(U. S. dollars in thousands except for share and
per share amounts)
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
U.S. DOLLARS IN THOUSANDS
NOTE 1 – GENERAL:
| a. | Actelis Networks, Inc. (hereafter -the Company) was established in 1998, under the
laws of the state of Delaware. The Company has a wholly-owned subsidiary in Israel, Actelis Networks Israel Ltd. (hereafter – the
Subsidiary). The Company is engaged in the design, development, manufacturing, and marketing of cyber hardened, hybrid fiber, copper networking
solutions for IoT and Telecommunication companies. The Company’s customers include providers of telecommunication services and enterprises
as well as resellers of the Company’s products. On May 12, 2022, the Company accepted a notification of effectiveness from the SEC, and
on May 17, 2022 completed its IPO. See note 2 below for further details. |
| b. | In December 2019, a novel coronavirus disease, or COVID-19, was first reported and on March 11,
2020, the World Health Organization characterized COVID-19 as a pandemic. The widespread health crisis is adversely affecting the broader
economies, financial markets and overall demand environment for many of the Company’s products. |
The Company’s operations and
the operations of the Company’s suppliers, channel partners and customers were disrupted to varying degrees by a range of external
factors related to the COVID-19 pandemic, some of which are not within the Company’s control. Many governments imposed, and may
yet impose, a wide range of restrictions on the physical movement of people in order to limit the spread of COVID-19. The COVID-19 pandemic
has had, and likely will continue to have, an impact on the attendance and productivity of the Company’s employees, and those of
our suppliers, channel partners or customers, resulting in negative impacts to the Company’s results of operations and overall financial
performance. We suffered delays in realization of certain new orders from customers, delay in testing of some new technologies in customer
premises and difficulty conducting business development activities in an effective way (face-to-face). In addition, we had to increase
credit lines by $2.0 million in 2021 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, electronic components including chip manufacturing
and project completion schedules in general, all of which can negatively impact 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 the Company’s employees,
customers, channel partners and suppliers. If we are not able to respond to and manage the impact of such events effectively, our business
will be affected.
| c. | The Company has incurred significant losses and negative cash flows
from operations and incurred losses of $1,895 and $10,982 for the three months ended March 31, 2023 and the year ended December 31, 2022,
respectively. During the three months ended March 31, 2023 and the year ended December 31, 2022, the Company had negative cash flows from
operations of $1,705 and $7,768, respectively. As of March 31, 2023, the Company’s accumulated deficit was $35,297. The Company
has funded its operations to date through equity financing and has cash on hand (including short term deposits and restricted cash) of
$2,398 and long-term deposits, restricted bank deposits and restricted cash of $4,079 as of March 31, 2023. The Company monitors its cash
flow projections on a current basis and takes active measures to obtain the funding it requires to continue its 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 the Company is not successful in generating sufficient cash flow or completing
additional financing, then it will need to execute a cost reduction plan that has been prepared. The Company’s transition to profitable
operations is dependent on generating a level of revenue adequate to support its cost structure. The Company expects to fund operations
using cash on hand, through operational cash flows and raising additional proceeds. There are no assurances, however, that the Company
will be able to generate the revenue necessary to support its cost structure or that it will be successful in obtaining the level of financing
necessary for its operations. Management has evaluated the significance of these conditions and the time in which it has to accomplish
them and has determined that the Company has sufficient resources to meet its operating obligations for at least one year from the issuance
date of these consolidated financial statements. |
NOTE 2 – INITIAL PUBLIC OFFERING (*):
On May 17, 2022,
the Company finalized its IPO offering of an aggregate of 421,250 shares of common stock, including the partial exercise by the underwriter
of its option to purchase 46,250 additional shares of common stock, at a price to the public of $40.00 per share.
The net proceeds
from the offering, including the over-allotment, to the Company were approximately $15.4 million, after deducting underwriting discounts,
commissions and expenses amounting to approximately $1.0 million.
As a result of the
IPO, the Company issued common stock in the transactions described below:
| 1) | Redeemable convertible preferred stock - the Company issued 773,108 shares of common stock (on a one (1) for one (1) basis, pursuant to the conversion provisions of the Series A and Series B redeemable convertible Preferred Stock agreements). Upon the conversion, the Company reclassified the redeemable convertible Preferred stock at its carrying amount, from temporary equity, into shareholders’ equity. |
| 2) | Convertible loan agreement
(“CLA”) (see Note 8) – the Company issued 163,816 shares of common stock. pursuant to the conversion features of
the loan agreement. |
Upon such issuance,
the Company reclassified the Convertible loan’s carrying amount (which reflected its then current fair value), into shareholders’
equity.
| 3) | Convertible notes (see Note
7) –The Company issued 90,009 shares of common stock pursuant to the conversion features of the note agreements issued during
December 2021 and April 2022. |
| 1. | The Company issued 61,756 shares of common stock as a result
of the exercise provisions of the detachable warrants granted to Mizrahi-Tefahot Bank as part of the Company’s financing agreement
with Bank Mizrahi. |
| 2. | The Company issued 18,000 shares of common stock to Migdalor
as a result of the exercise provisions of the detachable warrants granted to Migdalor as part of the loan agreement with Migdalor. |
| 3. | In addition, concurrently with the IPO and in connection with
the consummation of the IPO, the Company issued common stock warrants to the underwriters. The warrants are exercisable into 29,487 of
the Company’s common shares for an exercise price of $50 per share and can be exercised at any time during a period of 5 years
from the issuance date (i.e. until May 17, 2027). The warrants are classified as equity based on the guidance provided under ASC 718-10. |
As of the issuance
date of the underwriter warrants, the fair value of the warrants was estimated at $145. The valuation was based on a Black-Scholes option-pricing
model, using an expected volatility of 54%, a risk-free rate of 3.01%, a contractual term of 5 years, an expected dividend yield of 0%
and a stock price at the issuance date of $19.5.
| 5) | The Company redeemed 178,377 shares of non-voting common stock at their
par value, removing the stock from shareholders’ equity. |
| (*) | Adjusted to reflect the April 2023 reverse stock split, see
note 3(j). |
NOTE 3 – SIGNIFICANT ACCOUNTING
POLICIES:
The accompanying unaudited condensed
consolidated interim financial statements have been prepared in accordance with Article 10 of the Securities and Exchange Commission
(“SEC”)’s Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are
normally required by generally accepted accounting principles in the United States (“U.S. GAAP”) can be condensed or omitted.
These financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of
its financial position as of and for the periods presented. These condensed consolidated financial statements and notes thereto are unaudited
and should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022. The results
of operations for the three months ended March 31, 2023, are not necessarily indicative of results that could be expected for the 2023
fiscal year or any other interim period or for any other future year. All intercompany transactions and balances have been eliminated
in consolidation.
Certain prior period amounts have been reclassified to conform to the current period presentation.
| b) | Use of estimates in preparation of financial statements |
The preparation of
the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments
and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes.
The Company evaluates on an ongoing basis its assumptions, including those related to contingencies, fair values of financial instruments,
inventory write-offs, as well as in estimates used in applying the revenue recognition policy. The Company’s management believes that
the estimates, judgments, and assumptions used are reasonable based upon information available at the time they are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
| c) | Cash, cash equivalents and restricted cash |
The Company considers all highly liquid
investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried
at cost, which approximates their fair value.
| d) | Restricted cash and restricted deposits |
Restricted cash consists of cash held in restricted accounts classified
as current or long term based on the expected timing of the disbursement. Restricted deposits consist of deposits held in restricted deposits
bank accounts including deposits held as collateral for guarantees to third parties and other, classified as current or long term based
on the expected timing of the disbursement.
Treasury shares represents
ordinary shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury shares are accounted
for under the cost method. Under this method, repurchases of ordinary shares are recorded as treasury shares at historical purchase
prices. At retirement, the ordinary shares account is charged only for the aggregate par value of the shares. The treasury shares
have no rights.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued):
The Company’s product consists of hardware
and an embedded software that function together to deliver the product’s essential functionality. The embedded software is essential to
the functionality of the Company’s products. The Company’s products are sold with a two-year warranty for repairs or replacements of the
product in the event of damage or failure during the term of the support period, which is accounted for as a standard warranty. Services
relating to repair or replacement of hardware beyond the standard warranty period are offered under renewable, fee-based contracts and
include telephone support, remote diagnostics and access to on-site technical support personnel.
The Company also offers its customers
other management software. The Company sells its other non-embedded software either as perpetual or as term-based licenses.
The Company provides, to certain customers,
software updates that it chooses to develop, which the Company refers to as unspecified software updates, and enhancements related to
the Company’s management software through support service contracts. The Company also offers its customers product support services which
include telephone support, remote diagnostics and access to on-site technical support personnel.
The Company’s customers are comprised
of resellers, system integrators and distributors.
The Company follows five steps to record
revenue: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) it satisfies
its performance obligations.
Performance obligations promised in a
contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct,
whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available
from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services
is separately identifiable from other promises in the contract.
The transaction price is determined based
on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. The Company’s
contracts do not include additional discounts once product price is set, right of returns, significant financing components or any forms
of variable consideration.
The Company uses the practical expedient
and does not assess the existence of a significant financing component when the difference between payment and revenue recognition is
less than a year. The Company’s service period is for one year and is paid for either up front or on a quarterly basis.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES
(continued):
Sales of products
Most of the Company’s contracts
are of a single performance obligation (sales of the product with a standard warranty) thus the entire transaction price is allocated
to the single performance obligation. In addition, the Company also sells separate services such as product support service and extended
warranty.
Sales of software with related services
The Company sells perpetual
management software and term-based licenses for its management software together with related services. The perpetual management
software stand-alone selling price is established by taking into consideration available information such as historical selling
prices of the perpetual license, geographic location, and market conditions. For contracts that contain more than one identified
performance obligation (a term-based license for its management software together with related services), the stand-alone selling
price of a term-based license, is based on a ratio from the relevant perpetual management software stand-alone selling
price. The stand-alone selling price of the related service is then determined by applying the residual method.
Revenue from selling the Company’s
product and/or the software management (either as term-based or perpetual) is recognized at a point in time which is typically at the
time of shipment of products to the customer or when the code is transferred, respectively. Revenue from services (e.g., product support
service, software support service or extended warranty) is recognized on a straight-line basis over the service period, as a time-based
measure of progress best reflects our performance in satisfying this performance obligation.
| g) | Offering Costs associated with the Initial Public Offering |
The Company complies with the requirements of ASC 340-10-S99-1,
SEC Staff Accounting bulletin Topic 5A – “Expenses of Offering”. Offering costs consist principally of professional
and registration fees incurred through the balance sheet date that are related to the IPO. Offering costs directly attributable to the
issuance of an equity contract to be classified in equity are recorded as a reduction of equity.
The Company incurred offering costs amounting to approximately
$1.45 million, related to underwriting discounts and commissions, and other offering costs of $1 million as a result of the IPO.
| h) | Fair value of financial instruments |
Fair value measurements are classified
and disclosed in one of the following three categories:
Level 1 – Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Quoted prices
in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of
the asset or liability.
Level 3 – Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued):
The
following table represents the fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring
basis as of:
| |
| | |
Fair
value measurements at
March
31, 2023 | |
Description | |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
| |
| | |
| | |
| | |
| |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Warrants
(See Note 9) | |
$ | 8 | | |
$ | - | | |
$ | - | | |
$ | 8 | |
| |
| | |
Fair
value measurements at
December
31, 2022 | |
Description | |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
| |
| | |
| | |
| | |
| |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Warrants
(See Note 9) | |
$ | 8 | | |
$ | - | | |
$ | - | | |
$ | 8 | |
| h) | Fair
value of financial instruments |
As of March 31, 2023, and December 31, 2022, the fair values of the
Company’s cash, cash equivalents, short and long-term deposits, trade receivables, trade payables, long-term loan,restricted cash
and restricted bank deposits approximated the carrying values of these instruments presented in the Company’s consolidated balance
sheets because of their nature.
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents,
restricted cash, and trade receivables. Cash and cash equivalents and restricted cash are placed with banks and financial institutions
in the United States and Israel.
Management
believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, present minimal
credit risk with respect to those investments.
The
Company’s trade receivables are derived primarily from telecommunication operators, the Company’s reseller customers and enterprises
located mainly in the United States, Europe, and Asia.
Credit
risk with respect to trade receivables exists to the full extent of the amounts presented in the consolidated financial statements. Management
makes judgments as to its ability to collect outstanding accounts receivable and provides allowances for the applicable portion of accounts
receivable when collection becomes doubtful.
Management
provides allowances based upon a specific review of all significant outstanding invoices, analysis of its historical collection experience,
and current economic trends. If the historical data used to calculate the allowance for doubtful accounts does not reflect the Company’s
future ability to collect outstanding accounts receivable, additional provisions for doubtful accounts may be needed, and the future
results of operations could be materially affected.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued):
The Company has major customers, representing as follows:
| 1. | Customer A represented 29% of the Company Trade receivables balance as of March 31, 2023 and December 31, 2022, respectively. |
| 2. | Customer B represented 28% and 23% of the Company Trade receivables balance as of March 31, 2023 and December 31, 2022, respectively. |
| 3. | Customer C represented 0% and 10% of the Company Trade receivables
balance as of March 31, 2023 and December 31, 2022, respectively. |
See note 13 for details regarding the
revenues from these customers.
The Company does not see any credit
risk regarding the trade receivable balance, as most of the remaining balance was paid off after the balance sheet date.
On
April 15, 2022 (the “Closing Date”), the Company’s Board of Directors approved a Reverse Stock Split in the ratio
of forty-six to-one. The Reverse Stock split became effective as of May 2, 2022.
On
March 8 ,2023 (the “Closing Date”), the Company’s Board of Directors approved an additional Reverse Stock Split in
the ratio of ten-to-one. The Reverse Stock split became effective as of April 18, 2023.
The
Company accounted for the Reverse Stock Splits on a retroactive basis pursuant to ASC 260. As a result, all common stock, Non-voting
Common stock, redeemable Convertible Preferred stock and options outstanding and exercisable for common stock, exercise prices and
loss per share amounts have been adjusted, on a retroactive basis, for all periods presented in these condensed consolidated
financial statements and the applicable disclosures, to reflect such Reverse Stock Split.
NOTE
4 – INVENTORIES:
| |
March 31,
2023 | | |
December 31,
2022 | |
Raw materials | |
$ | 640 | | |
$ | 593 | |
Finished goods | |
$ | 634 | | |
$ | 586 | |
| |
$ | 1,274 | | |
$ | 1,179 | |
Inventory
write-downs totaled to $7 and $147 during the three months ended March 31, 2023, and the year ended December 31, 2022, respectively.
NOTE
5 – LEASES:
| 1) | The
Company has an operating lease agreement for its facility in the United States, which expires on March 31, 2024. The Company is not reasonably
certain that it will exercise the 5-year extension option and hence, the extension period was excluded from the measurement of the ROU
asset and the lease liability. The lease payments are denominated in USD. |
| 2) | On
July 1, 2022, the Company entered into a new operating lease agreement for additional offices in the United States, which expires on
September 30, 2025. The lease payments are denominated in USD. |
| 3) | The
Company’s Israeli subsidiary has an operating lease agreement for a facility in Israel, which expires on April 30, 2023. The Company
does not have an option for extending the lease agreement. The lease payments are denominated in ILS and are indexed to the consumer
price index. |
| 4) | On
October 18, 2021, the Company entered into an agreement to sublease its facility to an unrelated third party in the United States. The
sublease ends March 31, 2024. The sublease is classified as an operating lease. The Company recognized lease income during the three
months ended March 31, 2023 in the amount of $48. |
| 5) | The
Company leases its motor vehicles under operating lease agreements. |
| 6) | The
Company’s Israeli subsidiary has an operating lease agreement for testing equipment in Israel, which expires on February 7, 2025.
The lease payments are denominated in ILS. |
NOTE
5 – LEASES (continued):
Supplemental
information related to leases is as follows:
| |
March
31,
2023 | | |
December
31,
2022 | |
Operating
leases: | |
| | |
| |
Operating
lease right-of-use assets | |
$ | 548 | | |
$ | 726 | |
Current
Operating lease liabilities | |
$ | 361 | | |
$ | 445 | |
Non-Current
Operating lease liabilities | |
$ | 159 | | |
$ | 237 | |
Total Operating
lease liabilities | |
$ | 520 | | |
$ | 682 | |
Other
information:
| |
Three months
ended March 31,
2023 | | |
Three months
ended
March 31,
2022 | |
Cash
paid for amounts included in the measurement of lease liabilities (cash paid in thousands) | |
$ | 210 | | |
$ | 161 | |
Weighted Average Remaining
Lease Term | |
| 1.44 | | |
| 1.51 | |
Weighted Average Discount
Rate | |
| 3.8 | % | |
| 2.5 | % |
The
lease costs components are as follows:
| |
Three months
ended March 31,
2023 | | |
Three
months
ended March 31,
2022 | |
Fixed
payments | |
$ | 182 | | |
$ | 158 | |
Variable
payments that depend on an index or rate | |
| 28 | | |
| 3 | |
Total operating
lease cost | |
$ | 210 | | |
$ | 161 | |
Maturities
of operating lease liabilities were as follows:
| |
March
31,
2023 | | |
December
31,
2022 | |
2023 | |
$ | 299 | (*) | |
$ | 476 | |
2024 | |
| 177 | | |
| 177 | |
2025 | |
| 70 | | |
| 70 | |
Total
operating lease payments | |
| 546 | | |
| 723 | |
Less:
imputed interest | |
| (26 | ) | |
| (41 | ) |
Present
value of lease liabilities | |
$ | 520 | | |
$ | 682 | |
| (*) | excluding
the three months ended March 31, 2023. |
NOTE
6 – LOANS:
| a. | As
a result of the COVID pandemic, the US and Israeli governments offered different programs
of financial aid. The Company participated in the following programs: |
On
July 1, 2020, the Company received funding from an American Bank under the Small Business Administration COVID19 EIDL Program in the
total of $150. The loan bears interest of 3.75% per annum, the principal shall be repaid in 360 equal monthly payments starting January
1, 2023, unless forgiven per program regulations (the “EIDL Loan”).
| b. | On December 9, 2020, the Company signed a new loan agreement with an Israeli based financial institution for a loan of up to 20 million NIS (“New Israeli Shekel”) (an amount of $6,000) (the “New Loan”). The Company received $3,000 on December 2020, and additional $2,000 in January 2021. The loan bears interest of 9.6% per annum. The interest shall first be paid in 12 payments starting February 1, 2021. Starting February 1, 2022, the loan principal and interest shall be repaid in 72 equal payments, plus a onetime interest payment after the 36th month. |
As
part of the loan agreement, the Company issued the new Lender warrants to acquire common stock in the amount of $1,500 (see Note 9 regarding
the warrants granted).
In
November 2021, the Company received additional funding in the amount of $1,000 from the New Lender. The loan bears interest of 9.6% per
annum. Starting February 1, 2022, the loan principal and interest shall be repaid in 72 equal monthly payments, plus a onetime interest
payment after the 24th month. The Company increased the value of the warrant issued to the New Lender to $1,800 (see also Note 9). As
of March 31, 2023, the total loan balance outstanding was $4,758 (including $1,198 current maturities).
The
loan covenants (the “covenants”) include a debt to EBITDA minimum ratio or a coverage ratio of the loan by current assets.
On
December 21, 2022, pursuant to the terms of the loan Agreement, the Company deposited $2 million to a Company-owned interest-bearing
bank account, or the “designated account” (as defined in the Agreement), to satisfy
the required obligation associated with the loan agreement. An additional $2 million was deposited in the designated account by
March 31, 2023.
As
of March 31, 2023, the Company was in compliance with the covenants.
As
of March 31, 2023, future payments are summarized as follows:
| |
| |
New Loan | |
New Loan |
| |
EIDL Loan | |
from December 2020 and January 2021-In NIS * | |
from November 2021- In NIS * |
2023 (**) | |
6 | |
2,765($765) | |
525($146) |
2024 | |
9 | |
5,567($1,540) | |
1,080($299) |
2025 | |
9 | |
3,684($1,019) | |
704($195) |
2026 | |
9 | |
3,684($1,019) | |
704($195) |
2027 | |
9 | |
3,684($1,019) | |
704($195) |
2028 and thereafter | |
129 | |
303($84) | |
60($15) |
Less- accumulated interest | |
(12) | |
(5,140) ($1,422) | |
(1,124) ($311) |
Total | |
159 | |
14,547($4,024) | |
2,653($734) |
| * | The
exchange rate used in translation is $1 – 3.615 New Israeli Shekel. |
| ** | excluding
the three months ended March 31, 2023. |
NOTE
7 – CONVERTIBLE NOTE:
During
December 2021 to April 2022, the Company offered up to $3,000 of the Company’s 6% convertible note where both
principal and 6% annual interest are due three years from the date of execution (the “Notes”). The Notes were
subject to optional and mandatory conversion into shares of the Company’s Common stock, $0.0001 par value. In January 2022 the
Company performed a first closing of $2,100 convertible notes out of the $3,000 offered, and in April 2022, a second closing of $60
convertible notes, which private placement was completed pursuant to an exemption from registration under Rule 506(b) of
the Securities Act of 1933, as amended (“Securities Act”) and was funded by this amount (less fees and expenses). The
notes were convertible at any time by the holders into common stock and automatically converted to common stock upon the
consummation of an Initial Public Offering (“IPO”) at a 40% discounted conversion price.
The
Notes had an optional conversion price at a 40% discount based on a $50m value in the event that an IPO is not consummated and if an
IPO is not consummated within 18 months of the issuance of the Notes, the value of the Notes would be set at 110% of their then balance.
Prior
to the IPO, discussed further in Note 2, the Company determined that the predominant scenario was the IPO event. The Company measured
the convertible note in its entirety at fair value with changes in fair value recognized as financial income or loss in accordance with
ASC 480-10. On May 17, 2022, the Company finalized its IPO, as discussed in Note 2 and the notes were converted into the Company’s
common stock. The following table presents a roll forward of the fair value of the Notes in the year ended December 31, 2022:
| |
December 31, 2022 | |
Fair value at the beginning of the period | |
$ | - | |
Additions | |
| 1,847 | |
Change in fair value reported in statement of comprehensive loss | |
| 1,753 | |
Conversion to the Company’s common stock | |
| (3,600 | ) |
Fair value at the end of the period | |
$ | - | |
The Company recorded financial expenses associated with the Notes during
the three months ended March 31, 2023, and March 31, 2022, in the amount of $0 and $1,075.
NOTE
8 – CONVERTIBLE LOAN:
On
March 28, 2017, the Company entered into a convertible loan agreement (the “CLA”) in an aggregate principal amount of
up to $ 2,000. Loans under this agreement bear interest of 10% per annum. Following an amendment in March 2022, which was approved
by the required majority of the CLA holders, the maturity date of the CLA was established to be the earlier of (i) January 1,
2023, (ii) event of default (as defined in the Agreement) or (iii) deemed liquidation event (as defined in the Company’s
certificate of incorporation), in which the lenders are entitled to receive an amount equal to 300% of the principal amount of the loan.
The
valuation was performed under alternative scenarios of consummating an IPO or remaining private.
Upon the consummation of the IPO, the CLA was automatically converted
into the Company’s common stock based on its contractual terms and conditions. For further information, see Note 2 above.
The
following is a roll forward of the fair values:
| |
Year
ended
December 31 | |
| |
2022 | |
Fair
value at the beginning of the year | |
$ | 4,905 | |
Change
in fair value reported in statement of comprehensive loss | |
| 1,648 | |
Conversion
to the Company’s common stock | |
| (6,553 | ) |
Fair
value at the end of the period | |
$ | - | |
The Company recorded financial expenses associated with the CLA during
the three months ended March 31, 2023, and March 31, 2022, in the amount of $0 and $996.
NOTE
9 – WARRANTS (*):
| a) | On August 24, 2016, the Company issued warrants to Comerica Bank (“Comerica”) for the purchase of 7,305 shares of the Company’s Series B Redeemable Preferred Stock at an exercise price of $10.2672 per share contemporaneously with obtaining a loan from Comerica which was fully repaid in 2018 (the “Comerica Warrants”). The Comerica Warrants are exercisable at any time during the contract period which ends on August 24, 2026. |
Additionally,
in connection with the consummation of the IPO and the change of the type of the stock from redeemable preferred stock to common stock
at conversion, the Company reassessed the Comerica Warrants. As part of the contractual terms and conditions of Comerica’s Warrants,
a portion of the warrants are exercisable, as of the IPO date, into the Company’s common stock. The Comerica Warrants are still
outstanding as of March 31, 2023. The Company has evaluated whether the Comerica Warrants are still classified as liabilities and concluded
that due to a change-of-control provision which may affect the exercise price or entitle Comerica to demand cash, instead of shares,
to settle the warrants, Comerica’s Warrants will continue to be classified as liabilities and will be exercisable into the Company’s
common shares.
During
the period from February 2018 through November 2020, the Company issued warrants to Mizrahi-Tefahot Bank (“Mizrahi”)
contemporaneously with obtaining a loan and a credit facility. The warrants are convertible into series B convertible redeemable preferred
stock or common stock in a qualified financing round. The number of series B convertible redeemable preferred stock is determined by
the lesser of (1) dividing the warrant amount (as determined under the contract) by the applicable exercise price which depends on the
triggering event as established in the contract, or (2) the lowest stock purchase price in a qualified financing round.
| b) | During
December 2020 and November 2021, the Company issued warrants to Migdalor contemporaneously
with obtaining a loan. The warrants can either be (1) converted into the Company’s
common stock (the number of which shall be determined based on the warrant amount established
in the contract and the Company’s valuation as defined in the contract, or based on
a triggering event), at any time during a period of 96 months), or (2) redeemed for
cash based on the lesser of a predetermined amount or a formula as set in the contract, at
any time and in Migdalor’s own discretion, during a period of 96 months from the
date of issue. These warrants were classified as liabilities mainly due to the redemption
feature over the options. |
Upon
the consummation of the IPO (as further described in Note 2 above), the Company converted the outstanding warrants issued to Mizrahi
and Migdalor into the Company’s common stock based on the contractual terms and conditions of the related warrant agreements.
The
table below shows the impact on the statement of comprehensive loss related to the Comerica warrants for the years ended December 31:
| |
March
31,
2023 | | |
December
31,
2022 | |
| |
U.S.
dollars in thousands | |
Outstanding
as of January 1 | |
| 8 | | |
| 2,149 | |
Fair
value changes | |
| - | | |
| 1,049 | |
Additions | |
| - | | |
| - | |
Conversion
to the Company’s common stock | |
| - | | |
| (3,190 | ) |
Outstanding
at the end of the period | |
| 8 | | |
| 8 | |
The Company recorded other financial expenses (income) during the three
months ended March 31, 2023 and March 31, 2022, in the amount of $0 and $1,058, respectively, in connection with these warrants.
| (*) | Adjusted
to reflect April 2023 reverse stock split, see note 3(j). |
NOTE
10 – COMMITMENTS AND CONTINGENCIES:
The
Company is obligated to repay certain research and development grants received from the Government of Israel in the form of a royalty
rate on future sales of products derived from the funded research and development activities. The aggregate amount of royalties to be
paid is determined based on 100% of the total grants received for qualified projects plus interest based on LIBOR. The Company may be
required to pay royalties based on previous years funding in periods after March 31, 2023, for the future sale of product that includes
technology developed and funded with these research and development grants received to date.
As
of March 31, 2023, the Company had received approximately $14,300 (approximately $15,500 including LIBOR) and repaid approximately
$10,000 in such grants.
During
the year 2022, the Company paid an amount of $221, due in regard to previous years.
As
of March 31, 2023, and December 31, 2022, the Company had a liability to pay royalties in the amount of approximately $931 and $900,
respectively.
NOTE
11 – SHAREHOLDERS’ EQUITY (*):
| a. | Change
in authorized stock |
On
May 2, 2022, the Company’s Board of Directors approved an amendment to the Company’s Bylaws, stating the number of authorized
stock to be increased, as described below:
| a. | Common stock- $0.0001 par value – authorized shares increase to 30,000,000 shares from 11,009, 315 shares. |
| b. | Non-voting common stock- $0.0001 par value-authorized shares remain 2,803,774 shares. |
| c. | Preferred stock- $0.0001 par value - authorized shares increase to 10,000,000 shares from 7,988,691 shares. |
| b. | On May 16, 2022, the Company filed with the Secretary of State of the State of Delaware an amended and restated certificate of incorporation (the “A&R COI”), which became effective immediately. The A&R COI did not change the Company’s authorized shares of common stock and preferred stock of 42,803,774 authorized shares of common stock., 2,803,774 shares of non-voting common stock and 10,000,000 shares of preferred stock. |
| c. | During January and February 2023, the Company purchased 7,920 shares of its common stock, for a total price of $50. (Total of 10,690 common stock are held by the company as treasury shares) |
| d. | Share-based
compensation: |
| 1 | A
summary of the Company’s share options, granted to employees, directors, under option plans is as follows: |
| |
Number of options | | |
Weighted Average Exercise
Price | | |
Weighted Average Remaining Contractual Life | |
Outstanding – January 1, 2023 | |
| 96,458 | | |
$ | 4.89 | | |
| 5.34 | |
Granted | |
| - | | |
$ | - | | |
| | |
Exercised | |
| - | | |
$ | - | | |
| | |
Expired and forfeited | |
| (435 | ) | |
$ | 40.0 | | |
| | |
| |
| | | |
| | | |
| | |
Outstanding – March 31, 2023 | |
| 96,023 | | |
$ | 4.7 | | |
| 5.12 | |
Exercisable – March 31, 2023 | |
| 79,076 | | |
$ | 2.1 | | |
| 4.22 | |
See
also Note 2 above regarding warrants granted to the underwriters upon the consummation of the IPO in consideration for their underwriting
services.
NOTE 11 – SHAREHOLDERS’
EQUITY (*) (continued):
| 2) | Restricted
Stock Units (*): |
| |
March 31 2023 | |
| |
Number of RSUs | | |
Weighted-Average Grant Date Fair Value | |
RSUs outstanding at the beginning of the year | |
| 59,200 | | |
$ | 16.2 | |
Granted during the period | |
| - | | |
| - | |
Exercised during the period | |
| - | | |
| - | |
Forfeited during the period | |
| (1,200 | ) | |
| - | |
Outstanding as of March 31, 2023 | |
| 58,000 | | |
$ | 16.2 | |
| (*) | Adjusted
to reflect April 2023 reverse stock split, see note 3(j). |
NOTE
12 – BASIC AND DILUTED LOSS PER SHARE (*):
Basic net loss per share is computed using the weighted average number
of shares of common stock and fully vested RSUs outstanding during the period, net of treasury shares. In computing diluted loss per share,
basic loss per share is adjusted to take into account the potential dilution that could occur upon: (i) the exercise of options and non-vested
RSUs granted under employee stock compensation plans, and the exercise of warrants using the treasury stock method; and (ii) the conversion
of the convertible redeemable preferred stock, and convertible loan using the “if-converted” method, by adding to net loss
the change in the fair value of the convertible loan, net of tax benefits, and by adding the weighted average number of shares issuable
upon assumed conversion of these instruments. For further details on the effects on the instruments described below, please see note 2
above.
Options
to purchase 96,023 and 87,317 shares of common stock at an average exercise price of $4.7 and $1.516 per share were outstanding as of
March 31, 2023, and March 31, 2022, respectively, but were not included in the computation of diluted EPS because to do so would have
had antidilutive effect on the basic loss per share.
RSU’s
to purchase 59,200 shares of common stock at an average grant date fair value of $16.2 per share were outstanding as of March 31,
2023 but were not included in the computation of diluted EPS because to do so would have had antidilutive effect on the basic loss
per share.
Redeemable
convertible Preferred stock, which was convertible into 773,108 shares of common stock was outstanding as of March 31, 2022, but was
not included in the computation of diluted EPS because to do so would have had antidilutive effect on the basic loss per share.
The
convertible loan was not included in the calculation of the diluted loss per share as the loan was convertible into shares of common
stock only upon the occurrence of a contingent event which had yet to occur as of March 31, 2022. For more details see note 8.
Warrants
convertible into 25,624 of the Company’s Redeemable convertible preferred stock were outstanding as of March 31, 2022, but were
not included in the computation of diluted EPS because to do so would have had an antidilutive effect on the basic loss per share.
Warrants
convertible into 7,305 and 7,736 of the Company’s common stock were outstanding as of March 31, 2023, and 2022, respectively, but
were not included in the computation of diluted EPS because to do so would have had an antidilutive effect on the basic loss per share.
Warrants
convertible into 29,487 of the Company’s common stock were outstanding as of March 31, 2023, and December 31, 2022, but were not
included in the computation of diluted EPS because to do so would have had an antidilutive effect on the basic loss per share.
| (*) | Adjusted
to reflect April 2023 reverse stock split, see note 3(j). |
NOTE 13 – ENTITY
WIDE INFORMATION AND DISAGREGATED REVENUES:
The Company operates as one operating segment (developing
and marketing access broadband equipment for copper and fiber networks).
| a. | Geographic information: |
The following is a summary of revenues by geographic areas. Revenues
attributed to geographic areas, based on the location of the end customers:
| |
Three months Ended
March 31 | |
| |
2023 | | |
2022 | |
North America | |
| 625 | | |
| 568 | |
Europe, the Middle East and Africa | |
| 971 | | |
| 1,203 | |
Asia Pacific | |
| 252 | | |
| 97 | |
| |
| 1,848 | | |
| 1,868 | |
| b. | Revenues from contract liability: |
| |
March 31,
2023 | | |
December 31, 2022 | |
Opening balance | |
$ | 648 | | |
$ | 673 | |
Revenue recognized that was included in the contract liability balance at the beginning of the year | |
| (141 | ) | |
| (593 | ) |
Additions | |
| 106 | | |
| 568 | |
Remaining performance obligations | |
$ | 613 | | |
$ | 648 | |
As of March 31, 2023, the aggregate amount
of the transaction price allocated to the remaining performance obligation is $613, and the Company will be recognized this revenue over
the next 14 months.
| c. | The Company’s long-lived assets are located as follows: |
Property and Equipment, net:
| |
| | |
| |
Israel | |
$ | 72 | | |
$ | 75 | |
North America | |
| 4 | | |
| 5 | |
| |
$ | 76 | | |
$ | 80 | |
Operating lease right of use assets:
| |
| | |
| |
Israel | |
$ | 150 | | |
$ | 260 | |
North America | |
| 398 | | |
| 466 | |
| |
$ | 548 | | |
$ | 726 | |
NOTE 13 – ENTITY WIDE INFORMATION AND DISAGREGATED REVENUES
(continued):
| d. | Customers representing 10% or more of net revenues and the amount of revenues recognized are as follows: |
| |
Three months ended
March 31, 2023 | |
Customer A | |
| (*)42 % | |
$ | 774 | |
| |
Three months ended
March 31, 2022 | |
Customer A | |
| 59% | | |
$ | 1,114 | |
(*) | Included in Europe, the Middle East and Africa. |
The majority of the Company’s revenues are recognized
at a point in time.
NOTE 14 – RELATED PARTY
TRANSACTIONS:
| a. | In March 2017, the Company issued a convertible loan to investors (see note 8). The Company’s CEO
participated in the convertible loan in an amount of $26 and received identical terms and conditions as other investors of the convertible
loan. |
On May 17, 2022, the
Company finalized its IPO offering (see Note 2) and the convertible loan was converted.
| b. | In December 15, 2022, the Company issued 59,200 Restricted Stock Units (“RSUs”) to Directors,
officers, consultants and employees. The CEO received an amount of 12,500, the CFO received an amount of 2,500 and the Directors 10,000
(*). |
(*) | Adjusted to reflect April 2023 reverse stock split, see note 3(j). |
NOTE 15 – SUBSEQUENT EVENTS:
| a. | The Company evaluates events or transactions that occur after
the balance sheet date but prior to the issuance of the condensed consolidated financial statements to identify matters that require
additional disclosure. For its condensed consolidated financial statements as of March 31, 2023, and for the three months then ended,
the Company evaluated subsequent events through May 12, 2023, the date that the condensed consolidated financial statements were issued.
The Company has concluded that no subsequent event has occurred that require disclosure other than the below. |
|
b. |
On March 8, 2023 (the “Closing Date”), the Company’s Board of Directors approved an additional Reverse Stock Split in the ratio of ten-to-one. The Reverse Stock split became effective as of April 18, 2023. See note 3(j). |
| c. | On May 4, 2023, the Company entered into a securities purchase agreement with an accredited investor (the “Investor”), pursuant to which the Company agreed to issue and sell to the Investor in a private placement (the “Offering”) (i) 190,000 shares (the “Shares”) of common stock of the Company, $0.0001 par value (ii) 754,670 pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 754,670 shares of Common Stock and (iii) warrants to purchase up to 944,670 shares of Common Stock (“Common Warrants” and collectively with the Shares and the Common Warrants, the “Securities”) for a purchase price of $3.705 per share of Common Stock and related Common Warrant or $3.7049 per Pre-Funded Warrant and related Common Warrant, for a total aggregate gross proceeds of approximately $3.5 million. The Offering closed on May 8, 2023. The Common Warrants have an exercise price of $3.58 per share, are exercisable immediately upon issuance and expire five and one-half years following the issuance. H.C. Wainwright & Co., LLC acted as the exclusive placement agent
for the issuance and sale of the Securities. The Company has agreed to pay up to an aggregate cash fee equal to 7.0% of the gross proceeds
received by the Company from the Offering. The Company also agreed to pay the placement agent $65,000 for non-accountable expenses and
a management fee equal to 1.0% of the gross proceeds raised in the Offering. The Company also agreed to issue to the placement agent,
or its designees, unregistered warrants to purchase up to 7.0% of the aggregate number of the Shares and Pre-Funded Warrants sold to the
Investor (or warrants to purchase up to 66,127 shares of Common Stock) at an exercise price per share of $4.6313 and a term of five and
one-half years. (the “May 2023 Private Placement”). |