Eric Brock on Scaling Sovereign Infrastructure: Drones and CUAS

Excellent. Well, thank you, David. I'm really happy to be here. I'll start by just saying that I am a big fan of the podcast and what you've been building here. And you know, it's you, it's Michelle, your other co-hosts and guests. You know what you're doing on behalf of the business is really invaluable. You know providing the education and the content so again I'm really happy to be here. So just as by way of background I am the founder of Ondas Holdings, the chairman and CEO. I've been at the helm here for about eight years. Prior to Ondas I was actually on the other side of the table. I was an investor and before that I was a banker. So I spent a number of years on Wall Street as they say. But again I've been doing this now for eight years at Ondas. Ondas is a publicly traded company listed on the NASDAQ. We are small cap but we have invested hundreds of millions of dollars to develop what I believe are some really important technologies and capabilities. We focus this on critical markets. They range from defense and homeland security to public safety and critical infrastructure. So we are a dual use company providing wireless networks to those critical markets as you mentioned. Most of our conversation today however will focus on our autonomous drone platforms that we're providing as infrastructure for aeroscurity and intelligence. Essentially what we're doing with these technology platforms are protecting populations in critical locations. And I'll just add, you know in my intro here, that under the holdings umbrella we have two operating businesses and subsidiaries, wholly owned subsidiaries. There's American Robotics based in Baltimore, Maryland. And then we have Aerobotics which is based outside of Tel Aviv, Israel. So again, thrilled to be here. Look forward to the conversation.

Absolutely. Yeah, David, thanks for showing this. So, I'll just start by saying we were very pleased to see that both of our drone platforms, the Optimus system, UAV and our Iron Drone Raider, were prominently displayed at this press conference hosted by the Secretary of Transportation, Sean Duffy. And I'll say that the press conference itself, and we're going to talk a bit about part 108 in the future, but was obviously a big event for the industry, really historic day. And I just want to acknowledge what the, you know, the hard work that we've done as an industry to get to this point. I mean, there's been massive massive work on, you know, so many dimensions. And now we're here, right? So, but yeah, let me just tell you briefly. We have these two, those are our two drones. On the left you have the Optimus system that's used for, oh first I'll just say both Optimus and Iron Drone are fully autonomous drone platforms. They are deployed to protect critical locations and populations deployed as infrastructure. So they're housing docking stations. The Optimus is used for perimeter security, emergency response DFR, right drone first responder type use cases and inspection and mapping. So very versatile platform, operational, reliable, autonomous. The Iron Drone system is a newer platform we've introduced. And what the Iron Drone does is protect from the threat of hostile drones or intruder drones. And what we do in layered security here, and of course Echodyne and others play a really important part in this layered security. But we're the tool that can mitigate the threat or intercept the hostile drones. So any event, you know, that's what we have and we were, you know, had the pleasure and the privilege really to have them display it at this important press conference.

That's right.

So, of course, I'll just start by saying that, you know, the signal here from the FAA is important, but more broadly, we're seeing a host of, well, I'll say policy makers. So, policy makers and regulators, you know, really making a deliberate effort here to recognize the progress we've made as an industry. And I think the policy and regulations are going to become increasingly supportive. And it's really what we're seeing here is a recognition that technologies have matured, right? We've spent a lot of time and energy in creating these technologies. We've been demonstrating the safety and the safe deployment and operations of these systems and capabilities. So, you know, this has really been a critical step and I do think that, you know, we've kind of hit an inflection point and, you know, this is just hugely bullish. So, you know, Michelle, you know, where would, where should I take that?

Yeah. I think we're past the learn by doing phase. And in fact I think, you know, from my seat we can quibble about what the final rules are going to be. And we don't know, right, as David said we've got comment periods and there's going to be a lot of back and forth and a lot of people are going to have an opinion but I think, you know, from my seat what I do believe strongly is we're going to take a lot of the hurdles away that have been kind of a bottleneck for growth and maturity or the maturation of our industry. So, again, we've got technology check. We have now customers, right? Customers have been spending a lot of time with us in the field collectively to validate the safety, validate the value that our capabilities are bringing to their businesses, their operations, to the economy. And now we're going to be checking the box with regulations. So I don't quibble so much about what the outcomes are specifically. I'm sure some will be disappointed, some will be thrilled, but directionally there's going to be a massive improvement in debottlenecking what we do and, you know, we're going to see a lot of growth as a result.

Well, I think it's broad. I mean I think almost all of these end markets you think about are ready and, you know, at the same time I'll say if I connect it back to Ondas security and intelligence platforms we have, there's a lot of low-hanging fruit. So, you know, we might have a bit of an advantage, I don't think it's significant in the context of, you know, we've got massive markets that are only barely penetrated, right? So for all of us, you know, we're going to be able to see, you know, we're going to find more than we did the year before and in fact dramatically more and this is the beginning of a multi-year cycle. So, you know, the issue is I don't think we should be, I think we need to remind ourselves, okay, that, you know, today we've had these constraints again we're checking the box with technology, customer adoption is ready, regulations are now becoming more permissive but we don't have to have the day after part 108 is ratified a million drones in the air, right? There's going to be a process, we're going to have to build the scalability of what we do and, you know, but for all of us involved in this, you know, the transition from a small almost kind of, you know, development type industry to a real thriving and successful and valuable growth industry. You know, every year it's going to get better and better and it's going to be a pretty steep slope. So that's going to create tremendous opportunity. So again we don't have to be scaled the next day. Getting there is kind of, you know, starting that process is what we've been working for for many many years.

That's right. So for most of us, we've been spending the last five, ten years, some of us more in developing technology, right? Incredibly tech complex technology, deep technology, the integration of software, hardware than deploying that in the field. We've been doing through many many iterations. But now we have new challenges and that challenge is how do we build businesses around technology platforms, right? And again, that's, there's tons of opportunities. But there's also more new challenges that we're going to have. And I think that's what we have to do. It's a good characterization, Michelle. It's learn by doing on putting the companies together, but we have to start getting organized to do that now. I was talking in another group, you know, maybe a few weeks ago, and, you know, we're kind of the dog that caught the bus, right? We wanted to get the FAA into this position. We wanted to get these permissions to fly at more and more scale. But now how do we do it? How do we operationalize and deliver these incredible capabilities to customers who can really, you know, receive the value of, you know, that they provide?

I think it's huge, David. It's really really really significant. And again, I'll come back to it is the investor expectation isn't okay, you know, the regulations are fixed and all of a sudden we're, you know, we have big companies, right? And it doesn't happen overnight. But if you're an investor in the drone sector, you know, it's been a struggle. It's been a struggle for the companies because what we do on the development side for these technologies is really hard. There's timelines involved. There's this learn by doing, you know, on the development side, there's failures, right? And it's difficult, takes a lot of talent, takes a lot of blood sweat and tears, takes a lot of money. At the same time a lot of the folks who have been investing in our sector have been doing so, you know, really focused on initially technology risk, okay? And that means can that management team take their vision around the product and the services that we're creating and turn that into something that the customers want to adopt, right? We now we're in many many places, right, Ondas is one example but there's many of us who are doing that and now have, you know, technology platforms that are scalable and from the investor standpoint after pouring all this money and taking all this technology development risk the next question was okay when can I turn that into revenue growth, when can I turn that into operating profits so I can get a return on capital and that's been a really hard question to answer because again, we've got some constraints on the regulatory side. How do we do this at scale and put that steep growth curve? And, you know, now that that's been derisked, it really comes back to the management teams and the companies themselves. Okay? How do you convince that investment capital that you can put together that operating platform, right? To deliver that technology, those services, those capabilities in a way that the customers can accept them and adopt them. And you can do that, you know, at a, you know, profitably.

Yeah absolutely but I want to unpack that a little bit and really talk about what dual use means. So, and I'll make a distinction. Okay, dual use technology platforms are what they are, right? Not every drone is going to be relevant to military, homeland security, public safety, and say commercial markets like delivery, right? So, you know, there's a lot of drones that will do something. They're designed for purpose for a specific application, and that's great. So, I don't think we should feel like, you know, we have to, you know, build drones that are capable of doing everything or even multiple things. With that said, there's certain markets and we happen to be in them around, you know, security in particular that do that, that you can have platforms that are relevant for multiple markets. So take our Optimus system. Our Optimus system can be deployed to provide perimeter security around a military base or say a border and checkpoint. That same system can be deployed to, you know, say at a critical location like a rail yard, maritime port, a data center to provide that perimeter security but also emergency response. We can also on that same system do inspection and surveying, right, with different payloads and we do, we've automated all that. So this is really a dual-use platform at the same time.

Well, we've automated, so the Optimus system is installed as infrastructure.

Yeah. So, you know, in infrastructure and it's available 24/7 and it's multi-function. So, how do we have this system can do all these various applications and be constantly available? Well, we have in our docking station. It's very sophisticated. It's ruggedized. It's able to be deployed in virtually every environment, hot and cold, dusty, you name it. And, you know, we put it out there and we've got a robotic arm in this docking station so we can swap batteries and payloads. Swapping of batteries means we can go on our mission, we come back, we land, by the way, we land every time reliably. And then we swap a battery, we're immediately available for critical security services, right? Swap the battery, we can go right back out. We're doing this today in Dubai for drone as first responder use cases. So public safety and we've been doing it for three years now as infrastructure. It's a fleet of drones, all drone infrastructure with drones being remotely operated from a single remote control operating center. Right. But then with that we can also in this Optimus system swap payloads. So the core use case is for a system like this is that security. It's a video payload. But we can also swap in sensors, thermal, LIDAR sensor. We can even put, deliver emergency first aid kits for example with the system.

Yeah. Exactly. Exactly. So that's multiple functions. So, again, this is a dual-use technology. But with that said, you know, I'll just be very candid. If you have a say a strip mall where you want to provide security or any one of those functions, our system's going to be overkill, right? It's too much. So, you know, what I would say is at the, you know, the very high ends for those type of applications, you know, the Optimus is great and it's a dual use system. But if I can then take this one step further, you know, if you're an investor or you're, you know, you're on the board of directors or the leadership team of a company like Ondas or many other drone companies you can think about it as well as being a dual-use company, right? Because, you know, I'll make the assertion that the future of this drone economy, if these markets are as big as we all believe they are and they are. We can have a separate conversation around that. But we know these markets are huge. But they're also complex to address. It's not just the technology that's complex. It's how you put your operating company, the field support and services, supply chain. All that requires scale to do it at a profitable level. So if every single drone you saw was a company, right? One company one drone you very quickly you realize that that investment in operations doesn't scale, right? The path to profitability on a single revenue stream is very very difficult. So what I would say is, and this is up for debate, some people believe in extreme focus, we are a military drone, we have an ISR drone or an attritable drone or we're a logistics drone and they want to be extremely focused and, you know, we can have a good debate about that. But if I look at the future and we say we're going to do this at scale and the cost to deliver the service, right? The operating expenses you have scaling them is critical and dual use companies provide you that the biggest TAM out there, the biggest markets and there's so much economies of scope around how you put the field services, how you do the supply chain, the drone expertise you can bring. So I make the argument that dual use technologies are valuable but dual use companies at the end of the day are likely to be the most valuable.

Yeah, it's fascinating and I think the advice, there's really not a line between what's in the interest of investors and companies, right? Because all of us who are developing technology are making that transition. How do we operationalize? How do we scale our service delivery and we all need money to do it. We all need growth capital, right? Different than sort of early stage technology development capital. So if you want to earn the right to deploy growth capital, right, to have investors back you, you have to put together a compelling business plan. And I think more often than not, we're going to see that, you know, having, there's going to be consolidation, right? So, you have to look at yourself in the mirror if you're a CEO or a board member and you're having conversations with investors and you have to, you know, be able to convince yourself if you have a single platform that, you know, what you're doing is so compelling and by the way there will be a bunch of folks who are able to do this. I just don't think all of us will, right? So but, you know, you may be, there may be a handful of companies, a small percentage of our industry that says okay one platform, one revenue stream I can put the operating expense and operating capital together to get to a very compelling return for our investors, well that's great. But many of us are going to have to take the other tact and, you know, the other really fascinating thing here when we talk about, you know, the sovereign infrastructure, what does that mean? I think we're seeing in, you know, and it's fascinating because this becomes very quickly into the geopolitical and dual use conversations is that, you know, as we're transitioning towards adoption and growth, you know, we're faced with the reality that we have to localize everything we do. And this is particularly true on what I would say government levered businesses and technology platforms like we have. But, you know, we're making America great again. That is policy and that has real implications for our industry. If we, and in our industry at the same time is global, right? There's many US companies but there's European, there's, you know, drone companies all over the world who are doing really special things but if you want to sell in the US you have to have your supply chain here. You have to deliver more often than not, you know, the services from, you know, with US citizens, right? So you have to have a team, a sales and marketing team. You have to have the field support, trusted localized operators and that's what the customers are going to demand. That always is what national policy is going to demand. Now if you kind of, you know, say okay well that's pretty simple. We all know that Eric, now let's put your CFO's hat on. We've made this massive investment in technology. We can address all these markets globally. Why don't we want to monetize this in Europe and elsewhere? And of course we do. What that means is if you want to monetize it outside of the US and vice versa for European or other companies, technology providers, service providers if they want to do in the US, you know, we have to make the investments in Europe as American companies to scale. We have to localize there and vice versa. Europeans if they have a really attractive platform they have to make these investments in the US, right? They have to access the US supply chain they have to become American companies so, you know, what does that mean? That is even a more compelling case to consolidate this industry and use capital efficiently.

Yeah, good question, David. So, I guess I'll say, you know, chasing growth at any cost. I think we, you know, from an investment standpoint, we haven't necessarily been chasing growth because there hasn't been growth to chase because of the, you know, the maturation of technology that was necessary, right? The maturation of end markets and customers being able to accept and scale with us and then of course these regulations that we've spent a lot of time talking about at the outset. So what we have been chasing is really, you know, developing the technologies themselves and I would argue that we probably have too many technology development companies, right? There's not enough customers for the hundreds or thousands of us who are developing drone technologies to address, right? Because these big customers, you know, can't talk to all of us, right? Regulators can't engage with us and at the same time investors can't as well, right? So we've kind of been spreading our customer revenue which has been precious, likely a lot of it's pilot programs and things like that, we've been spreading that too thinly, we've been spreading investor capital too thinly, we have to concentrate that. So if I look at the, you know, from this point and maybe, you know, talk about what that investment cycle looks like from here, I think you're absolutely correct, you know, we need to be disciplined on how we deploy capital and I think that's just analysis of, okay, as we're thinking, I'll just give you from my seat, right? Because we have articulated an organic growth story but also a strategic growth platform. So we have an M&A platform and as a consolidator, you know, we're going to be trying to focus on the most mature technologies that tapping the biggest end markets we can and also focused on markets that are going to adopt more quickly than they would otherwise. And very often that gets back to the dual use. That's going to be defense, it's going to be public safety and security, it's going to be the critical infrastructure markets who are really poised to adopt, right? There's national policy imperatives around adopting these technologies. And that's kind of where we're going to focus.