General
You should read the following discussion and analysis in conjunction with our
consolidated financial statements and the notes to those financial statements
included elsewhere in this Annual Report. This discussion contains
forward-looking statements based upon current expectations that involve risks
and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.”
Our actual results may differ materially from those contained in or implied by
any forward-looking statements
Overview
data solutions through its wholly owned subsidiaries
Networks”) and
Networks
agriculture, and critical infrastructure markets with improved connectivity, and
data collection capabilities and automated decision making to improve
operations.
and the following is a discussion of each segment.
34
Ondas Networks Segment
mission-critical Industrial Internet applications and services. We refer to
these applications as the Mission-Critical Internet of Things (“MC-IoT”). Our
wireless networking products are applicable to a wide range of MC-IoT
applications, which are most often located at the very edge of large industrial
networks. These applications require secure, real-time connectivity with the
ability to process large amounts of data at the edge of large industrial
networks. Such applications are required in all of the major critical
infrastructure markets, including rail, electric grids, drones, oil and gas, and
public safety, homeland security and government, where secure, reliable and fast
operational decisions are required in order to improve efficiency and ensure a
high degree of safety and security.
We design, develop, manufacture, sell and support FullMAX, our patented,
Software Defined Radio (“SDR”) platform for secure, licensed, private, wide-area
broadband networks. Our customers install FullMAX systems in order to upgrade
and expand their legacy wide-area network infrastructure. Our MC-IoT
intellectual property has been adopted by the
Electronics Engineers
networking protocols, and forms the core of the IEEE 802.16s standard. Because
standards-based communications solutions are preferred by our mission-critical
customers and ecosystem partners, we have taken a leadership position in IEEE as
it relates to wireless networking for industrial markets. As such, management
believes this standards-based approach supports the adoption of our technology
across a burgeoning ecosystem of global partners and end markets.
Our software-based FullMAX platform is an important and timely upgrade solution
for privately-owned and operated wireless wide-area networks, leveraging
Internet Protocol-based communications to provide more reliability and data
capacity for our mission-critical infrastructure customers. We believe
industrial and critical infrastructure markets throughout the globe have reached
an inflection point where legacy serial and analog based protocols and network
transport systems no longer meet industry needs. In addition to offering
enhanced data throughput, FullMAX is an intelligent networking platform enabling
the adoption of sophisticated operating systems and equipment supporting
next-generation MC-IoT applications over wide field areas. These new MC-IoT
applications and related equipment require more processing power at the edge of
large industrial networks and the efficient utilization of network capacity and
scarce bandwidth resources which can be supported by the “Fog-computing”
capability integrated in our end-to-end network platform. Fog-computing utilizes
management software to enable edge compute processing and data and application
prioritization in the field enabling our customers more reliable, real-time
operating control of these new, intelligent MC-IoT equipment and applications at
the edge.
We sell our products and services globally through a direct sales force and
value-added sales partners to critical infrastructure providers including major
rail operators, commercial and industrial drone operators, electric and gas
utilities, water and wastewater utilities, oil and gas producers and pipeline
operators, and for other critical infrastructure applications in areas such as
homeland security and defense, and transportation. We continue to develop our
value-added reseller relationships which today include a major strategic
partnership with
of wireless connectivity for the global rail markets. In addition,
JVCKenwood, a global supplier of Land Mobile Radio (LMR) systems, have jointly
responded to a request from the rail industry for the design and delivery of a
next generation data and voice platform. We believe our
partnership and our joint effort with JVCKenwood are indicative of the potential
for additional Tier 1 partnerships in our other vertical markets including
securing reseller relationships with major suppliers to the worldwide government
and homeland security markets. These partnerships are being driven by the
flexibility of our FullMAX software to support legacy industrial protocols
(e.g., Push to Talk Voice,
Train Control System – ATCS) while simultaneously operating our state-of-the-art
MC-IoT protocols. This dual and multi-mode software capability provides major
industrial customers with a seamless migration path to advanced
internet-protocol-based networks. Over time, these legacy functions, like Push
to Talk Voice and ATCS, are transformed into just several of many new data
applications we can support.
The Global Rail Markets and our
The North American Rail Network is vast in scale, consisting of 140,000 miles of
track, 25,000 locomotives, and 1.6 million railcars. Within this large
footprint, we believe there are 200,000 highway crossings, with at least 65,000
of the crossings equipped with electronic systems today, a number which is
expected to increase in the coming years. We believe a significant portion of
the communications infrastructure has been in operation for more than 20 years
and now requires a technological upgrade to support new applications and
increased capacity requirements. Our MC-IoT platform offers an excellent
migration path for these applications. We believe the Class I Rails value the
ability of
capacity increase utilizing the railroad’s existing wireless infrastructure and
dedicated
and take advantage of future changes in spectrum availability. The Class 1 Rails
operate four separate nationwide networks, all of which are addressable by our
FullMAX platform.
adoption of its wireless platform by the Class 1 Rails, who were awarded
greenfield spectrum in the 900 MHz band by the
35
In
develop wireless communications products for the North American Rail Industry
based on Siemens’ Advanced Train Control System (“ATCS”) protocol and our MC-IoT
platform. At the same time, we entered into an agreement to allow Siemens to
sell
under the Siemens’ brand name “Airlink”. The dual-mode ATCS/MC-IoT radio system
was designed to support Siemens’ extensive installed base of ATCS radios as well
as offer Siemens’ customers the ability to support a host of new advanced rail
applications utilizing our MC-IoT wireless system. These new applications,
including Advanced Grade Crossing Activation and Monitoring, Wayside Inspection,
Railcar Monitoring, and support for next generation signaling and train control
systems, are designed to increase railroad productivity, reduce costs, and
improve safety. Siemens formally launched the dual mode ATCS / MC-IoT radio
products along with the Siemens branded
Railway Systems Suppliers (RSSI) conference in
Siemens secured its first commercial 900 MHz rail order for a major
Railroad
requested in
Multiple New Joint Development Programs
In January of 2021,
for the development of a next generation radio product for the global rail
markets including support for our first onboard locomotive radio. The formal
agreement, referred to as the Next Generation Radio Board, was signed by the
parties in
in
the development of a new industrial radio to support rail safety. This program
was completed as requested by
substantially expanded the Next Generation Radio Board development program by
issuing to
hardware and software solutions for Head of Train (HOT) locomotive applications
for the North American market and for a major Asian Rail customer. The expanded
program reprioritized the
delivery of completed products to the Asian Rail customer.
802.16 ("dot16") Rail Lab
In
the “dot16”
Networks
including interoperability and coexistence testing of 802.16 compliant wireless
systems, customization and optimization of different network rail
configurations, and next generation rail application testing. Importantly, the
lab is focused on multiple frequency bands and networks beyond the 900 MHz that
To summarize, since announcing our strategic partnership in
and Siemens have completed our first major joint development program for ATCS /
MC-IoT 900 MHz radios for the North American market and have secured and
delivered on initial orders of these products to a Class I railroad. In
2021
onboard locomotive radio and this program was significantly expanded in
2021
completed products in Q2 2022. In
Siemens-branded MC-IoT wireless systems under brand name ‘
North American railroads which will allow the companies to support the
deployment of multiple North American rail communications networks based on the
802.16 standard.
connectivity solutions and will serve as the foundation for the continued
adoption of our wireless technology in the global rail markets.
36
UAS, Drones and AURA Network Systems
In
stations and remote radios from AURA Networks Systems (“AURA”), a privately held
company deploying a nationwide network for the command and control of commercial
drones. AURA’s key differentiator is its exclusive ownership of dedicated,
licensed Air-to-Ground frequencies. We believe that operators of large,
fast-moving, and high-flying drones, including those used for inspection and
security applications as well as those for the Urban Air Mobility market (also
known as “flying cars”), will require a secure command and control network like
that planned by AURA. This command and control (C2) network will be designed to
meet FAA requirements in order to fly long distances beyond visual line of site
(BVLOS) of a drone operator.
In
ground infrastructure. AURA has now installed its initial nationwide
infrastructure based on our FullMAX technology in order to satisfy their
license requirements. In
with approval from the
Based on this approval and other advances in the network, AURA placed a new
purchase order in the first quarter of 2021 for continued system development
related to the optimization of FullMAX base station and remote radio equipment
for customer testing and demonstration networks. We have completed this project
as of
Additional Critical Markets
In the coming quarters we expect to launch additional initiatives to take our
MC-IoT connectivity and ecosystem partnering strategy into other critical
infrastructure markets. As evidence of this, in
new partnership with
and
significant expertise in bringing new technologies to these critical markets
along with significant governmental procurement expertise. This expertise would
otherwise require significant expense and time for
Our agreement with Rogue is another example of
our “Ecosystem Flywheel” with our capital-light business model.
American Robotics Segment
American Robotics designs, develops and manufactures autonomous drone systems,
providing high-fidelity, ultra-high-resolution aerial data to enterprise
customers. We provide our customers turnkey data solutions designed to meet
their unique requirements in the field. We do this via our internally developed
Scout System™, an industrial drone platform which provides commercial and
government customers with the ability to continuously digitize, analyze, and
monitor their assets and field operations in near real-time.
The Scout System™ has been designed from the ground up as an end-to-end product
capable of continuous unattended operations in the real world. Powered by
innovations in robotics automation, machine vision, edge computing, and AI, the
Scout System™ provides efficiencies as a drone solution for commercial use. Once
installed in the field at customer locations, a fleet of connected Scout Systems
remain indefinitely in an area of operation, automatically collecting data each
day, self-charging, and seamlessly delivering data analysis regularly and
reliably. AR markets the Scout System™ under a Robot-as-a-Service (“RaaS”)
business model, whereby our drone platform aggregates customer data and provides
the data analytics meeting customer requirements in return for an annual
subscription fee.
The Scout System™ consists of (i) Scout™, a highly automated, AI-powered drone
with advanced imaging payloads (ii) the ScoutBaseTM, a ruggedized weatherproof
base station for housing, charging, data processing, and cloud transfer, and
(iii) ScoutViewTM, a secure web portal and API which enables remote interaction
with the system, data, and resulting analytics anywhere in the world. These
major subsystems are connected via a host of supporting technologies. Using a
suite of proprietary technologies, including Detect-and-Avoid (“DAA”) and other
proprietary intelligent safety systems, we achieved the first and only
Aviation Administration
human on-site in
Robotics currently has the unique ability to serve markets which require
automated drone technology to enable scalable drone operations, which the
Company estimates to be 90% of all commercial drone applications.
37
American Robotics sells its products and services nationally through a direct
sales force to large enterprises that operate in the agriculture, industrial and
critical infrastructure verticals that include major rail operators, electric
and gas utilities, oil and gas producers, large agricultural input
manufacturers, large agricultural coops, and for other critical infrastructure
applications in areas such as homeland security and defense, and transportation.
As of
varying contract lengths with customers in multiple industries including
agriculture, oil and gas and materials management
COVID-19
In
has resulted in increased travel restrictions, business disruptions and
emergency quarantine measures across the world including
The Company’s business, financial condition and results of operations were
impacted from the COVID-19 pandemic for the years ended
2020 as follows:
? sales and marketing efforts were disrupted as our business development team
was unable to travel to visit customers and customers were unable to receive
visitors for on-location meetings;
? field activity for testing and deploying our wireless systems was delayed due
to the inability for our field service team to install and test equipment for
our customers; and
? Manufacturing and sales were disrupted due to ongoing supply chain constraints
for certain critical parts.
In the first quarter of 2020, we reduced our business activity to critical
operations only, and furloughed 80% of our workforce. Per orders issued by the
Health Officer of the
facilities were closed, except for functions related to the support of remote
workers and product support related to the essential transportation sector. On
we had no employees remaining on furlough. Of the 18 employees previously
furloughed, 14 are currently employed by us.
The Company expects its business, financial condition and results of operations
will be impacted from the COVID-19 pandemic during 2022, primarily due to the
slowdown of customer activity during 2020 and 2021, ongoing supply chain
constraints for certain critical parts, and difficulties in attracting
employees. The extent to which the coronavirus may impact our business will
depend on future developments, which are highly uncertain and cannot be
predicted, including new information which may emerge concerning the severity of
the COVID-19 and its variants. As a result, the Company is unable to reasonably
estimate the full extent of the impact from the COVID-19 pandemic on its future
business, financial conditions, and results of operations. In addition, if the
Company were to experience any new impact to its operations or incur additional
unanticipated costs and expenses as a result of the COVID-19 pandemic, such
operational delays and unanticipated costs and expenses could further adversely
impact the Company’s business, financial condition and results of operations
during 2022.
American Robotics Acquisition
Merger Agreement
On
“Agreement”) with
wholly owned subsidiary of the Company (“Merger Sub I”),
Inc.
(“Merger Sub II”), American Robotics, and
the representative of American Robotics’ Stockholders (as defined in the
Agreement). American Robotics is a company focused on designing, developing, and
marketing industrial drone solutions for rugged, real-world environments. AR’s
Scout System™ is a highly automated, AI-powered drone system capable of
continuous, remote operation and is marketed as a “drone-in-a-box” turnkey data
solution service under a Robot-as-a-Service (RAAS) business model. The Scout
System™ is the first drone system approved by the FAA for automated operation
beyond-visual-line-of-sight (BVLOS) without a human operator on-site.
On
issuance of shares of the Company’s common stock, including shares of common
stock underlying Warrants (as defined below), in connection with the acquisition
of American Robotics.
On the Closing Date, American Robotics merged with and into Merger Sub I, with
American Robotics continuing as the surviving entity, and American Robotics then
subsequently and immediately merged with and into Merger Sub II (“Merger II”),
with Merger Sub II continuing as the surviving entity and as a direct wholly
owned subsidiary of the Company. Simultaneously with Merger II, Merger Sub II
was renamed
38
Pursuant to the Agreement, American Robotics stockholders and certain service
providers received (i) cash consideration in an amount equal to
certain indebtedness, transaction expenses and other expense amounts as
described in the Agreement; (ii) 6,750,000 shares of the Company’s common stock
(inclusive of 26 fractional shares paid in cash as set forth in the Agreement);
(iii) warrants exercisable for 1,875,000 shares of the Company’s common stock
(the “Warrants”) (inclusive of 24 fractional shares paid in cash and the
equivalent of Warrants for 309,320 shares representing the value of options
exercisable for 211,038 shares issued under the Company’s incentive stock plan
and reducing the aggregate amount of Warrants as set forth in the Agreement);
and (iv) the cash release from the PPP Loan Escrow Amount (as defined in the
Agreement). Each of the Warrants entitle the holder to purchase a number of
shares of the Company’s common stock at an exercise price of
Warrants shall be exercisable in three equal annual installments commencing on
the one-year anniversary of the Closing Date and shall have a term of ten years.
59,544 of the stock options were issued fully vested to employees who did not
exercise their American Robotics options prior to the Closing Date and had no
ongoing service requirements and were included in the purchase consideration.
The remaining 151,494 stock options issued vest over four years and are
contingent on ongoing employment by the Company and are recorded as compensation
expense over the service period.
Also on the Closing Date, the Company entered into employment agreements and
issued 1,375,000 restricted stock units (“RSUs) under the Company’s incentive
stock plan to key members of American Robotics’ management. These RSUs vest in
equal installments on the next three anniversaries of the Closing Date and
vesting is contingent on the individuals remaining employed by the Company.
These RSUs are not included in purchase consideration and are expensed ratably
over the service period. They were valued at the closing market price on the
Closing Date.
The Company’s Consolidated Financial Statements for the year ended
2021
Closing Date to
See Note 5 to the accompanying Consolidated Financial Statements for further
information regarding the American Robotics acquisition.
Results of Operations
Year ended
Revenues
Year Ended
December 31,
Increase
2021 2020 (Decrease)
Revenue, net
American Robotics 66,617
- 66,617 Total$ 2,906,771 $ 2,163,719 $ 743,052
Revenue increased to
service, support, and subscriptions,
during the same period in 2020 included
maintenance/service contracts,
for other revenues.
39
Cost of goods sold
Year Ended
December 31,
Increase
2021 2020 (Decrease)
Cost of goods sold
American Robotics 27,909
- 27,909 Total$ 1,810,942 $ 1,236,051 $ 574,891
Cost of goods sold increased to
from
goods sold was the result of additional development costs being allocated to
development agreements in line with the increased revenue.
Gross profit
Year Ended
December 31,
Increase
2021 2020 (Decrease)
Gross Profit (Loss)
Ondas Networks $ 1,057,121 $ 927,668 $ 129,453
American Robotics 38,708 - 38,708
Total $ 1,095,829 $ 927,668 $ 168,161
Our gross profit increased by
compared to the year ended
and costs of sales as discussed above. Gross margin for the periods in 2021 and
2020 was 38% and 43%, respectively. This decrease in gross margin is due to a
higher mix of development projects with lower margins as compared to higher
margin product sales in the prior year period.
Operating Expenses
Year Ended
December 31,
Increase
2021 2020 (Decrease)
Operating expenses:
General and administrative $ 11,781,503 $ 7,641,234 $ 4,140,269
Sales and marketing 1,487,394 1,223,767 263,627
Research and development 5,800,549 3,586,553 2,213,996
Total $ 19,069,446 $ 12,451,554 $ 6,617,892
Our principal operating costs include the following items as a percentage of
total expense.
Year Ended
December 31,
2021 2020
Human resource costs, including benefits 36 % 51 %
Travel and entertainment 1 % 1 %
Other general and administration costs:
Professional fees and consulting expenses 30 % 31 %
Facilities and other expenses 15 % 11 %
Depreciation and amortization 7 % 1 %
Other research and deployment costs, excluding human
resources and travel and entertainment
10 % 5 %
Other sales and marketing costs, excluding human resources
and travel and entertainment 1 % - %
40
Operating expenses increased by
(000s)
Human resource costs, including benefits $ 423
Travel and entertainment 141
Other general and administration costs:
Professional fees and consulting costs 1,871
Facilities and other expenses 1,479
Depreciation and amortization 1,347
Other research and deployment costs, excluding human resources and
travel and entertainment
1,285
Other sales and marketing costs, excluding human resources and travel
and entertainment 72
$ 6,618
The increase in operating expenses was primarily due to an increase of
approximately
related to the American Robotics acquisition, increase of
facilities and other expenses including insurance due to acquisition of American
Robotics, increase of approximately
expense due to amortization of American Robotics intangible assets, and an
increase of approximately
ended
and increased headcount at
approximately
Operating Loss
Year Ended
December 31,
Increase
2021 2020 (Decrease)
Operating loss $ (17,973,617 ) $ (11,523,886 ) $ 6,449,731
As a result of the foregoing, our operating loss increased by
the year ended
result of an increase in operating expenses of approximately
primarily associated with the American Robotics acquisition as described above.
Other Income (Expense), net
Year Ended
December 31,
Increase
2021 2020 (Decrease)
Other income (expense), net
Other expense, decreased by
ended
ended
the year ended
quarter of 2021 as well as
the PPP loan forgiveness of
Net Loss
Year Ended
December 31,
Increase
2021 2020 (Decrease)
Net Loss $ (15,023,842 ) $ (13,477,880 ) $ 1,545,962
As a result of the net effects of the foregoing partially offset by the
provision for income tax benefit reported in the amount of
increased by
compared with
share of common stock, basic and diluted, was
allowance against
liability acquired as part of the American Robotics acquisition.
41
Summary of (Uses) and Sources of Cash
Year Ended
December 31,
2021 2020
Net cash used in operating activities
Net cash used in investing activities (10,210,631 ) (16,140 )
Net cash provided by financing activities 41,860,437 31,458,101
Increase in cash
14,754,390 23,907,705 Cash, beginning of period 26,060,733 2,153,028 Cash, end of period$ 40,815,123 $ 26,060,733
The principal use of cash in operating activities for the year ended
31, 2021
sales and marketing and research and development activities necessary to allow
us to service and support customers. The increase in cash flows used in
operating activities of approximately
in payables and accruals and increase in expenses related to acquisition of
American Robotics. Cash flows used in investing activities increased by
approximately
investment in Dynam A.I., purchase of lab equipment, and a security deposit on
our lease renewal in
activities of approximately
which raised approximately
raised approximately
Capital Loan and proceeds from sale of preferred stock in 2020.
Liquidity and Capital Resources
We have incurred losses since inception and have funded our operations primarily
through debt and the sale of capital stock. On
stockholders’ equity of approximately
net long-term borrowings outstanding of approximately
borrowings. On
working capital of approximately
In
common stock, generating net proceeds of approximately
2021
stock, generating net proceeds of approximately
funds raised in the
growth in revenue expected as the Company executes its business plan, will fund
its operations for at least the next twelve months from the issuance date of the
accompanying financial statements.
Our future capital requirements will depend upon many factors, including
progress with developing, manufacturing and marketing our technologies, the time
and costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other proprietary rights, our ability to establish
collaborative arrangements, marketing activities and competing technological and
market developments, including regulatory changes and overall economic
conditions in our target markets. Our ability to generate revenue and achieve
profitability requires us to successfully market and secure purchase orders for
our products and services from customers currently identified in our sales
pipeline as well as new customers. We also will be required to efficiently
manufacture and deliver equipment on those purchase orders. These activities,
including our planned research and development efforts, will require significant
uses of working capital. There can be no assurance that we will generate revenue
and cash as expected in our current business plan. We may seek additional funds
through equity or debt offerings and/or borrowings under additional notes
payable, lines of credit or other sources. We do not know whether additional
financing will be available on commercially acceptable terms or at all, when
needed. If adequate funds are not available or are not available on commercially
acceptable terms, our ability to fund our operations, support the growth of our
business or otherwise respond to competitive pressures could be significantly
delayed or limited, which could materially adversely affect our business,
financial conditions, or results of operations.
Off-Balance Sheet Arrangements
As of
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in
to make estimates and assumptions that affect reported amounts and related
disclosures in the financial statements. Management considers an accounting
estimate to be critical if:
? requires assumptions to be made that were uncertain at the time the estimate
was made, and
? changes in the estimate or different estimates that could have been selected
could have a material impact on our results of operations or financial
condition.
We base our estimates and judgments on our experience, our current knowledge,
our beliefs of what could occur in the future, our observation of trends in the
industry, information provided by our customers and information available from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We have identified the following accounting policies
and estimates as those that we believe are most critical to our financial
condition and results of operations and that require management’s most
subjective and complex judgments in estimating the effect of inherent
uncertainties: share-based compensation expense, income taxes, complex
derivative financial instruments and impairment of long-lived assets including
intangible assets acquired in business combinations.
42
Share-Based Compensation Expense. We calculate share-based compensation expense
for option awards and certain warrant issuances (“Share-based Award(s)”) based
on the estimated grant/issue date fair value using the Black-Scholes-Merton
option pricing model (“Black-Scholes Model”) and recognize the expense on a
straight-line basis over the vesting period. We account for forfeitures as they
occur. We have not included an estimate for forfeitures due to our limited
history and we revise based on actual forfeitures each period. The Black-Scholes
Model requires the use of a number of assumptions including volatility of the
stock price, the weighted average risk-free interest rate, and the vesting
period of the Share-based Award in determining the fair value of Share-based
Awards. Although we believe our assumptions used to calculate share-based
compensation expense are reasonable, these assumptions can involve complex
judgments about future events, which are open to interpretation and inherent
uncertainty. In addition, significant changes to our assumptions could
significantly impact the amount of expense recorded in a given period.
Income Taxes. As part of the process of preparing our consolidated financial
statements, we are required to estimate income taxes in each of the
jurisdictions in which we operate. Our provision for income taxes is determined
using the asset and liability approach to account for income taxes. A current
liability is recorded for the estimated taxes payable for the current year.
Deferred tax assets and liabilities are recorded for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates in effect for the year in which the timing differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates or tax laws are recognized in the provision for income
taxes in the period that includes the enactment date. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
more-likely-than-not to be realized. Changes in valuation allowances will flow
through the statement of operations unless related to deferred tax assets that
expire unutilized or are modified through translation, in which case both the
deferred tax asset and related valuation allowance are similarly adjusted. Where
a valuation allowance was established through purchase accounting for acquired
deferred tax assets, any future change will be credited or charged to income tax
expense. See Note 13 in the accompanying Notes to Consolidated Financial
Statements for discussion related to Tax Reform.
The determination of our provision for income taxes requires significant
judgment, the use of estimates, and the interpretation and application of
complex tax laws. In the ordinary course of our business, there are transactions
and calculations for which the ultimate tax determination is uncertain. In spite
of our belief that we have appropriate support for all the positions taken on
our tax returns, we acknowledge that certain positions may be successfully
challenged by the taxing authorities. We determine the tax benefits more likely
than not to be recognized with respect to uncertain tax positions. Although we
believe our recorded tax assets and liabilities are reasonable, tax laws and
regulations are subject to interpretation and inherent uncertainty; therefore,
our assessments can involve both a series of complex judgments about future
events and rely on estimates and assumptions. Although we believe these
estimates and assumptions are reasonable, the final determination could be
materially different than that which is reflected in our provision for income
taxes and recorded tax assets and liabilities.
Complex Derivative Financial Instruments. From time to time, we sell common
stock, and we issue convertible debt, both with common stock purchase warrants,
which may include terms requiring conversion price or exercise price adjustments
based on subsequent issuance of securities at prices lower than those in the
agreements of such securities. In these situations, the instruments may be
accounted for as liabilities and recorded at fair value each reporting period.
Due to the complexity of the agreement, we use an outside expert to assist in
providing the mark to market fair valuation of the liabilities over the
reporting periods in which the original agreement was in effect. It was
determined that a Binomial Lattice option pricing model using a Monte Carlo
simulation would provide the most accuracy given all the potential variables
encompassing a future dilutive event. This model incorporated transaction
assumptions such as our stock price, contractual terms, maturity, risk free
rates, as well as estimates about future financings, volatility, and holder
behavior. Although we believe our estimates and assumptions used to calculate
the fair valuation liabilities and related expense were reasonable, these
assumptions involved complex judgments about future events, which are open to
interpretation and inherent uncertainty. In addition, significant changes to our
assumptions could significantly impact the amount of expense recorded in a given
period.
Impairment of Long-Lived Assets. Carrying values of property and equipment and
finite-lived intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that their carrying values may not be
recoverable. If impairment indicators are present, we determine whether an
impairment loss should be recognized by testing the applicable asset or asset
group’s carrying value for recoverability. This assessment requires the exercise
of judgment in assessing the future use of and projected value to be derived
from the eventual disposal of the assets to be held and used. Assessments also
consider changes in asset utilization, including the temporary idling of
capacity and the expected timing for placing this capacity back into production.
If the carrying value of the assets are not recoverable, then a loss is recorded
for the difference between the assets’ fair value and respective carrying value.
The fair value of the assets is determined using an “income approach” based upon
a forecast of all the expected discounted future net cash flows associated with
the subject assets. Some of the more significant estimates and assumptions
include: market size and growth, market share, projected selling prices,
manufacturing cost and discount rate. Our estimates are based upon historical
experience, commercial relationships, market conditions and available external
information about future trends
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In
Simplifying the Accounting for Income Taxes, which removes certain exceptions
for recognizing deferred taxes for investments, performing intra-period tax
allocation and calculating income taxes in interim periods. ASU 2019-12 is
applicable to all entities subject to income taxes. ASU 2019-12 provides
guidance to minimize complexity in certain areas by introducing a policy
election to not allocate consolidated income taxes when a member of a
consolidated tax return is not subject to income tax and guides whether to
relate a step-up tax basis to a business combination or separate transaction.
ASU 2019-12 changes the current guidance of making an intraperiod allocation,
determining when a tax liability is recognized after a foreign entity investor
transition to or from equity method of accounting, accounting for tax law
changes and year-to-date losses in interim periods, and determining how to apply
income tax guidance to franchise taxes. The amendments from ASU 2019-12 are
effective for all public business entities for fiscal years beginning after
other entities for fiscal years beginning after
interim periods beginning after
The adoption of this pronouncement during the year ended
no impact on our accompanying consolidated financial statements.
43
Recently Issued Accounting Pronouncements
In
Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers, which requires contract assets and contract liabilities (i.e.,
deferred revenue) acquired in a business combination to be recognized and
measured by the acquirer on the acquisition date in accordance with ASC 606,
Revenue from Contracts with Customers, as if it had originated the contracts.
The new guidance creates an exception to the general recognition and measurement
principles of ASC 805, Business Combinations. The new guidance should be applied
prospectively and is effective for all public business entities for fiscal years
beginning after
effective for all other entities for fiscal years beginning after
2023
permitted. The Company is currently evaluating the effects of the adoption of
ASU No. 2021-08 on its consolidated financial statements.
In
standards update (“ASU”) 2021-04-Earnings Per Share (Topic 260), Debt-
Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock
Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own
Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or
Exchanges of Freestanding Equity-Classified Written Call Options, to clarify and
reduce diversity in an issuer’s accounting for modifications or exchanges of
freestanding equity-classified written call options (for example, warrants) that
remain equity classified after modification or exchange. The amendments in this
ASU are effective for public and nonpublic entities for fiscal years beginning
after
period. The Company is currently evaluating the effects of the adoption of ASU
No. 2021-04 on its consolidated financial statements.
In
Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which
simplifies an issuer’s accounting for convertible instruments by reducing the
number of accounting models that require separate accounting for embedded
conversion features. ASU 2020-06 also simplifies the settlement assessment that
entities are required to perform to determine whether a contract qualifies for
equity classification and makes targeted improvements to the disclosures for
convertible instruments and earnings-per-share (EPS) guidance. This update will
be effective for the Company’s fiscal years beginning after
and interim periods within those fiscal years. Early adoption is permitted, but
no earlier than fiscal years beginning after
periods within those fiscal years. Entities can elect to adopt the new guidance
through either a modified retrospective method of transition or a fully
retrospective method of transition. The Company is currently evaluating the
impact of the pending adoption of the new standard on its financial statements
and intends to adopt the standard as of
In
(Topic 326): Measurement of Credit Losses on Financial Instruments, which
replaces the incurred loss methodology with an expected loss methodology that is
referred to as the current expected credit loss (“CECL”) methodology. The CECL
model utilizes a lifetime expected credit loss measurement objective for the
recognition of credit losses for loans and other receivables at the time the
financial asset is originated or acquired. The expected credit losses are
adjusted each period for changes in expected lifetime credit losses. This model
replaces the multiple existing impairment models previously used under
generally accepted accounting principles, which generally require that a loss be
incurred before it is recognized. The new standard also applies to financial
assets arising from revenue transactions such as contract assets and accounts
receivables. For public business entities that meet the definition of an
filer, excluding entities eligible to be SRCs as defined by the
2016-13 is effective for fiscal years beginning after
other entities, ASU No. 2016-13 is effective for fiscal years beginning after
adoption of ASU No. 2016-13 on its consolidated financial statements.
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