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, 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 provide Triple-Shield protection of coding, scrambling and encryption
of the network traffic. We are working to expand our cyber-security offering by introducing a convergence of our network presence with
the IoT devices at the edge of such networks, to which we call “Cyber Aware Networking”.
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. In 2023,
we received the U.S. DoD certification for cyber-security and interoperability and Federal Information Processing Standard (“FIPS”)
compliance 140-2 compliance and inclusion in the Approved Product List.
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.
44
We derive a growing portion
of our revenue from our existing and new IoT customers. For the years ended December 31, 2023 and December 31, 2022, our
IoT customers in the aggregate accounted for approximately 73% and 65% 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, 2023 and December 31, 2022, our
top ten customers in the aggregate accounted for approximately 66% and 82% of our revenues.
As
of December 31, 2023, we have one outstanding loan with Migdalor Business Investments Fund (“Migdalor”) in the original
principal amount of approximately $6 million which is secured by all our assets (the “Migdalor Loan”), and of which approximately
$4.3 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. 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) and increase free operating cashflow.
In February 2024, we entered
into a new credit line facility from an Israeli bank of up to $1.5 million that increases the Company’s operating liquidity while
not increasing the Company’s total debt, as the Company will perform an early repayment of its existing debt using its restricted
cash in a similar amount. The new credit line will be secured by customer invoices and will incur interest at a Federal SOFR rate plus
5.5% and is available until the end of 2024, with possible extension. The Company performed a partial early repayment of its existing
debt facility with Migdalor under the Loan Agreement using its restricted cash at an amount equal to the amount of funding from the new
credit line to-date of approximately $550,000, therefore leaving the total debt amount of the Company at a similar level.
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 2,702 2,766
Interest expenses (766 ) (830 )
Other financial income (expenses), net 1,843 (4,051 )
Net Comprehensive Loss for the year (6,286 ) (10,982 )
45
Year Ended December 31, 2023, Compared to Year
Ended December 31, 2022
Revenues
Our revenues for the year
ended December 31, 2023 amounted to $5.6 million, compared to $8.8 million for the year ended December 31, 2022. The decrease was primarily
attributable to the decline of revenues generated from telco customers, as our focus continued to shift to IoT customers by $1.6 million
significantly impacted by a two-year software license renewal in 2022, therefore not repeated in 2023, driving a $0.5 million decline,
and to delays of IoT projects into 2024. By region, it is primarily attributable to a decrease of $1.7 million of revenues generated from
North America and a decrease of $1.5 million of revenues generated from Europe, the Middle East and Africa.
Cost of Revenues
Our cost of revenues for the
year ended December 31, 2023, amounted to $3.7 million compared to $4.7 million for the year ended December 31, 2022. The decrease from
the corresponding period was mainly due to the decrease in revenues, partially offset by the higher effect of indirect costs as the percent
of the lower revenues.
Research and Development Expenses
Our research and development
expenses for the year ended December 31, 2023, amounted to $2.7 million compared to $2.8 million for the year ended December 31, 2022.
The decrease is mainly due to a decrease in payroll expenses.
Sales and Marketing Expenses
Our sales and marketing expenses
for the year ended December 31, 2023, amounted to $3.0 million compared to $3.3 for the year ended December 31, 2022. The decrease was
mainly due to a decrease in commission expenses as a result of the decrease in revenues.
General and Administrative Expenses
Our general and administrative
expenses for the year ended December 31, 2023, amounted to $3.5 million compared to $4.2 million for the year ended December 31, 2022.
This decrease was mainly due to a reduction in professional services of approximately $0.2 million, a decrease in management bonus expenses
of $0.2 million, as well as a reduction in other non-payroll expenses associated with the IPO in 2022.
Operating Loss
Our operating loss for the
year ended December 31, 2023, was $7.4 million, compared to an operating loss of $6.1 million for the year ended December 31, 2022. The
increase was mainly due to the decrease in revenues and gross margin while continuing to invest in Sales and Marketing and Research and
Development expenses, which was offset by a decrease in sales commission expenses as well as general and administrative one-time expenses
due to the IPO in 2022.
Financial Expenses (income), Net
Our financial expenses (income),
net for the year ended December 31, 2023, was ($1.1) million (including $0.8 million interest expenses) compared to $4.9 million (including
$0.8 million interest expenses) for the year ended December 31, 2022. In 2023, the Company recorded financial income in connection with
a decrease in fair value of warrants in the amount of $1.7 million, while in 2022 the Company recorded finance expenses as a result of
increase in fair value of various financial instruments prior to the IPO completed in May 2022, such as a convertible loan, note and warrants,
in the amount of $4.5 million. The decrease in the finance expenses, net partially offset by a decrease in income from exchange rate differences
in the amount of $0.3 million for the year ended December 31, 2023, compared to $0.5 during the year ended December 31, 2022.
46
Net Loss
Our net loss for the year
ended December 31, 2023 was $6.3 million, compared to a net loss of 11.0 million for the year ended December 31, 2022. This decrease was
primarily due to the decrease in revenues and gross margin offset by a decrease in financial expenses, net resulting from the expenses
incur by the conversion of the financial instruments the Company had such as a convertible loan, note and warrants from the IPO completed
in May 2022 for the year ended December 31, 2022, compared to income in connection with a decrease in fair value of warrants for the year
ended December 31, 2023.
Non-GAAP Financial Measures
Other financial expenses (income), net (1,843 ) 4,051
Fixed asset depreciation expense 27 23
Stock based compensation 377 220
Research and development, capitalization 444 525
Other one-time costs and expenses 371 1,174
Non-GAAP Adjusted EBITDA (6,066 ) (4,065 )
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 accounting principles generally
accepted in the United States (“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 described above 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 types of expenses
included in these adjustments, provides valuable insight to our financial performance. Adjusted results should be considered only in conjunction
with results reported according to GAAP.
47
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 (6,066 ) (4,065 )
As a percentage of revenues (108.20 )% (46.03 )%
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. In May and December 2023, we also received proceeds of $4.6 million, net of underwriting
discounts and commissions and other offering costs of $0.4 million, following our private placements.
We
have incurred significant losses and negative cash flows from operations and net loss was $6.3 million and $11.0 million for the years
ended December 31, 2023, and December 31, 2022, respectively. During the years ended December 31, 2023, and December 31,
2022, we had negative cash flows from operations of $6.6 million and $7.8 million, respectively. As of December 31, 2023, our accumulated
deficit was $39.7 million. We have funded our operations to date through
equity and debt financing and have cash on hand (including short term bank deposits and restricted cash equivalents)
of $2.4 million and long-term restricted cash and cash equivalents and
restricted bank deposits of $3.4 as of December 31, 2023. 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 are not successful in generating sufficient cash flow or completing additional financing, including debt refinancing which shall
release restricted cash, then we will need to execute a new cost reduction plan in addition to previous cost reduction plans that were
executed so far. 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, that 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 our operations. Management has evaluated the significance of these conditions and has determined
that we do not have sufficient resources to meet our operating obligations for at least one year from the issuance date of these consolidated
financial statements. These conditions raise substantial doubt as to our ability to continue as a going concern. These consolidated financial
statements have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result from
the outcome of this uncertainty.
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 and Israel, Hamas and Hezbollah, 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.
48
Cash Flows
The table below, for the periods indicated, provides
selected cash flow information:
Net cash provided by (used in) investing activities 3,821 (4,034 )
Net cash provided by financing activities 3,761 15,286
As of December 31, 2023, we had cash, cash equivalents,
and restricted cash of $5.5 million compared to $4.3 million of cash, cash equivalents and restricted cash as of December 31, 2022.
Cash used in operating
activities (including the effect of exchange rate changes on cash and cash equivalents and restricted cash) amounted to $6.3 million
for the year ended December 31, 2023, compared to $7.8 million for the year ended December 31, 2022. The decrease in cash used in
operating activities was mainly due to a decrease in trade receivables, which was partially offset by the increase in our
operational loss.
Net cash provided by investing
activities was $3.8 million for the year ended December 31, 2023, compared to cash used in investing activities of $4.0 million for the
year ended December 31, 2022. The increase in cash used in investing activities was mainly due to changes in short term deposits and
restricted bank deposits.
Net cash provided by financing
activities was $3.8 million for the year ended December 31, 2023, compared to $15.3 million for the year ended December 31, 2022. The
cash flow from financing activities for the year ended December 31, 2023, resulted from proceeds from private placements which closed
on May and December 2023 in the aggregate amount of $4.6 million, net of underwriting commissions and other offering costs of $0.4 million
see note 14(d) to the condensed consolidated financial statements. 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, net of underwriting discounts and commissions and
other offering costs of $1.0 million.
49
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 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.
Marketable securities
Marketable securities
consist of debt securities. We elected the fair value option to measure and recognize our investments in debt securities in accordance
with ASC 825, Financial Instruments as we manage our portfolio and evaluates the performance on a fair value basis. Changes in fair value,
realized gains and losses on sales of marketable securities, are reflected in the statements of operation as finance expense (income),
net.
Inventory
Inventories are stated
at the lower of cost (cost is determined on a weighted average cost method) or net realizable value. Our inventories generally
are subject to impairment as they age. We regularly evaluate the carrying value of our inventories and when, based on such evaluation,
factors indicate that impairment has occurred, we impair the inventories’ carrying value.
Revenue recognition
The Company’s products consist of hardware
and 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 generally 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.
50
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
end-users, 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) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) it satisfies
its performance obligations.
Performance obligations promised in a contract
are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby
the customer can benefit from the good or service either on its own or together with other resources that are readily available from third
parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately
identifiable from other promises in the contract.
The transaction price is determined based on the
consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. The Company’s
contracts do not include additional discounts once the product price is set, right of returns, significant financing components or any
forms of variable consideration.
The Company uses the practical expedient and does
not assess the existence of a significant financing component when the difference between payment and revenue recognition is less than
a year. The Company’s service period is for one or more years and is paid for either up front or on a quarterly basis.
Accounting standards updates not yet adopted
Please see Note 2(hh) to our consolidated
financial statements included elsewhere in this prospectus for information.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
51
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.
ACTELIS NETWORKS, INC.
2023 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Balance sheets F-3 – F-4
Statements of comprehensive loss F-5
Statements of mezzanine equity and shareholders’ equity F-6
Statements of cash flows F-7 – F-8
Notes to consolidated financial statements F-9 – F-42
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, 2023 and 2022, and the related consolidated statements
of comprehensive loss, of mezzanine equity and shareholders’ equity and of cash flows for the years then ended, 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, 2023 and 2022, and the results of its
operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States
of America.
Substantial Doubt about the Company’s Ability to Continue
as a Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1b to the
consolidated financial statements, the Company has incurred recurring losses and negative cash flows from operating activities and
has an accumulated deficit as of December 31, 2023 that raise substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 1b. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we
are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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 26, 2024
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:
Restricted cash equivalents 1,565 -
Restricted bank deposits - 451
NON-CURRENT ASSETS:
Property and equipment, net 5 61 80
Restricted cash and cash equivalents 3,330 336
Restricted bank deposits 94 2,027
Operating lease right of use assets 6 918 726
Long-term deposits 78 12
F-3
ACTELIS NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(U. S. dollars in thousands except for share and
per share amounts)
December 31
Liabilities, Mezzanine Equity and shareholders’ equity
CURRENT LIABILITIES:
Current maturities of long-term loans 8 1,335 553
Employee and employee-related obligations 737 793
Operating lease liabilities 6 498 445
NON-CURRENT LIABILITIES:
Long-term loan, net of current maturities 8 3,154 4,625
Operating lease liabilities 405 237
Other long-term liabilities 23 48
TOTAL NON-CURRENT LIABILITIES 3,923 5,352
COMMITMENTS AND CONTINGENCIES 11
MEZZANINE EQUITY
Warrants to Placement Agent 14d 159 -
SHAREHOLDERS’ EQUITY : (*) 14
TOTAL SHAREHOLDERS’ EQUITY 229 3,265
TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY 11,223 14,819
* Adjusted to reflect reverse stock split, see note 2(ff).
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 2,702 2,766
Sales and marketing expenses, net 3,030 3,282
General and administrative expenses 3,531 4,163
Interest expenses (766 ) (830 )
Other financial income (expenses), net 18 1,843 (4,051 )
NET COMPREHENSIVE LOSS FOR THE YEAR (6,286 ) (10,982 )
* Adjusted to reflect reverse stock split, see note 2(ff).
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
ACTELIS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND
SHAREHOLDERS’ EQUITY
U.S. dollars in thousands (except number of shares)
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 - - - (2,700 ) * - - 15 - 15
Net comprehensive loss for the year - - - - - - - - (10,982 ) (10,982 )
Exercise of options into common stock - - - 32,009 - - - - - -
Share based compensation - - - - - - - 377 - 377
Repurchase of common stock - - - (7,920 ) * - - (50 ) - (50 )
Exercise of pre-funded warrants into common stock - - - 754,670 * - - * - *
Net comprehensive loss for the year - - - - - - - - (6,286 ) (6,286 )
* Represents an amount less than $1 thousand.
** Adjusted to reflect reverse stock split, see note 2(ff).
The accompanying
notes are an integral part of these consolidated financial statements.
F-6
ACTELIS NETWORKS, INC.
CONSOLIDATED 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:
Warrant issuance costs 223 -
Exchange rate differences (460 ) (627 )
Share-based compensation 377 220
Changes in fair value related to convertible loan - 1,648
Changes in fair value related to convertible note - 1,753
Changes in operating assets and liabilities:
Net change in operating lease assets and liabilities 19 (44 )
Prepaid expenses and other current assets 357 (280 )
Other long-term assets (100 ) (492 )
Trade payables (25 ) (139 )
Deferred revenues (188 ) (25 )
Other current liabilities (172 ) 508
Other long-term liabilities (10 ) (41 )
Net cash used in operating activities (6,577 ) (7,768 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Long- term deposit (56 ) 66
Proceeds from restricted long term bank deposits 4,827
Deposit of restricted long-term bank deposits (2,810 ) (27 )
Restricted short term bank deposit 451 (2,451 )
Purchase of property and equipment (9 ) -
Net cash provided by (used in) investing activities 3,821 (4,034 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options - 5
Proceeds from initial public offering - 18,697
Underwriting discounts and commissions and other offering costs (420 ) (2,175 )
Repurchase of common stock (50 )
Repayment of long-term loan (769 ) (1,241 )
Net cash provided by financing activities 3,761 15,286
INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 1,236 3,484
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR 4,279 795
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR 5,515 4,279
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Restricted cash equivalents, current 1,565 -
Restricted cash and cash equivalents, non-current 3,330 336
Total cash, cash equivalents and restricted cash 5,515 4,279
F-7
ACTELIS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
U.S. DOLLARS IN THOUSANDS
Year ended December 31
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Conversion of warrants to common stock upon initial public offering - 3,190
Repurchase of common stock - 15
Issuance costs of common stock, pre-funded warrants and warrants 159 -
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
ACTELIS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. DOLLARS IN THOUSANDS
NOTE 1 - GENERAL:
F-9
NOTE 2 - 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”).
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 Fair value of financial instruments, inventory write-offs, as well as in estimates used in applying the revenue recognition
policy. 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 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 Other financial
income (expenses), net , as appropriate.
d. Principles of consolidation
The consolidated financial statements
include the accounts of the Company and its wholly owned 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 cash equivalents and restricted deposits
Restricted cash and cash
equivalents consists of cash and cash equivalents 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 deposit bank accounts including
deposits held as collateral for guarantees to third parties and others, classified as current or long term based on the expected
timing of the disbursement.
g. Treasury Shares
Treasury shares represent 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. The treasury shares have no rights.
F-10
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
h. Trade Receivables, net
Trade
receivables are recorded at the invoiced amount, are mostly unsecured and do not bear interest. Accounts receivable have been
reduced by an allowance for credit losses. The Company maintains the allowance for estimated losses resulting from the inability of
the Company’s customers to make required payments. The allowance represents the current estimate of lifetime expected credit
losses over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts
when appropriate. The estimate is a result of the Company’s ongoing evaluation of collectability, customer creditworthiness,
historical levels of credit losses and future expectations. On this basis, management has determined that an allowance for credit
losses of $168 and $125 was appropriate as of December 31, 2023, and December 31, 2022, respectively. Expenses for allowance for
credit losses for the years ended December 31, 2023, and 2022 were $43 and $64, respectively.
i. Inventories
Inventories are stated at a 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 are 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.
The useful lives of the assets are
as follows:
Years
Computers, electronic equipment Mainly 3
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 products consist
of hardware and 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 generally 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-11
NOTE 2 - 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 end-users, 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) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) it satisfies
its performance obligations.