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. 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 May 11, 2023,
ACTELIS NETWORKS, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 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 |
| ● | 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
ACTELIS NETWORKS, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2023
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
ACTELIS NETWORKS, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2023
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 and Shareholders’ equity | F-5 |
| Condensed consolidated statements of cash flows | F6 - F7 |
| Notes to condensed consolidated financial statements | F8 - F22 |
F-1
ACTELIS NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(U. S. dollars in thousands except for share and per share amounts)
| March 31, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | ||||||||
| Short term deposits | ||||||||
| Restricted bank deposits | ||||||||
| Trade receivables, net of allowance for doubtful debts 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)
| March 31, 2023 | December 31, 2022 | |||||||
| Liabilities and redeemable convertible preferred stock and shareholders’ equity | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Current maturities of long-term loans | ||||||||
| Warrants | ||||||||
| Trade payables | ||||||||
| Deferred revenues | ||||||||
| Employee and employee-related obligations | ||||||||
| 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 10) | ||||||||
| REDEEMABLE CONVERTIBLE PREFERRED STOCK: | ||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY | ||||||||
| * | Represents an amount less than $1 thousands. |
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)
| For the Three months ended March 31, | ||||||||
| 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 expenses | ( | ) | ( | ) | ||||
| 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 AND SHAREHOLDERS’ EQUITY
(UNAUDITED)
U.S. dollars in thousands (except number of shares)
| Redeemable
Convertible Preferred Stock | Common Stock | Non-voting
| Additional | Total
shareholder’s | ||||||||||||||||||||||||||||||||
| Number
of shares (**) | Amount | Number
of shares(**) | Amount | Number
of shares(**) | Amount | paid-in capital | Accumulated deficit | 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 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| 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 | ( | ) | ||||||||||||||||||||||||||||||||||
| * |
| (**) |
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, | ||||||||
| 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 | ||||||||
| 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 | ( | ) | ||||||
| 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: | ||||||||
| Proceeds from private placement | ||||||||
| Repurchase of common stock | ( | ) | ||||||
| Repayment of long-term loan | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ( | ) | ||||
| INCREASE (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 | ||||||||
| * | Represents an amount less than $1 thousands. |
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)
Three
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 | ||||||||
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, 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, 2022 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-8
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 the April 2023 reverse stock split, see note 3(j). |
F-9
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 or 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 months ended March 31, 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) | Cash, cash equivalents and restricted cash |
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates their fair value.
| d) | Restricted cash and restricted deposits |
| e) | Treasury Shares |
Treasury shares represents ordinary shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury shares are accounted for under the cost method. Under this method, repurchases of ordinary shares are recorded as treasury shares at historical purchase prices. At retirement, the ordinary shares account is charged only for the aggregate par value of the shares. The treasury shares have no rights.
F-10
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued):
| f) | Revenue recognition |
The Company’s product consists of hardware and an embedded software that function together to deliver the product’s essential functionality. The embedded software is essential to the functionality of the Company’s products. The Company’s products are sold with a two-year warranty for repairs or replacements of the product in the event of damage or failure during the term of the support period, which is accounted for as a standard warranty. Services relating to repair or replacement of hardware beyond the standard warranty period are offered under renewable, fee-based contracts and include telephone support, remote diagnostics and access to on-site technical support personnel.
The Company also offers its customers other management software. The Company sells its other non-embedded software either as perpetual or as term-based licenses.
The Company provides, to certain customers, software updates that it chooses to develop, which the Company refers to as unspecified software updates, and enhancements related to the Company’s management software through support service contracts. The Company also offers its customers product support services which include telephone support, remote diagnostics and access to on-site technical support personnel.
The Company’s customers are comprised of resellers, system integrators and distributors.
The Company follows five steps to record revenue: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) 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.
F-11
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued):
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.
| g) | Offering Costs associated with the Initial Public Offering |
The Company complies with the requirements of ASC 340-10-S99-1, SEC Staff Accounting bulletin Topic 5A – “Expenses of Offering”. Offering costs consist principally of professional and registration fees incurred through the balance sheet date that are related to the IPO. Offering costs directly attributable to the issuance of an equity contract to be classified in equity are recorded as a reduction of equity.
The Company incurred offering costs amounting to approximately
$
| h) | 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
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued):
The following table represents the fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring basis as of:
Fair
value measurements at March 31, 2023 | ||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Warrants (See Note 9) | $ | | $ | $ | $ | | ||||||||||
Fair
value measurements at December 31, 2022 | ||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Warrants (See Note 9) | $ | | $ | $ | $ | | ||||||||||
| h) | Fair value of financial instruments |
As of March 31, 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.
| i) | 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 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 doubtful accounts does not reflect the Company’s future ability to collect outstanding accounts receivable, additional provisions for doubtful accounts may be needed, and the future results of operations could be materially affected.
F-13
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 |
See note 13 for details regarding the revenues from these customers.
The Company does not see any credit risk regarding the trade receivable balance, as most of the remaining balance was paid off after the balance sheet date.
| j) | Reverse split |
On April 15, 2022 (the “Closing Date”), 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 “Closing Date”), 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:
| March 31, 2023 | December 31,
| |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | $ | $ | ||||||
| $ | $ | |||||||
Inventory
write-downs totaled to $
NOTE 5 – LEASES:
| 1) | The
Company has an operating lease agreement for its facility in the United States, which expires on |
| 2) | On
July 1, 2022, the Company entered into a new operating lease agreement for additional offices in the United States, which expires on
|
| 3) | The
Company’s Israeli subsidiary has an operating lease agreement for a facility in Israel, which expires on |
| 4) | On
October 18, 2021, the Company entered into an agreement to sublease its facility to an unrelated third party in the United States. The
sublease ends |
| 5) | The Company leases its motor vehicles under operating lease agreements. |
| 6) | The Company’s Israeli subsidiary has an operating lease agreement for testing equipment in Israel, which expires on February 7, 2025. The lease payments are denominated in ILS. |
F-14
NOTE 5 – LEASES (continued):
Supplemental information related to leases is as follows:
March
31, | December
31, 2022 | |||||||
| Operating leases: | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Current Operating lease liabilities | $ | $ | ||||||
| Non-Current Operating lease liabilities | $ | $ | ||||||
| Total Operating lease liabilities | $ | $ | ||||||
Other information:
| Three months ended March 31, 2023 | Three months ended March 31, 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities (cash paid in thousands) | $ | $ | ||||||
| Weighted Average Remaining Lease Term | ||||||||
| Weighted Average Discount Rate | % | % | ||||||
The lease costs components are as follows:
| Three months ended March 31, 2023 | Three
months ended March 31, 2022 | |||||||
| Fixed payments | $ | $ | ||||||
| Variable payments that depend on an index or rate | ||||||||
| Total operating lease cost | $ | $ | ||||||
Maturities of operating lease liabilities were as follows:
| March
31, 2023 | December
31, 2022 | |||||||
| 2023 | $ | (*) | $ | |||||
| 2024 | ||||||||
| 2025 | ||||||||
| Total operating lease payments | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
| (*) |
F-15
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 March 31, 2023, the Company was in compliance with the covenants.
As of March 31, 2023, future payments are summarized as follows:
| 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-16
NOTE 7 – CONVERTIBLE NOTE:
During
December 2021 to April 2022, the Company offered up to $
The Notes had an optional conversion price at a 40% discount based on a $50m value in the event that an IPO is not consummated and if an IPO is not consummated within 18 months of the issuance of the Notes, the value of the Notes would be set at 110% of their then balance.
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. The following table presents a roll forward of the fair value of the Notes in the year ended December 31, 2022:
| 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 financial expenses associated with the Notes during
the three months ended March 31, 2023, and March 31, 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.
The following is a roll forward of the fair values:
| 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 financial expenses associated with the CLA during
the three months ended March 31, 2023, and March 31, 2022, in the amount of $
F-17
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.
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.
| b) | 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.
The table below shows the impact on the statement of comprehensive loss related to the Comerica warrants for the years ended December 31:
| March
31, 2023 | December
31, 2022 | |||||||
| U.S. dollars in thousands | ||||||||
| Outstanding as of January 1 | ||||||||
| Fair value changes | ||||||||
| Additions | ||||||||
| Conversion to the Company’s common stock | ( | ) | ||||||
| Outstanding at the end of the period | ||||||||
The Company recorded other financial expenses (income) during the three
months ended March 31, 2023 and March 31, 2022, in the amount of $
| (*) | Adjusted to reflect April 2023 reverse stock split, see note 3(j). |
F-18
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 March 31, 2023, the Company had received approximately $
During
the year 2022, the Company paid an amount of $
As
of March 31, 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. | Share-based compensation: |
| 1 | A summary of the Company’s share options, granted to employees, directors, under option plans is as follows: |
| Number of options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
| Outstanding – January 1, 2023 | $ | |||||||||||
| Granted | $ | |||||||||||
| Exercised | $ | |||||||||||
| Expired and forfeited | ( | ) | $ | |||||||||
| Outstanding – March 31, 2023 | $ | |||||||||||
| Exercisable – March 31, 2023 | $ | |||||||||||
See also Note 2 above regarding warrants granted to the underwriters upon the consummation of the IPO in consideration for their underwriting services.
F-19
NOTE 11 – SHAREHOLDERS’ EQUITY (*) (continued):
| 2) | Restricted Stock Units (*): |
| March 31 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 March 31, 2023 | $ | |||||||
| (*) |
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 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
RSU’s
to purchase
Redeemable
convertible Preferred stock, which was convertible into
The convertible loan was not included in the calculation of the diluted loss per share as the loan was convertible into shares of common stock only upon the occurrence of a contingent event which had yet to occur as of March 31, 2022. For more details see note 8.
Warrants
convertible into
Warrants
convertible into
Warrants
convertible into
| (*) | Adjusted to reflect April 2023 reverse stock split, see note 3(j). |
F-20
NOTE 13 – ENTITY WIDE INFORMATION AND DISAGREGATED REVENUES:
The Company operates as
| a. | Geographic information: |
The following is a summary of revenues by geographic areas. Revenues attributed to geographic areas, based on the location of the end customers:
| Three months Ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| North America | ||||||||
| Europe, the Middle East and Africa | ||||||||
| Asia Pacific | ||||||||
| b. | Revenues from contract liability: |
| March 31, 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 March 31, 2023, the aggregate amount
of the transaction price allocated to the remaining performance obligation is $
| c. | The Company’s long-lived assets are located as follows: |
Property and Equipment, net:
March 31, | December 31, | |||||||
| Israel | $ | $ | ||||||
| North America | ||||||||
| $ | $ | |||||||
Operating lease right of use assets:
March 31, | December 31, | |||||||
| Israel | $ | $ | ||||||
| North America | ||||||||
| $ | $ | |||||||
F-21
NOTE 13 – ENTITY WIDE INFORMATION AND DISAGREGATED REVENUES (continued):
| d. | Customers representing |
| Three months ended March 31, 2023 | ||||||||
| Customer A | (*) | $ | ||||||
| Three months ended March 31, 2022 | ||||||||
| Customer A | $ | |||||||
| (*) |
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. | In December 15, 2022, the Company issued |
| (*) | Adjusted to reflect April 2023 reverse stock split, see note 3(j). |
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 March 31, 2023, and for the three months then ended, the Company evaluated subsequent events through May 12, 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. | On March 8, 2023 (the “Closing Date”), 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. See note 3(j). |
| c. | 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 “Offering”) (i)
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 |
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 March 31 | ||||||||
| 2023 | 2022 | |||||||
| (dollars in thousands) | ||||||||
| Revenues | $ | 1,848 | $ | 1,868 | ||||
| Cost of revenues | 1,160 | 1,286 | ||||||
| Gross profit | 688 | 582 | ||||||
| Research and development expenses, net | 757 | 650 | ||||||
| Sales and marketing, net | 929 | 730 | ||||||
| General and administrative, net | 865 | 635 | ||||||
| Operating loss | (1,863 | ) | (1,433 | ) | ||||
| Interest expenses | (180 | ) | (220 | ) | ||||
| Other Financial income (expenses), net | 148 | (2,986 | ) | |||||
| Net Comprehensive Loss for the period | $ | (1,895 | ) | (4,639 | ) | |||
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Revenues
Our revenues for the three months ended March 31, 2023 amounted to $1.85 million, compared to $1.87 million for the three months ended March 31, 2022. The decrease from the corresponding period was primarily attributable to an increase of $212,000 of revenues generated from North America and Asia Pacific, offset by a decrease of $232,000 in revenues generated from Europe, the Middle East and Africa.
Cost of Revenues
Our cost of revenues for the three months ended March 31, 2023, amounted to $1.16 million compared to $1.29 million for the three months ended March 31, 2022. The decrease from the corresponding period was mainly due to a favorable product mix and lower logistics costs.
1
Research and Development Expenses
Our research and development expenses for the three months ended March 31, 2023 amounted to $0.76 million compared to $0.65 million for the three months ended March 31, 2022. The increase was mainly due to an increase in payroll expense for research and development personnel in the amount of $59,000, and an increase in professional services related to research and development in the amount of $37,000.
Sales and Marketing Expenses
Our sales and marketing expenses for the three months ended March 31, 2023 amounted to $0.9 million compared to $0.7 for the three months ended March 31, 2022. The increase from the corresponding period was mainly a result of our increased investments in sales and marketing, including in payroll expenses for additional personnel in the amount of $117,000, and increase in professional services expenses in the amount of $72,000 associated with an increase in our spending on marketing programs.
General and Administrative Expenses
Our general and administrative expenses for the three months ended March 31, 2023 amounted to $0.9 million compared to $0.6 million for the three months ended March 31, 2022. 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 March 31, 2023, was $1.9 million, compared to an operating loss of $1.4 million for the three months ended March 31, 2022. The increase was mainly due to higher expenses associated primarily with investment in sales and marketing and expenses attributed to the IPO completed in May 2022 and those costs associated with being a public company.
Other Financial expenses, net and interest expenses
Our financial income, net for the three months ended March 31, 2023, was $0.1 million (including $0.2 million interest expenses) compared to $3.2 million of financial expense, net (including $0.2 million interest expenses) for the three months ended March 31, 2022. During the three months ended March 31, 2022, the Company incurred financial expenses in connection with increases 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 $3.1 million.
Net Loss
Our net loss for the three months ended March 31, 2023 was $1.9 million, compared to net loss of $4.6 million for the three months ended March 31, 2022. This decrease was primarily due to the decrease in financial expenses, resulting from the conversion of the financial instruments the Company had such as a convertible loan, note and warrants in the IPO completed in May 2022, offset by an increase in operating expenses mainly due to investment in sales and marketing, as well as expenses attributed to our IPO in May 2022 and expenses associated with being a public company.
2
Non-GAAP Financial Measures
| (U.S. dollars in thousands) | Three months Ended March 31, 2023 | Three months Ended March 31, 2022 | ||||||
| Revenues | $ | 1,848 | $ | 1,868 | ||||
| GAAP net loss | (1,895 | ) | (4,639 | ) | ||||
| Interest Expense | $ | 180 | $ | 220 | ||||
| Other financial (income) expenses, net | (148 | ) | 2,986 | |||||
| Tax Expense | 21 | 12 | ||||||
| Fixed asset depreciation expense | 7 | 10 | ||||||
| Stock based compensation | 95 | 14 | ||||||
| Research and development, capitalization | 146 | 142 | ||||||
| Net change in operating lease assets and liabilities | - | 10 | ||||||
| Other one time costs and expenses | - | 288 | ||||||
| Non-GAAP Adjusted EBITDA | (1,594 | ) | $ | (957 | ) | |||
| GAAP net loss margin | (102.54 | )% | (248.35 | )% | ||||
| Adjusted EBITDA margin | (84.12 | )% | (51.23 | )% | ||||
Use of Non-GAAP Financial Information
Non-GAAP Adjusted EBITDA, Adjusted EBITDA margin are Non-GAAP financial measures. Their most directly comparable financial measures prepared in accordance with GAAP are GAAP net loss and GAAP net loss margin. In addition to reporting financial results in accordance with GAAP, we provide Non-GAAP supplemental operating results adjusted for certain items, including: financial expenses, which are interest, financial instrument fair value adjustments, exchange rate differences of assets and liabilities, stock based compensation expenses, depreciation and amortization expense, tax expense, and impact of development expenses ahead of product launch. We adjust for the items listed above and show non-GAAP financial measures in all periods presented, unless the impact is clearly immaterial to our financial statements. When we calculate the tax effect of the adjustments, we include all current and deferred income tax expense commensurate with the adjusted measure of pre-tax profitability.
We utilize the adjusted results to review our ongoing operations without the effect of these adjustments but not for comparison to budgeted operating results. We believe the supplemental adjusted results are useful to investors because they help them compare our results to previous periods and provide important insights into underlying trends in the business and how management oversees and optimizes our business operations on a day-to-day basis. We exclude the costs in calculating adjusted results to allow us and investors to evaluate the performance of the business based upon its expected ongoing operating structure. We believe the adjusted measures, accompanied by the disclosure of the costs of these programs, provides valuable insight to our financial performance. Adjusted results should be considered only in conjunction with results reported according to GAAP.
The non-GAAP financial measures are presented for supplemental informational purposes only. They should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided above for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
3
| (U.S. dollars in thousands) | Three months Ended March 31, 2023 | Three months Ended March 31, 2022 | ||||||
| Revenues | $ | 1,848 | $ | 1,868 | ||||
| Non-GAAP Adjusted EBITDA | (1,594 | ) | (957 | ) | ||||
| as a percentage of revenues | (84.12 | )% | (51.23 | )% | ||||
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 $1.9 million and $4.6 million for the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023 and 2022, we had negative cash flows from operations of $1.7 million and $1.3 million, respectively. As of March 31, 2023, we had an accumulated deficit of $35.3 million. We had cash on hand (including short term deposits and restricted cash) of $2.4 million, and long-term deposits and restricted cash of $4.1 million, as of March 31, 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 the COVID 19 pandemic, 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, our business, financial condition and results of operations could be adversely affected.
Cash Flows
The table below, for the periods indicated, provides selected cash flow information:
| (U.S. dollars in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | ||||||
| Net cash used in operating activities | $ | (1,705 | ) | $ | (1,307 | ) | ||
| Net cash used in investing activities | (334 | ) | (277 | ) | ||||
| Net cash used (provided by) in financing activities | (242 | ) | 1,718 | |||||
| Net change in cash | $ | (2,281 | ) | $ | 134 | |||
4
As of March 31, 2023, we had cash, cash equivalents, and restricted cash of $2.0 million compared to $4.3 million of cash, cash equivalents and restricted cash as of December 31, 2022.
Cash used in operating activities amounted to $1.7 million for the three months ended March 31, 2023, compared to $1.3 million for the three months ended March 31, 2022. The increase in cash used in operating activities was mainly due to increase in operating expenses, as well as expenses associated with our IPO and being a public company.
Net cash used in investing activities was $0.3 million for the three months ended March 31, 2023, compared to cash used in investing activities of $0.3 million for the three months ended March 31, 2022. The increase from the corresponding period was mainly due to change in short and long-term deposits, related to depositing cash into company interest bearing bank deposits in part due to increased collateral provided to our manufacturers.
Net cash used in financing activities was $0.2 million for the three months ended March 31, 2023, compared to Net cash provided from financing activities $1.7 million for the three months ended March 31, 2022.
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.
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 March 31, 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 March 31, 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.
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 “Offering”) (i) 190,000 shares (the “Shares”) of common stock of the Company, $0.0001 par value (the “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 also agreed to issue to Wainwright, or its designees, unregistered warrants to purchase up to 7.0% of the aggregate number of the Shares and Pre-Funded Warrants sold to the Investor (or warrants to purchase up to 66,127 shares of Common Stock) at an exercise price per share of $4.6313 and a term of five and one-half years (the “Placement Agent Warrant”). The Placement Agent Warrant and the shares of Common Stock issuable upon exercise thereof, will be issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act as transactions not involving a public offering and in reliance on similar exemptions under applicable state laws.
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 |
| ** | Furnished 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 12, 2023 | By: | /s/ Tuvia Barlev |
| Tuvia Barlev | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 12, 2023 | By: | /s/ Yoav Efron |
| Yoav Efron | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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