Item 1. Business
Company Overview
Actelis Networks, Inc. (“we,” “the
Company”, “Actelis”, “us”, “our”) is a market leader in cyber-hardened, rapid-deployment networking
solutions for wide-area IoT applications including federal, state and local government, intelligent traffic systems (“ITS”),
military, utility, rail, telecom and campus applications. Our unique portfolio of hybrid fiber-copper, environmentally hardened aggregation
switches, high density Ethernet devices, advanced management software and cyber-protection capabilities, unlocks the hidden value of essential
networks, delivering safer connectivity for rapid, cost-effective deployment.
Our networking solutions use a combination of
newly deployed fiber infrastructure and existing copper and coaxial lines which our patented technology can upgrade to Fiber-grade to
jointly create what we believe to be a highly cost-effective, secure and quick-to-deploy network. Our patent protected hybrid fiber-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, or too costly to reach with fiber, we can upgrade existing copper lines to deliver cyber-hardened, high-speed connectivity
without needing to replace the existing copper infrastructure with new fiber. We believe that such hybrid fiber-copper networking solution
has distinct advantages in most real-life installations, while providing significant budget savings and accelerating deployment of modern
IoT networks, as based on our experience, most IoT projects have challenging, hard to reach with Fiber locations which may explode such
projects’ timeline and budgets. We believe that our solutions can provide connectivity over either fiber or copper with speeds of
up to multi-Gigabit communication, while supporting Fiber-grade reliability and quality.
A primary focus of ours is to provide our customers
with a cyber-secure network solution. We currently offer Triple-Shield protection of data delivered with coding, scrambling and encryption
of the network traffic. We also provide secure, encrypted access to our network management software, and are working to further enhance
system-level and device-level software protection. We are also working to introduce additional capabilities for network-wide cyber protection
software as an additional SW and license based service.
When high speed, long reach, reliable and secure
connectivity is required, network operators usually resort to using wireline communication over physical communication lines such as fiber,
coax and copper, rather than wireless communication that is more limited in performance, reliability, reach and security. However, new
fiber wireline infrastructure is costly to deploy, involves lengthy civil works to install, and, based on our internal calculations, often
accounts for more than 50% of total cost of ownership (ToC) and time to deploy wide-area IoT projects.
Providing new fiber connectivity to hard-to-reach
locations is especially costly and time-consuming, often requiring permits for boring, trenching, and right-of-way, sometimes done over
many miles. Connecting such hard-to-reach locations may cause significant delays and budget overruns in IoT projects. Our solutions aim
to solve these challenges by instantly enhancing performance of such existing copper and coax infrastructure to fiber-grade performance,
through the use of advanced signal processing an unique, patented network architecture, without the need to run new fiber to hard-to-reach
locations; thus, effectively accelerating deployment of many IoT projects, as we estimate, sometimes from many months to only days. The
result for the network owner isa hybrid network that optimizes the use of both new Fiber (where available) as well as upgraded, fiber-grade
copper and coax that is now modernized, digitized and cyber-hardened. This unique hybrid network approach is making IoT projects often
significantly more affordable, fast to deploy and predictable to plan and budget.
In addition, our solutions can also provide power
over existing copper and coax lines to remotely power up network elements and IoT components connected to them (like cameras, small cell
and wifi base stations sensors etc.). Connecting power lines to millions of IoT locations can be costly and very time consuming as well
(similar to data connectivity, for the same reason- need for civil works). By offering the ability to combine power delivery over the
same existing copper and coax lines that we use for high-speed data, we believe our solutions are solving yet another important challenge
in connecting hard-to-reach locations. We believe that combining communication and power over the same existing lines is particularly
important to help connect many fifth generation, or 5G, small cells and Wi-Fi base stations, as high cost of connectivity and power is
often slowing their deployment.
Since our inception, our business was focused
on serving telecommunication service providers, also known as Telcos, to provide connectivity for enterprises and residential customers.
Our products and solutions have been deployed with more than 100 telecommunication service providers worldwide, in enterprise, residential
and mobile base station connectivity applications. In recent years, as we have further developed our technology and introduced additional
products, we turned our focus on serving the wide-area IoT markets. Our operations are focused on our fast-growing IoT business, while
maintaining our commitment to our existing Telco customers. In 2023, we expect to introduce new product offering, some of which could
serve both the IoT markets and our Telco customers.
We derive a significant portion of our revenue from our existing Telco
customers. For the years ended December 31, 2022 and December 31, 2021, our Telco customers in the aggregate accounted for approximately
35% and 48% of our revenues, respectively.
We derive a significant portion of our revenue
from a limited number of our customers. For the years ended December 31, 2022 and December 31, 2021, our top ten customers in the aggregate
accounted for approximately 82% and 78% of our revenues.
We have incurred significant losses and negative cash flows from operations
and as of December 31, 2022, we had an accumulated deficit of $33.4 million. We have funded our operations to date through equity financing
and we had cash on hand (including short term deposits and restricted cash) of $6 million, and long-term deposits and restricted cash
of $2.4 million, as of December 31, 2022. We continue to invest in sales and marketing resources to fuel our growth.
As of December 31, 2022, we have one outstanding
loan with Migdalor Business Investments Fund (“Migdalor”) in the original principal amount of approximately $6 million which
is secured by all our assets (the “Migdalor Loan”), and of which approximately $4.9 million remains outstanding. In December
2022, we deposited $2 million to a Company-owned interest bearing bank account, or the “designated account” and an additional
$2 million was deposited on or about February 28, 2023. Migdalor consented to allow us to seek additional accounts receivable financing
which would be used to partially repay the Migdalor Loan, which would reduce or eliminate the Additional Deposit (as defined in our agreement
with Migdalor) and increase free operating cashflow.
Initial Public Offering
On May 17, 2022, we closed our initial public
offering (“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
after deducting underwriting discounts and commissions of $1.4 million before additionally paid offering expenses of approximately $1.0
million amounting to proceeds available to us of $14.4 million.
Issuer Purchases of Equity Securities
On November 17, 2022, the Board authorized a stock
repurchase program pursuant to which we may repurchase up to $1.0 million of outstanding shares of our common stock. The Board authorized
us to purchase our common stock from time to time on a discretionary basis through open market or private transactions, through block
trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b-18 of the Securities Exchange Act, as amended,
and other applicable legal requirements.
Repurchases
under the share repurchase program will be made at management’s discretion at prices management considers to be attractive and in
the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading
price of the stock, alternative uses for capital, and our financial performance. The repurchase program may be suspended, terminated or
modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment
opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases.
The repurchase program does not obligate us to purchase any particular number of shares.
Our Technology
To address many of the most difficult wide-area
IoT connectivity challenges, we combine the benefits of fiber-optic infrastructure, where available, with the hidden potential in existing
legacy copper/coax wires that already connect billions of locations and devices globally (often at low speed, experiencing interruptions
and presenting poor information security, delivering mostly voice, or low speed control signals). However, these lines are readily
available at no additional deployment cost and can reach, as we believe, most locations. Using our patented signal-processing software
and hardware technology and system architecture, we can “upgrade” these lines, by deriving fiber-grade performance from them,
and integrate them with new fiber installations, where available, to create a seamless end-to-end hybrid-fiber-copper network, enabling
fast, reliable, and safe fiber-grade connectivity that is rapid to deploy and highly cost effective.
Our technology is both powerful and compact, and
is built as a relatively small set of feature-rich network elements, that serve as building block in many IoT verticals. These elements
include switches, typically enhanced with signal processing SW, concentrators, reach extenders, data encryption elements, power sources
and a smart networking software that allows for remote management and monitoring down to the single element and line performance, configuration
management making complex network topologies easy to deploy, analyze, debug and remote SW download to help with remote handling of large
and small networks.
Our solutions can also provide remote power over
the same existing copper lines to power up network elements and IoT components connected to them (like cameras and meters). Connecting
power lines to millions of IoT locations can be costly and very time consuming (similar to data connectivity). By offering the ability
to combine power delivery over the same copper lines used for high-speed data, we believe our solutions are solving yet another important
challenge in connecting hard-to-reach locations. We believe that combining communication and power over the same existing lines is particularly
important to help connect many fifth generation, or 5G, small cells and Wi-Fi base stations, as high cost of connectivity and power is
often slowing their deployment.
Rapid Deployment and Lower Cost of Critical
Connectivity for IoT
We aim to become the global leading provider of
cyber-secure, cost-effective and quick-to-deploy hybrid networking for all wide-area IoT applications. Our products work over all types
of wireline media on the global data network, whether owned or operated by telecom service providers or a private network operated by
enterprises or government organizations. Our products are structured as building blocks for most IoT applications, and are feature-rich.
This allows for one Actelis platform to often replace multiple other platforms available in the market, allowing for space-saving installation,
energy conservation (which we believe results in a greener network), and making network planning easier for our customers. We aim at having
our products installed and help accelerate deployment of wire-area IoT projects and applications everywhere.
For example, in one of the projects where our
solutions are deployed, we found that 70% of locations are easy-to-reach with new fiber optic installation. Connectivity for such easy-to-reach
locations may, as we believe, average $26,000 per mile for new fiber laid on poles, and can take between days to weeks to connect.
However, the remaining 30% of locations were hard-to-reach with new fiber optics, and accordingly may require boring or trenching to reach
IoT sensors or camera locations. Getting fiber to those 30% of hard-to-reach would require potentially connecting over obstacles, roads,
long distances, and may also require obtaining the right of way and permits for extensive civil works. We believe this aspect of the deployment
of new fiber optics may cost up to $400,000 per mile, which for this particular project would have impacted thousands of miles of roads,
resulting in enormous cost, delay and interruption to traffic..
In another project, we have been selected to provide
networking for a major city that has fiber installed to 15% of its traffic junctions, however 85% of its junctions are connected to low
performance copper lines susceptible for bad actors to tamper with. Upgrading the entire city’s infrastructure to Fiber would have
involved major civil works, permit delays and traffic interruptions for months or years, with a cost that would greatly exceed city’s
budget. Our hybrid fiber-copper network allowed for the city to use its 15% fiber deployment, upgrade instantly the performance of its
existing 85% copper lines to fiber-grade and join the two under a comprehensive management and security software package from Actelis
to create one seamless network, while providing major savings of both time and money.
In another project, we provided our hybrid networking
connectivity solution with remote powering over the data lines to 3G and 4G base stations. Looking forward, we believe that a dense grid
of 5G small cells would be required to enable global 5G coverage, which, may accelerate IoT deployment in many smart city projects and
other dense areas. We believe that connecting and powering these 5G small cells to the network cost effectively and rapidly, in both hard-to-reach
and easy-to-reach locations is key to successful and timely deployment for such network.
In 2022, we released our first product family
of hardened, hybrid, encrypted fiber-copper product family with 10Gbps switching capacity.
In 2023, we expect to further release, multi-Gigabit,
encrypted and cyber-hardened, hybrid fiber-copper product families higher performance for cities, campuses, roads and rail, airports and
5G base stations backhaul.
Cyber Security
IoT networks are vulnerable to cyber-attacks as
they often carry data related to critical processes and applications, such as provision of energy, water, gas and transportation services,
to large populations. We believe that this data requires enhanced security within the network.
Our products all include cyber safety features
that we are constantly developing. They currently include network traffic encryption and coding. We have developed and implemented a multi-layered
“Triple Shield” technology that includes (i) information coding for resilience and security (for copper wires); (ii) multi-line
information scrambling for increased resilience and added security (for copper wires); and (iii) an additional 256-bit hardware-based
real-time encryption of data running over fiber or copper — creating end-to-end protection for the entire hybrid network.
Our network management software is also cyber-hardened and helps protect the system. Our systems have been selected for deployment in
sensitive applications with U.S. DoD and other governments and military organizations, airports, utility companies, oil and gas companies,
smart cities, rail and traffic applications globally.
Since our IPO, we invested in further strengthening
our focus on adding more cybersecurity capabilities and solutions for our customers. We have invested in software and hardware capabilities
enhancing encryption of the data carried by our systems; we have introduced encrypted, cyber-hardened network management protocols; we
have also introduced encryption of operating systems running on our devices. Furthermore, we have acquired the necessary software protocol
and are in the process of certifying our product lines for Federal Intelligence Protocol Standards (FIPS). We are exploring directions
to provide software services to our customers that would allow them to flexibly safeguard their critical networks, and intelligently isolate
and protect from bad actors attacking their networks.
Market Verticals We Address
We execute our vision through a multi-channel,
global approach that combines our expertise, with the expertise of our trusted business partners, system integrators, distributors, and
consultants.
We operate a vertical based marketing plan where
we dedicate efforts and resources to each vertical. The IoT verticals that we have focused on include: (1) ITS; (4) rail; (2)
federal and military; (3) airports; (5) energy and water; (6) smart city; (7) education campuses; and (8) industrial campuses.
Our products are utilized within networks that have been deployed, for example by the City of Los Angeles, Highways England, Federal Aviation
Administration, the US military, including Air Force and Navy, and Stanford University. Our customers benefit from rapidly and cost-effectively
enabling their critical IoT functions such as traffic cameras and smart signaling, security cameras, smart parking meters and ticketing,
rail signaling and control, electrical substation management and protection, military operations, and many more. To date, we have been
most successful in selling to customers in the intelligent transportation systems, rail, federal and military, and airports markets, primarily
in the US, Canada, Europe, and Japan.
State of IoT Connectivity Market
IoT infrastructure connectivity demand is growing
rapidly. We believe there is an urgent need to connect tens of millions of locations with a fast and secure connection. A huge challenge
for IoT projects is that implementing connectivity between different IoT points in a network can consume the majority of a project’s
cost and time to implement, including unpredictable and unanticipated challenges that arise in each individual project.
According to a report by Facts and Factors (January
2022) Global Internet of Things (IoT) market is expected to grow to $ 1.8 trillion by 2028, at a Compounded Average Growth Rate (CAGR)
of 24.5%.
According to a report by Grand View Research (December 2022),
the smart city market for connectivity infrastructure alone is expected to reach to $6,965.02 billion by 2030 at a CAGR of 25.8%. Accordingly,
we believe that the number of IoT applications requiring our fast, smart, and secure connectivity is immense and provides us with a great
market opportunity to grow our business. From smart transportation systems (smart cameras, smart lights and signals, Vehicle to Everything,
or V2X communication) and smart security (cameras and radars), to smart parking, smart rail, power station monitoring, and industrial
and warehouse automation, we believe that we are uniquely positioned to address all of these applications in a versatile and flexible
manner.
We believe that there is an unserved segment that
is extremely large within that market pertaining to the challenges in protecting the interface between the physical security and the cybersecurity
of campuses, enterprises, industrial IoT (IIoT), government facilities, Smart Cities and utility plants.
We
believe that 5G mobile technology will play a major role in the implementation and scaling of IoT networks. According to research published
by ABI Research in January 2021, 5G technology is expected to grow at a CAGR of 41.2% between 2021 and 2027 with a major part of
that growth coming from servicing IoT networks. According to Grand View Research, the global small cell 5G network market size was valued
at $999.43 million in 2021. The market is expected to grow at a CAGR of
72.7% between 2022-2030.
5G base stations and small cells need to be deployed
in a dense grid of millions of locations and need to be connected to Gigabit speed communication and power. We are addressing these needs
for the rapid connectivity and power, aiming at enabling faster and more cost-effective deployment of 5G in IoT.
Our Solutions
We have invested nearly $100 million over
the years to develop its patented, multi-layered “Triple Shield” technology, which can serve all connectivity markets.
Our Triple Shield technology includes signal processing SW that is implementing optimization of multi-line signal coordination, the elimination
of interference to boost connectivity performance, the optimization of coding for resilience and security, multi-line data scrambling
for low latency, increased resilience, and added security. Our solutions also offer implementation of 256-bit encryption of transmission
for data running over fiber or copper for network-wide protection of data. Our technology is packaged into a small set of compact, hardened,
feature-rich network elements (such as switches, concentrators and reach extenders) — the MetaLIGHT product family — that
are used as building blocks addressing the needs of most wide-area IoT verticals and applications, in a space-and energy-saving fashion.
The ability to drive remote powering and synchronization signals to network ends over existing copper transmission lines provides additional
significant cost-and-time benefits to network operators.
Our offering includes our network management software,
providing built-in automation to help configure, manage, monitor, safeguard, install and maintain complex, hybrid networks of thousands
of elements remotely.
We aim to continue developing our technology to
include more system-wide security and further hybridity across all types of infrastructure. We will also seek to include cutting-edge
computing capabilities to serve all connectivity needs for our IoT customers, in an effective and easily deployable way, while maintaining
our commitment to serve our existing Telco customers.
We believe that our strong reputation as a provider
of high-quality solutions, and the trust we gain from being recognized as a solid solution provider by prominent customers (such as the
U.S. DoD) help us execute our strategy.
Products
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MetaLight
ML500/600/700/800/900 Series. EADs (Ethernet Access Devices) are a series of products which are cost efficient, compact and hardened
Ethernet switches for hybrid-fiber-copper networks, located near the IoT devices connected to the network. For example, our EAD is used
to connect street traffic lights and nearby controllers, cameras and IoT devices to the traffic control center, where either fiber, copper
or coax infrastructure cabling exists. This product can be installed either indoors or outdoors, including under extreme weather conditions. |
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ML2300 Aggregator Series. This product is designed for large, medium, and small aggregation/operating and control centers. Network aggregators can connect hundreds of locations or elements. For example, control centers of highways could use such aggregators to communicate with hundreds of EADs installed in cabinets along highways in order to securely connect IoT devices (e.g. security cameras) to the highway network. |
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XR239
Series. This product is installed on long copper lines and can be remotely powered from the data lines themselves, while a special
algorithm (Dynamic Spectral Software) is ensuring minimal interference with other signals running on adjacent conduits in the same cable.
It features a repeater to extend connectivity range to long distances, in some cases up to 100Km. The repeater is installed outdoors
and is resistant to cold, hot, rain, ice or snow. Our repeaters have been installed along rail systems in Alaska and Canada and have
been safely performing for more than five years. |
![](https://content.edgar-online.com/edgar_conv_img/2023/03/29/0001213900-23-024106_image_004.jpg) |
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Advanced MetaLIGHT EMS software. Our EMS (Element Management Systems) software enable remote management, monitoring, maintenance, and configuration of the installed equipment in the network. It is designed to monitor, control and configure our network elements in the field, locally or remotely, for networks of various scales up to thousands of elements. Our implementation during 2021 and 2022 for our end-user customer Highways England, as an example, is using such EMS systems to control thousands of EADs connecting IoT devices along thousands of highway miles. It includes detailed monitoring, logging and tracking of functions both locally and remotely, to allow for easy debugging and configuration of networks, security management, graphical display of network topologies, management of licenses, remote software download, connectivity to other network and management systems. EMS may also manage other software keys and elements (for example, for encryption or other cyber-safety functions), for which customers may pay separately for the licenses. |
![](https://content.edgar-online.com/edgar_conv_img/2023/03/29/0001213900-23-024106_image_005.jpg) |
We also offer support and maintenance services
together with the sales of our product. This includes consulting, telephone troubleshooting and remote support, training, product repairs
and software updates.
Product Specifications
Our products use advanced signal processing implemented
at the system level, with an approach that treats multiple copper lines as one multi-line channel, which we believe to achieve the following
benefits:
| ● | Increase the effective bandwidth of the communication link
by 50% to 500% compared to traditional, single line bandwidth; |
| ● | Extend connectivity distances from a few kilometers up to
100Km (for longer range topologies and slower speeds), and improves coverage area for connectivity by 2X to 4X times for the higher speed
services; and |
| ● | Improve communication reliability even if copper lines are
of poor quality, so that network operators can, in most cases, guarantee their customers what we believe are Service Level Availabilities
(SLAs) similar to that of fiber optic infrastructure. |
In addition to these main benefits, we have focused
our efforts and implemented technologies in our products in order to achieve the following:
| ● | Automatic multi-channel calibration based real-time line
quality analysis during installation (which greatly shortens the installation process and saves personnel time); |
| ● | Transmission in the copper lines to take into account signals
in neighboring lines to minimize crosstalk interference and be “Spectrally Friendly”; |
| ● | Multi-line spatial coding scrambling of data in a way that
enhances connection immunity to interference, and makes tapping into the data very difficult; |
| ● | Integration of remote powering and data on the same copper
pairs; |
| ● | Minimizing transmission delay to support delay-sensitive
applications; and |
| ● | Ability to safely, and accurately transmit clock signals
for cellular base station synchronization (not available yet for 5G). |
Since our inception, our business was focused
on serving telecommunication service providers, also known as Telcos, 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 IoT markets. Our operations are focused on our fast-growing IoT business, while maintaining our commitment to
our existing Telco customers.
Our Competitive Advantage
We have invested heavily and over more than 10 years
in the development of copper technologies and hybrid fiber-copper communication systems to create a solution that enables high-speed communication
over real-life networks of mixed media, securely, reliably, and with Gigabit-grade resilience.
Copper lines are readily available in billions
of locations. They are often buried in the ground or hanging from telephone poles, in bundles of tens or hundreds of wires.
Copper by itself was never designed for high-speed
communication. Attempts to deliver high-speed would encounter many problems, including signal attenuation, interference from other lines
in the Bundle and from any external electrical sources, variable quality and signal interruptions, and variable latency. Such wires are
also relatively easy to tap into physically, and the information is also radiated outside of the cable and may be exposed to security
threats.
In order to correct the issues with providing
high speed communications over copper wiring, we developed technologies utilizing a multi-line approach, encoding, scrambling and processing
the signals at system level (rather than at the single lines level), and finally also offering data encryption, to combat interference,
electromagnetic noise, and issues with copper line quality and data security.
The next step was to integrate our existing technologies
into hybrid-fiber-copper building blocks, that provide seamless communication over mixed, real-life fiber-copper networks, and many other
advantages.
We believe our product offering offers a unique
solution on the market in terms of value, by providing the following:
| ● | High performance hybrid-fiber-copper communication system |
| ● | Speeds from 10Mbps to 10Gbps |
| ● | Reach of up to 100Km (speed declines over long distances
in copper) |
| ● | Robust connectivity allowing Gigabit-grade service SLAs in
various harsh environments over copper or fiber |
| ● | Cyber-protection on several levels, including Triple Shield
Protection: |
| ● | Multi-line data scrambling and coding (copper) |
| ● | 256-bit system-wide encryption |
| ● | System level protection (encryption and other protections)
of management software, operating system and traffic flow |
| ● | Dense, feature-full design to replace multiple alternative
elements in the market, and allow for installation that is compact, lower cost and power saving: |
| ● | Advanced switching functions supporting complex network topologies |
| ● | Support for both advanced, digital IoT devices as well as
existing analog devices with serial interfaces — to save the need to replace these devices while allowing them to join
the digital network |
| ● | Power feeding for cameras and other IoT devices with the
data cable |
| ● | Ability to install our IoT building blocks in remote locations
with no power. Power can be provided from the communication line |
| ● | Ability to provide precise synchronization over the communication
lines to base stations |
| ● | Support for spectrally-friendly reach extenders up to 100Km
with minimal impact on other communication lines |
| ● | Automated software tools for installation and management
(including automated line calibration and configuration recognition during installation to avoid manual work, advanced management systems
that allow remote troubleshooting of any line connected to the system to save on operation and management time) |
We believe that the combination of these advantages
provide our customers with a highly cost-effective solution to quickly obtain IoT connectivity anywhere in their network.
We believe that our hybrid-fiber-copper solutions
have a significant competitive advantage in several layers: (a) copper performance (speed, reach, link stability and data security);
(b) seamless fiber-copper integration and end-to-end data encryption; (c) overall system cyber-hardened design; (d) versatile,
compact and feature-dense products with a good fit to the vast majority of applications; (e) very high product and transmission reliability;
automatic configuration tools and advanced management of every element in the field; and (f) highly cost-effective when compared
to alternatives. We believe that these advantages lead to very good value for our customers for both rapid deployment to all locations,
regardless of whether these locations are hard to reach. We also believe that these characteristics provide us with a competitive advantages
against many, if not all, companies in our space, such as Cisco, Rad, Nokia, Siemens, Belden and others.
We have hundreds of large, medium and small network
operators as end users of our products, including municipalities, railway, electricity, water infrastructure companies and military customers.
We believe that we enjoy a good reputation for offering reliable, high-performance and high-end products. We expect that the acceptance
process for our new products for existing customers will become simpler due to customers positive accumulated experience working with
us. We also have many non-exclusive third-party distributors, resellers and system integrators and partners around the world, located
in the U.S., Canada, Mexico, Costa Rica, Germany, Italy, Spain, Scandinavian countries, Greece, Netherlands, Japan, and India. These non-exclusive
third-party distributors are used to selling our products, and we believe that they appreciate the reliability of our products and the
quality of service and support that we provide. All of these advantages constitute an entry barrier, which we believe may make it more
difficult for a competitor to reach a similar status.
We believe that over the past years, we have built
a reputation for providing, according to our customers, reliable, high-quality communication solutions with better copper and hybrid fiber-copper
performance than other alternatives on the market. A competitor who wants to enter the market will have to compete with our reputation,
which has been acquired over a long period by providing long-term quality service to hundreds of network operators and hundreds of thousands
of end customers and IoT elements.
Our Sales and Marketing Strategy
We operate through two regions — Americas
and International (consisting of EMEA, or Europe, Middle East and Africa, and APAC, or Asia Pacific) in a matrix with a vertical structure
that is described below. Our sales and support teams are currently located in the United States, Mexico, Germany, Israel, and India. We
also execute our sales and marketing plan through a multi-channel by vertical global approach that combines our expertise with the expertise
of our trusted business partners. Our current business partners, as well as the partners we will seek in the future, are system integrators,
distributors, contractors, resellers, and consultants. Our business partners are currently located in North America, Central America,
throughout Europe, India, Singapore, China, Australia, Vietnam, Malaysia and Japan. Once we identify a relevant business opportunity in
a new territory, we seek to partner with local business partners or agents. We believe our strong brand name of high-quality communication
solutions, as well as the credibility we gain with esteemed customers such as the U.S. DoD, enhances our ability to provide our services.
For example, MetaLight 600 Series was approved for deployment by U.S. DoD and is on the Approved Product List (APL) since 2019.
We operate a vertical based marketing plan where
we dedicate tailored solutions and individual resources to each specific vertical. Our verticals include Intelligent Traffic Systems (ITS),
rail, smart city, Telco, utilities, federal and military.
ITS
ITS include customers who manage road systems
such as departments of traffic on either the municipality, county, state, or national level. The types of applications in this vertical
that require communication include road cameras, lane management systems, and road signs.
Rail
Rail systems include customers who own and operate
traditional inter-city rail lines as well as light rails. Some applications requiring communication in this vertical are central train
control systems, rail signals, safety cameras and alert sensors, and rail station communication. We currently have projects within this
vertical in North America, Europe, and Asia Pacific.
Federal and Military
Our current and future federal and military federal
aviation authorities, US military, Air Force and Navy bases, and other government and military facilities. For example, during 2022, we
were selected by Norseman Defense Technologies as an authorized sales partner to provide our solutions to all branches of the US Military
and Government. The types of applications within this vertical that requiring communication include radars, perimeter security systems,
energy systems, offices, laboratories and residences. We currently have projects within this vertical in North America, Europe and Asia
Pacific.
Airports
Airports include customers who are either a State
or Federal airport agency, or a service provider to the airport industry. The types of applications within this vertical requiring communication
are airport security, baggage management, and airport Wi-Fi. In 2022, we started delivering to our new airport integration customer, who
is a worldwide market-leader in airport operation technology, with which we signed an agreement to provide our solutions to hundreds of
airports in 39 countries.
Energy and Water
Energy and water include customers such as electric
utilities, oil companies and water utilities. The types of applications within this vertical that require communication are sub-station
monitoring, oil and gas pipeline and refineries, electric and water flow monitoring, and perimeter security. We have projects within this
vertical in North America and Europe.
Smart City
We believe the goal of nearly any city worldwide
is to become smarter and better serve its residents and visitors. Smart city customers include such municipalities. The types of applications
in this vertical requiring communication include security cameras, parking management, energy and water management, waste management,
digital signs, and provision of Wi-Fi connectivity. We currently have projects in more than 100 cities, mostly in North America and Europe.
Telco
Telco customers include communication service
providers of both wired and wireless services (including 4G and 5G). The types of applications within this vertical requiring communication
include enterprise offices, branch offices, residential buildings, educational facilities and back-haul for mobile base stations.
Channel and Territory coverage
The majority of our business is conducted indirectly
through various types of business partners, namely system integrators, distributors, contractors, resellers and consultants. Nevertheless,
our team often accompanies a channel partner during the selling process to help secure a deal with an end-user. We seek to cover the geographic
territories in which we sell, in combination with the target verticals described above. In this effort, we take advantage of existing
strong relationships with business partners in the United States, Canada, Europe, Latin America, and Asia Pacific and also seek to
recruit new business partners that can help us expand our coverage.
In addition, we maintain a website (at www.actelis.com)
tailored to the IoT strategy and is expanding our marketing initiatives (professional organizations, shows, online targeting, online campaigns
and lead generation) to grow our opportunity pipeline.
We operate through two main regional sales teams — Americas
and International (consisting of EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific)) in a vertical model similar to that which
was described in our marketing strategy above, and generates its pipeline of leads and opportunities through a combination of channel
presence, on-line presence as well as direct touch. Our sales teams are very experienced in the target verticals and have significant
competencies in the target networks of decision makers. We intend to invest in expanding this presence and strength.
Software and Services
Our products consist of hardware and an embedded
software that function together to deliver the product’s essential functionality. Our 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.
We also offer our customers our EMS management
software, either as perpetual or term based. EMS is optional and is being sold separately from our hardware products, and has been sold
either as per-element license, or as a license for a whole network.
Our customers may request added functions and
features for their specific need which we can customize for an additional fee.
We also offer our customers product support services
which include telephone support, remote diagnostics, and access to on-site technical support personnel. Such support service is sold as
a standalone contract or in combination with EMS management software and is offered for a term, usually 12 months with a renewal option.
Additionally, our customers can purchase software
support service which allow them to receive some additional features or free upgrades. Such support service is sold as a separate contract.
We offer service contracts at different levels
(Silver, Gold, Platinum), which may include different levels of support (remotely or in the field), hardware repairs, spare parts, help
with network design, and SW/HW upgrades. Such service contracts are sold separately from the sale of hardware products and may be sold
combined with our EMS software licenses. It usually covers periods post the expiration of our warranty period and would be renewed on
an annual basis. The cost of the service is derived from the size of the network, and the level of support required.
Competition
We compete in markets for networking and communications
services and solutions for service providers, businesses, government agencies and other organizations worldwide.
We compete with a number of companies in the markets
we serve. Our key competitors include Moxa Technologies, ADTRAN, Inc., FlexDSL Telecommunications AG, EtherWAN Systems, Inc. and Belden
Inc.
We believe the following competitive attributes
are necessary for our solutions to successfully compete in IoT networking market:
| ● | the performance and reliability of our solutions; |
| ● | cost of deployment and return on investment in terms of cost
savings; |
| ● | sophistication, novel and innovative intellectual property
and technology, and functionality of our offerings; |
| ● | cross-platform operability; |
| ● | ease of implementation and use of service; |
| ● | high quality customer support; and |
We believe that we compare favorably on the basis
of the factors listed above. However, many of our competitors have substantially greater financial, technical, and marketing resources;
relationships with large vendor partners; larger global presence; larger customer bases; longer operating histories; greater brand recognition;
and more established relationships in the industry than we do. Furthermore, new entrants not currently considered to be competitors may
enter the market through acquisitions, partnerships, or strategic relationships. See “Risk Factors — New competitors
may enter the marketplace and begin to compete with the Company.”
Manufacturing, Procurement and Logistics
We take advantage of the combination of our inhouse
skills and those of the third parties we partner with to execute our operational tasks which are planning and manufacturing finished goods
inventory, planning and procuring raw materials and delivering products to our customers based on promised delivery schedules.
Our raw material consists of electronic chipsets,
FPGA components, modems, and other electronic and mechanical components. Most of those components are procured by our contract manufacturers
from Israel and we assist them as needed in specific cases. Since the breakout of COVID19, as the world is experiencing shortages of electronic
components, we have assisted our manufacturers to acquire components that are harder to find. We recently secured components which were
announced to be end of life by their manufacturers in order to ensure adequate quantities of future product shipments.
Our products are assembled by various contract
manufacturers, located in Israel and in Taiwan who possess the expertise of assembly and quality control required for electronic manufacturing
in a turn-key fashion. Some of our products are manufactured to our specifications under an OEM arrangement. The company uses state-of-the-art
logistics services from the best providers worldwide and also has in-house expertise in executing such required processes.
We believe that we can add and/or replace our
contract manufacturer if necessary. We have successfully transitioned from one contract manufacturer to another in the past, and we believe
that a transition would be achievable, if necessary, in the future typically within three to six months.
Warranty
Our products are generally sold with a standard
warranty of two years for product defects, as well a technical center support, during normal business hours, for incidents raised by properly
trained personnel. Within the warranty agreement, we offer to repair or replace defective products, or software bug fixes. Upon expiration
of the warranty period, the customer has an option to purchase an extended warranty contract for an additional fee, typically for one
or more periods of 12 months.
Growth Strategy
Global Expansion and Recognition
We intend to leverage (a) the customers,
partners, and representatives’ presence in over 30 countries including the Americas, Europe and Asia, (b) brand recognition
developed over more than 10 years, and (c) the fact that our products are differentiated, as we believe, and offer unique value — to
expand into virtually all IoT verticals, and become the vendor of choice for cyber-protected building blocks for all IoT networking globally.
In order to achieve the right level of global
coverage, we are expanding our network of partners and representatives and aim increasingly at partnering with larger numbers of companies
with global presence. For example, we recently selected Norseman Technologies to serve as a business partner integrator of our products
to the Federal and military markets in the US through their acquisition contracts. Additionally, we signed up new business partners in
Europe and Asia Pacific, such as in Singapore, China, Vietnam and Malaysia.
We are investing in growing our sales, channel
management and support teams, and dedicate resources which specialize in specific verticals in each of the theaters. In August 2022, we
hired a new VP of Marketing who is executing campaigns through social media, industry shows and conferences and other online means. We
also are investing in lead-generation activities through third-parties who specialize in this practice.
Expansion of Multi-year deals
Over the past years, we entered into several
large multi-year contracts with ITS, military, airports, and more that will generate more predictable sales for the next several years.
For example, since the IPO, we announced several new deals we won or started to deliver, such as the worldwide airport technology provider,
a provider of energy services to a major European city in a major European country, the city of San Jose, California and Northern Ireland
railways. We intend to expand this strategy by investing in sales and marketing presence to extend the length these contracts and add
many others.
Expansion into Cyber Security, Recurring Revenue
Model
Cyber security is becoming increasingly more important
for critical IoT infrastructure. Some countries, like Germany, are starting to mandate encryption on all IoT communication, and we believe
this trend will continue. Our products are already capable to deliver sensitive information for many critical IoT applications, and we
invest intend to invest more in making this a strong differentiator, and to have our products recognized as the most cyber-safe IoT building
blocks in the growing secure IoT communication market.
Beyond that, we are expanding our cyber-protection
capabilities to provide protection not only of the data that is running in the system, but also to help protect elements and devices connected
to the network, especially in the interface between the physical and cybersecurity systems.
Adding the 5G Connectivity for IoT
A dense grid of 5G small cells is required in
order to build a global 5G coverage, which, as we believe, may be key to IoT deployment in many smart cities and other dense areas. We
believe that connecting these 5G small cells to the network cost effectively and rapidly, in both hard-to-reach and easy-to-reach locations,
as well as powering them cost-effectively is key to successful and timely deployment.
5G networks deployment is slowed down, as we believe,
by the challenge to provide connectivity and power to millions of base station locations that are required for an effective 5G network.
We expect that a second generation of this product
family may also include precision synchronization delivery for 5G base stations for in-building installations, where GPS base-station
synchronization is not available. This offering is still in early stages of concept evaluation, and may only be released in 2024 following
successful evaluation and development.
Adding MMwave Technology
While we can offer solutions over fiber and copper,
fixed, point-to-point wireless remains a valid option where for high-speed connectivity if line of sight is available and wireline communication
is not be available. To complement our coverage or solutions over all possible media, following this offering, we plan to evaluate basic
building blocks that may be acquired from third parties to integrate into our product offerings, for a complete cyber-hardened system
with multiple physical media options. Such offering may only be released in 2024–2025. We have not yet completed evaluation of such
third party partners. We expect that the addition of MMwave to our product offerings would add a new significant addressable market for
us.
Adding Edge Computing Capabilities
Once mass deployment of our IoT connectivity building
blocks is achieved, we are planning to leverage our presence in the field to offer our customers the option to host and integrate various
applications into our building blocks, many of which will be installed in critical information junctions for IoT networks. Such applications
may include video analysis, data monitoring and extraction, firewalls and many others, and would enable our customers, as we believe,
to develop recurring revenue models for them as well as for us.
Some examples for such applications that we have
been evaluating are:
| ● | Enhanced cyber-protection for devices and users; |
| ● | Video processing and machine vision (serving the AI ecosystem
such as, intruder detection, road safety and robotics); and |
| ● | Smart video transmission/compression for delivery of video
over 5G/mobile networks. |
We expect the development of such capabilities
to begin in 2023, and applications may be released starting in 2024. Some of the applications (especially around cyber-security) may be
developed by the Company. Others may be offered by third parties and integrated into the Company’s platform.
United States’ Bipartisan Infrastructure Law
In November 2021, President Biden signed the Bipartisan
Infrastructure Law to invest approximately $1.2 trillion to significantly upgrade the United States’ infrastructure. Specifically,
the Bipartisan Infrastructure Law mandates investing the following amounts: $110 billion to rebuild many of America’s roads
and bridges;$39 billion in public transit; $66 billion in high-speed rail; $108 billion to upgrade the nation’s electricity
grid; $55 billion to expand access to clean drinking water; $25 billion to modernize several US airports; $650 billion in previous
authorized funding for roads including nearly $300 billion for the Highway Trust Fund; and $65 billion to ensure that every American
has access to high-speed internet through deploying broadband infrastructure.
We believe that this significant increase in infrastructure
spending by the United States Government will likely result in investments in our communication infrastructure solutions, as these spending
initiatives are aimed at our targeted verticals.
Growth through Mergers and Acquisitions
We continue to evaluate potential growth through
mergers and acquisitions opportunities in situations where we believe that a transaction will fill business gaps or add key business operations
without requiring us to wait years for marketing and sales cycles to materialize. The resulting combination of our existing products
and services, new key personnel, and strategic partnerships through M&A could provide new offerings to our existing market.
If we target businesses in the same sector or
location, we hope to combine resources to reduce costs, eliminate duplicate facilities or departments and increase revenue. We believe
this strategy will provide for accelerated growth and maximize investor returns.
Environmental
We are not aware of any environmental laws that
have been enacted, nor are we aware of any such laws being contemplated for the future, that impact issues specific to our business.
Human Capital Resources
As of December 31, 2022, we had approximately
48 employees and contractors, of which 44 were full-time employees, including 17 in sales and marketing, 24 in research development, engineering,
and operations and 7 in general and administration. We have approximately 33 employees and contractors in Israel, 12 in the U.S., 2 in
Europe and 1 in Asia. Our U.S.-based employees are employed through a Professional Employer Organization, providing employee benefits
and services.
We believe our culture and principles enable us
to attract, retain, motivate and develop our workforce as well as drive employee engagement. We believe an engaged workforce leads to
a more innovative and productive company that serves its customers better. Our employees work to ensure that our products and services
connect and protect our customers critical infrastructure. A testament to that is the long-term retention of many of our employees and
their loyalty to us. We measure each one through a goal setting and measurement system to maximize our enterprise value and employee career
potential.
We support and strive for ethnic and gender diversity.
Item 1A. Risk Factors
Investing in our common stock involves a high
degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information
in this Annual Report, before deciding to invest in our common stock. The risks and uncertainties described below may not be the only
ones we face. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be harmed.
In that event, the trading price of our common stock could decline, and you could lose part or all of your investment. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Summary Risk Factors
Our business is subject to numerous risks and
uncertainties that you should consider before investing in our company. You should carefully consider all of the risks described more
fully in the section titled “Risk Factors” in this Annual Report, before deciding to invest in our common stock. If any of
these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected.
These key risks, include, but are not limited to, the following:
Risks Related to Our Business
| ● | We have a history of net losses, may incur substantial net
losses in the future, and may not achieve or sustain profitability or growth in future periods. If we cannot achieve and sustain profitability,
our business, financial condition, and operating results will be adversely affected. |
| ● | We have negative cash flow from our operations and, given
our projected funding needs, our ability to generate positive cash flow is uncertain. |
| ● | The price of our common stock does not meet the requirements
for continued listing on Nasdaq. If we fail to regain compliance with the minimum listing requirements, our common stock will be subject
to delisting. Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected
if our common stock is delisted. |
| ● | Unfavorable global economic or political conditions prolonged
and intensified throughout the second half of 2022 and in 2023 could adversely affect our business, financial condition or results of
operations. |
| ● | Prolonged inflation rates could negatively impact our revenues
and profitability if increases in the prices of our products or a decrease in customer spending results in lower sales. |
| ● | We may need to raise additional capital to meet our business
requirements in the future, and such capital raising may be costly or difficult to obtain and could dilute our stockholders’ ownership
interests. |
| ● | Our indebtedness could adversely affect our ability to raise
additional capital to fund operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting
our financial obligations. |
| ● | To support our business growth, in the past years we
increased our focus on serving certain IoT verticals, while continuing to serve our existing Telco customers. This change in our strategy
may make it more difficult to evaluate our business growth and future prospects, and may increase the risk that we will not be successful
in our plans. |
| ● | We may have ineffective sales and marketing efforts. |
| ● | We are dependent on the supply of electronic and mechanical
components and our business would be harmed if we do not receive sufficient supply of such components in number and performance to meet
our production requirements and product specifications in a timely and cost-effective manner. |
| ● | We outsource our product manufacturing and are dependent
on our key manufacturers, and on our component and OEM suppliers. We are susceptible to problems, and have encountered problems in the
past, in connection with procurement, decreasing quality, reliability, and protectability. |
| ● | Demand for our products and solutions may not grow or may
decline. |
| ● | Our gross margins may not increase or may deteriorate. |
| ● | Changes in the price and availability of our raw materials
and shipping could be detrimental to our profitability. |
| ● | Expanding our operations and marketing efforts to meet expected
growth may impact profitability if actual growth is less than expected. |
| ● | If our internal Company cyber-security measures are breached
or fail and unauthorized access is obtained to our IT environment, we may incur significant losses of data, which we may not be able
to recover and may experience a delay in our ability to conduct our day-to-day business. |
| ● | We provide cyber security features as part of our products
that may not completely prevent information security breaches, and our products are installed in live customer environments and may be
compromised by cyber-attacks and damage customer assets. |
| ● | We depend on key information systems and third-party service
providers. |
| ● | We depend on our management team and other key employees,
and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely affect
our business. |
| ● | We may face the effects of increased competition and rapid
technological changes. |
| ● | Our results of operations are likely to fluctuate from quarter
to quarter and year to year, which could adversely affect the trading price of our common stock. |
| ● | The loss of one or more of our significant customers, or
any other reduction in the amount of revenue we derive from any such customer, would adversely affect our business, financial condition,
results of operations and growth prospects. |
| ● | We are currently operating in a period of economic uncertainty
and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict
between Russia and Ukraine. Our business, financial condition and results of operations may be materially adversely affected by any negative
impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions. |
| ● | The effects of health pandemics, such as the ongoing global
COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, financial condition and results of operations. |
Risks Related to Protecting Our Technology
and Intellectual Property
| ● | Claims by others that we infringe their intellectual property
could force us to incur significant costs or revise the way we conduct our business. |
| ● | Our patents and proprietary technology may be challenged
or disputed. |
| ● | Any failure to protect our intellectual property rights could
impair our ability to protect our proprietary technology and our brand. |
| ● | The lives of our patents may not be sufficient to effectively
protect our products and business. |
Risks Related to Managing Our Business
Operations in Israel
| ● | Potential political, economic, and military instability in
the State of Israel, where our research and development facilities are located, may adversely affect our results of operations. |
| ● | Actelis Israel received Israeli government grants for certain
of our research and development activities, the terms of which require us to pay royalties and satisfy specified conditions in order
to manufacture products and transfer technologies outside of Israel. If we fail to satisfy these conditions, we may be required to pay
penalties and refund grants previously received. |
| ● | We may be adversely affected by fluctuations in the currency
exchange rate of the Israeli Shekel. |
| ● | Unanticipated changes in our effective tax rate and additional
tax liabilities, including those resulting from our international operations or the implementation of new tax rules, could harm our future
results. |
Risks Related to our Common Stock
| ● | The requirements of being a public company may strain our
resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board
members. |
| ● | We have identified a material weakness in our internal control
over financial reporting. If we experience material weaknesses in the future or otherwise fail to implement and maintain an effective
system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations which
may adversely affect investor confidence in us, and as a result, the value of our common stock. |
| ● | If we fail to maintain an effective system of internal control
over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could
lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock. |
Risks Related to Our Business
We have a history of net losses, may incur
substantial net losses in the future, and may not achieve or sustain profitability or growth in future periods. If we cannot achieve and
sustain profitability, our business, financial condition, and operating results will be adversely affected.
We have incurred net losses in recent years, and we may not achieve
or maintain profitability in the future. We experienced a net loss of $11 million and $5.3 million in the years ended December 31,
2022 and 2021, respectively. As a result, we had an accumulated deficit of $33.4 million as of December 31, 2022. We cannot predict
when or whether we will reach or maintain profitability.
We also expect our operating expenses to increase
in the future as we continue to invest for our future growth, including expanding our research and development function to drive further
development of our platform, expanding our sales and marketing activities, developing the functionality to expand into adjacent markets,
and reaching customers in new geographic locations, which will negatively affect our operating results if our total revenues do not increase.
In addition to the anticipated costs to grow our business, we also expect to incur significant additional legal, accounting, and other
expenses as a newly public company. These efforts and additional expenses may be more costly than we expect, and we cannot guarantee that
we will be able to increase our revenues to offset our operating expenses. Any failure to increase our revenues or to manage our costs
as we invest in our business would prevent us from achieving or maintaining profitability.
There is no guaranty that we will be able
to generate the revenue necessary to support our cost structure or obtain the level of financing necessary for our operations.
We have incurred significant losses and negative
cash flows from operations and incurred losses of $11 million and $5.3 million for the years ended December 31, 2022 and 2021, respectively.
During the years ended December 31, 2022 and 2021, we had negative cash flows from operations of $7.8 million and $2.7 million, respectively.
As of December 31, 2022, our accumulated deficit was $33.4 million. We have funded our operations to date through equity financing and
has cash on hand (including short term deposits and restricted cash) of $6.0 million and long-term deposits and restricted cash of $2.4
million as of December 31, 2022. We monitor our cash flow projections on a current basis and take active measures to obtain the funding
it requires to continue our operations. However, these cash flow projections are subject to various uncertainties concerning their fulfilment
such as the ability to increase revenues by attracting and expanding its customer base or reducing cost structure. If we will not succeed
in generating sufficient cash flow or completing additional financing, then it will need to execute a cost reduction plan that has been
prepared. Our transition to profitable operations is dependent on generating a level of revenue adequate to support our cost structure.
We expect to fund operations using cash on hand, through operational cash flows and raising additional proceeds. There are no assurances,
however, we will be able to generate the revenue necessary to support our cost structure or that we will be successful in obtaining the
level of financing necessary for its operations.
Furthermore, we may continue to incur negative
cash flow from operating and investing activities for the foreseeable future as we expect to incur research and development, sales and
marketing, and general and administrative expenses and make capital expenditures in our efforts to increase our sales. Our business also
will at times require significant amounts of working capital to support our growth of additional platforms. An inability to generate positive
cash flow from operating activities for the near term may adversely affect our ability to raise needed capital for our business on reasonable
terms, or at all, diminish supplier or customer willingness to enter into transactions with us, and have other adverse effects that may
decrease our long-term viability. There can be no assurance that we will achieve positive cash flow in the near future or at all.
The price of our
common stock does not meet the requirements for continued listing on Nasdaq. If we fail to regain compliance with the minimum listing
requirements, our common stock will be subject to delisting. Our ability to publicly or privately sell equity securities and the liquidity
of our common stock could be adversely affected if our common stock is delisted.
The continued listing
standards of Nasdaq require, among other things, that the minimum bid price of a listed company’s stock be at or above $1.00. If
the closing minimum bid price is below $1.00 for a period of more than 30 consecutive trading days, the listed company will fail to be
in compliance with Nasdaq’s listing rules and, if it does not regain compliance within the grace period, will be subject to delisting.
As previously reported, on November 4, 2022, we received a notice from the Nasdaq Listing Qualifications Department notifying us that
for 30 consecutive trading days, the bid price of our common stock had closed below the minimum $1.00 per share requirement. In accordance
with Nasdaq’s listing rules, we were afforded a grace period of 180 calendar days, or until May 2, 2023, to regain compliance with
the bid price requirement. In order to regain compliance, the bid price of our common stock must close at a price of at least $1.00 per
share for a minimum of 10 consecutive trading days.
If we fail to regain
compliance by May 2, 2023, we may be eligible for a second 180 day compliance period, provided that, on such date, we meet the continued
listing requirement for market value of publicly held shares and all other applicable Nasdaq listing requirements (other than the minimum
closing bid price requirement) and we provide written notice to Nasdaq of our intention to cure the deficiency during the second compliance
period, by effecting a reverse stock split, if necessary. Such extension of the grace period would be subject to Nasdaq’s discretion,
and there can be no guarantee that we would be granted an extension.
We cannot provide any
guarantee that we will regain compliance during the grace period or be able to maintain compliance with Nasdaq’s listing requirements
in the future. If we are not able to regain compliance during the grace period, or any extension of the grace period for which we may
be eligible, our common stock will be subject to delisting. Delisting from Nasdaq could adversely affect our ability to raise additional
financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities
and would negatively affect the value and liquidity of our common stock. Delisting could also have other negative results, including the
potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.
Unfavorable global
economic or political conditions prolonged and intensified throughout the second half of 2022 and in 2023 could adversely affect our business,
financial condition or results of operations.
Our business is susceptible
to general conditions in the global economy and in the global financial markets. A global financial crisis or a global or regional political
disruption has caused, and could in the future cause, extreme volatility in the capital and credit markets. A severe or prolonged economic
downturn, including a recession, the currently prolonged inflationary economic environment, continued rising interest rates, debt and
equity market fluctuations, diminished liquidity and credit availability, increased unemployment rates, decreased investor and consumer
confidence, supply chain challenges, natural catastrophes, the effects of climate change, regional and global conflicts and terrorist
attacks or political disruption or turmoil could result in a variety of risks to our business, including weakened demand for our product
candidates or any future product candidates, if approved, and our ability to raise additional capital when needed on acceptable terms,
if at all. A weak or declining economy or political disruption could also strain our manufacturers or suppliers, possibly resulting in
supply disruption, or cause our customers to delay making payments for our potential products. Any of the foregoing could materially and
adversely affect our business, financial condition, results of operations and prospects, and we cannot anticipate all of the ways in which
the political or economic climate and financial market conditions could adversely impact our business.
Prolonged inflation
rates could negatively impact our revenues and profitability if increases in the prices of our products or a decrease in customer spending
results in lower sales which would adversely affect our business, results of operations and financial condition.
Inflation rates, particularly
in the United States and Israel, have increased this year and are prolonged in the past months, at levels not seen in years in many countries
where our customers reside. Continued and increased inflation may result in decreased demand for our products and services, increased
operating costs (including our labor costs), reduced liquidity, and limitations on our ability to access credit or otherwise raise debt
and equity capital. In addition, the United States Federal Reserve has raised, and may again raise, interest rates in response to concerns
about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets,
may have the effect of further increasing economic uncertainty and heightening these risks. In an inflationary environment, we may be
unable to raise the sales prices of our products at or above the rate at which our costs increase, which could have a material and adverse
effect on our business, results of operations and financial condition. Accordingly, the U.S. dollar has strengthened against foreign currencies
as a result of the United States Federal Reserve’s actions to lower inflation, which is affecting our business partners, where they
sell local currency to the end-user of our products and services.
We may need to
raise additional capital to meet our business requirements in the future, and such capital raising may be costly or difficult to obtain
and could dilute our stockholders’ ownership interests.
In order for us to pursue our business objectives,
we may need to raise additional capital, which additional capital may not be available on reasonable terms or at all. Any additional capital
raised through the sale of equity or equity-backed securities may dilute our shareholders’ ownership percentages and could also
result in a decrease in the market value of our equity securities. 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. 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.
Our indebtedness could adversely affect
our ability to raise additional capital to fund operations, limit our ability to react to changes in the economy or our industry and prevent
us from meeting our financial obligations.
We currently have one outstanding loan with Migdalor,
in the original principal amount of approximately $6 million, of which approximately $5.0 million remains outstanding as of December 31,
2022, and which is secured by all our assets. 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.
Furthermore, on December 21,
2022, pursuant to the terms of the Senior Loan Agreement between Migdalor and our wholly owned subsidiary, Actelis Networks Israel, Ltd.,
dated December 2, 2020, as amended (the “Loan Agreement”), to satisfy our obligation associated with the cover/debt ratio
(as defined in the Loan Agreement), we deposited $2 million to a Company-owned interest bearing bank account, or the “designated
account” (as defined in the Loan Agreement). An additional $2 million was deposited in the designated account on or about February
28, 2023, as agreed between Migdalor and us.
We do not know whether we will be able to generate
sufficient cash flow from operations or raise additional capital to fund operating activities on a timely basis, on terms satisfactory
to us, or at all. Our indebtedness could have important consequences, including:
| ● | our ability to obtain additional debt or equity financing
for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes may be limited; |
| ● | a portion of our cash flows from operations will be dedicated
to the payment of principal and interest on the indebtedness and will not be available for other purposes, including operations, capital
expenditures and future business opportunities; |
| ● | our ability to adjust to changing market conditions may be
limited and may place us at a competitive disadvantage compared to less-leveraged competitors, if such exist; and |
| ● | we may be vulnerable during a downturn in general economic
conditions or in our business, or may be unable to carry on capital spending that is important to our growth. |
To support our business growth, in the past years
we increased our focus on serving certain IoT verticals, while continuing to serve our existing Telco customers. This change in our strategy
may make it more difficult to evaluate our business growth and future prospects, and may increase the risk that we will not be successful
in our plans.
Since our inception, our business was focused
on serving Telcos 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 IoT markets. Our operations are
focused on our fast-growing IoT business, while maintaining our commitment to our existing Telco customers. A significant portion of our
revenue is from our existing Telco customers. For the years ended December 31, 2022 and December 31, 2021, our Telco customers
in the aggregate accounted for approximately 35% and 48% of our revenues, respectively.
Our change in strategy and our efforts to serve
the IoT verticals that we have focused on may prove more expensive than we currently anticipate, or may require longer development and
deployment times, and we may not succeed in fully penetrating such IoT verticals, or at all.
We may have ineffective sales and marketing
efforts.
Our sales and marketing efforts to drive growth
may be ineffective as we try to win new deals either directly with end-user customers, or indirectly through business partners, distributors,
system integrators or value-add resellers. These ineffective efforts may cause us to miss our planned growth and harm our financial results.
We are dependent on the supply of electronic
and mechanical components and our business would be harmed if we do not receive sufficient supply of such components in number and performance
to meet our production requirements and product specifications in a timely and cost-effective manner.
We rely on a supply of electronic and mechanical
components of our final products to be able to fulfill and deliver customer orders. Such supply has been interrupted from time to time,
particularly as a result of the COVID-19 pandemic, and if such interruption continues, it may cause us to be unable to fulfill and deliver
such customer orders on expected delivery lead times. Such long lead times may cause customers to avoid placing orders or reduce future
orders. As a result, such interruptions, if they continue, will reduce our ability to grow our business at the pace we expect and may
cause us to miss our operating business plans.
In most cases, we do not have guaranteed supply
arrangements with our suppliers, and our business relies on placing orders to our suppliers as we receive forecasts or orders from our
customers. Because of the variability and uniqueness of customers’ orders, we do not maintain an extensive inventory of materials
for manufacturing. Through our procurement and production planning, we seek to minimize the risk of production and service interruptions
and/or shortages of key parts by, among other things, monitoring the financial stability of key suppliers, identifying (and often qualifying)
possible alternative suppliers, placing longer term orders for components and maintaining appropriate inventories of key components. Although
we make reasonable efforts to ensure that components are available from multiple suppliers, certain key components are available only
from a single supplier or a limited group of suppliers. Also, key components we obtain from some of our suppliers incorporate the suppliers’
proprietary intellectual property; in those cases, we are more reliant on third parties for high-performance, high-technology components,
which reduces the amount of control we have over the availability and protection of the technology and intellectual property that is used
in our products. In addition, if certain of our key suppliers experience liquidity issues and are forced to discontinue operations, it
could affect their ability to deliver parts and could result in delays for our products. Similarly, our suppliers themselves have increasingly
complex supply chains, and delays or disruptions at any stage of their supply chains may prevent us, and have prevented us, from obtaining
components in a timely manner and result in delays for our products. Our operating results and business may be adversely impacted if we
are unable to obtain components to meet our production requirements and product specifications, or if we are able to do so only on unfavorable
terms.
We outsource our product manufacturing and
are dependent on our key manufacturers, and on our component and OEM suppliers. We are susceptible to problems, and have encountered problems
in the past, in connection with procurement, decreasing quality, reliability, and protectability.
Our devices are assembled by using fully manufactured
parts, the manufacturing of which has been fully outsourced, and we have no direct control over the manufacturing processes of our products.
We outsource procurement and manufacturing activities to certain key manufacturers and certain component and OEM suppliers.
We also purchase unique components and products
from suppliers who are exclusively able to fulfill such supply. We may lose some or all of these relationships, or have a material weakness
in negotiating favorable terms, or such unique components have or may be declared end-of-life which may require product design changes.
Such circumstances have hurt our profitability in the past, and may hurt our profitability in the future, and negatively affect our ability
to deliver our product on time to customers.
Our lack of control in our manufacturing process
due to the fact that we outsource our product manufacturing may increase quality or reliability risks and could limit our ability to quickly
increase or decrease production rates. If necessary, switching production to other or additional subcontractors will entail a material
cost and a temporary decrease in our productivity. Our manufacturing process has been disrupted in the past, and may be disrupted in the
future, by various factors, including but not limited to shipping delays, bottlenecks resulting from raw materials specific shortages,
quality problems or a decrease in quality, manpower shortages by the manufacturers or political unease that would trigger the closure
of a facility or financial insolvency.
Furthermore, a supplier may discontinue production
of a particular part for any number of reasons, which may require us to purchase a large inventory of such discontinued parts in order
to ensure that a continuous supply of such parts remains available to our customers. Such “end-of-life” parts purchases could
result in significant expenditures by us in a particular period, and ultimately any unused parts may result in a significant inventory
write-off, either of which could have an adverse impact on our financial condition and results of operations for the applicable periods.
Additionally, in case any part embedded in our products is no longer available, we may be required to redesign such product in order to
enable usage of alternative parts, or be forced to announce end-of-life of such product. Refer to “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” for additional information on supply constraints related to the
COVID-19 pandemic.
Demand for our products and solutions may
not grow or may decline.
We may experience a reduction in customer demand
as a result of either of competition from other companies, technological changes required by our target markets, or disruptions of existing
and new customer relationships. Such demand reduction will prevent us from realizing our planned growth.
Our gross margins may not increase or may
deteriorate.
If our gross margins do not increase as planned
or deteriorate, it will be harder for us to achieve profitability, which could substantially impact our business and ability to carry
on operations if other financing sources are not secured on satisfactory terms. Our gross margins may deteriorate as a result of either
reductions of customers price points, increases in product component and manufacturing costs, or unfavorable changes in the mix between
more and less profitable customers and/or products.
Changes in the price and availability of
our raw materials and shipping could be detrimental to our profitability.
Chipsets, electronic and mechanical components
are significant components of our products. Over the past two years, the prices and availability of electronic and mechanical components
have been constantly increasing.
Furthermore, our products are assembled with various
contract manufacturers located in Israel and in Taiwan. As a result of the of COVID-19 pandemic, the world is experiencing shortages of
electronic components. We have already experienced instances of limited supply of certain raw materials and shipping delays, which resulted
in extended lead times, increased shipping costs and higher-than-usual backlogs. If the prices of such components and shipping were to
continue to increase, or if shipping delays continue to occur, such price changes and shipping delays could have a negative effect on
our gross margin and have a negative effect on revenues and earnings.
We may have previously agreed to set prices with
our customers and any changes in supply costs may decrease our margin and directly affect profitability. If prices increase, supply interruptions,
shipping delays, or shortages of materials continue to occur, it could have a negative effect on revenues and earnings.
Expanding our operations and marketing efforts
to meet expected growth may impact profitability if actual growth is less than expected.
To meet expected growth, we plan to expand operations,
including additional hiring, advertising, and promotion. If actual growth is less than expected, it would negatively impact our ability
to become profitable, which would require we raise additional capital if required, which may not be available on favorable terms, or at
all, which would impact our ability to carry on operations.
If our internal company cyber-security measures
are breached or fail and unauthorized access is obtained to our IT environment, we may incur significant losses of data, which we may
not be able to recover and may experience a delay in our ability to conduct our day-to-day business.
As cybersecurity attacks continue to evolve and
increase, our cyber-security measures and our IT environment could be penetrated or compromised by internal and external parties’
intent on extracting confidential information, disrupting business processes, corrupting information, or looking to force the Company
to pay a ransom. These risks could arise from external parties or from acts or omissions of internal or service provider personnel. Such
unauthorized access could disrupt our business and could result in the loss of assets, litigation, remediation costs, damage to our reputation
and failure to retain or attract customers following such an event, which could adversely affect our business.
Cyber attackers update their methods frequently.
Sometimes cyberattacks are unrecognizable at the time of their occurrence and even long after. In addition, cyber incidents can occur
as a result of non-technological failures, like human error or malicious acts. In some cases, information security incidents at our customers
or suppliers can also lead to information security incidents in our information systems. For these reasons, we cannot guarantee that the
safeguards taken by us and the safeguards we will take in the future will completely prevent information security incidents or damages
that may result from them as detailed above.
We provide cyber security features as part
of our products that may not completely prevent information security breaches, and our products are installed in live customer environments
and may be compromised by cyber-attacks and damage customer assets.
Our products include cyber-security features such
as data-traffic encryption that are engineered to protect our customers’ data and environment. Cyber-attacks become more sophisticated
and evolve quickly, and these features may fail to protect our customers as intended and fail at preventing information security breaches.
We plan to offer new cyber security products and features which we will either develop internally, obtain from partnerships with third-parties,
or through acquisitions in the future. These planned new cyber-security products and features may fail to protect our customers as intended
and not prevent information security breaches.
Our products are installed in live customer network
environments, and may be subject to cyber-attacks seeking access to our customers networks through our products. Those cyber-attack attempts
may take advantage of vulnerabilities of our products within the networks, vulnerabilities that may be known or unknown to us.
Our products and services include information
systems and digital data of various types, including data kept by our employees, suppliers, and customers (and their own customers). In
recent years there has been an increase in the frequency and severity of cyber incidents (including cybercrime). This trend is expected
to continue in the future and even worsen, despite all the defense mechanisms employed against it. Cyber events can lead to unauthorized
access, unauthorized disclosure, misuse, disruption, deletion, or modification of the Company and its customer assets, data, and processing,
as well as disrupting day-to-day operations, computing services, and significantly slowing them down and even disabling information
systems.
In the event of damage caused by such cyber-attacks,
we may suffer negative consequences, such as disruption of the Company’s and/or our customers’ activities, disruption of or
disabling information systems, theft of our and/or our customers’ data, or damage to its reputation thus affecting clients’
trust in the Company, and potentially exposing it to lawsuits. In such cases, our business results may be severely harmed.
We depend on key information systems and
third-party service providers.
We depend on key information systems to transact
our business accurately and efficiently. These systems and services are vulnerable to interruptions or other failures resulting from,
among other things, natural disasters, terrorist attacks, software, equipment or digital failures, processing errors, computer viruses,
other security issues or supplier defaults. Security, backup, and disaster recovery measures may not be adequate or implemented properly
to avoid such disruptions or failures. Any disruption or failure of these systems or services could cause substantial errors, processing
inefficiencies, security breaches, inability to use the systems or process transactions, loss of customers or other business disruptions,
all of which could negatively affect our business and financial performance.
We depend on our management team and other
key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely
affect our business.
Our future success depends, in part, on our ability
to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract
or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales, may seriously and adversely
affect our business, financial condition and results of operations. Although we have entered into employment or consulting agreements
with our personnel, their employment is generally for no specific duration.
Our future performance also depends on the continued
services and continuing contributions of our senior management team, which includes Tuvia Barlev, our Chief Executive Officer, to execute
on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of our senior management
team, particularly our Chief Executive Officer, could significantly delay or prevent the achievement of our development and strategic
objectives, which could adversely affect our business, financial condition and results of operations.
We may face the effects of increased competition
and rapid technological changes.
The industry in which we are engaged is subject
to rapid and significant technological change. There can be no assurance that our systems can be upgraded to meet future innovations which
will be required to meet our customer’s requirements, or that new technologies will be adopted successfully by us, or existing technologies
will not be improved, which would render the offerings obsolete or non-competitive. Companies we compete with enjoy significant competitive
advantages, including greater name recognition; greater financial, technical, and service resources; established networks; additional
product offerings; and greater resources for product development and sales and marketing.
There can be no assurance that other established
networking technology companies, any of which would likely have greater resources than us, will not enter the market. In addition, new
competitors may enter the marketplace and/or begin offering networking technology products and solutions and in channels similar to or
competing with ours. Such competition may reduce demand for our products and impact the growth prospects and ability to achieve profitability,
which may require us to raise new capital, which may not be available on favorable terms, or at all, and that would impair our ability
to carry on operations.
We cannot assure you that we will be able to compete
successfully against any of these competitors. Our failure to compete successfully with our competitors could harm our business.
We are dependent on skilled human capital.
Our ability to innovate and execute its business
plans is dependent on the ability to hire, replace, and train skilled personnel. The employment market suffers from shortages of candidates,
and such shortages may continue in future years, causing delays and preventing us from executing our plans.
Our results of operations are likely to
fluctuate from quarter to quarter and year to year, which could adversely affect the trading price of our common stock.
Our results of operations, including our revenue,
cost of revenue, gross margin, operating expenses, cash flow, and deferred revenue, have fluctuated from quarter to quarter and year to
year in the past and may continue to vary significantly in the future so that period-to-period comparisons of our results of operations
may not be meaningful. Accordingly, our financial results in any one quarter should not be relied upon as indicative of future performance.
Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, may be difficult
to predict, and may not fully reflect the underlying performance of our business. Factors that may cause fluctuations in our quarterly
financial results include:
| ● | our ability to attract new customers and increase revenue
from our existing customers; |
| ● | the loss of existing customers; |
| ● | customer satisfaction with our products, solutions, platform
capabilities and customer support; |
| ● | mergers and acquisitions or other factors resulting in the
consolidation of our customer base; |
| ● | our ability to gain new partners and retain existing partners; |
| ● | fluctuations in share-based compensation expense; |
| ● | decisions by potential customers to purchase competing offerings
or develop in-house technologies and solutions as alternatives to our offerings; |
| ● | changes in the spending patterns of our customers; |
| ● | the amount and timing of operating expenses related to the
maintenance and expansion of our business and operations, including investments in research and development, sales and marketing, and
general and administrative resources; |
| ● | developments or disputes concerning our intellectual property
or proprietary rights, our products and services, or third-party intellectual property or proprietary rights; |
| ● | negative publicity about our company, our offerings or our
partners, including as a result of actual or perceived breaches of, or failures relating to, privacy, data protection or data security; |
| ● | the timing of expenses related to the development or acquisition
of technologies or businesses and potential future charges for impairment of goodwill from acquired companies; |
| ● | general economic, industry, and market conditions; |
| ● | the impact of the ongoing COVID-19 pandemic, or any other
pandemic, epidemic, outbreak of infectious disease or other global health crises on our business, the businesses of our customers and
partners and general economic conditions; |
| ● | the impact of political uncertainty or unrest; |
| ● | changes in our pricing policies or those of our competitors; |
| ● | fluctuations in the growth rate of the markets that our offerings
address; |
| ● | seasonality in the underlying businesses of our customers,
including budgeting cycles, purchasing practices and usage patterns; |
| ● | the business strengths or weakness of our customers; |
| ● | our ability to collect timely on invoices or receivables; |
| ● | the cost and potential outcomes of future litigation or other
disputes; |
| ● | future accounting pronouncements or changes in our accounting
policies; |
| ● | our overall effective tax rate, including impacts caused
by any reorganization in our corporate tax structure and any new legislation or regulatory developments; |
| ● | our ability to successfully expand our business in the United States
and internationally; |
| ● | fluctuations in foreign currency exchange rates; and |
| ● | the timing and success of new products and solutions introduced
by us or our competitors, or any other change in the competitive dynamics of our industry, including consolidation among competitors,
customers or partners. |
The impact of one or more of the foregoing or
other factors may cause our results of operations to vary significantly. Such fluctuations make forecasting more difficult and could cause
us to fail to meet the expectations of investors and securities analysts, which could cause the trading price of our common stock to fall
substantially, resulting in the loss of all or part of your investment, and subject us to costly lawsuits, including securities class
action suits.
The loss of one or more of our significant
customers, or any other reduction in the amount of revenue we derive from any such customer, would adversely affect our business, financial
condition, results of operations and growth prospects.
Our future success is dependent on our ability
to establish and maintain successful relationships with a diverse set of customers.
We currently derive a significant portion of our
revenue from a limited number of our customers. For the years ended December 31, 2022 and December 31, 2021, our top ten
customers in the aggregate accounted for approximately 82% and 78% of our revenues.
We expect to continue to derive a significant
portion of our revenue from a limited number of customers in the future and, in some cases, the portion of our revenue attributable to
individual customers may increase. The loss of one or more significant customers or a reduction in the amount of revenue we derive from
any such customer could significantly and adversely affect our business, financial condition and results of operations. Customers may
choose not to renew their contracts or may otherwise reduce the breadth of the offerings which they purchase for any number of reasons.
We are also subject to the risk that any such customer will experience financial difficulties that prevent them from making payments to
us on a timely basis or at all.
We are currently operating in a period of
economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing
military conflict between Russia and Ukraine. Our business, financial condition and results of operations may be materially adversely
affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical
tensions.
U.S. and global markets are experiencing volatility
and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On
February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing
military conflict is highly unpredictable, and although we currently have no operations or sales in either Russia or Ukraine, the conflict
in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well
as supply chain interruptions for some of our components. Additionally, this conflict could
lead to sanctions, embargoes, regional instability, geopolitical shifts, cyberattacks, other retaliatory actions, and adverse effects
on macroeconomic conditions, currency exchange rates, and financial markets, which could adversely impact our operations and financial
results, as well as those of third parties with whom we conduct business. Our operations would be particularly vulnerable
to potential interruptions in the supply of certain critical materials and metals, such as neon gas and palladium, which are used in semiconductor
manufacturing. Any interruption to semiconductor chip supply could significantly impact our ability to receive the components and timely
roll-out of our operations. Furthermore, any potential increase in geopolitical tensions in Asia, particularly in the Taiwan Strait, could
also significantly disrupt existing semiconductor chip manufacturing and increase the prospect of an interruption to the semiconductor
chip supply across the world. A significant portion of the world’s semiconductor manufacturing is in Taiwan, and similar geopolitical
tensions there could create further supply chain disruptions, which could result in further delays for our products’ components.
The world’s largest semiconductor chip manufacturer
is located in Taiwan and a large part of equipment and materials, is manufactured in, and imported from, Taiwan. A setback to the current
state of relative peace and stability in the region could compromise existing semiconductor chip production and have downstream implications
for our company. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.
Governments in the United States and many other
countries, or the Sanctioning Bodies, have imposed economic sanctions on certain Russian individuals, including politicians, and Russian
corporate and banking entities. The Sanctioning Bodies, or others, could also institute broader sanctions on Russia, including banning
Russia from global payments systems that facilitate cross-border payments. These sanctions, or even the threat of further sanctions, may
result in the decline of the value and liquidity of Russian securities, a weakening of the ruble or other adverse consequences to the
global economy.
The current war in Ukraine, and geopolitical events
stemming from such conflicts, could cause consumer confidence and spending to decrease or result in increased volatility in the United
States and worldwide financial markets and economy. The extent and duration of the military action, resulting sanctions and resulting
future market disruptions in the region are impossible to predict, but could be significant and have a severe adverse effect worldwide
financial markets and economy.
The effects of health pandemics, such as
the ongoing global COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, financial condition and
results of operations.
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 our products.
Our operations and the operations of our 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 our 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 our employees, and those of our channel partners or customers, resulting in negative impacts to our results
of operations and overall financial performance. We suffered delays in realization of certain new orders from our customers, delay in
testing of some of our new technologies in customer premises and difficulty conducting business development activities in an effective
way (face-to-face). In addition, we had to increase our credit lines by $2.0 million to support the loss of revenue and profit. Additionally,
COVID-19 has resulted, and likely will continue to result, in delays in non-residential construction, non-crisis-related IT purchases
and project completion schedules in general, all of which can negatively impact our results in both current and future periods.
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 our 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.
Our performance is affected by general economic
and political conditions and taxation policies.
The success of our activities may be affected
by general economic and market conditions, like interest rates, currency exchange rate fluctuations, availability of credit, inflation
rates, economic uncertainty, changes in laws, and United States and international political circumstances. Unexpected volatility
or illiquidity could impair profitability or result in losses.
We may be adversely affected by the political
and economic situation in the U.S., Europe and a number of countries in Asia.
The U.S. communications market is directly
affected by economic developments in the U.S. economy. The European and Asian communications market is similarly reliant on political
and economic stability in those regions. Changing trends in these markets may lead to a decrease in investments and a delay in projects,
which could harm our business. To reduce our sensitivity to market changes, we operate in a large number of different vertical markets
and territories.
Our business could be adversely impacted
by changes in laws and regulations related to government contracts.
Federal or state government bodies or agencies
have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Legislators,
regulators, or government bodies or agencies may also make legal or regulatory changes or interpret or apply existing laws or regulations
that relate to government contracts. Changes in these laws, regulations or interpretations could require us to modify our platform in
order to comply with these changes, to incur substantial additional costs or divert resources that could otherwise be deployed to grow
our business, or expose us to unanticipated civil or criminal liability, among other things.
We are subject to laws and regulations worldwide,
changes to which could increase our costs and individually or in the aggregate adversely affect our business.
We are subject to laws and regulations affecting
our domestic and international operations in a number of areas. These U.S. and foreign laws and regulations affect our activities including,
but not limited to, in areas of labor, health and safety, tax, import and export requirements, foreign exchange controls and cash repatriation
restrictions, data privacy requirements, anti-competition, and environmental.
Compliance with these laws, regulations and similar
requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost
of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or
in their interpretation, could individually or in the aggregate make our products and services less attractive to our customers, delay
the introduction of new products in one or more regions, or cause us to change or limit our business practices. We have implemented policies
and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors,
or agents will not violate such laws and regulations or our policies and procedures.
Risks Related to Protecting Our Technology
and Intellectual Property
Claims by others that we infringe their
intellectual property could force us to incur significant costs or revise the way we conduct our business.
Our competitors protect their proprietary rights
by means of patents, trade secrets, copyrights, trademarks and other intellectual property. We have not conducted an independent review
of patents and other intellectual property issued to third parties, who may have patents or patent applications relating to our proprietary
technology. We may receive letters from third parties alleging, or inquiring about, possible infringement, misappropriation, or violation
of their intellectual property rights. Any party asserting that we infringe, misappropriate, or violate proprietary rights may force us
to defend ourselves, and potentially our customers, against the alleged claim. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages or interruption or cessation of our operations. Any such claims or lawsuit could:
| ● | be time-consuming and expensive to defend, whether meritorious
or not; |
| ● | require us to stop providing products or services that use
the technology that infringes the other party’s intellectual property; |
| ● | divert the attention of our technical and managerial resources; |
| ● | require us to enter into royalty or licensing agreements
with third-parties, which may not be available on terms that we deem acceptable; |
| ● | prevent us from operating all or a portion of our business
or force us to redesign our products, services or technology, which could be difficult and expensive and may make the performance or
value of our product or service offerings less attractive; |
| ● | subject us to significant liability for damages or result
in significant settlement payments; or |
| ● | require us to indemnify our customers. |
Furthermore, during the course of litigation,
confidential information may be disclosed in the form of documents or testimony in connection with discovery requests, depositions or
trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could materially adversely
affect our business. Some of our competitors may be able to sustain the costs of intellectual property litigation more effectively than
we can because they have substantially greater resources. In addition, any litigation could significantly harm our relationships with
current and prospective customers. Any of the foregoing could disrupt our business and have a material adverse effect on our business,
operating results and financial condition.
Our patents and proprietary technology may
be challenged or disputed.
We hold certain patent and trade secret rights
relating to various aspects of our technologies, which are of material importance to the Company and its future prospects. Any patents
we have obtained or do obtain may be challenged by re-examination or otherwise invalidated or eventually found unenforceable. Both the
patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may attempt to
challenge or invalidate our patents or may be able to design alternative techniques or devices that avoid infringement of our patents
or develop products with functionalities that are comparable to ours. In the event a competitor infringes upon our patent or other intellectual
property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful,
could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient
resources to enforce our intellectual property rights or to defend our patents against challenges from others.
Any failure to protect our intellectual
property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to compete depend largely
upon our intellectual property. To date, we have 20 registered patents and one patent application pending in the United States; five
registered patents in Europe, one registered patent in Mexico, and one patent application pending in WIPO, all of which in the general
area of high-speed carrier class Ethernet service and transport over bonded VDSL2, G.SHDSL as well as Fiber. We take reasonable steps
to protect our intellectual property, especially when working with third parties. However, the steps we take to protect our intellectual
property rights may be inadequate. For example, other parties, including our competitors, may independently develop similar technology,
duplicate our services, or design around our intellectual property and, in such cases, we may not be able to assert our intellectual property
rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information
or provide an adequate remedy in the event of unauthorized disclosure of our confidential information, and we may be unable to detect
the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.
We make business decisions about when to seek
patent protection for a particular technology and when to rely upon trade secret protection, and the approach we select may ultimately
prove to be inadequate. Even in cases where we seek patent protection, there is no assurance that the resulting patents will effectively
protect every significant feature of our technology or provide us with any competitive advantages. Moreover, we cannot guarantee that
any of our pending patent application will issue or be approved. The United States Patent and Trademark Office and various foreign
governmental patent agencies also require compliance with a number of procedurals, documentary, fee payment, and other similar provisions
during the patent application process and after a patent has issued. There are situations in which noncompliance can result in abandonment
or lapse of the patent, or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If
this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our business. Effective
trademark, copyright, patent, and trade secret protection may not be available in every country in which we conduct business. Further,
intellectual property law, including statutory and case law, in the United States and other countries, is constantly developing,
and any changes in the law could make it harder for us to enforce our rights.
In order to protect our intellectual property
rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce
our intellectual property rights could be costly, time-consuming, and distracting to management and could result in the impairment or
loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses,
counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination
of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our
related pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection
with intellectual property litigation particularly in the US, there is a risk that some of our confidential or sensitive information could
be compromised by disclosure in the event of litigation. In addition, during the course of litigation, there could be public announcements
of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results
to be negative, it could have a substantial adverse effect on the price of our common stock. Negative publicity related to a decision
by us to initiate such enforcement actions against a client or former client, regardless of its accuracy, may adversely impact our other
client relationships or prospective client relationships, harm our brand and business, and could cause the market price of our common
stock to decline. Our failure to secure, protect, and enforce our intellectual property rights could adversely affect our brand and our
business.
The lives of our patents may not be
sufficient to effectively protect our products and business.
Patents have a limited
lifespan. In the United States, if all maintenance fees are paid timely, the natural expiration of a patent is generally 20 years after
its first effective nonprovisional filing date. Although various extensions may be available, the life of a patent, and the protection
it affords, is limited. Given the amount of time required for the development, testing and regulatory review of new product candidates,
patents protecting such candidates might expire before or shortly after such product candidates are commercialized. Even if patents covering
our product candidates are obtained, once the patent life has expired for a product, we may be open to competition from biosimilar or
generic medications. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing
product candidates similar or identical to ours. Our patents issued as of March 15, 2023 will expire on dates ranging from March 20, 2023
to October 8, 2038, subject to any patent extensions that may be available for such patents. More specifically, the following patents
will expire over the next three years: EP02250273.6, DE 60207187.9-08, US7187711, US7167511, US7003026, US7606315, US7613235, US7587042.
In addition, although upon
issuance in the United States a patent’s life can be increased based on certain delays caused by the USPTO, this increase can be
reduced or eliminated based on certain delays caused by the patent applicant during patent prosecution. A patent term extension based
on regulatory delay may be available in the United States. However, only a single patent can be extended for each marketing approval,
and any patent can be extended only once, for a single product. Moreover, the scope of protection during the period of the patent term
extension does not extend to the full scope of the claim, but instead only to the scope of the product as approved. Laws governing analogous
patent term extensions in foreign jurisdictions vary widely, as do laws governing the ability to obtain multiple patents from a single
patent family. Additionally, we may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory
review process, apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy
applicable requirements. If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than
we request, the period during which we will have the right to exclusively market our product will be shortened and our competitors may
obtain approval of competing products following our patent expiration and may take advantage of our investment in development and clinical
trials by referencing our clinical and preclinical data to launch their product earlier than might otherwise be the case, and our revenue
could be reduced, possibly materially. If we do not have sufficient patent life to protect our products, our business and results of operations
will be adversely affected.
We may not be able to adequately defend
against piracy of intellectual property in foreign jurisdictions.
Considerable research is being performed in countries
outside of the United States, and a number of potential competitors are located in these countries. The laws protecting intellectual
property in some of those countries may not provide adequate protection to prevent our competitors from misappropriating our intellectual
property. Several of these potential competitors may be further along in the process of product development and also operate large, company-funded
research and development programs. As a result, our competitors may develop more competitive or affordable products, or achieve earlier
patent protection or product commercialization than we are able to achieve. Competitive products may render any products that we develop
obsolete.
Risks Related to Managing Our Business Operations
in Israel
Potential political, economic, and military
instability in the State of Israel, where our research and development facilities are located, may adversely affect our results of operations.
Our office where we conduct our research and development,
operations, sales outside the Americas, and administration activities, is located in Israel. Many of our employees are residents of Israel.
Accordingly, political, economic and military
conditions in Israel and the surrounding region may directly affect our business. Since the establishment of the State of Israel in 1948,
a number of armed conflicts have taken place between Israel and its neighboring Arab countries, the Hamas militant group and the Hezbollah.
Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect
our operations and results of operations. Ongoing and revived hostilities or other Israeli political or economic factors, such as, an
interruption of operations at the Tel Aviv airport, could prevent or delay our regular operation, product development and delivery of
products. If continued or resumed, these hostilities may negatively affect business conditions in Israel in general and our business in
particular. In the event that hostilities disrupt the ongoing operation of our facilities and our operations may be materially adversely
affected.
In addition, since 2010 political uprisings and
conflicts in various countries in the Middle East, including Egypt and Syria, are affecting the political stability of those countries.
It is not clear how this instability will develop and how it will affect the political and security situation in the Middle East. This
instability has raised concerns regarding security in the region and the potential for armed conflict. In Syria, a country bordering Israel,
a civil war is taking place. In addition, it is widely believed that Iran, which has previously threatened to attack Israel, has been
stepping up its efforts to achieve nuclear capability. Iran is also believed to have a strong influence among extremist groups in the
region, such as Hamas in Gaza and Hezbollah in Lebanon. Additionally, the Islamic State of Iraq and Levant, a violent jihadist group,
is involved in hostilities in Iraq and Syria. The tension between Israel and Iran and/or these groups may escalate in the future and turn
violent, which could affect the Israeli economy in general and us in particular. Any potential future conflict could also include missile
strikes against parts of Israel, including our offices and facilities. Such instability may lead to deterioration in the political and
trade relationships that exist between the State of Israel and certain other countries. Any armed conflicts, terrorist activities or political
instability in the region could adversely affect business conditions, could harm our results of operations and could make it more difficult
for us to raise capital. Parties with whom we do business may sometimes decline to travel to Israel during periods of heightened unrest
or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. Several countries,
principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions
on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases.
Similarly, Israeli companies are limited in conducting business with entities from several countries. For instance, the Israeli legislature
passed a law forbidding any investments in entities that transact business with Iran. In addition, the political and security situation
in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform
their commitments under those agreements pursuant to force majeure provisions in such agreements.
Our employees and consultants in Israel, including
members of our senior management, may be obligated to perform one month, and in some cases longer periods, of military reserve duty until
they reach the age of 40 (or older, for citizens who hold certain positions in the Israeli armed forces reserves) and, in the event of
a military conflict or emergency circumstances, may be called to immediate and unlimited active duty. In the event of severe unrest or
other conflict, individuals could be required to serve in the military for extended periods of time. In response to increases in terrorist
activity, there have been periods of significant call-ups of military reservists. It is possible that there will be similar large-scale
military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of our officers,
directors, employees and consultants related to military service. Such disruption could materially adversely affect our business and operations.
Additionally, the absence of a significant number of the employees of our Israeli suppliers and contractors related to military service
or the absence for extended periods of one or more of their key employees for military service may disrupt their operations.
Our insurance does not cover losses that may occur
as a result of an event associated with the security situation in the Middle East or for any resulting disruption in our operations. Although
the Israeli government has in the past covered the reinstatement value of direct damages that were caused by terrorist attacks or acts
of war, we cannot assure you that this government coverage will be maintained or, if maintained, will be sufficient to compensate us fully
for damages incurred and the government may cease providing such coverage or the coverage might not suffice to cover potential damages.
Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability
in the region would likely negatively affect business conditions generally and could harm our results of operations and product development.
Further, in the past, the State of Israel and
Israeli companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with
Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial conditions or the
expansion of our business. Similarly, Israeli corporations are limited in conducting business with entities from several countries.
The Israeli government is currently pursuing changes
to Israel’s judicial system, which, if adopted, may have an adverse effect on the macroeconomic conditions in Israel and consequently
on our business and our results of operations
Actelis Israel received Israeli government
grants for certain of our research and development activities, the terms of which require us to pay royalties and satisfy specified conditions
in order to manufacture products and transfer technologies outside of Israel. If we fail to satisfy these conditions, we may be required
to pay penalties and refund grants previously received.
Our wholly owned subsidiary, Actelis Israel, which
manages our research and development efforts, has been financed in part through royalty-bearing grants in an aggregate amount of approximately
$14 million (plus accrued interest), received from the Israeli Innovation Authority (formerly known as the Office of the Chief Scientist
of the Israeli Ministry of Economy), or the IIA, as of December 31, 2022. We are committed to pay royalties at a rate of 3.0% on revenues
up to the total amount of grants received, linked to the U.S. dollar and bearing interest at an annual rate of LIBOR applicable to U.S.
dollar deposits.
We are further required to comply with the requirements
of the Israeli Encouragement of Industrial Research, Development and Technological Innovation Law, 5744-1984 (formerly known as the Law
for Encouragement of Research and Development in the Industry, 1984), as amended, and related regulations, or the Research Law, with respect
to those past grants. When a grantee company develops know-how, technology or products using IIA grants, the terms of these grants and
the Research Law restrict the transfer or license of such know-how, and the transfer of manufacturing or manufacturing rights of such
products, technologies or know-how outside of Israel, without the prior approval of the IIA. Therefore, the discretionary approval of
an IIA committee would be required for any transfer or license to third parties inside or outside of Israel of Actelis Israel’s
know how or for the transfer outside of Israel of manufacturing or manufacturing rights related to those aspects of such technologies.
We may not receive those approvals. Furthermore, the IIA may impose certain conditions on any arrangement under which it permits us to
transfer technology or development outside of Israel.
The transfer or license of IIA-supported technology
or know-how outside of Israel and the transfer of manufacturing of IIA-supported products, technology or know-how outside of Israel may
involve the payment of significant amounts, depending upon the value of the transferred or licensed technology or know-how, our research
and development expenses, the amount of IIA support, the time of completion of the IIA-supported research project and other factors. These
restrictions and requirements for payment may impair our ability to sell, license or otherwise transfer our technology assets outside
of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel.
Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or
know-how developed with IIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay
to the IIA.
There are costs and difficulties inherent
in managing cross-border business operations.
Managing a business, operations, personnel or
assets in another country is challenging and costly. Any management that we may have (whether based abroad or in the United States)
may be inexperienced in cross-border business practices and unaware of significant differences in accounting rules, legal regimes, and
labor practices. Even with a seasoned and experienced management team, the costs and difficulties inherent in managing cross-border business
operations, personnel, and assets can be significant (and much higher than in a purely domestic business) and may negatively impact our
financial and operational performance.
Employment and other material contracts
we have with our Israeli employees are governed by Israeli laws. Our inability to enforce or obtain a remedy under these agreements could
adversely affect our business and financial condition.
All employees were asked to sign employment agreements
that contain confidentiality, non-compete and assignment of intellectual property provisions. The employment agreements with our employees
in Israel are governed by Israeli laws. The system of laws and the enforcement of existing laws and contracts in Israel may not be as
certain in implementation and interpretation as in the United States, leading to a higher than usual degree of uncertainty as to
the outcome of any litigation. Our inability to enforce or obtain a remedy under any of these or future agreements could adversely affect
our business and financial condition. Delay with respect to the enforcement of particular rules and regulations, including those relating
to intellectual property, customs, tax, and labor, could also cause serious disruption to operations abroad and negatively impact our
results.
Israeli courts have required employers seeking
to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm
one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s
confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such interests will
be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our
ability to remain competitive may be diminished.
In addition, Chapter 8 of the Israeli Patents
Law, 5727-1967, or the Patents Law, deals with inventions made in the course of an employee’s service and during his or her
term of employment, whether or not the invention is patentable, or service inventions. Section 134 of the Patents Law sets forth
that if there is no agreement which explicitly determines whether the employee is entitled to compensation for the service inventions
and the extent and terms of such compensation, such determination will be made by the Compensation and Rewards Committee, a statutory
committee of the Israeli Patents Office. As a result, it is unclear if, and to what extent, our research and development employees may
be able to claim compensation with respect to our future revenues. Such claims, if successfully asserted, could adversely affect our results
of operations and profitability.
We may be adversely affected by fluctuations
in the currency exchange rate of the Israeli Shekel.
We compute a significant number of expenses in
Israeli Shekels, both expenses from employees and suppliers. Our customers buy our products priced in US dollars or Euros. The strengthening
of the shekel against the dollar and the euro could erode our profitability.
Unanticipated changes in our effective tax
rate and additional tax liabilities, including those resulting from our international operations or the implementation of new tax rules,
could harm our future results.
We are subject to income taxes in the United States
and Israel. Our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions and complex
transfer pricing regulations administered by taxing authorities in various jurisdictions. Tax rates in the jurisdictions in which we operate
may change as a result of factors outside of our control or relevant taxing authorities may disagree with our determinations as to the
income and expenses attributable to specific jurisdictions. In addition, changes in tax and trade laws, treaties or regulations, or their
interpretation or enforcement, have become more unpredictable and may become more stringent, which could materially adversely affect our
tax position.
Forecasting our estimated annual effective tax
rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual effective tax rate.
Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory
tax rates, certain non-deductible expenses, the valuation of deferred tax assets and liabilities, adjustments to income taxes upon finalization
of tax returns, changes in available tax attributes, decision to repatriate non-U.S. earnings for which we have not previously provided
for U.S. taxes, and changes in federal, state, or international tax laws and accounting principles.
Finally, we may be subject to income tax audits
throughout the world. An adverse resolution of one or more uncertain tax positions in any period could have a material impact on our results
of operations or financial condition for that period.
Risks Related to our Common Stock
The requirements of being a public company
may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified
board members.
As a public company, we are subject to the reporting
requirements of the Exchange Act, the listing standards of Nasdaq and other applicable securities rules and regulations.
The requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs,
make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources.
For example, the Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our
business and results of operations. As a result of the complexity involved in complying with the rules and regulations applicable
to public companies, our management’s attention may be diverted from other business concerns, which could harm our business, results
of operations, and financial condition.
We also expect that being a public company and
these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may
be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult
for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation
committee, and qualified executive officers.
As a result of disclosure of information in filings
required of a public company, our business and financial condition is more visible, which may result in an increased risk of threatened
or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations
could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources
necessary to resolve them, could divert the resources of our management and harm our business, results of operations, and financial condition.
The individuals who now constitute our senior
management team have limited experience managing a publicly-traded company and limited experience complying with the increasingly complex
laws pertaining to public companies. Our senior management team may not successfully or efficiently manage our transition to a public
company that is subject to significant regulatory oversight and reporting obligations.
We are an “emerging growth company,”
and our compliance with the reduced reporting and disclosure requirements applicable to “emerging growth companies” may make
our common stock less attractive to investors.
We are an “emerging growth company,”
as defined in the JOBS Act, and we have elected to take advantage of certain exemptions and relief from various reporting requirements
that are applicable to other public companies that are not “emerging growth companies.” These provisions include, but are
not limited to: requiring only two years of audited financial statements and only two years of related selected financial data
and management’s discussion and analysis of financial condition and results of operations disclosures; being exempt from compliance
with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; being exempt from any rules that could
be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s
report on financial statements; being subject to reduced disclosure obligations regarding executive compensation in our periodic reports
and proxy statements; and not being required to hold nonbinding advisory votes on executive compensation or on any golden parachute payments
not previously approved.
In addition, while we are an “emerging growth
company,” we will not be required to comply with any new financial accounting standard until such standard is generally applicable
to private companies. As a result, our financial statements may not be comparable to companies that are not “emerging growth companies”
or elect not to avail themselves of this provision.
We may remain an “emerging growth company”
until as late as December 31, 2027, the fiscal year-end following the fifth anniversary of the completion of our IPO, though we may
cease to be an “emerging growth company” earlier under certain circumstances, including if (1) we have more than $1.07 billion
in annual net revenues in any fiscal year, (2) we become a “large accelerated filer,” with at least $700 million
of equity securities held by non-affiliates as of the end of the second quarter of that fiscal year or (3) we issue more than $1.0 billion
of non-convertible debt over a three-year period.
The exact implications of the JOBS Act are still
subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take
advantage of all of the benefits of the JOBS Act. In addition, investors may find our common stock less attractive to the extent we rely
on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be
a less active trading market for our common stock and our stock price may decline or become more volatile.
We have identified a material weakness in
our internal control over financial reporting. If we experience material weaknesses in the future or otherwise fail to implement and maintain
an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of
operations which may adversely affect investor confidence in us, and as a result, the value of our common stock.
As a public company, we are subject to significant
requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls
is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments
and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as
a public company. In addition, we are required, pursuant to Section 404, to furnish a report by management on, among other things,
the effectiveness of our internal control over financial reporting in the second annual report following the completion of our IPO. This
assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial
reporting. A material weakness is a deficiency or 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 and interim financial statements will not be
detected or prevented on a timely basis.
The rules governing the standards that must be
met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing,
and possible remediation. Testing and maintaining internal controls may divert our management’s attention from other matters that
are important to our business. Once we are no longer an “emerging growth company,” or a “smaller reporting company”,
our auditors will be required to issue an attestation report on the effectiveness of our internal controls on an annual basis.
In the course of preparing the financial statements
that are included in this Annual Report, management has determined that a material weakness exists within the internal control over financial
reporting. The material weakness identified relates to lack of a sufficient number of finance personnel to allow for adequate segregation
of duties. We concluded that the material weakness in our internal control over financial reporting occurs because as a newly public company,
we do 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.
In order to remediate the material weakness, we
expect to hire additional accounting and finance resources with public company experience or to provide the necessary training for such
new hires without public company experience, and to nominate board members with the required financial literacy.
We may not be able to fully remediate the identified
material weakness until the steps described above have been completed and our internal controls have been operating effectively for a
sufficient period of time. We believe we will make significant progress in our remediation plan within fiscal year 2023, but cannot assure
that we will be able to fully remediate the material weakness by such time. We also may incur significant costs to execute various aspects
of our remediation plan but cannot provide a reasonable estimate of such costs at this time.
In accordance with the provisions of the JOBS
Act, we and our independent registered public accounting firm were not required to, and did not, perform an evaluation of our internal
control over financial reporting as of December 31, 2022 nor any period subsequent in accordance with the provisions of the Sarbanes-Oxley
Act. Accordingly, we cannot assure you that we have identified all material weaknesses that may exist. Material weaknesses may still exist
when we report on the effectiveness of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley
Act after the completion of the IPO.
In the future, it is possible that additional
material weaknesses or significant deficiencies may be identified that we may be unable to remedy before the requisite deadline for these
reports. Our ability to comply with the annual internal control reporting requirements will depend on the effectiveness of our financial
reporting and data systems and controls across our company. Any weaknesses or deficiencies or any failure to implement new or improved
controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results and cause
us to fail to meet our financial reporting obligations, or result in material misstatements in our consolidated financial statements,
which could adversely affect our business and reduce our stock price.
If we are unable to conclude on an ongoing basis
that we have effective internal control over financial reporting in accordance with Section 404, our independent registered public
accounting firm may not issue an unqualified opinion. If we are unable to conclude that we have effective internal control over financial
reporting, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading
price of our common stock. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or
maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
If we fail to maintain an effective system
of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result,
stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of
our common stock.
Effective internal controls over financial reporting
are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed
to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could
cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404, or any
subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements
or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence
in our reported financial information, which could have a negative effect on the trading price of our stock.
We will be required to disclose changes made in
our internal controls and procedures on a quarterly basis and our management will be required to assess the effectiveness of these controls
annually, beginning with our second annual report on Form 10-K. In addition, our independent registered public accounting firm
will be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404, however
they will not be required to do so for so long as we are an emerging growth company. We could be an emerging growth company for up to
five years (i.e., until December 31, 2027). An independent assessment of the effectiveness of our internal controls over financial
reporting could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls
over financial reporting could lead to restatements of our financial statements and require us to incur the expense of remediation.
Our disclosure controls and procedures may
not prevent or detect all errors or acts of fraud.
We are subject to certain reporting requirements
of the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed
by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures
or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent
limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.
An active trading market may not develop
for our securities.
Our common stock is listed on the Nasdaq Capital
Market. However, we cannot predict the extent to which investor interest in our Company will lead to the development of an active trading
market in our common stock or how liquid that market might become. If such a market does not develop or is not sustained, it may be difficult
for you to sell your shares of common stock at the time you wish to sell them, at a price that is attractive to you, or at all.
The trading market for our common stock in the
future could be subject to wide fluctuations in response to several factors, including, but not limited to:
| ● | actual or anticipated variations in our results of operations; |
| ● | our ability or inability to generate revenues or profit; |
| ● | the number of shares in our public float; and |
Furthermore, our stock price may be impacted by
factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political,
and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price
of our common stock. Additionally, moving forward we anticipate having a limited number of shares in our public float, and as a result,
there could be extreme fluctuations in the price of our common stock.
Our issuance of additional capital stock
in connection with financings, acquisitions, investments, our 2015 Equity Incentive Plan, or otherwise will dilute all other stockholders.
In the future, we may need to raise additional
capital through equity and debt financings in order to fund our operations. If we raise capital through equity financings in the future,
that will result in dilution to all other stockholders. We also expect to grant equity awards to employees, directors, and consultants
under our 2015 Equity Incentive Plan. As part of our business strategy, we may acquire or make investments in complementary companies,
products, or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional
capital stock may cause stockholders to experience significant dilution of their ownership interests and the per-share value of our common
stock to decline.
We do not intend to pay dividends on our
common stock and, consequently, the ability of common stockholders to achieve a return on investment will depend on appreciation, if any,
in the price of our common stock.
You should not rely on an investment in our common
stock to provide dividend income. We do not plan to declare or pay any dividends on our capital stock in the foreseeable future. Instead,
we intend to retain any earnings to finance the operation and expansion of our business. Any credit agreements, which we may enter into
with institutional lenders, may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion
of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and any other
factors that the board of directors decides is relevant. Therefore, any return on your investment in our capital stock must come from
increases in the fair market value and trading price of the capital stock.
Future sales of our common stock, or the
perception that future sales may occur, may cause the market price of our common stock to decline, even if our business is doing well.
Sales of substantial amounts of our common stock
in the public market after our IPO, or the perception that these sales may occur, could materially and adversely affect the price of our
common stock and could impair our ability to raise capital through the sale of additional equity securities. Those shares of common stock
sold in our IPO will be freely tradable, without restriction, in the public market, except for any shares sold to our affiliates.
After the date of the IPO, when 4,212,500 shares
of common stock became publicly tradable, approximately 13,105,075 additional shares of common stock subject to “lock-up” agreements
entered into in connection with the IPO, are or will become eligible to be sold in the public market by existing stockholders by May 13,
2023 as a result of Rule 144 of the Securities Act, subject to volume and other limitations imposed under the federal securities laws.
Furthermore, additional shares of our common stock may be publicly tradable as a result of exercises of stock options and restricted stock
units (RSUs) under the 2015 Equity Incentive Plan. Sales of substantial amounts of our common stock in the public market after the completion
of the IPO, or the perception that such sales could occur, could adversely affect the market price of our common stock and could materially
impair our ability to raise capital through offerings of our common stock.
The market price of our common stock may be volatile and
may decline regardless of our operating performance, and you may lose all or part of your investments.
The market price of our common stock may fluctuate
significantly in response to numerous factors, many of which are beyond our control, including:
| ● | overall performance of the equity markets and/or publicly
listed technology companies; |
| ● | actual or anticipated fluctuations in our net revenues or
other operating metrics; |
| ● | changes in the financial projections we provide to the public
or our failure to meet these projections; |
| ● | failure of securities analysts to initiate or maintain coverage
of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet the estimates or the
expectations of investors; |
| ● | the economy as a whole and market conditions in our industry; |
| ● | political and economic stability in Israel; |
| ● | exchange rate fluctuations between U.S. dollars and
Israeli New Shekel; |
| ● | rumors and market speculation involving us or other companies
in our industry; |
| ● | announcements by us or our competitors of significant innovations,
acquisitions, strategic partnerships, joint ventures, or capital commitments; |
| ● | new laws or regulations or new interpretations of existing
laws or regulations applicable to our business; |
| ● | lawsuits threatened or filed against us; |
| ● | recruitment or departure of key personnel; |
| ● | other events or factors, including those resulting from war,
incidents of terrorism, or responses to these events; and |
| ● | the expiration of contractual lock-up or market standoff
agreements. |
In addition, extreme price and volume fluctuations
in the stock markets have affected and continue to affect many technology companies’ stock prices. Often, their stock prices have
fluctuated in ways unrelated or disproportionate to the companies’ operating performance. In the past, securities action litigation
has often been brought against a Company following a decline in the market price of its securities. This risk is especially relevant for
us because technology companies have experienced significant stock price volatility in recent years. If we face such litigation,
it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.
A possible “short squeeze” due
to a sudden increase in demand of our common stock that largely exceeds supply may lead to price volatility in our common stock.
Investors may purchase our common stock to hedge
existing exposure in our common stock or to speculate on the price of our common stock. Speculation on the price of our common stock may
involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available for
purchase in the open market, investors with short exposure may have to pay a premium to repurchase our common stock for delivery to lenders
of our common stock. Those repurchases may in turn, dramatically increase the price of our common stock until investors with short exposure
are able to purchase additional common stock to cover their short position. This is often referred to as a “short squeeze.”
A short squeeze could lead to volatile price movements in our common stock that are not directly correlated to the performance or prospects
of our common stock and once investors purchase the shares of common stock necessary to cover their short position the price of our common
stock may decline.
If securities or industry analysts do not
publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend,
in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts
do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company,
the trading price for our common stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage,
if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our
stock price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely
decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common
stock could decrease, which might cause our stock price and trading volume to decline.
Provisions in our charter documents and
under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our
current board of directors and limit the market price of our common stock.
Provisions in our amended and restated certificate
of incorporation, or the Charter, and bylaws, or the Bylaws, may have the effect of delaying or preventing a change of control or changes
in our management. Our Charter and Bylaws, include provisions that:
| ● | permit the board of directors to establish the number of
directors and fill any vacancies and newly-created directorships; |
| ● | classify our board of directors is classified into three
classes of directors with staggered three-year terms and stockholders will only be able to remove directors from office for cause; and |
| ● | provide that the board of directors is expressly authorized
to make, alter, or repeal our Bylaws. |
Moreover, Section 203 of the Delaware General
Corporation Law, or the DGCL, may discourage, delay, or prevent a change in control of our company. Section 203 imposes certain restrictions
on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.
Our Charter provides that derivative actions
brought on our behalf, actions against our directors, officers, employees or agent for breach of fiduciary duty and certain other actions
may be brought only in the Court of Chancery in the State of Delaware and the stockholders shall be deemed to have consented to this choice
of forum provision, which may have the effect of discouraging lawsuits against our directors, officers, other employees or agents.
Our Charter provides that, unless we consent in
writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum
for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary
duty owed by, or other wrongdoing by, any current or former director, officer, stockholder, employee or agent of the Company to the Company
or the Company’s stockholders, (c) any action asserting a claim against us or any current or former director, officer, stockholder,
employee or agent of the Corporation arising pursuant to any provision of the DGCL, or our Company’s Certificate of Incorporation
or Bylaws, (d) any action to interpret, apply, enforce or determine the validity of the Company’s Certificate of Incorporation
or Bylaws, (e) any action asserting a claim governed by the internal affairs doctrine or (f) any action asserting an “internal
corporate claim” as that term is defined in Section 115 of the General Corporation Law. The federal district courts of the United
States of America shall be the exclusive forum for the resolution of any complaint, claim or proceeding asserting a cause of action arising
under the Exchange Act or the Securities Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal
and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
Stockholders cannot waive compliance with the
federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring or holding
any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provision in our Charter.
The choice-of-forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or its directors, officers or other
employees, and may result in increased costs to a stockholder who has to bring a claim in a forum that is not convenient to the stockholder,
which may discourage such lawsuits. Although under Section 115 of the DGCL, exclusive forum provisions may be included in a company’s
certificate of incorporation, the enforceability of similar forum provisions in other companies’ certificates or incorporation or
bylaws has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable
or unenforceable. If a court were to find the exclusive forum provision of our Charter inapplicable or unenforceable with respect to one
or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other
jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a
diversion of the time and resources of our management and board of directors.
Our principal stockholders will continue
to have significant influence over us.
Our principal stockholders collectively beneficially
own approximately 23% of our outstanding common stock. See “Principal Stockholders.” These stockholders or their affiliates
will be able to exert significant influence over us and, if acting together, will be able to control matters requiring stockholder approval,
including the election of directors and approval of significant corporate transactions, including a merger, consolidation or sale of all
or substantially all of our assets and the issuance or redemption of equity interests in certain circumstances. The interests of these
stockholders may not always coincide with, and in some cases may conflict with, our interests and the interests of our other stockholders.
For instance, these stockholders could attempt to delay or prevent a change in control of our company, even if such change in control
would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock.
This concentration of ownership may also affect the prevailing market price of our common stock due to investors’ perceptions that
conflicts of interest may exist or arise. As a result, this concentration of ownership may not be in your best interests.