UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

OR

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

For the transition period from to

Commission File Number: 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) |  | (IRS Employer Identification No.)
4039 Clipper Court Fremont, California |  | 94538
(Address of Principal Executive Offices) |  | (Zip Code)

(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, par value $0.0001 per share |  | ASNS |  | The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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, a 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2023, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $5,472,624 based on the closing sale price on that date of $3.18. Shares of common stock held by each executive officer and director and by each other person who may be deemed to be an affiliate of the Registrant have been excluded from this computation. The determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes.

As of March 20, 2024, there were 3,020,268 shares of the registrant’s common stock, par value $0.0001 per share, outstanding, including treasury shares.

ACTELIS NETWORKS, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2023

TABLE OF CONTENTS

PART I |
ITEM 1. | BUSINESS | 1
ITEM 1A. | RISK FACTORS | 16
ITEM 1B. | UNRESOLVED STAFF COMMENTS | 41
ITEM 1C. | CYBERSECURITY | 42
ITEM 2. | PROPERTIES | 42
ITEM 3. | LEGAL PROCEEDINGS | 42
ITEM 4. | MINE SAFETY DISCLOSURES | 42
PART II |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 43
ITEM 6. | [RESERVED] | 43
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 44
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 51
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | F-1
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 52
ITEM 9A. | CONTROLS AND PROCEDURES | 52
ITEM 9B. | OTHER INFORMATION | 54
ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS | 54
PART III |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | 55
ITEM 11. | EXECUTIVE COMPENSATION | 64
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | 68
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 72
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES | 74
PART IV |
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | 75
ITEM 16. | FORM 10-K SUMMARY | 76
SIGNATURES | 77

i

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (the “Annual Report”) contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” These forward-looking statements involve a number of risks and uncertainties. We caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. These statements are based on current expectations of future events. Such statements include, but are not limited to, statements about future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, cost savings, objectives of management, business strategies, financing, potential growth and market opportunities, products, and other statements that are not historical facts.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “anticipate” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” “possible” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Annual Report include, but are not limited to, statements about:

| ● | our history of losses and need for additional capital to fund our operations and our ability to obtain additional capital on acceptable terms, or at all;

| ● | our ability to protect our intellectual property and continue to innovate;

| ● | our success in retaining or recruiting, or changes required in, our officers, key employees or directors;

| ● | the potential insufficiency of our disclosure controls and procedures to detect errors or acts of fraud;

| ● | the accuracy of our estimates regarding expenses, future revenues, and capital requirements;

| ● | the success of competing products or technologies that are or may become available;

| ● | our ability to grow the business due to the uncertainty resulting from the COVID-19 pandemic or any future pandemic;

| ● | our ability to comply with complex and increasing regulations by governmental authorities;

| ● | our ability to regain and maintain compliance with continued listing requirements of the Nasdaq Capital Market;
| ● | our ability to continue as a going concern;

| ● | statements as to the impact of the political and security situation in Israel on our business, including due to the number of armed conflicts between Israel and Hamas (an Islamist militia and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon);

| ● | our public securities’ potential liquidity and trading; and

| ● | our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act.

Forward-looking statements are based on our management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions, and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Annual Report may turn out to be inaccurate. Important factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors,” Use of Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Annual Report. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. You should read thoroughly this Annual Report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

The forward-looking statements included in this Annual Report speak only as of the date of this Annual Report. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Annual Report. See “Where You Can Find More Information.”

On April 19, 2023, we effected a reverse stock split of our shares of common stock at the ratio of 1-for-10. Unless indicated otherwise by the context, all common stock, option, warrant and per share amounts as well as share prices appearing this Annual Report on Form 10-K have been adjusted to give retroactive effect to the stock split for all periods presented.

ii

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, 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 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 Wi-Fi 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.

1

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 introduced new product offering, some of which could serve both the IoT markets and our Telco customers.

We derive a growing portion of our revenue from our existing and new IoT customers. For the years ended December 31, 2023 and December 31, 2022, our IoT customers in the aggregate accounted for approximately 73% and 65% 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, 2023 and December 31, 2022, our top ten customers in the aggregate accounted for approximately 66% and 82% of our revenues.

We have incurred significant losses and negative cash flows from operations and as of December 31, 2023, we had an accumulated deficit of $39.7 million. We have funded our operations to date through equity financing and we had cash on hand (including short term bank deposits and restricted cash equivalents) of $2.4 million and long-term restricted cash and cash equivalents and restricted bank deposits of $3.4 million as of December 31, 2023. We continue to invest in sales and marketing resources to fuel our growth.

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 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.

2

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 introduced the next-generation product families for hybrid-fiber-copper (or in short “hybrid-fiber”) Gigabit grade connectivity under the product family name, “Gigaline” or GL. Under the Gigaline families of hybrid-fiber networking solutions for fiber, copper and coax environments, we solved new challenges faced by our IoT and telecom customers and expanded our offerings.

Cybersecurity

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, coax 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.

We continue to invest in further strengthening our focus on 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 successfully completed the certification of our product lines for Federal Intelligence Protocol Standards (FIPS) and were approved by the DoD’s Joint Interoperability Test Command (JITC) for interoperability and cybersecurity approved product list (APL) in 2024. 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. We refer to such objective as Cyber-Aware Networking.

3

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.

4

Recent Developments

December 2023 Private Placement Offering

On December 17, 2023, we entered into a securities purchase agreement (the “Purchase Agreement”) with an accredited investor (the “Investor”), pursuant to which we agreed to issue and sell to the Investor in a private placement (the “Offering”) (i) 301,000 shares (the “Shares”) of common stock of the Company, $0.0001 par value (the “Common Stock”), (ii) 970,187 pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 970,187 shares of Common Stock and (iii) warrants to purchase up to 1,271,187 shares of Common Stock (“Common Warrants” and collectively with the Shares and the Common Warrants, the “Securities”) for a purchase price of $1.18 per share of Common Stock and related Common Warrant or $1.1799 per Pre-Funded Warrant and related Common Warrant, for a total aggregate gross proceeds of approximately $1.5 million. The Offering closed on December 20, 2023.

Nasdaq Listing Compliance

On August 25, 2023, we received a notification letter from the Listing Qualifications Department of the Nasdaq Stock Market LLC (the “Nasdaq Staff”) indicating that we are not in compliance with Nasdaq Listing Rule 5550(b)(1) due to our failure to maintain a minimum of $2,500,000 in shareholders’ equity (the “Minimum Shareholders’ Equity Requirement”) or any alternatives to such requirement. In order to maintain our listing on the Nasdaq Capital Market, we submitted a plan of compliance addressing how we intended to regain compliance. We had until February 21, 2024 to evidence compliance with the Minimum Shareholders’ Equity Requirement. As of the date of this Annual Report, we have not provided such evidence. In the event that our shares of common stock would be subject to delisting, we intend to timely request a hearing before the Nasdaq Hearings Panel (the “Panel”). For more information about this risk, please see “Item 1.A – Risk Factors – Risks Related to Our Business Operations – Our shares of common stock could be delisted from the Nasdaq Capital Market if we fail to regain compliance with the Nasdaq’s stockholders’ equity continued listing standards. Our ability to publicly or privately sell equity securities and the liquidity of our shares of common stock could be adversely affected if we are delisted from the Nasdaq Capital Market”.

May 2023 Private Placement Offering

On May 4, 2023, we entered into a securities purchase agreement with an accredited investor (the “Investor”), pursuant to which we agreed to issue and sell to the Investor in a private placement (the “May 2023 Private Placement”) (i) 190,000 shares (the “Shares”) of Common Stock, (ii) 754,670 pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 754,670 shares of Common Stock and (iii) warrants to purchase up to 944,670 shares of Common Stock (“Common Warrants” and collectively with the Shares and the Common Warrants, the “Securities”) for a purchase price of $3.705 per share of Common Stock and related Common Warrant or $3.7049 per Pre-Funded Warrant and related Common Warrant, for a total aggregate gross proceeds of approximately $3.5 million. The Offering closed on May 8, 2023. The Common Warrants have an exercise price of $3.58 per share, are exercisable immediately upon issuance and expire five and one-half years following the issuance.

Our Solutions

We have invested nearly $100 million over the years to develop our patented, multi-layered “Triple Shield” technology, which can serve all connectivity markets. Our Triple Shield technology includes signal processing software 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.

In 2023, we introduced the next-generation product families for hybrid-fiber-copper (or in short “hybrid-fiber”) Gigabit grade connectivity under the product family name, “Gigaline” or GL. Under the Gigaline families of hybrid-fiber networking solutions for fiber, copper and coax environments, we solved new challenges faced by our IoT and telecm customers and expanded our offerings.

One such product line, the GL800 aims at extending multi-gigabit fiber-grade connectivity to buildings, enterprises, IoT installations, campuses, and 5G/4G base stations.

5

A second product line, the GL900, extends Gigabit connectivity from fiber installations outside buildings (“homes passed” by fiber) into individual offices and apartments within MDUs and MTUs, without the need for landlord investment in re-wiring buildings with fiber. MDU/MTU market in the US alone is estimated by the company to include more than 18M buildings.

A third product group, GL5000 and GL6000, that was introduced in 2023 includes over 40 variants of hardened, 10Gbps fiber switches to expand our fiber offering into the IoT market.

Our product offering includes our EMS network management software, providing built-in automation to help configure, manage, monitor, safeguard, install and maintain complex, hybrid networks of thousands of elements remotely. Our EMS management Software was enhanced to support these new products and strengthened with advanced security features to support better cyber production and meet DoD demands. Our products are also built for future integration with enhanced security services we may introduce in the future.

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

| ● | Gigaline 800/900/5000/6000 Series. Advanced, software managed, temperature and cyber-hardened, layer 2 and layer 3, hybrid-fiber-copper switching devices, at multi-gigabit speeds of up to 10Gbps. These devices deliver a much broader selection of solutions for large and small networks, at higher speeds, and better security, in support of hybrid-fiber networks that contain more fiber, and covering IoT, MDU and MTU markets. |
| ● | MetaLight ML500/600/700/Series. EADs (Ethernet Access Devices) are a series of products which are cost efficient, compact and hardened Ethernet switches for long-distance hybrid-fiber 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 family can be installed either indoors or outdoors, including under extreme weather conditions. |
| ● | 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. |
| ● | 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. |
| ● | Advanced MetaLIGHT/Gigaline 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, and 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. |

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.

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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:

| ● | Speeds ranging from 10MB to 10GBPS; distances up to 100Km (speeds a lower for longer distances) infrastructure

Supporting any hybrid combination of new Fiber infrastructure and existing copper and coax infrastructure, supporting data security an encryption protocols, certified for FIPS by US DoD labs; supporting outdoor hardened environmental requirements dense and compact to save space and allow for flexible location setting.

| ● | Automatic calibration tools and automated management SW enable hassle-free installation withing hours vs. weeks over existing wiring.

| ● | 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) and uptime similar to that of fiber optic infrastructure regardless of the media used, and uptime that allows our customers to support mission-critical applications.

In addition to these main benefits, we have focused our efforts and implemented technologies in our products in order to achieve the following:

| ● | 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 (Telecom), 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 Telecom customers.

Our Competitive Advantage

We have invested heavily and over more than 10 years in the development of copper technologies and hybrid-fiber 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 and coax lines are readily available in billions of locations. They are often buried in the ground, running in the walls of buildings or hanging from telephone poles, in bundles of tens or hundreds of wires.

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Copper wires were never designed for long-reach, secure, high-speed communication. Attempts to deliver high-speed would encounter many problems, including signal attenuation, cross-talk 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 building blocks, that provide seamless communication over mixed, real-life fiber-copper-coax networks, and many other advantages.

We believe our products offer a unique solution on the market in terms of value, by providing the following:

| ● | High performance hybrid-fiber 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, coax or fiber

Rapid installation in hours vs. weeks or months if new infrastructure is needed

| ● | 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

Military — grade, DoD certified FIPS cyber protection

| ● | 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

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| ● | 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

| ● | Routing functions

| ● | 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 provides our customers with a highly cost-effective solution to quickly obtain IoT connectivity anywhere in their network.

We believe that our hybrid-fiber solutions have a significant competitive advantage in several layers: (a) copper performance (speed, reach, link stability and data security); (b) seamless fiber-copper-coax 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 advantage 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, airports, electricity, water infrastructure companies as well as other governmental agencies and military customers. We believe that we enjoy a strong 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, Philippines, 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 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, Europe, India, Singapore, China, Australia, Vietnam 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 products and services. For example, we achieved UL laboratories compliance with FIPS 140-2 cybersecurity standard required by the United States Department of Defence (DoD) and the Joint Interoperability Test Command (JITC) labs approval of the Company’s products for cybersecurity and interoperability, putting the products in the DoD Approved Products List (APL).

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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, Telecom, 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. Since 2022, we are delivering to our 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.

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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 a 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. While our hybrid-fiber offerings are unique in our opinion, providing the highest value to network operators, our customer may still elect to implement their networks in other ways.

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As such we compete with a number of companies in the markets we serve. Our key competitors include Moxa Technologies, 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 and Telecom networking markets, and likewise we believe that we are providing leading products in all the categories below:

| ● | the performance and reliability of our solutions over any wireline (non-wireless) medium;

Rapid deployment/implementation

| ● | 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;

| ● | security;

| ● | ease of implementation and use of service;

| ● | management capabilities;

| ● | high-quality customer support; and

| ● | price.

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 “Item 1.A - 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 and we assist them as needed in specific cases. For example, since the breakout of COVID-19, as the world is experiencing shortages of electronic components, we have assisted our manufacturers in acquiring components that are harder to find. We also secure components as have been designated to be the close to end of life by their manufacturers 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.

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Warranty

Our products are generally sold with a standard warranty of two years for product defects, as well as technical center support with properly trained personnel, during normal business hours, to address incidents raised customers. 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 continue to expand our network of partners and representatives, as well as reputable advisors, and aim increasingly at partnering with larger numbers of companies with global presence. These can be system-integrators, value-added resellers, contractors, distributors, and consultants. For example, in 2022, we 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 July 2023, we hired a new SVP of Sales, Americas who is executing campaigns our sales strategy in the United States, Canada, Central and South America. We continued in 2023 to invest in marketing activities through social media, industry shows and conferences and other online means. We also are investing in lead-generation and management internally and 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 Cybersecurity, Recurring Revenue Model

Cybersecurity is essential for IoT infrastructure. Such security must be addressed at the data traffic, switching, and network management level. Encryption is a fundamental building block to achieve the necessary protection, preferably at a low networking layer. Our products are already capable of delivering sensitive information for many critical IoT applications, and we are investing 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. We are referring to such objective as Cyber-Aware Networking.

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.

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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.

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 began working on such capabilities in 2023, and expect applications to be released starting late 2024.

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, 2023, we had approximately 49 employees and contractors, of which 43 were full-time employees, including 19 in sales and marketing, 22 in research development, engineering, and operations and 8 in general and administration. We have approximately 34 employees and contractors in Israel, 11 in the U.S., 3 in Europe and 1 in Asia. Our U.S.-based employees are employed through a Professional Employer Organization, providing employee benefits and services.

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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.

Legal Proceedings

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. To the knowledge of our management, there are no legal proceedings currently pending against us which we believe would have a material adverse effect on our business, financial position, results of operations and, to the best of our knowledge, there are no such legal proceedings contemplated or threatened. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Government Regulation

Our products are required to be certified for safety and local standards in each country that we sell in as needed. In the United States, Canada, Europe, and Japan our products are UL certified (safety), EN (emissions Regulation), VCCI (Japanese emissions standard), CISPR (European emission standard), ICES (Canadian radio frequency emissions standards), ETSI (European electromagnetic compatibility standard), CFR (US Federal Broadcasting Regulation), as well as IEC (European Safety Standard). We have also received the JITC (Joint Interoperability Test Command) certification of meeting certain cybersecurity standards required by the U.S. Department of Defense.

We are subject to numerous federal, state, provincial, local, and foreign laws and regulations relating to the storage, handling, emission, and discharge of materials into the environment, including the Comprehensive Environmental Response, Compensation, and Liability Act; the Clean Water Act; the Clean Air Act; the Emergency Planning and Community Right-To-Know Act; the Resource Conservation and Recovery Act; and similar laws in the other countries in which we operate. While we believe that our existing environmental control procedures are adequate, we will continue to evaluate and update our procedures as needed to address new or changing aspects of environmental matters.

Intellectual Property

We rely on a combination of trade secrets, patent, trademark and copyright laws in the United States, as well as intellectual property licenses and other contractual rights (including confidentiality procedures, contractual provisions, and non-disclosure and assignment-of-intellectual property agreements with our employees, independent contractors, consultants and companies with which we conduct business) to establish and protect our A.I. technology, intellectual property and proprietary rights, trade secrets, databases, and our brand.

We have registered Actelis Networks as a service trademark in the United States, and we are the registered holder of the domain name Actelis.com that includes “Actelis Networks, Inc.”. We also have 17 registered patents in the United States; 5 registered patents in Europe, 1 registered patent in Mexico, 1 registered patent in Indonesia, and 1 WIPO patent application, 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 covering various aspects of our technology. While we continue to consult with counsel on the advisability to seek patent protection of some of our algorithms, we rely heavily on trade secrets to protect our intellectual property around our technology.

Without accounting for any potential patent term adjustments or extensions or other forms of exclusivity with respect to our U.S. issued patents, 4 expire between 2024 and 2026, 5 expire between 2027 and 2030, and 8 expire between 2031 and 2038. Any patent issuing from the pending WIPO patent application will begin to expire in 2041. With respect to our European patents, 3 European patents are expected to expire between 2024 and 2026, and 2 European patent is expected to expire between 2027 and 2038. Our Mexican patent is expected to expire in 2026 and our Indonesian patent is expected to expire in 2028.

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We continue to maintain our intellectual property and confidential business information in a number of ways. For instance, we have a policy of requiring all employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us. Our employee agreements also require relevant employees to assign to us all rights to any inventions made or conceived during their employment with us in accordance with applicable law. In addition, we have a policy of requiring individuals and entities with which we discuss potential business relationships to sign non-disclosure agreements. Lastly, our agreements with clients include confidentiality and non-disclosure provisions.

Corporate Information

We were incorporated in Delaware in 1998. We completed our initial public offering on May 17, 2022 and our common stock is currently listed on the Nasdaq Global Select Market under the symbol “ASNS.” Our principal executive offices are located at 4039 Clipper Court, Fremont, CA94538, and our telephone number is (510)-545-1040.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the “SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. Such reports and other information filed by us with the SEC are available free of charge on the SEC’s website at www.sec.gov. or on our website at https://actelis.com/when such reports are available on the SEC’s website. We use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The contents of the websites referred to above are not incorporated into this filing.

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 on page 19, 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.

| ● | Our shares of common stock could be delisted from the Nasdaq Capital Market if we fail to regain compliance with the Nasdaq’s stockholders’ equity continued listing standards. Our ability to publicly or privately sell equity securities and the liquidity of our shares of common stock could be adversely affected if we are delisted from the Nasdaq Capital Market.

| ● | Our financial condition raises substantial doubt as to our ability to continue as a going concern.

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| ● | Unfavorable global economic or political conditions 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 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 conflicts between Russia and Ukraine and between Israel and Hamas and Hezbollah. 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 and Israel or any other geopolitical tensions.

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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

| ● | Conditions in the Middle East and in Israel, where our research and development facilities are located, may harm our 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.

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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.

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 $6.3 million and $11.0 million in the years ended December 31, 2023 and 2022, respectively. As a result, we had an accumulated deficit of $39.7 million as of December 31, 2023. We cannot predict when or whether we will reach or maintain profitability.

We may also increase our operating expenses 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 $6.3 million and $11.0 million for the years ended December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, we had negative cash flows from operations of $6.6 million and $7.8 million, respectively. As of December 31, 2023, our accumulated deficit was $39.7 million. We have funded our operations to date through equity financing and have cash on hand (including short term bank deposits and restricted cash equivalents) of $2.4 million and long-term restricted cash and cash equivalents and restricted bank deposits of $3.4 million as of December 31, 2023. 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.

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Our financial condition raises substantial doubt as to our ability to continue as a going concern.

Our consolidated financial statements have been prepared assuming that we will continue to operate as a going concern. These events and conditions, along with other matters, indicate that a material uncertainty exists that may cast significant doubt on our ability to continue as a going concern. This going concern determination could materially limit our ability to raise additional funds through the issuance of equity or debt securities or otherwise. Further financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. There can be no assurance that we will succeed in generating sufficient revenues from our product sales to continue our operations as a going concern. If funds are not available to us, we may be required to delay, reduce the scope of, or eliminate research or development plans for, or commercialization efforts with respect to our products. This may raise substantial doubts about our ability to continue as a going concern.

Our shares of common stock could be delisted from the Nasdaq Capital Market if we fail to regain compliance with the Nasdaq’s stockholders’ equity continued listing standards. Our ability to publicly or privately sell equity securities and the liquidity of our shares of common stock could be adversely affected if we are delisted from the Nasdaq Capital Market.

On August 25, 2023, we received a notification letter from the Nasdaq Staff indicating that we are not in compliance with Nasdaq Listing Rule 5550(b)(1) due to our failure to meet the Minimum Shareholders’ Equity Requirement or any alternatives to such requirement. In order to maintain our listing on the Nasdaq Capital Market, we submitted a plan of compliance addressing how we intended to regain compliance. We had until February 21, 2024 to evidence compliance with the Minimum Shareholders’ Equity Requirement. As of the date of this Annual Report, we have not provided such evidence. In the event that our shares of common stock would be subject to delisting, we intend to timely request a hearing before the Panel.

We have in the past, and may in the future, be unable to comply with certain of the listing standards that we are required to meet to maintain the listing of our ordinary shares on Nasdaq. For instance, on November 3, 2022, we received notification from the Nasdaq Staff that we were not in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had an initial grace period of 180 calendar days, or until May 2, 2023 (the “Minimum Bid Price Compliance Period”), to regain compliance with the minimum bid price requirement. On April 19, 2023, we implemented a 1-for-10 reverse stock split. One of the primary intents for the consolidation was that the anticipated increase in the price of our shares of common stock immediately following and resulting from a reverse stock split due to the reduction in the number of issued and outstanding shares of ordinary shares would help us meet the price criteria for continued listing on the Nasdaq Capital Market. On May 3, 2023, we received a notification from the Nasdaq Staff that we had regained compliance with the Nasdaq Listing Rule 5550(a)(2).

If we fail to satisfy the continued listing requirements of Nasdaq, such as minimum stockholders’ equity requirements or minimum bid price requirements, Nasdaq may take steps to delist our shares of common stock. Such a delisting would have a negative effect on the price of our shares of common stock, impair the ability to sell or purchase our shares of common stock when persons wish to do so, and any delisting materially adversely affect our ability to raise capital or pursue strategic restructuring, refinancing or other transactions on acceptable terms, or at all. Delisting from Nasdaq could also have other negative results, including the potential loss of institutional investor interest and fewer business development opportunities, as well as a limited amount of news and analyst coverage of us. Delisting could also result in a determination that our shares of common stock are a “penny stock,” which would require brokers trading in our shares of common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary market for our shares of common stock. In the event of a delisting, we would attempt to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our shares of common stock to become listed again, stabilize the market price or improve the liquidity of our securities, prevent our shares of common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.

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Unfavorable global economic or political conditions 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 in 2023 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.

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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 two outstanding loans, with Migdalor, in the original principal amount of approximately $6 million, of which approximately $4.0 million remains outstanding as of December 31, 2023, and with Hamizrahi-Tefahot Bank with which we signed a credit line agreement in February 2024, off of which we have used approximately $552,000 to-date, and which are secured by all our assets (where our accounts receivable asset is carved out from Migdalor’s senior security for Mizrahi-Tefahot Bank). 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 $2.0 million was deposited in the designated account on or about February 28, 2023, as agreed between Migdalor and us. As of the date of this Annual Report on Form 10-K, our designated account has a balance covering the loan principal balance at approximately 100%.

In February 2024, we entered into a new credit line facility from an Israeli bank of up to $1.5 million that increases the Company’s operating liquidity while not increasing the Company’s total debt, as the Company will perform an early repayment of its existing debt using its restricted cash in a similar amount. The new credit line will be secured by customer invoices and will incur interest at a Federal SOFR rate plus 5.5% and is available until the end of 2024, with possible extension. At the same time, the Company plans to perform a partial early repayment of its existing debt facility with Migdalor under the Loan Agreement using its restricted cash at an amount equal to the amount of funding from the new credit line, therefore leaving the total debt amount at a similar level.

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 portion of our revenue continues to be derived from our existing Telco customers. For the years ended December 31, 2023 and December 31, 2022, our Telco customers in the aggregate decreased from approximately 35% of our revenues in the year ended December 31, 2022, to 27% in the year ended December 31, 2023.

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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 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.

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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.

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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.

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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;

| ● | mix of our revenue;

| ● | 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;

| ● | network outages;

| ● | 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;

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| ● | 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, 2023 and December 31, 2022, our top ten customers in the aggregate accounted for approximately 66% and 82% 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 and between Israel and Hamas and Hezbollah. 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 and Israel 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.

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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 Israel, 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.

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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;

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| ● | 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 17 registered patents in the United States; 5 registered patents in Europe, one registered patent in Mexico, , one registered patent in Indonesia, 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.

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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 20, 2024 will expire on dates ranging from September 25, 2024 to October 31, 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, US7606315, US7613235, EP1943827, EP1964377, GB2556826, MX279453, US7587042, IDP0030744.

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.

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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

Conditions in the Middle East and in Israel, where our research and development facilities are located, may harm our 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. Most of our officers and directors are residents of Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, and between Israel and the Hamas (an Islamist militia and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon).

In particular, in October 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks on the Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other areas within the State of Israel. These attacks resulted in thousands of deaths and injuries, and Hamas additionally kidnapped many Israeli civilians and soldiers. Following the attack, Israel’s security cabinet declared war against Hamas and commenced a military campaign against Hamas and Hezbollah and these terrorist organizations in parallel continued rocket and terror attacks. As a result of the events of October 7, 2023 whereby Hamas terrorists invaded southern Israel and launched thousands of rockets in a widespread terrorist attack on Israel, the Israeli government declared that the country was at war and the Israeli military began to call-up reservists for active duty. As of the date of this Annual Report, we have not been impacted by any absences of personnel at our service providers or counterparties located in Israel. Military service call ups that result in absences of personnel from us for an extended period of time may materially and adversely affect our business, prospects, financial condition and results of operations. As of the date of this Annual Report, we currently have 42 full-time employees, with 33 employees located in Israel and 9 employee located outside of Israel.

Since the war broke out on October 7, 2023, our operations have not been adversely affected by this situation, and we have not experienced any material disruptions to our operations. We have the ability, if necessary, to shift our manufacturing from Israel to other countries where we have business partners, and we have not had customers in Israel in the last year. However, the intensity and duration of the war in the Middle East is difficult to predict at this stage, as are such war’s economic implications on the Company’s business and operations and on Israel’s economy in general. if the war in the other fronts, such as Lebanon, Syria and the West Bank expands further, our operations may be adversely affected.

In addition, since the commencement of these events, there have been continued hostilities along Israel’s northern border with Lebanon (with the Hezbollah terror organization) and southern border (with the Houthi movement in Yemen). It is possible that hostilities with Hezbollah in Lebanon will escalate, and that other terrorist organizations, including Palestinian military organizations in the West Bank as well as other hostile countries, such as Iran, will join the hostilities. Such clashes may escalate in the future into a greater regional conflict. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza, Hezbollah in Lebanon, the Houthi movement in Yemen and various rebel militia groups in Syria. These situations may potentially escalate in the future to more violent events which may affect Israel and us. 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 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. 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. 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 condition or the expansion of our business.

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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. In recent years, the hostilities involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel.

Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. 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 and could harm our results of operations. To-date, we have received Israeli government war related support funding of approximately $100,000.

Finally, political conditions within Israel may affect our operations. Israel has held five general elections between 2019 and 2022, and prior to October 2023, the Israeli government pursued extensive changes to Israel’s judicial system, which sparked extensive political debate and unrest. To date, these initiatives have been substantially put on hold. Actual or perceived political instability in Israel or any negative changes in the political environment, may individually or in the aggregate adversely affect the Israeli economy and, in turn, our business, financial condition, results of operations and growth prospects.

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, 2023. 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.

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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.

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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.

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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.

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During the year ending December 31, 2023 and up to the date of this Annual Report, we have made significant progress in our internal controls plan, including hiring new financial experts and increasing the amount of financial personnel, as well as mapping, documenting and testing our internal controls with the assistance of a third-party accounting firm with specific expertise in Sarbanes-Oxley (“SOX”) compliance. However, we 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 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.

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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

| ● | increased competition.

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.

As of today, all shares that were in lock-up following the IPO closed in May 2022 have been released and are available for trading by their holders, subject to administrative process completion with our transfer agent. 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.

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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.

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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.

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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 financial condition raises substantial doubt as to our ability to continue as a going concern.

Our consolidated financial statements have been prepared assuming that we will continue to operate as a going concern. These events and conditions, along with other matters, indicate that a material uncertainty exists that may cast significant doubt on our ability to continue as a going concern. This going concern determination could materially limit our ability to raise additional funds through the issuance of equity or debt securities or otherwise. Further financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. There can be no assurance that we will succeed in generating sufficient revenues from our product sales to continue our operations as a going concern. If funds are not available to us, we may be required to delay, reduce the scope of, or eliminate research or development plans for, or commercialization efforts with respect to our products. This may raise substantial doubts about our ability to continue as a going concern.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

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ITEM 1C. CYBERSECURITY.

Risk management and strategy

We have developed and maintain a cybersecurity risk management program that focuses primarily on securing and safeguarding computer systems, networks, cloud services, business applications, and data and that is integrated in our overall risk management strategy and framework. We have implemented protocols to protect against cyber threats and ensure the containment and security of sensitive business data, including ongoing security reviews of critical systems, continuous monitoring of event data, and employee training programs, which processes are aligned with our overall business and operational goals and strategies. Our risk assessment occurs on an ongoing basis and covers identification of risks that could act against the company’s objectives as well as specific risks related to a compromise to the security of data.

We engage a third-party to provide operational support for cybersecurity risks. This forms a critical part of our risk management strategy, facilitating effective management and mitigation of risks, and ensuring adherence to applicable regulatory and industry standards.

Overall, we believe that we have established a robust framework for confidentiality, integrity, and availability of information, adhering to relevant security standards, practices, and compliance requirements. In addition, we maintain insurance to help protect against risks associated with cybersecurity threats. As of the date of this report, we do not believe that any risks from cybersecurity threats have materially affected, or are reasonably likely to materially affect, us, including our business strategy, results of operations, or financial condition. However, despite our efforts, we cannot eliminate all risks from cybersecurity threats, or provide assurances that we have not experienced an undetected cybersecurity incident. For more information about these risks, please see “Item 1.A – Risk Factors – Risks Related to Our Business 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” in this Annual Report.

Governance

Our board of directors provides oversight of our cybersecurity program and helps guide our strategy for managing cybersecurity risks in the context of our overall risk management system. Our cybersecurity program is managed by our Chief Financial Officer and our external IT team whose is responsible for leading enterprise-wide cybersecurity execution, protocols, framework, standards and processes. The Chief Financial Officer reports to our board of directors, as well as our Chief Executive Officer and other members of senior management as appropriate.

ITEM 2. PROPERTIES.

We lease our facility in California, which consists of approximately 3,000 square feet of office, lab and warehouse space. Our lease expires in October 2025. We also sublease our previous facility in California of approximately 9,000 square feet to a third party. This lease expires on March 31, 2024, and we do intend to renew the lease.

We also lease an office and lab facility in Petach-Tikva, Israel consisting of approximately 13,500 square feet serving our R&D personnel, operations and administration as well as our EMEA and APAC sales team. Our lease expires in December 2025.

We believe our facilities are sufficient to meet our current needs and that suitable space will be available as and when needed. We do not own any real property.

ITEM 3. LEGAL PROCEEDINGS.

We are not currently a party to any material legal proceedings.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock began trading on the Nasdaq Capital Market under the symbol “ANAS” on May 13, 2022. Prior to that time, there was no public market for our common stock.

Stockholders

As of March 20, 2024, we had 3,020,268 outstanding shares of common stock outstanding, including treasury shares, no outstanding shares of preferred stock, and approximately 54 holders of record of our outstanding shares of common stock. A significant number of shares of our common stock are held in either nominee name or street name brokerage accounts, and consequently, we are unable to determine the total number of beneficial owners of our common stock.

Dividends

To date, we have not paid cash dividends on our common stock and do not plan to pay such dividends in the foreseeable future. Our Board will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements, and general business conditions. Dividends, under the Delaware General Corporation Law, may only be paid from our net profits or surplus. To date, we have not had a fiscal year with net profits and, subject to a valuation by the Board of the present value of the Company’s assets, do not have surplus.

Unregistered Sales of Equity Securities

We have previously disclosed all sales of securities without registration under the Securities Act of 1933, as amended (the “Securities Act”).

Repurchases of Equity Securities by the Issuer and Affiliated Purchasers

During the year ended December 2023, the Company purchased 7,920 shares of its common stock, for a total price of $50,000.

ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in “Part I, Item 1A - Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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, 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.

A primary focus of ours is to provide our customers with a cyber-secure network solution. We provide Triple-Shield protection of coding, scrambling and encryption of the network traffic. We are working to expand our cyber-security offering by introducing a convergence of our network presence with the IoT devices at the edge of such networks, to which we call “Cyber Aware Networking”.

When high speed, long reach, reliable and secure connectivity is required, network operators usually resort to using wireline communication over physical communication lines rather than wireless communication that is more limited in performance, reliability and security. However, wireline communication infrastructure is costly, and, 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.

Typically, providing new fiber connectivity to hard-to-reach locations is costly and time-consuming, often requiring permits for boring, trenching, and right-of-way. Connecting such hard-to-reach locations may cause significant delays and budget overruns in IoT projects. Our solutions aim to solve these challenges effectively accelerating deployment of IoT projects, and making IoT projects more affordable and predictable to plan and budget.

Our solutions can also provide remote power over 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 existing copper 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. Our solutions have been tested for performance and security by the U.S. DoD laboratories and approved for deployment with U.S. Federal Government and U.S. defense forces as part of APL (Approved Product List) in 2019. In 2023, we received the U.S. DoD certification for cyber-security and interoperability and Federal Information Processing Standard (“FIPS”) compliance 140-2 compliance and inclusion in the Approved Product List.

Since our inception, our business was focused on serving telecommunication service providers, also known as Telcos, providing connectivity for enterprises and residential customers. Our products and solutions have been deployed with more than 100 telecommunication service providers worldwide, in enterprise, residential and mobile base station connectivity applications. In recent years, as we have further developed our technology and rolled out additional products, we turned our focus on serving the wide-area IoT markets. Our operations are focused on our fast-growing IoT business, while maintaining our commitment to our existing Telco customers.

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We derive a growing portion of our revenue from our existing and new IoT customers. For the years ended December 31, 2023 and December 31, 2022, our IoT customers in the aggregate accounted for approximately 73% and 65% 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, 2023 and December 31, 2022, our top ten customers in the aggregate accounted for approximately 66% and 82% of our revenues.

As of December 31, 2023, 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 $4.3 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.

In February 2024, we entered into a new credit line facility from an Israeli bank of up to $1.5 million that increases the Company’s operating liquidity while not increasing the Company’s total debt, as the Company will perform an early repayment of its existing debt using its restricted cash in a similar amount. The new credit line will be secured by customer invoices and will incur interest at a Federal SOFR rate plus 5.5% and is available until the end of 2024, with possible extension. The Company performed a partial early repayment of its existing debt facility with Migdalor under the Loan Agreement using its restricted cash at an amount equal to the amount of funding from the new credit line to-date of approximately $550,000, therefore leaving the total debt amount of the Company at a similar level.

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. 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). We expect to continue repaying the principal and interest of the Migdalor Loan from our operating cash flow. Please refer to the “Liquidity and Financial Condition” section below for further discussion.

Results of Operations

The table below provides our results of operations for the periods indicated.

|  | Year ended December 31 |
|  | 2023 |  |  | 2022 |
|  | (dollars in thousands) |
Revenues |  |  | 5,606 |  |  |  | 8,831 |
Cost of revenues |  |  | 3,706 |  |  |  | 4,721 |
Gross profit |  |  | 1,900 |  |  |  | 4,110 |
Research and development expenses |  |  | 2,702 |  |  |  | 2,766 |
Sales and marketing, net |  |  | 3,030 |  |  |  | 3,282 |
General and administrative |  |  | 3,531 |  |  |  | 4,163 |
Operating loss |  |  | (7,363 | ) |  |  | (6,101 | )
Interest expenses |  |  | (766 | ) |  |  | (830 | )
Other financial income (expenses), net |  |  | 1,843 |  |  |  | (4,051 | )
Net Comprehensive Loss for the year |  |  | (6,286 | ) |  |  | (10,982 | )

45

Year Ended December 31, 2023, Compared to Year Ended December 31, 2022

Revenues

Our revenues for the year ended December 31, 2023 amounted to $5.6 million, compared to $8.8 million for the year ended December 31, 2022. The decrease was primarily attributable to the decline of revenues generated from telco customers, as our focus continued to shift to IoT customers by $1.6 million significantly impacted by a two-year software license renewal in 2022, therefore not repeated in 2023, driving a $0.5 million decline, and to delays of IoT projects into 2024. By region, it is primarily attributable to a decrease of $1.7 million of revenues generated from North America and a decrease of $1.5 million of revenues generated from Europe, the Middle East and Africa.

Cost of Revenues

Our cost of revenues for the year ended December 31, 2023, amounted to $3.7 million compared to $4.7 million for the year ended December 31, 2022. The decrease from the corresponding period was mainly due to the decrease in revenues, partially offset by the higher effect of indirect costs as the percent of the lower revenues.

Research and Development Expenses

Our research and development expenses for the year ended December 31, 2023, amounted to $2.7 million compared to $2.8 million for the year ended December 31, 2022. The decrease is mainly due to a decrease in payroll expenses.

Sales and Marketing Expenses

Our sales and marketing expenses for the year ended December 31, 2023, amounted to $3.0 million compared to $3.3 for the year ended December 31, 2022. The decrease was mainly due to a decrease in commission expenses as a result of the decrease in revenues.

General and Administrative Expenses

Our general and administrative expenses for the year ended December 31, 2023, amounted to $3.5 million compared to $4.2 million for the year ended December 31, 2022. This decrease was mainly due to a reduction in professional services of approximately $0.2 million, a decrease in management bonus expenses of $0.2 million, as well as a reduction in other non-payroll expenses associated with the IPO in 2022.

Operating Loss

Our operating loss for the year ended December 31, 2023, was $7.4 million, compared to an operating loss of $6.1 million for the year ended December 31, 2022. The increase was mainly due to the decrease in revenues and gross margin while continuing to invest in Sales and Marketing and Research and Development expenses, which was offset by a decrease in sales commission expenses as well as general and administrative one-time expenses due to the IPO in 2022.

Financial Expenses (income), Net

Our financial expenses (income), net for the year ended December 31, 2023, was ($1.1) million (including $0.8 million interest expenses) compared to $4.9 million (including $0.8 million interest expenses) for the year ended December 31, 2022. In 2023, the Company recorded financial income in connection with a decrease in fair value of warrants in the amount of $1.7 million, while in 2022 the Company recorded finance expenses as a result of increase in fair value of various financial instruments prior to the IPO completed in May 2022, such as a convertible loan, note and warrants, in the amount of $4.5 million. The decrease in the finance expenses, net partially offset by a decrease in income from exchange rate differences in the amount of $0.3 million for the year ended December 31, 2023, compared to $0.5 during the year ended December 31, 2022.

46

Net Loss

Our net loss for the year ended December 31, 2023 was $6.3 million, compared to a net loss of 11.0 million for the year ended December 31, 2022. This decrease was primarily due to the decrease in revenues and gross margin offset by a decrease in financial expenses, net resulting from the expenses incur by the conversion of the financial instruments the Company had such as a convertible loan, note and warrants from the IPO completed in May 2022 for the year ended December 31, 2022, compared to income in connection with a decrease in fair value of warrants for the year ended December 31, 2023.

Non-GAAP Financial Measures

(U.S. dollars in thousands) |  | Year Ended December 31, 2023 |  |  | Year Ended December 31, 2022 |
Revenues |  | $ | 5,606 |  |  | $ | 8,831 |
GAAP net loss |  |  | (6,286 | ) |  |  | (10,982 | )
Interest Expense |  |  | 766 |  |  |  | 830 |
Other financial expenses (income), net |  |  | (1,843 | ) |  |  | 4,051 |
Tax Expense |  |  | 78 |  |  |  | 94 |
Fixed asset depreciation expense |  |  | 27 |  |  |  | 23 |
Stock based compensation |  |  | 377 |  |  |  | 220 |
Research and development, capitalization |  |  | 444 |  |  |  | 525 |
Other one-time costs and expenses |  |  | 371 |  |  |  | 1,174 |
Non-GAAP Adjusted EBITDA |  |  | (6,066 | ) |  |  | (4,065 | )
GAAP net loss margin |  |  | (112.14 | )% |  |  | (124.36 | )%
Adjusted EBITDA margin |  |  | (108.20 | )% |  |  | (46.03 | )%

Use of Non-GAAP Financial Information

Non-GAAP Adjusted EBITDA, Adjusted EBITDA margin are Non-GAAP financial measures. Their most directly comparable financial measures prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) are GAAP net loss and GAAP net loss margin. In addition to reporting financial results in accordance with GAAP, we provide Non-GAAP supplemental operating results adjusted for certain items, including: financial expenses, which are interest, financial instrument fair value adjustments, exchange rate differences of assets and liabilities, stock based compensation expenses, depreciation and amortization expense, tax expense, and impact of development expenses ahead of product launch. We adjust for the items listed above and show non-GAAP financial measures in all periods presented, unless the impact is clearly immaterial to our financial statements. When we calculate the tax effect of the adjustments, we include all current and deferred income tax expense commensurate with the adjusted measure of pre-tax profitability.

We utilize the adjusted results to review our ongoing operations without the effect of these adjustments but not for comparison to budgeted operating results. We believe the supplemental adjusted results are useful to investors because they help them compare our results to previous periods and provide important insights into underlying trends in the business and how management oversees and optimizes our business operations on a day-to-day basis. We exclude the costs described above in calculating adjusted results to allow us and investors to evaluate the performance of the business based upon its expected ongoing operating structure. We believe the adjusted measures, accompanied by the disclosure of the types of expenses included in these adjustments, provides valuable insight to our financial performance. Adjusted results should be considered only in conjunction with results reported according to GAAP.

47

The non-GAAP financial measures are presented for supplemental informational purposes only. They should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided above for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

|  | For the year ended December 31 |
(U.S. dollars in thousands) |  | 2023 |  |  | 2022 |
Revenues |  | $ | 5,606 |  |  | $ | 8,831 |
Non-GAAP Adjusted EBITDA |  |  | (6,066 | ) |  |  | (4,065 | )
As a percentage of revenues |  |  | (108.20 | )% |  |  | (46.03 | )%

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through the sale of equity securities, debt financing, convertible loans and royalty-bearing grants that we received from the Israel Innovation Authority. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes. We also received proceeds of $15.4 million, net of underwriting discounts and commissions and other offering costs of $1.0 million, following our IPO in May 2022. In May and December 2023, we also received proceeds of $4.6 million, net of underwriting discounts and commissions and other offering costs of $0.4 million, following our private placements.

We have incurred significant losses and negative cash flows from operations and net loss was $6.3 million and $11.0 million for the years ended December 31, 2023, and December 31, 2022, respectively. During the years ended December 31, 2023, and December 31, 2022, we had negative cash flows from operations of $6.6 million and $7.8 million, respectively. As of December 31, 2023, our accumulated deficit was $39.7 million. We have funded our operations to date through equity and debt financing and have cash on hand (including short term bank deposits and restricted cash equivalents) of $2.4 million and long-term restricted cash and cash equivalents and restricted bank deposits of $3.4 as of December 31, 2023. 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 are not successful in generating sufficient cash flow or completing additional financing, including debt refinancing which shall release restricted cash, then we will need to execute a new cost reduction plan in addition to previous cost reduction plans that were executed so far. 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, that 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 our operations. Management has evaluated the significance of these conditions and has determined that we do not have sufficient resources to meet our operating obligations for at least one year from the issuance date of these consolidated financial statements. These conditions raise substantial doubt as to our ability to continue as a going concern. These consolidated financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.

Our future capital requirements will be affected by many factors, including our revenue growth, the timing and extent of investments to support such growth, the expansion of sales and marketing activities, increases in general and administrative costs, repayment of principal of our existing credit line, working capital to support securing raw material supply and many other factors as described under “Risk Factors.”

To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, and cannot generate significant recurring revenues, profit and cash flow provided by operating activity, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. However, such financing may not be available on favorable terms, or at all. In particular, the repercussions from the COVID 19 pandemic, inflation, economic uncertainty, as well as the war between Russia and the Ukraine and Israel, Hamas and Hezbollah, has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when desired, our business, financial condition and results of operations could be adversely affected.

48

Cash Flows

The table below, for the periods indicated, provides selected cash flow information:

(U.S. dollars in thousands) |  | Year Ended December 31, 2023 |  |  | Year Ended December 31, 2022 |
Net cash used in operating activities (including the effect of exchange rate changes on cash and cash equivalents and restricted cash) |  | $ | (6,346 | ) |  | $ | (7,768 | )
Net cash provided by (used in) investing activities |  |  | 3,821 |  |  |  | (4,034 | )
Net cash provided by financing activities |  |  | 3,761 |  |  |  | 15,286 |
Net change in cash |  | $ | 1,236 |  |  | $ | 3,484 |

As of December 31, 2023, we had cash, cash equivalents, and restricted cash of $5.5 million compared to $4.3 million of cash, cash equivalents and restricted cash as of December 31, 2022.

Cash used in operating activities (including the effect of exchange rate changes on cash and cash equivalents and restricted cash) amounted to $6.3 million for the year ended December 31, 2023, compared to $7.8 million for the year ended December 31, 2022. The decrease in cash used in operating activities was mainly due to a decrease in trade receivables, which was partially offset by the increase in our operational loss.

Net cash provided by investing activities was $3.8 million for the year ended December 31, 2023, compared to cash used in investing activities of $4.0 million for the year ended December 31, 2022. The increase in cash used in investing activities was mainly due to changes in short term deposits and restricted bank deposits.

Net cash provided by financing activities was $3.8 million for the year ended December 31, 2023, compared to $15.3 million for the year ended December 31, 2022. The cash flow from financing activities for the year ended December 31, 2023, resulted from proceeds from private placements which closed on May and December 2023 in the aggregate amount of $4.6 million, net of underwriting commissions and other offering costs of $0.4 million see note 14(d) to the condensed consolidated financial statements. The cash flow from financing activities for the year ended December 31, 2022, resulted from proceeds from the Company’s IPO in the amount of $15.4, net of underwriting discounts and commissions and other offering costs of $1.0 million.

49

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on the audited consolidated financial statements which are included elsewhere in this prospectus. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actelis bases its estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates.

Management considers accounting estimates to be critical if both (i) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (ii) the impact within a reasonable range of outcomes of the estimate and assumption is material to the Actelis financial condition.

Management believes the following addresses the most critical accounting policies and estimates, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Critical judgement and estimates

Critical judgement and estimates have been used primarily in estimating the fair value of our financial instruments (for example, warrants, notes and stock options), as well as the estimate of future usage of existing inventory to determine the net value of our inventory (see notes in financial statements).

Estimating the fair value of financial instruments such as warrants, notes and stock options are influenced by assessments of our future financial performance. Such assessments are forward-looking in nature and therefore subject to significant uncertainty. Estimating the value of net inventory is also influenced by assessments of future usage of such inventory which is also forward looking in nature and therefore subject to significant uncertainty.

Marketable securities

Marketable securities consist of debt securities. We elected the fair value option to measure and recognize our investments in debt securities in accordance with ASC 825, Financial Instruments as we manage our portfolio and evaluates the performance on a fair value basis. Changes in fair value, realized gains and losses on sales of marketable securities, are reflected in the statements of operation as finance expense (income), net.

Inventory

Inventories are stated at the lower of cost (cost is determined on a weighted average cost method) or net realizable value. Our inventories generally are subject to impairment as they age. We regularly evaluate the carrying value of our inventories and when, based on such evaluation, factors indicate that impairment has occurred, we impair the inventories’ carrying value.

Revenue recognition

The Company’s products consist of hardware and 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 generally 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.

50

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 end-users, 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 the 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 or more years and is paid for either up front or on a quarterly basis.

Accounting standards updates not yet adopted

Please see Note 2(hh) to our consolidated financial statements included elsewhere in this prospectus for information.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

51

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

ACTELIS NETWORKS, INC.

2023 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

| Page
Report of Independent Registered Public Accounting Firm (PCAOB name: Kesselman & Kesselman C.P.A.s and PCAOB ID: 1309) | F-2
Consolidated financial statements – U.S. dollars in thousands (except for share and per share amounts): |
Balance sheets | F-3 – F-4
Statements of comprehensive loss | F-5
Statements of mezzanine equity and shareholders’ equity | F-6
Statements of cash flows | F-7 – F-8
Notes to consolidated financial statements | F-9 – F-42

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Actelis Networks, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Actelis Networks, Inc. and its subsidiary (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of comprehensive loss, of mezzanine equity and shareholders’ equity and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1b to the consolidated financial statements, the Company has incurred recurring losses and negative cash flows from operating activities and has an accumulated deficit as of December 31, 2023 that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1b. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Kesselman & Kesselman |

Certified Public Accountants (Isr.)

A member firm of PricewaterhouseCoopers International Limited

Tel Aviv, Israel

March 26, 2024

We have served as the Company’s auditor since 2019.

Kesselman & Kesselman, 146 Derech Menachem Begin, Tel-Aviv 6492103, Israel,

P.O Box 7187 Tel-Aviv 6107120, Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il

F-2

ACTELIS NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(U. S. dollars in thousands except for share and per share amounts)

|  |  |  | December 31 |
|  | Note |  | 2023 |  |  | 2022 |
Assets |  |  |  |  |  |  |  |
CURRENT ASSETS: |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  |  |  | 620 |  |  |  | 3,943 |
Restricted cash equivalents |  |  |  |  | 1,565 |  |  |  | - |
Short-term deposits |  |  |  |  | 197 |  |  |  | 1,622 |
Restricted bank deposits |  |  |  |  | - |  |  |  | 451 |
Trade receivables, net of allowance for credit losses of $168 and $125 as of December 31, 2023, and December 31, 2022, respectively |  |  |  |  | 664 |  |  |  | 3,034 |
Inventories |  | 3 |  |  | 2,526 |  |  |  | 1,179 |
Prepaid expenses and other current assets, net of allowance for doubtful debts of $144 and $0 as of December 31, 2023, and December 31, 2022, respectively |  | 4 |  |  | 340 |  |  |  | 678 |
TOTAL CURRENT ASSETS |  |  |  |  | 5,912 |  |  |  | 10,907 |
NON-CURRENT ASSETS: |  |  |  |  |  |  |  |  |  |
Property and equipment, net |  | 5 |  |  | 61 |  |  |  | 80 |
Prepaid expenses |  |  |  |  | 592 |  |  |  | 492 |
Restricted cash and cash equivalents |  |  |  |  | 3,330 |  |  |  | 336 |
Restricted bank deposits |  |  |  |  | 94 |  |  |  | 2,027 |
Severance pay fund |  |  |  |  | 238 |  |  |  | 239 |
Operating lease right of use assets |  | 6 |  |  | 918 |  |  |  | 726 |
Long-term deposits |  |  |  |  | 78 |  |  |  | 12 |
TOTAL NON-CURRENT ASSETS |  |  |  |  | 5,311 |  |  |  | 3,912 |
TOTAL ASSETS |  |  |  |  | 11,223 |  |  |  | 14,819 |

F-3

ACTELIS NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS (continued)

(U. S. dollars in thousands except for share and per share amounts)

|  |  |  | December 31 |
|  | Note |  | 2023 |  |  | 2022 |
Liabilities, Mezzanine Equity and shareholders’ equity |  |  |  |  |  |  |  |
CURRENT LIABILITIES: |  |  |  |  |  |  |  |
Current maturities of long-term loans |  | 8 |  |  | 1,335 |  |  |  | 553 |
Trade payables |  |  |  |  | 1,769 |  |  |  | 1,781 |
Deferred revenues |  |  |  |  | 389 |  |  |  | 484 |
Employee and employee-related obligations |  |  |  |  | 737 |  |  |  | 793 |
Accrued royalties |  | 11 |  |  | 1,062 |  |  |  | 900 |
Operating lease liabilities |  | 6 |  |  | 498 |  |  |  | 445 |
Other current liabilities |  | 7 |  |  | 1,122 |  |  |  | 1,246 |
TOTAL CURRENT LIABILITIES |  |  |  |  | 6,912 |  |  |  | 6,202 |
NON-CURRENT LIABILITIES: |  |  |  |  |  |  |  |  |  |
Long-term loan, net of current maturities |  | 8 |  |  | 3,154 |  |  |  | 4,625 |
Deferred revenues |  |  |  |  | 71 |  |  |  | 164 |
Operating lease liabilities |  |  |  |  | 405 |  |  |  | 237 |
Accrued severance |  |  |  |  | 270 |  |  |  | 278 |
Other long-term liabilities |  |  |  |  | 23 |  |  |  | 48 |
TOTAL NON-CURRENT LIABILITIES |  |  |  |  | 3,923 |  |  |  | 5,352 |
TOTAL LIABILITIES |  |  |  |  | 10,835 |  |  |  | 11,554 |
COMMITMENTS AND CONTINGENCIES |  | 11 |  |  |  |  |  |  |  |
MEZZANINE EQUITY |  |  |  |  |  |  |  |  |  |
Redeemable Convertible Preferred Stock $0.0001 par value, 10,000,000 authorized; None issued and outstanding as of December 31, 2023 and December 31, 2022. |  |  |  |  | - |  |  |  | - |
Warrants to Placement Agent |  | 14d |  |  | 159 |  |  |  | - |
SHAREHOLDERS’ EQUITY : (*) |  | 14 |  |  |  |  |  |  |  |
Common stock, $0.0001 par value: 30,000,000 shares authorized; 3,007,745 and 1,737,986 shares issued and outstanding as of December 31, 2023, and December 31, 2022, respectively. |  |  |  |  | 1 |  |  |  | 1 |
Non-voting common stock, $0.0001 par value: 2,803,774 shares authorized; No shares issued and outstanding as of December 31, 2023, and December 31, 2022. |  |  |  |  | - |  |  |  | - |
Additional paid-in capital |  |  |  |  | 39,916 |  |  |  | 36,666 |
Accumulated deficit |  |  |  |  | (39,688 | ) |  |  | (33,402 | )
TOTAL SHAREHOLDERS’ EQUITY |  |  |  |  | 229 |  |  |  | 3,265 |
TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY |  |  |  |  | 11,223 |  |  |  | 14,819 |

* | Adjusted to reflect reverse stock split, see note 2(ff).

The accompanying notes are an integral part of these consolidated financial statements.

F-4

ACTELIS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(U. S. dollars in thousands except for share and per share amounts)

|  |  |  | Year ended December 31 |
|  | Note |  | 2023 |  |  | 2022 |
REVENUES |  | 17 |  |  | 5,606 |  |  |  | 8,831 |
COST OF REVENUES |  |  |  |  | 3,706 |  |  |  | 4,721 |
GROSS PROFIT |  |  |  |  | 1,900 |  |  |  | 4,110 |
OPERATING EXPENSES: |  |  |  |  |  |  |  |  |  |
Research and development expenses |  |  |  |  | 2,702 |  |  |  | 2,766 |
Sales and marketing expenses, net |  |  |  |  | 3,030 |  |  |  | 3,282 |
General and administrative expenses |  |  |  |  | 3,531 |  |  |  | 4,163 |
TOTAL OPERATING EXPENSES |  |  |  |  | 9,263 |  |  |  | 10,211 |
OPERATING LOSS |  |  |  |  | (7,363 | ) |  |  | (6,101 | )
Interest expenses |  |  |  |  | (766 | ) |  |  | (830 | )
Other financial income (expenses), net |  | 18 |  |  | 1,843 |  |  |  | (4,051 | )
NET COMPREHENSIVE LOSS FOR THE YEAR |  |  |  |  | (6,286 | ) |  |  | (10,982 | )
Net loss per share attributable to common shareholders – basic and diluted |  | 16 |  | $ | (*)(2.61 | ) |  | $ | (*)(9.45 | )
Weighted average number of common stocks used in computing net loss per share – basic and diluted |  |  |  |  | (*)2,412,717 |  |  |  | (*)1,162,124 |

* | Adjusted to reflect reverse stock split, see note 2(ff).

The accompanying notes are an integral part of these consolidated financial statements.

F-5

ACTELIS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY

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

|  | Warrants To Placement Agent |  |  | Redeemable Convertible Preferred Stock |  |  | Common Stock |  |  | Non-voting Common Stock |  |  | Additional |  |  |  |  |  | Total shareholder’s |
|  | Amount |  |  | Number of shares(**) |  |  | Amount |  |  | Number of shares(**) |  |  | Amount |  |  | Number of shares(**) |  |  | Amount |  |  | paid-in capital |  |  | Accumulated deficit |  |  | (deficit) equity |
BALANCE AS OF JANUARY 1, 2022 |  |  | - |  |  |  | 773,108 |  |  |  | 5,585 |  |  |  | 205,040 |  |  |  | * |  |  |  | 178,377 |  |  |  | * |  |  |  | 2,824 |  |  |  | (22,420 | ) |  |  | (19,596 | )
CHANGES DURING THE YEAR ENDED DECEMBER 31, 2022: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Exercise of options into common stock |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 77,749 |  |  |  | * |  |  |  | - |  |  |  | - |  |  |  | 5 |  |  |  | - |  |  |  | 5 |
Share based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 220 |  |  |  | - |  |  |  | 220 |
Conversion of convertible redeemable preferred stock to common stock upon initial public offering |  |  | - |  |  |  | (773,108 | ) |  |  | (5,585 | ) |  |  | 773,108 |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | 5,584 |  |  |  | - |  |  |  | 5,585 |
Issuance of common stock upon initial public offering and private placement, net of underwriting discounts and commissions and other offering costs |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 421,250 |  |  |  | * |  |  |  | - |  |  |  | - |  |  |  | 14,675 |  |  |  | - |  |  |  | 14,675 |
Conversion of convertible loan to common stock upon initial public offering |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 163,816 |  |  |  | * |  |  |  | - |  |  |  | - |  |  |  | 6,553 |  |  |  | - |  |  |  | 6,553 |
Conversion of convertible note to common stock upon initial public offering |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 90,009 |  |  |  | * |  |  |  | - |  |  |  | - |  |  |  | 3,600 |  |  |  | - |  |  |  | 3,600 |
Conversion of warrants to common stock upon initial public offering |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 79,756 |  |  |  | * |  |  |  | - |  |  |  | - |  |  |  | 3,190 |  |  |  | - |  |  |  | 3,190 |
Redemption of non-voting common stock upon initial public offering |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (178,377 | ) |  |  | * |  |  |  | - |  |  |  | - |  |  |  | * |
Repurchase of common stock |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2,700 | ) |  |  | * |  |  |  | - |  |  |  | - |  |  |  | 15 |  |  |  | - |  |  |  | 15 |
Net comprehensive loss for the year |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (10,982 | ) |  |  | (10,982 | )
BALANCE AS OF DECEMBER 31, 2022 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,737,986 |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | 36,666 |  |  |  | (33,402 | ) |  |  | 3,265 |
Exercise of options into common stock |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 32,009 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Share based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 377 |  |  |  | - |  |  |  | 377 |
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 |  |  | 159 |  |  |  | - |  |  |  | - |  |  |  | 491,000 |  |  |  | * |  |  |  | - |  |  |  | - |  |  |  | 2,609 |  |  |  | - |  |  |  | 2,609 |
Exercise of pre-funded warrants into common stock |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 754,670 |  |  |  | * |  |  |  | - |  |  |  | - |  |  |  | * |  |  |  | - |  |  |  | * |
Reclassification of warrants from liabilities to equity (see note (14(d)) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 314 |  |  |  |  |  |  |  | 314 |
Net comprehensive loss for the year |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (6,286 | ) |  |  | (6,286 | )
BALANCE AS OF DECEMBER 31, 2023 |  |  | 159 |  |  |  | - |  |  |  | - |  |  |  | 3,007,745 |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | 39,916 |  |  |  | (39,688 | ) |  |  | 229 |

* | Represents an amount less than $1 thousand.

** | Adjusted to reflect reverse stock split, see note 2(ff).

The accompanying notes are an integral part of these consolidated financial statements.

F-6

ACTELIS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. DOLLARS IN THOUSANDS

|  | Year ended December 31 |
|  | 2023 |  |  | 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES: |  |  |  |  |  |
Net loss for the year |  |  | (6,286 | ) |  |  | (10,982 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |  |  |
Depreciation |  |  | 27 |  |  |  | 23 |
Changes in fair value related to warrants to lenders and investors |  |  | (1,658 | ) |  |  | 1,049 |
Warrant issuance costs |  |  | 223 |  |  |  | - |
Inventory write-downs |  |  | 239 |  |  |  | 147 |
Exchange rate differences |  |  | (460 | ) |  |  | (627 | )
Share-based compensation |  |  | 377 |  |  |  | 220 |
Changes in fair value related to convertible loan |  |  | - |  |  |  | 1,648 |
Changes in fair value related to convertible note |  |  | - |  |  |  | 1,753 |
Interest expenses |  |  | 295 |  |  |  | 830 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Trade receivables |  |  | 2,370 |  |  |  | (887 | )
Net change in operating lease assets and liabilities |  |  | 19 |  |  |  | (44 | )
Inventories |  |  | (1,585 | ) |  |  | (429 | )
Prepaid expenses and other current assets |  |  | 357 |  |  |  | (280 | )
Other long-term assets |  |  | (100 | ) |  |  | (492 | )
Trade payables |  |  | (25 | ) |  |  | (139 | )
Deferred revenues |  |  | (188 | ) |  |  | (25 | )
Other current liabilities |  |  | (172 | ) |  |  | 508 |
Other long-term liabilities |  |  | (10 | ) |  |  | (41 | )
Net cash used in operating activities |  |  | (6,577 | ) |  |  | (7,768 | )
CASH FLOWS FROM INVESTING ACTIVITIES: |  |  |  |  |  |  |  |
Short term deposit, net |  |  | 1,418 |  |  |  | (1,622 | )
Long- term deposit |  |  | (56 | ) |  |  | 66 |
Proceeds from restricted long term bank deposits |  |  | 4,827 |  |  |  |  |
Deposit of restricted long-term bank deposits |  |  | (2,810 | ) |  |  | (27 | )
Restricted short term bank deposit |  |  | 451 |  |  |  | (2,451 | )
Purchase of property and equipment |  |  | (9 | ) |  |  | - |
Net cash provided by (used in) investing activities |  |  | 3,821 |  |  |  | (4,034 | )
CASH FLOWS FROM FINANCING ACTIVITIES: |  |  |  |  |  |  |  |
Proceeds from exercise of options |  |  | - |  |  |  | 5 |
Proceeds from initial public offering |  |  | - |  |  |  | 18,697 |
Proceeds from issuance of common stocks, pre-funded warrants and warrants (see note 14d) |  |  | 5,000 |  |  |  | - |
Underwriting discounts and commissions and other offering costs |  |  | (420 | ) |  |  | (2,175 | )
Repurchase of common stock |  |  | (50 | ) |  |  |  |
Repayment of long-term loan |  |  | (769 | ) |  |  | (1,241 | )
Net cash provided by financing activities |  |  | 3,761 |  |  |  | 15,286 |
Effect of exchange rate changes on cash and cash equivalents and restricted cash |  |  | 231 |  |  |  | (72 | )
INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |  |  | 1,236 |  |  |  | 3,484 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR |  |  | 4,279 |  |  |  | 795 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR |  |  | 5,515 |  |  |  | 4,279 |
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  | 620 |  |  |  | 3,943 |
Restricted cash equivalents, current |  |  | 1,565 |  |  |  | - |
Restricted cash and cash equivalents, non-current |  |  | 3,330 |  |  |  | 336 |
Total cash, cash equivalents and restricted cash |  |  | 5,515 |  |  |  | 4,279 |

F-7

ACTELIS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

U.S. DOLLARS IN THOUSANDS

|  | Year ended December 31 |
|  | 2023 |  |  | 2022 |
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION: |  |  |  |  |  |
Cash paid for interest |  |  | 431 |  |  |  | 818 |
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS: |  |  |  |  |  |  |  |
Right of use assets obtained in exchange for new operating lease liabilities |  |  | 702 |  |  |  | 237 |
Conversion of convertible loan to common stock upon initial public offering |  |  | - |  |  |  | 6,553 |
Conversion of convertible note to common stock upon initial public offering |  |  | - |  |  |  | 3,600 |
Conversion of warrants to common stock upon initial public offering |  |  | - |  |  |  | 3,190 |
Conversion of convertible redeemable preferred stock to common stock upon initial public offering |  |  | - |  |  |  | 5,585 |
Repurchase of common stock |  |  | - |  |  |  | 15 |
Issuance costs of common stock, pre-funded warrants and warrants |  |  | 159 |  |  |  | - |
Reclassification of warrants from liability to equity upon amendment to private placement agreement (see Note 14(d)) |  |  | 314 |  |  |  | - |

The accompanying notes are an integral part of these consolidated financial statements.

F-8

ACTELIS NETWORKS, INC.

NOTES TO 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, 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. See note 14c below for further details. The Company’s Common Stock is listed on the NASDAQ.

| b. | The Company has incurred significant losses and negative cash flows from operations, net loss was $6,286 and $10,982 for the years ended December 31, 2023, and December 31, 2022, respectively. During the years ended December 31, 2023, and December 31, 2022, the Company had negative cash flows from operations of $6,577 and $7,768, respectively. As of December 31, 2023, the Company’s accumulated deficit was $39,688. The Company has funded its operations to date through equity and debt financing and has cash on hand (including short term bank deposits and restricted cash equivalents) of $2,382 and long-term restricted cash and cash equivalents and restricted bank deposits of $3,424 as of December 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, 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 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.

| c. | On October 7th, 2023, an attack by the Hamas terrorist organization was inflicted on the State of Israel which started a war between Israel and the Hamas as well as military conflicts on other fronts. As of the date of the issuance of these consolidated financial statements, the Company has not identified any material effect on its operations as a result of those events. 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.

F-9

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:

| a. | Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

| b. | Use of estimates in preparation of financial statements

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company evaluates on an ongoing basis its assumptions, including those related to Fair value 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, judgment, 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 liabilities at the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

| c. | Functional currency

The currency of the primary economic environment in which the operations of the Company and its Subsidiary are conducted is the U.S. dollar (“$” or “dollar”). Therefore, the functional currency of the Company and its Subsidiary is the dollar. In determining the appropriate functional currency to be used, the Company reviewed factors relating to sales, costs and expenses, financing activities and cash flows.

Transactions and balances denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been re-measured to dollars in accordance with the provisions of ASC 830-10, “Foreign Currency Translation”. All transaction gains and losses from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of comprehensive loss as Other financial income (expenses), net , as appropriate.

| d. | Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. Intercompany transactions and balances have been eliminated upon consolidation.

| e. | Cash and cash equivalents

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.

| f. | Restricted cash and cash equivalents and restricted deposits

Restricted cash and cash equivalents consists of cash and cash equivalents 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 deposit bank accounts including deposits held as collateral for guarantees to third parties and others, classified as current or long term based on the expected timing of the disbursement.

| g. | Treasury Shares

Treasury shares represent 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. The treasury shares have no rights.

F-10

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| h. | Trade Receivables, net

Trade receivables are recorded at the invoiced amount, are mostly unsecured and do not bear interest. Accounts receivable have been reduced by an allowance for credit losses. The Company maintains the allowance for estimated losses resulting from the inability of the Company’s customers to make required payments. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts when appropriate. The estimate is a result of the Company’s ongoing evaluation of collectability, customer creditworthiness, historical levels of credit losses and future expectations. On this basis, management has determined that an allowance for credit losses of $168 and $125 was appropriate as of December 31, 2023, and December 31, 2022, respectively. Expenses for allowance for credit losses for the years ended December 31, 2023, and 2022 were $43 and $64, respectively.

| i. | Inventories

Inventories are stated at a lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory write-offs are provided to cover risks arising from slow-moving items, excess inventories, discontinued products, new products introduction and for market prices lower than cost. Any write-off is recognized in the consolidated statement of comprehensive loss as cost of revenues. In addition, if required, the Company records a liability for firm non-cancelable and unconditional purchase commitments with contract manufacturers for quantities in excess of the Company’s future demands forecast consistent with its valuation of excess and obsolete inventory.

Cost is determined as follows:

Raw materials, parts, supplies and finished products- using the weighted average cost method.

| j. | Property and equipment, net

Property and equipment are stated at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Depreciation expense is calculated on a straight-line basis over the estimated useful lives of the related assets. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and the related gain or loss is reported in the statement of comprehensive loss.

The useful lives of the assets are as follows:

|  | Years
Computers, electronic equipment |  | Mainly 3
Office furniture and equipment |  | 7
Leasehold improvements |  | By the shorter of lease term and the estimated useful life of the asset

| k. | Impairment of long-lived assets subject to amortization

The Company evaluates long-lived assets, such as property and equipment with finite lives, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company identifies impairment of long-lived assets when estimated undiscounted future cash flows expected to result from the use of the assets plus net proceeds expected from disposition of the assets, if any, are less than the carrying value of the assets. If the Company identifies an impairment, the Company reduces the carrying amount of the assets to their estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.

| l. | Revenue recognition

The Company’s products consist of hardware and 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 generally 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.

F-11

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

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 end-users, 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 the 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 or more years and is paid for either up front or on a quarterly basis.

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.

F-12

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

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.

| m. | Cost of revenues

Cost of revenues includes cost of materials, costs associated with packaging, assembly and testing costs, as well as cost of personnel (including share-based compensation), shipping costs, inventory write down, royalties, costs of logistics and quality assurance, access to on-site technical support personnel as well as warranty expenses and other expenses associated with manufacturing support.

| n. | Offering Costs associated with the Initial Public Offering and private placements

Offering costs consist principally of professional and registration fees incurred through the balance sheet date that are related to the IPO and private placements. Offering costs directly attributable to the issuance of an equity contract to be classified in equity are recorded as a reduction of equity.

In 2022, as a result of the IPO, the Company incurred offering costs amounting to approximately $1.45 million, related to underwriting discounts and commissions, and other offering costs of $1 million- see note 14c

In 2023 as a result of private placements, the Company incurred offering and other costs amounting to approximately $0.4 million - see note 14d.

| o. | Basic and diluted net loss per share

Basic net loss per share is computed using the weighted average number of common shares, Pre-Funded Warrants to purchase shares of Common Stock for an exercise price of $0.0001 which are exercisable immediately 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 redeemable convertible 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; and (iii) the conversion of the warrants classified as lability, by adding to net loss the change in the fair value of the warrants and by adding the weighted average number of shares issuable upon assumed conversion of these warrants using the treasury stock method.

| p. | 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 (see note 13) based on Level 3 inputs, and the warrants liability amounted to $8 as of December 31, 2023, and 2022, are presented in the Other current liabilities in the accompanying consolidated balance sheets.

F-13

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

As of December 31, 2023, and 2022, the fair values of the Company’s cash, cash equivalents, short and long-term deposits, Restricted bank deposits, trade receivables, trade payables, long-term loan and restricted cash approximated the carrying values of these instruments presented in the Company’s consolidated balance sheets because of their nature.

| q. | Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, trade receivables and Restricted bank deposits. 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.

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

| 1. | Customer A- 30% and 5% of the Company Trade receivables balance as of December 31, 2023 and December 31, 2022 respectively.

| 2. | Customer B- 11% and 29% of the Company Trade receivables balance as of December 31, 2023 and December 31, 2022 respectively.

| 3. | Customer C- 11% and 1% of the Company Trade receivables balance as of December 31, 2023 and December 31, 2022 respectively.

See note 17 for details regarding the revenues from these customers.

The Company does not see any credit risk regarding this balance, as most of the remaining balance was paid off after the balance sheet date.

F-14

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| r. | Warranty costs

The Company’s products generally include a standard warranty of two years for product defects. The Company accrues for warranty at the time revenue is recognized. The Company’s estimates of future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, specific warranty accruals may be recorded if unforeseen problems arise. The provision for warranty amounted to $47 and $96 as of December 31, 2023, and 2022, respectively. These provisions are included in “Other current liabilities” and “Other long-term liabilities” in the accompanying consolidated balance sheets.

| s. | Sales and marketing expenses, net

Sales and marketing expenses include such expenses for the company’s sales teams, business development activities, sales engineering, and customer support.

| t. | Research and development costs

Research and development costs are expensed as incurred and include compensation for engineers, external services, and material costs associated with new product development, enhancement of current products.

Based on the Company’s product development process, the Company does not incur material costs after the point in time at which the product as a whole reaches technological feasibility.

| u. | Shipping and handling

The Company classifies shipping and handling charged to customers as revenues and classifies costs relating to shipping and handling as cost of revenues.

| v. | Government grants and related royalties

The Company is paying royalties to the government of Israel for funding received for research and development. Royalties are calculated and paid at a rate of 3% of the applicable revenues. During 2023 and 2022, respectively, the Company incurred royalty expenses of $334 and $257, included within cost of revenues (see note 11).

| w. | Segments

The Company operates in one segment. Management does not segregate its business for internal reporting. The chief operating decision maker is the Company’s Chief Executive Officer (“CODM”) The CODM evaluates the performance of its business based on financial data consistent with the presentation in the accompanying financial statements. The Company concluded that its unified business is conducted globally and accordingly represents one operating segment.

F-15

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| x. | Income taxes

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). ASC 740 prescribes the use of the asset and liability method whereby deferred tax assets and liability account balances are determined based on differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that a portion or all of the deferred tax assets will not be realized.

The Company implements a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company does not have any liabilities in any reported periods regarding uncertain tax positions.

Taxes which would apply in the event of disposal of investment in foreign subsidiary have not been taken into account in computing the deferred taxes, since the Company’s intention is to hold, and not to realize the investment.

| y. | Employee related benefits:

Severance pay

The Company’s liability for severance pay for its Israeli employees is calculated pursuant to the Israeli Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees whose employment is terminated by the Company or who are otherwise entitled to severance pay in accordance with Israeli law or labor agreements are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability for all of its Israeli employees is partly provided for by monthly deposits for insurance policies and the remainder by an accrual. The accrued value of these policies is recorded as an asset in the Company’s consolidated balance sheet. Such deposits are not considered to be “plan assets” and are therefore included in “Severance pay fund” in the consolidated balance sheets.

During April and May 2008 (the “transition date”), the Company amended the contracts of most of its Israeli employees so that starting on the transition date, such employees are subject to Section 14 of the Severance Pay Law, 1963 (“Section 14”) for severance pay accumulated in periods of employment subsequent to the transition date. Pursuant to Section 14, these employees are entitled to monthly deposits made by the Company on their behalf with insurance companies. These deposits are not recorded as an asset on the Company’s balance sheet, and there is no liability recorded as the Company does not have a future obligation to make any additional payments. The Company’s contributions to the defined contribution plans are charged to the consolidated statements of Comprehensive loss as and when the services are received from the Company’s employees. For the Company’s employees in Israel that began employment prior to Article 14, the Company calculates the liability for severance pay based on the most recent salary of these employees multiplied by the number of years of employment as of the Article 14 inception date. These liabilities are presented under “Accrued severance pay” in the Company’s consolidated balance sheets.

The carrying value for the deposited funds for the Company’s employees’ severance pay for employment periods prior to the transition date includes profits and losses accumulated up to the balance sheet date.

F-16

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

The amounts of contribution plans expenses were approximately $175 and $182 for each of the years ended December 31, 2023, and 2022, respectively.

The Company expects to contribute approximately $169 in the year ending December 31, 2024, to insurance companies in connection with its contribution plans.

Gain (loss) on amounts funded in respect of employee rights upon retirement totaled approximately $5 and $(4) for the years ended December 31, 2023, and December 31, 2022, respectively.

401(k) profit sharing plans

The Company has a number of savings plans in the United States that qualify under Section 401(k) of the current Internal Revenue Code as a “safe harbor” plan. The Company must make a mandatory contribution to the 401(k) plan to satisfy certain nondiscrimination requirements under the Internal Revenue Code. This mandatory contribution is made to all eligible employees. The contribution costs were $8 and $9 for the years ended December 31, 2023, and 2022, respectively.

| z. | Share-based compensation

Share-based compensation expense for all share-based payment awards, including share options and restricted share units (“RSUs”), is determined based on the grant-date fair value. The Company recognizes these compensation costs net of actual forfeitures and recognizes compensation cost for all options on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years and three years for the RSUs.

The Company accounts for share-based compensation arrangements with non-employees based on the estimated fair value of the equity instrument using the Black-Scholes option-pricing model. Compensation cost is recognized over the period that the services are provided, and the award is earned by the counterparty.

The Company follows ASC 718 to determine whether a share-based payment should be classified and accounted for as a liability award or equity award. All grants of share-based awards to employee classified as equity awards are recognized in the financial statements based on their grant date fair values which are calculated using the Black-Scholes Option-pricing model.

For options and RSU’s with graded vesting, the Company has elected a fair-value-based measure of the entire award by using a single weighted-average expected term.

The Company records forfeitures for share-based payments awards as they occur.

Share-based compensation classified as mezzanine equity

Share-based compensation subject to possible redemption are classified as mezzanine equity based on the guidance provided under ASC 480-10-S99-3A and SAB Topic 14E. See also Note 14d for additional information on share-based compensation granted to the underwriter in connection with an offering of common stocks and warrants.

| aa. | Convertible Note

The Company follows ASC 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) in its evaluation of the accounting for a hybrid instrument. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception; (b) variations in something other than the fair value of the issuer’s equity shares; or (c) variations inversely related to changes in the fair value of the issuer’s equity shares. Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives and are carried as a liability at fair value at each balance sheet date with remeasurements reported in interest expense in the accompanying Consolidated Statements of Comprehensive Loss.

F-17

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

The Company concluded that the value of the note is predominantly based on a fixed monetary amount known at the date of issuance, to be converted into shares of common stock, at a conversion price per share reflecting a discount of 40% from the conversion price Accordingly, the note was classified as a liability and is measured at its fair value at each reporting date, pursuant to the provisions of ASC 480-10. Upon the consummation of the IPO, the convertible note was automatically converted into the Company’s common stock based on its contractual terms and conditions. (See note 10).

| bb. | Convertible loan

The Company follows ASC 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) in its evaluation of the accounting for a hybrid instrument. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception; (b) variations in something other than the fair value of the issuer’s equity shares; or (c) variations inversely related to changes in the fair value of the issuer’s equity shares. Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives and are carried as a liability at fair value at each balance sheet date with remeasurements reported in interest expense in the accompanying Consolidated Statements of Comprehensive Loss.

The Company concluded that the value of the loan is predominantly based on a fixed monetary amount known at the date of issuance, to be converted into shares of common stock, at a conversion price per share reflecting a discount of no more than 65% of the lowest price per share paid by any investor in an offering. Accordingly, the loan was classified as a liability and is measured at its fair value, pursuant to the provisions of ASC 480-10. Upon the consummation of the IPO, the convertible loan was automatically converted into the Company’s common stock based on its contractual terms and conditions. (See note 10).

| cc. | Warrants

Common stock warrants

The Company accounts for its warrants as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants and applicable authoritative guidance in Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity” (“ASC 480”), and ASC 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, or meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. See note 14.

Redeemable Preferred stock warrants

The Company accounts for redeemable preferred stock warrants at fair value and classifies redeemable preferred stock warrants as liabilities in accordance with ASC 480, as the warrants are exercisable into contingently redeemable preferred stock as described in Note 14. All redeemable preferred stock warrants are recognized at fair value and re-measured at each balance sheet date. At the end of each reporting period, changes in fair value during the period are recognized as a component of financial income (expense), net.

F-18

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Following the guidance of ASC 480, the Redeemable Preferred stock warrants were required to be classified as a liability because the redemption feature of their underlying redeemable preferred stock potentially requires the Company to repurchase its stock by transferring assets upon specific events which would not necessarily be within the control of the Company (See note 14). In connection with the consummation of the IPO, the type of the stock has changed from redeemable preferred stock to common stock at conversion, and the Company re-evaluated the classification of certain warrants.

Other redeemable preferred stock warrants were converted into the Company’s common stock upon the consummation of the IPO.

Warrants issued in connection with obtaining loans and/or securing credit facilities.

Warrants issued in connection with obtaining a loan or securing a credit facility are considered deferred issuance costs. Deferred issuance costs for obtaining a loan are reflected as a deduction from the carrying amount of the related loan and are amortized using the effective interest method.

| dd. | Redeemable Preferred stock

The Company’s redeemable preferred stock is not mandatorily redeemable, nor redeemable at the option of the holder after a specified date, but a deemed liquidation event would constitute a redemption event outside of the common shareholders’ control. Therefore, all redeemable Preferred stock has been presented outside of permanent equity in accordance with ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity”. Upon the consummation of the IPO, all of the Company’s redeemable preferred stocks were converted into common stock and reclassified from temporary equity, into permanent equity (see note 14c)

| ee. | Commitments and contingencies

The Company accounts for its contingent liabilities in accordance with ASC Topic 450, Contingencies (“ASC 450”). A provision is recorded when it is both probable that liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter.

| ff. | Reverse stock split

On April 15, 2022, 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 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. As a result, all common stock, Non-voting Common stock, redeemable Convertible Preferred stock, warrants, RSUs 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 consolidated financial statements and the applicable disclosures, to reflect such Reverse Stock Splits.

F-19

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| gg. | Leases

|  | On January 1, 2022, the Company adopted ASU No. 2016-02, Leases (“Topic 842”). The Company determines if an arrangement is a lease at inception. Balances related to operating leases are included in operating lease right-of-use (“ROU”) assets, Current maturities of operating leases liabilities and non-current operating leases liabilities in the consolidated balance sheets. Leases primarily consist of real estate property and vehicles and are classified as operating leases with fixed payment terms. The Company determines if an arrangement is a lease, or contains a lease, at inception and records the leases upon lease commencement, which is the date when the underlying asset is made available for use by the lessor. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease expenses for the operating leases are recognized on a straight-line basis over the lease term and are included in operating expenses in the consolidated statements of operations and comprehensive loss. Options to extend or terminate the lease are taken into account when it is reasonably certain at the commencement date that such options will be exercised. The Company elected to apply for the short-term lease exemption for lease with a non-cancelable period of twelve months or less. Additionally, the Company has lease agreements with lease and non-lease components. On the commencement date, lease payments that include variable lease payments dependent on an index or a rate (such as the Consumer Price Index or a market interest rate), are initially measured using the index or rate at the commencement date. Such variable payments are recognized in the consolidated statements of operations and comprehensive loss in the period in which the event or condition that triggers the payment occurs. These variable payment amounts were not material to the consolidated financial statements for the periods presented. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate because the interest rate implicit in most of its leases is not readily determinable. ASC 842 provides several optional practical expedients in transition, which permits the Company not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard. The Company elected to utilize the available package of practical expedients permitted under the transition guidance within ASC 842 which does not require it to reassess the prior conclusions about lease identification, lease classification and initial direct costs. Sublease In October 2021, the Company entered into a sublease agreement for its offices in the United States. The Company applies the guidelines in ASC-842 regarding subleases, which state that the classification should be based on the underlying asset being subleased and concluded that the sublease is an operating lease where the Company is the Lessor. The sublease income is recognized on a straight-line basis over the expected lease term less any allowances for doubtful collection of rent and is included in the operating expenses, net, in the Company’s consolidated statements of comprehensive loss.

F-20

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| hh. | New Accounting Pronouncements

Recently adopted accounting pronouncements:

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments to introduce a new model for recognizing credit losses on financial instruments based on estimated current expected credit losses, or CECL. Under the new standard, an entity is required to estimate CECL on trade receivables at inception, based on historical information, current conditions, and reasonable and supportable forecasts. The guidance is effective for the Company for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early application is permitted. The Company adopted ASC 326 on January 1, 2023, and upon adoption of the standard, there was no immediate impact to the Company’s financial position, results of operations or cash flows. On an ongoing basis, the Company will contemplate forward-looking economic conditions in recording lifetime expected credit losses for the Company’s financial assets measured at cost, such as the Company’s trade receivables.

In August 2020, the FASB issued ASU 2020-06 Debt- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This guidance simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Furthermore, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share. ASU 2020-06 is effective for the Company for annual periods beginning after December 15, 2023, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2023, and there was no material impact on the Company’s consolidated balance sheet and the consolidated statements of operations upon adoption.

Recently issued accounting pronouncements, not yet adopted:

As an emerging growth company, the Jumpstart Our Business Startup Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election.

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. The ASU is effective for the Company for annual periods beginning after December 15, 2025. The Company is evaluating the potential impact of this guidance on its consolidated financial statements. The amendments in this Update should be applied on a prospective basis. Retrospective application is permitted.

In November 2023, the FASB issued ASU 2023-07 “Segment Reporting: Improvements to Reportable Segment Disclosures.” This guidance expands public entities’ segment disclosures primarily by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. Public entities with a single reportable segment are required to provide the new disclosures and all the disclosures required under ASC 280. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments are required to be applied retrospectively to all prior periods presented in an entity’s financial statements. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements and related disclosures.

F-21

NOTE 3 - INVENTORIES:

|  | December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Raw materials |  |  | 757 |  |  |  | 593 |
Finished goods |  |  | 1,769 |  |  |  | 586 |
|  |  | 2,526 |  |  |  | 1,179 |

Inventory write-downs totaled $239 and $147 during the year ended December 31, 2023, and 2022 respectively.

NOTE 4 - PREPAID EXPENSES AND OTHER CURRENT ASSETS:

|  | December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Prepaid expenses |  |  | 198 |  |  |  | 473 |
Governmental authorities |  |  | 84 |  |  |  | 130 |
Other, net* |  |  | 58 |  |  |  | 75 |
|  |  | 340 |  |  |  | 678 |

* | Prepaid expenses and other current assets are stated as net of allowances. The allowance for Prepaid expenses and other current assets is based on the Company’s periodic assessment of the collectability of the accounts based on a combination of factors including the age of the balance, and the reasonability to use this asset. During 2023 and 2022, the Company recorded allowances for Prepaid expenses and other current assets in the amounts of $144 and $0, respectively.

NOTE 5 - PROPERTY AND EQUIPMENT, NET:

|  | December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Cost: |  |  |  |  |  |
Computer, software, and electronic equipment |  |  | 8,583 |  |  |  | 8,575 |
Office furniture and equipment |  |  | 872 |  |  |  | 872 |
Leasehold improvements |  |  | 292 |  |  |  | 292 |
|  |  | 9,747 |  |  |  | 9,739 |
Less: accumulated depreciation |  |  | 9,686 |  |  |  | 9,659 |
Property and equipment, net |  |  | 61 |  |  |  | 80 |

Depreciation expenses were $27 and $23 for the years ended December 31, 2023, and 2022, respectively.

F-22

NOTE 6 - LEASES:

| 1) | The Company has an operating lease agreement for its facility in the United States, which expires on March 31, 2024. The Company will not exercise it’s 5-year extension option, which was initially 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) | 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 years ended December 31, 2023, and December 31, 2022, in the amount of $119 and $168, respectively.

| 4) | The Company’s Israeli subsidiary has an operating lease agreement for a facility in Israel, which was renewed on December 28, 2023, and expires on December 31, 2025. The lease payments are denominated in NIS and are indexed to the consumer price index.

| 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 07, 2025. The lease payments are denominated in ILS.

Supplemental information related to leases is as follows:

|  | December 31, 2023 |  |  | December 31, 2022 |
Operating leases: |  |  |  |  |  |
Operating lease right-of-use assets |  | $ | 918 |  |  | $ | 726 |
Current Operating lease liabilities |  | $ | 498 |  |  | $ | 445 |
Non-Current Operating lease liabilities |  | $ | 405 |  |  | $ | 237 |
Total Operating lease liabilities |  | $ | 903 |  |  | $ | 682 |

F-23

NOTE 6 - LEASES (continued):

Other information:

|  | Year ended December 31, 2023 |  |  | Year ended December 31, 2022 |
Cash paid for amounts included in the measurement of lease liabilities (cash paid in thousands) |  | $ | 478 |  |  | $ | 747 |
Weighted Average Remaining Lease Term |  |  | 1.80 |  |  |  | 1.50 |
Weighted Average Discount Rate |  |  | 10.2 | % |  |  | 3.49 | %

The lease costs components are as follows:

|  | Year ended December 31, 2023 |  |  | Year ended December 31, 2022 |
Fixed payments |  | $ | 459 |  |  | $ | 723 |
Variable payments that depend on an index or rate |  |  | 19 |  |  |  | 24 |
Total lease cost |  | $ | 478 |  |  | $ | 747 |

Maturities of operating lease liabilities were as follows:

|  | December 31, 2023 |
2024 |  | $ | 548 |
2025 |  |  | 433 |
2026 |  |  | 6 |
Total operating lease payments |  |  | 987 |
Less: imputed interest |  |  | (84 | )
Present value of lease liabilities |  | $ | 903 |

NOTE 7 - OTHER ACCRUED LIABILITIES:

|  | December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Accrued expenses |  |  | 955 |  |  |  | 1,190 |
Accrued standard warranty |  |  | 24 |  |  |  | 48 |
Other |  |  | 143 |  |  |  | 8 |
|  |  | 1,122 |  |  |  | 1,246 |

NOTE 8 - 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 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 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. As of December 31, 2023, the total loan balance outstanding was $148 (including $2 current maturities).

F-24

NOTE 8 - LOANS (continued):

| b. | 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 “New Loan”). The Company received $3,000 in December 2020, and an 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 to Migdalor warrants to acquire common stock in the amount of $1,500 (see Note 13 regarding the warrants granted). The warrants were exercised, pursuant to the loan agreement, upon the Company’s IPO in May 2022.

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 (see also Note 13). As of December 31, 2023, the total loan balance outstanding was $4,339 (including $1,333 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 during the year ended December 31, 2023. These balances are included in Restricted Bank deposits and Restricted Cash in the Consolidated Balance Sheet.

As a result of the above deposits, as of December 31, 2023, the Company was in compliance with the covenants of the Migdalor loan.

As of December 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 * |
2024 |  |  | 9 |  |  |  | 5,567($1,535) |  |  |  | 1,080($298) |
2025 |  |  | 9 |  |  |  | 3,684($1,016) |  |  |  | 704($194) |
2026 |  |  | 9 |  |  |  | 3,684($1,016) |  |  |  | 704($194) |
2027 |  |  | 9 |  |  |  | 3,684($1,016) |  |  |  | 704($194) |
2028 and thereafter |  |  | 225 |  |  |  | 305($84) |  |  |  | 59($16) |
Less- accumulated interest |  |  | (113 | ) |  |  | (3,635)($1,003) |  |  |  | (804)($221) |
Total |  |  | 148 |  |  |  | 13,289($3,664) |  |  |  | 2,447($675) |

* | The exchange rate used in translation is $1 – 3.627 New Israeli Shekel.

F-25

NOTE 9 - 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 14, 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 14d 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 Other financial expenses associated with the Convertible Notes during the year ended December 31, 2022, in the amount of $1,753.

NOTE 10 - 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.

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 14 below.

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 Other financial expenses associated with the Convertible Loan during the year ended December 31, 2022, in the amount of $1,648.

F-26

NOTE 11 - 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 December 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 December 31, 2023, the Company had received approximately $14,300 (approximately $15,736 including interest) and repaid approximately $10,275 in such grants.

During the years 2023 and 2022, the Company repaid amounts of $73 and $221, respectively.

As of December 31, 2023, and 2022, the Company had a liability to repay royalties in the amount of approximately $1,062 and $900, respectively.

NOTE 12 – REDEEMABLE CONVERTIBLE PREFERRED STOCK:

The rights, preferences, and privileges of the redeemable preferred stock (series A and series B) are described below:

Dividends:

| a. | The holders of redeemable convertible preferred stock shall be entitled to receive dividends, out of any assets legally available therefore, when and as declared by the Board of Directors from time to time, out of any assets of the Company legally available, therefore.

| b. | The Company may not declare or pay any dividends or make any distribution of assets on, or redeem, purchase or otherwise acquire, shares or any other capital shares of the Company ranking junior to the redeemable convertible preferred stock as to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, unless a corresponding distribution is effected in respect of the redeemable convertible preferred stock as if the redeemable convertible preferred stock had been converted into common stock.

No dividends have been declared to date.

Conversion rights:

Each of the holders of redeemable convertible preferred stock shall have the right, at such holder’s discretion, at any time or from time to time, to convert each redeemable convertible preferred share held by it into such number of fully paid and non-assessable shares of common stock as it is determined by dividing the applicable original issue price by the applicable conversion price per share for the redeemable convertible preferred stock in effect at the time of conversion. The initial conversion price for each redeemable convertible preferred share shall be the original issue price for such redeemable preferred share. The conversion price is subject to adjustment.

Each redeemable convertible preferred stock will automatically convert into shares of common stock at the then-effective conversion price for each such share immediately upon the earlier of: (i) the Company’s sale of its common stock in a firm commitment, underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended (“Securities Act”), which results in aggregate gross proceeds to the Company of not less than $ 5,000 at a Company valuation of at least $15,000; or (ii) the date specified in a written request to the Company for such conversion from either the holders (a) of at least 75% of the series B redeemable convertible preferred stock then outstanding, or (b) from the holders of at least 75% of the series A redeemable convertible preferred stock then outstanding.

F-27

NOTE 12 - REDEEMABLE CONVERTIBLE PREFERRED STOCK (continued):

Liquidation rights:

Upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary or deemed liquidation the assets of the Company available for distribution to its shareholders shall be distributed in the following order of priority:

First and in preference to any distribution of any available assets to the holders of any other class or series of share of the corporation, the holders of series B redeemable convertible preferred stock shall be entitled to receive an amount equal to $ 0.9991 per share plus interest at the rate of 8% per annum from the original issuance date of such series B redeemable convertible preferred stock. If the assets are insufficient to permit a full payment, then all assets shall be distributed ratably among the holders of series B redeemable convertible preferred stock.

In the event that, following the satisfaction of the B liquidation preference in full, the available assets shall exceed the amount necessary to pay the B liquidation preference, the remaining assets shall be distributed among the holders of series A redeemable convertible preferred stock in preference to holders of common stock, an amount equal to $ 0.60168 per share plus interest at the rate of 8% per annum from the original issuance date of such series A redeemable preferred stock. If the assets are insufficient to permit a full payment, then all assets shall be distributed ratably among the holders of series A. If the assets exceed the amount necessary to fulfill the payment, then the remaining assets shall be distributed ratably among the holders of common stock.

Voting rights:

The holders of redeemable convertible preferred stock will vote together with, in the same manner and with the same effect as the holders of common stock on all matters on which the holders of common stock shall be entitled to vote. The holders of redeemable convertible preferred Stock shall be entitled to cast such number of votes equal to the number of shares of common stock into which the redeemable convertible preferred stocks are then convertible.

The Company applied the provision of ASC 480-10-S99-3A and classifies the redeemable convertible preferred Stock outside of permanent equity.

As of December 31, 2023, and December 31, 2022, all of the Company’s Redeemable convertible preferred stock were converted to common stock.

NOTE 13 - WARRANTS:

| a) | On August 24, 2016, the Company issued warrants to Comerica Bank (“Comerica”) for the purchase of 73,048 shares of the Company’s Series B Redeemable Preferred Stock at an exercise price of $1.02672 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 December 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. As of December 31, 2023, and December 31, 2022, the estimated fair value of the Comerica warrants was $8, and it was based on a Black-Scholes option-pricing model.

F-28

NOTE 13 - WARRANTS (continued):

| b) | 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. Upon the consummation of the IPO (as further described in Note 14d below), the Company converted the outstanding warrants issued to Mizrahi into the Company’s common stock based on the contractual terms and conditions of the related warrant agreements.

| c) | 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 14d below), the Company converted the outstanding warrants issued to Migdalor into the Company’s common stock based on the contractual terms and conditions of the related warrant agreements.

| d) | 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. See note 14(d) for further details.

| e) | On December 20, 2023, the Company completed another 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. These warrants were classified as equity. See note 14(d) for further details

The table below shows the impact on the statement of comprehensive loss related to the warrants which were classified as liabilities, that the Company issued for the years ended December 31, 2023, and December 31 2022:

|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |  |  | U.S. dollars in thousands |
Outstanding as of January 1 |  |  | 8 |  |  |  | 2,149 |
Additions |  |  | 1,972 |  |  |  |  |
Fair value changes |  |  | (1,726 | ) |  |  | 1,049 |
Warrants amendment |  |  | 68 |  |  |  | - |
Conversion to the Company’s common stock |  |  | - |  |  |  | (3,190 | )
Reclassification to equity (see note (14(d)) |  |  | (314 | ) |  |  |  |
Outstanding as of December 31 |  |  | 8 |  |  |  | 8 |

The Company recorded “Other financial expenses (income)” during the year ended December 31, 2023, and December 31, 2022, in the amount of $(1,726) and $1,049, respectively.

F-29

NOTE 14 - SHAREHOLDERS’ EQUITY:

| a. | Share capital (*)

On May 2, 2022, the Company’s Board of Directors approved an amendment to the Company’s Bylaws, stating the number of authorized stocks 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. | Redeemable Convertible Preferred stock- $0.0001 par value - authorized shares increase to 10,000,000 shares from 7,988,691 shares.

The Company’s issued and outstanding common stocks as of December 31, 2023, and 2022, are 3,007,745 and 1,737,986, respectively.

| 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 includes the Company’s total authorized shares of 42,803,774, of which 30,000,000 are authorized shares of common stock, 2,803,774 are shares of non-voting common stock and 10,000,000 are shares of redeemable convertible preferred stock.

| c. | 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:

| a. | Redeemable convertible preferred stock (see Note 12) - 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 Preferred Stock agreements). Upon the conversion, the Company reclassified the Convertible Preferred stock at its carrying amount, from temporary equity, into shareholders’ equity.

| b. | Convertible loan agreement (“CLA”) (see Note 10) – 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.

| c. | Convertible notes (see Note 9) –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.

F-30

NOTE 14 - SHAREHOLDERS’ EQUITY (continued):

| d. | Warrants (See Note 13):

| 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 $19.50 prior to the reverse split.

| e. | The Company redeemed 178,377 shares of non-voting common stock at their par value, removing the stock from shareholders’ equity.

| (*) | Adjusted to reflect reverse stock split, see note 2(ff).

| d. | Offering of common stocks and warrants

| a. | On May 8, 2023, the Company completed a fund-raising round in a total gross amount of $3.5 million pursuant to which the Company agreed to issue and sell to Armistice Capital Master Fund Ltd. (the “Holder”) in a private placement (the “Offering”):

| 1. | 190,000 shares of the Company’s common stock, $0.0001 par value;

| 2. | 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 a 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.; and

| 3. | warrants to purchase up to 944,670 shares of Common Stock (“Common Warrants”) for an exercise price of $3.58 which are exercisable (physically or upon occurrence of certain events on net-cash basis at the Holder’s discretion) immediately upon their issuance until November 8, 2028. Their exercise price is adjustable upon dilutive events (such as subsequent rights offerings, pro-rata distributions and stock dividends and splits). The Holder also possesses a right to receive any additional consideration that holders of common stocks may be entitled to upon a fundamental transaction (as defined in the agreement).

F-31

NOTE 14 - SHAREHOLDERS’ EQUITY (continued):

The Company determined that the Common Warrants were not indexed to the Company’s own stock and therefore were excluded from equity classification and classified as warrant liabilities. The Common Warrants were measured at fair value at inception and in subsequent reporting periods with changes in fair value recognized as financial income or expense as change in fair value of warrant liabilities in the period of change in the consolidated statements of comprehensive loss.

The Common Warrants were recorded at fair value on May 8, 2023, at $1,972, and the residual value was allocated to the common stock and pre-funded warrants which were classified as equity.

The valuation was based on a Black-Scholes option-pricing model, using an expected volatility of 54%, a risk-free rate of 3.49%, a contractual term of 5.5 years and a stock price at the issuance date of $3.70.

On September 30, 2023, the Company remeasured the common warrants at a fair value of $246.

The valuation was based on a Black-Scholes option-pricing model, using an expected volatility of 54%, a risk-free rate of 4.60%, a contractual term of 5.1 years and a stock price of $1.10.

The Company recorded other financial income (expenses) during 2023, in the amount of $1,726, in connection with the revaluation of these warrants to their fair value.

On September 30, 2023, the Company and the Holder entered into a Common warrants amendment agreement (the “Amendment”) to amend the Common warrants to purchase up to 944,670 shares of the Company’s common stock, par value $0.0001 issued to the Holder. The Amendment made certain adjustments to the definition of a “Fundamental Transaction” in Common Warrant agreement. Additionally, the Amendment increased the number of Common Warrants to include an additional 55,000 Common warrants and changed the exercise price of the Common Warrants to $2.75.

The Company reclassified the Common warrants as equity based on the guidance provided under ASC 815-40, due to the adjustments stated in the Amendment.

As of the date of the amendment of the Common warrants, the fair value of the warrants was estimated at $314. The valuation was based on a Black-Scholes option-pricing model, using an expected volatility of 54%, a risk-free rate of 4.60%, a contractual term of 5.1 years and a stock price at the issuance date of $1.10.

As a result of the Amendment, the Company recorded other financial expenses in 2023, in the amount of $68.

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.

Offering Costs related to May 2023 fund-raising:

Upon the consummation of the Offering and pursuant to an agreement entered into with H.C. Wainwright & Co., LLC (the “Underwriter”), the Company has paid in cash to the Underwriter (and the escrow agent) a total amount of $291. The Company has also granted to the Underwriter upon the consummation of the Offering, warrants to purchase up to 66,127 of the Company’s common stocks which carry the same terms as the common stock warrants described above (Note 14d), except for the exercise price which reflected 125% of the share price in the Offering ($4.6313). The warrants are classified as mezzanine equity.

As of the issuance date of the underwriter warrants, the fair value of the warrants was estimated at $104. The valuation was based on a Black-Scholes option-pricing model, using an expected volatility of 56%, a risk-free rate of 3.29%, a contractual term of 5.5 years and a stock price at the issuance date of 3.58.

F-32

NOTE 14 - SHAREHOLDERS’ EQUITY (continued):

Out of the total offering costs, an amount of $223 related to the issuance of the Common Warrants was recognized as a financial expense in the Consolidated statement of comprehensive loss, and an amount of $172 related to the issuance of the Common stocks and the prefunded warrants was recognized in equity.

The allocation of total offering costs between the warrants, common stocks and prefunded warrants was in the same proportion as the allocation of the total proceeds from the offering.

b. On December 20, 2023, the Company completed a fund-raising round in a total gross amount of $1.5 million pursuant to which the Company agreed to issue and sell to the Holder in December’s private placement (the “Second Offering”):

| 1. | 301,000 shares of the Company’s common stock, $0.0001 par value;

| 2. | 970,187 pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 970,187 shares of Common Stock for an exercise price of $0.0001 which are exercisable (either physically or on a 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.

| 3. | warrants to purchase up to 1,271,187 shares of Common Stock (“Common Warrants”) for an exercise price of $1.18 which are exercisable (physically or upon occurrence of certain events on a net-cash basis at the Holder’s discretion) immediately upon their issuance until June 20, 2029. Their exercise price is adjustable upon dilutive events (such as subsequent rights offerings, pro-rata distributions and stock dividends and splits). The Holder also possesses a right to receive any additional consideration that holders of common stocks may be entitled to upon a fundamental transaction (as defined in the agreement).

In connection with the Second Offering, the Company also has agreed to amend the existing warrants to purchase up to an aggregate of 999,670 shares of the Company’s common stock that were previously issued in May 2023 (and amended in November 2023) at an exercise price of $2.75 per share, such that effective on the date of shareholder approval to amend the warrants, the amended warrants will have a reduced exercise price of $1.18 per share. In the event that the Shareholder Approval is not obtained, the warrant amendment shall be null and void and the provisions of the existing warrants shall remain unchanged. As of December 31, 2023, the shareholder approval was not obtained.

The common stock, pre-funded warrants and the warrants were classified as equity pursuant to ASC 815-40.

Offering Costs related to December 2023 fund-raising:

Upon the consummation of the Second Offering and pursuant to an agreement entered into with H.C. Wainwright & Co., LLC (the “Underwriter”), the Company has paid in cash to the Underwriter (and the escrow agent) a total amount of $129. The Company has also granted to the Underwriter upon the consummation of the Second Offering, warrants to purchase up to 88,983 of the Company’s common stocks which carry the same terms as the common stock warrants described above (Note 14c.), except for the exercise price which reflect 125% of the share price in the Second Offering ($1.475). The warrants are classified as mezzanine equity based on the guidance provided under ASC 480-10-S99-3A and SAB Topic 14. E.

F-33

NOTE 14 - SHAREHOLDERS’ EQUITY (continued):

As of the issuance date of the underwriter warrants, the fair value of the warrants was estimated at $55. The valuation was based on a Black-Scholes option-pricing model, using an expected volatility of 57%, a risk-free rate of 3.86%, a contractual term of 5.5 years and a stock price at the issuance date of 1.18.

The total Second Offering costs in the amount of $230 was recognized in equity.

| e. | Stock repurchase program (*)

On November 17, 2022, the Company’s Board of Directors authorized a stock repurchase program pursuant to which the Company intends to repurchase up to $1.0 million of its outstanding common stock. The Board authorized the Company to purchase its 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 10b5-1 of the Securities Exchange Act of 1934, 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.

During 2023, the Company purchased 7,920 shares of its common stock, for a total price of $50.

| f. | Share-based compensation (*)

On June 30, 2015, the Company adopted the 2015 Equity Incentive Plan (“the 2015 Plan”).

Under the 2015 Plan, the Board of Directors may grant up to 280 Incentive Share Options, Non-statutory shares options, share appreciation rights, restricted share and restricted share units (RSU’s) to employees, directors, and consultants. The exercise price of an option cannot be less than 100% of the fair market value of the underlying share of common stock on the date of grant for incentive share options (not less than 110% of the fair market value for shareholders owning more than 10% of all classes of share) as determined by the Board of Directors. The maximum option term is 10 years (five years for shareholders owning more than 10% of all classes of share). The 2015 Plan grants the Board of Directors the discretion to determine when the options granted become exercisable.

In January 2016, the Company’s Board of Directors approved an additional quantity of 22 share options permitted to be granted under the 2015 Plan.

Pursuant to the current Section 102 of the Israeli Tax Ordinance, which came into effect on January 1, 2003, options and RSUs may be granted through a trustee (i.e., Approved 102 Options) or not through a trustee (i.e., Unapproved 102 Options). The Subsidiary elected to grant its options and RSU’s through a trustee. As a result, the Subsidiary will not be allowed to claim as an expense for tax purposes in Israel the amounts credited to the employee as capital gains to the grantees, although it will generally be entitled to do so in respect of the salary income component (if any) of such awards when the related tax is paid by the employee.

F-34

NOTE 14 - SHAREHOLDERS’ EQUITY (continued):

| 1) | During the years ended December 31, 2023, and December 2022, the following awards were granted:

Award Type (2015 Plan) |  | Number of Awards in 2023 |  |  | Number of Awards in 2022 (*) |  |  | Vesting Conditions |  | Expiration Date
Options |  |  | 400 |  |  |  | 16,778 |  |  | Over 4 years from grant date-25% every year (from the second year- 2.08% each month) |  | 10th anniversary of Grant Date
RSU |  |  | 45,100 |  |  |  | 59,200 |  |  | Over 3 years from grant date |  |

| 2) | A summary of the Company’s share option activity under option plans is as follows:

|  | Number of Options |  |  | Weighted- Average Exercise Price |  |  | Weighted Average Remaining Contractual Life |
Outstanding – January 1, 2023 |  |  | 96,459 |  |  | $ | 4.89 |  |  |  | 5.34 |
Granted |  |  | 400 |  |  | $ | 1.48 |  |  |  | 9.71 |
Exercised |  |  | (2,489 | ) |  | $ | 0.90 |  |  |  |  |
Forfeited |  |  | (6,606 | ) |  | $ | 22.74 |  |  |  |  |
Outstanding – December 31, 2023 |  |  | 87,764 |  |  | $ | 3.63 |  |  |  | 4.11 |
Exercisable – December 31, 2023 |  |  | 80,064 |  |  | $ | 2.36 |  |  |  | 3.67 |

|  | Number of Options (*) |  |  | Weighted- Average Exercise Price (*) |  |  | Weighted Average Remaining Contractual Life |
Outstanding – January 1, 2022 |  |  | 89,049 |  |  | $ | 1.52 |  |  |  | 5.43 |
Granted |  |  | 16,778 |  |  | $ | 21.96 |  |  |  |  |
Exercised |  |  | (7,775 | ) |  | $ | 0.81 |  |  |  |  |
Forfeited |  |  | (1,593 | ) |  | $ | 15.09 |  |  |  |  |
Outstanding – December 31, 2022 |  |  | 96,459 |  |  | $ | 4.89 |  |  |  | 5.34 |
Exercisable – December 31, 2022 |  |  | 77,196 |  |  | $ | 1.48 |  |  |  | 4.36 |

No income tax benefit has been recognized relating to share-based compensation expense and no tax benefits have been realized from exercised share options.

See also above regarding warrants granted to the underwriters upon the consummation of the IPO in consideration for their underwriting services.

F-35

NOTE 14 - SHAREHOLDERS’ EQUITY (continued):

| 3) | The following table summarize information as of December 31, 2023, regarding the number of ordinary shares issuable upon outstanding options and exercisable options:

Exercise price |  | Options outstanding as of December 31, 2023 |  |  | Weighted average remaining contractual life (years) |  |  | Options exercisable as of December 31, 2023 |  |  | Weighted average remaining contractual life (years) |
0.64 |  |  | 30,309 |  |  |  | 1.61 |  |  |  | 30,309 |  |  |  | 1.61 |
1.06 |  |  | 43,461 |  |  |  | 4.44 |  |  |  | 43,402 |  |  |  | 4.43 |
1.48 |  |  | 400 |  |  |  | 9.71 |  |  |  | 100 |  |  |  | 9.71 |
5.78 |  |  | 5,500 |  |  |  | 8.96 |  |  |  | 1,750 |  |  |  | 8.96 |
13.62 |  |  | 3,894 |  |  |  | 7.41 |  |  |  | 2,524 |  |  |  | 7.41 |
40.00 |  |  | 4,200 |  |  |  | 8.72 |  |  |  | 1,979 |  |  |  | 8.72 |
|  |  | 87,764 |  |  |  |  |  |  |  | 80,064 |  |  |  |  |

| 3) | The following table summarize information as of December 31, 2022, regarding the number of ordinary shares issuable upon outstanding options and exercisable options:

Exercise price |  | Options outstanding as of December 31, 2022 (*) |  |  | Weighted average remaining contractual life (years) |  |  | Options exercisable as of December 31, 2022 |  |  | Weighted average remaining contractual life (years) |
0.64 |  |  | 31,236 |  |  |  | 2.61 |  |  |  | 31,236 |  |  |  | 2.61 |
1.06 |  |  | 44,989 |  |  |  | 5.43 |  |  |  | 43,752 |  |  |  | 5.39 |
5.78 |  |  | 8,843 |  |  |  | 9.96 |  |  |  | - |  |  |  | - |
13.62 |  |  | 3,891 |  |  |  | 8.41 |  |  |  | 1,547 |  |  |  | 8.41 |
40.00 |  |  | 7,500 |  |  |  | 9.72 |  |  |  | 661 |  |  |  | 9.72 |
|  |  | 96,459 |  |  |  |  |  |  |  | 77,196 |  |  |  |  |

The aggregate intrinsic value represents the total intrinsic value (the difference between the fair value of the Company’s common shares on December 31, 2023 and the exercise price, multiplied by the number of options that would have been received by the option holders had all option holders exercised their options on such date) as of December 31, 2023, and December 31, 2022, was $17 and $291, respectively. The total intrinsic value of options exercised during the years ended December 31, 2023, and December 31, 2022, was $6 and $27, accordingly.

The weighted average grant-date fair value of the share options granted during the year ended December 31, 2022 was $4.20, based on the Black-Scholes option-pricing model.

Key assumptions used to estimate the fair value of the share options granted during the year ended December 31, 2022 included:

|  | 2022 |
Expected term of options (years) |  |  | 10 |
Expected common stock price volatility** |  |  | 54 | %
Expected dividend rate |  |  | 0 | %
Risk-free interest rate |  |  | 3.21%-3.25 | %

** | The expected volatility was based on the historical stock prices of publicly traded comparable companies.

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NOTE 14 - SHAREHOLDERS’ EQUITY (continued):

| 4) | Share-based compensation expense for share options in the consolidated statements of comprehensive loss is summarized as follows:

|  | Year Ended December 31, |
|  | 2023 |  |  | 2022 |
Cost of revenues |  |  | 3 |  |  |  | 3 |
Research and development |  |  | 23 |  |  |  | 26 |
Sales and marketing |  |  | 11 |  |  |  | 11 |
General and administrative |  |  | 11 |  |  |  | 12 |
Total Share-based compensation expense |  |  | 48 |  |  |  | 52 |

| 5) | Restricted Stock Units (RSUs)

During 2023 and 2022, the Company issued RSUs to Directors, officers, consultants and employees.

The RSUs are vested over a three-year period.

The grant-date fair value of the RSUs granted was based on the Company’s common stock price at the time of grant.

A summary of the Company’s RSUs activity under option plans is as follows:

|  | Year ended December 31, 2023 |  |  | Year ended December 31, 2022 |
|  | Number of RSUs |  |  | Weighted- Average Grant Date Fair Value |  |  | Number of RSUs (*) |  |  | Weighted- Average Grant Date Fair Value |
RSUs outstanding at the beginning of the year |  |  | 59,200 |  |  | $ | 16.20 |  |  |  | - |  |  |  | - |
Granted during the year |  |  | 43,100 |  |  | $ | 3.33 |  |  |  | 59,200 |  |  | $ | 16.20 |
Vested during the year |  |  | (29,520 | ) |  |  | 12.36 |  |  |  | - |  |  |  | - |
Forfeited during the year |  |  | (1,500 | ) |  |  | 16.20 |  |  |  | - |  |  |  | - |
Outstanding at the end of the year |  |  | 71,280 |  |  | $ | 10.35 |  |  |  | 59,200 |  |  | $ | 16.20 |

Share-based compensation expense for RSUs in the consolidated statement of comprehensive loss is summarized as follows:

|  | Year Ended December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Cost of revenues |  |  | 9 |  |  |  | 3 |
Research and development |  |  | 53 |  |  |  | 18 |
Sales and marketing |  |  | 47 |  |  |  | 12 |
General and administrative |  |  | 220 |  |  |  | 135 |
Total Share-based compensation expense |  |  | 329 |  |  |  | 168 |

As for the share-based compensation granted to the underwriter in connection with the offering of common stocks and warrants, see 14d above.

* | Adjusted to reflect reverse stock split, see note 2(ff).

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NOTE 15 - INCOME TAXES:

| a. | The Company and its Subsidiary are subject to U.S. and Israeli income tax laws.

| b. | The US entity is subject to a federal income tax rate of 21% in 2019 and thereafter and State taxes of 9%. The Subsidiary is subject to ordinary corporate income tax rate of 23% in 2019 and thereafter.

| c. | Carryforward tax losses:

As of December 31, 2023, the Company has net operating loss carry forwards of approximately $2,966. In addition, the Company has loss carry forward of approximately $4,410, which the Company did not perform a qualification test for and has certain doubts regarding their qualification, and therefore the Company has not recorded deferred tax assets due to these losses.

As of December 31, 2023, the Company’s subsidiary has net operating loss carry forwards of approximately $121.1 million. Net operating loss carry forwards relating to activity in Israel have an indefinite carry forward period.

Utilization of the U.S. federal and state net operating losses may be subject to a substantial limitation due to the change in ownership limitations provided by the Internal Revenue Code of 1986, as amended and similar to state provisions. The annual limitation may result in the expiration of the net operating losses and credits before their utilization.

| d. | Loss before taxes on income are comprised as follows:

|  | Year Ended December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Domestic |  |  | 82 |  |  |  | (4,535 | )
Foreign Subsidiary |  |  | (6,368 | ) |  |  | (6,447 | )
Total |  |  | (6,286 | ) |  |  | (10,982 | )

| e. | Reconciliation of the theoretical tax expense to actual tax expense:

The main reconciling item between the statutory tax rate of the Company and the effective rate is the provision for a full valuation allowance in respect of tax benefits from carry forward tax losses due to the uncertainty of the realization of such tax benefits.

| f. | The Company’s major tax jurisdictions are the United States and Israel. Due to unutilized net operating losses and research credits, the tax years from 2017 remain open and subject to examinations by the appropriate governmental agencies in the United States. For the Company’s subsidiary, the tax years from 2017 and later remain open for examination by the tax authorities.

| g. | The components of the Company’s net deferred tax assets were as follows:

|  | Year Ended December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Deferred tax assets (liabilities): |  |  |
Loss carryforwards |  |  | 28,746 |  |  |  | 27,932 |
Valuation allowance |  |  | (28,746 | ) |  |  | (27,932 | )
Total net deferred tax assets |  |  | - |  |  |  | - |

The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income.

Changes in valuation allowance for deferred tax assets were as follows:

|  | Year Ended December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Valuation allowance at beginning of year |  |  | 27,932 |  |  |  | 31,049 |
Changes in valuation allowance |  |  | 814 |  |  |  | (3,117 | )
Valuation allowance at end of year |  |  | 28,746 |  |  |  | 27,932 |

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NOTE 16 - BASIC AND DILUTED LOSS PER SHARE: (*)

Basic net loss per share is computed using the weighted average number of common stock, Pre-Funded Warrants to purchase shares of Common Stock for an exercise price of $0.0001 which are exercisable immediately 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 14 above.

Options to purchase 87,764 and 96,459 shares of common stock at an average exercise price of $3.63 and $4.89 per share were outstanding as of December 31, 2023, and December 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 71,280 and 59,200 shares of common stock at an average grant date fair value of $10.35 and $16.20 per RSU were outstanding as of December 31,2023, and December 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.

Warrants convertible into 2,462,759 and 36,792 of the Company’s common stock were outstanding as of December 31, 2023, and 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 (See Note 14(d)).

The table below shows the reconciliation of the number of shares in the computation of basic and diluted loss per share attributable to common shareholders:

|  | Year Ended December 31, |
|  | 2023 |  |  | 2022 |
Numerator: |  |  |  |  |  |
Net loss |  | $ | (6,286 | ) |  | $ | (10,982 | )
Denominator: |  |  |  |  |  |  |  |
Common shares outstanding used in computing net loss per share attributable to common shareholders |  |  | 2,178,178 |  |  |  | 1,160,367 |
Pre-Funded warrants to purchase common shares |  |  | 225,631 |  |  |  | - |
Fully vested RSUs outstanding used in computing net loss per share attributable to common shareholders |  |  | 8,908 |  |  |  | 1,757 |
Weighted average number of shares used in computing basic and diluted net loss per share attributable to common shareholders |  |  | 2,412,717 |  |  |  | 1,162,124 |
Net loss per share attributable to common shareholders – basic and diluted |  | $ | (*)(2.61 | ) |  | $ | (*)(9.45 | )

* | Adjusted to reflect reverse stock split, see note 2(ff).

F-39

NOTE 17 - 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 customers:

|  | Year Ended December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
North America |  |  | 2,524 |  |  |  | 4,348 |
Europe, the Middle East and Africa |  |  | 2,532 |  |  |  | 3,999 |
Asia Pacific |  |  | 512 |  |  |  | 484 |
Israel |  |  | 38 |  |  |  | - |
|  |  | 5,606 |  |  |  | 8,831 |

| b. | Revenues from contract liability:

|  | December 31, 2023 |  |  | December 31, 2022 |
Opening balance |  | $ | 648 |  |  | $ | 673 |
Revenue recognized that was included in the contract liability balance at the beginning of the period |  |  | (544 | ) |  |  | (593 | )
Additions |  |  | 356 |  |  |  | 568 |
Remaining performance obligations |  | $ | 460 |  |  | $ | 648 |

As of December 31, 2023, the aggregate amount of the transaction price allocated to the remaining performance obligation is $385, and the Company will recognize this revenue over the 12-18 months.

| c. | The Company’s long-lived assets are located as follows: Property and Equipment, net and Operating lease right of use assets

|  | December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Israel |  |  | 788 |  |  |  | 335 |
North America |  |  | 191 |  |  |  | 471 |
|  |  | 979 |  |  |  | 806 |

F-40

NOTE 17 - 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:

|  | December 31, 2023 |
|  | % |  |  | Revenues |
|  | U.S. dollars in thousands |
Customer B |  |  | 16 | % |  |  | 911 |
Customer D |  |  | 10 | % |  |  | 583 |

|  | December 31, 2022 |
|  | % |  |  | Revenues |
|  | U.S. dollars in thousands |
Customer B |  |  | 33 | % |  |  | 3,021 |
Customer E |  |  | 16 | % |  |  | 1,475 |
Customer F |  |  | 11 | % |  |  | 1,009 |

The majority of the Company’s revenues are recognized at a point in time.

NOTE 18 – OTHER FINANCIAL INCOME (EXPENSES), NET:

|  | Year Ended December 31 |
|  | 2023 |  |  | 2022 |
|  | U.S. dollars in thousands |
Change in convertible loan fair value |  |  | - |  |  |  | (1,648 | )
Change in convertible note fair value |  |  | - |  |  |  | (1,753 | )
Change in warrants’ fair value |  |  | 1,658 |  |  |  | (1,049 | )
Exchange rates differences |  |  | 313 |  |  |  | 506 |
Offering costs of warrants liabilities |  |  | (223 | ) |  |  | - |
Other |  |  | 95 |  |  |  | (107 | )
|  |  | 1,843 |  |  |  | (4,051 | )

NOTE 19 - RELATED PARTY TRANSACTIONS: (*)

| a) | On February 20, 2015, the Company made a loan to the CEO, in the principal amount of $106, which loan was evidenced by a secured, non-negotiable promissory note. In April 2022, the Company entered into a Securities Purchase and Loan Repayment Agreement with the CEO, pursuant to which the CEO sold to the Company 27,699 shares for a purchase price equal to $4.55 per share for an aggregate purchase consideration of $126. In lieu of paying the CEO the Purchase Consideration for the shares in cash, the Purchase Consideration was used to repay in full the outstanding loan amount and accrued interest owed to the Company by the CEO, and the promissory Note was terminated. Additionally, due to the fact that the Company repurchased the CEO’s shares for a price per share which exceeded the underlying common stock fair value by $0.55, the Company has also recognized compensation costs attributable to the CEO’s past services to the Company. The Company has recognized the repurchased shares as treasury shares at the cost that represents the then-current market value of the repurchased shares.

F-41

NOTE 19 - RELATED PARTY TRANSACTIONS (*) (continued):

| b) | As part of the Shareholder Agreement (the “SHA”), commencing on February 15, 2015, the company was paying one of its shareholders a monthly management fee of $5. The Company and the shareholder agreed to amend the agreement with the shareholder to replace the monthly payment with a success-based fees, effective on January 1, 2020. The amendment offers success-based fee of up to $150 on funding of up to $4,000. During January 2022, the Company paid the shareholder an amount of $100 related to the amendment, and by June 2022 the Company paid the shareholder an additional amount of $50. In aggregate, including the $100 paid in January, the shareholder received an amount of $150 pursuant to the amendment to the shareholder’s agreement. The Company recorded the payments partially as an incremental expense related to the IPO and partially as operating expenses. As of December 31, 2022, the agreement has terminated.

| c) | In March 2017, the Company issued a convertible loan to investors (see note 10). 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 14c) and the convertible loan was converted into shares of common stock.

| d) | On 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 reverse stock split, see note 2(ff).

NOTE 20 - SUBSEQUENT EVENTS:

| a. | On January 15, 2024, the Subsidiary entered into a credit agreement with Bank Mizrahi-Tefahot. The Credit Agreement provides for a $1.5 million credit facility available to be used by the Subsidiary (“New Credit Facility”). Under the New Credit Facility, 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 Facility. The New Credit Facility, 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 Facility for so long as the following conditions continue to be met:

| (a) | Throughout the duration of the New Credit Facility, the outstanding extended credit under it does not exceed 80% of the aggregate amount of the open customer invoices securing the New Credit Facility;

| (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 Facility.

b. In February 2024, the Subsidiary performed a partial early repayment of the New Loan in the amount of ILS 2,000,000 (approximately $550,000).

F-42

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation on Disclosure Controls and Procedures

We have conducted an evaluation of the effectiveness of our “disclosure controls and procedures”, as defined by Rules 13a-15(e) and 15d-15(e) of Exchange Act, as of December 31, 2023, the end of the period covered by this Annual Report. This evaluation, which was performed under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), is performed to determine whether our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Disclosure controls and procedures, no matter how well designed and effectively operated, can only provide reasonable assurance of achieving their control objectives.

Based upon that evaluation, our CEO and CFO concluded our disclosure controls and procedures were not effective as of the period covered by this Annual Report on Form 10-K due to the material weakness discussed below.

Management’s report on internal control over financial reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external reporting purposes in accordance with GAAP.

Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements, including the possibility of human error, the circumvention or overriding of controls or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. . Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate over time.

Under the supervision and with the participation of the CEO and the CFO, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023. We performed an assessment of the effectiveness of our internal control over financial reporting based on the framework described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2023 given the existence of the previously identified material weakness described below having not been remediated as of year-end.

52

Material Weakness

We have identified one material weakness in the design and operation of our internal control over financial reporting in connection with the preparation of our financial statements, as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, that had not been remediated as of December 31, 2023. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company’s management, including our CEO and CFO, concluded that, as of December 31, 2023:

We lacked a sufficient complement of professionals with an appropriate level of accounting knowledge, training and experience to maintain appropriate segregation of duties in our finance and accounting functions.

Our independent registered public accounting firm will not be required to opine on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company” as defined in the JOBS Act.

Remediation Plan and Status

We have taken and intend to continue to take actions to remediate the material weakness described above. To remediate this material weakness, we continue to map, document and test our internal controls (recently, with the assistance of a third-party accounting firm with specific expertise in SOX compliance), and accordingly, we continued to make progress in our internal controls plan. Among other procedures, management has executed the following remedial actions:

| ● | Hired new financial experts and increasing the number of financial personnel.

| ● | Continued to map, document and test our internal controls, with the assistance of a third-party accounting firm with specific expertise in SOX compliance.

| ● | Implemented new control procedures over certain areas identified as requiring enhancement in order to address the lack of a sufficient number of finance personnel to allow for adequate segregation of duties.

In addition to the actions underway, we plan to continue enhancements to our internal controls over financial reporting in 2024. Additional remedial actions include:

| ● | Maintain or increase the level and design of segregation of duties, including maintaining or growing the quality and number of finance personnel

| ● | Continue to document and test annually our internal control over financial reporting

| ● | Continue engagement with an outside accounting firm with specific SOX and Internal Control expertise

| ● | Continued hiring of additional accounting, information technology, and internal controls resources who possess public company accounting, auditing and reporting expertise

The actions we are taking are subject to ongoing senior management review, as well as oversight of the audit committee of our Board. We also may conclude that additional measures may be required to remediate the material weaknesses or determine to modify the remediation plans described above. We will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively. We will continue to monitor the design and effectiveness of these and other processes, procedures, and controls and make any further changes management deems appropriate.

53

In addition to the items noted above, as we continue to evaluate, remediate and improve our internal control over financial reporting, executive management may elect to implement additional measures to address control deficiencies or may determine that the remediation efforts described above require modification. Executive management, in consultation with and at the direction of our Audit Committee and an expert outside consultant, will continue to assess the control environment and the above-mentioned efforts to remediate the underlying causes of the identified material weakness.

Although we plan to complete this remediation process as quickly as possible, we are unable, at this time to estimate how long it will take; and our efforts may not be successful in remediating the deficiencies or material weaknesses.

Notwithstanding the material weakness set forth above, based on the performance of additional procedures by management designed to ensure reliability of financial reporting, the Company’s management has concluded that the consolidated financial statements included in this Annual Report on Form 10-K, fairly present, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with GAAP.

Changes In Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

During the fourth quarter of 2023, the following Rule 10b5-1 trading arrangements (as defined in Item 408(a)(1)(i) of Regulation S-K) and non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K) intended to satisfy the affirmative defense of Rule 10b5-1(c) of the Exchange Act were adopted or terminated by our directors and/or executive officers (as defined in Section 16 of the Exchange Act):

Name |  | Title |  | Date of Adoption of Rule 10b5-1 Trading Arrangement(1) |  | Scheduled Expiration Date of Rule 10b5-1 Trading Arrangement |  | Aggregate Number of Securities to Be Sold |
Tuvia Barlev |  | Chief Executive Officer |  | 12/15/2023 (2) |  | The earlier of 6/1/2024 or when $10,000 notional amount of shares are purchased |  | $ | 10,000 | (3)

(1) | Date of adoption of Rule 10b5-1 trading arrangements is in accordance with both the Company’s insider trading policy and applicable SEC rules and regulations.

(2) | The first trade pursuant to the Rule 10b5-1 trading arrangement will be, in accordance with both the Company’s insider trading policy and applicable SEC rules and regulations, on a date after the date of adoption of the Rule 10b5-1 trading arrangement.

(3) | The 10b5-1 purchase plan will expire upon the earlier of 6/1/2024 or when $10,000 notional amount of shares of common stock are purchased.

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

54

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The following table sets forth information regarding our executive officers and directors, including their ages as of the date of this Annual Report:

Name |  | Age |  | Position
Tuvia Barlev |  | 62 |  | Chief Executive Officer, Secretary and Chairman of the Board
Yoav Efron |  | 55 |  | Chief Financial Officer
Eyal Aharon |  | 51 |  | Vice President R&D
Michal Winkler-Solomon |  | 56 |  | Vice President Marketing
Yaron Altit |  | 54 |  | EVP Sales Intl.
Hemi Kabir |  | 54 |  | Vice President, Operations
Brett Harrison |  | 59 |  | Senior Vice President of Sales, North Americas
Elad Domanovitz |  | 45 |  | Chief Technology Officer
Israel Niv(1)(2)(3) |  | 70 |  | Director
Joseph Moscovitz |  | 69 |  | Director
Dr. Naama Halevi-Davidov(1)(2)(3) |  | 53 |  | Director
Noemi Schmayer(1)(2)(3) |  | 56 |  | Director

(1) | Member of the Audit Committee

(2) | Member of the Compensation Committee

(3) | Member of Nominating and Corporate Governance Committee

Tuvia Barlev, Chief Executive Officer, Chairman of the Board, and Secretary

Mr. Barlev serves as our Chief Executive Officer and Secretary since January 2013 and has served as the Chairman of the Board since 2010. Previously, Mr. Barlev founded our company in 1998 and served as the Chief Executive Officer until January 2010. Mr. Barlev is a seasoned serial entrepreneur with more than 25 years of experience in high-technology leadership in military, telecommunications, e-commerce, Big Data and clean energy. Prior to joining Actelis, he was head of the R&D organization at Teledata (acquired by ADC in 1998), a global supplier of advanced digital loop carrier (DLC) equipment from 1996 to 1998. Previously, Mr. Barlev served as a senior research officer with the Israeli government, and he was also founder, Chairman/Acting CEO at companies including Superfish Inc., a leading provider of visual search technology, from 2007 to 2015; Leyden Energy, a leading supplier of breakthrough battery technology from 2010 to 2012; Adyounet Inc., provider of advanced direct marketing services over the Web from 2006 to 2009; and SafePeak LTD., provider of hot data acceleration platform for Big Data across the cloud from 2011 to 2012. Mr. Barlev holds BSC and MSEE degrees from Tel Aviv University, both Summa Cum Laude.

Yoav Efron, Chief Financial Officer

Mr. Efron serves as our Chief Financial Officer since January 2018. Mr. Efron is responsible for all financial aspects of our business and for strategy, as well as Information Technology and Human Resources. Prior to joining Actelis, Mr. Efron was the CFO of TriPlay Inc. and eMusic Inc., a B2C cloud media services company from 2012 to 2017. From 2010 to 2014, Mr. Efron was an entrepreneur in energy efficiency and from 1998 through 2010 worked at Avaya Inc., a Fortune 500 telecommunications company in various executive financial roles including Finance Director. Mr. Efron earned his bachelor’s degree in economics and management from the Hebrew University of Jerusalem.

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Elad Domanovitz, Chief Technology Officer

Dr. Domanovitz serves as our Chief Technologies Officer since April 2017, prior to that he served as director of technologies from 2014. Dr. Domanovitz brings extensive experience envisioning and developing Actelis’ research capabilities. As Actelis’ Chief Scientist, Dr. Domanovitz is responsible for driving Actelis’ technology development and aligning it with the company’s overall vision and worldwide go-to-market strategies. Dr. Domanovitz is also responsible for enriching the Actelis IT portfolio and he also actively participates in standards committees. Dr. Domanovitz joined Actelis in November 2005 and has since held several positions in the Algorithms and CTO groups. Dr. Domanovitz holds a Ph.D., MSc. and a BSc (cum laude) in Electrical Engineering from Tel Aviv University.

Eyal Aharon, VP R&D

Mr. Aharon serves as our Vice President of R&D since January 2018. Previously, Mr. Aharon served as our director of software engineering from 2011 through December 2017. Mr. Aharon brings extensive experience in Research and Development to Actelis, having over 20 years in the telecommunication industry. As Actelis’ VP of R&D, Mr. Aharon is responsible for all current and strategic activities of the R&D group. Mr. Aharon joined Actelis in 2000 and has since held several positions within the R&D group. Prior to joining Actelis, he held several positions in ADC Teledata. Mr. Aharon holds a BA in Computer Science and Economics from Tel-Aviv University, and a Master’s in Economics from Tel-Aviv University.

Michal Winkler-Solomon, VP Marketing

Ms. Winkler-Solomon serves as our Vice President of Marketing since March 2017 and prior as AVP of Product Marketing from March 2016. Ms. Winkler-Solomon has more than 20 years of Product Marketing and Product Management experience. Since joining Actelis in 2001, Ms. Winkler-Solomon has held Product Management, and Product Marketing positions, where she has been responsible for product specifications, positioning, and marketing of the company’s industry-leading Ethernet in the First Mile product line.

Prior to Actelis, Ms. Winkler-Solomon held positions as Chief Technology Officer of BeConnected. Prior, Ms. Winkler-Solomon held positions as Product Manager of the Access Division at Telrad Telecommunications where she led Nortel Networks product development. Prior, Ms. Winkler-Solomon spent five years developing communication systems for the Israeli army. Ms. Michal Winkler-Solomon holds a B.Sc in Electrical Engineering from the Technion and an MBA from Tel Aviv University.

Yaron Altit, Executive Vice President, International Sales

Mr. Altit serves as our Vice President of International Sales since June 2017. Prior to joining us, Mr. Altit was self-employed from 2013 to 2017. Mr. Altit brings more than 25 years of experience to his position as Actelis’ Executive Vice President International Sales business unit, including vast experience in sales management positions in the Telecom, Datacom, and control plane industries. In his role, Mr. Altit is responsible for all EMEA & APAC regions customer-facing functions, including sales, customer support, pre-sale engineering, business development and regional marketing. Mr. Altit held executive positions in several telecommunication companies, including management of Sales, Customer Support and Business Development at Schema, where he was the General Manager of EMEA Business unit. Previously, Mr. Altit held top sales management positions at Mindspeed Technologies. Mr. Altit was responsible for European and International sales at T-Soft (now Cramer Systems, an Amdocs OSS division). Mr. Altit studied towards a B.A. in Economics and Accounting at the Ramat Gan College.

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Hemi Kabir, Vice President, Operations

Mr. Kabir serves as our Vice President of Operations since January 2015. With more than 20 years of experience in operations, supply chain and engineering, Mr. Kabir manages Actelis’ Supply Chain, Purchasing, Quality Assurance and Operations Engineering departments, and is responsible for Actelis’ operations including manufacturability, continuous improvement initiatives and cost-savings activities. Prior to joining Actelis, Mr. Kabir was head of Supply Chain management and purchasing at “Better place” Israel, where he was in charge of defining and managing the supply chain divisions. Mr. Kabir holds MBA degree from Heriot Watt University, BA degree in management from the Open University and Industrial practical engineering diploma from Israeli College of Management.

Brett Harrison, Senior Vice President of Sales, North Americas

Mr. Harrison brings more than 20 years of experience including sales leadership, strategy and business development in various technology fields such as communications and cyber security. Prior to joining the Company, since September 2022, Mr. Harrison was the President of Sage Holdings, LLC. From June 2020 until August 2022, Mr. Harrison was the RVP of Sales at Palo Alto Networks. From June 2019 until June 2020, Mr. Harrison served as the VP of North American Banking Service Sales at NCR Corporation. From January 2017 until June 2019, Mr. Harrison served as the VP of Telco Sales at Check Point Software Technologies. From October 2012 until January 2017, Mr. Harrison served as a Vice President of Sales at Avaya. From October 2002 until January 2012, Mr. Harrison served as the VP of Sales at the Company. Mr. Harrison holds a Bachelor of Science degree in Electronics from Chapman University.

Dr. Israel Niv, Director

Dr. Niv serves as a board member in our company since 2015. Dr. Niv serves on the board of Palo Alto University, Dealsum, and Attolight AG, and is an advisor to the Silicom Ventures investment group. Dr. Niv served as former Chairman of Femtronix inc. and as GM of Opal Inc. (formerly traded on Nasdaq). Dr. Niv has also founded Optonics, and served as CEO of DGC. Dr. Niv received a BSc in chemistry and a PhD in chemical physics from Ben-Gurion University of the Negev (Israel). Dr. Niv completed his postdoctoral work at the University of Southern California as a Weizmann Postdoctoral Fellow.

Joseph Moscovitz, Director

Mr. Moscovitz began serving on our board of directors following our IPO in May 2022. In November 2022, we engaged Mr. Moscovitz as a short term business development consultant to the Company. Mr. Moscovitz has served as the Chief Strategy Officer at Telit Communications Plc from January 2019 through December 2021. Prior to that Mr. Moscovitz served as Chief Executive Officer of Telit Automotive Solutions from December 2016 through December 2018 and President of Products and Solutions at Telit Plc from January 2011 through November 2016.

Mr. Moscovitz was previously employed as a Chief Executive Officer of Cell Data Ltd. and a Chief Executive Officer by Microkim Ltd. Mr. Moscovitz received his Bachelor of Science in Electrical Engineering from Technion-Israel Institute of Technology.

Dr. Naama Halevi-Davidov, Director

Dr. Halevi Davidov began serving on our board of directors following our IPO in May 2022. Dr. Halevi Davidov has served as a Financial Consultant to Joytunes Ltd., a developer of music learning software, since April 2021, as a director of Gamida-Cell Ltd., since January 2022 and as a director and Audit Committee member of Kaltura, Inc. since July 2021. Prior to that, Dr. Halevi Davidov served as Financial Advisor to Gloat Ltd., a talent marketplace platform, and to Healthy IO Ltd., a manufacturer and marketer of medical equipment. Dr. Halevi Davidov served as the Chief Financial Officer of Kaltura from November 2012 to August 2017. Dr. Halevi Davidov has also served on the board of Kaltura, Inc. subsidiary, Kaltura Asia Pte Ltd. since February 2015. Dr. Halevi Davidov is a Certified Public Accountant in Israel. Dr. Halevi Davidov received a Ph.D. in Strategy from Tel Aviv University in 2012, a Master’s in Finance and Marketing from Tel Aviv University in 2002 and Bachelor of Arts in Accounting and Economics from Tel Aviv University in 2000. Dr. Halevi Davidov was selected to serve on our board of directors because of her extensive knowledge of and experience with corporate financial strategy.

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Noemi Schmayer, Director

Ms. Schmayer began serving on our board of directors following our IPO in May 2022. Ms. Schmayer acted as a Senior Partner and Head of the High-tech and global corporations in one of the five largest law firms in Israel. Since then, Ms. Schmayer has been counseling companies and individuals regarding mergers & acquisitions, investments and strategy, and serves as a director of several board of directors including serving as the external director of Somoto Ltd (publicly traded on the Tel Aviv Stock Exchange under the name Nostromo Energy Ltd) and served as legal counsel for Smart Shooter Ltd. Ms. Schmayer is a renowned specialist in corporate law, corporate finance, cross-border transactions, and commercial law. Ms. Schmayer wields particular expertise in M&A, finance transactions, and complexed commercial contracts in High-tech and Biotech. Ms. Schmayer received an LLB in law from Tel Aviv University.

Number and Terms of Office of Officers and Directors

Our board of directors has five members, at least three of whom will be deemed “independent” under SEC and Nasdaq rules.

Our officers are appointed by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our certificate of incorporation as it deems appropriate.

Each of the directors of the Company were elected pursuant to the provisions of the Stockholders Agreement and our Certificate of Incorporation in effect prior to the IPO. Tuvia Barlev had a right under the Stockholders Agreement to designate one director. Dr. Niv was elected by the holders of the majority of the Series A Preferred Stock. Joseph Moscovitz, Naama Halevi-Davidov, and Noemi Schmayer were elected by both the majority of our outstanding common stock and the holders of the majority of the Series A Preferred Stock and Series Preferred B Stock. The Stockholders Agreement was terminated in connection with our IPO and going forward, each of the directors were appointed by the holders of the majority of our outstanding common stock pursuant to the provisions of our Certificate of Incorporation, with (i) directors in Class I, consisting of Noemi Schmayer, to stand for election at the Annual Meeting to be held in 2026; (ii) directors in Class II, consisting of Joseph Moscovitz and Naama Halevi-Davidov, to stand for election at the annual meeting of stockholders to be held in 2024; and (iii) directors in Class III, consisting of Israel Niv and Tuvia Barlev, to stand for election at the annual meeting of stockholders to be held in 2025.

Our Company is governed by our Board. Currently, each member of our Board, other than Tuvia Barlev and Joseph Moscovitz, is an independent director; and all standing committees of our Board of Directors are composed entirely of independent directors, in each case under Nasdaq’s independence definition applicable to boards of directors. For a director to be considered independent, our Board of Directors must determine that the director has no relationship which, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Members of the Audit Committee also must satisfy a separate SEC independence requirement, which provides that they may not accept directly or indirectly any consulting, advisory or other compensatory fee from us or any of our subsidiaries other than their directors’ compensation. In addition, under SEC rules, an Audit Committee member who is an affiliate of the issuer (other than through service as a director) cannot be deemed to be independent. In determining the independence of members of the Compensation Committee, Nasdaq listing standards require our Board of Directors to consider certain factors, including, but not limited to: (1) the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by us to the director, and (2) whether the director is affiliated with us, one of our subsidiaries or an affiliate of one of our subsidiaries. Under our Compensation Committee Charter, members of the Compensation Committee also must qualify as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, and as “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act. The independent members of the Board of Directors are Israel Niv, Naama Halevi-Davidov, and Noemi Schmayer.

Committees of the Board of Directors

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee, each with its own charter that has been approved by the board. The anticipated composition and responsibilities of each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by our board of directors. Upon our listing on The Nasdaq Capital Market, each committee’s charter will be available under the Corporate Governance section of our website at www.actelis.com. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this Annual Report.

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Audit Committee

The members of our audit committee are Israel Niv, Naama Halevi-Davidov, and Noemi Schmayer, with Naama Halevi-Davidov serving as Chairperson. The composition of our audit committee meets the requirements for independence under current Nasdaq listing standards and SEC rules and regulations. Each member of our audit committee meets the financial literacy requirements of Nasdaq listing standards. In addition, our board of directors has determined that Naama-Halevi Davidov is an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act of 1933. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq. The audit committee, among other things:

| ● | reviews our consolidated financial statements and our critical accounting policies and practices;

| ● | selects a qualified firm to serve as the independent registered public accounting firm to audit our consolidated financial statements;

| ● | helps to ensure the independence and performance of the independent registered public accounting firm;

| ● | discusses the scope and results of the audit with the independent registered public accounting firm and review, with management and the independent registered public accounting firm, our interim and year-end results of operations;

| ● | pre-approves all audit and all permissible non-audit services to be performed by the independent registered public accounting firm;

| ● | oversees the performance of our internal audit function when established;

| ● | reviews the adequacy of our internal controls;

| ● | develops procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

| ● | reviews our policies on risk assessment and risk management; and

| ● | reviews related party transactions.

Compensation Committee

The members of our compensation committee are Naama Halevi-Davidov, Israel Niv, and Noemi Schmayer, with Israel Niv serving as Chairperson. The composition of our compensation committee meets the requirements for independence under Nasdaq Capital Market listing standards and SEC rules and regulations. Each member of the compensation committee is also a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act. The purpose of our compensation committee is to discharge the responsibilities of our board of directors relating to compensation of our executive officers. The compensation committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq. The compensation committee, among other things:

| ● | reviews, approves and determines, or make recommendations to our board of directors regarding, the compensation of our executive officers;

| ● | administers our stock and equity incentive plans;

| ● | helps to ensure the independence and performance of the independent registered public accounting firm;

| ● | reviews and approves, or make recommendations to our board of directors regarding, incentive compensation and equity plans; and

| ● | establishes and reviews general policies relating to compensation and benefits of our employees.

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Nominating and Corporate Governance Committee

The members of our nominating and corporate governance committee are Noemi Schmayer, Naama Halevi-Davidov, and Israel Niv, with Noemi Schmayer serving as Chairperson. The composition of our nominating and corporate governance committee meets the requirements for independence under Nasdaq listing standards and SEC rules and regulations. The nominating and corporate governance committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq. The nominating and corporate governance committee, among other things:

| ● | identifies, evaluates and selects, or make recommendations to our board of directors regarding, nominees for election to our board of directors and its committees;

| ● | evaluates the performance of our board of directors and of individual directors;

| ● | considers and make recommendations to our board of directors regarding the composition of our board of directors and its committees;

| ● | reviews developments in corporate governance practices;

| ● | oversees environmental, social and governance (ESG) matters;

| ● | evaluates the adequacy of our corporate governance practices and reporting; and

| ● | develops and make recommendations to our board of directors regarding corporate governance guidelines and matters.

Compensation Committee Interlocks and Insider Participation

None of our executive officers currently serves, and in the past year has not served, as a member of the compensation committee of any entity that has one or more executive officers serving on our board of directors.

Oversight of Risk Management

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including economic risks, financial risks, legal and regulatory risks and others, such as the impact of competition. Management is responsible for the day-to-day management of the risks that we face, while our Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, our Board is responsible for satisfying itself that the risk management processes designed and implemented by management are adequate and functioning as designed. Our Board assesses major risks facing our Company and options for their mitigation in order to promote our stockholders’ interests in the long-term health of our Company and our overall success and financial strength. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for us. The involvement of our full Board of Directors in the risk oversight process allows our Board to assess management’s appetite for risk and also determine what constitutes an appropriate level of risk for our Company. Our Board regularly includes agenda items at its meetings relating to its risk oversight role and meets with various members of management on a range of topics, including corporate governance and regulatory obligations, operations and significant transactions, risk management, insurance, pending and threatened litigation and significant commercial disputes.

While our Board is ultimately responsible for risk oversight, various committees of our Board oversee risk management in their respective areas and regularly report on their activities to our entire Board. In particular, the Audit Committee has the primary responsibility for the oversight of financial risks facing our Company. The Audit Committee’s charter provides that it will discuss our major financial risk exposures and the steps we have taken to monitor and control such exposures. Our Board has also delegated primary responsibility for the oversight of all executive compensation and our employee benefit programs to the Compensation Committee. The Compensation Committee strives to create incentives that encourage a level of risk-taking behavior consistent with our business strategy.

We believe the division of risk management responsibilities described above is an effective approach for addressing the risks facing our Company and that our Board’s leadership structure provides appropriate checks and balances against undue risk taking.

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Code of Business Conduct and Ethics

Our Board has adopted a code of ethical conduct that applies to our principal executive officer, principal financial officer and senior financial management. This code of ethical conduct is embodied within our Code of Business Conduct and Ethics, which applies to all persons associated with our Company, including our directors, officers and employees (including our principal executive officer, principal financial officer, principal accounting officer and controller). In order to satisfy our disclosure requirements under Item 5.05 of Form 8-K, we will disclose amendments to, or waivers of, certain provisions of our Code of Business Conduct and Ethics relating to our chief executive officer, chief financial officer, chief accounting officer, controller or persons performing similar functions on our website promptly following the adoption of any such amendment or waiver. The Code of Business Conduct and Ethics provides that any waivers of, or changes to, the code that apply to the Company’s executive officers or directors may be made only by the Audit Committee. In addition, the Code of Business Conduct and Ethics includes updated procedures for non-executive officer employees to seek waivers of the code.

Number and Terms of Office of Officers and Directors

Our board of directors has five members, at least three of whom will be deemed “independent” under SEC and Nasdaq rules.

Our officers are appointed by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our certificate of incorporation as it deems appropriate.

Each of the directors of the Company were elected pursuant to the provisions of the Stockholders Agreement and our Certificate of Incorporation in effect prior to the IPO. Tuvia Barlev had a right under the Stockholders Agreement to designate one director. Dr. Niv was elected by the holders of the majority of the Series A Preferred Stock. Joseph Moscovitz, Naama Halevi-Davidov, and Noemi Schmayer were elected by both the majority of our outstanding common stock and the holders of the majority of the Series A Preferred Stock and Series Preferred B Stock. The Stockholders Agreement was terminated in connection with our IPO and going forward, each of the directors were appointed by the holders of the majority of our outstanding common stock pursuant to the provisions of our Certificate of Incorporation, with (i) directors in Class I, consisting of Noemi Schmayer, to stand for election at the Annual Meeting to be held in 2026; (ii) directors in Class II, consisting of Joseph Moscovitz and Naama Halevi-Davidov, to stand for election at the annual meeting of stockholders to be held in 2024; and (iii) directors in Class III, consisting of Israel Niv and Tuvia Barlev, to stand for election at the annual meeting of stockholders to be held in 2025.

Our Company is governed by our Board. Currently, each member of our Board, other than Tuvia Barlev and Joseph Moscovitz, is an independent director; and all standing committees of our Board of Directors are composed entirely of independent directors, in each case under Nasdaq’s independence definition applicable to boards of directors. For a director to be considered independent, our Board of Directors must determine that the director has no relationship which, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Members of the Audit Committee also must satisfy a separate SEC independence requirement, which provides that they may not accept directly or indirectly any consulting, advisory or other compensatory fee from us or any of our subsidiaries other than their directors’ compensation. In addition, under SEC rules, an Audit Committee member who is an affiliate of the issuer (other than through service as a director) cannot be deemed to be independent. In determining the independence of members of the Compensation Committee, Nasdaq listing standards require our Board of Directors to consider certain factors, including, but not limited to: (1) the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by us to the director, and (2) whether the director is affiliated with us, one of our subsidiaries or an affiliate of one of our subsidiaries. Under our Compensation Committee Charter, members of the Compensation Committee also must qualify as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, and as “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act. The independent members of the Board of Directors are Israel Niv, Naama Halevi-Davidov, and Noemi Schmayer.

Committees of the Board of Directors

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee, each with its own charter that has been approved by the board. The composition and responsibilities of each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by our board of directors. Each committee’s charter will be available under the Corporate Governance section of our website at www.actelis.com. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this Annual Report.

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Audit Committee

The members of our audit committee are Israel Niv, Naama Halevi-Davidov, and Noemi Schmayer, with Naama Halevi-Davidov serving as Chairperson. The composition of our audit committee meets the requirements for independence under current Nasdaq listing standards and SEC rules and regulations. Each member of our audit committee meets the financial literacy requirements of Nasdaq listing standards. In addition, our board of directors has determined that Naama-Halevi Davidov is an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq. The audit committee, among other things:

| ● | reviews our consolidated financial statements and our critical accounting policies and practices;

| ● | selects a qualified firm to serve as the independent registered public accounting firm to audit our consolidated financial statements;

| ● | helps to ensure the independence and performance of the independent registered public accounting firm;

| ● | discusses the scope and results of the audit with the independent registered public accounting firm and review, with management and the independent registered public accounting firm, our interim and year-end results of operations;

| ● | pre-approves all audit and all permissible non-audit services to be performed by the independent registered public accounting firm;

| ● | oversees the performance of our internal audit function when established;

| ● | reviews the adequacy of our internal controls;

| ● | develops procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

| ● | reviews our policies on risk assessment and risk management; and

| ● | reviews related party transactions.

Compensation Committee

The members of our compensation committee are Naama Halevi-Davidov, Israel Niv, and Noemi Schmayer, with Israel Niv serving as Chairperson. The composition of our compensation committee meets the requirements for independence under Nasdaq Capital Market listing standards and SEC rules and regulations. Each member of the compensation committee is also a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act. The purpose of our compensation committee is to discharge the responsibilities of our board of directors relating to compensation of our executive officers. The compensation committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq. The compensation committee, among other things:

| ● | reviews, approves and determines, or make recommendations to our board of directors regarding, the compensation of our executive officers;

| ● | administers our stock and equity incentive plans;

| ● | helps to ensure the independence and performance of the independent registered public accounting firm;

| ● | reviews and approves, or make recommendations to our board of directors regarding, incentive compensation and equity plans; and

| ● | establishes and reviews general policies relating to compensation and benefits of our employees.

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Nominating and Corporate Governance Committee

The members of our nominating and corporate governance committee are Noemi Schmayer, Naama Halevi-Davidov, and Israel Niv, with Noemi Schmayer serving as Chairperson. The composition of our nominating and corporate governance committee meets the requirements for independence under Nasdaq listing standards and SEC rules and regulations. The nominating and corporate governance committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq. The nominating and corporate governance committee, among other things:

| ● | identifies, evaluates and selects, or make recommendations to our board of directors regarding, nominees for election to our board of directors and its committees;

| ● | evaluates the performance of our board of directors and of individual directors;

| ● | considers and make recommendations to our board of directors regarding the composition of our board of directors and its committees;

| ● | reviews developments in corporate governance practices;

| ● | oversees environmental, social and governance (ESG) matters;

| ● | evaluates the adequacy of our corporate governance practices and reporting; and

| ● | develops and make recommendations to our board of directors regarding corporate governance guidelines and matters.

Compensation Committee Interlocks and Insider Participation

None of our executive officers currently serves, and in the past year has not served, as a member of the compensation committee of any entity that has one or more executive officers serving on our board of directors.

Oversight of Risk Management

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including economic risks, financial risks, legal and regulatory risks and others, such as the impact of competition. Management is responsible for the day-to-day management of the risks that we face, while our Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, our Board is responsible for satisfying itself that the risk management processes designed and implemented by management are adequate and functioning as designed. Our Board assesses major risks facing our Company and options for their mitigation in order to promote our stockholders’ interests in the long-term health of our Company and our overall success and financial strength. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for us. The involvement of our full Board of Directors in the risk oversight process allows our Board to assess management’s appetite for risk and also determine what constitutes an appropriate level of risk for our Company. Our Board regularly includes agenda items at its meetings relating to its risk oversight role and meets with various members of management on a range of topics, including corporate governance and regulatory obligations, operations and significant transactions, risk management, insurance, pending and threatened litigation and significant commercial disputes.

While our Board is ultimately responsible for risk oversight, various committees of our Board oversee risk management in their respective areas and regularly report on their activities to our entire Board. In particular, the Audit Committee has the primary responsibility for the oversight of financial risks facing our Company. The Audit Committee’s charter provides that it will discuss our major financial risk exposures and the steps we have taken to monitor and control such exposures. Our Board has also delegated primary responsibility for the oversight of all executive compensation and our employee benefit programs to the Compensation Committee. The Compensation Committee strives to create incentives that encourage a level of risk-taking behavior consistent with our business strategy.

We believe the division of risk management responsibilities described above is an effective approach for addressing the risks facing our Company and that our Board’s leadership structure provides appropriate checks and balances against undue risk taking.

Code of Business Conduct and Ethics

Our Board has adopted a code of ethical conduct that applies to our principal executive officer, principal financial officer and senior financial management. This code of ethical conduct is embodied within our Code of Business Conduct and Ethics, which applies to all persons associated with our Company, including our directors, officers and employees (including our principal executive officer, principal financial officer, principal accounting officer and controller). In order to satisfy our disclosure requirements under Item 5.05 of Form 8-K, we will disclose amendments to, or waivers of, certain provisions of our Code of Business Conduct and Ethics relating to our chief executive officer, chief financial officer, chief accounting officer, controller or persons performing similar functions on our website promptly following the adoption of any such amendment or waiver. The Code of Business Conduct and Ethics provides that any waivers of, or changes to, the code that apply to the Company’s executive officers or directors may be made only by the Audit Committee. In addition, the Code of Business Conduct and Ethics includes updated procedures for non-executive officer employees to seek waivers of the code.

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ITEM 11. EXECUTIVE COMPENSATION.

EXECUTIVE AND DIRECTOR COMPENSATION

The following table shows the total compensation awarded to, earned by, or paid to (1) the individual who served as our principal executive officer during fiscal year 2023 and 2022; and (2) our next most highly compensated executive officer who earned more than $100,000 during fiscal year 2023 and were serving as executive officers as of December 31, 2023. We refer to these individuals in this Annual Report as our named executive officers.

Name and Principal Position |  | Year |  | Salary ($) |  |  | Bonus ($) |  |  | Stock Awards ($) |  |  | Option Awards ($) |  |  | Nonequity incentive plan compensation ($) |  |  | Nonqualified deferred compensation earnings ($) |  |  | All other compensation ($) |  |  | Total ($) |
Tuvia Barlev |  | 2023 |  |  | 298,000 |  |  |  | 163,000 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 13,834 |  |  |  | 475,885 |
Chief Executive Officer and Chairman |  | 2022 |  |  | 250,000 |  |  |  | 125,000 |  |  |  | 500,000 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 11,603 |  |  |  | 886,603 |
Yoav Efron |  | 2023 |  |  | 183,727 |  |  |  | 36,500 |  |  |  | — |  |  |  | — |  |  |  |  |  |  |  |  |  |  |  | 16,337 |  |  |  | 236,564 |
Chief Financial Officer |  | 2022 |  |  | 172,614 |  |  |  | 85,000 |  |  |  | 100,000 |  |  |  | — |  |  |  |  |  |  |  |  |  |  |  | 26,934 |  |  |  | 384,548 |
Yaron Altit |  | 2023 |  |  | 132,381 |  |  |  | 62,790 |  |  |  | 11,760 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 21,584 |  |  |  | 228,515 |
Executive Vice President, International Sales |  | 2022 |  |  | 121,850 |  |  |  | 82,865 |  |  |  | 3,840 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 20,885 |  |  |  | 229,440 |

Outstanding Equity Awards at Fiscal Year-End

The following table provides certain information concerning any common share purchase options, stock awards or equity incentive plan awards held by the executive officers named above at the fiscal year ended December 31, 2023.

|  | Option Awards |  |  | Stock Awards |  |  |  |
Name |  | Number of Securities Underlying Unexercised Options (#) Exercisable |  |  | Number of Securities Underlying Unexercised Options (#) Unexercisable |  |  | Option Exercise Price ($) |  |  | Option Expiration Date |  |  | Number of Shares of Stock That Have Not Vested (#) |  |  | Market Value of Shares of Stock That Have Not Vested ($) |
Tuvia Barlev |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Chief Executive Officer and Chairman |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 4,167 | (1) |  | $ | 4,667 |
Yoav Efron |  |  | 10,700 | (2) |  |  | — |  |  | $ | 1.058 |  |  |  | 02/08/2028 |  |  |  | — |  |  |  | — |
Chief Financial Officer |  |  | 1,630 |  |  |  | 544 | (3) |  | $ | 13.616 |  |  |  | 05/27/2031 |  |  |  | — |  |  |  | — |
|  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 834 | (4) |  | $ | 934 |
Yaron Altit |  |  | 5,255 | (5) |  |  | — |  |  | $ | 1.058 |  |  |  | 06/08/2027 |  |  |  | — |  |  |  | — |
Executive Vice President, International Sales |  |  | 5,445 | (6) |  |  | — |  |  |  | 1.058 |  |  |  | 05/08/2028 |  |  |  |  |  |  |  |  |
|  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 533 | (7) |  | $ | 597 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 4,000 | (8) |  |  | 4,480 |

(1) | The RSUs vests annually in three equal tranches, with the first tranche vesting on May 17, 2023, the second tranche vesting on May 17, 2024, and the last tranche vesting on May 17, 2025.

(2) | This option grant was vested in full on December 7, 2021.

(3) | 25% of these options vested on May 27, 2022, with the remaining 75% vesting monthly thereafter.

(4) | The RSUs vests annually in three equal tranches, with the first tranche vesting on May 17, 2023, the second tranche vesting on May 17, 2024, and the last tranche vesting on May 17, 2025

(5) | This option grant was vested in full on June 12, 2021.

(6) | This option grant was vested in full on February 1, 2022.

(7) | The RSUs vests annually in three equal tranches, with the first tranche vesting on September 29, 2023, the second tranche vesting on September 29, 2024, and the last tranche vesting on September 29, 2025.

(8) | The RSUs vests annually in three equal tranches, with the first tranche vesting on June 14, 2024, the second tranche vesting on June 14, 2025, and the last tranche vesting on June 14, 2026.

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Health, Welfare and Retirement Benefits

All of our named executive officers are eligible to participate in our employee benefit plans, including our medical, dental, and life and disability insurance plans, in each case on the same basis as all of our other employees. We provide a 401(k) plan to our employees, including our named executive officers, as discussed in the section below entitled “-401(k) Plan.” Our employees in Israel are eligible to participate by law in the company’s retirement, training and health benefits.

401(k) Plan

We maintain a defined contribution employee retirement plan (“401(k) plan”), for our employees. Our named executive officers are also eligible to participate in the 401(k) plan on the same basis as our other employees. The 401(k) plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code of 1986, as amended (“Code”), and is also intended to qualify as a safe harbor plan. During 2023, we made matching contributions of 100% of the amount of each participant’s contributions, up to 0.5% of each participant’s compensation. The 401(k) plan currently does not offer the ability to invest in our securities.

Employment Agreements

We have entered into written employment agreements with our executive officers. All of these agreements contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under applicable law.

Chief Executive Officer

Employment Agreement with Mr. Tuvia Barlev

On February 15, 2015, we entered into an at-will employment agreement with Mr. Tuvia Barlev, which remains in effect as of the date of this Annual Report.

In May 2022, the Company approved an increase to Mr. Barlev’s salary, effective upon completion of the IPO, to $300,000 with performance bonuses of an additional $260,000. In addition, Mr. Barlev received a bonus of $125,000 following the IPO and is entitled annually to receive $500,000 of RSUs under the Company’s 2015 Plan. For the fiscal year of 2023, Mr. Barlev was not granted these RSUs.

In May 2023, the Company approved an increase to Mr. Barlev’s salary to $330,000, effective as of April 1,2023. In addition, Mr. Barlev was granted an additional 27,500 RSUs, and a $163,801 bonus for 2022. However, Mr. Barlev decided not to apply his approved salary increase. In addition, in September 2023 the board indefinitely delayed the grant of 27,500 RSUs to Mr. Barlev.

Mr. Barlev’s employment agreement provides that that he will be entitled to severance if we terminate his employment without “Cause” (as defined in the employment agreement), if he terminates his employment for “Good Reason” (as defined in the employment agreement), or following his death or permanent disability. In any event in which Mr. Barlev is entitled to severance pursuant to these provisions, we shall continue to pay Mr. Barlev his then-in-effect base salary and provide benefit continuation at our expense for a period of nine months from the date of termination of employment. Any severance payable to Mr. Barlev shall be payable in equal instalments in the same manner and in our regular payroll cycle as other salaried executive employees are paid.

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Consultant Agreement with Barlev Enterprises Inc.

In February 2015, we entered into a consulting agreement with Barlev Enterprises Inc., a company owned by Mr. Tuvia Barlev, our Chief Executive Officer, and his wife, Nurit Barlev, or the Barlev Consulting Agreement. Pursuant to the Barlev Consulting Agreement, Barlev Enterprises Inc. provides services to us as an independent contractor, and receives a monthly retainer of $2,083 for these services. The Barlev Consulting Agreement contains provisions regarding noncompetition, non-solicitation, confidentiality of information and assignment of inventions. The enforceability of the noncompetition covenants is subject to certain limitations. The Barlev Consulting Agreement will continue to be in full force and effect unless otherwise terminated in accordance with its terms. The Barlev Consulting Agreement may be terminated by either party, with or without cause, at any time upon six (6) months advance written notice to the other party. This agreement has terminated following the IPO.

Promissory Note with Tuvia Barlev

On February 20, 2015, we made a loan to our Chief Executive Officer, Mr. Tulia Barlev, in the principal amount of $106,290, which loan was evidenced by a secured, non-negotiable promissory note, or the Barlev Note. In April 2022, we entered into a Securities Purchase and Loan Repayment Agreement with Mr. Barlev, pursuant to which Mr. Barlev sold to the Company 27,699 shares for a purchase price equal to $4.55 per share for an aggregate purchase consideration of $126,023, or the Purchase Consideration. In lieu of paying Mr. Barlev the Purchase Consideration for the shares in cash, the Purchase Consideration was used to repay in full the outstanding loan amount and accrued interest owed to the Company by Mr. Barlev, and the Barlev Note was terminated.

Chief Financial Officer

Employment Agreements with Mr. Yoav Efron

In December 2017, we entered into an at will employment agreement with our Chief Financial Officer, Mr. Yoav Efron, and he entered into another, separate, at will employment agreement with our subsidiary. Both of these agreements remain in effect as of the date of this Annual Report.

In May 2022, the Company approved an increase to Mr. Efron’s salary, effective upon completion of the IPO, to $187,000 through both employment agreements (which the subsidiary agreement is effected by the currency exchange rates) with performance bonuses of an additional $50,000. In addition, Mr. Efron received a one-time $85,000 bonus upon completion of the IPO and is entitled annually to receive $100,000 of RSUs. For the fiscal year of 2023, Mr. Efron was not granted these RSUs.

In May 2023, the Company approved an increase to Mr. Efron salary to $205,000, effective as of April 1,2023. In addition, Mr. Efron was granted an additional 5,500 RSUs, and a $36,500 bonus for 2022. However, Mr. Efron decided not to apply his approved salary increase. In addition, in September 2023 the board indefinitely delayed the grant of 5,500 RSUs to Mr. Efron.

Mr. Efron employment agreements provide that that he will be entitled to severance if we terminate his employment without “Cause” (as defined in the employment agreements), if he terminates his employment for “Good Reason” (as defined in the employment agreements), we shall continue to pay Mr. Efron his then-in-effect base salary and provide benefit continuation at our expense for a period of nine months from the date of termination of employment following an acquisition of us. Any severance payable to Mr. Efron shall be payable in equal instalments in the same manner and in our regular payroll cycle as other salaried executive employees are paid.

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Executive Vice President, International Sales

Employment Agreement, as amended, with Mr. Yaron Altit

On June 19, 2017, we entered into an at-will employment agreement with Mr. Yaron Altit, and of which remains in effect as of the date of this Annual Report. On April 2023, the Company approved an increase to Mr. Altit’s salary, effective March 1, 2023 to a monthly salary of 42,000 NIS. Additionally, Mr. Altit will receive 4,000 RSU pending board approval.

Either party shall be entitled to terminate the employment agreement by providing written notice to the other party at least 90 days in advance. In the event Mr. Altit resigns without giving prior notice, the Company reserves the right to deduct any owed amounts, including salary, equivalent to the salary he would have been entitled to receive had he been employed during the notice period.

The Company reserves the right to terminate the employment agreement without the need for prior notice for “good cause” as defined in the employment agreement.

Director Compensation

Our Board adopted a non-employee director compensation policy pursuant to which each of our directors who is not an employee or consultant of our company will be eligible to receive an annual cash retainer of $10,000 for his or her service on our board of directors and an annual cash retainer of $2,000 for his or her service on a committee of our board of directors, with the chairperson of each committee receiving an additional $3,000 annually. Additionally, following the IPO, as compensation for serving on the Board, Dr. Naama Halevi-Davidov, Israel Niv, Noemi Schmayer and Joseph Moscovitz were each granted 2,500 RSUs, of which shall fully vest over 36 months, subject to each member’s continued service on the Board. Furthermore, in connection with the IPO, on March 22, 2023, Compensation Committee of the Board approved, and thereafter, on May 2, 2023, the entire Board approved and ratified the annual issuance of RSUs worth $100,000 at their time of their grant to each of our members of the Board, Dr. Naama Halevi-Davidov, Israel Niv, Noemi Schmayer and Joseph Moscovitz (the “Annual RSU Grants”). The Annual RSU Grants shall fully vest over 36 months, subject to each member’s continued service on the Board, as compensation for serving on the Board. Each Annual RSU Grant will be subject to their availability under the Plan. The members of the Board did not receive any new grants of options during 2023.

Our directors are and will continue to be reimbursed by us for any out-of-pocket expenses incurred in connection with activities conducted on our behalf. The compensation of Mr. Barlev as a named executive officer is set forth in the section above; he does not receive any additional compensation for his service as the Chairman of the Board.

For the year ended 2023, our non-employee directors were compensated as follows in the table below:

Name |  | Year |  | Fees Earned or Paid in Cash ($) |  |  | Option Awards ($) |  |  | All Other Compensation ($) |  |  | Total ($) |
Israel Niv |  | 2023 |  | $ | 19,000 |  |  |  | — |  |  | $ | — |  |  | $ | 19,000 |
Dr. Naama Halevi-Davidov(1)(2) |  | 2023 |  | $ | 19,000 |  |  |  | — |  |  |  | — |  |  | $ | 19,000 |
Joseph Moscovitz |  | 2023 |  | $ | 10,000 |  |  |  | — |  |  | $ | — |  |  | $ | 10,000 |
Noemi Schmayer |  | 2023 |  | $ | 19,000 |  |  |  | — |  |  | $ | — |  |  | $ | 19,000 |

Director and Officer Liability Insurance

We have purchased following the IPO, and intend to review in May 2024, our director and officer liability insurance that provides financial protection for our directors and officers in the event that they are sued in connection with the performance of their services and also provides employment practices liability coverage, which insures for harassment and discrimination suits.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our Common Stock as of March 20, 2024 of:

| ● | each of our directors and executive officers; and
| ● | each person known to us to beneficially own 5% of our Common Stock on an as-converted basis.

The calculations in the table are based on 3,020,268 common shares issued and outstanding as of March 20, 2024, including treasury shares.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.

Unless otherwise indicated, the address for each beneficial owner listed in the table below is c/o Actelis Networks, Inc., 4039 Clipper Court, Fremont, CA 94538.

Name of Beneficial Owner(1) |  | No. of Shares * Beneficially Owned |  |  | % of Class |
Tuvia Barlev(2) |  |  | 169,872 |  |  |  | 5.6 | %
Yoav Efron(3) |  |  | 14,319 |  |  |  | * |
Eyal Aharon(4) |  |  | 4,799 |  |  |  | * |
Yaron Altit(5) |  |  | 10,967 |  |  |  | * |
Michal Winkler-Solomon(6) |  |  | 4,516 |  |  |  | * |
Hemi Kabir(7) |  |  | 5,357 |  |  |  | * |
Israel Niv(8) |  |  | 68,472 |  |  |  | 2.3 | %
Elad Domanovitz(9) |  |  | 5,632 |  |  |  | * |
Noemi Schmayer(10) |  |  | 1,666 |  |  |  | * |
Joseph Moscovitz(11) |  |  | 1,666 |  |  |  | * |
Dr. Naama Halevi-Davidov(12) |  |  | 1,666 |  |  |  | * |
Brett Harrison |  |  | — |  |  |  | — |
All executive officers and directors as a group (12 persons) |  |  | 288,855 |  |  |  | 9.6 | %
5% Stockholders |  |  |  |  |  |  |  |
Armistice Capital Master Fund, Ltd.(13) |  |  | 301,000 | (14) |  |  | 9.99 | %(14)

| * | Less than 1%

(1) | Unless otherwise noted, the business address of the following entities or individuals is 4039 Clipper Court, Fremont, CA 94538.

(2) | Consists of (i) 161,539 shares of common stock held by Mr. Barlev and (ii) 8,333 shares of common stock issuable upon the vesting of RSUs issued to Mr. Barlev which options are exercisable within 60 days from March 20, 2024.

(3) | Consists of (i) 323 shares of common stock held by Mr. Efron; (ii) 12,330 shares of common stock issuable upon the exercise of options and (iii) 1,666 RSUs, each issued to Mr. Efron which options are exercisable within 60 days from March 20, 2024.

(4) | Includes (i) 4,132 shares of common stock issuable upon the exercise of options and (ii) 667 RSUs, each issued to Mr. Aharon which options are exercisable within 60 days from March 20, 2024.

(5) | Includes (i) 10,700 shares of common stock issuable upon the exercise of options and (ii) 267 RSUs, each issued to Mr. Altit which options are exercisable within 60 days from March 20, 2024.

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(6) | Includes (i) 4,116 shares of common stock issuable upon the exercise of options and (ii) 400 RSUs issued to Ms. Winkler Solomon which options are exercisable within 60 days from March 20, 2024.

(7) | Includes (i) 4,823 shares of common stock issuable upon the exercise of options and (ii) 534 RSUs, each issued to Mr. Kabir which options are exercisable within 60 days from March 20, 2024.

(8) | Consists of (i) 45,856 shares of common stock held by The Niv Family Trust, for which the Reporting Person and his spouse serve as trustees; (ii) 13,939 shares of common stock held by Sharon Hava Niv 2015 Family Trust for which Mr. Niv and his spouse serve as trustee; (iii) 7,011 shares of common stock issuable upon the exercise of options; and (iv) 1,666 RSUs issued to Mr. Niv which options are exercisable within 60 days from March 20, 2024.

(9) | Includes (i) 5,232 shares of common stock issuable upon the exercise of options and (ii) 400 RSUs, each issued to Mr. Domanovitz which options are exercisable within 60 days from March 20, 2024.

(10) | Includes 1,666 shares of common stock issuable upon the exercise of options issued to Ms. Schmayer which options are exercisable within 60 days from March 20, 2024.

(11) | Includes 1,666 shares of common stock issuable upon the exercise of options issued to Mr. Moscovitz which options are exercisable within 60 days from March 20, 2024.

(12) | Includes 1,666 shares of common stock issuable upon the exercise of options issued to Dr. Halevi-Davidov which options are exercisable within 60 days from March 20, 2024.

(13) | The securities are directly held by Armistice Capital Master Fund Ltd., a Cayman Islands exempted company (the “Master Fund”), and may be deemed to be indirectly beneficially owned by: (i) Armistice Capital, LLC (“Armistice Capital”), as the investment manager of the Investor; and (ii) Steven Boyd, as the Managing Member of Armistice Capital. Armistice Capital and Steven Boyd disclaim beneficial ownership of the securities except to the extent of their respective pecuniary interests therein. The business address of the Master Fund is c/o Armistice Capital, LLC, 510 Madison Ave, 7th Floor, New York, NY 10022.

(14) | Represents 301,000 shares of common stock. Does not include (i) 944,670 shares of common stock issuable upon the exercise of warrants issued in May 2023, (ii) 55,000 shares of common stock issuable upon the exercise of warrants issued in September 2023, (iii) 970,187 shares of common stock issuable upon the exercise of pre-funded warrants issued in December 2023, and (iv) 1,271,187 shares of common stock issuable upon the exercise of warrants issued in December 2023. All of these warrants are subject to a beneficial ownership limitation of 4.99%, which such limitation restrict the Master Fund from exercising that portion of the warrants that would result in the Master Fund and its affiliates owning, after exercise, a number of shares of common stock in excess of the beneficial ownership limitation.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information as of December 31, 2023 with respect to our compensation plans under which equity securities may be issued.

Plan Category |  | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights |  |  | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights |  |  | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
|  | (a) |  |  | (b) |  |  | (c) |
Equity compensation plans approved by security holders: |  |  |  |  |  |  |  |  |  |  |  |
2015 Equity Incentive Plan(1) |  |  | 159,044 |  |  | $ | 2.36 |  |  |  | 90,356 |
Equity compensation plans not approved by security holders |  |  | — |  |  |  | — |  |  |  | — |
Total |  |  | 159,044 |  |  | $ | 2.36 |  |  |  | 90,356 |

(1) | The weighted average exercise price relates to the options only. RSUs were excluded as they have no exercise price.

2015 Equity Incentive Plan

The 2015 Equity Incentive Plan, or the Plan, was adopted by our Board, on May 10, 2015. The Plan provides for the grant of equity-based incentive awards to our employees, directors, and consultants in order to incentivize them to increase their efforts on behalf of our Company and to promote the success of our business.

Authorized Shares. As of the date of this Annual Report, there are 98,174 options to purchase shares of common stock reserved and available for grant under the Plan. Common stock subject to options granted under the Plan that expire or become unexercisable without having been exercised in full will become available again for future grant or sale under the Plan.

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Administration. The Board, or a duly authorized committee of the Board, administers the Plan, or the Administrator. Under the Plan, the Administrator has the authority, subject to applicable law, to interpret the terms of the Plan and any award agreements or awards granted thereunder, designate recipients of awards, determine and amend the terms of awards, including the exercise price of an option award, the fair market value of a share, the time and vesting schedule applicable to an award or the method of payment for an award, accelerate or amend the vesting schedule applicable to an award, prescribe the forms of agreement for use under the Plan and take all other actions and make all other determinations necessary for the administration of the 2015 Plan.

The administrator also has the authority to approve the conversion, substitution, cancellation or suspension under and in accordance with the Plan of any or all awards, and the authority to modify outstanding awards unless otherwise provided by the terms of the Plan.

The administrator may adopt special appendices and/or guidelines and provisions for persons who are residing in or employed in, or subject to, the taxes of, any domestic or foreign jurisdictions, to comply with applicable laws, regulations, or accounting, listing or other rules with respect to such domestic or foreign jurisdictions.

Eligibility. The Plan provides for granting awards under various tax regimes, including, without limitation, in compliance with Section 102 of the Ordinance and Section 3(i) of the Ordinance and for awards granted to our United States employees or service providers, including those who are deemed to be residents of the United States for tax purposes, Section 422 of the Code and Section 409A of the Code.

Grants. All awards granted pursuant to the Plan will be evidenced by an award agreement. Award agreements need not be in the same form and may differ in the terms and conditions included therein. The award agreement will set forth the terms and conditions of the award, including the type of award, number of shares subject to such award, vesting schedule and conditions, the exercise price, if applicable, the date of expiration of the award, any special terms applying to such award (if any), including the terms of any country-specific or other applicable appendix, as determined by our board of directors.

Awards. The Plan provides for the grant of stock options, Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock and Restricted Stock Units.

With respect to options granted under the Plan, unless otherwise determined by the administrator, and subject to the conditions of the Plan, options vest and become exercisable, if applicable, under the following schedule: 25% of the shares covered by the option on the first anniversary of the vesting commencement date determined by the administrator (and in the absence of such determination, the date on which such option was granted) and 6.25% of the shares covered by the option at the end of each subsequent three-month period thereafter over the course of the following three years; provided that the grantee remains continuously as an employee or provides services to our company and our affiliates throughout such vesting dates.

Each option will expire ten years from the date of the grant thereof, unless such shorter term of expiration is otherwise designated by the administrator or required by applicable law.

Options under the Plan may be exercised by providing our company with a notice of exercise and full payment of the exercise price for such shares underlying the option, if applicable, in such form and method as may be determined by the administrator and permitted by applicable law. An option may not be exercised for a fraction of a share. If the Company’s shares are listed for trading on any securities exchange, and if the administrator so determines, all or part of the exercise price and any withholding taxes may be paid by the delivery of an irrevocable direction to a securities broker approved by our company to sell shares and to deliver all or part of the sales proceeds to our company or the trustee, or, the delivery of an irrevocable direction to pledge shares to a securities broker or lender approved by our company, as security for a loan, and to deliver all or part of the loan proceeds to our company, or such other method of payment acceptable to our company as determined by the administrator.

Transferability. Other than by will, the laws of descent and distribution or as otherwise provided under the Plan, the awards and shares granted under the 2015 Plan are not assignable or transferable, unless determined otherwise by the Administrator in which case such Award may only be transferred as permitted by Rule 701 of the Securities Act of 1933.

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Termination of Relationship. In the event of termination of a grantee’s employment or service with our company, all vested and exercisable options held by such grantee as of the date of termination may be exercised within ninety days after such date of termination, unless otherwise determined by the administrator, but in no event later than the date of expiration of the option as set forth in the award agreement. After such ninety-day period, all such unexercised options will terminate, and the shares covered by such options shall again be available for issuance under the Plan.

In the event of termination of a grantee’s employment or service with our company or any of our affiliates due to such grantee’s death or permanent disability, all vested and exercisable options held by such grantee as of the date of termination may be exercised by the grantee or the grantee’s legal guardian, estate or by a person who acquired the right to exercise the options by bequest or inheritance, as applicable, within 12 months after such date of termination, unless otherwise provided by the administrator, but in no event later than the date of expiration of the option as set forth in the award agreement. Any options which are unvested as of the date of such termination or which are vested but not then exercised within the 12-month period following such date, will terminate and the shares covered by such options shall again be available for issuance under the Plan.

All restricted shares still subject to restriction under the applicable restriction period as set by the administrator in the applicable award agreement, lapsed will revert to the Company and again will become available for grant under the Plan.

Rights as a stockholder. Subject to terms of the Plan, a grantee shall have no rights as a stockholder of our company with respect to any shares covered by an award until the grantee shall have exercised the award and paid the exercise price therefor, if applicable, and becomes the record holder of the subject shares.

Transactions. Shares subject to an award, as well as the price per share covered by each outstanding award, shall be proportionately adjusted for any increase or decrease in the number of issued shares resulting from a share split, reverse share split, combination or reclassification of the shares, or any other increase or decrease in the number of issued shares effected without receipt of consideration by our company, provided, however, that the Administrator will make such adjustments to an Award required by Section 25102(o) of the California Corporations Code to the extent the Company is relying upon the exemption afforded thereby with respect to the Award.

In the event of a merger or Change in Control, each outstanding Award will be treated as the Administrator determines without a Participant’s consent, including, without limitation, that either (i) Awards will be assumed, or substantially equivalent Awards will be substituted, by the acquiring or succeeding corporation (or an affiliate thereof) with appropriate adjustments as to the number and kind of shares and prices; (ii) upon written notice to a Participant, that the Participant’s Awards will terminate upon or immediately prior to the consummation of such merger or Change in Control (subject to the provisions of the paragraph above); (iii) outstanding Awards will vest and become exercisable, realizable, or payable, or restrictions applicable to an Award will lapse, in whole or in part prior to or upon consummation of such merger or Change in Control, and, to the extent the Administrator determines, terminate upon or immediately prior to the effectiveness of such merger of Change in Control; (iv) (A) the termination of an Award in exchange for an amount of cash and/or property, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights as of the date of the occurrence of the transaction (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction the Administrator determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment), or (B) the replacement of such Award with other rights or property selected by the Administrator in its sole discretion; or (v) any combination of the foregoing or other alternative not listed hereinabove. In taking any of the actions permitted under this subsection, the Administrator will not be obligated to treat all Awards, all Awards held by a Participant, or all Awards of the same type, similarly. In the event of liquidation or winding up of our company, the administrator will notify each Participant as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.

71

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

The following includes a summary of transactions since January 1, 2021 to which we have been a party in which the amount involved exceeded $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described under “Executive and Director Compensation.”

Services Agreement with Ram Vromen

On December 27, 2021, we entered into a service agreement with Dr. Ram Vromen, our former director, or the Vromen Services Agreement. Under the terms of the Vromen Services Agreement, Dr. Vromen provides services to us as an independent contractor. The services include advising us and aiding in fundraising, assisting with presentations and providing follow-up, negotiating deals, legal assistance. We agreed to pay the outstanding amount for unpaid services rendered by Dr. Vromen during the period between February 15, 2015, and ending on December 31, 2019, of $197,500 plus VAT, or the Outstanding Fees. Pursuant to the Vromen Services Agreement, Dr. Vromen will also be entitled to additional fees in the amount of $150,000, plus VAT as follows: Dr. Vromen will receive (1) $100,000 upon the earlier to occur of (i) the closing of a financing round by us of at least $2.0 million and (ii) achievement of at least $3.0 million in EBITDA as reported by us, which VAT was paid to Dr. Vromen in January 2022 following the closing of our private placement, and (2) $50,000 upon the earlier to occur of (i) the closing of a financing round by us of at least $4.0 million and (ii) achievement of at least $3.0 million in EBITDA as reported by us. In the event that we reach one of the milestones set forth above and Dr. Vromen is entitled to receive such additional fees, then we will pay to Dr. Vromen all of the Outstanding Fees, together with the payment of such additional fees, provided that we may pay any and all of the Outstanding Fees in several installments over a period not to exceed twenty-four (24) months from achievement of the applicable milestone.

Related Party Transaction Policy

We adopted a formal, written policy that our executive officers, directors (including director nominees), holders of more than 5% of any class of our voting securities and any member of the immediate family of or any entities affiliated with any of the foregoing persons, are not permitted to enter into a related party transaction with us without the prior approval or, in the case of pending or ongoing related party transactions, ratification of our audit committee. For purposes of our policy, a related party transaction is a transaction, arrangement or relationship where we were, are or will be involved and in which a related party had, has or will have a direct or indirect material interest.

Certain transactions with related parties, however, are excluded from the definition of a related party transaction including, but not limited to:

| ● | transactions involving the purchase or sale of products or services in the ordinary course of business, not exceeding $20,000;

| ● | transactions where a related party’s interest derives solely from his or her service as a director of another entity that is a party to the transaction;

| ● | transactions where a related party’s interest derives solely from his or her ownership of less than 10% of the equity interest in another entity that is a party to the transaction; and

| ● | transactions where a related party’s interest derives solely from his or her ownership of a class of our equity securities and all holders of that class received the same benefit on a pro rata basis.

72

No member of the Audit Committee may participate in any review, consideration or approval of any related party transaction where such member or any of his or her immediate family members is the related party. In approving or rejecting the proposed agreement, our Audit Committee shall consider the relevant facts and circumstances available and deemed relevant by the Audit Committee, including, but not limited to:

| ● | the benefits and perceived benefits to us;

| ● | the materiality and character of the related party’s direct and indirect interest;

| ● | the availability of other sources for comparable products or services;

| ● | the terms of the transaction; and

| ● | the terms available to unrelated third parties under the same or similar circumstances.

In reviewing proposed related party transactions, the Audit Committee will only approve or ratify related party transactions that are in, or not inconsistent with, the best interests of us and our stockholders.

The transactions described below were consummated prior to our adoption of the formal, written policy described above, and therefore the foregoing policies and procedures were not followed with respect to the transactions. However, we believe that the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.

Policy for Approval of Related Party Transactions

We have adopted our Code of Ethics to avoid, wherever possible, all conflicts of interests, except under guidelines or resolutions approved by our Board (or the appropriate committee of our Board) or as disclosed in our public filings with the SEC. Under our Code of Ethics, conflict of interest situations will include any financial transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness) involving Actelis. Our Code of Ethics is filed as an exhibit to this Annual Report.

In addition, the Audit Committee of our Board adopted a charter, providing for the review, approval and/or ratification of “related party transactions,” which are those transactions required to be disclosed pursuant to Item 404 of Regulation S-K as promulgated by the SEC, by the Audit Committee. At its meetings, the Audit Committee shall be provided with the details of each new, existing, or proposed related party transaction, including the terms of the transaction, any contractual restrictions that the company has already committed to, the business purpose of the transaction, and the benefits of the transaction to the company and to the relevant related party. Any member of the committee who has an interest in the related party transaction under review by the committee shall abstain from voting on the approval of the related party transaction, but may, if so requested by the chairman of the committee, participate in some or all of the committee’s discussions of the related party transaction. Upon completion of its review of the related party transaction, the committee may determine to permit or to prohibit the related party transaction. Our Audit Committee will review on a quarterly basis all payments that were made by us to our sponsor, officers, or directors, or our or any of their affiliates.

These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.

The Board has determined that Israel Niv, Naama Halevi-Davidov, and Noemi Schmayer are “independent” directors, as defined by the rules of the SEC and the Nasdaq rules and regulations.

73

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table provides detail about fees for professional services rendered to us by our independent registered public accounting firm for the fiscal years ended December 31, 2023 and 2022.

|  | Fiscal Year Ended December 31, |  |  | Fiscal Year Ended December 31, |
|  | 2023 |  |  | 2022 |
Audit fees (1) |  | $ | 255,938 |  |  | $ | 270,000 |
Audit related fees (2) |  |  | 39,463 |  |  |  | 7,000 |
Tax fees |  |  | 15,571 |  |  |  | - |
All other fees |  |  | - |  |  |  | - |
Total |  | $ | 310,972 |  |  | $ | 277,000 |

Audit Fees. This category includes the audit of our annual financial statements, review of financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

Audit-Related Fees. This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC, review of registration statements and other accounting consulting.

Tax Fees. This category consists of professional services rendered for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.

All Other Fees. This category consists of fees for other miscellaneous items.

Policy on Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors

Consistent with the SEC policies regarding auditor independence, our Board has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. In recognition of this responsibility, our Board has established a policy to pre-approve all audit and permissible non-audit services provided by the independent auditor.

Prior to engagement of the independent auditor for the next year’s audit, management will submit an aggregate of services expected to be rendered during that year for each of the following four categories of services to the Board for approval.

74

PART IV

ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this report.

| (1) | Financial statements.

For a list of the consolidated financial statements included herein, see “Index to Consolidated Financial Statements” under Part I, Item 8 of this Annual Report on Form 10-K.

| (2) | Schedules.

No financial statement schedules have been submitted because they are not required or are not applicable or because the information required is included in the consolidated financial statements or the notes thereto.

| (3) | Exhibits.

(a) Exhibits.

Exhibit No. |  | Description
3.1 |  | Form of the Twenty-Fourth Amended and Restated Certificate of Incorporation of the Registrant, dated May 2, 2022 (as filed as Exhibit 3.5 to the Company’s Form S-1/A, filed on May 10, 2022)
3.2 |  | Amended and Restated Bylaws of Actelis Networks, Inc. (as filed as Exhibit 3.4 to the Company’s Form S-1/A, filed on May 10, 2022)
4.1 |  | Description of Securities (filed as Exhibit 4.1 to the Company’s Form 10-K for the fiscal year ended December 31, 2022, filed on March 29, 2023)
4.2 |  | Form of Representative’s Warrant (as filed as Exhibit 4.1 to the Company’s Form S-1/A, filed on May 2, 2022)
4.3 |  | Form of Common Warrant (as filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on May 8, 2023)
4.4 |  | Form of Pre-Funded Warrant (as filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on May 8, 2023)
4.5 |  | Form of Placement Agent Warrant (as filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on May 8, 2023)
4.6 |  | Form of Common Warrant (as filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on December 20, 2023)
4.7 |  | Form of Pre-Funded Warrant (as filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on December 20, 2023)
4.8 |  | Form of Placement Agent Warrant (as filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on December 20, 2023)
4.9 |  | Form of Credit Agreement (as filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on February 14, 2024)
10.1 |  | Lease by and between Actelis Networks Israel, Ltd. and Moshe Smucha, dated January 13, 2000 (as filed as Exhibit 10.2 to the Company’s Form S-1/A, filed on May 2, 2022)
10.2 |  | First Amendment to the Lease and Management Agreements from October 22, 2017, by and between Homerton Investments, Ltd. and Actelis Networks Israel Ltd., dated April 14, 2021 (as filed as Exhibit 10.3 to the Company’s Form S-1/A, filed on May 2, 2022)
10.3+ |  | Employment Agreement between Actelis Networks, Inc. and Mr. Tuvia Barlev dated February 15, 2015 (as filed as Exhibit 10.9 to the Company’s Form S-1/A, filed on May 2, 2022)
10.4+ |  | Offer letter between Actelis Networks, Inc. and Mr. Yoav Efron dated November 30, 2017 (as furnished as Exhibit 10.10 to the Company’s Form S-1/A, filed on May 10, 2022)
10.5+ |  | Employment Agreement between Actelis Networks Israel, Ltd. And Mr. Yoav Efron dated November 30, 2017 (as furnished as Exhibit 10.11 to the Company’s Form S-1/A, filed on May 10, 2022)

75

10.6+ |  | Consulting Agreement between Actelis Networks, Inc. and Barlev Enterprises dated February 20, 2015 (as furnished as Exhibit 10.12 to the Company’s Form S-1/A, filed on May 10, 2022)
10.7+ |  | Actelis Networks, Inc. 2015 Equity Incentive Plan (as filed as Exhibit 10.13 to the Company’s Form S-1, filed on April 15, 2022)
10.8+ |  | Amendment No. 1 to 2015 Equity Incentive Plan (as filed as Exhibit 10.14 to the Company’s Form S-1, filed on April 15, 2022)
10.9 |  | Senior Loan Agreement between Migdalor Business Investment Fund and Actelis Networks Israel, Ltd., dated December 2, 2020 (as filed as Exhibit 10.16 to the Company’s Form S-1, filed on April 15, 2022)
10.10 |  | Amendment Number 1 to Senior Loan Agreement between Migdalor Business Investment Fund and Actelis Networks Israel, Ltd., dated November 17, 2021 (as filed as Exhibit 10.17 to the Company’s Form S-1, filed on April 15, 2022)
10.11 |  | Securities Purchase and Loan Repayment Agreement between Actelis Networks, Inc. and Mr. Tuvia Barlev dated April 15, 2022 (as filed as Exhibit 10.18 to the Company’s Form S-1, filed on April 15, 2022)
10.12 |  | Form of Securities Purchase Agreement (as filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on May 8, 2023)
10.13 |  | Form of Registration Rights Agreement (as filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on May 8, 2023)
10.14 |  | Form of Warrant Amendment (as filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on December 20, 2023)
10.15 |  | Form of Securities Purchase Agreement (as filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 20, 2023)
10.16 |  | Form of Warrant Amendment (as filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on December 20, 2023)
10.17 |  | Form of Registration Rights Agreement (as filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on December 20, 2023)
10.18 |  | Form of Fixed Lien Agreement (as filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on February 14, 2024)
10.19 |  | Form of Fixed Lien Agreement (as filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on February 14, 2024)
21.1 |  | Subsidiaries of the Registrant (as filed as Exhibit 21.1 to the Company’s Form S-1, filed on April 15, 2022)
23.1* |  | Consent of Kesselman & Kesselman, Certified Public Accountants (Isr.) a member firm of PricewaterhouseCoopers International Limited, independent registered accounting firm for the Company
31.1* |  | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule15d-14(a)
31.2* |  | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule15d-14(a)
32.1* |  | Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule15d-14(b) and 18 U.S.C. Section 1350
32.2* |  | Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule15d-14(b) and 18 U.S.C. Section 1350
97.1* |  | Actelis Networks, Inc. Executive Officer Clawback Policy
101.INS |  | Inline XBRL Instance Document.
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document.
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* | Filed herewith
+ | Management contract or compensatory plan or arrangement

ITEM 16. FORM 10-K SUMMARY

Not applicable

76

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ACTELIS NETWORKS, INC. |  |
/s/ Tuvia Barlev |  | Date: March 26, 2024
Tuvia Barlev |  |
Chief Executive Officer and Director |  |

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature |  | Title |  | Date
/s/ Tuvia Barlev |  | Chief Executive Officer, Secretary and |  | March 26, 2024
Tuvia Barlev |  | Chairman of the Board (Principal Executive Officer) |  |
/s/ Yoav Efron |  | Chief Financial Officer |  | March 26, 2024
Yoav Efron |  | (Principal Financial Officer and Principal Accounting Officer) |  |
/s/ Joseph Moscovitz |  | Director |  | March 26, 2024
Joseph Moscovitz |  |  |  |
/s/ Dr. Naama Halevi-Davidov |  | Director |  | March 26, 2024
Dr. Naama Halevi-Davidov |  |  |  |
/s/ Israel Niv |  | Director |  | March 26, 2024
Israel Niv |  |  |  |
/s/ Noemi Schmayer |  | Director |  | March 26, 2024
Noemi Schmayer |  |  |  |

77

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