Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

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. ("Actelis," "we," "us," "our," "the Company," "our company") 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. 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 services.

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 and 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 is a 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.

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, federal and DoW markets, as well as multi-dwelling units, and introduced, in 2024, our cyber-aware networking solutions for IoT markets as well.

Our operations are focused on our fast-growing federal and DoW markets, Intelligent Transportation and MDUs while maintaining our commitment to our existing Telco customers. In 2024, we introduced new product offering, some of which could serve both the IoT markets and our Telco customers.

In August 2024, we announced signing a strategic partnership with an advanced cybersecurity provider to develop and deliver a novel, AI-Powered SaaS offering, under Actelis' 'Cyber Aware Networking' initiative. This software, designed as an intelligence layer integrated into Actelis' networking devices, leverages the network's power and proximity to IoT devices to monitor and protect physical assets such as cameras, sensors, and other devices at the edge, enabling corrective actions before issues propagate throughout the network.

We derive a majority of our revenues from our existing and new IoT (including federal and DoW) customers. For the years ended December 31, 2025 and December 31, 2024, our IoT customers in the aggregate accounted for approximately 73% and 72% of our revenues, respectively.

We derive a significant portion of our revenues from a limited number of our customers. For the years ended December 31, 2025 and December 31, 2024, our top ten customers in the aggregate accounted for approximately 62% and 74% of our revenues.

In February 2024, we entered into the Credit Line. The Credit Line is secured by customer invoices and incurs interest at a Federal SOFR rate plus 5.5%. The Credit Line was extended until February 1, 2026. As of the date hereof, the Company has not further extended the credit facility; however, it may do so in the future.

The Credit Line balance drawn is examined every month, adjusted up to every three months, and the repayment of the Credit Line is made up to every three months subject to the expiration of the financing period for the invoices that were financed. We may refinance newly issued invoices at any time up to the Credit Line limit and subject to the terms of the Credit Line. As of December 31, 2025 the current balance outstanding is approximately $479,234.

Results of Operations

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

		Year ended December 31
		2025				2024
		(dollars in thousands)
Revenues			3,671				7,760
Cost of revenues			2,453				3,490
Gross profit			1,218				4,270
Research and development expenses			2,638				2,383
Sales and marketing, net			2,866				2,639
General and administrative			2,899				3,169
Other Income, net			-				(163	)
Operating loss			(7,185	)			(3,758	)
Interest expenses			(251	)			(618	)
Other financial income (expense), net			(825	)			2
Net Comprehensive Loss for the year			(8,261	)			(4,374	)

Year Ended December 31, 2025, Compared to Year Ended December 31, 2024

Revenues

Our revenues for the year ended December 31, 2025 amounted to $3.7 million, compared to $7.8 million for the year ended December 31, 2024. The decrease was primarily attributable to software and services renewal last year for 2 years which will be up for renewal in 2027, as well as a large deal to the City of Washington D.C. last year, while 2025's revenues are more backend loaded.

Cost of Revenues

Our cost of revenues for the year ended December 31, 2025, amounted to $2.5 million compared to $3.5 million for the year ended December 31, 2024. The decrease from the corresponding period was primarily attributable to a decrease in sales which led to a decline in variable costs and fixed cost remaining constant.

Research and Development Expenses

Our research and development expenses for the year ended December 31, 2025, amounted to $2.6 million compared to $2.4 million for the year ended December 31, 2024. The increase is due to the strengthening of the Israeli shekel against the U.S. dollar which led to an increase in expenditure by approximately $151,000.

Sales and Marketing Expenses

Our sales and marketing expenses for the year ended December 31, 2025, amounted to $2.9 million compared to $2.6 million for the year ended December 31, 2024. The increase was primarily attributable to engaging consultants to expand market reach in primarily the government sector.

General and Administrative Expenses

Our general and administrative expenses for the year ended December 31, 2025, amounted to $2.9 million compared to $3.2 million for the year ended December 31, 2024. The decrease was mainly due to cost reduction measures taken, while these benefits were offset by higher costs driven by the strengthening of the Israeli shekel against the U.S. dollar.

Other Income

We had no other Income for the year ended December 31, 2025, compared to $163,000 for the year ended December 31, 2024. The income in 2024 is related to government grant from the State of Israel associated with the Iron Swords war.

Operating Loss

Our operating loss for the year ended December 31, 2025, was $7.2 million, compared to an operating loss of $3.8 million for the year ended December 31, 2024. The increase was mainly due to the decline in sales, while operating expenditure remained consistent and increased operating expenses by $0.3 million driven by the strengthening of the Israeli shekel against the U.S. dollar by approximately 7%.

Financial Expenses (income), Net

Our financial expenses, net for the year ended December 31, 2025, was approximately $1.08 million of interest expense, compared to $620,000 for the year ended December 31, 2024 The increase is mainly due to expenditure of $750,000 related to the Commitment Fee under the Common Stock Purchase Agreement payable in common shares issuance.

Net Loss

Our net loss for the year ended December 31, 2025 was $8.3 million, compared to a net loss of $4.4 million for the year ended December 31, 2024. This increase was primarily attributable to lower sales while operating expenditure remained consistent, as well as due to a one-time financial commitment expenditure of $750,000. In addition, the Israeli shekel strengthened by an average of 7% against the U.S. dollar, leading to higher operating expenses and contributing to increase in net loss.

Non-GAAP Financial Measures

(U.S. dollars in thousands)		Year Ended December 31, 2025				Year Ended December 31, 2024
Revenues		$	3,671			$	7,760
GAAP net loss			(8,261	)			(4,374	)
Interest Expense			251				618
Other financial expense (income), net			825				(2	)
Tax Expense			-				103
Fixed asset depreciation expense			20				26
Stock based compensation			309				337
Other one-time costs and expenses/(income)			-				(189	)
Non-GAAP Adjusted EBITDA			(6,856	)			(3,481	)
GAAP net loss margin			(225	)%			(56.37	)%
Adjusted EBITDA margin			(186.73	)%			(44.86	)%

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.

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.

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)		2025				2024
Revenues		$	3,671			$	7,760
Non-GAAP Adjusted EBITDA			(6,856	)			(3,481	)
As a percentage of revenues			(186.73	)%			(44.86	)%

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, proceeds of $4.6 million, net of underwriting discounts and commissions and other offering costs of $0.4 million, were also received following our private placements.

July 2025 Private Placement

On June 30, 2025, we entered into the July 2025 Purchase Agreement with certain accredited Investors, pursuant to which we agreed to issue and sell to the Investors in the July 2025 Private Placement (a) 162,602 shares of Common Stock, (b) Series A-3 Warrants to purchase up to 162,602 shares of Common Stock, and (c) Series A-4 Warrants to purchase up to 325,204 shares of Common Stock, for a purchase price of $6.15 per share and related July 2025 Common Warrants, for a total aggregate gross proceeds of approximately $1 million. The July 2025 Private Placement closed on July 2, 2025.

The Series A-3 Warrants have an exercise price of $6.15 per share, are exercisable commencing on the July 2025 Shareholder Approval Date and expire five years following the July 2025 Shareholder Approval Date. On November 7, 2025, the July 2025 Shareholder Approval was obtained in a special meeting of our shareholders, resulting in the July 2025 Shareholder Approval Date being such date.

The Series A-4 Warrants have an exercise price of $6.15 per share, are exercisable commencing on the July 2025 Shareholder Approval Date and expire eighteen months following the July 2025 Shareholder Approval Date.

HCW acted as the Placement Agent for the issuance and sale of the Securities. The Company has agreed to pay an aggregate cash fee equal to 7.0% of the gross proceeds received by the Company from the Offering and $35,000 for accountable expenses to the placement agent. The Company also agreed to issue to the Placement Agent, or its designees, July 2025 Placement Agent Warrants to purchase up to 7.0% of the aggregate number of the shares of Common Stock sold to the Investors (or warrants to purchase up to 11,382 shares of Common Stock) at an exercise price per share of $7.688 which will be exercisable commencing on the July 2025 Shareholder Approval Date and a have term of five years after the July 2025 Shareholder Approval Date.

September 2025 Warrant Inducement

On September 2, 2025, we entered into the Inducement Letter with a Holder of certain of the Company's Existing Warrants to purchase an aggregate of 427,020 shares of the Company's common stock, consisting of (i) 127,119 warrants issued on December 20, 2023 with an expiration date of June 20, 2029 at an exercise price of $11.8 per share (ii) 99,967 warrants issued on June 6, 2024 with an expiration date of December 6, 2029 at an exercise price of $20.00 per share and (iii) 199,934 warrants issued on July 2, 2024 with an expiration date of July 2, 2026 at an exercise price of $17.50 per share.

Pursuant to the Inducement Letter, the Holder agreed to exercise for cash the Existing Warrants to purchase an aggregate of 427,020 shares of the Company's common stock at a reduced exercise price of $3.70 per share in consideration of the Company's agreement to issue the New Warrants, as descried below, to purchase up to an aggregate of 640,530 New Warrant Shares at an exercise price of $3.70 per share. The Company received aggregate gross proceeds of approximately $1.6 million from the exercise of the Existing Warrants by the Holder, before deducting financial advisory fees and other offering expenses payable by the Company.

Rodman & Renshaw LLC and HCW acted as financial advisors to the Company in connection with the transactions contemplated by the Inducement Letter. Pursuant to an engagement letter with HCW, the Company has agreed to pay the financial advisors a cash fee equal to 7.0% of the aggregate gross proceeds received from the Holder's exercise of the Existing Warrants, as well as a management fee equal to 1.0% of the gross proceeds from the exercise of the Existing Warrants and $25,000 paid for non-accountable expenses. The Company has also agreed to issue to the financial advisors or their designees the Inducement Placement Agent Warrants to purchase up to 29,891 shares of common stock (representing 7.0% of the Existing Warrants being exercised), which will have the same terms as the New Warrants having a term of five years of Stockholder Approval (as defined below) except the Inducement Placement Agent Warrants will have an exercise price equal to $4.625 per share (125% of the exercise price of the Existing Warrants).

The New Warrants have an exercise price equal to $3.70 per share. The New Warrants will be exercisable from the effective date (the "Warrant Stockholder Approval Date") of shareholder approval ("Stockholder Approval"), until (i) the five-year anniversary of such date for 340,629 of the New Warrants and (ii) the twenty-four-month anniversary of such date for 299,901 of the New Warrants. The exercise price and number of New Warrant Shares issuable upon exercise of the New Warrants is subject to appropriate adjustment in the event of stock dividends, stock splits, subsequent rights offerings, pro rata distributions, reorganizations, or similar events affecting the Company's common stock and the exercise price. On November 7, 2025, the Warrant Stockholder Approval was obtained in a special meeting of our shareholder, resulting in the Warrant Stockholder Approval Date being such date.

The closing of the transactions contemplated pursuant to the Inducement Letter occurred on September 3, 2025.

Provided that the Inducement Letter prohibited the Company from entering into an agreement to effect any issuance by the Company involving a variable rate transaction, the Holder agreed to waive such prohibition with respect to the transactions contemplated by the ELOC Purchase Agreement, and signed an amendment to the Inducement Letter on October 9, 2025. Pursuant to such amendment, the Company issued to the Holder 10,000 warrants to purchase shares of common stock of the Company on similar terms as the Series A-1 Warrants.

Equity Line of Credit Agreement

On September 27, 2025, we entered into the Common Stock Purchase Agreement, with an effective date of October 1, 2025, and a related White Lion RRA with White Lion. Pursuant to the Common Stock Purchase Agreement, the Company has the right, but not the obligation to require White Lion to purchase, from time to time, up to $30,000,000 in aggregate Commitment Amount of newly issued shares of the Company's Common Stock, subject to certain limitations and conditions set forth in the Common Stock Purchase Agreement.

As consideration for White Lion's irrevocable commitment to purchase the Company's Common Stock up to the Commitment Amount, the Company agreed to issue shares of Common Stock to White Lion (the "Commitment Shares") equal to $750,000 (the "Commitment Fee Amount") divided by the lowest traded price of the Company's common stock during the 30 business days prior to the issuance of the Commitment Shares. Upon mutual agreement with White Lion, the Company issued 1,704,545 pre-funded warrants to purchase shares of Common Stock exercisable into the Commitment Shares on December 31, 2025.

White Lion Private Placement

Concurrently on September 27, 2025, the Company entered into the PIPE Purchase Agreement with White Lion, pursuant to which the Company agreed to issue and sell to White Lion in a private placement (the "Offering") (i) 87,177 shares of Common Stock, and (ii) White Lion Pre-Funded Warrants to purchase up to 312,823 shares of Common Stock (for a purchase price of $2.125 per share of Common Stock and $2.124 per White Lion Pre-Funded Warrant, for a total aggregate gross proceeds of approximately $850,000. The Offering closed on September 29, 2025.

The Company had a right to redeem 48,826 of the shares of Common Stock at a redemption price of $0.001 per share. The Company and White Lion have agreed that, in lieu of such redemption, on October 20, 2025, the Company reduced the number shares issuable pursuant upon exercise of the White Lion Pre-Funded Warrants by 48,826 shares, to 263,997.

The White Lion Pre-Funded Warrants are immediately exercisable at an exercise price of $0.001 per share of Common Stock and will not expire until exercised in full. However, the Company may not issue a number of shares of Common Stock pursuant to exercise of the White Lion Pre-Funded Warrants in an amount that will not exceed the Exchange Cap when combined with the number of Shares issued in the Offering, before shareholder approval for further issuance beyond the Exchange Cap is obtained. The Company intends to obtain such shareholder approval concurrently with the Shareholder Approval required for the issuance of shares of Common Stock under the Common Stock Purchase Agreement beyond the Exchange Cap.

December 2025 Offering

On December 17, 2025, we offered and sold in the December 2025 Offering (i) 4,352,500 shares of the Company's Common Stock, (ii) 1,897,500 December 2025 Pre-Funded Warrants, and (iii) 6,250, December 2025 Common Warrants, at a purchase price of $0.80 per share of Common Stock and accompanying December 2025 Common Warrant, and $0.7999 per December 2025 Pre-Funded Warrant and accompanying December 2025 Common Warrant. Aggregate gross proceeds from the December 2025 Offering (without taking into account any proceeds from any future exercises of December 2025 Warrants) were approximately $5 million. The Offering closed on December 19, 2025.

The December 2025 Pre-Funded Warrants are immediately exercisable at an exercise price of $0.0001 per share of Common Stock and will not expire until exercised in full.

Each December 2025 Common Warrant has an exercise price of $0.80 per share, is exercisable immediately on upon issuance and will expire on the five-year anniversary of the date of issuance.

HCW acted as the sole placement agent, on a "best efforts" basis, in connection with the Offering. On March 3, 2025, the Company and HCW had entered into the Engagement Agreement with the Company to serve as exclusive underwriter, agent or advisor in any offering of securities of the Company for a six-month term. The Engagement Agreement has been extended twice since its initial effectiveness and currently runs through March 12, 2026 . Under the Engagement Agreement, as extended, the Company agreed to pay the Placement Agent an aggregate cash fee equal to 7.0% of the gross proceeds received by the Company in the Offering, as well as a management fee equal to 1.0% of the gross proceeds raised in the Offering. The Company also agreed under the Engagement Agreement to reimburse the Placement Agent $25,000 for non-accountable expenses and up to $100,000 for fees and expenses of legal counsel and other out-of-pocket expenses of the Placement Agent in connection with the Offering. Pursuant to the Engagement Agreement, the Company will issue to the Placement Agent or its designees 437,500 December 2025 Placement Agent Warrants to purchase up to 437,500 shares of Common Stock, representing 7.0% of the sum of the Shares and Pre-Funded Warrants to be sold in the Offering. The December 2025 Placement Agent Warrants have an exercise price of $1.00 per share of Common Stock (representing 125% of the public offering price per Share and accompanying Common Warrant), are exercisable for five years from the date of the commencement of sales in this offering, and otherwise reflect substantially the same terms as the December 2025 Common Warrants. The Engagement Agreement contains representations, warranties, indemnification and other provisions customary for transactions of this nature.

The net proceeds to the Company from the December 2025 Offering are approximately $4.46 million after deducting placement agent fees and estimated offering expenses payable by the Company. The Company intends to use the proceeds from the Offering for general corporate purposes.

In September 2024, we entered into the ATM Agreement with HCW pursuant to which we may offer and sell, at our option, up to $16.7 million of our shares of common stock through an at-the-market equity program under which HCW agreed to act as sales agent. As of the date of this report, we have sold 4,646,045 of our shares of common stock for total gross proceeds of approximately $4.7 million under the ATM program. As of the date of this filing and so long as our public float remains below $75.0 million, we are subject to limitations pursuant to General Instruction I.B.6 of Form S-3, which limits the amount we can offer to up to one-third of our public float during any trailing 12-month period.

We have incurred significant losses and negative cash flows from operations and net loss was $8.3 million and $4.4 million for the years ended December 31, 2025, and December 31, 2024, respectively. During the years ended December 31, 2025, and December 31, 2024, we had negative cash flows from operations of $8.1 million and $6.5 million, respectively.

As of December 31, 2025, our accumulated deficit was $52 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 $4.4 million and long-term restricted bank deposits of $30 thousand and long term deposit of $91 thousand as of December 31, 2025. 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, 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.

Cash Flows

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

(U.S. dollars in thousands)		Year Ended December 31, 2025				Year Ended December 31, 2024
Net cash used in operating activities (including the effect of exchange rate changes on cash and cash equivalents and restricted cash)		$	(7,694	)		$	(6,538	)
Net cash (used in)/ provided by investing activities			(8	)			197
Net cash provided by financing activities			9,797				3,093
Net change in cash		$	2,095			$	(3,248	)

As of December 31, 2025, we had cash, cash equivalents, and restricted cash of $4.4 million compared to $2.3 million of cash, cash equivalents and restricted cash as of December 31, 2024.

Cash used in operating activities (including the effect of exchange rate changes on cash and cash equivalents and restricted cash) amounted to $7.7 million for the year ended December 31, 2025, compared to $6.5 million for the year ended December 31, 2024. The increase from the corresponding period was mainly due to lower sales.

Net cash used by investing activities was $8,000 for the year ended December 31, 2025, compared to cash provided by investing activities of $197,000 for the year ended December 31, 2024. The decrease from the corresponding period was mainly due to the reduction in short-term bank deposits.

Net cash provided by financing activities was $9.8 million for the year ended December 31, 2025, compared to $3.1 million for the year ended December 31, 2024. The increase from the corresponding period was mainly driven by proceeds from sales of common stocks in an at the market (ATM) offering, proceeds from private placements which occurred in July and September 2025, a follow-on securities offering which occurred in December 2025 and proceeds from a warrant inducement transaction which occurred in September 2025.

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 report. 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, costs and expenses during the reporting period.

Actelis bases its estimates primarily on historical and anticipated operations, market and customer trends and feedback, financial factors and indicators (for example, interest rates, volatility of market share price etc.), product quality and manufacturing expectations, and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events.

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 revenues and estimate of future usage of existing inventory to determine the net value of our inventory (see notes in financial statements).

Inventory

Inventories are stated at the lower of cost (cost is determined on a weighted average cost method) or net realizable value. We regularly evaluate the carrying value of our inventories in order to identify obsolete or excess inventory based on estimates of future demand for our products to support future sales and service and we use information of historical usage and our short and long-term pipeline of opportunities. We also assess the product volume requirement for replacement and repair of products in order to serve our installed base during and post warranty periods If our demand forecast for specific products is greater than actual demand and we fail to reduce purchasing and manufacturing output accordingly, we could be required to write off inventory beyond the current reserve, which would negatively impact our gross margin. 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.

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.

Some of our contracts with customers include multiple performance obligations, and we make estimates and judgments to allocate the transaction price to each performance obligation based on an observable or estimated standalone selling price ("SSP"). The SSP is the price, or estimated price, of the software or service when sold on a standalone basis. We consider our evaluation of SSP to be a critical accounting estimate.

An observable price of a good or service sold separately provides the best evidence of SSP. However, in many situations, SSP will not be readily observable, but must still be estimated using reasonably available information. We have observable standalone selling prices of our management software, of our hardware products including the embedded software within, and our services offerings and their costs, and therefore use historical transaction data on a standalone basis, our pricing models, along with our judgment, to establish SSP ranges for each of these elements.. As such, the establishment of SSP of our hardware, management software, maintenance and other services, and directly impact the amount of revenues recognized, and therefore also impacts the overall timing of revenue recognition.

We review and analyze the SSP ranges we have from time to time but no more than annually, which have not changed in 2025. In the future, SSP for our software and services could be impacted by various factors, including potential changes in our pricing practices, customer demand for our products and services, and various market or economic conditions. However, we consider the risk of significant volatility in our established SSP to be small given our historical transaction experience and internal processes to monitor SSP ranges on an ongoing basis and work with management in the event a trend that could impact the future ranges is detected.

Accounting standards updates not yet adopted

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