Q3 2023 Ondas Holdings Inc Earnings Call

[music].

Good day and welcome to the Audis Holdings incorporated third quarter 2023 conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad and to withdraw your question. Please press Star then two.

Before we begin the company would like to remind you that this call may contain forward looking statements. While these forward looking statements reflect on its best current judgment. They are subject to risks and uncertainties that can cause actual results to differ materially from those implied by these forward looking statements.

These forward looking statements are discussed in August periodic SEC filings and in the earnings press release issued today, which are both available on the company's website honest 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 certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is shown in our press release issued earlier today.

Which is available at the Investor Relations section of our website. This non-GAAP information is provided as a supplement to not as a substitute 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. Mr. Eric Brock Chairman and CEO and interim CFO. Please go ahead Sir.

Well, thank you operator, and good morning, or I guess 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 want to highlight that the value of our company and 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 Widescale adoption and the value we are creating for our customers employees.

Yes, and this is of 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 and specifically the added challenges of having a low stock price and high cost of capital.

We are seeing firsthand to our aerobatics team in Israel, how evo.

Little 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 Gaza conflict continues to present challenges I cannot say, however that they are safe because of course. This war is being fought on their home front, but.

They are with us and working hard in a variety of capacities to ensure that their families and their country are as safe as possible I am proud of our team in Israel and how they are bravely rising to the challenges and how our team in the United States is supporting our collective efforts.

As I mentioned the.

The evolving geopolitical and volatile global economic situation is impacting industry is creating demand for the industrial wireless technology in area of security and data platforms. I'd ask provides the increasing requirements for performance and resiliency are the defining trends and the critical services and industrial economy spanning from transportation and <unk>.

The security and defense across the globe.

These trends highlight the value we create for customers our partners in our ecosystem and are supportive of our industry's long term success with the support of these strong strong global tailwind, we are seeing growing opportunities for our andaz formats wireless connectivity platform and are optimists, and iron drone autonomous drone systems, which I'll emphasize or.

Now commercially ready and being adopted and deployed at an increasing rate.

Of course, we are offering these valuable solutions to 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 looked to demonstrate that to you on this call and more importantly during the months and quarters ahead I believe we are on.

Cost a great success.

I'm joined today by some key members of our leadership team and you'll hear from familiar faces ensure cantor founder President and CFO of bond us networks and their kleiner, the founder and CEO of robotics, and the president of onto US economists systems and.

In addition, <unk> is joining us today for the first time.

As you know Tim was.

Recently joined US as American Biotics CEO, we will properly introduced him later in the call as we share the update and outlook at OAS.

On another note as we announced last month I have stepped in as interim CFO in place of U shaped curve of the world.

What has been called to serve and the Israeli Army you Shay and other members of our team and our robotics are performing their duties with great honor of course, we expect U shape and our other team members to return hopefully soon.

To that point, we've had a number of employees who have been called this or have done so and already repairing turned back to their homes and the workplace.

Let's turn to the agenda, we will start today's call with some brief comments about the third quarter performance and the significant progress we have made in advancing the adoption of our technology platforms.

I will then provide a review of our third quarter financial performance and our balance sheet and liquidity position.

Then we will transition and provide a business update for on dust networks, and our Oes business units, where I will ask Stewart and mayor Brian commentary around current business activity and the outlook for Q4 here. We will we will ask him to introduce himself and share his thoughts on the opportunities ahead for OAS and American robotics.

We 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 at both on dust networks, and Argos 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.

Dust networks generated record revenues of $2 4 million in Q3.

We believe the substantial growth year over year puts 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.

I also want to highlight the capital raise announced early in the third quarter, whereby we secured a $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 and the end markets and customers we are targeting for growth.

And on dust networks field activity progressed, we're getting closer and closer to the breakout volume orders driven by success in the 900 megahertz network with the class one rails, we see deeper more intentional engagement with the railroad customers around the technical implementation of rollout strategies.

As she said she deadlines near.

Stuart will share more details around our work with Siemens and the class one rail customers and the outlooks for 900 megahertz deployment. In addition to other global rail markets.

I don't want yes, despite the obvious challenges on the ground in Israel, we continue to perform for our customers. The recently announced order from a governmental entity and Dubai demonstrates that fleet expansion continues and the city of Dubai with the Optimists public safety infrastructure I will highlight again that we believe we are uniquely deploying autonomous.

Drone systems in urban settings, and setting the gold standard for performance reliability and value with our optima system.

This was further amplified by the historic type certificate that we received in September from the AA.

And this is just a second small UAS developer to receive a type certificate from the FAA, but we believe we are the only certified drone designed for security and data collection applications.

T C Award validates the unique quality and reliability of our system and has been well received by customers as we expected.

Undoubtedly help shorten sales cycles for new customers as we look ahead.

While we continue to make progress with customers with the Optima system. We are very excited to highlight the opportunities we see with iron drone.

We announced yesterday, we have accelerated our development activity at the radar, our AI driven autonomous counter UAS platform.

This activity is targeted at meeting specific requirements.

It really defense forces or I B S. Four.

An urgent need to protect critical locations and people from the threat of hostile drones in Israel.

The iron enjoying later is a proprietary counter UAS system. We believe the raiders unique capabilities are meeting a large and rapidly growing market at the right time.

Mary is going to share more details regarding this exciting work during the call.

And another significant development at OAS, we announced that Tim has joined US as American robotics 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 for the right job at the right time is the experienced talent and drive to continue the physician on das in American robotics as leaders and scaling drone.

Knowledge solutions across industrial and government markets, we target.

We'll hear from Tim a bit later on this.

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 and as inventory becomes available in the U S. We will touch on this in the outlook.

So to wrap up the introduction we are now beginning to scale at both on dust networks in a way, yes, I am happy with how we're 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 orders customer adoption and revenue growth. In addition to maintain.

Cost discipline, as we work to drive down cash burn and move towards profitability.

Now, let's turn to the financial review as I mentioned earlier I will handle this section.

Of the call in place of ECA Carroll, 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 on dust networks and OE S S and 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 $630000 of revenue realized in the third quarter of 2022.

Revenue growth was primarily the result of higher product shipments that on dust networks, Oh, Yes revenue was modest in Q3. After we had recognized a large unit sale in the UAE in the second quarter of this year.

We expect revenues the OAS to vary from quarter to quarter it to normalize to a more predictable pattern as we grow our customer base and more of these customers enter fleet programs and recurring service agreements in United States and internationally.

Gross profit in the third quarter of 2023 was approximately $550000 up slightly from the $400000 in the third quarter of 2022.

Gross margins were 28% in the third quarter of 2023, a decline from 63, 2% in the third quarter of 2022. The margin decline is primarily due to costs, including labor for us Optimist customer service operations related to units in service during a quarter when we recognized a comparatively low level.

Optimists related product and service revenues.

Operating expenses 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 air Robotics expenses.

Operating expenses declined as a result of strong cost controls and lower costs from the integration of American robotics and robotics onto the OAS business unit. 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 during the quarter of 2023 were equal to approximately seven $5 million, which was lower than expectations cash.

Cash operating expenses exclude noncash operate reading items, including $1 3 million and depreciation and amortization and $800000 of noncash 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 556% 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 narrowed its EBITDA loss of $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 with $21 million in cash, which was supported by the $25 million in gross proceeds raised from the previously announced financings on dust networks and honest holdings early in the third quarter.

Cash used in operations during the first nine months of 2023 reflects ongoing investment in the business. So the year to date burn was elevated due to certain one off and nonrecurring costs realized early in the year, which were related to the acquisition area of robotics and the integration of Air Robotics, and then American robotics into the OAS business unit.

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 $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 positions us to continue to execute our growth plan, we ended the quarter with $21 million in cash.

The original new convertible notes, we have approximately $30 4 million in outstanding debt went.

I would 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 advertise the notes under more favorable conditions.

As previously discussed it is our objective to advertise these notes as soon as we can by using shares to retire. The notes you either via monthly amortization or the C. DS notes convert entirely to equity prior to maturity.

I want to highlight two important features that the convertible that may not be widely understood by our investors.

First the Investor is limited to only four 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 or common shares or cash does not necessarily happen every month as a convertible note investor has the option to defer amortization into the future and practice the convertible investor has done this brittleness or has deferred amortization option from time to time.

At the end of the day the way to drive this acquisition 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 Argos. After many years of hard work by our team and important support from our investors. We have now transitioned our business from.

Platform development to market adoption apples on dust networks and honest 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 million 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.

I want to also highlight that both business units have grown significantly in 2023 again, reflecting that platform adoption is emotion.

I bet networks expected timelines with the rails extended relative to our previous goals are OAS business unit is expected to deliver its original growth targets presented at the time of the <unk> acquisition.

While we are proud of our strong growth in 2023 versus the prior year. We also know 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 get give specific outlook for 2024 at this time, however, I want to reiterate we expect substantial growth to continue in both businesses.

Units next year as we scale adoption and deliver revenue growth. We will remain focused on controlling expenses as we drive towards improved profitability. We expect cash operating expenses to be approximately $7 million for the fourth quarter of 2023, we're continuing to manage opex efficiently and we will look to maintain costs.

Alan going forward.

Now we will transition to a review of our business units and App store Cantor and mayor client or to share updates on recent activity in the field with customers and industry partners.

We will also asked him to share some comments regarding American robotics, and drill down a bit into the outlook for OAS and the United States.

We will start with Stewart, who will update us on the current status with the rails on <unk> 16 adoption and focus on the work with customers and our preparations for volume deployment and a new 900 Mega War Stuart.

Great. Thank you Eric.

And I'm just 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 and product shipments to Siemens business.

This is coming off a strong second quarter of approximately $1 5 million in revenue, which was the prior record quarter for shipments.

<unk> growth demonstrates that we are growing our production capacity.

Total revenue year to date through September 2023 was approximately $5 1, million% to 250% increase over the comparable period in 2022.

We continue to be fully engaged with Siemens the class one rails and now transit customers to further prepare for large scale commercial deployment.

Furthermore, we continue our work with the E R and our rail customers, which includes the development roadmap for a number of future products and additional networks beyond 900 megahertz.

Yes.

We continue to work hand in hand on deployments with key rail personnel.

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 the appointment activity given the impending deadline.

We are in discussions with one of these customers that are seeking for a turnkey solution, which would include on just providing field services support to deploy the a T. C. S system upgrades 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 rail Cross railroad crossing.

We believe this work in the areas of focus reflect positively on how the rails have come to value the 900 megahertz network opportunity.

Simultaneous to this field work humans is actively negotiating purchase orders with select rails.

It makes me, which is the technical subsidiary of D. A R continues to be engaged on the dock 16 network integration plans with an immediate focus on the new network controller and critical got 16 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 them next week 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 our 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 ones and engaged 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 hear responses from the proposals we submitted on several major passenger and transit communications upgrades.

As we grow we will pay close attention to spending levels on operating costs as we drive towards profitability.

Revenue and gross profits grow with increasing demand in shipments we are focused on moving towards profitability as we move through the year.

And then to 2024.

Now I'll hand, the call back to Eric.

Eric.

Thank you Stuart I'll now ask may require to take the floor and update us on progress with customers and autonomous systems and provide some insight into recent developments at OAS and the outlook from here.

Mayor.

Thank you Eric before providing the Q3 update for yes, I would like to acknowledge the exceptional efforts of our team in Israel, some of whom I haven't been called to serve in the Israeli defense forces during the Gaza conflict. Our team has worked tremendously as they always do and I'm very grateful for the effort and commitment.

Our success.

Through this commitment and with regret supports of our U S based team.

I'll start on the systems, we are maintaining operations in Israel.

Turning now to the third quarter update on those autonomous system continued to deliver on our business plan for 2023 and maintain momentum in the global market.

In the Middle East fleet expansion in Dubai, UAE continues to advance as evidenced by the recently announced $2 6 million dollar order for immediate delivery of additional opening was one system from a local governmental entity.

The optimal fleet expansion in Dubai illustrates the effectiveness of our weather.

Optimal system in the field of public safety and governmental one applications and the ongoing advancement of activity with existing customers.

We have successfully deployed the optimal one infrastructure in Haifa, Israel and successfully completed one break in proof of concept in maritime security.

The POC was conducted in complex boat compounding eastland, consisting of seven ports and corporations.

The successful outcome paves the way for further deployment in high for Florida area, marking a significant advancement in maritime security technology for many other ports torches and facilities worldwide.

<unk> continues its expansion behind you even these one creating partnership marketing and distribution agreements in the Kingdom of Saudi Arabia, India, and now my local which we announced last week.

In medical we have initiated a new relationship with Meg represent a leading it solutions provider focused on North African markets under the Mou, we will offer to make remnant our advanced running infrastructure in North Africa.

The agreement includes the potential for manufacture of optimal system in the kingdom of Morocco, and the Republic of sending gun as well as the establishment of a joint center in Morocco.

We also received a grant from the Israel Innovation authority.

To advance the island, one radio our AI driven counter drone system.

The grant was approximately $450000 and will be used for development of advanced features such as enhanced night vision and flying in GPS denied environments.

The Gwen to represent the level of innovation of the islands, one way too and the interests of Israel and aerospace a global leader in this innovative solution.

The interesting thing I owned one radio counter UAS platform continues to increase in Israel and beyond.

We announced yesterday that we have accelerated our development timelines and are advancing specific system enhancements to meet their requirements over the Israeli defense forces to meet an urgent needs related to the conflict in Gaza.

We are working closely with Israeli defense contractors to support system integration and readiness for deployment.

This work is further supported by the financial Grund mentioned earlier that we received in August from the Iia.

We believe in the island one region is exceptional system meeting a very large need in 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 Undrawn radar.

We are happy to share this update with you 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 around the island, one and to visit our website on the.

Com for more information about the special capabilities over the system.

As we announced in September our Optimus won't receive it in Walton This type certification from the FAA.

This is the second type certification granted by the SBA for a small drone and first of its kind for a non air carrier fully automated one designed for security and other character.

With the type certification O S will be able to improve the FAA complicated unmanned aerial operations, such as flying overloads and people.

And as is currently the only one manufacturer in the U S. A to all and FAA type certification for one design for security and about the capturing operations.

This certification opening was one was achieved after four years of intensive engineering and agency review processes.

We believe the DC will support the ongoing business development activities over American robotics in U S commercial and governmental markets and will serve to accelerate demand and.

Shortened sales cycles.

In the U S market to medical robotics, among with our customer the Massachusetts Department of transportation and romantic or Department will soon launch the pilot program, we previously announced in June.

The program will include the provisional demonstrations to relevant stakeholders, such as the government agencies showcasing our optimal system capabilities for emergency response and critical infrastructure monitoring.

We look forward to sharing more details on this launch soon.

In addition to launching the Mazda program, our customer pipeline is maturing and expanding and we expect to secure additional and engagement for the first quarter.

Of course, we expect the addition of Tim tenant where he is now leading the expansion in the U S. As a medical robotics CEO to have a significant impact to driving an expanded set of defense and commercial opportunities.

I am now going to ask Eric to introduce teams. So we can share more comments on the medical robotics and the opportunities we see looking ahead.

We are excited to have team joined the <unk> team as we continue to drive platform adoption globally Eric.

Humira I will now ask Tim tended to share a few words on why he joined on Das and on the opportunities we have at American 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 and have been incredibly impressed with its bill.

Acumen. In addition to its very obvious aviation multi mode 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 at Argos and thrilled to have him join our leadership team Tim I will now hand, the floor to you.

Thank you, Eric and it's great to attend my first investor call with and Us.

Eric mentioned I've spent a career that spans defense and commercial aviation and most importantly drone technology.

As a previous leader at the Federal Aviation Administration I, let the standup of the UAS drone integration office and was part of the initial cadre that develop 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 on dust networks American robotics, and air Robotics 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 drawing in a box solutions defines one of the most important segment and the commercial drone industry.

Although there are multiple segments or categories and the drone sector fully autonomous technologies are critical to scaling 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 is to drive adoption of Optimists and iron drone systems within the United States in Americas, we.

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.

It 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 and 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 and a very complex and highly regulated market developing world class programs and offering the right mix of capabilities and solutions.

American Robotics has a strong and trusted provider of drilling 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 drone regulatory environment is rapidly improving which was.

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 new regulations advance.

Including the pending part 108 rule, which will among other things should improve the scaling of drone 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 has 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 drone platforms 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 meets expectations.

We are rapidly developing our go to market plan that includes leveraging our growing partnerships building on our current platforms and increasing our offerings of capabilities and solutions for our clients.

These offerings will include comprehensive aviation and aerospace solutions.

I will now hand, the call back to mayor, who will share the outlook for our <unk> business unit.

Thank you team.

We expect a strong end to 2023 four on the total number of systems. This is true despite the operational challenges presented by the Gaza conflict amusement.

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 of revenue target was established for the Oes at the beginning of the window Robotics acquisition was closed.

In addition, our customer pipeline in the U S 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 types of certification we received for the Optum was doing.

In the United States, we are in discussions for initial P overseas with the number of customers and distribution partners in security government as well as in oil and gas and other industrial end markets.

The Gaza conflict in Israel is likely impacted inventory delivery schedule. We expect our initial 10 of 15 systems to be available over the course of Q4 into Q1 'twenty 'twenty four.

We have an additional five sue stemming the production queue and continue to expect to increase production orders in 2024.

We are pleased with the growth in 'twenty between three and work with our team.

This completes my former remarks, Eric I'm going to end the call back to you now.

Thank you Mayor. 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 August 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 on.

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.

Thank you we will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

Anytime your question has been addressed and you would like to withdraw your question. Please press Star then two and at this time I'll pause momentarily to assemble our roster.

And the first question will come from Tim Horan with Oppenheimer. Please go ahead.

Hey, guys. Thanks for the time beyond.

The counter UAS systems here, a 1 billion dollar marketing in 'twenty three can you talk about what the competition looks like and how do you measure that $1 billion market. I guess it was does anyone have a system like this and you don't.

Maybe how much intellectual property do you have in here.

And you know I know you have a growing to 5 billion by 2030.

You don't get the sense so Bob.

You know what what percentage comes from the different ways to do counter UAS systems like how important will your type of functionality be in and the growth of that market.

Yeah, sure Hi, Tim and thanks for the question. So if you look at the counter UAS market.

Principally two types of technologies that are used to a counter hostile drones the first type.

Is the jamming of radio frequencies and.

G P S, which interferes with the operation of the drone you know those sorts of technologies.

Pluses and minuses I'm, one of the complications with deploying a jamming system.

Is when you Jamie radio frequencies, you can interfere with other wireless communications that have public safety implications. So for example in an airport you you want to be really careful if you're using <unk> technology.

On the other hand with the the system, we have a it's a capture a type of a strategy of a platform and as you know this this system is fully autonomous so so when we deploy this is infrastructure, it's typically going to be deployed at at borders at important are low.

Cases, such as power plants government buildings are places where people congregate like stadiums for example.

Refineries critical infrastructure and these are the places where jamming is not acceptable because when you jam.

Radio frequencies are you you have the risk of things falling from the Sky.

In addition to the other.

Drawbacks around public safety in wireless communications so.

So 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 sizes. We've looked at we see the public the public reports as well from various research groups and they all kind of point to.

Two very large markets that are growing rapidly and we think about sort of the value of the drone and why they're growing rapidly.

We we can pick up the paper you know any given day and on the front pages talking Theres talk about hostile drones.

And that's the only something is that we're likely to see more of so so we think the demand for the security we can provide with your iron growing later.

It is very valuable and we're we like where we're positioned well let me add another thing you asked I think it was related to what makes our technology unique and I do think it is the autonomy when we deploy these systems, we're deploying them again and critical locations.

You know to counteract the threat of a hostile drone.

But it is fully autonomous so the systems. There is typically integrated with a radar or radar or other detect type of technology, where we know where we can identify a hostile drones coming in.

And.

Without this system can autonomous we react to that room because of course when drones are moving.

The speed of reaction to neutralize the threat is of critical importance.

So when the drones are deployed there's there's several up several drones that can be what we call high speed rone small high speed drones that'll be deployed and we're able to do and this is really really a difficult is we're able to firstly when we launched the drones to the radar but to identify the location.

But of course this is a moving target.

To autonomously once we launch the reader lock in to that hospital drone.

And then of course apprehend it with a net so that's that autonomy are around what we're offering is unique.

And I would highlight that so anyway, but that was hopefully that was helpful.

Yeah, that's really helpful. So it's fair to say majority of the market right now with the G. P. S. Blocking I mean is there anyone else with a system like yours on the market.

I think yes.

The majority is as the Jimmy techniques, we're aware of it.

At least a couple of others that are that have a capture capability, but we don't think they have the the form factor the cost.

Point, where the price point and the autonomy that we're delivering we think we're a uniquely capable in all of those levels.

Yeah, It's a very interesting product look good luck I'm back on the rail side can you give us maybe just an update on.

How much do you think the rails need to spend the next two years to they keep existing spectrum and and just you know rough idea on timing of when you expect big orders.

Deliveries to occur and and you know when do they have to be finished.

Sure sure. So you know the Tam that we're addressing and starting at 900 megahertz doesn't change right. It's we 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 are in the field along the track across seas et cetera.

So the Tam is still what we discussed.

In terms of where we are with the customers as I said Stuart amplified we're seeing a lot of 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 deployments begin to scale across the industry I'll remind you that the most the bulk of our work for the first three.

Call. It even four years was with the wireless comms community WCC, which is a central group underneath the umbrella of the a O.

Sure.

They in March.

I made the statement that the 900 megahertz network will use the <unk> technology and at that point in time, we began to work with the folks in the field.

Specifically, the communications and signaling group for CNS groups, and we're doing a lot of work with them and I'd remind you that the the CNS group along with other field operating groups with the railroads have the important responsibility to keep trains running so and what they're doing with us as we went through the <unk>.

Planning for going through the training and the implementation of how to deploy the system of course, then they have to operate and maintain the network and this is a system, where we really have just.

Going through that whole process for the train operators have some complexity. So we're going through the blocking and tackling to make sure that all of this act.

Activity when they're implementing a new modern system.

It can be repeatable and scalable as they go through their 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 and were advancing so I cant put a specific date on this Tim but as I said, we're getting very close and we do think that our 2024.

Sure.

Gonna be a really big here for for growth were tracking orders now.

So I know, it's early but it's pretty important I mean, if you can give us some kind of range of revenue or how you're thinking about revenue next year.

Are you you're talking about 100% growth five years from some growth.

I'm not looking for specific specific to you, but you know any kind of thoughts on what the web you can do next year would be really helpful.

Yeah, so without a doubt when we're looking at 2024.

Before I turn it over.

Going into 'twenty 'twenty four we're looking at multiples of what we've done this year, which is really just to get our production moving.

Moving building that capacity and capability and start to provide inventory for the early activity. We have the railroads. So so theres going to be a significant growth next year.

Okay.

And can you give us a sense of the breakdown between braille in drone and then separately can you give us a rough idea of what you're thinking about for gross margins next year I mean, I know, there's a lot of moving parts.

Sure. So we're gonna anyway. So we are at the moment and is getting back to the rail.

I liked 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 that's on the drilling side, we have a pipeline. We're gonna do you expect them to continue fleet expansion and the UAE.

As you know we've also established some other partnerships.

With local.

Partners in India, and in 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 you know it.

Like to think that we can do even better than that.

So, but you know what.

We're going through the proper planning and when we're ready probably early next year.

Put more more details around that in terms of margins. We're still we still look at our business through these technologies platforms or it's 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 kind of a census, a little bit more color on why is that.

Highlighted we have sort of a it's kind of a.

Fixed level of cost.

At the OAS business unit for field service operations. So we have people in the field who are tasked with.

Serving customers and also growing the business its debatable, whether this should be cost of sales our SG&A and you go look at that next year, but we had a.

You have some cost or cogs related to that sort of a service operations in the field and that was relative as compared to a very low revenue quarter for the the drone business. So you know what as you look at the the the margins into next year and beyond.

Targeting at least 50% and that was I believe as we get volumes in operating leverage even on the gross margin line, you're going to see some expansion from there.

Thank you.

Sure.

The next question will come from Matthew <unk> with Maxim Group. Please go ahead.

Hey, Thanks for thanks for taking my questions.

Can you touch on.

I'm Stuart mentioned opera.

<unk> to provide turnkey services to a class one rail around the 900 <unk>.

<unk> 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.

Yes, sure actually Stuart I'll, let you take that.

Sure.

No.

<unk>.

What we're starting to see is as we're getting closer to the deadline.

The customers are looking to some of our expertise in deploying wireless networks. So.

Right.

I would not say that it it's a solid trend right now, but it it.

It does open up new opportunities and what we see also as their confidence in us is growing in terms of our capabilities, where historically a lot of the rails have managed tightly and internally there their deployment processes, but we're starting to see trust in <unk>.

Our ability to to assist and accelerate the deployment so.

Uh huh.

We think this does represent a new opportunity, we're not forecasting it heavily yet but we.

We do think it's showing additional confidence in our capabilities.

Yeah, that's oh amplify that it'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 a legacy technology that literally decades old to a new modern general IP network and you know it.

So it's rightly, saying the expertise we bring in there with demonstrated on a daily basis is valued highly so at a minimum across the board will be strongly involved in advising and training folks on new systems, and how we see deployment and operation of the network, but we are likely to be called on them.

In certain instances for even more significant services around that.

Thank you that's helpful. And then I apologize if this is gonna be a multipart follow up but I think it's all getting to the same point.

A little bit of color around the none.

[laughter] around the cash operating expenses I think for.

For Q4.

Can you talk a little bit about.

You know again, I know I'm asking for color around 2024, but but you know what can we kind of expect from Opex looking into 'twenty four.

Hmm.

How do you think about you know.

Can we kind of take your general gross margin run rate to apply your opex.

And sort of get to your burn rate and and thirdly in reference to that opportunity.

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.

Yeah, Great question, Matt So we'll look at it a couple 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 significant operating leverage across both businesses specifically non das networks. You know the operating leverage is going to be even more apparent.

Because we know we've got our most of our FX that you see is really related to development of the technology platform and specific products that you mentioned the railroad customers are desiring.

M L.

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 accretive to profitability, because we're gonna be able to charge for those services. So.

So I don't see a significant increase in opex for on dust networks.

As we're scaling with customers and generating revenue on the drone side.

And particularly with the U S, you'll probably see us expand.

You know the team a bit to service that growing business.

But that's not going to there's not going to be sort of a big shock to the to the head count for example, and in advance we're gonna be able do that simultaneously and a lot of those field services actually can be contracted and in at least a transitional way with third parties and you like are likely to see us.

Actually establishing partnerships.

On the on the field services side for for the OAS business unit.

Thank you.

Sure.

Again, if you have a question. Please press Star then one our next question will come from Mike Latimore with Northland Capital markets. Please go ahead.

Yeah, Hey, guys. This is Luke on for Mike.

Just wanted to touch on the $2 $6 million to buy order are you guys able to quantify how many units or how many drones disorder was four.

No we're not and.

Sure.

I guess I'll say, there's proprietary information.

For now but.

But I do think that we're getting into next year, we will give you a sense as to what the installed bases, but I don't want to kind of you know.

Public foreign connect car pricing strategies.

The all.

All of the customers that we work with them to get.

Various levels of our solutions.

The systems are different so.

That's right in your summer services sums or somewhat purchases.

Okay, Yeah, no I totally get that is there any way you'd be able to quantify how many you sold in total in the Dubai region.

I don't want to do that right now.

Okay fair enough or any sort of outlook in this in this region for for 2024.

Yeah sure so in the region.

With the public safety.

There's public comments from customers that they intend to have a 24 or more systems by 2025, we've seen similar statements.

Statements from Oh.

Customer in Abu Dhabi.

And of course, as we're expanding the partnerships into other markets such as Saudi Arabia.

India, Morocco, and we have other conversations like that.

The fleet opportunities in those markets are as big or bigger.

Some of those economies.

Are significantly larger than what we're seeing at the outset in anyway.

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 the split between the networks and autonomous systems.

Yeah. So the the number I don't have it handy.

Handy, but it's.

Yeah.

But I'd say, we're probably 90.

95, or so and it's a it's about half and half.

But I can get you a more specific number of them.

I haven't looked at that.

Yes that works for now thanks for taking the questions guys and congrats on the corridor.

Sure. Thank you.

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.

Sure. Okay. Thank you operator, and I 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.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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