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 incorporation or organization) | (I.R.S. Employer I.D. No.) |
(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.
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 May 13, 2024,
ACTELIS NETWORKS, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2024
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, 2023, filed on March 26, 2024, 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 ability to access sources of capital, including debt financing and other sources of capital to finance operations and growth; |
| ● | 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 common stock may be at risk for delisting from the Nasdaq Capital Market in the future if we do not maintain compliance with Nasdaq’s continued listing requirements. Delisting could adversely affect the liquidity of our common stock and the market price of our common stock could decrease; |
| ● | 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 ability to successfully execute on our future operating plans as a going concern; |
| ● | statements as to the impact of the political and security situation in the Middle East on our business, including due to the number of armed conflicts between Israel and Hamas (an Islamist militia and political group in the Gaza Strip), Hezbollah (an Islamist militia and political group in Lebanon) and Iran; and |
| ● | our financial performance following the date hereof. |
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.
ii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
ACTELIS NETWORKS, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED March 31, 2024
(Unaudited)
TABLE OF CONTENTS
Page | |
| Condensed consolidated financial statements (unaudited) – U.S. dollars in thousands: | |
| Condensed consolidated balance sheets | F-2-F-3 |
| Condensed consolidated statements of comprehensive loss | F-4 |
| Condensed consolidated statements of Mezzanine and Shareholders’ equity (Capital deficiency) | F-5 |
| Condensed consolidated statements of cash flows | F-6-F-7 |
| Notes to condensed consolidated financial statements | F-8 |
F-1
ACTELIS NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(U. S. dollars in thousands except for share and per share amounts)
| March
31, 2024 | December 31, 2023 | |||||||
| Assets | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash equivalents | ||||||||
| Short term deposits | ||||||||
| Trade receivables, net of allowance for credit losses of $ | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets, net of allowance for doubtful debts of $ | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Prepaid expenses | ||||||||
| Restricted cash and cash equivalents | ||||||||
| 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)
| March
31, 2024 | December 31, 2023 | |||||||
| Liabilities, Mezzanine Equity and shareholders’ equity (capital deficiency) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short term loan | ||||||||
| Current maturities of long-term loans | ||||||||
| Trade payables | ||||||||
| Deferred revenues | ||||||||
| Employee and employee-related obligations | ||||||||
| Advances from reseller | ||||||||
| Accrued royalties | ||||||||
| Operating lease liabilities | ||||||||
| Other accrued liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Long-term loan, net of current maturities | ||||||||
| Deferred revenues | ||||||||
| Operating lease liabilities | ||||||||
| Accrued severance | ||||||||
| Other long-term liabilities | ||||||||
| TOTAL NON-CURRENT LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 6) | ||||||||
| MEZZANINE EQUITY | - | |||||||
| Redeemable Convertible Preferred Stock $ | ||||||||
| WARRANTS TO PLACEMENT AGENT (Note 7d) | ||||||||
| SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY): | ||||||||
| Common stock, $ | ||||||||
| Non-voting common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY) | ( | ) | ||||||
| TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY) | ||||||||
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 March 31, | ||||||||
| 2024 | 2023 | |||||||
| REVENUES | ||||||||
| COST OF REVENUES | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES: | ||||||||
| Research and development expenses | ||||||||
| Sales and marketing expenses, net | ||||||||
| General and administrative expenses | ||||||||
| TOTAL OPERATING EXPENSES | ||||||||
| OPERATING LOSS | ( | ) | ( | ) | ||||
| Interest expenses | ( | ) | ( | ) | ||||
| Other Financial income, 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.
CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)
(UNAUDITED)
U.S. dollars in thousands (except number of shares)
| Warrants To Placement Agent | Redeemable Convertible Preferred Stock | Common Stock | Non-voting Common Stock | Additional | Total | |||||||||||||||||||||||||||||||||||
| Amount | Number of shares | Amount | Number of
shares | Amount | Number of shares | Amount | paid-in capital | Accumulated deficit | shareholders’ (deficit) equity | |||||||||||||||||||||||||||||||
| 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 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| BALANCE AS OF JANUARY 1, 2024 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| CHANGES DURING THE FIRST QUARTER ENDED MARCH 31, 2024: | ||||||||||||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Vesting of RSUs | ||||||||||||||||||||||||||||||||||||||||
| Net comprehensive loss for the period | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| BALANCE AS OF MARCH 31, 2024 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| * |
The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).
F-5
ACTELIS NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three
months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| 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 | ||||||||
| Inventory write-downs | ||||||||
| Exchange rate differences | ( | ) | ( | ) | ||||
| Share-based compensation | ||||||||
| Interest expenses | ( | ) | ||||||
| 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 | ( | ) | ( | ) | ||||
| Advances from reseller | ||||||||
| Other current liabilities | ( | ) | ||||||
| Other long-term liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Short term deposits | ||||||||
| Short term Restricted bank deposits | ( | ) | ||||||
| Long term Restricted bank deposits | ( | ) | ||||||
| Long term deposits | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Repurchase of common stock | ( | ) | ||||||
| Proceeds from credit lines with bank | ||||||||
| Early repayment of long-term loan | ( | ) | ||||||
| Repayment of long-term loan | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ( | ) | ||||
| DECREASE 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 | ||||||||
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 (continued)
(UNAUDITED)
| March
31, 2024 | December 31, 2023 | |||||||
| U.S. dollars in thousands | ||||||||
| RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash equivalents, current | ||||||||
| Restricted cash and cash equivalents, non-current | ||||||||
| Total cash, cash equivalents and restricted cash | ||||||||
| Three
months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| U.S. dollars in thousands | ||||||||
| SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).
F-7
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, networking solutions for IoT and Telecommunication governmental agencies and companies. The Company’s customers include governmental agencies, providers of telecommunication services, 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, 2022, completed its IPO. The Company’s Common Stock is listed on the NASDAQ. |
| b. | The Company has incurred significant losses and negative cash flows from operations. Net loss was $ |
| C. | On October 7th, 2023, an attack by the Hamas terrorist organization was inflicted on the State of Israel which started a war between Israel and the Hamas as well as military conflicts on other fronts. As of the date of the issuance of these consolidated financial statements, the Company has not identified any material effect on its operations as a result of those events. The Company continues to monitor its ongoing activities and will make adjustments in its business if needed, including updating any estimates or judgments impacting its financial statements as appropriate, while supporting the safety and well-being of its employees. It is currently not possible to predict the effects of such conflicts and its impact on the Company’s business, operations or financial conditions. |
| D. | On August 25, 2023, the Company received a notification letter from the Nasdaq Staff indicating that we are not in compliance with Nasdaq Listing Rule 5550(b)(1) due to our failure to meet the Minimum Shareholders’ Equity Requirement or any alternatives to such requirement. In order to maintain our listing on the Nasdaq Capital Market, we submitted a plan of compliance addressing how we intended to regain compliance. We had until February 21, 2024 to evidence compliance with the Minimum Shareholders’ Equity Requirement. As of the date of this Quarterly Report, we have not provided such evidence. |
F-8
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 1 – GENERAL (continued):
On March 27, 2024, the Company received a delist determination letter (the “Delist Letter”) from the Staff advising the Company that the Staff had determined to delist the Company’s securities from Nasdaq due to its non-compliance with the Equity Rule unless the Company timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”). The Company has since timely requested a hearing, which request served to stay any further action by Nasdaq at least pending the hearing before the Panel and the expiration of any extension the Panel may grant following the hearing.
NOTE 2 – 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, 2023. The results of operations for the three months ended March 31, 2024, are not necessarily indicative of results that could be expected for the 2024 fiscal year or any other interim period or for any other future year. All intercompany transactions and balances have been eliminated in consolidation.
| 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) | 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.
F-9
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (continued):
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.
The
Company measured the fair value of the warrants it issued (see note 5) based on Level 3 inputs, and the warrants liability amounted to
$
As of March 31, 2024, and December 31, 2023, the fair values of the Company’s cash and cash equivalents, restricted cash and cash equivalents, short and long-term deposits, trade receivables, trade payables, long-term loan, and restricted bank deposits approximated the carrying values of these instruments presented in the Company’s condensed 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 cash equivalents, and trade receivables. Cash and cash equivalents and restricted cash and cash equivalents 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 consolidated financial statements. Management makes judgments as to its ability to collect outstanding accounts receivable and provides allowances for the applicable portion of accounts receivable when collection becomes doubtful.
Management provides allowances based upon a specific review of all significant outstanding invoices, analysis of its historical collection experience, and current economic trends. If the historical data used to calculate the allowance for credit losses does not reflect the Company’s future ability to collect outstanding accounts receivable, additional provisions for credit losses may be needed, and the future results of operations could be materially affected.
The Company has customers balances representing 10% or more of Trade receivables as follows:
| 1. | Customer A represented |
| 2. | Customer B represented |
| 3. | Customer C represented |
| 4. | Customer D represented |
The Company does not see any credit risk regarding the major trade receivable balance.
F-10
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 3 – INVENTORIES:
| March
31, 2024 | December 31, 2023 | |||||||
| Raw materials | ||||||||
| Finished goods | ||||||||
Inventory
write-downs amounted to and $
NOTE 4 – 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 program: |
On
July 1, 2020, the Company received Economic Injury Disaster Loan (the “EIDL Loan”) from an American Bank under the Small
Business Administration COVID19 Program in the total of $
| b. | On December 9, 2020, the Company signed a new loan agreement with an Israeli based financial institution (“Migdalor”) for a loan of up to |
As
part of the loan agreement, the Company issued to Migdalor 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 $
In February
2024, the Company performed a partial early repayment of Migdalor Loan in the amount of ILS
As of March 31,
2024, the total loan balance outstanding was $
F-11
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 4 – LOANS (continued):
| New Loan | New Loan | |||||||||||
| EIDL Loan | from December 2020 and January 2021- In NIS * | from November 2021- In NIS * | ||||||||||
| 2024(**) | ) | ) | ||||||||||
| 2025 | ) | ) | ||||||||||
| 2026 | ) | ) | ||||||||||
| 2027 | ) | ) | ||||||||||
| 2028 and thereafter | ) | ) | ||||||||||
| Less- accumulated interest | ( | ) | ( | ) | ( | ) | ||||||
| Total | ) | ) | ||||||||||
| * |
| ** |
| c. | On January 15, 2024, the Subsidiary entered into a credit agreement with Bank Mizrahi-Tefahot. The Credit Agreement provides for a $ |
Under the Credit Agreement, the Company is permitted to draw upon the New Credit Facility for so long as the following conditions continue to be met:
| (a) | Throughout the duration of the New Credit Facility, the outstanding extended credit under it does not exceed |
| (b) | Customer invoices are payable within 90 days from the date of the Company’s monthly report to the Lender; and |
| (c) | No
single customer of the Company may account for open customer invoices securing over |
The Credit facility will be examined and adjusted up to every three months, and repayment of the Credit facility will be made every three months if the company does not meet the above conditions.
As
of March 31, 2024, the Subsidiary used $
NOTE 5 – 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 which occurred in May 2022, 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, 2024. 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.
F-12
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 5 – WARRANTS (continued):
| b) | 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. Such warrants were classified as liabilities based on the terms of the underlying agreement. On September 30, 2023, these warrants were reclassified to equity due to an amendment to the warrants’ agreements. See note 7(d) for further details. |
| c) | On December 20, 2023, the Company completed another 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. These warrants were classified as equity. See note 7(d) for further details |
NOTE 6 – COMMITMENTS AND CONTINGENCIES:
| a. | 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 March 31, 2024, the Company had received approximately $
As
of March 31, 2024, and December 31, 2023, the Company had a liability to pay royalties in the amount of approximately $
| b. | In March 2024, the Company received an advance payment of $ |
NOTE 7 – SHAREHOLDERS’ EQUITY:
| a. | During January and February 2023, the Company purchased |
| b. | Offering of common stocks and warrants May 2023 |
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 |
F-13
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 7 – SHAREHOLDERS’ EQUITY (continued):
| 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.
The
Common Warrants were recorded at fair value on May 8, 2023, at $
On
September 30, 2023, the Company and the Holder entered into a Common warrants amendment agreement (the “Amendment”) to amend
the Common warrants to purchase up to
The Company reclassified the Common warrants as equity based on the guidance provided under ASC 815-40, due to the adjustments stated in the amendment.
As
of the date of the amendment of the Common warrants, the fair value of the warrants was estimated at $
During
July and August 2023, the Holder elected to exercise
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 $
F-14
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 7 – SHAREHOLDERS’ EQUITY (continued):
| c. | Offering of common stocks and warrants December 2023 |
On
December 20, 2023, the Company completed a fund-raising round in a total gross amount of $
| 1. |
| 2. | 970,187 pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to |
| 3. | warrants to purchase up to |
In
connection with the Second Offering, the Company also has agreed to amend the existing warrants to purchase up to an aggregate of
The common stock, pre-funded warrants and the warrants were classified as equity pursuant to ASC 815-40.
Offering Costs related to December 2023 fund-raising:
Upon
the consummation of the Second 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 $
The
total Second Offering costs in the amount of $
F-15
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 7 – SHAREHOLDERS’ EQUITY (continued):
| d. | Share-based compensation: |
| 1) |
| Number
of options | Weighted Average Exercise Price | Weighted Average | ||||||||||
| Outstanding – January 1, 2024 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited | ( | ) | $ | |||||||||
| Outstanding - March 31, 2024 | $ | |||||||||||
| Exercisable - March 31, 2024 | $ | |||||||||||
| 2) | Restricted Stock Units: |
| March 31 2024 | ||||||||
| Number
of RSUs | Weighted-Average Grant Date Fair Value | |||||||
| RSUs outstanding at the beginning of the year | $ | |||||||
| Granted during the period | ||||||||
| Vested during the period | ( | ) | ||||||
| Forfeited during the period | ( | ) | ||||||
| Outstanding as of March 31, 2024 | $ | |||||||
NOTE 8 – 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
Options
to purchase
RSU’s
to purchase
Warrants
convertible into
F-16
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 8 – BASIC AND DILUTED LOSS PER SHARE (continued):
Three
months ended | ||||||||
| 2024 | 2023 | |||||||
| Numerator: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Common shares outstanding used in computing net loss per share attributable to common shareholders | ||||||||
| Pre-Funded warrants to purchase common shares | ||||||||
| Repurchase of common stock | ( | ) | ||||||
| $ | ( | ) | $ | ( | ) | |||
F-17
ACTELIS NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. DOLLARS IN THOUSANDS
NOTE 9 – REVENUES:
The
Company operates as
| a. | Geographic information: |
| Three
months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| North America | ||||||||
| Europe, the Middle East and Africa | ||||||||
| Asia Pacific | ||||||||
| b. |
| March
31, 2024 | December 31, 2023 | |||||||
| Opening balance | $ | $ | ||||||
| Revenue recognized that was included in the contract liability balance at the beginning of the year | ( | ) | ( | ) | ||||
| Additions | ||||||||
| Remaining performance obligations | $ | $ | ||||||
As
of March 31, 2024, the aggregate amount of the transaction price allocated to the remaining performance obligation is $
| c. |
| Three
months ended March 31, 2024 | ||||||||
| Customer A | % | $ | ||||||
| Customer B | % | $ | ||||||
| Three
months ended March 31, 2023 | ||||||||
| Customer A | ||||||||
| Customer B | % | $ | ||||||
The majority of the Company’s revenues are recognized at a point in time.
NOTE 10 – SUBSEQUENT EVENTS:
In April 2024, the Company made an additional partial early repayment
of Migdalor loan in the amount of NIS
F-18
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, 2023 filed with the SEC on March 26, 2024 (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, as updated in Part II, Item 1A below, and the Special Note Regarding Forward Looking Statements above.
Results of Operations
Three months ended March 31 | ||||||||
| 2024 | 2023 | |||||||
| (dollars in thousands) | ||||||||
| Revenues | $ | 726 | $ | 1,848 | ||||
| Cost of revenues | 506 | 1,160 | ||||||
| Gross profit | 220 | 688 | ||||||
| Research and development expenses, net | 647 | 757 | ||||||
| Sales and marketing, net | 627 | 929 | ||||||
| General and administrative, net | 817 | 865 | ||||||
| Operating loss | (1,871 | ) | (1,863 | ) | ||||
| Interest expenses | (207 | ) | (180 | ) | ||||
| Other Financial income (expenses), net | 92 | 148 | ||||||
| Net Comprehensive Loss for the period | $ | (1,986 | ) | (1,895 | ) | |||
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Revenues
Our revenues for the three months ended March 31, 2024 amounted to $726,000, compared to $1.8 million for the three months ended March 31, 2023. The decrease from the corresponding period was primarily attributable to a decrease of $236,000 of revenues generated from North America, a decrease of $636,000 of revenues generated from Europe the Middle East and Africa as a major project phase completed in the three months ended March 31, 2023, and a decrease of $250,000 of revenues generated from Asia Pacific.
Cost of Revenues
Our cost of revenues for the three months ended March 31, 2024, amounted to $506,000 compared to approximately $1.2 million for the three months ended March 31, 2023. The decrease from the corresponding period was mainly due to the decrease in revenues, partially offset by the higher effect of fixed costs as a higher percent of the lower revenues.
Research and Development Expenses
Our research and development expenses for the three months ended March 31, 2024 amounted to $647,000 compared to $757,000 for the three months ended March 31, 2023. The decrease is mainly due to a decrease in payroll expenses.
1
Sales and Marketing Expenses
Our sales and marketing expenses for the three months ended March 31, 2024 amounted to $627,000 compared to $929,000 for the three months ended March 31, 2023. The decrease was mainly due to a decrease in commission expenses as a result of the decrease in revenues primarily driven by the project phase completion in Europe, and a decrease in payroll associated with the Company’s cost reduction measures.
General and Administrative Expenses
Our general and administrative expenses for the three months ended March 31, 2024 amounted to $817,000 compared to $865,000 for the three months ended March 31, 2023.
Operating Loss
Our operating loss for the three months ended March 31, 2024, was approximately $1.87 million, compared to an operating loss of approximately $1.86 million for the three months ended March 31, 2023.
Other Financial expenses, net and interest expenses
Our financial income, net for the three months ended March 31, 2024, was $115,000 (including $207,000 interest expenses) compared to $32,000 of financial expense, net (including $180,000 interest expenses) for the three months ended March 31, 2023. The increase is mainly due to a decrease in income from exchange rate differences.
Net Loss
Our net loss for the three months ended March 31, 2024 was approximately $2.0 million, compared to net loss of approximately $1.9 million for the three months ended March 31, 2023.
Non-GAAP Financial Measures
| (U.S. dollars in thousands) | Three months Ended March 31, 2024 | Three months Ended March 31, 2023 | ||||||
| Revenues | $ | 726 | $ | 1,848 | ||||
| GAAP net loss | (1,986 | ) | (1,895 | ) | ||||
| Interest Expense | $ | 207 | $ | 180 | ||||
| Other financial (income) expenses, net | (92 | ) | (148 | ) | ||||
| Tax Expense | 17 | 21 | ||||||
| Fixed asset depreciation expense | 4 | 7 | ||||||
| Stock based compensation | 89 | 95 | ||||||
| Research and development, capitalization | - | 146 | ||||||
| Other one time costs and expenses | (26 | ) | - | |||||
| Non-GAAP Adjusted EBITDA | (1,787 | ) | $ | (1,594 | ) | |||
| GAAP net loss margin | (246.27 | )% | (102.54 | )% | ||||
| Adjusted EBITDA margin | (90.00 | )% | (84.12 | )% | ||||
2
Use of Non-GAAP Financial Information
Non-GAAP Adjusted EBITDA and Adjusted EBITDA margin are Non-GAAP financial measures. In addition to reporting financial results in accordance with GAAP, we provide Non-GAAP supplemental operating results adjusted for certain items, including: financial expenses, which are interest, financial instrument fair value adjustments, exchange rate differences of assets and liabilities, stock based compensation expenses, depreciation and amortization expense, tax expense, and impact of development expenses ahead of product launch. We adjust for the items listed above and show non-GAAP financial measures in all periods presented, unless the impact is clearly immaterial to our financial statements. When we calculate the tax effect of the adjustments, we include all current and deferred income tax expense commensurate with the adjusted measure of pre-tax profitability.
We utilize the adjusted results to review our ongoing operations without the effect of these adjustments but not for comparison to budgeted operating results. We believe the supplemental adjusted results are useful to investors because they help them compare our results to previous periods and provide important insights into underlying trends in the business and how management oversees and optimizes our business operations on a day-to-day basis. We exclude the costs in calculating adjusted results to allow us and investors to evaluate the performance of the business based upon its expected ongoing operating structure. We believe the adjusted measures, accompanied by the disclosure of the costs of these programs, provides valuable insight to our financial performance. Adjusted results should be considered only in conjunction with results reported according to GAAP.
| (U.S. dollars in thousands) | Three months Ended March 31, 2024 | Three months Ended March 31, 2023 | ||||||
| Revenues | $ | 726 | $ | 1,848 | ||||
| Non-GAAP Adjusted EBITDA | (1,787 | ) | (1,594 | ) | ||||
| as a percentage of revenues | (246.27 | )% | (84.12 | )% | ||||
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.
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, 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 war in Israel and 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.
As discussed in Note 1(b) to the condensed consolidated financial statements appearing elsewhere in this Quarterly report on Form 10-Q, we have incurred significant losses and negative cash flows from operations and incurred losses of approximately $2.0 million and approximately $1.9 million for the three months ended March 31, 2024 and 2023, respectively. During the three months ended March 31, 2024 and 2023, we had negative cash flows from operations of $203,000 and $1.7 million, respectively.
3
As of March 31, 2024, we had an accumulated deficit of $41.7 million, cash on hand (including short term deposits and restricted cash equivalents) of $2.8 million, and long-term restricted cash and cash equivalents and restricted bank deposits of $2.6 million. 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.
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 condensed consolidated financial statements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business, and do not include any adjustments that might result from the outcome of this uncertainty.
Cash Flows
The table below, for the periods indicated, provides selected cash flow information:
| (U.S. dollars in thousands) | Three months ended March 31, 2024 | Three months ended March 31, 2023 | ||||||
| Net cash used in operating activities including the effect of exchange rate changes on cash and cash equivalents and restricted cash) | $ | (205 | ) | $ | (1,705 | ) | ||
| Net cash used in investing activities | (1 | ) | (334 | ) | ||||
| Net cash used in financing activities | (164 | ) | (242 | ) | ||||
| Net change in cash | $ | (370 | ) | $ | (2,281 | ) | ||
As of March 31, 2024, we had cash, cash equivalents, and restricted cash and cash equivalents of approximately $5.1 million compared to approximately $5.5 million of cash, cash equivalents and restricted cash as of December 31, 2023.
Cash used in operating activities amounted to $205,000 for the three months ended March 31, 2024, compared to approximately $1.7 million for the three months ended March 31, 2023. The decrease in cash used in operating activities was mainly due to an increase in advances from customers and accounts payable, which were partially offset by a lower decrease in accounts receivables.
Net cash used in investing activities was $1,000 for the three months ended March 31, 2024, compared to cash used in investing activities of $334,000 for the three months ended March 31, 2023. The decrease from the corresponding period was mainly due to the increase in short term deposits and restricted bank deposits in the three months ended March 31, 2023.
Net cash used in financing activities was $164,000 for the three months ended March 31, 2024, compared to Net cash used in financing activities $242,000 for the three months ended March 31, 2023.
4
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.
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 and our annual financial statements for the year ended December 31, 2023, including the footnotes, for a description of our significant accounting policies. 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 continued to conduct ongoing evaluation of the effectiveness of our “disclosure controls and procedures”, as defined by Rules 13a-15(e) and 15d-15(e) of Exchange Act, as of March 31, 2024, the end of the period covered by this Quarterly Report. This evaluation, which was performed under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), is performed to determine whether our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Disclosure controls and procedures, no matter how well designed and effectively operated, can only provide reasonable assurance of achieving their control objectives.
Based upon that evaluation, our CEO and CFO concluded our disclosure controls and procedures were not effective as of the period covered by this Quarterly Report on Form 10-Q due to the material weakness discussed below.
5
Management’s report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external reporting purposes in accordance with GAAP.
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements, including the possibility of human error, the circumvention or overriding of controls or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate over time.
Under the supervision and with the participation of the CEO and the CFO, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2024. We performed an assessment of the effectiveness of our internal control over financial reporting based on the framework described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our management concluded that we did not maintain effective internal control over financial reporting as of March 31, 2024 given the existence of the previously identified material weakness described below having not been remediated as of the last day of the period covered by this Quarterly Report.
Material Weakness
We have identified one material weakness in the design and operation of our internal control over financial reporting in connection with the preparation of our financial statements, that had not been remediated as of March 31, 2024. 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. The Company’s management, including our CEO and CFO, concluded that, as of March 31, 2024:
We lacked a sufficient complement of professionals with an appropriate level of accounting knowledge, training and experience to maintain appropriate segregation of duties in our finance and accounting functions.
Our independent registered public accounting firm will not be required to opine on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company” as defined in the JOBS Act.
Remediation Plan and Status
We have taken and intend to continue to take actions to remediate the material weakness described above. To remediate this material weakness, we continue to map, document and test our internal controls (recently, with the assistance of a third-party accounting firm with specific expertise in SOX compliance), and accordingly, we continued to make progress in our internal controls plan. Among other procedures, management has executed the following remedial actions:
| ● | Hired new financial experts and increasing the number of financial personnel. |
| ● | Continued to map, document and test our internal controls, with the assistance of a third-party accounting firm with specific expertise in SOX compliance. |
| ● | Implemented new control procedures over certain areas identified as requiring enhancement in order to address the lack of a sufficient number of finance personnel to allow for adequate segregation of duties. |
6
In addition to the actions underway, we continue to add enhancements to our internal controls over financial reporting in 2024. Additional remedial actions include:
| ● | Maintain or increase the level and design of segregation of duties, including maintaining or growing the quality and number of finance personnel |
| ● | Continue to document and test annually our internal control over financial reporting |
| ● | Continue engagement with an outside accounting firm with specific SOX and Internal Control expertise |
| ● | Continued hiring of additional accounting, information technology, and internal controls resources who possess public company accounting, auditing and reporting expertise |
The actions we are taking are subject to ongoing senior management review, as well as oversight of the audit committee of our Board. We also may conclude that additional measures may be required to remediate the material weaknesses or determine to modify the remediation plans described above. We will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively. We will continue to monitor the design and effectiveness of these and other processes, procedures, and controls and make any further changes management deems appropriate.
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 and an expert outside consultant, 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 weaknesses.
Notwithstanding the material weakness set forth above, based on the performance of additional procedures by management designed to ensure reliability of financial reporting, the Company’s management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q, fairly present, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with GAAP.
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 March 31, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
7
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.
Except as set forth below in this Item 1A and the Risk Factors included in our previous filings made with the SEC, there have been no material changes to our risk factors from those disclosed in “Part I. Item 1A. Risk Factors” in the Form 10-K filed with the SEC on March 26, 2024.
Conditions in the Middle East and in Israel, where our research and development facilities are located, may harm our operations.
Our office where we conduct our research and development, operations, sales outside the Americas, and administration activities, is located in Israel. Many of our employees are residents of Israel. Most of our officers and directors are residents of Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, and between Israel and the Hamas (an Islamist militia and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon).
In particular, in October 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks on the Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other areas within the State of Israel. These attacks resulted in thousands of deaths and injuries, and Hamas additionally kidnapped many Israeli civilians and soldiers. Following the attack, Israel’s security cabinet declared war against Hamas and commenced a military campaign against Hamas and Hezbollah and these terrorist organizations in parallel continued rocket and terror attacks. As a result of the events of October 7, 2023 whereby Hamas terrorists invaded southern Israel and launched thousands of rockets in a widespread terrorist attack on Israel, the Israeli government declared that the country was at war and the Israeli military began to call-up reservists for active duty. As of the date of this Quarterly Report on Form 10-Q, we have not been impacted by any absences of personnel at our service providers or counterparties located in Israel. Military service call ups that result in absences of personnel from us for an extended period of time may materially and adversely affect our business, prospects, financial condition and results of operations. As of the date of this Quarterly Report, we currently have 42 full-time employees, with 33 employees located in Israel and 9 employees located outside of Israel.
Since the war broke out on October 7, 2023, our operations have not been adversely affected by this situation, and we have not experienced any material disruptions to our operations. We have the ability, if necessary, to shift our manufacturing from Israel to other countries where we have business partners, and we have not had customers in Israel in the last year. However, the intensity and duration of the war in the Middle East is difficult to predict at this stage, as are such war’s economic implications on the Company’s business and operations and on Israel’s economy in general. if the war in the other fronts, such as Lebanon, Syria and the West Bank expands further, our operations may be adversely affected.
In addition, since the commencement of these events, there have been continued hostilities along Israel’s northern border with Lebanon (with the Hezbollah terror organization) and southern border (with the Houthi movement in Yemen). It is possible that hostilities with Hezbollah in Lebanon will escalate, and that other terrorist organizations, including Palestinian military organizations in the West Bank as well as other hostile countries will join the hostilities. Such clashes may escalate in the future into a greater regional conflict. In addition, Iran recently launched a direct attack on Israel involving hundreds of drones and missiles, and has threatened to continue to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza, Hezbollah in Lebanon, the Houthi movement in Yemen and various rebel militia groups in Syria. These situations may potentially escalate in the future to more violent events which may affect Israel and us. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions, could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business may decline to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements. Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansion of our business.
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Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. In recent years, the hostilities involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel.
Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions and could harm our results of operations. To-date, we have received Israeli government war related support funding of approximately $100,000.
Finally, political conditions within Israel may affect our operations. Israel has held five general elections between 2019 and 2022, and prior to October 2023, the Israeli government pursued extensive changes to Israel’s judicial system, which sparked extensive political debate and unrest. To date, these initiatives have been substantially put on hold. Actual or perceived political instability in Israel or any negative changes in the political environment, may individually or in the aggregate adversely affect the Israeli economy and, in turn, our business, financial condition, results of operations and growth prospects.
Our shares of common stock could be delisted from the Nasdaq Capital Market if we fail to regain compliance with the Nasdaq’s stockholders’ equity continued listing standards. Our ability to publicly or privately sell equity securities and the liquidity of our shares of common stock could be adversely affected if we are delisted from the Nasdaq Capital Market.
On August 25, 2023, we received a notification letter from the Listing Qualifications Staff (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that our stockholders’ equity did not comply with the minimum $2,500,000 stockholders’ equity requirement for continued listing set forth in Listing Rule 5550(b) (the “Equity Rule”).
We had until February 21, 2024 to evidence compliance with the Equity Rule. As of the date of Quarterly Report on Form 10-Q, we have not provided such evidence.
On March 27, 2024, we received a delist determination letter (the “Delist Letter”) from the Staff advising us that the Staff had determined to delist our securities from Nasdaq due to our non-compliance with the Equity Rule unless we timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”). We have since timely requested a hearing, which request served to stay any further action by Nasdaq at least pending the hearing before the Panel and the expiration of any extension the Panel may grant following the hearing.
At a hearing, we intend to present our plan for regaining compliance with the Equity Rule and may request a further extension to complete the plan. No assurance can be provided that Nasdaq will ultimately accept our plan or that we will ultimately regain compliance with the Equity Rule.
We have in the past, and may in the future, be unable to comply with certain of the listing standards that we are required to meet to maintain the listing of our ordinary shares on Nasdaq. For instance, on November 3, 2022, we received notification from the Nasdaq Staff that we were not in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had an initial grace period of 180 calendar days, or until May 2, 2023 (the “Minimum Bid Price Compliance Period”), to regain compliance with the minimum bid price requirement. On April 19, 2023, we implemented a 1-for-10 reverse stock split. One of the primary intents for the consolidation was that the anticipated increase in the price of our shares of common stock immediately following and resulting from a reverse stock split due to the reduction in the number of issued and outstanding shares of ordinary shares would help us meet the price criteria for continued listing on the Nasdaq Capital Market. On May 3, 2023, we received a notification from the Nasdaq Staff that we had regained compliance with the Nasdaq Listing Rule 5550(a)(2).
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If we fail to satisfy the continued listing requirements of Nasdaq, such as minimum stockholders’ equity requirements or minimum bid price requirements, Nasdaq may take steps to delist our shares of common stock. Such a delisting would have a negative effect on the price of our shares of common stock, impair the ability to sell or purchase our shares of common stock when persons wish to do so, and any delisting materially adversely affect our ability to raise capital or pursue strategic restructuring, refinancing or other transactions on acceptable terms, or at all. Delisting from Nasdaq could also have other negative results, including the potential loss of institutional investor interest and fewer business development opportunities, as well as a limited amount of news and analyst coverage of us. Delisting could also result in a determination that our shares of common stock are a “penny stock,” which would require brokers trading in our shares of common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary market for our shares of common stock. In the event of a delisting, we would attempt to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our shares of common stock to become listed again, stabilize the market price or improve the liquidity of our securities, prevent our shares of common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
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.
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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: May 14, 2024 | By: | /s/ Tuvia Barlev |
| Tuvia Barlev | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 14, 2024 | By: | /s/ Yoav Efron |
| Yoav Efron | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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