U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM
For the quarterly period
ended
For the transition period from _________ to _________
Commission File No.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer |
(Address of principal executive offices)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No
Indicate the number of shares outstanding of
each of the issuer’s classes of common stock, as of the latest practicable date: as of August 22, 2023,
ACTELIS NETWORKS, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2023
TABLE OF CONTENTS
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Actelis Networks Inc.’s (the “Company”, “we”) financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performances, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performances or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to Part II, Item 1A of this Quarterly Report on Form 10-Q and the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 29, 2023, with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov.
In addition, forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
| ● | our ability to protect our intellectual property and continue to innovate; |
| ● | our success in retaining or recruiting, or changes required in, our officers, key employees or directors following our offering; |
| ● | the potential insufficiency of our disclosure controls and procedures to detect errors or acts of fraud; |
| ● | the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; |
| ● | the success of competing products or technologies that are or may become available; |
| ● | our potential ability to obtain additional financing; |
| ● | our ability to grow the business due to the uncertainty resulting from the recent COVID-19 pandemic or any future pandemic; |
| ● | our ability to comply with complex and increasing regulations by governmental authorities; |
| ● | our ability to maintain continued listing of our securities listed on the Nasdaq Capital Market; |
| ● | our public securities’ potential liquidity and trading; |
| ● | our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act; |
| ● | our anticipated use of the proceeds from our initial public offering (“IPO”) and subsequent equity finncings; and |
| ● | our financial performance following the date hereof. |
ii
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. Forward-looking statements are based on our management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions, and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate.
The forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date of this filing. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date hereof.
iii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
ACTELIS NETWORKS, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED June 30, 2023
(Unaudited)
TABLE OF CONTENTS
|
Page | ||
| Condensed consolidated financial statements (unaudited) – U.S. dollars in thousands: | ||
| Condensed consolidated balance sheets | F2-F3 | |
| Condensed consolidated statements of comprehensive loss | F-4 | |
| Condensed consolidated statements of redeemable convertible preferred stock, warrants to placement agent and Shareholders' equity | F5-F6 | |
| Condensed consolidated statements of cash flows | F7-F8 | |
| Notes to condensed consolidated financial statements | F9-F22 |
F-1
ACTELIS NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(U. S. dollars in thousands except for share and per share amounts)
| June 30, 2023 |
December 31, | |||||||
| Assets | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | ||||||||
| Short term deposits | ||||||||
| Restricted bank deposits | ||||||||
| Trade receivables, net of allowance for credit losses of $ | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Prepaid expenses | ||||||||
| Restricted cash | ||||||||
| Restricted bank deposits | ||||||||
| Severance pay fund | ||||||||
| Operating lease right of use assets | ||||||||
| Long term deposits | ||||||||
| TOTAL NON-CURRENT ASSETS | ||||||||
| TOTAL ASSETS | ||||||||
F-2
ACTELIS NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
UNAUDITED
(U. S. dollars in thousands except for share and per share amounts)
| June 30, 2023 | December 31, | |||||||
| Liabilities and redeemable convertible preferred stock, warrants to placement agent and shareholders’ equity | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Current maturities of long-term loans | ||||||||
| Warrants | ||||||||
| Trade payables | ||||||||
| Deferred revenues | ||||||||
| Employee and employee-related obligations | ||||||||
| Accrued royalties | ||||||||
| Current maturities of operating lease liabilities | ||||||||
| Other accrued liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
NON-CURRENT LIABILITIES: | ||||||||
| Long-term loan, net of current maturities | ||||||||
| Warrants | ||||||||
| Deferred revenues | ||||||||
| Operating lease liabilities | ||||||||
| Accrued severance | ||||||||
| Other long-term liabilities | ||||||||
| TOTAL NON-CURRENT LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 10) | ||||||||
| REDEEMABLE CONVERTIBLE PREFERRED STOCK: | ||||||||
| Redeemable
convertible preferred stock - $ | ||||||||
| WARRANTS TO PLACEMENT AGENT (Note 11(e)) | ||||||||
SHAREHOLDERS' EQUITY (**): | ||||||||
| Common stock, $ | ||||||||
| Non-voting common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND REDEEMABLE CONVERTIBLE PREFERRED STOCK, WARRANTS TO PLACEMENT AGENT AND SHAREHOLDERS’ EQUITY | ||||||||
| (**) |
The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).
F-3
ACTELIS NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(U. S. dollars in thousands except for share and per share amounts)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUES | ||||||||||||||||
| COST OF REVENUES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Research and development expenses, net | ||||||||||||||||
| Sales and marketing expenses, net | ||||||||||||||||
| General and administrative expenses, net | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Financial income (expenses), net | ( | ) | ( | ) | ||||||||||||
| NET COMPREHENSIVE LOSS FOR THE PERIOD | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| (*) |
The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).
F-4
ACTELIS NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK, WARRANTS TO PLACEMENT AGENT AND SHAREHOLDERS’ EQUITY
(UNAUDITED)
U.S. dollars in thousands (except number of shares)
| Warrants to Placement Agent | Redeemable Convertible Preferred Stock | Common Stock | Non-voting
Common Stock | Total | ||||||||||||||||||||||||||||||||||||
| Amount | Number of shares (**) | Amount | Number
of shares(**) | Amount | Number
of shares(**) | Amount | Additional paid-in capital | Accumulated deficit | shareholders’ equity (deficiency) | |||||||||||||||||||||||||||||||
| BALANCE AS OF JANUARY 1, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| CHANGES DURING THE FIRST QUARTER ENDED March 31, 2022: | ||||||||||||||||||||||||||||||||||||||||
| Exercise of options into common stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Share based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Net comprehensive loss for the period | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| BALANCE AS OF March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Share based compensation | ||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible preferred stock to common stock upon initial public offering | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon initial public offering and private placement, net of underwriting discounts and commissions and other offering costs | ||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible loan to common stock upon initial public offering | ||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible note to common stock upon initial public offering | ||||||||||||||||||||||||||||||||||||||||
| Conversion of warrants to common stock upon initial public offering | ||||||||||||||||||||||||||||||||||||||||
| Redemption of non-voting common stock upon initial public offering | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Net comprehensive loss for the period | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| BALANCE AS OF June 30, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||||||
F-5
| Warrants
to Placement Agent | Convertible Preferred Stock | Common Stock | Non-voting
Common Stock | Total | ||||||||||||||||||||||||||||||||||||
| Amount | Number
of shares(**) | Amount | Number
of shares(**) | Amount | Number
of shares(**) | Amount | Additional paid-in capital | Accumulated deficit | shareholders’ equity (capital deficiency) | |||||||||||||||||||||||||||||||
| U.S. dollars in thousands (except number of shares) | ||||||||||||||||||||||||||||||||||||||||
| BALANCE AS OF JANUARY 1, 2023 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| CHANGES DURING THE FIRST QUARTER ENDED March 31, 2023: | ||||||||||||||||||||||||||||||||||||||||
| Share based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net comprehensive loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| BALANCE AS OF March 31, 2023 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Share based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and pre-funded warrants upon private placement, net of underwriting commissions and other offering costs | ||||||||||||||||||||||||||||||||||||||||
| Exercise of options into common stock | ||||||||||||||||||||||||||||||||||||||||
| Net comprehensive loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| BALANCE AS OF June 30, 2023 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| * |
| (**) |
The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).
F-6
ACTELIS NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six
months ended | ||||||||
| 2023 | 2022 | |||||||
| U.S. dollars in thousands | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss for the period | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Changes in fair value related to warrants to lenders and investors | ( | ) | ||||||
| Warrant issuance costs | ||||||||
| Inventories write-downs | ||||||||
| Exchange rate differences | ( | ) | ( | ) | ||||
| Share-based compensation | ||||||||
| Changes in fair value related to convertible loan | ||||||||
| Changes in fair value related to convertible note | ||||||||
| Financial income from long term bank deposit | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables | ( | ) | ||||||
| Net change in operating lease assets and liabilities | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Trade payables | ( | ) | ||||||
| Deferred revenues | ( | ) | ||||||
| Other current liabilities | ( | ) | ||||||
| Other long-term liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Short term deposits | ( | ) | ||||||
| Long term Restricted bank deposits | ( | ) | ||||||
| Long term deposits | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from exercise of options | ||||||||
| Proceeds from common stocks, pre-funded warrants and warrants (see Note 11d) | ||||||||
| Proceeds from initial public offering and private placement | ||||||||
| Underwriting discounts and commissions and other offering costs | ( | ) | ( | ) | ||||
| Repurchase of common stock | ( | ) | ||||||
| Repayment of long-term loan | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ( | ) | ||||
| INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||
| BALANCE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE PERIOD | ||||||||
| BALANCE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE PERIOD | ||||||||
| * | Represents an amount less than $1 thousands. |
The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).
F-7
ACTELIS NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
Six
months ended | ||||||||
| 2023 | 2022 | |||||||
| U.S. dollars in thousands | ||||||||
| RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash, current | ||||||||
| Restricted cash, non-current | ||||||||
| Total cash, cash equivalents and restricted cash | ||||||||
| SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | $ | ||||||
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
Issuance costs of common stock, pre-funded warrants and warrants | $ | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).
F-8
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
U.S. DOLLARS IN THOUSANDS
NOTE 1 - GENERAL:
| a. | Actelis Networks, Inc. (hereafter -the Company) was established in 1998, under the laws of the state of Delaware. The Company has a wholly-owned subsidiary in Israel, Actelis Networks Israel Ltd. (hereafter – the Subsidiary). The Company is engaged in the design, development, manufacturing, and marketing of cyber hardened, hybrid fiber, copper networking solutions for IoT and Telecommunication companies. The Company's customers include providers of telecommunication services and enterprises as well as resellers of the Company's products. On May 12, 2022, the Company accepted a notification of effectiveness from the SEC, and on May 17 completed its IPO. See note 2 below for further details. |
| b. | In December 2019, a novel coronavirus disease, or COVID-19, was first reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The widespread health crisis is adversely affecting the broader economies, financial markets and overall demand environment for many of the Company’s products. |
The Company’s operations and
the operations of the Company’s suppliers, channel partners and customers were disrupted to varying degrees by a range of external
factors related to the COVID-19 pandemic, some of which are not within the Company’s control. Many governments imposed, and may
yet impose, a wide range of restrictions on the physical movement of people in order to limit the spread of COVID-19. The COVID-19 pandemic
has had, and likely will continue to have, an impact on the attendance and productivity of the Company’s employees, and those of
our suppliers, channel partners or customers, resulting in negative impacts to the Company’s results of operations and overall financial
performance. We suffered delays in realization of certain new orders from customers, delay in testing of some new technologies in customer
premises and difficulty conducting business development activities in an effective way (face-to-face). In addition, we had to increase
credit lines by $
The duration and extent of the impact from the COVID-19 pandemic or any future epidemic or pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, the effects of measures enacted by policy makers and central banks around the globe, and the impact of these and other factors on the Company’s employees, customers, channel partners and suppliers. If we are not able to respond to and manage the impact of such events effectively, our business will be affected.
| c. | The Company has incurred
significant losses and negative cash flows from operations and incurred losses of $ |
F-9
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 2– INITIAL PUBLIC OFFERING (*):
On May 17, 2022,
the Company finalized its IPO offering of an aggregate of
The net proceeds
from the offering, including the over-allotment, to the Company were approximately $
As a result of the IPO, the Company issued common stock in the transactions described below:
| 1) | Redeemable convertible preferred
stock - the Company issued |
| 2) | Convertible loan agreement (“CLA”) (see Note 8) –
the Company issued |
Upon such issuance, the Company reclassified the Convertible loan’s carrying amount (which reflected its then current fair value), into shareholders’ equity.
| 3) | Convertible notes (see Note 7) –The Company issued |
| 4) | Warrants (See Note 9): |
| 1. | The Company issued |
| 2. | The Company issued |
| 3. | In addition, concurrently with the IPO and in connection with the consummation of the IPO, the Company
issued common stock warrants to the underwriters. The warrants are exercisable into |
As of the issuance
date of the underwriter warrants, the fair value of the warrants was estimated at $
| 5) | The Company redeemed |
| (*) | Adjusted to reflect reverse stock split, see note 3(f). |
F-10
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES:
| a) | Basis of presentation |
The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with Article 10 of the Securities and Exchange Commission (“SEC”)’s Regulation S-X. As permitted under those rules, certain footnotes and other financial information that are normally required by generally accepted accounting principles in the United States (“U.S. GAAP”) can be condensed or omitted. These financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of its financial position as of and for the periods presented. These condensed consolidated financial statements and notes thereto are unaudited and should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022. The results of operations for the three and six months ended June 30, 2023, are not necessarily indicative of results that could be expected for the 2023 fiscal year or any other interim period or for any other future year. All intercompany transactions and balances have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current period presentation.
| b) | Use of estimates in preparation of financial statements |
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. The Company evaluates on an ongoing basis its assumptions, including those related to contingencies, fair values 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, judgments, and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
| c) | Revenue recognition |
The Company's products consist of hardware and an embedded software that function together to deliver the product's essential functionality. The embedded software is essential to the functionality of the Company's products. The Company's products are sold with a two-year warranty for repairs or replacements of the product in the event of damage or failure during the term of the support period, which is accounted for as a standard warranty. Services relating to repair or replacement of hardware beyond the standard warranty period are offered under renewable, fee-based contracts and include telephone support, remote diagnostics, and access to on-site technical support personnel.
The Company also offers its customers other management software. The Company sells its other non-embedded software either as perpetual or as term-based licenses.
The Company provides, to certain customers, software updates that it chooses to develop, which the Company refers to as unspecified software updates, and enhancements related to the Company's management software through support service contracts. The Company also offers its customers product support services which include telephone support, remote diagnostics and access to on-site technical support personnel.
The Company’s customers are comprised of resellers, system integrators and distributors.
F-11
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued):
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 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 year and is paid for either up front or on a quarterly basis.
Sales of products
Most of the Company’s contracts are of a single performance obligation (sales of the product with a standard warranty) thus the entire transaction price is allocated to the single performance obligation. In addition, the Company also sells separate services such as product support service and extended warranty.
Sales of software with related services
The Company sells perpetual management software and term-based licenses for its management software together with related services. The perpetual management software stand-alone selling price is established by taking into consideration available information such as historical selling prices of the perpetual license, geographic location, and market conditions. For contracts that contain more than one identified performance obligation (a term-based license for its management software together with related services), the stand- alone selling price of a term-based license, is based on a ratio from the relevant perpetual management software stand-alone selling price. The stand-alone selling price of the related service is then determined by applying the residual method.
Revenue from selling the Company’s product and/or the software management (either as term-based or perpetual) is recognized at a point in time which is typically at the time of shipment of products to the customer or when the code is transferred, respectively. Revenue from services (e.g., product support service, software support service or extended warranty) is recognized on a straight-line basis over the service period, as a time-based measure of progress best reflects our performance in satisfying this performance obligation.
| d) | Fair value of financial instruments |
Fair value measurements are classified and disclosed in one of the following three categories:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
F-12
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued):
Fair value measurements at June 30, 2023 | ||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Warrants (See Note 9) | $ | $ | $ | $ | ||||||||||||
| Warrants (See Note 11(d)) | $ | $ | $ | $ | ||||||||||||
Fair value measurements at December 31, 2022 | ||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Warrants (See Note 9) | $ | $ | $ | $ | ||||||||||||
As of June 30, 2023, and December 31, 2022, the fair values of the Company’s cash, cash equivalents, short and long-term deposits, trade receivables, trade payables, long-term loan, restricted cash and restricted bank deposits approximated the carrying values of these instruments presented in the Company’s consolidated balance sheets because of their nature.
| e) | Concentration of risk |
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and trade receivables. Cash and cash equivalents and restricted cash are placed with banks and financial institutions in the United States and Israel.
Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, present minimal credit risk with respect to those investments.
The Company’s trade receivables are derived primarily from telecommunication operators, the Company’s reseller customers and enterprises located mainly in the United States, Europe, and Asia.
Credit risk with respect to trade receivables exists to the full extent of the amounts presented in the condensed consolidated financial statements.
Accounts receivable have been reduced by an allowance for doubtful accounts. 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.
F-13
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued):
The Company has major customers, representing as follows:
| 1. | Customer A represented | |
|
| 2. | Customer B represented |
| 3. | Customer C represented | |
| 4. | Customer D represented |
| 5. | Customer E represented |
The Company does not see any credit risk regarding the major trade receivable balance, as most of the remaining balance was paid off after the balance sheet date.
| f) | Reverse split |
On April 15, 2022, the Company’s Board of Directors approved a Reverse Stock Split in the ratio of forty-six to-one. The Reverse Stock split became effective as of May 2, 2022. On March 8 ,2023, the Company’s Board of Directors approved an additional Reverse Stock Split in the ratio of ten-to-one. The Reverse Stock split became effective as of April 18, 2023.
The Company accounted for the Reverse Stock Splits on a retroactive basis pursuant to ASC 260. As a result, all common stock, Non-voting Common stock, redeemable Convertible Preferred stock and options outstanding and exercisable for common stock, exercise prices and loss per share amounts have been adjusted, on a retroactive basis, for all periods presented in these condensed consolidated financial statements and the applicable disclosures, to reflect such Reverse Stock Split.
NOTE 4 - INVENTORIES:
| June 30, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | | |||||
| Finished goods | $ | $ | ||||||
| $ | $ | |||||||
Inventory write-downs
totaled to $
NOTE 5 - LEASES:
The Company’s Israeli subsidiary has an operating lease agreement for a facility in Israel, which expired on
F-14
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 6 - LOANS:
| a. | As a result of the COVID pandemic, the US and Israeli governments offered different programs of financial aid. The Company participated in the following programs: |
On July 1, 2020,
the Company received funding from an American Bank under the Small Business Administration COVID19 EIDL Program in the total of $
| b. | On December 9, 2020, the Company signed a new loan agreement with an Israeli based financial institution
for a loan of up to |
As part of the loan
agreement, the Company issued the new Lender warrants to acquire common stock in the amount of $
In November 2021,
the Company received additional funding in the amount of $
The loan covenants (the “covenants”) include a debt to EBITDA minimum ratio or a coverage ratio of the loan by current assets.
On December 21,
2022, pursuant to the terms of the loan Agreement, the Company deposited $
As of June 30, 2023, the Company was in compliance with the covenants.
| New Loan | New Loan | |||||
| EIDL Loan | from December 2020 and January 2021- In NIS * | from November 2021 - In NIS * | ||||
| 2023 (**) | ||||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| 2028 and thereafter | ||||||
| Less- accumulated interest | ( | ( | ( | |||
| Total |
| * |
| ** |
F-15
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 7 - CONVERTIBLE NOTE:
During December 2021 to April 2022,
the Company offered up to $
The Notes had an optional conversion
price at a
Prior to the IPO, discussed further
in Note 2, the Company determined that the predominant scenario was the IPO event. The Company measured the convertible note in its entirety
at fair value with changes in fair value recognized as financial income or loss in accordance with ASC 480-10. On May 17, 2022, the Company
finalized its IPO, as discussed in Note 2 and the notes were converted into the Company’s common stock.
| December 31, 2022 | ||||
| Fair value at the beginning of the period | $ | |||
| Additions | ||||
| Change in fair value reported in statement of comprehensive loss | ||||
| Conversion to the Company’s common stock | ( | ) | ||
| Fair value at the end of the period | $ | |||
The Company recorded other expense
(income) associated with the Notes during the three and six months ended June 30, 2023, and June 30, 2022, in the amount of $
NOTE 8 - CONVERTIBLE LOAN:
On March 28, 2017, the Company
entered into a convertible loan agreement (the “CLA”) in an aggregate principal amount of up to $
The valuation was performed under alternative scenarios of consummating an IPO or remaining private.
Upon the consummation of the IPO, the CLA was automatically converted into the Company’s common stock based on its contractual terms and conditions. For further information, see Note 2 above.
| Year ended December 31 | ||||
| 2022 | ||||
| Fair value at the beginning of the year | $ | |||
| Change in fair value reported in statement of comprehensive loss | ||||
| Conversion to the Company’s common stock | ( | ) | ||
| Fair value at the end of the period | $ | |||
The Company recorded other expense (income)
associated with the CLA during the three and six months ended June 30, 2023, and June 30, 2022, in the amount of $
F-16
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 9 – WARRANTS (*):
| a) | On August 24, 2016, the Company issued warrants to Comerica Bank (“Comerica”) for the purchase of |
Additionally, in connection with the consummation of the IPO and the change of the type of the stock from redeemable preferred stock to common stock at conversion, the Company reassessed the Comerica Warrants. As part of the contractual terms and conditions of Comerica’s Warrants, a portion of the warrants are exercisable, as of the IPO date, into the Company’s common stock. The Comerica Warrants are still outstanding as of March 31, 2023. The Company has evaluated whether the Comerica Warrants are still classified as liabilities and concluded that due to a change-of-control provision which may affect the exercise price or entitle Comerica to demand cash, instead of shares, to settle the warrants, Comerica’s Warrants will continue to be classified as liabilities and will be exercisable into the Company’s common shares.
| b) | During the period from February 2018 through November 2020, the Company issued warrants to Mizrahi-Tefahot Bank (“Mizrahi”) contemporaneously with obtaining a loan and a credit facility. The warrants are convertible into series B convertible redeemable preferred stock or common stock in a qualified financing round. The number of series B convertible redeemable preferred stock is determined by the lesser of (1) dividing the warrant amount (as determined under the contract) by the applicable exercise price which depends on the triggering event as established in the contract, or (2) the lowest stock purchase price in a qualified financing round. |
| c) |
During December 2020 and November 2021, the Company issued warrants to Migdalor contemporaneously with obtaining a loan. The warrants can either be (1) converted into the Company’s common stock (the number of which shall be determined based on the warrant amount established in the contract and the Company’s valuation as defined in the contract, or based on a triggering event), at any time during a period of 96 months), or (2) redeemed for cash based on the lesser of a predetermined amount or a formula as set in the contract, at any time and in Migdalor’s own discretion, during a period of 96 months from the date of issue. These warrants were classified as liabilities mainly due to the redemption feature over the options. |
Upon the consummation of the IPO (as further described in Note 2 above), the Company converted the outstanding warrants issued to Mizrahi and Migdalor into the Company’s common stock based on the contractual terms and conditions of the related warrant agreements.
| d) | On May 8, 2023, the Company completed a fund-raising round. Upon the consummation of the Offering and pursuant to an agreement entered into with the Holder and the underwriter, the Company issued warrants to purchase shares of Common Stock. See note 11(d) and 11(e) for further details. |
| June 30, 2023 | December 31, 2022 | |||||||
| Outstanding as of January 1 | ||||||||
| Additions | ||||||||
| Fair value changes | ( | ) | ||||||
| Conversion to the Company’s common stock | ( | ) | ||||||
| Outstanding at the end of the period | ||||||||
The Company recorded other expense (income) during the three
and six months ended June 30, 2023 and June 30, 2022, in the amount of $(
| (*) | Adjusted to reflect April 2023 reverse stock split, see note 3(f). |
F-17
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company is obligated to repay certain
research and development grants received from the Government of Israel in the form of a royalty rate on future sales of products derived
from the funded research and development activities. The aggregate amount of royalties to be paid is determined based on
As of June 30, 2023, the Company
had received approximately $
During the year ended December 31,
2022, the Company paid an amount of $
As of June 30, 2023, and December
31, 2022, the Company had a liability to pay royalties in the amount of approximately $
NOTE 11 – SHAREHOLDERS’ EQUITY (*):
| a. | Change in authorized stock |
On May 2, 2022, the Company’s Board of Directors approved an amendment to the Company’s Bylaws, stating the number of authorized stock to be increased, as described below:
| a. | Common stock- $ |
| b. | Non-voting common stock- $ |
| c. | Preferred stock- $ |
| b. | On May 16, 2022, the Company filed with the Secretary of State of the State of Delaware an amended and
restated certificate of incorporation (the “A&R COI”), which became effective immediately. The A&R COI did not change
the Company’s authorized shares of common stock and preferred stock of |
| c. | During January and February 2023, the Company purchased |
| d. | Offering of common stocks and warrants |
On
May 8, 2023, the Company completed a fund-raising round in a total gross amount of $
| 1. |
| 2. | 754,670 pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to |
| 3. | warrants to purchase up to |
The Company determined that the Common Warrants are not indexed to the Company’s own stock and therefore are precluded from equity classification. The Common Warrants will be measured at fair value at inception and in subsequent reporting periods with changes in fair value recognized as financial income or expense as change in fair value of warrant liabilities in the period of change in the condensed consolidated statements of comprehensive loss.
F-18
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 11 – SHAREHOLDERS’ EQUITY (continued) (*):
The Common
Warrants were recorded at fair value on May 8, 2023, at $
The valuation was
based on a Black-Scholes option-pricing model, using an expected volatility of
The Company recorded
other income (expenses) during the three and six months ended June 30, 2023, in the amount of $
| e. | Offering Costs related to May 2023 fund-raising round |
Upon the consummation of the Offering and pursuant to an
agreement entered into with H.C. Wainwright & Co., LLC (the “Underwriter”), the Company has paid in cash to the Underwriter
(and the escrow agent) a total amount of $
As of the
issuance date of the underwriter warrants, the fair value of the warrants was estimated at $
Out of the total offering costs, an amount of $
The allocation of total offering costs between the warrants, common stocks and prefunded warrants was in the same proportion as the allocation of the total proceed from the offering.
During July and August
2023, the Holder elected to exercise
| f. | Share-based compensation: |
| 1) |
| Number of options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
| Outstanding – January 1, 2023 | $ | |||||||||||
| Granted | $ | |||||||||||
| Exercised | ( | ) | $ | |||||||||
| Expired and forfeited | ( | ) | $ | |||||||||
| Outstanding – June 30, 2023 | $ | |||||||||||
| Exercisable – June 30, 2023 | $ | |||||||||||
F-19
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 11 – SHAREHOLDERS’ EQUITY (continued) (*):
See also Note 2 above regarding warrants granted to the underwriters upon the consummation of the IPO in consideration for their underwriting services.
| 2) | Restricted Stock Units (*): |
During the six months ended June 30,
2023, the Company issued
The RSUs are vested over a three-year period.
The grant-date fair value of the RSUs granted was based on the Company’s common stock price at the time of grant.
| June 30, 2023 | ||||||||
| Number of RSUs | Weighted-Average Grant Date Fair Value | |||||||
| RSUs outstanding at the beginning of the year | $ | | ||||||
| Granted during the period | ||||||||
| Exercised during the period | ( | ) | ||||||
| Forfeited during the period | ( | ) | ||||||
| Outstanding as of June 30, 2023 | $ | |||||||
| (*) | Adjusted to reflect April 2023 reverse stock split, see note 3(f). |
NOTE 12 - BASIC AND DILUTED LOSS PER SHARE (*):
Basic net loss per share is computed using the weighted average number of shares of common stock and pre-funded warrants and fully vested RSUs outstanding during the period, net of treasury shares. In computing diluted loss per share, basic loss per share is adjusted to take into account the potential dilution that could occur upon: (i) the exercise of options and non-vested RSUs granted under employee stock compensation plans, and the exercise of warrants using the treasury stock method; and (ii) the conversion of the convertible redeemable preferred stock, and convertible loan using the “if-converted” method, by adding to net loss the change in the fair value of the convertible loan, net of tax benefits, and by adding the weighted average number of shares issuable upon assumed conversion of these instruments. For further details on the effects on the instruments described below, please see note 2 above.
Options to purchase
but were not included in the computation of diluted EPS because to do so would have had antidilutive effect on the basic loss per share.
RSU’s to purchase
Warrants convertible into
| (*) | Adjusted to reflect April 2023 reverse stock split, see note 3(f). |
F-20
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 13 - REVENUES:
The Company operates as
| a. | Geographic information: |
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Europe, the Middle East and Africa | ||||||||||||||||
| Asia Pacific | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| b. |
| June 30, 2023 | December 31, 2022 | |||||||
| Opening balance | $ | $ | | |||||
| Revenue recognized that was included in the contract liability balance at the beginning of the year | ( | ) | ( | ) | ||||
| Additions | ||||||||
| Remaining performance obligations | $ | $ | ||||||
As of June 30, 2023, the aggregate
amount of the transaction price allocated to the remaining performance obligation is $
| c. |
| Three months ended June 30, 2023 | Six months ended June 30, 2023 | |||||||||||||||||
| Customer A (*) | % | $ | % | $ | ||||||||||||||
| Customer B (*) | % | $ | % | $ | ||||||||||||||
| Customer C (*) | % | $ | % | $ | ||||||||||||||
| Customer D (*) | % | $ | % | $ | ||||||||||||||
F-21
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 13 - REVENUES (continued) (*):
| Three months ended June 30, 2022 | Six months ended June 30, 2022 | |||||||||||||||||
| Customer A | % | $ | % | $ | ||||||||||||||
| Customer B (*) | % | $ | % | $ | ||||||||||||||
| Customer C | % | $ | % | $ | ||||||||||||||
| (*) |
The majority of the Company's revenues are recognized at a point in time.
NOTE 14 – RELATED PARTY TRANSACTIONS:
| a. | In
March 2017, the Company issued a convertible loan to investors (see note 8). The Company’s CEO participated in the convertible
loan in an amount of $ |
On May 17, 2022, the Company finalized its IPO offering (see Note 2) and the convertible loan was converted.
| b. | On
December 15, 2022, the Company issued |
| (*) | Adjusted to reflect April 2023 reverse stock split, see note 3(f). |
NOTE 15 - SUBSEQUENT EVENTS:
| a. | The Company evaluates events or transactions that occur after the balance sheet date but prior to the issuance of the condensed consolidated financial statements to identify matters that require additional disclosure. For its condensed consolidated financial statements as of June 30, 2023, and for the three and six months then ended, the Company evaluated subsequent events through August 24, 2023, the date that the condensed consolidated financial statements were issued. The Company has concluded that no subsequent event has occurred that require disclosure other than the below. |
| b. | During July and August, 2023, the Holder of the private placement
(see note 11d) decided to exercise |
F-22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
References in this report to “we,” “Actelis,” “us,” “our,” or the “Company” refer to Actelis Networks, Inc. and its wholly owned subsidiary. References to our “management” or our “management team” refer to our officers and directors. You should read the following discussion of our historical performance, financial condition and future prospects in conjunction with the management’s discussion and analysis of financial conditions and results of operations and the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2023 (referred to herein as the “Annual Report”). The following discussion and analysis of our financial condition and results of operations should also be read in conjunction with the condensed consolidated financial statements (including the notes thereto) contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risk and uncertainties. For further information on items that could impact our future operating performance or financial condition, see the sections titled “Risk Factors” included in the Annual Report and the Special Note Regarding Forward Looking Statements above.
Results of Operations
The table below provides our results of operations for the periods indicated.
| Three months ended June 30 | Six months ended June 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||
| Revenues | $ | 1,896 | $ | 3,081 | 3,744 | $ | 4,949 | |||||||||
| Cost of revenues | 1,264 | 1,159 | 2,424 | 2,445 | ||||||||||||
| Gross profit | 632 | 1,922 | 1,320 | 2,504 | ||||||||||||
| Research and development expenses, net | 669 | 676 | 1,426 | 1,326 | ||||||||||||
| Sales and marketing, net | 712 | 837 | 1,641 | 1,567 | ||||||||||||
| General and administrative, net | 969 | 1,067 | 1,834 | 1,702 | ||||||||||||
| Operating loss | (1,718 | ) | (658 | ) | (3,581 | ) | (2,091 | ) | ||||||||
| Interest expenses | (171 | ) | (204 | ) | (351 | ) | (424 | ) | ||||||||
| Other Financial income (expenses), net | 296 | (792 | ) | 444 | (3,778 | ) | ||||||||||
| Net Comprehensive Loss for the period | (1,593 | ) | (1,654 | ) | $ | (3,488 | ) | $ | (6,293 | ) | ||||||
Three and Six Months Ended June 30, 2023, Compared to Three and Six Months Ended June 30, 2022
Revenues
Our revenues for the three months ended June 30, 2023 amounted to $1.9 million, compared to $3.1 million for the three months ended June 30, 2022. The decrease from the corresponding period was primarily attributable to a decrease of $1.3 million of revenues generated from North America and Asia Pacific, offset by an increase of $0.1 million in revenues generated from Europe, the Middle East and Africa.
Our revenues for the six months ended June 30, 2023, amounted to $3.74 million, compared to $4.95 million for the six months ended June 30, 2022. The decrease from the corresponding period was primarily attributable to a decrease of $1.3 million in revenues generated from North America and Europe, the Middle East and Africa, offset by an increase of $0.1 million in revenues generated from Asia Pacific.
1
Cost of Revenues
Our cost of revenues for the three months ended June 30, 2023, amounted to $1.3 million compared to $1.2 million for the three months ended June 30, 2022. The increase from the corresponding period was primarily attributable to change in the product mix.
Our cost of revenues for the six months ended June 30, 2023 amounted to $2.4 million compared to $2.45 million for the six months ended June 30, 2022.
Research and Development Expenses
Our research and development expenses for the three months ended June 30, 2023, amounted to $0.7 million compared to $0.7 million for the three months ended June 30, 2022.
Our research and development expenses for the six months ended June 30, 2023, amounted to $1.4 million compared to $1.3 million for the six months ended June 30, 2022. The increase was mainly due to an increase in payroll expenses for research and development personnel in the amount of $25,000, and an increase in professional services related to research and development in the amount of $51,000.
Sales and Marketing Expenses
Our sales and marketing expenses for the three months ended June 30, 2023, amounted to $0.7 million compared to $0.8 for the three months ended June 30, 2022. The decrease was mainly due to a decrease in commission expenses.
Our sales and marketing expenses for the six months ended June 30, 2023, amounted to $1.6 million compared to $1.6 for the six months ended June 30, 2022.
General and Administrative Expenses
Our general and administrative expenses for the three months ended June 30, 2023 amounted to $0.97 million compared to $1.07 million for the three months ended June 30, 2022. The decrease is driven by cost reduction measures.
Our general and administrative expenses for the six months ended June 30, 2023, amounted to $1.8 million compared to $1.7 million for the six months ended June 30, 2023. This increase was mainly due to payroll, insurance expenses and professional services expenses, in connection with our IPO completed in May 2022 and those costs associated with being a public company.
Operating Loss
Our operating loss for the three months ended June 30, 2023, was $1.7 million, compared to an operating loss of $0.7 million for the three months ended June 30, 2022. The increase was mainly due to the decrease in revenues and gross margin.
Our operating loss for the six months ended June 30, 2023, was $3.6 million, compared to an operating loss of $2.1 million for the six months ended June 30, 2022. The increase was mainly due to the decreases in revenues and gross margin.
2
Financial Expenses, Net
Our financial income, net for the three months ended June 30, 2023 was $0.1 million (including $0.2 million interest expenses) compared to financial expenses, net of $1.0 million (including $0.2 million interest expenses) for the three months ended June 30, 2022. During the three months ended June 30, 2023, the Company recorded financial income in connection with a decrease in fair value of warrants in the amount of $0.4 million, compared to an 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 $1.4 million, for the three months ended June 30, 2022. In addition, the Company recorded income in the amount of $0.1 from exchange rate differences during the three months ended June 30, 2023, compared to $0.5 million, during the three months ended June 30, 2022.
Our financial income, net for the six months ended June 30, 2023, was $0.1 million (including $0.35 million interest expenses) compared to financial expenses, net of $4.2 million (including $0.4 million interest expenses) for the six months ended June 30, 2022. During the six months ended June 30, 2023, the Company recorded financial income in connection with a decrease in fair value of warrants in the amount of $0.4 million, compared to an 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. In addition, the Company recorded income in the amount of $0.25 million from exchange rate differences, compared to $0.65 during the three months ended June 30, 2022.
Net Loss
Our net loss for the three months ended June 30, 2023, was $1.6 million, compared to net loss of $1.7 million for the three months ended June 30, 2022.
Our net loss for the six months ended June 30, 2023, was $3.5 million, compared to net loss of $6.3 million for the six months ended June 30, 2022. This decrease was primarily due to the decrease in revenues and gross margin as well as a decrease in financial expenses, resulting from the conversion of the financial instruments the Company had such as a convertible loan, note and warrants from the IPO completed in May 2022.
Non-GAAP adjusted EBITDA
| (U.S. dollars in thousands) | Three months Ended June 30, 2023 | Three months Ended June 30, 2022 | Six months Ended June 30, 2023 | Six months Ended June 30, 2022 | ||||||||||||
| Revenues | $ | 1,896 | $ | 3,081 | $ | 3,744 | $ | 4,949 | ||||||||
| GAAP net loss | (1,593 | ) | (1,654 | ) | (3,488 | ) | (6,293 | ) | ||||||||
| Interest Expense | 171 | 204 | 351 | 424 | ||||||||||||
| Other Financial expenses (income), net | (296 | ) | 792 | (444 | ) | 3,778 | ||||||||||
| Tax Expense | 19 | 62 | 40 | 74 | ||||||||||||
| Fixed asset depreciation expense | 6 | 10 | 13 | 20 | ||||||||||||
| Stock based compensation | 97 | 14 | 192 | 28 | ||||||||||||
| Research and development, capitalization | 112 | 138 | 258 | 280 | ||||||||||||
| Other one-time costs and expenses | 223 | 513 | 223 | 801 | ||||||||||||
| Non-GAAP Adjusted EBITDA | (1,261 | ) | 79 | (2,855 | ) | (888 | ) | |||||||||
| GAAP net loss margin | (84.02 | )% | (53.67 | )% | (93.16 | )% | (127.2 | )% | ||||||||
| Adjusted EBITDA margin | (66.51 | )% | 2.6 | % | (76.25 | )% | (17.94 | )% | ||||||||
Use of Non-GAAP Financial Information
Non-GAAP Adjusted EBITDA, and backlog of customer open orders are Non-GAAP financial measures. In addition to reporting financial results in accordance with GAAP, we provide Non-GAAP 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.
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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 reference measures of performance that cannot yet be reflected in our financial results such as backlog of customer open orders. We believe the supplemental adjusted results are useful to investors because they help them compare our results to previous periods and provide important insights into underlying trends in the business and how management oversees and optimizes our business operations on a day-to-day basis. We exclude the costs in calculating adjusted results to allow us and investors to evaluate the performance of the business based upon its expected ongoing operating structure. We believe the adjusted measures, accompanied by the disclosure of the costs of these programs, provides valuable insight to our financial performance. Adjusted results should be considered only in conjunction with results reported according to GAAP.
| For the three months ended June 30 | For the six months ended June 30 | |||||||||||||||
| (U.S. dollars in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Revenues | $ | 1,896 | $ | 3,081 | $ | 3,744 | $ | 4,949 | ||||||||
| Non-GAAP Adjusted EBITDA | (1,261 | ) | 79 | (2,855 | ) | (888 | ) | |||||||||
| As a percentage of revenues | (66.51 | )% | 2.6 | % | (76.25 | )% | (17.94 | )% | ||||||||
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the sale of equity securities, debt financing, convertible loans and royalty-bearing grants that we received from the Israel Innovation Authority. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes. We also received proceeds of $15.4 million, net of underwriting discounts and commissions and other offering costs of $1.0 million, following our IPO in May 2022.
We have incurred significant losses and negative cash flows from operations and incurred losses of $3.5 million and $6.3 million for the six months ended June 30, 2023 and 2022, respectively. During the six months ended June 30, 2023, and 2022, we had negative cash flows from operations of $2.9 million and $3.8 million, respectively. As of June 30, 2023, we had an accumulated deficit of $36.9 million. We had cash on hand (including short term deposits and restricted bank deposit) of $3.8 million, and long-term deposits, restricted bank deposits and restricted cash of $4.4 million, as of June 30, 2023. We monitor our cash flow projections on a current basis and take active measures to obtain the funding we require to continue our operations. However, these cash flow projections are subject to various uncertainties concerning their fulfillment, such as the ability to increase revenues due to lack of customers or decrease cost structure. Our transition to profitable operations is dependent on generating a level of revenue adequate to support our cost structure through growth of existing and new customers.
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” in our Annual Report.
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 inflation, economic uncertainty and a potential recession, as well as the war between Russia and the Ukraine, has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when desired, such as the May 2023 Private Placement (as defined below), our business, financial condition and results of operations could be adversely affected.
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Equity Financings
On May 4, 2023, the Company entered into a securities purchase agreement with an accredited investor (the “Investor”), pursuant to which the Company agreed to issue and sell to the Investor in a private placement (the “May 2023 Private Placement”) (i) 190,000 shares (the “Shares”) of Common Stock, (ii) 754,670 pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 754,670 shares of Common Stock and (iii) warrants to purchase up to 944,670 shares of Common Stock (“Common Warrants” and collectively with the Shares and the Common Warrants, the “Securities”) for a purchase price of $3.705 per share of Common Stock and related Common Warrant or $3.7049 per Pre-Funded Warrant and related Common Warrant, for a total aggregate gross proceeds of approximately $3.5 million. The Offering closed on May 8, 2023. The Common Warrants have an exercise price of $3.58 per share, are exercisable immediately upon issuance and expire five and one-half years following the issuance.
H.C. Wainwright & Co., LLC acted as the exclusive placement agent for the issuance and sale of the Securities. The Company has agreed to pay up to an aggregate cash fee equal to 7.0% of the gross proceeds received by the Company from the Offering. The Company also agreed to pay Wainwright $65,000 for non-accountable expenses and a management fee equal to 1.0% of the gross proceeds raised in the Offering. The Company has also granted to the Underwriter upon the consummation of the Offering, warrants to purchase up to 66,127 of the Company’s common stocks which carry the same terms as the common stock warrants described above (Note 11d3 to the condensed consolidated financial statements), except for the exercise price which reflect 125% of the share price in the Offering ($4.6313).
Cash Flows
The table below, for the periods indicated, provides selected cash flow information:
| (U.S. dollars in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | ||||||
| Net cash used in operating activities | $ | (2,939 | ) | $ | (3,782 | ) | ||
| Net cash provided by (used in) investing activities | 677 | (87 | ) | |||||
| Net cash provided by financing activities | 2,780 | 16,221 | ||||||
| Net change in cash | $ | 518 | $ | 12,352 | ||||
As of June 30, 2023, we had cash, cash equivalents, and restricted cash of $4.8 million compared to $13.1 million of cash, cash equivalents and restricted cash as of June 30, 2022.
Operating Activities
Cash used in operating activities amounted to $2.9 million for the six months ended June 30, 2023, compared to $3.8 for the six months ended June 30, 2022. The decrease in cash used in operating activities was mainly due to decrease in trade receivables, offset by an increase in inventories.
Investing Activities
Net cash provided by investing activities was $0.7 million for the six months ended June 30, 2023, compared to cash used in investing activities of $0.09 for the six months ended June 30, 2022. The increase from the corresponding period was mainly due to changes in short term deposits.
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Financing Activities
Net cash provided by financing activities was $2.8 million for the six months ended June 30, 2023, compared to $16.2 million for the six months ended June 30, 2022. The cash flow from financing activities for the six months ended June 30, 2023, resulted from proceeds from a private placement which closed on May 4, 2023 – see note 11(d) to the condensed consolidated financial statements. The cash flow from financing activities for the six months ended June 30, 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. In addition, the increase is related to the private placement first and second closing. See notes 2 to the condensed consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. We evaluate our estimates, assumptions and judgments on an ongoing basis. Our estimates, assumptions and judgments are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our condensed consolidated financial statements, which, in turn, could change the results from those reported.
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles issued by the Financial Accounting Standards Board, or FASB. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies include revenue from contracts with customers which is more fully described in the notes to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We believe that these accounting policies discussed are critical to our financial results and to the understanding of our past and future performance, as these policies relate to the more significant areas involving management’s estimates and assumptions. We consider an accounting estimate to be critical if: (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate; and (2) changes in the estimate could have a material impact on our financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not required for a smaller reporting company.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
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As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation and due to the material weakness described below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of March 29, 2023 were not effective. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the condensed consolidated financial statements for the periods covered by and included in this quarterly report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
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Previously Identified Material Weakness and Plans to Remediate
In connection with the preparation of our financial statements as of and for the years ended December 31, 2022 and 2021 and as disclosed in our Annual Report, we identified a material weakness in our internal control over financial reporting relating to the lack of a sufficient number of finance personnel to allow for adequate segregation of duties that had not been remediated as of December 31, 2022. We concluded that the material weakness in our internal control over financial reporting occurred because, prior to our IPO, as a private company we did not have the necessary business processes, systems, personnel, and related internal controls necessary to satisfy the accounting and financial reporting requirements of a public company.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As we have thus far not needed to comply with Section 404 of the Sarbanes-Oxley Act, neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. In light of this deficiency, we believe that it is possible that certain additional control deficiencies and material weaknesses may have been identified if such an evaluation had been performed.
We are working to remediate the material weakness. Our remediation efforts are ongoing, and we will continue our initiatives to implement and document policies, procedures, and internal controls. We have taken steps to enhance our internal control environment and plan to take additional steps to remediate the deficiencies and address material weaknesses. Specifically:
| ● | We will hire qualified personnel in our accounting department. We will continue to evaluate the structure of the finance organization and add resources as needed; |
| ● | We are implementing additional internal reporting procedures, including those designed to add strength to our review processes and improve our segregation of duties; and |
| ● | We are redesigning and implementing common internal control activities; and we will continue to establish policies and procedures and enhance corporate oversight over process-level controls and structures to ensure that there is appropriate assignment of authority, responsibility and accountability to enable remediating our material weaknesses. |
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In addition to the items noted above, as we continue to evaluate, remediate and improve our internal control over financial reporting, executive management may elect to implement additional measures to address control deficiencies or may determine that the remediation efforts described above require modification. Executive management, in consultation with and at the direction of our Audit Committee, will continue to assess the control environment and the above-mentioned efforts to remediate the underlying causes of the identified material weakness
Although we plan to complete this remediation process as quickly as possible, we are unable, at this time to estimate how long it will take; and our efforts may not be successful in remediating the deficiencies or material weakness. We believe our remediation actions will be effective in remediating the material weakness identified, and we continue to devote significant time and attention to these efforts. However, the material weakness will not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weakness above is not remediated as of June 30, 2023.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
This Quarterly Report on Form 10-Q does not include a report of management’s assessment regarding internal control over financial reporting as permitted in this transition period under the rules of the SEC for newly public companies.
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Part II – Other Information
Item 1. Legal Proceedings.
From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. To the knowledge of our management, there are no legal proceedings currently pending against us which we believe would have a material effect on our business, financial position or results of operations and, to the best of our knowledge, there are no such legal proceedings contemplated or threatened.
Item 1A. Risk Factors.
Readers should carefully the risk factors set forth in the section titled “Risk Factors” included in our Annual Report. Our business involves significant risks. You should carefully consider the risks and uncertainties described in our Annual Report, together with all of the other information in this Quarterly Report on Form 10-Q, and including those set forth below, as well as our audited consolidated financial statements and related notes as disclosed in our Prospectus. The risks and uncertainties described in our Prospectus are not the only ones we face. Additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business, including those listed below. The realization of any of these risks and uncertainties could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our strategic objectives. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Actelis Networks, Inc. | ||
| Date: August 24, 2023 | By: | /s/ Tuvia Barlev |
| Tuvia Barlev | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| Date: August 24, 2023 | By: | /s/ Yoav Efron |
| Yoav Efron | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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