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. (“Actelis,”
“we,” “us,” “our,” “the Company,” “our company”) 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.
Our networking solutions
use a combination of newly deployed fiber infrastructure and existing copper and coaxial lines which our patented technology can upgrade
to Fiber-grade to jointly create what we believe to be a highly cost-effective, secure, and quick-to-deploy network. Our patent protected
hybrid fiber networking solutions deliver excellent communication over fiber to locations that may be easy to reach with new fiber. However,
for locations that are difficult, or too costly to reach with fiber, we can upgrade existing copper lines to deliver cyber-hardened, high-speed
connectivity without needing to replace the existing copper infrastructure with new fiber. We believe that such hybrid fiber copper networking
solution has distinct advantages in most real-life installations, while providing significant budget savings and accelerating deployment
of modern IoT networks. Based on our experience, most IoT projects have challenging, hard to reach with fiber locations which may explode
such projects’ timeline and budgets. We believe that our solutions can provide connectivity over either fiber or copper with speeds
of up to multi-Gigabit communication, while supporting Fiber-grade reliability and quality.
A primary focus of ours is
to provide our customers with a cyber-secure network solution. We currently offer Triple-Shield protection of data delivered with coding,
scrambling and encryption of the network traffic. We also provide secure, encrypted access to our network management software, and are
working to further enhance system-level and device-level software protection. We are also working to introduce additional capabilities
for network-wide cyber protection software as an additional SW and license-based services.
When high speed, long reach,
reliable and secure connectivity is required, network operators usually resort to using wireline communication over physical communication
lines such as fiber, coax, and copper, rather than wireless communication that is more limited in performance, reliability, reach and
security. However, new fiber wireline infrastructure is costly to deploy, involves lengthy civil works to install, 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.
Providing new fiber connectivity
to hard-to-reach locations is especially costly and time-consuming, often requiring permits for boring, trenching, and right-of-way, sometimes
done over many miles. Connecting such hard-to-reach locations may cause significant delays and budget overruns in IoT projects. Our solutions
aim to solve these challenges by instantly enhancing performance of such existing copper and coax infrastructure to fiber-grade performance,
through the use of advanced signal processing and unique, patented network architecture, without the need to run new fiber to hard-to-reach
locations; thus, effectively accelerating deployment of many IoT projects, as we estimate, sometimes from many months to only days. The
result for the network owner is a hybrid network that optimizes the use of both new Fiber (where available) as well as upgraded, fiber-grade
copper and coax that is now modernized, digitized and cyber-hardened. This unique hybrid network approach is making IoT projects often
significantly more affordable, fast to deploy and predictable to plan and budget.
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In addition, our solutions
can also provide power over existing copper and coax lines to remotely power up network elements and IoT components connected to them
(like cameras, small cell and Wi-Fi base stations sensors etc.). Connecting power lines to millions of IoT locations can be costly and
very time consuming as well (similar to data connectivity, for the same reason — need for civil works). By offering the ability
to combine power delivery over the same existing copper and coax 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.
Since our inception, our
business was focused on serving telecommunication service providers, also known as Telcos, to provide 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 introduced additional products, we turned our focus on serving the wide-area IoT, federal and DoW markets, as well as multi-dwelling
units, and introduced, in 2024, our cyber-aware networking solutions for IoT markets as well.
Our operations are focused
on our fast-growing federal and DoW markets, Intelligent Transportation and MDUs while maintaining our commitment to our existing Telco
customers. In 2024, we introduced new product offering, some of which could serve both the IoT markets and our Telco customers.
In August 2024, we announced
signing a strategic partnership with an advanced cybersecurity provider to develop and deliver a novel, AI-Powered SaaS offering, under
Actelis’ ‘Cyber Aware Networking’ initiative. This software, designed as an intelligence layer integrated into Actelis’
networking devices, leverages the network’s power and proximity to IoT devices to monitor and protect physical assets such as cameras,
sensors, and other devices at the edge, enabling corrective actions before issues propagate throughout the network.
We derive a majority of our
revenues from our existing and new IoT (including federal and DoW) customers. For the years ended December 31, 2025 and December 31,
2024, our IoT customers in the aggregate accounted for approximately 73% and 72% of our revenues, respectively.
We derive a significant portion
of our revenues from a limited number of our customers. For the years ended December 31, 2025 and December 31, 2024, our
top ten customers in the aggregate accounted for approximately 62% and 74% of our revenues.
In February 2024, we entered into the Credit Line. The Credit Line
is secured by customer invoices and incurs interest at a Federal SOFR rate plus 5.5%. The Credit Line was extended until February 1, 2026.
As of the date hereof, the Company has not further extended the credit facility; however, it may do so in the future.
The Credit Line balance drawn
is examined every month, adjusted up to every three months, and the repayment of the Credit Line is made up to every three months subject
to the expiration of the financing period for the invoices that were financed. We may refinance newly issued invoices at any time up to
the Credit Line limit and subject to the terms of the Credit Line. As of December 31, 2025 the current balance outstanding is approximately
$479,234.
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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 2,638 2,383
Other Income, net - (163 )
Interest expenses (251 ) (618 )
Other financial income (expense), net (825 ) 2
Net Comprehensive Loss for the year (8,261 ) (4,374 )
Year Ended December 31, 2025, Compared to Year
Ended December 31, 2024
Revenues
Our revenues for the year
ended December 31, 2025 amounted to $3.7 million, compared to $7.8 million for the year ended December 31, 2024. The decrease was primarily
attributable to software and services renewal last year for 2 years which will be up for renewal in 2027, as well as a large deal to the
City of Washington D.C. last year, while 2025’s revenues are more backend loaded.
Cost of Revenues
Our cost of revenues for
the year ended December 31, 2025, amounted to $2.5 million compared to $3.5 million for the year ended December 31, 2024. The decrease
from the corresponding period was primarily attributable to a decrease in sales which led to a decline in variable costs and fixed cost
remaining constant.
Research and Development Expenses
Our research and development expenses for the year ended December 31,
2025, amounted to $2.6 million compared to $2.4 million for the year ended December 31, 2024. The increase is due to the strengthening
of the Israeli shekel against the U.S. dollar which led to an increase in expenditure by approximately $151,000.
Sales and Marketing Expenses
Our sales and marketing expenses for the year ended December 31, 2025,
amounted to $2.9 million compared to $2.6 million for the year ended December 31, 2024. The increase was primarily attributable to engaging
consultants to expand market reach in primarily the government sector.
General and Administrative Expenses
Our general and administrative
expenses for the year ended December 31, 2025, amounted to $2.9 million compared to $3.2 million for the year ended December 31, 2024. The
decrease was mainly due to cost reduction measures taken, while these benefits were offset by higher costs driven by the strengthening
of the Israeli shekel against the U.S. dollar.
Other Income
We had no other Income for
the year ended December 31, 2025, compared to $163,000 for the year ended December 31, 2024. The income in 2024 is related to government
grant from the State of Israel associated with the Iron Swords war.
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Operating Loss
Our operating loss for the
year ended December 31, 2025, was $7.2 million, compared to an operating loss of $3.8 million for the year ended December 31, 2024. The
increase was mainly due to the decline in sales, while operating expenditure remained consistent and increased operating expenses by
$0.3 million driven by the strengthening of the Israeli shekel against the U.S. dollar by approximately 7%.
Financial Expenses (income), Net
Our financial expenses, net for the year ended December 31, 2025, was
approximately $1.08 million of interest expense, compared to $620,000 for the year ended December 31, 2024 The increase is mainly due
to expenditure of $750,000 related to the Commitment Fee under the Common Stock Purchase Agreement payable in common shares issuance.
Net Loss
Our net loss for the year ended December 31, 2025 was $8.3 million, compared to
a net loss of $4.4 million for the year ended December 31, 2024. This increase was primarily attributable to lower sales while operating
expenditure remained consistent, as well as due to a one-time financial commitment expenditure of $750,000. In addition, the Israeli shekel
strengthened by an average of 7% against the U.S. dollar, leading to higher operating expenses and contributing to increase in net loss.
Non-GAAP Financial Measures
Other financial expense (income), net 825 (2 )
Tax Expense - 103
Fixed asset depreciation expense 20 26
Stock based compensation 309 337
Other one-time costs and expenses/(income) - (189 )
Non-GAAP Adjusted EBITDA (6,856 ) (3,481 )
GAAP net loss margin (225 )% (56.37 )%
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.
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.
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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 (6,856 ) (3,481 )
As a percentage of revenues (186.73 )% (44.86 )%
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, proceeds of $4.6 million, net of underwriting
discounts and commissions and other offering costs of $0.4 million, were also received following our private placements.
July 2025 Private Placement
On June 30, 2025, we entered
into the July 2025 Purchase Agreement with certain accredited Investors, pursuant to which we agreed to issue and sell to the Investors
in the July 2025 Private Placement (a) 162,602 shares of Common Stock, (b) Series A-3 Warrants to purchase up to 162,602 shares of Common
Stock, and (c) Series A-4 Warrants to purchase up to 325,204 shares of Common Stock, for a purchase price of $6.15 per share and related
July 2025 Common Warrants, for a total aggregate gross proceeds of approximately $1 million. The July 2025 Private Placement closed on
July 2, 2025.
The Series A-3 Warrants have
an exercise price of $6.15 per share, are exercisable commencing on the July 2025 Shareholder Approval Date and expire five years following
the July 2025 Shareholder Approval Date. On November 7, 2025, the July 2025 Shareholder Approval was obtained in a special meeting of
our shareholders, resulting in the July 2025 Shareholder Approval Date being such date.
The Series A-4 Warrants have
an exercise price of $6.15 per share, are exercisable commencing on the July 2025 Shareholder Approval Date and expire eighteen months
following the July 2025 Shareholder Approval Date.
HCW acted as the Placement
Agent for the issuance and sale of the Securities. The Company has agreed to pay an aggregate cash fee equal to 7.0% of the gross proceeds
received by the Company from the Offering and $35,000 for accountable expenses to the placement agent. The Company also agreed to issue
to the Placement Agent, or its designees, July 2025 Placement Agent Warrants to purchase up to 7.0% of the aggregate number of the shares
of Common Stock sold to the Investors (or warrants to purchase up to 11,382 shares of Common Stock) at an exercise price per share of
$7.688 which will be exercisable commencing on the July 2025 Shareholder Approval Date and a have term of five years after the July 2025
Shareholder Approval Date.
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September 2025 Warrant Inducement
On September 2, 2025, we entered
into the Inducement Letter with a Holder of certain of the Company’s Existing Warrants to purchase an aggregate of 427,020 shares
of the Company’s common stock, consisting of (i) 127,119 warrants issued on December 20, 2023 with an expiration date of June 20,
2029 at an exercise price of $11.8 per share (ii) 99,967 warrants issued on June 6, 2024 with an expiration date of December 6, 2029 at
an exercise price of $20.00 per share and (iii) 199,934 warrants issued on July 2, 2024 with an expiration date of July 2, 2026 at an
exercise price of $17.50 per share.
Pursuant to the Inducement
Letter, the Holder agreed to exercise for cash the Existing Warrants to purchase an aggregate of 427,020 shares of the Company’s
common stock at a reduced exercise price of $3.70 per share in consideration of the Company’s agreement to issue the New Warrants,
as descried below, to purchase up to an aggregate of 640,530 New Warrant Shares at an exercise price of $3.70 per share. The Company received
aggregate gross proceeds of approximately $1.6 million from the exercise of the Existing Warrants by the Holder, before deducting financial
advisory fees and other offering expenses payable by the Company.
Rodman & Renshaw LLC and
HCW acted as financial advisors to the Company in connection with the transactions contemplated by the Inducement Letter. Pursuant to
an engagement letter with HCW, the Company has agreed to pay the financial advisors a cash fee equal to 7.0% of the aggregate gross proceeds
received from the Holder’s exercise of the Existing Warrants, as well as a management fee equal to 1.0% of the gross proceeds from
the exercise of the Existing Warrants and $25,000 paid for non-accountable expenses. The Company has also agreed to issue to the financial
advisors or their designees the Inducement Placement Agent Warrants to purchase up to 29,891 shares of common stock (representing 7.0%
of the Existing Warrants being exercised), which will have the same terms as the New Warrants having a term of five years of Stockholder
Approval (as defined below) except the Inducement Placement Agent Warrants will have an exercise price equal to $4.625 per share (125%
of the exercise price of the Existing Warrants).
The New Warrants have an exercise
price equal to $3.70 per share. The New Warrants will be exercisable from the effective date (the “Warrant Stockholder Approval
Date”) of shareholder approval (“Stockholder Approval”), until (i) the five-year anniversary of such date for 340,629
of the New Warrants and (ii) the twenty-four-month anniversary of such date for 299,901 of the New Warrants. The exercise price and number
of New Warrant Shares issuable upon exercise of the New Warrants is subject to appropriate adjustment in the event of stock dividends,
stock splits, subsequent rights offerings, pro rata distributions, reorganizations, or similar events affecting the Company’s common
stock and the exercise price. On November 7, 2025, the Warrant Stockholder Approval was obtained in a special meeting of our shareholder,
resulting in the Warrant Stockholder Approval Date being such date.
The closing of the transactions
contemplated pursuant to the Inducement Letter occurred on September 3, 2025.
Provided that the Inducement
Letter prohibited the Company from entering into an agreement to effect any issuance by the Company involving a variable rate transaction,
the Holder agreed to waive such prohibition with respect to the transactions contemplated by the ELOC Purchase Agreement, and signed an
amendment to the Inducement Letter on October 9, 2025. Pursuant to such amendment, the Company issued to the Holder 10,000 warrants to
purchase shares of common stock of the Company on similar terms as the Series A-1 Warrants.
Equity Line of Credit Agreement
On September 27, 2025, we
entered into the Common Stock Purchase Agreement, with an effective date of October 1, 2025, and a related White Lion RRA with White Lion.
Pursuant to the Common Stock Purchase Agreement, the Company has the right, but not the obligation to require White Lion to purchase,
from time to time, up to $30,000,000 in aggregate Commitment Amount of newly issued shares of the Company’s Common Stock, subject
to certain limitations and conditions set forth in the Common Stock Purchase Agreement.
As consideration for White
Lion’s irrevocable commitment to purchase the Company’s Common Stock up to the Commitment Amount, the Company agreed to issue
shares of Common Stock to White Lion (the “Commitment Shares”) equal to $750,000 (the “Commitment Fee Amount”)
divided by the lowest traded price of the Company’s common stock during the 30 business days prior to the issuance of the Commitment
Shares. Upon mutual agreement with White Lion, the Company issued 1,704,545 pre-funded warrants to purchase shares of Common Stock exercisable
into the Commitment Shares on December 31, 2025.
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White Lion Private Placement
Concurrently on September
27, 2025, the Company entered into the PIPE Purchase Agreement with White Lion, pursuant to which the Company agreed to issue and sell
to White Lion in a private placement (the “Offering”) (i) 87,177 shares of Common Stock, and (ii) White Lion Pre-Funded Warrants
to purchase up to 312,823 shares of Common Stock (for a purchase price of $2.125 per share of Common Stock and $2.124 per White Lion Pre-Funded
Warrant, for a total aggregate gross proceeds of approximately $850,000. The Offering closed on September 29, 2025.
The Company had a right to
redeem 48,826 of the shares of Common Stock at a redemption price of $0.001 per share. The Company and White Lion have agreed that, in
lieu of such redemption, on October 20, 2025, the Company reduced the number shares issuable pursuant upon exercise of the White Lion
Pre-Funded Warrants by 48,826 shares, to 263,997.
The White Lion Pre-Funded
Warrants are immediately exercisable at an exercise price of $0.001 per share of Common Stock and will not expire until exercised in full.
However, the Company may not issue a number of shares of Common Stock pursuant to exercise of the White Lion Pre-Funded Warrants in an
amount that will not exceed the Exchange Cap when combined with the number of Shares issued in the Offering, before shareholder approval
for further issuance beyond the Exchange Cap is obtained. The Company intends to obtain such shareholder approval concurrently with the
Shareholder Approval required for the issuance of shares of Common Stock under the Common Stock Purchase Agreement beyond the Exchange
Cap.
December 2025 Offering
On December 17, 2025, we offered
and sold in the December 2025 Offering (i) 4,352,500 shares of the Company’s Common Stock, (ii) 1,897,500 December 2025 Pre-Funded
Warrants, and (iii) 6,250, December 2025 Common Warrants, at a purchase price of $0.80 per share of Common Stock and accompanying December
2025 Common Warrant, and $0.7999 per December 2025 Pre-Funded Warrant and accompanying December 2025 Common Warrant. Aggregate gross proceeds
from the December 2025 Offering (without taking into account any proceeds from any future exercises of December 2025 Warrants) were approximately
$5 million. The Offering closed on December 19, 2025.
The December 2025 Pre-Funded
Warrants are immediately exercisable at an exercise price of $0.0001 per share of Common Stock and will not expire until exercised in
full.
Each December 2025 Common
Warrant has an exercise price of $0.80 per share, is exercisable immediately on upon issuance and will expire on the five-year anniversary
of the date of issuance.
HCW acted as the sole placement
agent, on a “best efforts” basis, in connection with the Offering. On March 3, 2025, the Company and HCW had entered into
the Engagement Agreement with the Company to serve as exclusive underwriter, agent or advisor in any offering of securities of the Company
for a six-month term. The Engagement Agreement has been extended twice since its initial effectiveness and currently runs through March
12, 2026 . Under the Engagement Agreement, as extended, the Company agreed to pay the Placement Agent an aggregate cash fee equal
to 7.0% of the gross proceeds received by the Company in the Offering, as well as a management fee equal to 1.0% of the gross proceeds
raised in the Offering. The Company also agreed under the Engagement Agreement to reimburse the Placement Agent $25,000 for non-accountable
expenses and up to $100,000 for fees and expenses of legal counsel and other out-of-pocket expenses of the Placement Agent in connection
with the Offering. Pursuant to the Engagement Agreement, the Company will issue to the Placement Agent or its designees 437,500 December
2025 Placement Agent Warrants to purchase up to 437,500 shares of Common Stock, representing 7.0% of the sum of the Shares and Pre-Funded
Warrants to be sold in the Offering. The December 2025 Placement Agent Warrants have an exercise price of $1.00 per share of Common Stock
(representing 125% of the public offering price per Share and accompanying Common Warrant), are exercisable for five years from the date
of the commencement of sales in this offering, and otherwise reflect substantially the same terms as the December 2025 Common Warrants.
The Engagement Agreement contains representations, warranties, indemnification and other provisions customary for transactions of this
nature.
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The net proceeds to the Company
from the December 2025 Offering are approximately $4.46 million after deducting placement agent fees and estimated offering expenses payable
by the Company. The Company intends to use the proceeds from the Offering for general corporate purposes.
In September 2024, we entered
into the ATM Agreement with HCW pursuant to which we may offer and sell, at our option, up to $16.7 million of our shares of common stock
through an at-the-market equity program under which HCW agreed to act as sales agent. As of the date of this report, we have sold 4,646,045
of our shares of common stock for total gross proceeds of approximately $4.7 million under the ATM program. As of the date of this filing
and so long as our public float remains below $75.0 million, we are subject to limitations pursuant to General Instruction I.B.6 of Form
S-3, which limits the amount we can offer to up to one-third of our public float during any trailing 12-month period.
We have incurred significant
losses and negative cash flows from operations and net loss was $8.3 million and $4.4 million for the years ended December 31,
2025, and December 31, 2024, respectively. During the years ended December 31, 2025, and December 31, 2024, we had negative
cash flows from operations of $8.1 million and $6.5 million, respectively.
As of December 31, 2025,
our accumulated deficit was $52 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 $4.4 million and long-term restricted bank deposits of $30 thousand
and long term deposit of $91 thousand as of December 31, 2025. 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, 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.
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Cash Flows
The table below, for the
periods indicated, provides selected cash flow information:
Net cash (used in)/ provided by investing activities (8 ) 197
Net cash provided by financing activities 9,797 3,093
As of December 31, 2025,
we had cash, cash equivalents, and restricted cash of $4.4 million compared to $2.3 million of cash, cash equivalents and restricted cash
as of December 31, 2024.
Cash used in operating activities
(including the effect of exchange rate changes on cash and cash equivalents and restricted cash) amounted to $7.7 million for the year
ended December 31, 2025, compared to $6.5 million for the year ended December 31, 2024. The increase from the corresponding period was
mainly due to lower sales.
Net cash used by investing
activities was $8,000 for the year ended December 31, 2025, compared to cash provided by investing activities of $197,000 for the year
ended December 31, 2024. The decrease from the corresponding period was mainly due to the reduction in short-term bank deposits.
Net cash provided by financing
activities was $9.8 million for the year ended December 31, 2025, compared to $3.1 million for the year ended December 31, 2024. The increase
from the corresponding period was mainly driven by proceeds from sales of common stocks in an at the market (ATM) offering, proceeds from
private placements which occurred in July and September 2025, a follow-on securities offering which occurred in December 2025 and proceeds
from a warrant inducement transaction which occurred in September 2025.
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 report. 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, costs and expenses during the reporting period.
Actelis bases its estimates
primarily on historical and anticipated operations, market and customer trends and feedback, financial factors and indicators (for example,
interest rates, volatility of market share price etc.), product quality and manufacturing expectations, and various other assumptions
that it believes are reasonable under the circumstances, including assumptions as to future events.
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.
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Critical judgement and estimates
Critical judgement and
estimates have been used primarily in estimating revenues and estimate of future usage of existing inventory to determine the net
value of our inventory (see notes in financial statements).
Inventory
Inventories are stated at
the lower of cost (cost is determined on a weighted average cost method) or net realizable value. We regularly evaluate the carrying value
of our inventories in order to identify obsolete or excess inventory based on estimates of future demand for our products to support future
sales and service and we use information of historical usage and our short and long-term pipeline of opportunities. We also assess the
product volume requirement for replacement and repair of products in order to serve our installed base during and post warranty periods
If our demand forecast for specific products is greater than actual demand and we fail to reduce purchasing and manufacturing output accordingly,
we could be required to write off inventory beyond the current reserve, which would negatively impact our gross margin. 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.
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.
62
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.
Some of our contracts with
customers include multiple performance obligations, and we make estimates and judgments to allocate the transaction price to each performance
obligation based on an observable or estimated standalone selling price (“SSP”). The SSP is the price, or estimated price,
of the software or service when sold on a standalone basis. We consider our evaluation of SSP to be a critical accounting estimate.
An observable price of a
good or service sold separately provides the best evidence of SSP. However, in many situations, SSP will not be readily observable, but
must still be estimated using reasonably available information. We have observable standalone selling prices of our management software,
of our hardware products including the embedded software within, and our services offerings and their costs, and therefore use historical
transaction data on a standalone basis, our pricing models, along with our judgment, to establish SSP ranges for each of these elements..
As such, the establishment of SSP of our hardware, management software, maintenance and other services, and directly impact the amount
of revenues recognized, and therefore also impacts the overall timing of revenue recognition.
We review and analyze the
SSP ranges we have from time to time but no more than annually, which have not changed in 2025. In the future, SSP for our software and
services could be impacted by various factors, including potential changes in our pricing practices, customer demand for our products
and services, and various market or economic conditions. However, we consider the risk of significant volatility in our established SSP
to be small given our historical transaction experience and internal processes to monitor SSP ranges on an ongoing basis and work with
management in the event a trend that could impact the future ranges is detected.
Accounting standards updates not yet adopted
Please see Note 2 (ee)
to our consolidated financial statements included elsewhere in this prospectus for information.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
63
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ACTELIS NETWORKS, INC.
2025 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Balance sheets F-3 – F-4
Statements of comprehensive loss F-5
Statements of shareholders’ equity F-6
Statements of cash flows F-7 – F-8
Notes to consolidated financial statements F-9 – F-45
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, 2025 and 2024, and the related consolidated statements
of comprehensive loss, of 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, 2025 and 2024, 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, 2025. These circumstances 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 audits 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 18, 2026
We have served as the Company’s auditor since 2019.
Kesselman & Kesselman, 146 Derech Menachem Begin St. 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 305 300
Restricted bank deposit 76 -
Prepaid expenses and other current assets 4 634 584
NON-CURRENT ASSETS:
Property and equipment, net 5 26 38
Restricted bank deposits 30 91
Operating lease right of use assets 6 69 410
Long-term deposits 91 86
F-3
ACTELIS NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(U. S. dollars in thousands except for share and per
share amounts)
December 31
Liabilities and shareholders’ equity
CURRENT LIABILITIES:
Short term Loans 8 350 -
Employee and employee-related obligations 624 688
Current maturities of operating lease liabilities 6 14 415
NON-CURRENT LIABILITIES:
Long-term loans, net of current maturities 8 150 150
Deferred revenues 20 92
Operating lease liabilities, net of current maturities 23 6
Pre-funded Warrants Liability 10 750 -
Other long-term liabilities 6 180
TOTAL NON-CURRENT LIABILITIES 1,241 657
COMMITMENTS AND CONTINGENCIES 9
SHAREHOLDERS’ EQUITY (*): 11
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 9,530 8,225
* Adjusted to reflect reverse stock split, see note 2(bb).
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 2,638 2,383
General and administrative expenses 2,899 3,169
Other Income - (163 )
Interest expenses (251 ) (618 )
Other financial (expense) income, net 15 (825 ) 2
NET COMPREHENSIVE LOSS FOR THE YEAR (8,261 ) (4,374 )
* Adjusted to reflect reverse stock split, see note 2(bb).
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
ACTELIS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
U.S. dollars in thousands (except number of shares)
Common Stock Non-voting Common Stock Additional Total
CHANGES DURING THE YEAR ENDED DECEMBER 31, 2024:
Share Based Compensation - - - - 337 - 337
Vesting of RSUs 2,823 * - - (* ) - -
Warrant to lender 84 84
Issuance of common stock, net of offering costs 159,485 * - - 1,938 - 1,938
Exercise of Pre funded warrants into common stock 97,019 * - - - - - *
Exercise of options into common stock 2,281 * - - 32 - 32
Net comprehensive loss for the year - - - - - (4,374 ) (4,374 )
Share Based Compensation - - - - 309 - 309
Vesting of RSUs 3,168 * - - (* ) - -
Warrant to lender 22 22
Issuance of ordinary shares for ELOC holders 21,000 * - - 56 - 56
Reverse split share round-up adjustments 51,363 * - - - - -
Net comprehensive loss for the year - - - - - (8,261 ) (8,261 )
* Represents an amount less than $1 thousand.
** Adjusted to reflect reverse stock split, see note 2(bb).
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 and investors - (8 )
Financial expenses (income) 198 (24 )
Share-based compensation 309 337
Issuance costs of ELOC agreement 750 -
Changes in operating assets and liabilities:
Net change in operating lease assets and liabilities (44 ) 26
Prepaid expenses and other current assets (18 ) (143 )
Deferred revenues (95 ) (122 )
Other current liabilities (747 ) (580 )