Item 1A. Risk Factors
Investing in our common stock involves a high
degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information
in this Annual Report, before deciding to invest in our common stock. The risks and uncertainties described below may not be the only
ones we face. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be harmed.
In that event, the trading price of our common stock could decline, and you could lose part or all of your investment. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Summary Risk Factors
Our business is subject to numerous risks and
uncertainties that you should consider before investing in our company. You should carefully consider all of the risks described more
fully in the section titled “Risk Factors” in this Annual Report, before deciding to invest in our common stock. If any of
these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected.
These key risks, include, but are not limited to, the following:
Risks Related to Our Business
● We may have ineffective sales and marketing efforts.
● Demand for our products and solutions may not grow or may decline.
● Our gross margins may not increase or may deteriorate.
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● We depend on key information systems and third-party service providers.
Risks Related to Protecting Our Technology
and Intellectual Property
● Our patents and proprietary technology may be challenged or disputed.
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Risks Related to Managing Our Business
Operations in Israel
Risks Related to our Common Stock
Risks Related to Our Business
We have a history of net losses, may incur
substantial net losses in the future, and may not achieve or sustain profitability or growth in future periods. If we cannot achieve and
sustain profitability, our business, financial condition, and operating results will be adversely affected.
We have incurred net losses in recent years, and we may not achieve
or maintain profitability in the future. We experienced a net loss of $11 million and $5.3 million in the years ended December 31,
2022 and 2021, respectively. As a result, we had an accumulated deficit of $33.4 million as of December 31, 2022. We cannot predict
when or whether we will reach or maintain profitability.
We also expect our operating expenses to increase
in the future as we continue to invest for our future growth, including expanding our research and development function to drive further
development of our platform, expanding our sales and marketing activities, developing the functionality to expand into adjacent markets,
and reaching customers in new geographic locations, which will negatively affect our operating results if our total revenues do not increase.
In addition to the anticipated costs to grow our business, we also expect to incur significant additional legal, accounting, and other
expenses as a newly public company. These efforts and additional expenses may be more costly than we expect, and we cannot guarantee that
we will be able to increase our revenues to offset our operating expenses. Any failure to increase our revenues or to manage our costs
as we invest in our business would prevent us from achieving or maintaining profitability.
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There is no guaranty that we will be able
to generate the revenue necessary to support our cost structure or obtain the level of financing necessary for our operations.
We have incurred significant losses and negative
cash flows from operations and incurred losses of $11 million and $5.3 million for the years ended December 31, 2022 and 2021, respectively.
During the years ended December 31, 2022 and 2021, we had negative cash flows from operations of $7.8 million and $2.7 million, respectively.
As of December 31, 2022, our accumulated deficit was $33.4 million. We have funded our operations to date through equity financing and
has cash on hand (including short term deposits and restricted cash) of $6.0 million and long-term deposits and restricted cash of $2.4
million as of December 31, 2022. We monitor our cash flow projections on a current basis and take active measures to obtain the funding
it requires to continue our operations. However, these cash flow projections are subject to various uncertainties concerning their fulfilment
such as the ability to increase revenues by attracting and expanding its customer base or reducing cost structure. If we will not succeed
in generating sufficient cash flow or completing additional financing, then it will need to execute a cost reduction plan that has been
prepared. Our transition to profitable operations is dependent on generating a level of revenue adequate to support our cost structure.
We expect to fund operations using cash on hand, through operational cash flows and raising additional proceeds. There are no assurances,
however, we will be able to generate the revenue necessary to support our cost structure or that we will be successful in obtaining the
level of financing necessary for its operations.
Furthermore, we may continue to incur negative
cash flow from operating and investing activities for the foreseeable future as we expect to incur research and development, sales and
marketing, and general and administrative expenses and make capital expenditures in our efforts to increase our sales. Our business also
will at times require significant amounts of working capital to support our growth of additional platforms. An inability to generate positive
cash flow from operating activities for the near term may adversely affect our ability to raise needed capital for our business on reasonable
terms, or at all, diminish supplier or customer willingness to enter into transactions with us, and have other adverse effects that may
decrease our long-term viability. There can be no assurance that we will achieve positive cash flow in the near future or at all.
The price of our
common stock does not meet the requirements for continued listing on Nasdaq. If we fail to regain compliance with the minimum listing
requirements, our common stock will be subject to delisting. Our ability to publicly or privately sell equity securities and the liquidity
of our common stock could be adversely affected if our common stock is delisted.
The continued listing
standards of Nasdaq require, among other things, that the minimum bid price of a listed company’s stock be at or above $1.00. If
the closing minimum bid price is below $1.00 for a period of more than 30 consecutive trading days, the listed company will fail to be
in compliance with Nasdaq’s listing rules and, if it does not regain compliance within the grace period, will be subject to delisting.
As previously reported, on November 4, 2022, we received a notice from the Nasdaq Listing Qualifications Department notifying us that
for 30 consecutive trading days, the bid price of our common stock had closed below the minimum $1.00 per share requirement. In accordance
with Nasdaq’s listing rules, we were afforded a grace period of 180 calendar days, or until May 2, 2023, to regain compliance with
the bid price requirement. In order to regain compliance, the bid price of our common stock must close at a price of at least $1.00 per
share for a minimum of 10 consecutive trading days.
If we fail to regain
compliance by May 2, 2023, we may be eligible for a second 180 day compliance period, provided that, on such date, we meet the continued
listing requirement for market value of publicly held shares and all other applicable Nasdaq listing requirements (other than the minimum
closing bid price requirement) and we provide written notice to Nasdaq of our intention to cure the deficiency during the second compliance
period, by effecting a reverse stock split, if necessary. Such extension of the grace period would be subject to Nasdaq’s discretion,
and there can be no guarantee that we would be granted an extension.
We cannot provide any
guarantee that we will regain compliance during the grace period or be able to maintain compliance with Nasdaq’s listing requirements
in the future. If we are not able to regain compliance during the grace period, or any extension of the grace period for which we may
be eligible, our common stock will be subject to delisting. Delisting from Nasdaq could adversely affect our ability to raise additional
financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities
and would negatively affect the value and liquidity of our common stock. Delisting could also have other negative results, including the
potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.
Unfavorable global
economic or political conditions prolonged and intensified throughout the second half of 2022 and in 2023 could adversely affect our business,
financial condition or results of operations.
Our business is susceptible
to general conditions in the global economy and in the global financial markets. A global financial crisis or a global or regional political
disruption has caused, and could in the future cause, extreme volatility in the capital and credit markets. A severe or prolonged economic
downturn, including a recession, the currently prolonged inflationary economic environment, continued rising interest rates, debt and
equity market fluctuations, diminished liquidity and credit availability, increased unemployment rates, decreased investor and consumer
confidence, supply chain challenges, natural catastrophes, the effects of climate change, regional and global conflicts and terrorist
attacks or political disruption or turmoil could result in a variety of risks to our business, including weakened demand for our product
candidates or any future product candidates, if approved, and our ability to raise additional capital when needed on acceptable terms,
if at all. A weak or declining economy or political disruption could also strain our manufacturers or suppliers, possibly resulting in
supply disruption, or cause our customers to delay making payments for our potential products. Any of the foregoing could materially and
adversely affect our business, financial condition, results of operations and prospects, and we cannot anticipate all of the ways in which
the political or economic climate and financial market conditions could adversely impact our business.
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Prolonged inflation
rates could negatively impact our revenues and profitability if increases in the prices of our products or a decrease in customer spending
results in lower sales which would adversely affect our business, results of operations and financial condition.
Inflation rates, particularly
in the United States and Israel, have increased this year and are prolonged in the past months, at levels not seen in years in many countries
where our customers reside. Continued and increased inflation may result in decreased demand for our products and services, increased
operating costs (including our labor costs), reduced liquidity, and limitations on our ability to access credit or otherwise raise debt
and equity capital. In addition, the United States Federal Reserve has raised, and may again raise, interest rates in response to concerns
about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets,
may have the effect of further increasing economic uncertainty and heightening these risks. In an inflationary environment, we may be
unable to raise the sales prices of our products at or above the rate at which our costs increase, which could have a material and adverse
effect on our business, results of operations and financial condition. Accordingly, the U.S. dollar has strengthened against foreign currencies
as a result of the United States Federal Reserve’s actions to lower inflation, which is affecting our business partners, where they
sell local currency to the end-user of our products and services.
We may need to
raise additional capital to meet our business requirements in the future, and such capital raising may be costly or difficult to obtain
and could dilute our stockholders’ ownership interests.
In order for us to pursue our business objectives,
we may need to raise additional capital, which additional capital may not be available on reasonable terms or at all. Any additional capital
raised through the sale of equity or equity-backed securities may dilute our shareholders’ ownership percentages and could also
result in a decrease in the market value of our equity securities. The terms of any securities issued by us in future capital transactions
may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative
securities, which may have a further dilutive effect on the holders of any of our securities then outstanding. In addition, we may incur
substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law
compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection
with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.
Our indebtedness could adversely affect
our ability to raise additional capital to fund operations, limit our ability to react to changes in the economy or our industry and prevent
us from meeting our financial obligations.
We currently have one outstanding loan with Migdalor,
in the original principal amount of approximately $6 million, of which approximately $5.0 million remains outstanding as of December 31,
2022, and which is secured by all our assets. If we cannot generate sufficient cash flow from operations to service our debt, we may need
to further refinance our debt, dispose of assets or issue equity to obtain necessary funds.
Furthermore, on December 21,
2022, pursuant to the terms of the Senior Loan Agreement between Migdalor and our wholly owned subsidiary, Actelis Networks Israel, Ltd.,
dated December 2, 2020, as amended (the “Loan Agreement”), to satisfy our obligation associated with the cover/debt ratio
(as defined in the Loan Agreement), we deposited $2 million to a Company-owned interest bearing bank account, or the “designated
account” (as defined in the Loan Agreement). An additional $2 million was deposited in the designated account on or about February
28, 2023, as agreed between Migdalor and us.
We do not know whether we will be able to generate
sufficient cash flow from operations or raise additional capital to fund operating activities on a timely basis, on terms satisfactory
to us, or at all. Our indebtedness could have important consequences, including:
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To support our business growth, in the past years
we increased our focus on serving certain IoT verticals, while continuing to serve our existing Telco customers. This change in our strategy
may make it more difficult to evaluate our business growth and future prospects, and may increase the risk that we will not be successful
in our plans.
Since our inception, our business was focused
on serving Telcos for enterprises and residential customers. Our products and solutions have been deployed with more than 100 telecommunication
service providers worldwide, in enterprise, residential and mobile base station connectivity applications. In recent years, as we have
further developed our technology and rolled out additional products, we turned our focus on serving the IoT markets. Our operations are
focused on our fast-growing IoT business, while maintaining our commitment to our existing Telco customers. A significant portion of our
revenue is from our existing Telco customers. For the years ended December 31, 2022 and December 31, 2021, our Telco customers
in the aggregate accounted for approximately 35% and 48% of our revenues, respectively.
Our change in strategy and our efforts to serve
the IoT verticals that we have focused on may prove more expensive than we currently anticipate, or may require longer development and
deployment times, and we may not succeed in fully penetrating such IoT verticals, or at all.
We may have ineffective sales and marketing
efforts.
Our sales and marketing efforts to drive growth
may be ineffective as we try to win new deals either directly with end-user customers, or indirectly through business partners, distributors,
system integrators or value-add resellers. These ineffective efforts may cause us to miss our planned growth and harm our financial results.
We are dependent on the supply of electronic
and mechanical components and our business would be harmed if we do not receive sufficient supply of such components in number and performance
to meet our production requirements and product specifications in a timely and cost-effective manner.
We rely on a supply of electronic and mechanical
components of our final products to be able to fulfill and deliver customer orders. Such supply has been interrupted from time to time,
particularly as a result of the COVID-19 pandemic, and if such interruption continues, it may cause us to be unable to fulfill and deliver
such customer orders on expected delivery lead times. Such long lead times may cause customers to avoid placing orders or reduce future
orders. As a result, such interruptions, if they continue, will reduce our ability to grow our business at the pace we expect and may
cause us to miss our operating business plans.
In most cases, we do not have guaranteed supply
arrangements with our suppliers, and our business relies on placing orders to our suppliers as we receive forecasts or orders from our
customers. Because of the variability and uniqueness of customers’ orders, we do not maintain an extensive inventory of materials
for manufacturing. Through our procurement and production planning, we seek to minimize the risk of production and service interruptions
and/or shortages of key parts by, among other things, monitoring the financial stability of key suppliers, identifying (and often qualifying)
possible alternative suppliers, placing longer term orders for components and maintaining appropriate inventories of key components. Although
we make reasonable efforts to ensure that components are available from multiple suppliers, certain key components are available only
from a single supplier or a limited group of suppliers. Also, key components we obtain from some of our suppliers incorporate the suppliers’
proprietary intellectual property; in those cases, we are more reliant on third parties for high-performance, high-technology components,
which reduces the amount of control we have over the availability and protection of the technology and intellectual property that is used
in our products. In addition, if certain of our key suppliers experience liquidity issues and are forced to discontinue operations, it
could affect their ability to deliver parts and could result in delays for our products. Similarly, our suppliers themselves have increasingly
complex supply chains, and delays or disruptions at any stage of their supply chains may prevent us, and have prevented us, from obtaining
components in a timely manner and result in delays for our products. Our operating results and business may be adversely impacted if we
are unable to obtain components to meet our production requirements and product specifications, or if we are able to do so only on unfavorable
terms.
We outsource our product manufacturing and
are dependent on our key manufacturers, and on our component and OEM suppliers. We are susceptible to problems, and have encountered problems
in the past, in connection with procurement, decreasing quality, reliability, and protectability.
Our devices are assembled by using fully manufactured
parts, the manufacturing of which has been fully outsourced, and we have no direct control over the manufacturing processes of our products.
We outsource procurement and manufacturing activities to certain key manufacturers and certain component and OEM suppliers.
We also purchase unique components and products
from suppliers who are exclusively able to fulfill such supply. We may lose some or all of these relationships, or have a material weakness
in negotiating favorable terms, or such unique components have or may be declared end-of-life which may require product design changes.
Such circumstances have hurt our profitability in the past, and may hurt our profitability in the future, and negatively affect our ability
to deliver our product on time to customers.
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Our lack of control in our manufacturing process
due to the fact that we outsource our product manufacturing may increase quality or reliability risks and could limit our ability to quickly
increase or decrease production rates. If necessary, switching production to other or additional subcontractors will entail a material
cost and a temporary decrease in our productivity. Our manufacturing process has been disrupted in the past, and may be disrupted in the
future, by various factors, including but not limited to shipping delays, bottlenecks resulting from raw materials specific shortages,
quality problems or a decrease in quality, manpower shortages by the manufacturers or political unease that would trigger the closure
of a facility or financial insolvency.
Furthermore, a supplier may discontinue production
of a particular part for any number of reasons, which may require us to purchase a large inventory of such discontinued parts in order
to ensure that a continuous supply of such parts remains available to our customers. Such “end-of-life” parts purchases could
result in significant expenditures by us in a particular period, and ultimately any unused parts may result in a significant inventory
write-off, either of which could have an adverse impact on our financial condition and results of operations for the applicable periods.
Additionally, in case any part embedded in our products is no longer available, we may be required to redesign such product in order to
enable usage of alternative parts, or be forced to announce end-of-life of such product. Refer to “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” for additional information on supply constraints related to the
COVID-19 pandemic.
Demand for our products and solutions may
not grow or may decline.
We may experience a reduction in customer demand
as a result of either of competition from other companies, technological changes required by our target markets, or disruptions of existing
and new customer relationships. Such demand reduction will prevent us from realizing our planned growth.
Our gross margins may not increase or may
deteriorate.
If our gross margins do not increase as planned
or deteriorate, it will be harder for us to achieve profitability, which could substantially impact our business and ability to carry
on operations if other financing sources are not secured on satisfactory terms. Our gross margins may deteriorate as a result of either
reductions of customers price points, increases in product component and manufacturing costs, or unfavorable changes in the mix between
more and less profitable customers and/or products.
Changes in the price and availability of
our raw materials and shipping could be detrimental to our profitability.
Chipsets, electronic and mechanical components
are significant components of our products. Over the past two years, the prices and availability of electronic and mechanical components
have been constantly increasing.
Furthermore, our products are assembled with various
contract manufacturers located in Israel and in Taiwan. As a result of the of COVID-19 pandemic, the world is experiencing shortages of
electronic components. We have already experienced instances of limited supply of certain raw materials and shipping delays, which resulted
in extended lead times, increased shipping costs and higher-than-usual backlogs. If the prices of such components and shipping were to
continue to increase, or if shipping delays continue to occur, such price changes and shipping delays could have a negative effect on
our gross margin and have a negative effect on revenues and earnings.
We may have previously agreed to set prices with
our customers and any changes in supply costs may decrease our margin and directly affect profitability. If prices increase, supply interruptions,
shipping delays, or shortages of materials continue to occur, it could have a negative effect on revenues and earnings.
Expanding our operations and marketing efforts
to meet expected growth may impact profitability if actual growth is less than expected.
To meet expected growth, we plan to expand operations,
including additional hiring, advertising, and promotion. If actual growth is less than expected, it would negatively impact our ability
to become profitable, which would require we raise additional capital if required, which may not be available on favorable terms, or at
all, which would impact our ability to carry on operations.
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If our internal company cyber-security measures
are breached or fail and unauthorized access is obtained to our IT environment, we may incur significant losses of data, which we may
not be able to recover and may experience a delay in our ability to conduct our day-to-day business.
As cybersecurity attacks continue to evolve and
increase, our cyber-security measures and our IT environment could be penetrated or compromised by internal and external parties’
intent on extracting confidential information, disrupting business processes, corrupting information, or looking to force the Company
to pay a ransom. These risks could arise from external parties or from acts or omissions of internal or service provider personnel. Such
unauthorized access could disrupt our business and could result in the loss of assets, litigation, remediation costs, damage to our reputation
and failure to retain or attract customers following such an event, which could adversely affect our business.
Cyber attackers update their methods frequently.
Sometimes cyberattacks are unrecognizable at the time of their occurrence and even long after. In addition, cyber incidents can occur
as a result of non-technological failures, like human error or malicious acts. In some cases, information security incidents at our customers
or suppliers can also lead to information security incidents in our information systems. For these reasons, we cannot guarantee that the
safeguards taken by us and the safeguards we will take in the future will completely prevent information security incidents or damages
that may result from them as detailed above.
We provide cyber security features as part
of our products that may not completely prevent information security breaches, and our products are installed in live customer environments
and may be compromised by cyber-attacks and damage customer assets.
Our products include cyber-security features such
as data-traffic encryption that are engineered to protect our customers’ data and environment. Cyber-attacks become more sophisticated
and evolve quickly, and these features may fail to protect our customers as intended and fail at preventing information security breaches.
We plan to offer new cyber security products and features which we will either develop internally, obtain from partnerships with third-parties,
or through acquisitions in the future. These planned new cyber-security products and features may fail to protect our customers as intended
and not prevent information security breaches.
Our products are installed in live customer network
environments, and may be subject to cyber-attacks seeking access to our customers networks through our products. Those cyber-attack attempts
may take advantage of vulnerabilities of our products within the networks, vulnerabilities that may be known or unknown to us.
Our products and services include information
systems and digital data of various types, including data kept by our employees, suppliers, and customers (and their own customers). In
recent years there has been an increase in the frequency and severity of cyber incidents (including cybercrime). This trend is expected
to continue in the future and even worsen, despite all the defense mechanisms employed against it. Cyber events can lead to unauthorized
access, unauthorized disclosure, misuse, disruption, deletion, or modification of the Company and its customer assets, data, and processing,
as well as disrupting day-to-day operations, computing services, and significantly slowing them down and even disabling information
systems.
In the event of damage caused by such cyber-attacks,
we may suffer negative consequences, such as disruption of the Company’s and/or our customers’ activities, disruption of or
disabling information systems, theft of our and/or our customers’ data, or damage to its reputation thus affecting clients’
trust in the Company, and potentially exposing it to lawsuits. In such cases, our business results may be severely harmed.
We depend on key information systems and
third-party service providers.
We depend on key information systems to transact
our business accurately and efficiently. These systems and services are vulnerable to interruptions or other failures resulting from,
among other things, natural disasters, terrorist attacks, software, equipment or digital failures, processing errors, computer viruses,
other security issues or supplier defaults. Security, backup, and disaster recovery measures may not be adequate or implemented properly
to avoid such disruptions or failures. Any disruption or failure of these systems or services could cause substantial errors, processing
inefficiencies, security breaches, inability to use the systems or process transactions, loss of customers or other business disruptions,
all of which could negatively affect our business and financial performance.
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We depend on our management team and other
key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely
affect our business.
Our future success depends, in part, on our ability
to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract
or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales, may seriously and adversely
affect our business, financial condition and results of operations. Although we have entered into employment or consulting agreements
with our personnel, their employment is generally for no specific duration.
Our future performance also depends on the continued
services and continuing contributions of our senior management team, which includes Tuvia Barlev, our Chief Executive Officer, to execute
on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of our senior management
team, particularly our Chief Executive Officer, could significantly delay or prevent the achievement of our development and strategic
objectives, which could adversely affect our business, financial condition and results of operations.
We may face the effects of increased competition
and rapid technological changes.
The industry in which we are engaged is subject
to rapid and significant technological change. There can be no assurance that our systems can be upgraded to meet future innovations which
will be required to meet our customer’s requirements, or that new technologies will be adopted successfully by us, or existing technologies
will not be improved, which would render the offerings obsolete or non-competitive. Companies we compete with enjoy significant competitive
advantages, including greater name recognition; greater financial, technical, and service resources; established networks; additional
product offerings; and greater resources for product development and sales and marketing.
There can be no assurance that other established
networking technology companies, any of which would likely have greater resources than us, will not enter the market. In addition, new
competitors may enter the marketplace and/or begin offering networking technology products and solutions and in channels similar to or
competing with ours. Such competition may reduce demand for our products and impact the growth prospects and ability to achieve profitability,
which may require us to raise new capital, which may not be available on favorable terms, or at all, and that would impair our ability
to carry on operations.
We cannot assure you that we will be able to compete
successfully against any of these competitors. Our failure to compete successfully with our competitors could harm our business.
We are dependent on skilled human capital.
Our ability to innovate and execute its business
plans is dependent on the ability to hire, replace, and train skilled personnel. The employment market suffers from shortages of candidates,
and such shortages may continue in future years, causing delays and preventing us from executing our plans.
Our results of operations are likely to
fluctuate from quarter to quarter and year to year, which could adversely affect the trading price of our common stock.
Our results of operations, including our revenue,
cost of revenue, gross margin, operating expenses, cash flow, and deferred revenue, have fluctuated from quarter to quarter and year to
year in the past and may continue to vary significantly in the future so that period-to-period comparisons of our results of operations
may not be meaningful. Accordingly, our financial results in any one quarter should not be relied upon as indicative of future performance.
Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, may be difficult
to predict, and may not fully reflect the underlying performance of our business. Factors that may cause fluctuations in our quarterly
financial results include:
● the loss of existing customers;
● mix of our revenue;
● our ability to gain new partners and retain existing partners;
● fluctuations in share-based compensation expense;
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● changes in the spending patterns of our customers;
● network outages;
● general economic, industry, and market conditions;
● the impact of political uncertainty or unrest;
● changes in our pricing policies or those of our competitors;
● fluctuations in the growth rate of the markets that our offerings address;
● the business strengths or weakness of our customers;
● our ability to collect timely on invoices or receivables;
● the cost and potential outcomes of future litigation or other disputes;
● future accounting pronouncements or changes in our accounting policies;
● fluctuations in foreign currency exchange rates; and
The impact of one or more of the foregoing or
other factors may cause our results of operations to vary significantly. Such fluctuations make forecasting more difficult and could cause
us to fail to meet the expectations of investors and securities analysts, which could cause the trading price of our common stock to fall
substantially, resulting in the loss of all or part of your investment, and subject us to costly lawsuits, including securities class
action suits.
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The loss of one or more of our significant
customers, or any other reduction in the amount of revenue we derive from any such customer, would adversely affect our business, financial
condition, results of operations and growth prospects.
Our future success is dependent on our ability
to establish and maintain successful relationships with a diverse set of customers.
We currently derive a significant portion of our
revenue from a limited number of our customers. For the years ended December 31, 2022 and December 31, 2021, our top ten
customers in the aggregate accounted for approximately 82% and 78% of our revenues.
We expect to continue to derive a significant
portion of our revenue from a limited number of customers in the future and, in some cases, the portion of our revenue attributable to
individual customers may increase. The loss of one or more significant customers or a reduction in the amount of revenue we derive from
any such customer could significantly and adversely affect our business, financial condition and results of operations. Customers may
choose not to renew their contracts or may otherwise reduce the breadth of the offerings which they purchase for any number of reasons.
We are also subject to the risk that any such customer will experience financial difficulties that prevent them from making payments to
us on a timely basis or at all.
We are currently operating in a period of
economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing
military conflict between Russia and Ukraine. Our business, financial condition and results of operations may be materially adversely
affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical
tensions.
U.S. and global markets are experiencing volatility
and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On
February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing
military conflict is highly unpredictable, and although we currently have no operations or sales in either Russia or Ukraine, the conflict
in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well
as supply chain interruptions for some of our components. Additionally, this conflict could
lead to sanctions, embargoes, regional instability, geopolitical shifts, cyberattacks, other retaliatory actions, and adverse effects
on macroeconomic conditions, currency exchange rates, and financial markets, which could adversely impact our operations and financial
results, as well as those of third parties with whom we conduct business. Our operations would be particularly vulnerable
to potential interruptions in the supply of certain critical materials and metals, such as neon gas and palladium, which are used in semiconductor
manufacturing. Any interruption to semiconductor chip supply could significantly impact our ability to receive the components and timely
roll-out of our operations. Furthermore, any potential increase in geopolitical tensions in Asia, particularly in the Taiwan Strait, could
also significantly disrupt existing semiconductor chip manufacturing and increase the prospect of an interruption to the semiconductor
chip supply across the world. A significant portion of the world’s semiconductor manufacturing is in Taiwan, and similar geopolitical
tensions there could create further supply chain disruptions, which could result in further delays for our products’ components.
The world’s largest semiconductor chip manufacturer
is located in Taiwan and a large part of equipment and materials, is manufactured in, and imported from, Taiwan. A setback to the current
state of relative peace and stability in the region could compromise existing semiconductor chip production and have downstream implications
for our company. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.
Governments in the United States and many other
countries, or the Sanctioning Bodies, have imposed economic sanctions on certain Russian individuals, including politicians, and Russian
corporate and banking entities. The Sanctioning Bodies, or others, could also institute broader sanctions on Russia, including banning
Russia from global payments systems that facilitate cross-border payments. These sanctions, or even the threat of further sanctions, may
result in the decline of the value and liquidity of Russian securities, a weakening of the ruble or other adverse consequences to the
global economy.
The current war in Ukraine, and geopolitical events
stemming from such conflicts, could cause consumer confidence and spending to decrease or result in increased volatility in the United
States and worldwide financial markets and economy. The extent and duration of the military action, resulting sanctions and resulting
future market disruptions in the region are impossible to predict, but could be significant and have a severe adverse effect worldwide
financial markets and economy.
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The effects of health pandemics, such as
the ongoing global COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, financial condition and
results of operations.
In December 2019, a novel coronavirus disease,
or COVID-19, was first reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The widespread
health crisis is adversely affecting the broader economies, financial markets and overall demand environment for many of our products.
Our operations and the operations of our suppliers,
channel partners and customers were disrupted to varying degrees by a range of external factors related to the COVID-19 pandemic, some
of which are not within our control. Many governments imposed, and may yet impose, a wide range of restrictions on the physical movement
of people in order to limit the spread of COVID-19. The COVID-19 pandemic has had, and likely will continue to have, an impact on the
attendance and productivity of our employees, and those of our channel partners or customers, resulting in negative impacts to our results
of operations and overall financial performance. We suffered delays in realization of certain new orders from our customers, delay in
testing of some of our new technologies in customer premises and difficulty conducting business development activities in an effective
way (face-to-face). In addition, we had to increase our credit lines by $2.0 million to support the loss of revenue and profit. Additionally,
COVID-19 has resulted, and likely will continue to result, in delays in non-residential construction, non-crisis-related IT purchases
and project completion schedules in general, all of which can negatively impact our results in both current and future periods.
The duration and extent of the impact from the
COVID-19 pandemic or any future epidemic or pandemic depends on future developments that cannot be accurately predicted at this time,
such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, the effects of measures
enacted by policy makers and central banks around the globe, and the impact of these and other factors on our employees, customers, channel
partners and suppliers. If we are not able to respond to and manage the impact of such events effectively, our business will be affected.
Our performance is affected by general economic
and political conditions and taxation policies.
The success of our activities may be affected
by general economic and market conditions, like interest rates, currency exchange rate fluctuations, availability of credit, inflation
rates, economic uncertainty, changes in laws, and United States and international political circumstances. Unexpected volatility
or illiquidity could impair profitability or result in losses.
We may be adversely affected by the political
and economic situation in the U.S., Europe and a number of countries in Asia.
The U.S. communications market is directly
affected by economic developments in the U.S. economy. The European and Asian communications market is similarly reliant on political
and economic stability in those regions. Changing trends in these markets may lead to a decrease in investments and a delay in projects,
which could harm our business. To reduce our sensitivity to market changes, we operate in a large number of different vertical markets
and territories.
Our business could be adversely impacted
by changes in laws and regulations related to government contracts.
Federal or state government bodies or agencies
have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Legislators,
regulators, or government bodies or agencies may also make legal or regulatory changes or interpret or apply existing laws or regulations
that relate to government contracts. Changes in these laws, regulations or interpretations could require us to modify our platform in
order to comply with these changes, to incur substantial additional costs or divert resources that could otherwise be deployed to grow
our business, or expose us to unanticipated civil or criminal liability, among other things.
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We are subject to laws and regulations worldwide,
changes to which could increase our costs and individually or in the aggregate adversely affect our business.
We are subject to laws and regulations affecting
our domestic and international operations in a number of areas. These U.S. and foreign laws and regulations affect our activities including,
but not limited to, in areas of labor, health and safety, tax, import and export requirements, foreign exchange controls and cash repatriation
restrictions, data privacy requirements, anti-competition, and environmental.
Compliance with these laws, regulations and similar
requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost
of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or
in their interpretation, could individually or in the aggregate make our products and services less attractive to our customers, delay
the introduction of new products in one or more regions, or cause us to change or limit our business practices. We have implemented policies
and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors,
or agents will not violate such laws and regulations or our policies and procedures.
Risks Related to Protecting Our Technology
and Intellectual Property
Claims by others that we infringe their
intellectual property could force us to incur significant costs or revise the way we conduct our business.
Our competitors protect their proprietary rights
by means of patents, trade secrets, copyrights, trademarks and other intellectual property. We have not conducted an independent review
of patents and other intellectual property issued to third parties, who may have patents or patent applications relating to our proprietary
technology. We may receive letters from third parties alleging, or inquiring about, possible infringement, misappropriation, or violation
of their intellectual property rights. Any party asserting that we infringe, misappropriate, or violate proprietary rights may force us
to defend ourselves, and potentially our customers, against the alleged claim. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages or interruption or cessation of our operations. Any such claims or lawsuit could:
● be time-consuming and expensive to defend, whether meritorious or not;
● divert the attention of our technical and managerial resources;
● require us to indemnify our customers.
Furthermore, during the course of litigation,
confidential information may be disclosed in the form of documents or testimony in connection with discovery requests, depositions or
trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could materially adversely
affect our business. Some of our competitors may be able to sustain the costs of intellectual property litigation more effectively than
we can because they have substantially greater resources. In addition, any litigation could significantly harm our relationships with
current and prospective customers. Any of the foregoing could disrupt our business and have a material adverse effect on our business,
operating results and financial condition.
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Our patents and proprietary technology may
be challenged or disputed.
We hold certain patent and trade secret rights
relating to various aspects of our technologies, which are of material importance to the Company and its future prospects. Any patents
we have obtained or do obtain may be challenged by re-examination or otherwise invalidated or eventually found unenforceable. Both the
patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may attempt to
challenge or invalidate our patents or may be able to design alternative techniques or devices that avoid infringement of our patents
or develop products with functionalities that are comparable to ours. In the event a competitor infringes upon our patent or other intellectual
property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful,
could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient
resources to enforce our intellectual property rights or to defend our patents against challenges from others.
Any failure to protect our intellectual
property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to compete depend largely
upon our intellectual property. To date, we have 20 registered patents and one patent application pending in the United States; five
registered patents in Europe, one registered patent in Mexico, and one patent application pending in WIPO, all of which in the general
area of high-speed carrier class Ethernet service and transport over bonded VDSL2, G.SHDSL as well as Fiber. We take reasonable steps
to protect our intellectual property, especially when working with third parties. However, the steps we take to protect our intellectual
property rights may be inadequate. For example, other parties, including our competitors, may independently develop similar technology,
duplicate our services, or design around our intellectual property and, in such cases, we may not be able to assert our intellectual property
rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information
or provide an adequate remedy in the event of unauthorized disclosure of our confidential information, and we may be unable to detect
the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.
We make business decisions about when to seek
patent protection for a particular technology and when to rely upon trade secret protection, and the approach we select may ultimately
prove to be inadequate. Even in cases where we seek patent protection, there is no assurance that the resulting patents will effectively
protect every significant feature of our technology or provide us with any competitive advantages. Moreover, we cannot guarantee that
any of our pending patent application will issue or be approved. The United States Patent and Trademark Office and various foreign
governmental patent agencies also require compliance with a number of procedurals, documentary, fee payment, and other similar provisions
during the patent application process and after a patent has issued. There are situations in which noncompliance can result in abandonment
or lapse of the patent, or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If
this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our business. Effective
trademark, copyright, patent, and trade secret protection may not be available in every country in which we conduct business. Further,
intellectual property law, including statutory and case law, in the United States and other countries, is constantly developing,
and any changes in the law could make it harder for us to enforce our rights.
In order to protect our intellectual property
rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce
our intellectual property rights could be costly, time-consuming, and distracting to management and could result in the impairment or
loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses,
counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination
of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our
related pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection
with intellectual property litigation particularly in the US, there is a risk that some of our confidential or sensitive information could
be compromised by disclosure in the event of litigation. In addition, during the course of litigation, there could be public announcements
of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results
to be negative, it could have a substantial adverse effect on the price of our common stock. Negative publicity related to a decision
by us to initiate such enforcement actions against a client or former client, regardless of its accuracy, may adversely impact our other
client relationships or prospective client relationships, harm our brand and business, and could cause the market price of our common
stock to decline. Our failure to secure, protect, and enforce our intellectual property rights could adversely affect our brand and our
business.
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The lives of our patents may not be
sufficient to effectively protect our products and business.
Patents have a limited
lifespan. In the United States, if all maintenance fees are paid timely, the natural expiration of a patent is generally 20 years after
its first effective nonprovisional filing date. Although various extensions may be available, the life of a patent, and the protection
it affords, is limited. Given the amount of time required for the development, testing and regulatory review of new product candidates,
patents protecting such candidates might expire before or shortly after such product candidates are commercialized. Even if patents covering
our product candidates are obtained, once the patent life has expired for a product, we may be open to competition from biosimilar or
generic medications. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing
product candidates similar or identical to ours. Our patents issued as of March 15, 2023 will expire on dates ranging from March 20, 2023
to October 8, 2038, subject to any patent extensions that may be available for such patents. More specifically, the following patents
will expire over the next three years: EP02250273.6, DE 60207187.9-08, US7187711, US7167511, US7003026, US7606315, US7613235, US7587042.
In addition, although upon
issuance in the United States a patent’s life can be increased based on certain delays caused by the USPTO, this increase can be
reduced or eliminated based on certain delays caused by the patent applicant during patent prosecution. A patent term extension based
on regulatory delay may be available in the United States. However, only a single patent can be extended for each marketing approval,
and any patent can be extended only once, for a single product. Moreover, the scope of protection during the period of the patent term
extension does not extend to the full scope of the claim, but instead only to the scope of the product as approved. Laws governing analogous
patent term extensions in foreign jurisdictions vary widely, as do laws governing the ability to obtain multiple patents from a single
patent family. Additionally, we may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory
review process, apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy
applicable requirements. If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than
we request, the period during which we will have the right to exclusively market our product will be shortened and our competitors may
obtain approval of competing products following our patent expiration and may take advantage of our investment in development and clinical
trials by referencing our clinical and preclinical data to launch their product earlier than might otherwise be the case, and our revenue
could be reduced, possibly materially. If we do not have sufficient patent life to protect our products, our business and results of operations
will be adversely affected.
We may not be able to adequately defend
against piracy of intellectual property in foreign jurisdictions.
Considerable research is being performed in countries
outside of the United States, and a number of potential competitors are located in these countries. The laws protecting intellectual
property in some of those countries may not provide adequate protection to prevent our competitors from misappropriating our intellectual
property. Several of these potential competitors may be further along in the process of product development and also operate large, company-funded
research and development programs. As a result, our competitors may develop more competitive or affordable products, or achieve earlier
patent protection or product commercialization than we are able to achieve. Competitive products may render any products that we develop
obsolete.
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Risks Related to Managing Our Business Operations
in Israel
Potential political, economic, and military
instability in the State of Israel, where our research and development facilities are located, may adversely affect our results of operations.
Our office where we conduct our research and development,
operations, sales outside the Americas, and administration activities, is located in Israel. Many of our employees are residents of Israel.
Accordingly, political, economic and military
conditions in Israel and the surrounding region may directly affect our business. Since the establishment of the State of Israel in 1948,
a number of armed conflicts have taken place between Israel and its neighboring Arab countries, the Hamas militant group and the Hezbollah.
Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect
our operations and results of operations. Ongoing and revived hostilities or other Israeli political or economic factors, such as, an
interruption of operations at the Tel Aviv airport, could prevent or delay our regular operation, product development and delivery of
products. If continued or resumed, these hostilities may negatively affect business conditions in Israel in general and our business in
particular. In the event that hostilities disrupt the ongoing operation of our facilities and our operations may be materially adversely
affected.
In addition, since 2010 political uprisings and