ACTELIS NETWORKS, INC. References in this report to "we," "Actelis," "us," "our," or the "Company" refer toActelis 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 prospectus datedMay 12, 2022 , filed with theSecurities and Exchange Commission (the "SEC") onMay 16, 2022 pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended (the "Securities Act") (referred to herein as the "Prospectus"). 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 Prospectus and the Special Note Regarding Forward Looking Statements above. Overview Actelis is a networking solutions company with a mission to enable cyber secure, rapid deployment networking for all for wide-area Internet of Things, or IoT, projects, enabling applications in Smart Cities, Smart Campuses, airports, military bases, Smart Roads, Smart Rail, and utilities. Our patented hybrid fiber-copper networking solutions deliver excellent communication over fiber to locations that may be easy to reach with new fiber. However, for locations that are difficult to reach with fiber, we can upgrade existing copper lines, to deliver cyber-hardened, high-speed connectivity without needing to replace the existing copper infrastructure with new fiber. We believe that such hybrid fiber-copper networking solution has distinct advantages in most real-life installations, providing significant budget savings and accelerating deployment of modern IoT networks. We believe that our solutions can provide connectivity over fiber or copper up to multi-Gigabit communication, while supporting Gigabit-Grade reliability and quality. When high-speed, long reach, high reliability and secure connectivity is required, network operators usually resort to using wireline communication over physical communication lines rather than wireless communication that is more limited in performance, reliability and security. However, wireline communication infrastructure is costly, and often accounts for more than 50% of total cost of ownership and time to deploy wide-area IoT projects. Typically, providing new fiber connectivity to hard-to-reach locations is costly and time-consuming, often requiring permits for boring, trenching, and right-of-way. Connecting such hard-to-reach locations, may cause significant delays and budget overruns in IoT projects. Our solutions aim to solve these challenges.
By alleviating difficult challenges in connectivity, we believe that Actelis' solutions are making a significant difference by effectively accelerating deployment of IoT projects, and making IoT projects more affordable and predictable to plan and budget.
Our solutions also offer end-to-end network security to protect critical IoT data, utilizing a powerful combination of coding and encryption technologies, applied as required on both new and existing infrastructure within the hybrid-fiber-copper network. Our solutions have been tested for performance and security by theU.S. Department of Defense , or theU.S. DoD , laboratories, and approved for deployment with theU.S. Federal Government. 1
As ofSeptember 30, 2022 , we had more than 300 customers, including cities, road and rail authorities, utilities and military organizations. We experienced an average annual sales growth in our IoT business of more than 20% each year from 2018 through 2021 in booking of orders from customers in the IoT market. Since our inception, our business was focused on serving telecommunication service providers, also known as Telcos, providing connectivity for enterprises and residential customers. Our products and solutions have been deployed with more than 100 telecommunication service providers worldwide, in enterprise, residential and mobile base station connectivity applications. In recent years, as we have further developed our technology and rolled out additional products, we turned our focus on serving the wide-area IoT markets. Our operations are focused on our fast-growing IoT business, while maintaining our commitment
to our existing Telco customers. We currently have one outstanding loan withMigdalor Business Investments Fund , or Migdalor, which is secured by all our assets. As ofSeptember 30, 2022 , the amount outstanding under the loan is$5.00 million (based on the NIS/USD exchange rate as of such date) (the "Migdalor Loan"). If we cannot generate sufficient cash flow from operations to service our debt, we may need to further refinance our debt, dispose of assets or issue equity to obtain necessary funds. We expect to continue repaying the principal and interest of the Migdalor Loan from our operating cash flow. Initial Public Offering OnMay 17, 2022 , we closed our IPO of common shares, in which we sold a total of 4,212,500 shares of common stock at$4 per share, including 462,500 shares pursuant to the partial exercise of the underwriters' over-allotment option, for total net proceeds of$15.4 million , which, after deducting underwriting discounts and commissions of$1.4 million before additionally paid offering expenses of approximately$1.0 million amounted to proceeds available to the Company of$14.4 million . Upon the closing of our IPO, all outstanding shares of our redeemable convertible preferred stock automatically converted into 7,731,083 shares of common stock on a one-for-one basis. For additional information, see Note 1(d) to our Condensed Consolidated Financial Statements. Impact of COVID-19 Pandemic There continues to be widespread impact from the COVID-19 pandemic. Beginning in the first quarter of 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. Although infection rates and regulations have decreased globally, we continue to experience material residual impacts resulting from the pandemic, including inflationary impact on our cost structure and our operating expenses, specifically increases in costs for logistics and supply chains, heavy purchase price variance of electronic components, as well as from various operating vendors we use in our ongoing business. This inflationary environment contributes to recent increases in interest rates, as well as in the strengthening of theU.S. dollar against foreign currencies, which is affecting our business partners, where they sell local currency to the end-user of our products and services. Furthermore, this inflationary impact has affected us by requiring certain employment and compensation adjustments necessary to remain a competitive employer. 2 Results of Operations The table below provides our results of operations for the periods indicated. Three months ended Nine months ended September 30 September 30 2022 2021 2022 2021 (dollars in thousands) (dollars in thousands) Revenues 1,348 1,422 6,297 5,995 Cost of revenues 813 896 3,258 3,002 Gross profit 535 526 3,039 2,993
Research and development expenses, net 723 552 2,049 1,818 Sales and marketing, net 790 627 2,357 1,576 General and administrative, net 1,028 255 2,730 906 Operating loss (2,006 ) (908 ) (4,097 ) (1,307 ) Financial expenses, net (201 ) (279 ) (4,403 ) (592 ) Net Comprehensive Loss for the period (2,207 ) (1,187 )
(8,500 ) (1,899 )
Three and Nine Months Ended
Revenues
Our revenues for the three months ended
Our revenues for the nine months ended
Cost of Revenues Our cost of revenues for the three months endedSeptember 30, 2022 , amounted to$0.8 million compared to$0.9 million for the three months ended September
30, 2021.
Our cost of revenues for the nine months endedSeptember 30, 2022 , amounted to$3.3 million compared to$3.0 million for the nine months endedSeptember 30, 2021 . The increase from the corresponding period was mainly due to the increase in revenues, as well as a change in the product mix and an increase in purchase price variance of the cost of components and manufacturing driven by supply shortages and shipment costs.
Research and Development Expenses
Our research and development expenses for the three months endedSeptember 30, 2022 amounted to$0.7 million compared to$0.6 million for the three months endedSeptember 30, 2021 . The increase was mainly due to the acceleration of investments, primarily an increase in payroll expense in the amount of 131,000, in research and development. Our research and development expenses for the nine months endedSeptember 30, 2022 amounted to$2.0 million compared to$1.8 million for the nine months endedSeptember 30, 2021 . The increase was mainly due to the acceleration of investments, primarily an increase in payroll expenses in the amount of$230,000 . Sales and Marketing Expenses Our sales and marketing expenses for the three months endedSeptember 30, 2022 amounted to$0.8 million compared to$0.6 for the three months endedSeptember 30, 2021 . The increase from the corresponding period was mainly associated with increased investments in sales and marketing, specifically in payroll expenses in the amount of$97,000 , mainly due to hiring of sales and marketing employees and increase in travel expenses in the amount of$66,000 , offset by a decrease in professional services in the amount of$42,000 . 3 Our sales and marketing expenses for the nine months endedSeptember 30, 2022 amounted to$2.4 million compared to$1.6 for the nine months endedSeptember 30, 2021 . The increase in comparison with the corresponding period was mainly associated with increased sales compensation due to higher revenue of$192,000 , increased investments in sales and marketing, specifically in payroll expenses in the amount of$382,000 , mainly due to hiring of sales and marketing employees, increase in other professional services in the amount of$41,000 and increase in travel expenses in the amount of$138,000 .
General and Administrative Expenses
Our general and administrative expenses for the three months endedSeptember 30, 2022 amounted to$1.0 million compared to$0.3 million for the three months endedSeptember 30, 2021 . The increase was mainly due to payroll and professional services expenses attributed to being a public company following our IPO completed inMay 2022 . Our general and administrative expenses for the nine months endedSeptember 30, 2022 amounted to$2.7 million compared to$0.9 million for the nine months endedSeptember 30, 2021 . The increase was mainly due to payroll and professional services expenses attributed to the work on the IPO in the amount of$1.0 million , completed inMay 2022 , as well as to being a public company. Operating Loss
Our operating loss for the three months endedSeptember 30, 2022 , was$2.0 million , compared to an operating income of$0.9 million for the three months endedSeptember 30, 2021 . The increase was mainly due higher expenses associated primarily with investment in sales and marketing and expenses attributed to being a public company. Our operating loss for the nine months endedSeptember 30, 2022 , was$4.1 million , compared to an operating loss of$1.3 million for the nine months endedSeptember 30, 2021 . The increase was mainly due to a delay in supply, due to shortages, as well as higher expenses associated primarily with investment in sales and marketing and expenses attributed to the IPO completed inMay 2022 and being a public company. Financial Expenses, Net Our financial expense, net for the three months endedSeptember 30, 2022 , was$0.2 million compared to$0.3 million for the three months endedSeptember 30, 2021 . The decrease is attributed mostly to exchange rate differences. Our financial expense, net for the nine months endedSeptember 30, 2022 was$4.4 million compared to$0.6 million for the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , we incurred financial expenses mainly due to increases in fair value of various financial instruments, such as convertible loan, note and warrants in the amount of$4.5 million up until the IPO when such instruments converted to equity, and had income in the amount of$0.7 million , from exchange rate differences. Since all convertible loans and nearly all warrants we had outstanding converted to equity in connection with the IPO, we do not expect additional material financial expenses going forward for these loans and warrants compared to those we incurred in 2020, 2021 and the first two quarters of 2022. Net Loss Our net loss for the three months endedSeptember 30, 2022 was$2.2 million , compared to net loss of$1.2 million for the three months endedSeptember 30, 2021 . The increase was primarily due to the increase in operating expenses mainly due to investment in sales and marketing, as well as expenses attributed to being a public company. 4
Our net loss for the nine months endedSeptember 30, 2022 was$8.5 million , compared to net loss of$1.9 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to the increase in financial expenses, resulting from the increases in fair value of various financial instruments, as well as an increase in operating expenses mainly due to investment in sales and marketing, as well as expenses attributed to our IPO inMay 2022 and being
a
public company.
Non-GAAP Financial Measures
Three months Three months Nine months Nine months
Ended Ended Ended Ended
September 30,
2022 2021 2022 2021
Revenues $ 1,348 $ 1,422 $ 6,297 $ 5,995
GAAP net loss (2,207 ) (1,187 ) (8,500 ) (1,899 )
Interest Expense 201 279 4,403 592
Tax Expense 28 6 102 69Fixed asset depreciation expense 9 7 29 31 Stock based compensation 13 8 41 28 Research and development, capitalization 143 119 423 472 Other one-time costs and expenses 115 - 916 - Non-GAAP Adjusted EBITDA (1,698 ) (768 ) (2,586 ) (707 ) GAAP net loss margin (163.72 )% (83.47 )% (134.98 )% (31.67 )% Adjusted EBITDA margin (125.96 )%
(54.01 )% (41.07 )% (11.79 )%
Use of Non-GAAP Financial Information
Non-GAAP Adjusted EBITDA, Adjusted EBITDA margin, and backlog of customer open orders are Non-GAAP financial measures. In addition to reporting financial results in accordance with GAAP, we provide Non-GAAP 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 reference measures of performance that cannot yet be reflected in our financial results such as backlog of customer open orders. We believe the supplemental adjusted results are useful to investors because they help them compare our results to previous periods and provide important insights into underlying trends in the business and how management oversees and optimizes our business operations on a day-to-day basis. We exclude the costs in calculating adjusted results to allow us and investors to evaluate the performance of the business based upon its expected ongoing operating structure. We believe the adjusted measures, accompanied by the disclosure of the costs of these programs, provides valuable insight to our financial performance. Adjusted results should be considered only in conjunction with results reported according to GAAP.
For the three months ended For the nine months ended
September 30 September 30 (U.S. dollars in thousands) 2022 2021 2022 2021 Revenues$ 1,348 $ 1,422 $ 6,297 $ 5,995 Non-GAAP Adjusted EBITDA (1,698 ) (768 ) (2,586 ) (707 ) As a percentage of revenues (125.96 )% (54.01 )% (41.07 )% (11.79 )% 5
Backlog of Customer Open Orders
Our backlog of customer open orders consists of product orders for which we have received a customer purchase order, and which have not yet been shipped. Orders are generally not subject to cancellation or rescheduling by the customer. We believe the review of backlog of customer open orders together with revenues is useful supplemental information to investors because it provides important insights into underlying trends in the business and how management oversees and optimizes our business operations on a day-to-day basis. As ofSeptember 30, 2022 , our firm backlog of customer open orders was$3.9 million and as ofSeptember 30, 2021 , our firm backlog of customer open orders was$5.2 million . In almost all cases, the backlog of customer open orders has been caused by the current global delays in supply in electronic components. We expect the majority of the backlog of customer open orders as ofSeptember 30, 2022 to be shipped during 2022. For the three months ended For the nine months ended (U.S. dollars in thousands Revenues) September 30 September 30 2022 2021 2022 2021 Revenues$ 1,348 $
1,422
Backlog of open Orders(1)$ 3,917 $ 5,153 $ 3,917 $ 5,153
(1) Presented as of
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 theIsrael Innovation Authority . Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes. Our principal sources of liquidity following our IPO inMay 2022 as discussed below under the section titled "Initial Public Offering," are expected to be the net proceeds from this offering as well as cash proceeds generated from our sales. 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 repercussions from the COVID 19 pandemic, as well as the war betweenRussia and theUkraine , has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when desired, our business, financial condition and results of operations could be adversely affected. For the nine months endedSeptember 30, 2022 , we have incurred substantial costs and expenses as we continued to build our infrastructure and prepare for growth, which included incurring legal, insurance and accounting fees in preparation for both the IPO and being a public company thereafter. Our revenues for the three months endedSeptember 30, 2022 decreased by 5.2% and our revenues for the nine months endedSeptember 30, 2022 increased by 5.0%, over revenues for the three and nine months endedSeptember 30, 2021 , respectively, as we increased product and service delivery to our customers and as we made some progress in resolving supply shortages. In addition, backlog of customer open orders remained high, as ofSeptember 30, 2022 , as we had a balance of$3.9 million , compared to a balance of$5.1 million as ofSeptember 30, 2021 , representing a decrease of 23.5%, driven by faster delivery of delayed orders as we continued to overcome supply chain shortages. 6 Cash Flows The table below, for the periods indicated, provides selected cash flow information: Nine Months Nine Months Ended Ended September 30, September 30, (U.S. dollars in thousands) 2022 2021
Net cash used in operating activities
(102 ) (6 )
Net cash provided by financing activities 16,028 1,878
Net change in cash $ 10,150 $ 394
As of September 30, 2022 , we had cash, cash equivalents, and restricted cash of
$10.9 million compared to $0.8 million of cash, cash equivalents and restricted
cash as of December 31, 2021 .
Cash used in operating activities amounted to $5.8 million for the nine months
ended September 30, 2022 , compared to $1.5 for the nine months ended September
30, 2021 . 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
from operating as a public company.
Net cash used in investing activities was $0.1 million for the nine months ended
September 30, 2022 , compared to cash used in investing activities of $0 for the
nine months ended September 30, 2021 . The increase from the corresponding period
was mainly due to change in short term deposits and purchasing of propertyand equipment. Net cash provided by financing activities was$16.0 million for the nine months endedSeptember 30, 2022 , compared to$1.9 million for the nine months endedSeptember 30, 2021 . The cash flow from financing activities for the nine months endedSeptember 30, 2022 , resulted from proceeds from the Company's IPO in the amount of$15.4 , net of underwriting discounts and commissions and other offering costs of$1.0 million . In addition, the increase is related to the$2.2 million raised from the private placement first and second closings. Initial Public Offering
On
In connection with the IPO, the following transactions occurred in the second quarter of 2022: (i) The redeemable convertible Series A and Series B Preferred Stock were converted into an aggregate of 7,731,083 shares of common stock; (ii) The convertible notes and convertible loan were converted into an aggregate of 2,538,257 shares of common stock, (iii) The outstanding warrants issued toMigdalor and Mizrahi-Tefahot Bank were converted into an aggregate 797,567 shares of common stock, (iv) 1,783,773 of Non-Voting Common Stock were redeemed by the Company at par value of$0.0001 per share and (v) we incurred approximately$1.0 million of IPO expenses. Additionally, 294,875 warrants to purchase common stock were issued upon the IPO to the underwriters at a conversion price of$5.00 per share. We believe that as a result of the IPO, as can be seen in the financial instrument restructuring that occurred in connection therewith as described above, we currently have sufficient cash to meet our expected funding requirements over the next twelve months. However, we have experienced, and we continue to experience, negative operating margins and cash outflows from operating activities. We may need to raise additional capital in the future to expand our presence in the marketplace and achieve operating efficiencies, and to accomplish our long-term business plan over the next several years. There can be no assurance as to the availability or terms upon which such financing and capital might be available. 7
We do not have any material commitments for capital expenditures during the next twelve months.
We may need to raise additional capital, which may not be available on reasonable terms or at all. Additional capital would be used to accomplish the following:
? finance our current operating expenses; ? pursue growth opportunities; ? hire and retain qualified management and key employees; ? respond to competitive pressures; ? comply with regulatory requirements; and ? maintain compliance with applicable laws.
Current conditions in the capital markets are such that traditional sources of capital may not be available to us when needed or may be available only on unfavorable terms. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions, the impact of the COVID-19 pandemic, the Russian invasion ofUkraine , and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you that we will be able to successfully raise additional capital at all or on terms that are acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our business, results of operations and financial condition. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities could result in substantial dilution for our current stockholders. The terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then-outstanding. We may issue additional shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock in connection with hiring or retaining personnel, option or warrant exercises, future acquisitions or future placements of our securities for capital-raising or other business purposes. The issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline and existing stockholders may not agree with our financing plans or the terms of such financings. In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition. Furthermore, any additional debt or equity financing that we may need may not be available on terms favorable to us, or at all. If we are unable to obtain such additional financing on a timely basis, we may have to curtail our development activities and growth plans and/or be forced to sell assets, perhaps on unfavorable terms, or we may have to cease our operations, which would have a material adverse effect on our business, results of operations and financial condition. We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support. 8
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance withU.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 withU.S. generally accepted accounting principles issued by theFinancial 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 annual financial statements for the year 2021 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.
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