U. S. Securities and Exchange Commission

Washington, D. C. 20549

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File No. 001-41375

ACTELIS NETWORKS, INC.

(Exact name of registrant as specified in its charter)

Delaware		52-2160309
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer I.D. No.)

4039 Clipper Court, Fremont, CA 94538

(Address of principal executive offices)

(510) 545-1045

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.0001 par value per share		ASNS		The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of November 14, 2024, 6,253,715 shares of the Company’s common stock, par value $0.0001 per share were issued and outstanding.

ACTELIS NETWORKS, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2024

TABLE OF CONTENTS

		PAGE
PART I - FINANCIAL INFORMATION		F-1

Item 1.	Condensed Consolidated Interim Financial Statements (Unaudited)	F-1
	Condensed Consolidated Balance Sheets as of September 30, 2024 (unaudited) and December 31, 2023	F-3
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2024 and 2023	F-5
	Unaudited Condensed consolidated statements of redeemable convertible preferred stock, warrants to placement agent and Shareholders’ equity	F-6
	Unaudited Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2024 and 2023	F-8
	Notes to Condensed Consolidated Interim Financial Statements	F-10
Item 2.	Management’s Discussion & Analysis of Financial Condition and Results of Operations	1
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	9
Item 4.	Controls and Procedures	9

PART II - OTHER INFORMATION		11

Item 1.	Legal Proceedings	11
Item 1A.	Risk Factors	11
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults Upon Senior Securities	13
Item 4.	Mine Safety Disclosures	13
Item 5	Other information	13
Item 6.	Exhibits	14

SIGNATURES		15

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ACTELIS NETWORKS, INC.

QUARTERLY REPORT FOR THE PERIOD ENDED September 30, 2024

(Unaudited)

F-1

ACTELIS NETWORKS, INC.

QUARTERLY REPORT FOR THE PERIOD ENDED September 30, 2024

(Unaudited)

TABLE OF CONTENTS

	Page
Condensed consolidated financial statements (unaudited) – U.S. dollars in thousands:
Condensed consolidated balance sheets	F-3 - F-4
Condensed consolidated statements of comprehensive loss	F-5
Condensed consolidated statements of mezzanine and Shareholders' equity	F-6 - F-7
Condensed consolidated statements of cash flows	F-8 - F-9
Notes to condensed consolidated financial statements	F-10 - F-23

F-2

ACTELIS NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(U. S. dollars in thousands)

	September 30, 2024		December 31, 2023
Assets
CURRENT ASSETS:
Cash and cash equivalents		2,241		620
Short term deposits		-		197
Restricted cash equivalents		300		1,565
Trade receivables, net of allowance for credit losses of $168 as of September 30, 2024, and December 31, 2023.		1,828		664
Inventories		2,372		2,526
Prepaid expenses and other current assets, net of allowance for doubtful debts of $181 and $144 as of September 30, 2024, and December 31, 2023, respectively		481		340
TOTAL CURRENT ASSETS		7,222		5,912

NON-CURRENT ASSETS:
Property and equipment, net		52		61
Prepaid expenses		592		592
Restricted cash and cash equivalents		-		3,330
Restricted bank deposits		91		94
Severance pay fund		200		238
Operating lease right of use assets		515		918
Long term deposits		78		78
TOTAL NON-CURRENT ASSETS		1,528		5,311

TOTAL ASSETS		8,750		11,223

F-3

ACTELIS NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

UNAUDITED

(U. S. dollars in thousands)

	September 30, 2024			December 31, 2023
Liabilities, Mezzanine Equity and shareholders’ equity
CURRENT LIABILITIES:
Credit line		927			-
Current maturities of long-term loans		-			1,335
Trade payables		893			1,769
Deferred revenues		277			389
Employee and employee-related obligations		760			737
Accrued royalties		1,033			1,062
Current maturities of operating lease liabilities		450			498
Other current liabilities		735			1,122
TOTAL CURRENT LIABILITIES		5,075			6,912

NON-CURRENT LIABILITIES:
Long-term loan, net of current maturities		150			3,154
Deferred revenues		160			71
Operating lease liabilities		62			405
Accrued severance		226			270
Other long-term liabilities		16			23
TOTAL NON-CURRENT LIABILITIES		614			3,923
TOTAL LIABILITIES		5,689			10,835

COMMITMENTS AND CONTINGENCIES (Note 10)

MEZZANINE EQUITY
Redeemable convertible preferred stock - $0.0001 par value, 10,000,000 authorized as of September 30, 2024, December 31, 2023. None issued and outstanding as of September 30, 2024, December 31, 2023.		-			-

WARRANTS TO PLACEMENT AGENT (Note 7)		228			159

SHAREHOLDERS' EQUITY :
Common stock, $0.0001 par value: 30,000,000 shares authorized: 6,254,664 and 3,007,745 shares issued and outstanding as of September 30, 2024, and December 31, 2023, respectively.		1			1
Non-voting common stock, $0.0001 par value: 2,803,774 shares authorized as of September 30, 2024, and December 31, 2023, None issued and outstanding as of September 30, 2024, and December 31, 2023.		-			-
Additional paid-in capital		45,095			39,916
Accumulated deficit		(42,263	)		(39,688	)
TOTAL SHAREHOLDERS’ EQUITY		2,833			229

TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY		8,750			11,223

The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).

F-4

ACTELIS NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

(U. S. dollars in thousands)

	Nine months ended September 30,						Three months ended September 30,
	2024			2023			2024			2023

REVENUES		6,698			4,589			2,541			845
COST OF REVENUES		2,792			3,043			798			619
GROSS PROFIT		3,906			1,546			1,743			226

OPERATING EXPENSES:
Research and development expenses		1,793			2,117			543			691
Sales and marketing expenses		2,001			2,332			727			691
General and administrative expenses		2,398			2,805			790			971
Other income		(163	)		-			-			-
TOTAL OPERATING EXPENSES		6,029			7,254			2,060			2,353

OPERATING LOSS		(2,123	)		(5,708	)		(317	)		(2,127	)
Interest expense		(590	)		(512	)		(246	)		(161	)
Other Financial income, net		138			1,865			52			1,421
NET COMPREHENSIVE LOSS FOR THE PERIOD		(2,575	)		(4,355	)		(511	)		(867	)

Net loss per share attributable to common shareholders – basic and diluted	$	(0.59	)	$	(1.93	)	$	(0.09	)	$	(0.32	)
Weighted average number of common stocks used in computing net loss per share – basic and diluted		4,429,738			2,254,235			6,014,548			2,685,626

The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).

F-5

ACTELIS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY (continued)

(UNAUDITED)

U.S. dollars in thousands (except number of shares)

	Redeemable Convertible Preferred Stock		Warrants To Placement Agent		Common Stock					Non-voting Common Stock				Additional						Total
Nine Months Ended	Amount		Amount		Number of shares			Amount		Number of shares		Amount		paid-in capital			Accumulated deficit			shareholders' equity
BALANCE AS OF JANUARY 1, 2023		-		-		1,737,986			1		-		-		36,666			(33,402	)		3,265
Share based compensation		-		-		-			-		-		-		298			-			298
Repurchase of common stock		-		-		(7,920	)		*		-		-		(50	)		-			(50	)
Issuance of common stock and pre-funded warrants upon private placement, net of underwriting commissions and other offering costs		-		104		190,000			*		-		-		1,356			-			1,356
Exercise of options into common stock		-		-		19,443			*		-		-		10			-			10
Exercise of pre-funded warrants into common stock		-		-		754,670			*		-		-		-			-			*
Reclassification of warrants from liabilities to equity		-		-		-			-		-		-		314			-			314
Net comprehensive loss for the period		-		-		-			-		-		-		-			(4,355	)		(4,355	)
BALANCE AS OF SEPTEMBER 30, 2023		-		104		2,694,179			1		-		-		38,594			(37,757	)		838

BALANCE AS OF JANUARY 1, 2024		-		159		3,007,745			1		-		-		39,916			(39,688	)		229
Share based compensation						-			-		-		-		259						259
Vesting of RSUs		-		-		28,228			*		-		-		*			-			-
Issuance of common stock, net of offering costs (note 7f)		-		-		227,939			*		-		-		316			-			316
Exercise of options into common stock		-		-		21,225			*		-		-		32			-			32
Warrant to lender		-		-		-			-		-		-		61			-			61
Exercise of Pre funded warrants into common stock (Note 7b)		-		-		970,187			*		-		-					-			*
Warrant inducement agreement, net of offering costs (Note 7e)		-		27		999,670			*		-		-		1,951			-			1,951
Warrant inducement agreement, net of offering costs (Note 7d)		-		42		999,670			*		-		-		2,560			-			2,560
Net comprehensive loss for the period											-		-					(2,575	)		(2,575	)
BALANCE AS OF SEPTEMBER 30, 2024		-		228		6,254,664			1		-		-		45,095			(42,263	)		2,833

*	Represents an amount less than $1 thousand.

The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited)

F-6

ACTELIS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY (continued)

(UNAUDITED)

U.S. dollars in thousands (except number of shares)

	Redeemable Convertible Preferred Stock		Warrants To Placement Agent		Common Stock				Non-voting Common Stock				Additional					Total
Three Months Ended	Amount		Amount		Number of shares		Amount		Number of shares		Amount		paid-in capital		Accumulated deficit			shareholders' equity
BALANCE AS OF JUNE 30, 2023		-		104		1,930,718		1		-		-		38,174		(36,890	)		1,285
Share based compensation		-		-		-		-		-		-		106		-			106
Exercise of options into common stock		-		-		8,791		*		-		-		*		-			*
Exercise of pre-funded warrants into common stock		-		-		754,670		-		-		-		*		-			*
Reclassification of warrants from liabilities to equity		-		-		-		-		-		-		314		-			314
Net comprehensive loss for the period		-		-		-		-		-		-		-		(867	)		(867	)
BALANCE AS OF SEPTEMBER 30, 2023		-		104		2,694,179		1		-		-		38,594		(37,757	)		838

BALANCE AS OF JUNE 30, 2024		-		201		5,017,322		1		-		-		42,687		(41,752	)		936
Share based compensation		-		-						-		-		80					80
Vesting of RSUs		-		-		9,733		*		-		-		-					-
Warrant to lender		-		-		-		-		-		-		61					61
Warrant inducement agreement, net of offering costs (Note 7e)		-		27		999,670		*		-		-		1,951					1,951
Issuance of common stock, net of offering costs (note 7d)		-		-		227,939		*		-		-		316					316
Net comprehensive loss for the period		-		-						-		-				(511	)		(511	)
BALANCE AS OF SEPTEMBER 30, 2024		-		228		6,254,664		1		-		-		45,095		(42,263	)		2,833

*	Represents an amount less than $1 thousand.

The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).

F-7

ACTELIS NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended September 30,
	2024			2023
	U.S. dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period		(2,575	)		(4,355	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		11			20
Changes in fair value related to warrants to lenders and investors		-			(1,658	)
Warrant issuance costs		-			223
Inventories write-downs		39			132
Interest expenses		(56	)		-
Exchange rate differences		(58	)		(365	)
Share-based compensation		259			298
Financial income from short and long term bank deposit		(11	)		(78	)
Changes in operating assets and liabilities:
Trade receivables		(1,164	)		2,319
Net change in operating lease assets and liabilities		12			25
Inventories		115			(1,651	)
Prepaid expenses and other current assets		(140	)		62
Long term prepaid expenses		-			(100	)
Trade payables		(875	)		411
Deferred revenues		(23	)		(262	)
Other current liabilities		(350	)		(185	)
Other long-term liabilities		35			(30	)
Net cash used in operating activities		(4,781	)		(5,194	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Short term deposits		198			1,363
Long term Restricted bank deposits		-			75
Long term deposits		-			(2	)
Purchase of property and equipment		(1	)		(6	)
Net cash provided by investing activities		197			1,430
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options		32			10
Proceeds from issuance of common stocks, pre-funded warrants and warrants		*			3,500
Proceeds from issuance common stock, net of offering costs		316			-
Proceeds from credit lines with bank, net		927			-
Proceeds from Warrant inducement agreement		5,248
Underwriting discounts and commissions and other offering costs		(668	)		(291	)
Early repayment of long-term loan		(4,038	)
Repayment of long-term loan		(193	)		(583	)
Repurchase of common stock		-			(50	)
Net cash provided by financing activities		1,624			2,586
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS		(14	)		(12	)

DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS		(2,974	)		(1,190	)
BALANCE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD		5,515			4,279
BALANCE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS AT END OF THE PERIOD		2,541			3,089

*	Represents an amount less than $1 thousand.

The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).

F-8

ACTELIS NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(UNAUDITED)

	September 30
	2024		2023
	U.S. dollars in thousands

RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents		2,241		682
Restricted cash equivalents, current		300		-
Restricted cash and cash equivalents, non-current		-		2,407
Total cash, cash equivalents and restricted cash		2,541		3,089

	Nine months ended September 30,
	2024		2023
	U.S. dollars in thousands
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	576	$	512
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
Issuance costs of common stock, pre-funded warrants and warrants		-	$	104

Reclassification of warrants from liability to equity upon amendment to private placement agreement	$	-	$	314
Issuance costs of the Warrant inducement agreement	$	2,651		-
Warrant to lender	$	61		-

The accompanying notes are an integral part of these condensed consolidated financial statements (Unaudited).

F-9

ACTELIS NETWORKS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. DOLLARS IN THOUSANDS

NOTE 1 – GENERAL:

Actelis Networks, Inc. (hereafter -the Company) was established in 1998, under the laws of the state of Delaware. The Company has a wholly-owned subsidiary in Israel, Actelis Networks Israel Ltd. (hereafter – the Subsidiary). The Company is engaged in the design, development, manufacturing, and marketing of cyber hardened, hybrid fiber, networking solutions for IoT and Telecommunication governmental agencies and companies. The Company’s customers include governmental agencies, providers of telecommunication services, enterprises as well as resellers of the Company’s products. On May 12, 2022, the Company accepted a notification of effectiveness from the SEC, and on May 17, 2022, completed its IPO. The Company’s Common Stock is listed on the NASDAQ.

The Company has incurred significant losses and negative cash flows from operations. Net loss was $2,575 and $4,355 for the nine months ended September 30, 2024, and September 30, 2023, respectively. During the nine months ended September 30, 2024, and September 30, 2023, the Company had negative cash flows from operations of $4,781 and $5,194, respectively. As of September 30, 2024, the Company’s accumulated deficit was $42,263. The Company has funded its operations to date through equity and debt financing and has cash on hand (including restricted cash equivalents) of $2,541 restricted bank deposits of $91 as of September 30, 2024. 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, including debt refinancing which shall release restricted cash, then it will need to execute a new cost reduction plan in addition to previous cost reduction plans that were executed so far. 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 has determined that the Company does not have sufficient resources to meet its operating obligations for at least one year from the issuance date of these condensed consolidated financial statements. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. These consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.

On October 7, 2023, Hamas launched a series of attacks on civilian and military targets in Southern and Central Israel, to which the Israel Defense Forces have responded. In addition, both Hezbollah and the Houthi movement have attacked military and civilian targets in Northern Israel, to which Israel has responded, including through increased air and ground operations in Lebanon. In addition, the Houthi movement has attacked international shipping lanes in the red sea. Further, on April 2024, and on October 2024, Iran launched a series of drone and missile strikes against Israel, to which Israel has responded. To date our operations and financial results have not been materially affected. The Company continues to monitor its ongoing activities and will make adjustments in its business if needed, including updating any estimates or judgments impacting its financial statements as appropriate, while supporting the safety and well-being of its employees. It is currently not possible to predict the effects of such conflicts and its impact on the Company’s business, operations or financial conditions. We continue to monitor political and military developments closely and examine the consequences for our business, results of operations and financial condition.

F-10

ACTELIS NETWORKS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. DOLLARS IN THOUSANDS

NOTE 1 – GENERAL: (continued):

On November 21, 2023 we applied for an Israeli government grant associated with the Swords of Iron war declared by the State of Israel following the October 7, 2023 attack by Hamas.

The Company was found eligible and received an amount of $163 which was recognized as other income during the second quarter in 2024. The grant is not repayable.

On August 25, 2023, the Company received a notification letter from the Nasdaq Staff indicating that the company was not in compliance with Nasdaq Listing Rule 5550(b)(1) due to the company's failure to meet the Minimum Shareholders’ Equity Requirement or any alternatives to such requirement. In order to maintain listing on the Nasdaq Capital Market, the company has submitted a plan of compliance addressing how we intended to regain compliance. The company had until February 21, 2024 to evidence compliance with the Minimum Shareholders’ Equity Requirement.

On March 27, 2024, the Company received a delist determination letter (the “Delist Letter”) from the Staff advising the Company that the Staff had determined to delist the Company’s securities from Nasdaq due to its non-compliance with the Equity Rule unless the Company timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”). The Company timely requested a hearing before the Panel. Following the hearing, on June 10, 2024, the Panel granted the Company’s request for continued listing subject to the Company evidencing compliance with the Minimum Shareholders’ Equity Requirement by August 30, 2024.

On August 27, 2024, the Company received formal written notice from the Nasdaq Staff confirming that the Company has evidenced compliance with all applicable criteria for continued listing on The Nasdaq Capital Market as set forth in Nasdaq Listing Rule 5550. In accordance with Nasdaq Listing Rule 5815(d)(4)(B), the Company will remain subject to Panel monitor for equity compliance through August 27, 2025.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES:

Basis of presentation

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with Article 10 of the Securities and Exchange Commission (“SEC”)’s Regulation S-X. As permitted under those rules, certain footnotes and other financial information that are normally required by generally accepted accounting principles in the United States (“U.S. GAAP”) can be condensed or omitted. These financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of its financial position as of and for the periods presented. These condensed consolidated financial statements and notes thereto are unaudited and should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2023. The results of operations for the three and nine months ended September 30, 2024, are not necessarily indicative of results that could be expected for the 2024 fiscal year or any other interim period or for any other future year. All intercompany transactions and balances have been eliminated in consolidation.

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.

F-11

ACTELIS NETWORKS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. DOLLARS IN THOUSANDS

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES: (continued):

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.

The Company measured the fair value of the warrants it issued (see note 5) based on Level 3 inputs, and the warrants liability amounted to $8 as September 30, 2024 and December 31, 2023, are presented in the Other current liabilities in the accompanying condensed consolidated balance sheets.

As of September 30, 2024, and December 31, 2023, the fair values of the Company’s cash and cash equivalents, restricted cash and cash equivalents, short and long-term deposits, trade receivables, trade payables, long-term loan, restricted bank deposits, Severance pay fund and other current assets approximated the carrying values of these instruments presented in the Company’s condensed consolidated balance sheets because of their nature.

Concentration of risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and trade receivables. Cash and cash equivalents and restricted cash are placed with banks and financial institutions in the United States and Israel.

Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, present minimal credit risk with respect to those investments.

The Company’s trade receivables are derived primarily from telecommunication operators, the Company’s reseller customers and enterprises located mainly in the United States, Europe, and Asia.

Credit risk with respect to trade receivables exists to the full extent of the amounts presented in the condensed consolidated financial statements. Management makes judgments as to its ability to collect outstanding accounts receivable and provides allowances for the applicable portion of accounts receivable when collection becomes doubtful.

Management provides allowances based upon a specific review of all significant outstanding invoices, analysis of its historical collection experience, and current economic trends. If the historical data used to calculate the allowance for credit losses does not reflect the Company’s future ability to collect outstanding accounts receivable, additional provisions for credit losses may be needed, and the future results of operations could be materially affected.

F-12

ACTELIS NETWORKS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. DOLLARS IN THOUSANDS

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES: (continued):

The Company has customers balances representing 10% or more of Trade receivables as follows:

Customer A represented 0% and 30% of the Company Trade receivables balance as of September 30, 2024, and December 31, 2023, respectively.

Customer B represented 4.5 % and 11% of the Company Trade receivables balance as of September 30, 2024, and December 31, 2023, respectively.

Customer C represented0 % and 11% of the Company Trade receivables balance as of September 30, 2024, and December 31, 2023, respectively.

Customer D represented 38% and 0% of the Company Trade receivables balance as of September 30, 2024, and December 31, 2023, respectively.

Customer E represented 21.4% and 0% of the Company Trade receivables balance as of September 30, 2024, and December 31, 2023, respectively.

The Company does not see any credit risk regarding the major trade receivable balance.

New Accounting Pronouncements

Accounting Pronouncements effective in future periods

In November 2023, the FASB issued ASU No. 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU improves reportable segments disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the potential impact of this guidance on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09 Improvements to Income Tax Disclosures. The ASU improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. For public business entities, the ASU is effective for annual periods beginning after December 15, 2024. The Company is evaluating the potential impact of this guidance on its consolidated financial statements.

NOTE 3 – INVENTORIES:

	September 30, 2024		December 31, 2023
Raw materials		1,344		757
Finished goods		1,028		1,769
		2,372		2,526

Inventory write-downs amounted to $39 and $132 during the nine months ended September 30, 2024, and 2023, respectively and $14 and $35 during the three months ended September 30 2024 and 2023, respectively. Inventories write-downs are recorded in cost of revenues.

NOTE 4 – LOANS:

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 Economic Injury Disaster Loan (the “EIDL Loan”) from an American Bank under the Small Business Administration COVID19 Program in the total of $150. The loan matures in June, 2050 and bears interest of 3.75% per annum, payable monthly commencing on January 1, 2023, unless forgiven per program regulations. As of September 30, 2024, the total loan balance outstanding was $150.

F-13

ACTELIS NETWORKS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. DOLLARS IN THOUSANDS

NOTE 4 – LOANS: (continued):

On December 9, 2020, the Company signed a new loan agreement with an Israeli based financial institution (“Migdalor”) for a loan of up to 20 million NIS ("New Israeli Shekel") (an amount of $6,000). 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 one-time 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.

In November 2021, the Company received additional funding in the amount of $1,000 from Migdalor. 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 Migdalor to $1,800. Upon the consummation of the IPO, the Company converted all the above outstanding warrants issued to Migdalor into the Company’s common stock based on the contractual terms and conditions of the related warrant agreements.

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 $2,000 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 $2,000 was deposited in the designated account during the year ended December 31, 2023, which was classified in Restricted cash equivalents in the condensed Consolidated Balance Sheet.

As of September 30, 2024, the Company was in compliance with the covenants of the Migdalor loan.

In February 2024, the Company performed a partial early repayment of Migdalor Loan in the amount of 2 million NIS (approximately $550). During April and May 2024, the Company made an additional partial early repayment of Migdalor loan in the amount of 10.9 million NIS approximately $2,933). In May 2024, the Company signed an amendment to the agreement with Migdalor, pursuant to which the remaining $470 of the one-time interest payment which was originally due in January 2024 to Migdalor will be paid in 12 equal monthly payments bearing 9.6% interest from February 2024 till February 2025. In addition, the Company is obligated to issue Migdalor warrants to acquire common stock for up to $150 subject to the agreed upon formula. The Company has a paid, during July 2024, a total amount of $196 (for the periods from February to June) of the one-time interest payment.

In July 2024, the company repaid the remaining loan balance to Migdalor, totaling 1.16 million ILS (approximately 0.3$ million )

As of September 30, 2024, the total outstanding of the one-time interest payment was 0.7 million NIS (approximately $0.2 million).

On January 15, 2024, the Subsidiary entered into a credit agreement with Bank Mizrahi-Tefahot. The Credit Agreement provides for a $1,500 credit facility available to be used by the Subsidiary (“New Credit Line”). Under the New Credit Line, which will be secured by the Subsidiary’s customer receivables, the Subsidiary will pay an annual fixed interest at a Federal SOFR rate plus 5.5% on any amount withdrawn under the New Credit Line. The New Credit Line, at an annual fixed interest rate of 1.5% for unused credit amount, expires on December 27, 2024, subject to extension.

Under the Credit Agreement, the Company is permitted to draw upon the New Credit Line for customer invoices that meet the following conditions:

(a)

Throughout the duration of the New Credit Line, the Company may present customer receivables and receive credit financing that does not exceed 80% of the aggregate amount of the open customer invoices securing the New Credit Facility; The credit financing is to be repaid within 90 days.

(b)

Customer invoices are payable within 90 days from the date of the Company’s monthly report to the Lender; and

(c)

No single customer of the Company may account for open customer invoices securing over 30% of the total borrowed amount under the New Credit Line.

The Credit Line balance drawn will be examined every month and adjusted up to every three months and Repayment of the Credit Line will be made up to every three months subject to the expiration of the financing period for the invoices that were financed. The Company may refinance newly issued invoices at any time up to the Credit Line limit and subject to the terms of the Credit Line.

As of September 30, 2024, the Subsidiary used $0.9 million of the credit line.

F-14

ACTELIS NETWORKS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. DOLLARS IN THOUSANDS

NOTE 5 – WARRANTS:

The company has several types of warrants. The warrants classified as liability are presented in this note, and the equity warrants are presented under note 7.

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 which occurred in May 2022, and the change of the type of the stock from redeemable preferred stock to common stock at conversion, the Company reassessed the Comerica Warrants. As part of the contractual terms and conditions of Comerica’s Warrants, a portion of the warrants are exercisable, as of the IPO date, into the Company’s common stock.

The 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. The Comerica Warrants are still outstanding as of September 30, 2024.

On May 8, 2023, the Company completed a fund-raising round. Upon the consummation of the Offering and pursuant to an agreement entered into with the Holder and the underwriter, the Company issued warrants to purchase shares of Common Stock. Such warrants were classified as liabilities based on the terms of the underlying agreement. On September 30, 2023, these warrants were reclassified to equity due to an amendment to the warrants’ agreements (for further details see also Note 7b). On June 6, 2024, these warrants were exercised pursuant to the inducement agreement, as described in notes 7d below.

NOTE 6 – 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. The Company may be required to pay royalties based on previous years funding in periods after September 30, 2024, for the future sale of product that includes technology developed and funded with these research and development grants received to date.

As of September 30, 2024, the Company had received approximately $14,300 (approximately $15,830 including interest) and repaid approximately $10,518 in such grants.

As of September 30, 2024, and December 31, 2023, the Company had a liability to pay royalties in the amount of approximately $1,033 thousands and $1,062 thousands respectively.

F-15

ACTELIS NETWORKS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. DOLLARS IN THOUSANDS

NOTE 7 – SHAREHOLDERS’ EQUITY:

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).

Offering of common stocks and warrants May 2023:

On May 8, 2023, the Company completed a fund-raising round in a total gross amount of $3,500 pursuant to which the Company agreed to issue and sell to Armistice Capital Master Fund Ltd. (the “Holder”) in a private placement (the “Offering”):

190,000 shares of the Company’s common stock, $0.0001 par value;

754,670 pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 754,670 shares of Common Stock for an exercise price of $0.0001 which are exercisable (either physically or on net-cash basis at the Holder’s discretion) immediately upon their issuance until their full exercise. Their exercise price is adjustable upon dilutive events (such as subsequent rights offerings, pro-rata distributions and stock dividends and splits). The Holder also has certain rights upon a fundamental transaction (as defined in the agreement) as specified in the agreement. The warrants were classified as equity pursuant to ASC 815-40. During July and August 2023, the Holder elected to exercise 754,670 of the pre-funded warrant. The total exercise price in the amount of $0.0755 was paid in cash.

warrants to purchase up to 944,670 shares of Common Stock (“Common Warrants”) for a

SEC Form 10-Q filed by Actelis Networks Inc.