176 $ 313,583 $ 83,180 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 our right to consideration in exchange for good or services that we have transferred
to a customer is conditional on something other than the passage of time. We did not have any contract assets recorded at September
30, 2019 or December 31, 2018. 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, 2019, and the year ended December 31, 2018, and is included in other current
liabilities in the Company’s unaudited condensed consolidated balance sheet.
Nine Months Ended September 30, Year Ended December 31,
Balance at beginning of period $ 20,631 $ 30,690
Additions 20,826 32,106
Transfer to revenue (32,250 ) (42,166 )
Balance at end of period $ 9,207 $ 20,631 Warranty Reserve We provide a limited one-year
assurance-type warranty on our software and hardware products. The assurance-type warranty covers defects in material and workmanship
only. If a warranted software or hardware component is determined to be defective after being tested by the Company, 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 at September 30, 2019 and December 31, 2018 are immaterial to the Company’s
financial statements. Accounting Standard Update 2016-02, Leases Under Topic 842, operating
lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily consisting
of office space with remaining lease terms of 15 months to 44 months. Current facility leases include our offices in Sunnyvale,
CA and Chengdu, Sichuan Province, People’s Republic of China. Lease costs were $445,148 for the nine months ended September
30, 2019. There was no sublease rental income for the nine months ended September 30, 2019. Leases with an initial
term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the
adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right of use (“ROU”)
assets. Our lease agreements generally
do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information
available at lease commencement date for purposes of determining the present value of lease payments. We used the incremental borrowing
rate on December 31, 2018 for all leases that commenced prior to that date. Lease Costs
Three Months Ended Nine Months Ended
Components of total lease costs:
Operating lease expense $ 148,922 $ 445,148
Short-term lease costs (1) 11,122 38,626
Total lease costs $ 160,044 $ 483,774
(1) Represents short-term leases which are immaterial. Lease Positions as of September 30, 2019 ROU lease assets and lease
liabilities for our operating leases were recorded in the unaudited condensed consolidated balance sheet as follows:
As of 2019
Assets:
Operating lease assets, current $ 337,000
Operating lease assets, net of current 369,275
Total lease assets $ 706,275
Liabilities:
Operating lease liabilities, current $ 589,158
Operating lease liabilities, net of current 432,860
Total lease liabilities $ 1,022,018 Lease Terms and Discount Rate
Weighted average remaining lease term (in years) – operating lease 2.3
Weighted average discount rate – operating lease 14 % Cash Flows
Nine Months Ended 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases $ 340,044 Undiscounted Cash Flows Future lease payments included
in the measurement of lease liabilities on the unaudited condensed consolidated balance sheet as of September 30, 2019, for the
following five years and thereafter are as follows:
Years ending December 31,
2019 (3 months) $ 155,075
2020 645,248
2021 173,545
2022 116,392
2023 67,895
Total future minimum lease payments 1,158,155
Lease imputed interest (136,137 )
Total $ 1,022,018 In March 2019, one of
our long-term operating leases was abandoned and the likelihood of entering into a sublease agreement for the property was minimal;
therefore, the Right to Use Asset value of $259,926 was considered impaired and the amount was charged to asset impairment on
the accompanying unaudited condensed consolidated financial statements. Net Loss Per Common Share Net loss per share
for all periods presented is based on the equity structure of the legal acquirer, which assumes common stock is outstanding and
is reflected on a retrospective basis for all periods presented. 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 the Company has net losses for each period presented. The following potentially
dilutive securities for the nine months ended September 30, 2019 and 2018 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, 2019
September 30, 2018
Warrants 5,466,057 -
Convertible debt - 140,678
TOTAL 5,466,057 140,678 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. The table below sets
forth the Company’s customers that accounted for greater than 10% of its revenues for the three- and nine-month periods ended
September 30, 2019 and 2018, respectively:
Three Months Ended Nine Months Ended
Customer 2019 2018 2019 2018
A - 16 % 44 % 48 %
B - 55 % 18 % 33 %
C 85 % - 36 % -
D - 27 % - 12 % Customers C accounted
for 100% of the Company’s accounts receivable balance at September 30, 2019. Recent Accounting Pronouncements In August 2018, the
Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”), 2018-13 that
eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain
new information and modifies some disclosure requirements. The FASB developed the amendments to Accounting Standards Codification
(“ASC”) 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures
in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users
of the financial statements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019
and for interim periods within those fiscal years. An entity is permitted to early adopt either the entire standard or only the
provisions that eliminate or modify requirements. We are currently evaluating the effect of this guidance on our disclosures. In June 2018, the FASB
issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting In July 2017, the
FASB issued ASU 2017-11 (“ASU 2017-11”), Earnings Per Share (“Topic 260”), Distinguishing Liabilities
from Equity Derivatives and Hedging In February 2016,
the FASB issued ASU 2016-02, Leases. This guidance requires lessees to record most leases on their balance sheets while recognizing
expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific
provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type
and direct financing leases. The standard is effective for public business entities for annual periods beginning after December
15, 2018, and interim periods within those years. Early adoption is permitted for all entities. In July 2018, the FASB amended
the new leases standard and issued ASU 2018-11, Leases, (Topic 842): Targeted Improvements to give entities another option for
transition and to provide lessors with a practical expedient. We adopted ASU 2016-02 on January 1, 2019 utilizing the alternative
transition method allowed for under ASU 2018-11. Comparative financial information was not adjusted and will continue to be reported
under ASC 840. We also elected the transition relief package of practical expedients and as a result we did not assess (1) whether
existing or expired contracts contain leases, (2) lease classification for any existing or expired leases, and (3) whether lease
origination costs qualified as initial direct costs. We elected the short-term lease practical expedient by establishing an accounting
policy to exclude leases with a term of 12 months or less. We elected not to separate lease components from non-lease components
for our specified asset classes. Additionally, the adoption of the new standard resulted in increased disclosure requirements
in our quarterly and annual filings. Reclassification Certain amounts reported
in prior years in the financial statements have been reclassified to conform to the current year’s presentation. |
