Ondas Inc. Q4 FY2021 Earnings Call

Welcome to the Ondas Holdings Inc. Fourth Quarter and Full Year 2021 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Before we begin, the company would like to remind you that this call may contain forward-looking statements. While these forward-looking statements reflect Ondas' 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 risk factors are discussed in Ondas' periodic SEC filings and in the earnings press release issued today, which are both available on the company's website. Ondas undertakes no obligation to revise or update any forward-looking statements to reflect future events or circumstances, except as required by law. Please also note, this event is being recorded. I would now like to turn the conference over to Eric Brock, Chairman and CEO. Please go ahead, sir.

Well, good morning, and it's a pleasure to welcome you to our conference call. I'm pleased to be joined today by our President and CFO, Derek Reisfield; Stewart Kantor, the President of Ondas Networks; and American Robotics CEO, Reese Mozer. Today, we plan to review last year's financial performance and strategic accomplishments and discuss our outlook for 2022. Similar to our last call, I want to set the stage by starting with an overview of Ondas Holdings in order to provide some important context on our market opportunity and business strategy before we outline our plan to deliver on the growth opportunities ahead. Ondas Holdings has two complementary lines of business, Ondas Networks and American Robotics. Both companies provide platform technologies for high-value industrial markets. These are full end-to-end integrated mission-critical IoT data solutions. Networks provides mission-critical private wireless networks, offering unmatched data capacity and operating flexibility for industrial and government markets. American Robotics offers the Scout System, the first and only fully autonomous drone platform approved by the FAA to fly beyond visual line of sight without human operation on site. We do this in industrial, agriculture, and government settings. Ondas Networks processes and transfers mission-critical industrial data via its software-based FullMAX connectivity platform and American Robotics via the Scout System provides automated data collection and edge processing. We believe both companies have attractive, high-margin, capital-efficient, high return on investment business models. We offer these platform technologies under the Ondas Holdings umbrella, providing us with a unique opportunity to build the ecosystem around our technology platforms. We believe this allows Ondas Networks and American Robotics to invest in and develop even more valuable full-stack solutions for our customers via partnerships like we have with Siemens or be it investment as we have done with artificial intelligence and machine learning specialists, Dynam.AI, or the strategic acquisition like the definitive agreement we announced yesterday to acquire Ardenna, a leading rail track inspection analytics provider. We believe our technology platform and business platform strategy is poised to deliver incredible value to our customers. We have argued, I think successfully that we are at the foothills of an industrial technology investment cycle driven by next-generation data solutions. We call this mission-critical IoT. Data collection, wireless broadband communications, and data analytics are at the core of these MC-IoT solutions and customers need companies like Ondas Holdings to bring these complex technologies together into complete integrated end-to-end data solutions. We believe there are outsized rewards available for companies and their investors who are able to define the full-stack solutions for these high ROI next-generation data services. We also believe that Ondas has a business strategy and the talent and experience to bring this value to customers for the benefit of our shareholders. I want to share a few words on yesterday's announcement of our definitive agreement to acquire the Ardenna assets from industrial technology developer, Birhle Applied Research. The Ardenna deal is a perfect example of how Ondas and Ardenna can bring substantial value to customers and unlock bottlenecks holding back growth in industrial MC-IoT data markets. We believe Ardenna is widely regarded as one of the most sophisticated providers of drone-driven rail inspection analytics across the global rail industry. They are pioneers in the business and began developing these systems back in 2014 when they partnered with BNSF Railway as part of the FAA-sponsored Pathfinder UAS program. While Ardenna's analytics software and services are extremely valuable, market growth has been held back by a data collection bottleneck. If you're in the business of offering data analytics services, you need data to analyze. And as we know, collecting the data has been the conundrum for industrial markets. Of course, we believe the data collection problem is one that American Robotics and our Scout System can solve. Similar to other industrial sectors, the railroads need to scale their data collection abilities. They need automation and BVLOS drone operating capability to reduce the cost and complexity of data collection related to human pilots and FAA regulations. This transaction solves the problem for rail customers by combining the leading automated industrial data collection platform in our Scout System with Ardenna's world-class analytics capabilities. This is a powerful solution for our rail customers and accelerates Ondas' ability to penetrate the rail sector, providing end-to-end data services. We expect the deal to close in the second quarter. I want to highlight that the bulk of consideration for Ardenna will be Ondas shares of common stock, suggesting that Birhle Ardenna's owners find this transaction to be value-creating. We believe this deal is a home run for our rail customers and Ondas shareholders. With that introduction, let's shift towards outlining the agenda for today's call. First, I will highlight the progress we are making on key business priorities at Networks and American Robotics, then I will ask Derek to share our Q4 and full-year 2021 financial results. Then Stewart and I will provide an update on Ondas Networks business development progress and growth plan, of course, focusing on our progress with the railroads and Siemens. Reese will then provide a similar update for American Robotics as we execute the go-to-market strategy for the Scout System. I will then summarize the outlook before we open the floor for Q&A. Let's now bring you up to speed on how we are executing on our key priorities.

Great. Thank you, Eric. As I share our financial results today for the fourth quarter and for the full year 2021, please note that we include our financial statements in the press release and Form 10-K filings this morning. The numbers we are reporting include financial results for American Robotics beginning on August 6, 2021. Moving to our fourth quarter results. Revenue increased by 194% to approximately $0.6 million for the three months ended December 31, as compared to approximately $200,000 for the three months ended December 31, 2020. The increase in revenue was primarily a result of higher development revenue in the three months ended December 31, 2021, as compared to the three months ended December 31, 2020, as we achieved milestones in our development contract with Siemens. Gross profit increased by 264% to approximately $166,000 for the three months ended December 31, 2021, as compared to approximately $46,000 for the three months ended December 31, 2020, as a result of higher revenue. Gross profit on a percentage basis was approximately 29% for the three months ended December 31, 2021, compared to 23% for the three months ended December 31, 2020. Operating expenses increased by $3.5 million for the three months ended December 31, 2021, as compared to the three months ended December 31, 2020. The increase in operating expenses was primarily due to the expenses associated with the American Robotics acquisition. The company realized an operating loss of approximately $7 million for the three months ended December 31, 2021, as compared to $3.7 million for the three months ended December 31, 2020. Operating loss increased primarily as a result of the increased operating expenses of approximately $3.5 million, primarily associated with the American Robotics acquisition. Please note that the operating expenses and our operating loss included non-cash expenses related to the amortization of intangibles and stock-based compensation equal to $2.1 million for the three months ended December 31, 2021, as compared to $1.7 million for the three months ended December 31, 2020. Net loss was relatively flat at $4.1 million for the three months ended December 31, 2021, as compared to the three months ended December 31, 2020. The net loss was favorably impacted by the release of $2.9 million of valuation allowance against the company's deferred tax assets. Moving on to the next slide, I'll now transition to Ondas' full year financial results for 2021. Revenues increased by over 34% to approximately $2.9 million for the year ended December 31, 2021, compared to approximately $2.2 million for the year ended December 31, 2020. The increase in revenue was primarily due to larger amounts of development revenue from Siemens and AURA Networks during 2021, offset by lower amounts of product revenue. Gross profit increased by approximately 18% to $1.1 million as a result of higher revenue for the full year 2021 as compared to $927,000 for 2020. Gross profit on a percentage basis was approximately 38% for 2021 as compared to 43% for 2020. The lower gross margin was the result of a lower share of revenue coming from higher-margin product sales. Operating expenses increased approximately 53% to $19.1 million during 2021 as compared to $12.5 million during 2020. The increase in operating expenses was primarily due to an increase of approximately $1.6 million in professional fees related to the American Robotics acquisition, an increase of approximately $1.3 million in depreciation and amortization expense, due largely to the amortization of American Robotics intangible assets and an increase in research and development expenses during 2021. The company realized an operating loss of approximately $18 million for the full year 2021 as compared to an operating loss of approximately $11.5 million for 2020. Operating loss increased primarily as a result of an increase of approximately $1.9 million in professional fees due largely to the American Robotics acquisition, an increase of approximately $1.5 million in depreciation and amortization expense due to the amortization of the American Robotics intangible assets largely, and an increase in research development expenses for 2021. Note, non-cash expenses amounted to approximately $4.8 million. This is comprised of the aforementioned depreciation and amortization charges of approximately $1.5 million as well as approximately $3.3 million in stock-based compensation. Net loss was approximately $15 million for the full year 2021 as compared to a net loss result of $13.5 million for 2020. And lastly, the company exited 2021 with a strong balance sheet. We held cash and cash equivalents of approximately $40.8 million as of December 31, 2021, as compared to approximately $26.1 million as of December 31, 2020.

Well, thank you, Derek. Now Stewart, Reese, and I will share a more detailed look into the 2022 outlook, starting first with Ondas Networks and then American Robotics. As we have highlighted, Ondas Networks entered 2022 with momentum and we believe is well-positioned to deliver growth in bookings and revenue. We expect growth to be driven by the Class 1 rails, where we now see platform adoption of our FullMAX wireless technology beginning in the greenfield 900 megahertz network. The initial launch order for ATCS, we announced in December 2021, was followed by another order in January from a second railroad, a purchase we announced for the first time today. We expect orders to ramp with more rail customers and in larger sizes as we move through 2022, and Stewart will provide more details regarding the rail ordering process as we move through the presentation. In addition to the beginning of the 900 megahertz rollout, we secured the federated MC-IoT lab, which we believe is yet another validator of the strong engagement from the AAR and its Class I rail members. Our success with moving the Class I rails into growth mode has been supported by a strong and broadening partnership with Siemens. We have completed the next-generation ATCS development program and Siemens is providing orders for this product. In addition, Siemens has engaged Ondas for additional development programs for new products, and we expect to see still more activity beyond what has already been announced. On the marketing side, Siemens has expanded to new markets. We are being introduced to new business opportunities with transit rails in both North America and in international markets, which we believe will lead to additional product development programs. As we previously mentioned, we have completed the demonstration network for AURA and will continue to support the network and AURA's customers as clarity emerges on the next development phase of an FAA certifiable system. As we update the outlook for rail, I want to reframe and quantify the opportunity that we see with Class I freight operators in North America. The Class I rails performed train operations over four critical networks. We have them on the top left of the screen, ATCS or Advanced Train Control Systems run on the legacy 900 megahertz network. The 450 megahertz band is where we call on-locomotive telemetry. That's the HOT and EOT applications, Head of Train and End of Train. The critical voice, our land mobile radio push-to-talk system runs on 160, and the positive train control, or PTC system runs on 220 megahertz. All of these are legacy narrowband communications platforms. Our work with the rails leads us to believe that our FullMAX 802.16 platform can be deployed across all of these networks to provide increased data capacity and flexibility so that the rails can adopt new MC-IoT technologies to increase train velocity and improve safety. These new technologies supported by a FullMAX wireless network serve to increase freight capacity for the transportation of goods, leading to higher revenue and improved profitability for our railroad customers. As we highlight, the legacy 900 megahertz network will be retired in full over the next several years as the AAR needs to return this spectrum to the FCC in its entirety by 2025. So the legacy 900 network is going away. Fortunately, the FCC has provided the AAR with a new improved spectrum position, and this is what provides Ondas and our partner Siemens with our initial greenfield opportunity to deploy our FullMAX technology. Based on Ondas' internal management calculations and estimates, we believe this is a market opportunity of at least $300 million. The deployment across the new 900 megahertz spectrum band will be a multiyear effort, and as new data-intensive technologies are introduced, the network will be densified with more 802.16-enabled base stations and edge remotes. Of course, as we described, we believe our FullMAX technology will be adopted more broadly across the Class I rail networks beyond the initial 900 megahertz network in other frequency bands. In aggregate, we internally estimate a total addressable market of over $800 million for all four networks. And as we highlight, we believe new voice, sensor, and other IoT applications to be developed by the rails and the vendor community will create hundreds of millions of dollars of upside to these market size estimates leading to a total potential TAM of over $1 billion. I'm going to hand the call to Stewart now so we can share more details on the MC-IoT lab, our Siemens partnership, and what we have learned regarding the ordering process and likely ramp of railroad customer deployments in the 900 megahertz network.

Thank you, Eric. On the last earnings call, we told you that Ondas and Siemens were negotiating with the Association of American Railroads for the implementation of the MC-IoT Rail Lab to be hosted at our headquarters in Sunnyvale, California. Then in December, we announced that we had received an order for the lab. Since that time, we've been in high gear organizing and staffing the lab effort. We refer to a lab as the North American Federated Lab, and federated means in terms of there will be a series of independent networks for the Class I rails that need to be interoperable. The lab exists to enable the optimization of different network configurations to ensure interoperability and coexistence all while using shared licensed spectrum as the Class I standardized on Ondas' 802.16 enabled technology. The initial focus of the lab will be on use cases developed for the greenfield 900 megahertz spectrum, but we expect to quickly evolve to the testing of other rail spectrum bands, including 160 megahertz, 220 megahertz and 450 megahertz. This is all great news for Ondas and Siemens as the rails converge on the 802.16 standard as the path forward for their future communications needs. Now, let's move on to our evolving strategic partner with Siemens Mobility, which continues to broaden. We feel it worthwhile to highlight where we started with Siemens, how far we've come and some of our expectations for the future. The timeline on the slide highlights these key milestones. As most of you recall, in May 2020, we announced our strategic partnership, which included a joint development program to integrate Siemens' ATCS technology with Ondas' MC-IoT platform for the 900 megahertz band. At the same time, we announced the branding agreement where Siemens obtained the exclusive rights to market and sell Ondas' MC-IoT products under the Siemens Airlink brand in the North American rail markets. In September of 2021, these programs were formally launched at RSSI, the major U.S. rail show. And since then, Siemens has already secured orders from two Class I railroads for these products in the critical 900 megahertz band. The first order was secured in Q4 and delivered by Ondas and Siemens in December. The new order was just obtained in January of this year. Now going back a bit here on the development side, in January of 2021, we told you about a new joint development program with Siemens to build our first onboard locomotive radio for the 450 megahertz band in North America. This program was initially focused on bringing a next-generation head of train locomotive application to North America. Then in October of 2021, Siemens greatly expanded the HOT program to include a version of the product for a major Asian railroad, which has now become the new priority with the expectation of deliveries beginning in Q2 of this year. We will be providing more details on this program as it evolves, both in Asia and North America. Then in December of last year, Siemens placed their order with us for the railroad Rail Lab, which was obtained from the AAR and is based on Ondas' 802.16 technology. We believe Siemens, like Ondas, use the Rail Lab as the declining step in securing the next-generation communications networks for the North American rail. To summarize, we come a tremendous way from April 2020 to now, having completed a major joint development program in North America, secured multiple Class I orders for that product, begun a new development program for a worldwide locomotive radio program, and obtained the North American Rail Lab. And right now, Ondas and Siemens are working with a third Class I, which has already begun fieldwork in preparation for an expected significant order for 900 megahertz. That's three active Class I's for the 900 megahertz networks. As we go forward with Siemens, we will continue to focus on the all-important volume orders and deliveries for the 900 megahertz network while we continue to advance the new development programs for new networks and new frequency bands. As you can see, our relationship, which started with North America has now evolved to Asia with a plan for a European program in the works. The Siemens partnership has truly evolved to a global one. We continuously stressed the importance of the flexibility of the FullMAX communications platform, along with the Siemens partnership and the rail industry support for the 802.16 standard. By incorporating today's industry-specific protocols from Siemens, including ATCS and HOT with the ability to support newer advanced IP-based applications, we believe we are enabling the smooth transition to the adoption of the digital railroad. This includes moving from the current state of fixed blocked operations to moving block to eventually autonomous train operations, the key to a substantially more efficient industry. We highlight the key steps involved in the rollout of the 900 megahertz on this slide, which we believe will follow previous large-scale rail deployments. As mentioned previously, the technology choice for 802.16 has been led by the AAR, which represents the Class I rails collectively. This centralized approach and control has been critical given the need for both interoperability and peaceful coexistence among the rails. Furthermore, the Rail Lab is under AAR's direction and control to ensure ongoing seamless operation. Each Class I controls its own rollout plans with Ondas and Siemens providing backup support. The heavy lifting for the network installation and operation is almost entirely in the hands of each individual railroad. On this slide, you can see various components involved in the rollout plans ranging from acceptance testing to engineering, design, and training all the way through to ongoing customer support and maintenance. Launch orders tend to be smaller in size followed by larger, more substantial orders six to twelve months later. These larger orders typically come with precise delivery schedules that support the rails' rollout plan. To reiterate, we have received 900 megahertz orders from two Class I's with a third having begun fieldwork in advance of significant orders. We also now have visibility into new applications. These rails plan to implement beyond ATCS. We've listed some of these applications on the slide, including interlocking and remote crossing control. In other words, we are already seeing the evolution away from the single-purpose legacy networks like ATCS to multi-use FullMAX enabled networks.

All right. Thanks, Stewart. Now we transitioned to providing some specific KPIs, targets, and objectives for Ondas Networks in 2022. We have increasing but still limited insight into both customer budgets and ordering plans. And while visibility is improving, we don't have the backlog secured to confidently provide a specific revenue outlook. However, we do want to offer some color on what we are looking to achieve in the market potential we see with the Class I rails for 2022 and beyond. As we highlighted earlier, the potential growth for Ondas Networks with the Class I rails alone is significant, starting with the 900 megahertz network. We estimate the TAM for 900 at several hundred million dollars in size. We expect the ordering activity, which has begun, will ramp over 2022 and even more so in '23 and beyond. At a high level, we expect to receive orders from at least five rails in 2022; we expect bookings of $20 million or more, with 900 megahertz being the biggest component. In addition, we expect to secure an order from an international customer for the on-locomotive product we are developing with Siemens. Bookings and deliveries are critical in ramping the 900 megahertz network, and Class 1 orders remain a clear focus for Ondas Networks and as part of our compensation programs. Fortunately, we see scope to continue to execute on an increasingly broadening market opportunity. We expect our relationship with Siemens to grow in 2022 as we expand the product portfolio; we expect to complete the Head of Train or HOT 450 megahertz products for both the Asia and North American markets. We also expect to launch a new development program for a track-to-train radio system for European markets, which we will update you on soon, we hope. Over the course of the year, we'll be updating you on the MC-IoT lab activity. The lab will open the Ondas platform to a broader ecosystem of rail vendors, which will help create further value and accelerate the development of new applications, broadening the use case of Ondas' technology. In addition, we expect the rails to ultimately expand lab activity to other network frequency bands, including the 160 megahertz critical voice or LMR network and look forward to sharing more details later in the year. So to summarize the outlook of what we aim to deliver in 2022, we expect orders to ramp with new customers and with larger deals. Our objective is at least $20 million in orders for Ondas Networks. We believe our relationship with Siemens will expand even more, and the lab will help lock in a bigger opportunity for more rail vendor relationships in 900 and across other frequency bands.

Thank you, Eric. Since the merger with Ondas was completed last August, American Robotics has moved quickly to lay the groundwork for long-term growth and success. Firstly, the agenda was expanding our team at all levels. We've accomplished this on target and on schedule, onboarding some of the top talent in our fields. We have ramped up our supply chain and manufacturing capabilities to meet the existing demand of our customer pipeline this year and beyond. We've begun maturing a nationwide operations infrastructure with a focus on safety, reliability, and efficiency. And we were acknowledged for these efforts and others through two additional patent grants and five industry awards. On the sales front, we have secured our first wave of blue-chip customers within our target markets. These are Chevron, ConocoPhillips, two of the largest oil and gas companies in the world, and Stockpile Reports, who serves over 300 customers in the bulk materials industry in 48 countries. Additionally, we have many more customers in our pipeline, and we are excited to share these announcements once the deals are finalized. Finally, through careful analysis and close collaboration with our customers, we believe we have identified clear paths to dominance in each of our target markets, and we have already taken key steps to execute these plans. In oil and gas, we have partnered with and invested in Dynam.AI to build a portfolio of industry-specific analytics capabilities for Chevron, ConocoPhillips, and others. In rail, we have entered into a definitive agreement to acquire Ardenna, the leading developer of drone-based rail analytics, with access to the largest database of high-resolution rail imagery in existence. In both materials and mining, we have partnered with Stockpile Reports to integrate their leading analytics software into the Scout System. Diving deeper into each of these, our headcount at American Robotics has expanded 450% year-over-year. We've onboarded key personnel and industry-leading talent at all levels of the organization, including VP of Sales, VP of Operations, VP of Engineering, Director of Talent, Director of Product, and Director of Flight Operations. We are honored to have some of the brightest and most experienced minds in our industry join us with training from MIT, Stanford, Carnegie-Mellon, and West Point; in backgrounds from GE, iRobot, Amazon Robotics, AeroVironment, MIT Lincoln Labs, Ford, IBM, and the U.S. Armed Forces, to name a few. This expanded staff allows us to support the significant inbound interest for our product and prepare the organization for expanded commercial sales. It takes the best to build the best, and our swift and consistent success in hiring top talent is a testament to our company's vision, technology, and opportunity. Critical to our ability to capitalize on our unique positions in the market is our capability to produce and deliver our hardware in commercial quantities. Over the past year, we have significantly matured our supply chain and manufacturing capabilities by establishing critical relationships and partnerships with vendors and manufacturing partners, as well as onboarding internal and contract-based manufacturing support. Our systems are currently capable of being produced by our industry-leading contract manufacturing partners, and systems from these partners have been delivered and installed at our customer sites. We are currently finalizing orders for 30 or more systems, as well as working with our manufacturing partners' team and continue optimizing this process with the goal of increased manufacturing speed and decreased bring-up time for each system. We expect to place additional orders as we move through 2022 and look ahead to 2023. This is a multi-year process of continued improvements on the road to producing thousands of these automated drone systems while still maintaining industrial-grade quality standards. The American Robotics customer pipeline is defined almost entirely by inbound interest. Industrial customers in our target markets know the difference between vaporware and real solutions, and it is clear American Robotics has demonstrated the latter through our industry-leading drone-in-a-box platform and our groundbreaking FAA approval. Within the oil and gas market, American Robotics' customer pipeline is currently at capacity and continues growing with many of the world's largest oil and gas producers. Public names currently include Chevron and ConocoPhillips, and we anticipate more announcements in the coming quarters. In coordination with these customers, we have identified the top use cases, each of which can be described as a killer app for this market. Combining that with American Robotics' industry-leading autonomy and FAA approval, our confidence level is high that we will be able to execute a path to dominance. As noted in previous updates, we've also partnered with Stockpile Reports, the leading provider of image-based software analytics for the bulk materials and mining industry. Through Stockpile Reports' existing business, American Robotics has access to over 300 customers in 48 countries, including some of the nation's largest producers of construction aggregates. We are working closely with Stockpile Reports to prepare both organizations for the deployment of hundreds of Scout Systems. As mentioned previously, we've taken a number of steps to extend and solidify our moats in our target markets. One example of this is our investment in and partnership with Dynam.AI, a leading software developer for complex artificial intelligence and machine learning products. Each industry applicable to the drone market requires industry-specific analytics, and Dynam.AI helps accelerate and expand our offerings with Tier 1 talent and technology. Currently, our joint work with Dynam is focused on delivering the capabilities discussed above for the oil and gas market, and we see a number of other opportunities to continue to expand our work further. For the rail market, we are very excited to announce a definitive agreement to acquire Ardenna, a leading provider of drone-based rail analytics software. We estimate the total addressable market for drone-in-a-box solutions within the rail market to be $6.85 billion, and we believe the addition of Ardenna will immediately place American Robotics as the leading provider. Ardenna has spent the last 7-plus years researching and developing AI-based analytics specifically for this market and specifically in partnership with the largest Class I rail in North America, BNSF. Through these efforts, Ardenna has amassed over 28,000 miles of rail track images, resulting in a massive data lake of over 30 terabytes of high-resolution rail imagery. This data and the AI-focused team at Ardenna provide immediate access to this valuable sector. There are over 200,000 miles of track and hundreds of rail yards in North America alone, and we believe this technology has the potential to eliminate 90% of train derailments before they occur. We intend to both integrate Ardenna's rail and spectrum product within the Scout System as well as market this as a standalone SaaS product to others in the industry. Looking ahead to the remainder of 2022, our focus now is on providing top service to our blue-chip industrial customers. These corporations require and demand high levels of quality, reliability, and safety, and we intend to provide that. By year-end, we anticipate 30 Scout Systems installed and operating. At the conclusion of these POCs, we expect to start transitioning to fleet orders with these customers. As a reminder, we are targeting customers that have the capacity for hundreds of thousands of Scout Systems across the United States and the world. We estimate the potential for over 10 million asset sites worldwide to eventually employ automated drone-in-a-box technology on a daily basis. Thus, we believe this is just the beginning. We're going to continue ramping our operations and manufacturing capacity to support this plan, focusing not only on industry-leading technologies but also on industry-leading operations, processes, and culture. Our customers demand it; our regulators demand it, and we intend to deliver it. Additionally, since the close of our merger with Ondas, a mere seven months ago, we have already demonstrated the power and flexibility of the Scout System platform to expand our moat in our target markets through a partnership in both materials and mining markets via Stockpile Reports, an acquisition in the rail market via Ardenna, and internal development in the oil and gas market via an investment in Dynam.AI and the AR team. This is a signal of what's to come and evidence of American Robotics' business plan being put into action. I look forward to sharing more updates with all as our investments accelerate into revenue growth and profitability. And I will now hand it back to Eric for some closing remarks.

Well, thank you, Reese. As we've outlined in the past, we made the case today, we see a generational opportunity to define scale, lead, and create massive value for customers and shareholders by virtue of our market-leading industrial technology platforms. We have the systems, talent, and experience and the mandate from customers and our investors to do this. We have a healthy balance sheet to support our ongoing investment in technical solutions and business development. We expect cash OpEx to be about $6.5 million to $7 million in Q1 with modest working capital requirements as we build inventory for expected growth. Over the course of 2022, cash OpEx will trend a bit higher than we expect it to be increasingly offset by revenue and gross profits, particularly as Ondas Networks grows with the rails. In addition to filing our 10-K this morning, we announced a public at-the-market or ATM offering with Oppenheimer. The purpose of the ATM is to provide additional balance sheet flexibility for the company. We believe we may have opportunities to accelerate certain technology investments with Ondas Networks and American Robotics to respond to customer demand. Similarly, the ecosystem around our platforms may offer opportunities for partnerships, JVs, or acquisitions. We have recently seen some dislocation in public and private equity markets within our MC-IoT ecosystem. This too could create investment opportunities for Ondas. In short, Ondas intends to stay on offense and pursue opportunities to cement and extend our leadership positions. Let's take a minute to summarize the call and wrap our prepared remarks before we move to Q&A. As we outlined, Ondas Networks is transitioning from investment mode to platform delivery in 2022. The adoption cycle is beginning in that Class I 900 megahertz network. In addition, the Siemens partnership is broadening across new products, additional networks, and with new customer segments. Ondas is preparing internally for a ramp-up in sales by building capacity and inventory to support expected demand from Siemens in the Class I rails in 2022. And American Robotics will continue to scale operations in moats in its key target markets, oil and gas, mining, and rail as we transition franchise customers to fleet orders. AR will continue to invest in technology, particularly expanding its payload and data analytics capabilities, and we will do this hand-in-hand with our customers. I'm excited about 2022 and the momentum we have in our businesses. Our team has worked hard. Our shareholders have supported this difficult work, and we firmly believe the fruits of our labor will begin to bloom in very visible ways in the quarters ahead. Operator, I'd like to open the call to Q&A.

Today's first question comes from Tim Horan of Oppenheimer.

I have a couple of questions. First, next August, the rails need to vacate some of the spectrum to be turned over to Anterix. How much of the network needs to be completed by next August to facilitate that? Also, how much of the spectrum will they actually have, or will there be some sort of relief extended? I have a few more follow-up questions as well.

Sure, Tim, thanks for your question. The legacy 900 megahertz network is set to be retired in two phases. The first phase is in August 2023, when about half of the railroads need to vacate the spectrum, and the remaining half will do so by 2025. The railroads have indicated they are confident they can meet these deadlines. Currently, we are seeing the ATCS migration progressing, and we have shared our perspective on what that ramp looks like. Additionally, between now and 2023, and increasingly up to 2025, the single-purpose legacy 900 megahertz network will transition into a flexible FullMAX platform. As Stewart mentioned, we anticipate new applications beyond ATCS being developed during this time. So we expect the construction to continue leading up to the August 2023 deadline for half the railroads, with the remainder facing the deadline in August 2025.

Okay. So just to be clear, they need to spend between $100 million and $200 million between now and next August to vacate that spectrum with you guys. That implies a serious ramp-up in bookings revenues at some point. I just want to be clear on it.

Yes. We do expect a serious ramp, as you just called it. And again, it's initially going to be ATCS, building the base station infrastructure, and then building the edge devices for these new applications over the coming years.

Okay. Great. And then on the drone side, can you give us an update, you've obviously had a lot of interest. I mean what's the total demand for these drones? Is it thousands, hundreds for sitting here 5 years from now? I mean, just any more color on that would be great.

Yes, sure. I'll ask Reese to take that.

Sorry, Tim, can you repeat the question?

Yes, I apologize. Could you just give us an update on what you think the total demand for the Scout drones is as you look at the market? I mean are we talking thousands, tens of thousands, hundreds? Because I'm just trying to understand how you're thinking about ramping up the assembly line or the production facilities for these. Are we thinking about building hundreds of these a year, thousands, tens? Just to get a sense of what are you designing your manufacturing facilities for now?

Yes. Roughly speaking, if we look far out, we believe that there's over 10 million asset sites around the world that will eventually deploy autonomous drone in the box systems. So I think ultimately, we're talking about millions of these systems, and that's obviously going to be a ramp over time. That's not something that we have the capacity to do today, but that's what our goal is. So I think in the next several years, it's going to be discussions around hundreds and thousands, but again, eventually trending towards tens of thousands and eventually millions.

So what are you designing the manufacturing facilities to build per year now? Because it seems like it takes a very long time to ramp these contractors up because isn't manufacturing the gating factor for deploying these at this stage? I mean, it seems like you could sell a thousand systems immediately. And I guess I'm just trying to understand how do you bring the whole business model together, you definitely have demand for thousands. So why not set up the manufacturing to basically be able to manufacture 1,000 per year now?

Yes. That's a good question. Manufacturing is a factor. It's not the only factor. There are other elements that stop us today from deploying thousands of systems. I mean, simply speaking, even the customers that work with Chevron and ConocoPhillips, although they know that they eventually want thousands of systems, we're talking about very large Fortune 100 companies that have budget cycles that are measured in 6 months to a year. And it's not yet at the point where it's a flip of a switch, and we're going to deploy thousands to Chevron. We need to prove ourselves out on a number of aspects. There are some logistical things that are taking place right now to give some examples on that, cybersecurity audits, safety analysis, we need to be integrated more tightly into their operational systems. People need to be trained on how to use these things. So I think the manufacturing ramp-up goes in parallel to these other activities that have to be scaled as well. So installation, operations, maintenance, etc., is going to be growing again in parallel to the manufacturing.

Very helpful. And then lastly, the acquisition today, can you give us any financials, how much revenue was associated with it? And maybe how much stock did you give for the acquisition?

Sure. The Ardenna acquisition was primarily equity-based, involving 870,000 shares and $900,000 in cash. We are investing about what they have in invested capital to develop their suite of analytics software, which took them many years and significant effort. This acquisition also includes an established customer pipeline. In terms of cost and value, our railroad partners, like BNSF, spend significantly more to create their data lakes, which is a substantial source of value for us. Having access to this data is essential for developing analytics programs using AI and machine learning techniques. We see this deal as a major success. It not only offers great value individually, as monetizing our software packages is appealing, but it will also enhance our ability to scale and serve in the railroad market when we integrate Ardenna's capabilities with the Scout System, which is a lucrative market. Ardenna has generated some revenue, and we are shifting towards more commercial activity with them. Their pipeline and addressable market include nearly every railroad planning to implement a drone program, and interest in drones within the rail industry is on the rise.

Sorry, just to be clear, can you give us any revenue color for this year from that acquisition, sorry?

So Reese, why don't you talk about what we expect for landing customers this year?

Yes. I'll begin by saying that Ardenna exemplifies our full-stack philosophy in this market, highlighting the necessity for a comprehensive end-to-end solution for industrial customers. Over the past seven years, our detainer and their Class I rail partners have invested millions into outstanding analytics software, which must be integrated with an automated drone system for it to be truly effective. This collaboration is advantageous for both parties, and we are enthusiastic about it. Additionally, they have concurrently developed their R&D over the past seven years to expand their customer pipeline to include well-known Class I rails. This year, we are at a stage where initial deployments of that SaaS software are feasible and likely. We plan to continue this trajectory while integrating it into the Scout System. We also finalized the acquisition quickly in the second quarter. Once we gain control, we will be able to provide more information regarding the revenue opportunities.

And our next question today comes from Mike Latimore at Northland Capital Markets.

So Eric, did you say that within the bookings outlook, you expect orders from five Class I railroads. Is that what you said?

Yes, Yes, we did.

And can you talk a little bit about the use cases there? I guess these orders are coming in before the lab work is done. So maybe just what's the opportunity to kind of wash individual orders prior to the lab working?

I'll ask Stewart to take that and talk about these new applications.

There are several applications that individual railroads have been exploring for quite some time. One specific application we highlighted during the call is interlocking. What makes this application interesting is that it operates as a distributed network rather than a centralized one. It facilitates the coordination of trains as they approach crossings, enabling effective red light and green light operations. One of our customers is considering a large-scale deployment of interlocking. It's important to note that a significant part of the rail networks focuses on a single rail, and interoperability happens when these networks connect with one another. We have various applications in mind, including interlocking and some bridge drops, that railroads are targeting in the near term. Additionally, as we mentioned in one of our slides, there is a shift towards moving block applications, which allows trains to operate without being confined to fixed blocks, preventing delays where one train must stop while another moves forward. In essence, we aim to transition from fixed block to moving block systems and eventually to autonomous trains. This progression involves a series of applications that need to be developed, and the railroads have decided to start working on these use cases now.

Okay. And then on the bookings. So should we assume that revenue recognition on those bookings is, I don't know, six months after they occur for deployment purposes?

It's hard to have visibility at the moment on that. I think when we get orders, we should be able to turn them around much more quickly than that. We're getting inventory kind of in production ramping in advance or in anticipation. So I don't think it's six months, but I can't tell you with precision sort of when the order hits and when we turn that into deliveries.

Mike, regarding the launch, there are numerous processes involved. Each rail follows its own approach to design, which varies from rail to rail, and the amount of prework needed also differs. Therefore, we need to coordinate individually with each rail throughout this process. That's why we mentioned that some rails are opting for smaller launch orders while others are preparing for larger ones. We are collaborating with Siemens on this.

And then should we still think about the ARR on the drones is about $50,000 a year? Is that right?

Reese?

Yes. I think for modeling purposes right now that is appropriate, though it may end up being conservative. Hopefully, we'll be able to share more on that later this year.

Got it. And as you get more involved with your blue-chip customers here, are they asking for, I don't know, additional functionality that require some R&D this year or anything like that?

Yes, in some circumstances, yes. So in the stockpile market, for example, no, that's a mature analytics package that we have in our partnership with Stockpile Reports with Rail. Ardenna comes with a fairly mature software package. In oil and gas, I think that would be the largest area of R&D. So we've identified a number of high-value use cases, and we'd like to integrate some new payloads and associate that with some analytics for Chevron and ConocoPhillips and others.

And our next question today comes from William Morrison of National Securities.

There has been significant progress overall, with many positive developments. I wanted to ask about some of the Class I railroads. One recently announced a budget increase of around 30% year-over-year, raising it to about $3.5 billion. They indicated that part of this budget is designated for modernizing their network. How will this impact Ondas, and what specific elements will it involve? How much of it will be purely for infrastructure, like towers and other standard equipment, compared to radios?

Thank you for the question, Bill. As you pointed out, the potential for spending is significant. One key advantage of our technology is its ability to function across various frequency bands. This flexibility means that when railroads enhance their networks for greater capacity and adaptability, they primarily aim to maximize the usage of their existing spectrum assets. They already have the necessary infrastructure in place, including base stations and often antennas that we can reuse since we typically deploy new base stations on the same tower. Additionally, the edge devices are already in the field, either connected to the equipment they intend to monitor and control or integrated into projects with Siemens, where our FullMAX technologies are utilized. Most of the network upgrade expenditure is linked to the equipment and solutions we offer. Furthermore, as Stewart mentioned earlier, the railroads will primarily handle the bulk of the labor required, and they possess ample capacity to do so, functioning much like many telecom operations.

Okay. So that's good. So if most of it is towards radios, other than the order book, they must have some kind of schedule for you to ramp your manufacturing or just to kind of align all your sourcing and everything. I mean what does that look like? Because that to me looks like a couple of hundred million for one rail?

Yes. I can't speak exactly to that budget you're talking about. But we are preparing for increased volumes as you would expect. And of course, we're spending a lot of time with Siemens and now increasingly with the customers on issues like supply chain. And that is a real issue. Of course, that's something that's not unfamiliar to everyone on this call now, but we're trying to do our best to get in front of that. So what that means is the railroads and as we referred to it, we are getting increasing visibility. We will be expecting to get more visibility on their ordering plans, and that we'll need to work closely with them and Siemens to make sure the supply chain and our ability to produce and deliver is there. And there's a lot of energy being put into just that.

And what's the early expectations for meeting the right into the occasion on the supply chain in this Siemens supply chain infrastructure help you? Or are you all on your own?

Siemens is going to be very helpful. Obviously, what they do in their manufacturing process and supply chain teams are big. And they're going to be very motivated and are motivated to help us procure components.

I mean do you see any potential fuel stoppers or any critical parts...

It's difficult to be specific. We are experiencing tightness in the supply chain, which can sometimes be related to specific components. However, we are currently assessing the situation and identifying where the challenges are. We will do our best to manage those issues.

And our next question today comes from Ophir Gottlieb with Capital Market Laboratories.

Eric, just a point of clarification and then 2 questions. First of all, it looks like it says expected growth in revenue and gross profits will offset cash burn for 2022 and 2023 for rail. Does that mean rail at least for '22 and '23 is going to be running operating cash flow breakeven?

I wouldn't say it's breakeven for 2022. I think about it quarterly as we see the increase in orders and begin delivering, recognizing revenue, and receiving payments. We believe the payment terms will be favorable. As we reach what I've described on a quarterly basis, with modest revenue levels, Ondas Networks will become self-funding and profitable. We're guiding for the first quarter around $6.5 million in cash operating expenses, with slightly less than half attributed to Ondas Networks, and the rest going to accounts receivable and holding company expenses. Given our margin profile of 50% or greater on system sales, not including recurring software and system maintenance revenue, with $7 million to $8 million in quarterly revenue, we would be cash flow positive on an operating basis. That's how I view it. We'll see how we can increase orders and translate that into cash receipts as the year progresses. I believe Ondas Networks should be self-funding by 2023 based on our understanding of the expected growth.

Okay. So you don't necessarily have to tug on that ATM?

Exactly. This is all about balance sheet flexibility and optionality, as Reese mentioned. This also applies to Ondas. Customers are looking for us to innovate and provide solutions, and if we have the right approach, given the return on investment, they may want us to act more quickly, and we want to be prepared to do that.

Okay. So I have two questions. So another Ondas has secured two Class I rails that sounds like a third is coming shortly. And I think there was a guidance to have five by year-end. And since there's a transition for Class I rails to come off of legacy networks, and enterprises don't go backwards once they come off of a legacy network. What does this look like in, say, 2024? I know that you've given the total addressable markets, but let me ask you this way. Is this a $300 million to $800 million of potential revenue available through 2024 and '25? Or how should I look at that? And then I have one follow-up on American Robotics.

No. I think over the next several years, our focus for the railroads will mainly be on the new 900 megahertz network. Overall, including the deployment of crossings at high rails, which are maintenance vehicles that operate along the track, and applications mentioned earlier, this will amount to several hundred million dollars. Additionally, we have the 450 network, where we are already developing a product, specifically the on-locomotive radio systems for HOT and EOT, which you can expect to begin seeing in 2023, with Siemens anticipated to have orders for upgrading HOT. This will progress sequentially. The majority of our investment will be directed towards the 900 network, while 450 and 160 will follow. I encourage you to monitor our development efforts in this area. As we mentioned previously, we have initiated a product with Siemens for 450, and we believe that 160 will also see activity from the rails regarding some development work in the upcoming quarters.

Okay. It sounds like 2024 of things go according to plan should deliver at least $100 million in the rail revenue. And American Robotics sounds quite on track to hit its $30 million to $60 million in annual recurring revenue. That's how I read it. Does that sound reasonable?

I think those numbers are in the ballpark.

Okay. All right. So I have a question on American Robotics. As you know, I spoke with one of your major oil and gas customers. And I understood from them that the time to fleet order is actually a lot faster than I thought it was, let's say, 1,000 to 2,000 drones could actually happen in 9 to 12 months from the first deployment of the payer, the sort of the testing payer. And that's, of course, assuming Scout can deliver what they hope it can. There's no guarantees. But these companies can scale, let's say, within a year. It occurred to me, it seems like if one of these mega caps is going to get into the final step function with American Robotics for a fleet order, they know that it would be a company defining moment for Ondas. And it seems to me that they would take some sort of stake in the firm, not just to benefit from their own CapEx, right, but also logistically to essentially guarantee that the manufacturing of drones goes to the front of the line. If you get an order, then they're going to want all 2,000 drones. Is that a reasonable way to think about the relationship between American Robotics and fleet orders? Or are these conversations happening either internally or externally that potential Fortune 100 company that has tested and moves into the step function may actually take a stake in the company? I don't know what you can say about that.

I can't speak specifically to that. However, I believe what you're mentioning holds true. If there are mission-critical technologies, these companies will likely invest significantly, especially in emerging technologies like those from Ondas, which would lead to partnerships. The financial arrangements are still uncertain, but we believe there is potential for collaboration. At the same time, we think we can determine our own path. We are well-capitalized and plan to remain that way. We have a clear strategy to develop the team and infrastructure needed to support these companies, and we can establish various relationships to enhance that. We'll see how things unfold. We are excited to engage and deliver, and we believe that everything will work out in the end.

Yes, we're approaching these conversations with companies like Chevron and ConocoPhillips very much from a partnership perspective. This isn't at the point where it's pure sales, and we're just trying to pump as many units to them. We know that this is a long-term relationship, and that assuming we succeed in integrating thousands of drone systems, we become a very important part of their infrastructure that's critical to their day-to-day operations and the safety of their assets, etc. And so I think both sides recognize that, and we're working closely with them on a weekly basis to really establish that kind of partnership mindset. So I think all sorts of things come out of that, and we're leaving the door open for all sorts of conversations again beyond just a pure kind of sales relationship.

Okay. And Reese, I saw the guidance for American Robotics from the presentation last September about moving forward step by step. Considering that American Robotics is onboarding more Fortune 100 companies, which they have the capacity to support with 1,000 or even 2,000 units, this could lead to an acceleration of the guidance provided. However, does American Robotics, despite being involved in contract manufacturing, have the capability to respond to a potential order from a major oil and gas company on December 31, 2022, for 1,000 to 2,000 Scouts? I understand that this would be ahead of your planned schedule, which would be fantastic news. But could this be fulfilled with your current manufacturing capacity? It appears feasible, but it would likely push you to the upper limits of what you can produce.

I think it's theoretical. I appreciate the enthusiasm with Chevron, but I don't believe that they would install that many systems all at once. I view an order of 1,000 or 2,000 drone systems as part of a rollout strategy over the upcoming year. Each site needs to be identified, there are power requirements, and each unit requires a cement pad. Additionally, you need to ensure data connectivity, which can differ from site to site, and each unit has to be configured with flight plan boundaries. Regardless of whether it's American Robotics or any other firm, there are steps that must take place, extending the timeline a bit, which is acceptable. So yes, I foresee a ramp-up that will be spread out over the following year.

Yes. They wouldn't expect 1,000 drones the next day. To wrap things up, is each of these Scouts still projected to have a payback period of under a year and a free cash flow margin of just over 70%? Is that still how you view things as you continue to scale?

Yes. Generally, yes. And certainly, when we get to quantities like that, supply chain constraints of raise component prices a little bit. So we're right on the border of that right now in low quantities. But yes, certainly when you get to 100,000, absolutely.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Okay. Well, thanks for attending the call. We're looking forward to this year as we outlined today, we're very excited. We've got some momentum, and we'll be in touch. We're going to keep you posted on business development as we move through this quarter, and we'll talk soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.