ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis
of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial
information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis
or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business,
includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth
in “Part I, Item 1A - Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially
from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Actelis Networks, Inc. (“we,” “the
Company”, “Actelis”, “us”, “our”) is a market leader in cyber-hardened, rapid-deployment networking
solutions for wide-area IoT applications including federal, state and local government, intelligent traffic systems (“ITS”),
military, utility, rail, telecom and campus applications. Our unique portfolio of hybrid fiber-copper, environmentally hardened aggregation
switches, high density Ethernet devices, advanced management software and cyber-protection capabilities, unlocks the hidden value of essential
networks, delivering safer connectivity for rapid, cost-effective deployment.
A primary focus of ours is to provide our customers
with a cyber-secure network solution. We currently provide Triple-Shield protection of coding, scrambling and encryption of the network
traffic.
When high speed, long reach, reliable and secure
connectivity is required, network operators usually resort to using wireline communication over physical communication lines rather than
wireless communication that is more limited in performance, reliability and security. However, wireline communication infrastructure is
costly, and, based on our internal calculations, often accounts for more than 50% of total cost of ownership (ToC) and time to deploy
wide-area IoT projects.
Typically, providing new fiber connectivity to
hard-to-reach locations is costly and time-consuming, often requiring permits for boring, trenching, and right-of-way. Connecting such
hard-to-reach locations may cause significant delays and budget overruns in IoT projects. Our solutions aim to solve these challenges
effectively accelerating deployment of IoT projects, and making IoT projects more affordable and predictable to plan and budget.
Our solutions can also provide remote power over
existing copper lines to power up network elements and IoT components connected to them (like cameras and meters). Connecting power lines
to millions of IoT locations can be costly and very time consuming (similar to data connectivity). By offering the ability to combine
power delivery over the same existing copper lines that we use for high-speed data, we believe our solutions are solving yet another important
challenge in connecting hard-to-reach locations. We believe that combining communication and power over the same existing lines is particularly
important to help connect many fifth generation, or 5G, small cells and Wi-Fi base stations, as high cost of connectivity and power is
often slowing their deployment. Our solutions have been tested for performance and security by the U.S. DoD laboratories, and approved
for deployment with U.S. Federal Government and U.S. defense forces as part of APL (Approved Product List) in 2019.
Since our inception, our business was focused
on serving telecommunication service providers, also known as Telcos, providing connectivity 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 wide-area IoT markets. Our operations are focused on our fast-growing IoT business,
while maintaining our commitment to our existing Telco customers.
41
We currently derive a significant portion of our
revenue 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.
We 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 currently have one outstanding loan with Migdalor
Business Investments Fund, or Migdalor, in the original principal amount of approximately $6 million which is secured by all our
assets, which remains outstanding as of December 31, 2022 of which approximately $5 million remains outstanding. In December 2022,
we deposited $2 million to a Company-owned interest bearing bank account, or the “designated account” and an additional $2
million was deposited on or about February 28, 2023. 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. Migdalor consented to allow us to
seek additional accounts receivable financing which would be used to partially repay the Migdalor Loan, which would reduce or eliminate
the Additional Deposit (as defined in our agreement with Migdalor). We expect to continue repaying the principal and interest of the Migdalor
Loan from our operating cash flow. Please refer to the “Liquidity and Financial Condition” section below for further discussion.
Results of Operations
The table below provides our
results of operations for the periods indicated.
Year ended December 31
(dollars in thousands)
Research and development expenses, net 2,766 2,443
General and administrative, net 4,163 1,183
Interest expenses (830 ) (690 )
Other financial expenses, net (4,051 ) (2,701 )
Net Comprehensive Loss for the year (10,982 ) (5,251 )
Year Ended December 31, 2022, Compared to Year
Ended December 31, 2021
Revenues
Our revenues for the year ended December 31, 2022
amounted to $8.8 million, compared to $8.5 million for the year ended December 31, 2021. The increase from the corresponding period was
primarily attributable to an increase of $626,000 of revenues generated from Europe, the Middle East and Africa, offset by a decrease
of $340,000 in revenues generated from North America and Asia Pacific, of which is primarily attributed to a decline in Telcom customers’
revenues.
42
Cost of Revenues
Our cost of revenues for the
year ended December 31, 2022, amounted to $4.7 million compared to $4.6 million for the year ended December 31, 2021.
Research and Development Expenses
Our research and development
expenses for the year ended December 31, 2022, amounted to $2.8 million compared to $2.4 million for the year ended December 31, 2021.
The increase was mainly due to an increase in payroll expense for research and development personnel in the amount of $256,000, and an
increase in professional services related to research and development in the amount of $64,000.
Sales and Marketing Expenses
Our sales and marketing expenses
for the year ended December 31, 2022, amounted to $3.3 million compared to $2.2 for the year ended December 31, 2021. The increase from
the corresponding period was mainly a result of our increased investments in sales and marketing, including in payroll expenses for additional
personnel in the amount of $595,000, and increase in commission expenses in the amount of $249,000. We also had an increase in travel
expenses in the amount of $181,000.
General and Administrative Expenses
Our general and administrative expenses for the
year ended December 31, 2022, amounted to $4.2 million compared to $1.2 million for the year ended December 31, 2021. This increase was
mainly due to payroll, insurance expenses and professional services expenses, in connection with the IPO completed in May 2022 and our
status as a public company thereafter.
Operating Loss
Our operating loss for the year ended December
31, 2022, was $6.1 million, compared to an operating loss of $1.9 million for the year ended December 31, 2021. The increase was mainly
due to higher expenses associated primarily with investment in sales and marketing and expenses attributed to the IPO completed in May
2022 and costs associated with our status as a public company.
Financial Expenses, Net
Our financial expense, net for the year ended
December 31, 2022, was $4.9 million (including $0.8 million interest expenses) compared to $3.4 million (including $0.7 million interest
expenses) for the year ended December 31, 2021. This increase during the year ended December 31, 2022 is due to us incurring financial
expenses in connection with increases in fair value of various financial instruments, such as convertible loan, note and warrants in the
amount of $4.5 million up until the IPO when such instruments converted to equity. Additionally, during the year ended December 31,
2022, we had income in the amount of $0.5 million from exchange rate differences. Since all convertible loans and nearly all warrants
we had outstanding converted to equity in connection with the IPO, we do not expect additional material financial expenses going
forward for these loans and warrants.
Net Loss
Our net loss for the year ended December 31, 2022
was $11 million, compared to a net loss of $5.3 million for the year ended December 31, 2021. This increase was primarily due to the increase
in financial expenses, resulting from the increases in fair value of various financial instruments, as well as an increase in operating
expenses mainly due to investment in sales and marketing, as well as expenses attributed to our IPO in May 2022 and being a public company.
43
Non-GAAP Financial Measures
Other financial expenses, net 4,051 2,701
Fixed asset depreciation expense 23 37
Stock based compensation 220 53
Research and development, capitalization 525 586
Other one-time costs and expenses 1,714 -
Non-GAAP Adjusted EBITDA (4,065 ) (1,097 )
Adjusted EBITDA margin (46.03 )% (12.84 )%
Use of Non-GAAP Financial Information
Non-GAAP Adjusted EBITDA,
Adjusted EBITDA margin are Non-GAAP financial measures. Their most directly comparable financial measures prepared in accordance with
GAAP are GAAP net loss and GAAP net loss margin. In addition to reporting financial results in accordance with GAAP, we provide Non-GAAP
supplemental operating results adjusted for certain items, including: financial expenses, which are interest, financial instrument fair
value adjustments, exchange rate differences of assets and liabilities, stock based compensation expenses, depreciation and amortization
expense, tax expense, and impact of development expenses ahead of product launch. We adjust for the items listed above and show non-GAAP
financial measures in all periods presented, unless the impact is clearly immaterial to our financial statements. When we calculate the
tax effect of the adjustments, we include all current and deferred income tax expense commensurate with the adjusted measure of pre-tax
profitability.
We utilize the adjusted results
to review our ongoing operations without the effect of these adjustments but not for comparison to budgeted operating results. We believe
the supplemental adjusted results are useful to investors because they help them compare our results to previous periods and provide important
insights into underlying trends in the business and how management oversees and optimizes our business operations on a day-to-day
basis. We exclude the costs in calculating adjusted results to allow us and investors to evaluate the performance of the business based
upon its expected ongoing operating structure. We believe the adjusted measures, accompanied by the disclosure of the costs of these programs,
provides valuable insight to our financial performance. Adjusted results should be considered only in conjunction with results reported
according to GAAP.
44
The non-GAAP financial measures
are presented for supplemental informational purposes only. They should not be considered a substitute for financial information presented
in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided
above for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors
are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most
directly comparable GAAP financial measures.
For the year ended December 31
Non-GAAP Adjusted EBITDA (4,065 ) (1,097 )
As a percentage of revenues (46.03 )% (12.84 )%
Liquidity and Capital Resources
Since our inception, we have
financed our operations primarily through the sale of equity securities, debt financing, convertible loans and royalty-bearing grants
that we received from the Israel Innovation Authority. Our primary requirements for liquidity and capital are to finance working capital,
capital expenditures and general corporate purposes. We also received proceeds of $15.4 million, net of underwriting discounts and commissions
and other offering costs of $1.0 million, following our IPO in May 2022.
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, we had an accumulated deficit of $33.4 million. We had cash on hand (including short term deposits and restricted
cash) of $6 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 we require to continue our operations. However, these cash flow projections
are subject to various uncertainties concerning their fulfillment, such as the ability to increase revenues due to lack of customers or
decrease cost structure. Our transition to profitable operations is dependent on generating a level of revenue adequate to support our
cost structure.
Our future capital requirements
will be affected by many factors, including our revenue growth, the timing and extent of investments to support such growth, the expansion
of sales and marketing activities, increases in general and administrative costs, repayment of principal of our existing credit line,
working capital to support securing raw material supply and many other factors as described under “Risk Factors.”
To the extent additional funds
are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, and cannot generate significant
recurring revenues, profit and cash flow provided by operating activity, we anticipate that they will be obtained through the incurrence
of additional indebtedness, additional equity financings or a combination of these potential sources of funds. However, such financing
may not be available on favorable terms, or at all. In particular, the repercussions from the COVID 19 pandemic, inflation, economic uncertainty,
as well as the war between Russia and the Ukraine, has resulted in, and may continue to result in, significant disruption of global financial
markets, reducing our ability to access capital. If we are unable to raise additional funds when desired, our business, financial condition
and results of operations could be adversely affected.
Our revenues for the year
ended December 31, 2022, increased by 3.3%, as we increased product and service delivery to our customers and successfully reduced our
supply shortages.
45
Cash Flows
The table below, for the periods indicated,
provides selected cash flow information:
Net cash used in operating activities $ (7,768 ) $ (2,726 )
Net cash used in investing activities (4,034 ) (54 )
Net cash provided by financing activities 15,286 2,904
As of December 31, 2022, we
had cash, cash equivalents, and restricted cash of $4.3 million compared to $0.8 million of cash, cash equivalents and restricted cash
as of December 31, 2021.
Cash used in operating activities
amounted to $7.8 million for the year ended December 31, 2022, compared to $2.7 million for the year ended December 31, 2021. The increase
in cash used in operating activities was mainly due to increase in operating expenses, as well as expenses associated with our IPO and
from operating as a public company.
Net cash used in investing
activities was $4.0 million for the year ended December 31, 2022, compared to cash used in investing activities of $0.1 million for the
year ended December 31, 2021. The increase from the corresponding period was mainly due to change in short and long-term deposits, related
to depositing cash into company interest bearing bank deposits in part due to increased collateral provided to our manufacturers.
Net cash provided by financing
activities was $15.3 million for the year ended December 31, 2022, compared to $2.9 million for the year ended December 31, 2021. The
cash flow from financing activities for the year ended December 31, 2022, resulted from proceeds from the Company’s IPO in the amount
of $15.4 million, net of underwriting discounts and commissions and other offering costs of $1.0 million. In addition, the increase is
related to the $1.85 million raised from the private placement first and second closings.
Internal Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act.
Our management has conducted an evaluation of the effectiveness of our internal control over financial reporting. Our internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and
the preparation of our financial statements for external purposes in accordance with U.S. GAAP.
A material weakness is a deficiency or combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis. An effective internal control system,
no matter how well designed, has inherent limitations, including the possibility of human error or overriding of controls, and therefore
can provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal
control over financial reporting may not prevent or detect all misstatements, including the possibility of human error, the circumvention
or overriding of controls or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation
and fair presentation of financial statements.
46
In connection with the preparation of our financial
statements as of and for the years ended December 31, 2022 and 2021, we identified a material weakness in our internal control
over financial reporting in the lack of sufficient finance personnel in the segregation of duties. As such, there is a reasonable possibility
that a misstatement of our financial statements will not be prevented or detected on a timely basis.
As we have thus far not needed to comply with
Section 404 of the Sarbanes-Oxley Act, neither we nor our independent registered public accounting firm has performed an evaluation
of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. In light of this,
we believe that it is possible that additional control deficiencies and material weaknesses may have been identified if such an evaluation
had been performed.
We are working to remediate the material weakness.
Our remediation efforts are ongoing, and we will continue our initiatives to strengthen our finance personnel and implement and document
policies, procedures, and internal controls. We have taken steps to enhance our internal control environment and plan to take additional
steps to remediate the deficiencies and address material weaknesses. Specifically:
In addition to the items noted above, as we continue
to evaluate, remediate and improve our internal control over financial reporting, executive management may elect to implement additional
measures to address control deficiencies or may determine that the remediation efforts described above require modification. Executive
management, in consultation with and at the direction of our Audit Committee, will continue to assess the control environment and the
above-mentioned efforts to remediate the underlying causes of the identified material weaknesses.
Although we plan to complete this remediation
process as quickly as possible, we are unable, at this time to estimate how long it will take; and our efforts may not be successful in
remediating the deficiencies or material weaknesses. Notwithstanding the material weakness discussed above, we have performed additional
procedures to ensure the consolidated financial statements included in this Form 10-K, fairly present, in all material respects, the Company’s
financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. GAAP.
47
Critical Accounting Policies and Estimates
Management’s discussion and analysis of
our financial condition and results of operations is based on the audited consolidated financial statements of which are included elsewhere
in this prospectus. The preparation of these consolidated financial statements requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actelis bases its estimates on historical and anticipated
results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future
events. Actual results could differ from those estimates.
Management considers accounting estimates to be
critical if both (i) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved,
and (ii) the impact within a reasonable range of outcomes of the estimate and assumption is material to the Actelis financial condition.
Management believes the following addresses the
most critical accounting policies and estimates, which are those that are most important to the portrayal of our financial condition and
results of operations and require management’s most difficult, subjective and complex judgments:
Critical judgement and estimates
Critical judgement and estimates have been used
primarily in estimating the fair value of our financial instruments (for example, warrants, notes and stock options), as well as the estimate
of future usage of existing inventory to determine the net value of our inventory (see notes in financial statements).
Estimating the fair value of financial instruments
such as warrants, notes and stock options are influenced by assessments of our future financial performance. Such assessments are forward-looking in
nature and therefore, subject to significant uncertainty. Estimating the value of net inventory is also influenced by assessments of future
usage of such inventory which is also forward looking in nature and therefore subject to significant uncertainty.
Accounting standards updates not yet adopted
Please see Note 2(ii) to our consolidated financial statements
included elsewhere in this prospectus for information
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
48
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ACTELIS NETWORKS, INC.
2022 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Balance sheets F-3 –F-4
Statements of comprehensive loss F-5
Statements of cash flows F-7 – F-8
Notes to consolidated financial statements F-9 – F-37
F-1
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and
Shareholders of Actelis Networks, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Actelis Networks, Inc. and its subsidiary (the “Company”) as of December 31, 2022 and 2021, and the related
consolidated statements of comprehensive loss, of redeemable convertible preferred stock and shareholders’ equity (capital deficiency)
and of cash flows for each of the two years in the period ended December 31, 2022, including the related notes (collectively referred
to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the
United States of America.
Change in Accounting Principle
As discussed in Note 3n to the consolidated financial statements, the
Company changed the manner in which it accounts for leases in 2022.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated
financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member firm of PricewaterhouseCoopers International
Limited
Tel Aviv, Israel
March 29, 2023
We have served as the Company’s auditor
since 2019.
Kesselman & Kesselman, 146 Derech
Menachem Begin, Tel-Aviv 6492103, Israel,
P.O Box 7187 Tel-Aviv 6107120, Telephone:
+972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il
F-2
ACTELIS NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(U. S. dollars in thousands except for share and
per share amounts)
December 31
Assets
CURRENT ASSETS:
Short-term deposits 1,622 -
Restricted bank deposits 451 -
Prepaid expenses and other current assets 5 678 398
NON-CURRENT ASSETS:
Property and equipment, net 6 80 103
Prepaid expenses 492 -
Restricted cash 336 -
Operating lease right of use assets 726 -
Long-term deposits 12 78
F-3
ACTELIS NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(U. S. dollars in thousands except for share and
per share amounts)
December 31
CURRENT LIABILITIES:
Current maturities of long-term loans 9 553 758
Employee and employee-related obligations 793 703
Operating lease liabilities 445 -
NON-CURRENT LIABILITIES:
Long-term loan, net of current maturities 9 4,625 5,473
Deferred revenues 164 -
Operating lease liabilities 237 -
Other long-term liabilities 48 79
COMMITMENTS AND CONTINGENCIES 12
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
TOTAL REDEEMABLE CONVERTIBLE PREFERRED STOCK - 5,585
SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY): 15
TOTAL SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY) 3,265 (19,596 )
* Represents an amount less than $1 thousands.
The accompanying notes are an
integral part of these consolidated financial statements.
F-4
ACTELIS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(U. S. dollars in thousands except for share and
per share amounts)
Year ended December 31
OPERATING EXPENSES:
Research and development expenses, net 2,766 2,443
Sales and marketing expenses, net 3,282 2,204
General and administrative expenses, net 4,163 1,183
Interest expenses (830 ) (690 )
NET COMPREHENSIVE LOSS FOR THE YEAR (10,982 ) (5,251 )
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
ACTELIS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)
U.S. dollars in thousands (except number of shares)
CHANGES DURING THE YEAR ENDED DECEMBER 31, 2021:
Exercise of options into common stock - - 2,763 * - - * - *
Share based compensation - - - - - - 53 - 53
Net comprehensive loss for the year - - - - - - - (5,251 ) (5,251 )
CHANGES DURING THE YEAR ENDED DECEMBER 31, 2022:
Exercise of options into common stock - - 77,749 * - - 5 - 5
Share based compensation - - - - - - 220 - 220
Repurchase of common stock - - (27,699 ) * - - 15 - 15
Net comprehensive loss for the year - - - - - - - (10,982 ) (10,982 )
* Represents an amount less than $1 thousands.
The accompanying
notes are an integral part of these consolidated financial statements.
F-6
ACTELIS NETWORKS, INC.
CONOSLIDATED STATEMENTS OF CASH FLOWS
U.S. DOLLARS IN THOUSANDS
Year ended December 31
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in fair value related to warrants to lenders 1,049 1,031
Inventories write-downs 147 102
Exchange rate differences (642 ) 167
Share-based compensation 220 53
Changes in fair value related to convertible loan 1,648 1,342
Changes in fair value related to convertible note 1,753 -
Treasury shares 15 -
Changes in operating assets and liabilities:
Trade receivables (887 ) (731 )
Net change in operating lease assets and liabilities (44 ) -
Prepaid expenses and other current assets (280 ) (236 )
Other long-term assets (492 ) -
Long term deposits - 27
Deferred revenues (25 ) 92
Other current liabilities 508 516
Other long-term liabilities (41 ) 29
Net cash used in operating activities (7,768 ) (2,726 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Short term deposit (1,622 ) -
Long- term deposit 66 -
Restricted long term bank deposit (27 ) -
Restricted bank deposit (2,451 ) -
Purchase of property and equipment - (54 )
Net cash used in investing activities (4,034 ) (54 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options 5 *
Proceeds from long-term debt, net of issuance costs - 2,904
Proceeds from initial public offering and private placement 18,697 -
Underwriting discounts and commissions and other offering costs (2,175 ) -
Repayment of long-term loan (1,241 ) -
Net cash provided by financing activities 15,286 2,904
INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 3,484 124
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR 795 671
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR 4,279 795
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Restricted cash, non-current 336 102
Total cash, cash equivalents and restricted cash 4,279 795
* Represents an amount less than $1 thousands.
F-7
ACTELIS NETWORKS, INC.
CONOSLIDATED STATEMENTS OF CASH FLOWS
U.S. DOLLARS IN THOUSANDS
Year ended December 31
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Additional warrants - 95
Conversion of warrants to common stock upon initial public offering 3,190 -
Repurchase of common stock 15 -
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
NOTE 1 - GENERAL:
The Company’s operations and
the operations of the Company’s 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 the Company’s 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 the Company’s employees, and those of
our suppliers, channel partners or customers, resulting in negative impacts to the Company’s results of operations and overall financial
performance. We suffered delays in realization of certain new orders from customers, delay in testing of some new technologies in customer
premises and difficulty conducting business development activities in an effective way (face-to-face). In addition, we had to increase
credit lines by $2.0 million in 2021 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, electronic components including chip manufacturing
and project completion schedules in general, all of which can negatively impact 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 the Company’s 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.
F-9
NOTE 2– INITIAL PUBLIC
OFFERING:
On May 17, 2022,
the Company finalized its IPO offering of an aggregate of 4,212,500 shares of common stock, including the partial exercise by the underwriter
of its option to purchase 462,500 additional shares of common stock, at a price to the public of $4.00 per share.
The net proceeds
from the offering, including the over-allotment, to the Company were approximately $15.4 million, after deducting underwriting discounts,
commissions and expenses amounting to approximately $1.0 million.
As a result of the
IPO, the Company issued common stock in the transactions described below:
Upon such issuance,
the Company reclassified the Convertible loan’s carrying amount (which reflected its then current fair value), into shareholders’
equity.
d. Warrants (See Note 14):
As of the issuance
date of the underwriter warrants, the fair value of the warrants was estimated at $145. The valuation was based on a Black-Scholes option-pricing
model, using an expected volatility of 54%, a risk-free rate of 3.01%, a contractual term of 5 years, an expected dividend yield of 0%
and a stock price at the issuance date of $1.95.
NOTE 3 - SIGNIFICANT ACCOUNTING
POLICIES:
a. Basis of Presentation
The accompanying consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
Certain prior period amounts have been reclassified to conform
to the current year presentation.
F-10
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued):
b. Use of estimates in preparation of financial statements
The preparation of the consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. The Company evaluates on an ongoing basis its assumptions, including
those related to contingencies, Fair value of financial instruments, inventory write-offs, as well as in estimates used in applying the
revenue recognition policy (See note 2l). The Company’s management believes that the estimates, judgment, and assumptions used are reasonable
based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and
the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
c. Functional currency
The currency of the
primary economic environment in which the operations of the Company and its Subsidiary are conducted is the U.S. dollar (“$”
or “dollar”). Therefore, the functional currency of the Company and its Subsidiary is the dollar. In determining the appropriate
functional currency to be used, the Company reviewed factors relating to sales, costs and expenses, financing activities and cash flows.
Transactions and
balances denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been re-measured to
dollars in accordance with the provisions of ASC 830-10, “Foreign Currency Translation”. All transaction gains and losses from
re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of comprehensive loss
as financial income or expenses, as appropriate.
d. Principles of consolidation
The consolidated
financial statements include the accounts of the Company and the Subsidiary. Intercompany transactions and balances have been eliminated
upon consolidation.
e. Cash and cash equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried
at cost, which approximates their fair value.
f. Restricted cash and restricted deposits
Restricted cash consists of cash held in restricted accounts, classified
as current or long term based on the expected timing of the disbursement. Restricted deposits consist of deposits held in restricted deposits
bank accounts including deposits held as collateral for guarantees to third parties and other, classified as current or long term based
on the expected timing of the disbursement
g. Treasury Shares
Treasury shares represents ordinary
shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury shares are accounted for under
the cost method. Under this method, repurchases of ordinary shares are recorded as treasury shares at historical purchase prices. At retirement,
the ordinary shares account is charged only for the aggregate par value of the shares. The treasury shares have no rights.
h. Trade Receivables, net
Trade receivables are recorded at the
invoiced amount, are unsecured and do not bear interest. Trade receivables are stated net of allowances. The allowance for doubtful accounts
is based on the Company’s
periodic assessment of the collectability
of the accounts based on a combination of factors including the payment terms of each account, its
age, the collection history of each customer, and the customer’s financial condition. On this basis, management has determined that
an allowance for doubtful accounts of $125 and $61 was appropriate as of December 31, 2022, and December 31, 2021, respectively. Allowance
for doubtful expense for the years ended December 31, 2022, and 2021 was $64 and $0, respectively.
F-11
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued):
i. Inventories
Inventories are
stated at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation. Inventory write-offs are provided to cover
risks arising from slow-moving items, excess inventories, discontinued products, new products introduction
and for market prices lower than cost. Any write-off is recognized in the consolidated statement of comprehensive loss as cost of
revenues. In addition, if required, the Company records a liability for firm non-cancelable and unconditional purchase commitments
with contract manufacturers for quantities in excess of the Company’s future demands forecast consistent with its valuation of
excess and obsolete inventory.
Cost
is determined as follows:
Raw
materials, parts, supplies and finished products- using the weighted average cost method.
j. Property and equipment, net
Property and equipment
is stated at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Depreciation expense is calculated
on a straight-line basis over the estimated useful lives of the related assets. The cost and related accumulated depreciation of assets
sold or otherwise disposed of are removed from the accounts and the related gain or loss is reported in the statement of comprehensive
loss.
Annual rates of depreciation
are as follows:
%
Computers, electronic equipment and software Mainly 33%
Office furniture and equipment 7
k. Impairment of long-lived assets subject to amortization
The Company evaluates
long-lived assets, such as property and equipment with finite lives, for impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. The Company identifies impairment of long-lived assets when estimated undiscounted
future cash flows expected to result from the use of the assets plus net proceeds expected from disposition of the assets, if any, are
less than the carrying value of the assets. If the Company identifies an impairment, the Company reduces the carrying amount of the assets
to their estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.
l. Revenue recognition
The Company’s product
consists of hardware and an embedded software that function together to deliver the product’s essential functionality. The embedded software
is essential to the functionality of the Company’s products. The Company’s products are sold with a two-year warranty for repairs or replacements
of the product in the event of damage or failure during the term of the support period, which is accounted for as a standard warranty.
Services relating to repair or replacement of hardware beyond the standard warranty period are offered under renewable, fee-based contracts
and include telephone support, remote diagnostics and access to on-site technical support personnel.
F-12
NOTE 3 - SIGNIFICANT ACCOUNTING
POLICIES (continued):
The Company also
offers its customers other management software. The Company sells its other non-embedded software either as perpetual or as term-based
licenses.
The Company provides,
to certain customers, software updates that it chooses to develop, which the Company refers to as unspecified software updates, and enhancements
related to the Company’s management software through support service contracts. The Company also offers its customers product support
services which include telephone support, remote diagnostics and access to on-site technical support personnel.
The Company’s
customers are comprised of resellers, system integrators and distributors.
The Company follows
five steps to record revenue: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii)