TIDMENET
RNS Number : 8840B
Ethernity Networks Ltd
12 June 2019
Ethernity Networks Ltd
(Ethernity or the "Company")
Company registration number: 51-347834-7.
Results for the Year Ended 31 December 2018
Ethernity Networks, headquartered in Israel, provides innovative
networking and security solutions on programmable hardware for
accelerating telco/cloud networks. Ported onto any FPGA,
Ethernity's software offers complete data plane processing with a
rich set of networking features, robust security, and a wide range
of virtual functions to optimise the network. The Company's ACE-NIC
smart network adapters, ENET SoCs, and turnkey network appliances
offer best-in-class all-programmable platforms for the telecom,
cloud service provider, and enterprise markets offering its
customers complete solutions that quickly adapt to their changing
needs, improving time-to-market and facilitating the deployment of
edge computing, 5G, IoT, and NFV.
The Company's core technology, which is populated on
programmable logic, enables delivering data offload functionality
at the pace of software development, improves performance and
reduces power consumption and latency, therefore facilitating the
deployment of virtualization of networking functionality.
David Levi, Chief Executive said "I am now significantly more
positive of achieving our planned growth objectives in existing and
new market places as I see the growth in interest in the Company's
offerings and the opening of materially significant discussions
that will lead to the Company making considered headway in 2019 and
allow for multiple times growth in 2020 as the solutions pass
testing phases by the operators and reach mass deployment."
For further information, please contact:
Ethernity Networks Tel: +972 8 915 0392
David Levi, Chief Executive Officer
Mark Reichenberg, Chief Financial Officer
Arden Partners plc (NOMAD and Broker) Tel: +44 207 614 5900
Tom Price / Benjamin Cryer
Market Abuse Regulation
The information communicated in this Announcement is inside
information for the purposes of Article 7 of Market Abuse
Regulation 596/2014 ("MAR"). For the purposes of MAR and Article 2
of Commission Implementing Regulation (EU) 2016/1055, this
announcement is being made on behalf of the Company by Mark
Reichenberg, Chief Financial Officer.
Chairman's Statement
During 2018 Ethernity continued to develop its patented products
and technology solutions across a range of applications and related
markets in the network and cloud data management arenas.
Specific product and design solutions were delivered during the
year resulting in first technology licensing agreements with two
Tier1 OEM customers, that will generate recurrent revenue streams
due to commence in 2019 and then in following years.
Following on from the previous year, legacy royalty and FPGA
income remained low as anticipated during the year due to historic
customers not producing revenue from this generation of products.
However, going forward licensing income is anticipated to recover
in 2019 and this is set out in further detail in the Chief
Executive`s Review below.
During the year the management's focus continued on developing
the Sales and Marketing and Research and Development team's
strength and infrastructure, as the Company deployed resources to
support existing customers and to target new business
opportunities.
The Company traded in line with expectations for the year with
revenue delivery in 2018 being relatively low due to market delays
and customer positioning. This is outlined further in the Strategic
and Financial Review set out below.
Revenues for 2018 were $1.12m (2017 $1.52m) with gross margin of
$0.813m (2017 $1.3m) and operating loss of $2.7m (2017 $0.152m
profit) respectively. The Company continued a managed investment
programme, investing approximately $4m (2017 $1.95m) in R&D and
related expenditure.
At the year end the Company`s cash balance available for working
capital and investment for growth was $8.5m (2017 $14.9m). The
Company maintains close management of the use of cash resources and
the rate of deployment of cash is monitored by management and the
Board with a view to adjusting cash utilisation and maintaining
cash reserves to meet trading requirements.
Since the year end, Ethernity has continued with its investment
programme which is focussed on customer led product and service
development directly related to customer relationships. Sales and
market opportunities are developed based on a continued presence
and profile within the network and data management sectors, where
the Company`s IP and technology innovation maintains a considerable
profile.
The Board remains conscious of the uncertainties over the timing
of the securing of customer orders and receipt of revenues from
product sales and licensing transactions. This remains a challenge
for the executive management in predicting when substantive
revenues and related profits will be earned, including for the
current financial year. However, the Board is confident that the
Company`s solutions continue to be well received and will translate
to significant revenues in the years ahead.
The Board is very appreciative of the considerable efforts of
our management and staff, who all work tirelessly towards the
development, sales and administrative goals of the Company. I thank
them for their continuing hard work and commitment to the
Company.
Outlook
It is apparent that 2019 will be another year of challenges to
steadily develop customer partnerships and relationships and grow
the revenue delivery from a relatively low base. However, the Board
is confident that progress will be made during the year and of
building value over the longer term for shareholders.
Graham Woolfman
Chairman
11 June 2019
Chief Executives Statement
Business and Market Overview
Ethernity Networks operates in a market which is evolving and
undergoing significant change. This includes the growing use of
FPGA devices for networking appliances and the transition to 5G
networks which will provide higher data throughput to users and
Network Function Virtualization (NFV).
The Company presents its technology and appliances to OEMs and
other partners responsible for integration, delivery and support of
overall solutions with embedded Ethernity technology, in FPGA Smart
NIC or appliances. The Company has continued to build its R&D
and Sales and Marketing infrastructure to enable the Company to
move from a technology / IP company to a solutions and complete
product provider.
Central to all of Ethernity`s delivery is patented architecture
which produces the fundamental ENET code, which has been deployed
in 600,000 OEM platforms in broadband, Ethernet Access and mobile
markets. This ENET code is embedded into the various solutions, be
they licensed products, the FPGA Smart NIC or as part of
appliances.
We expect continued progress in the market acceptance of the use
of FPGA for networking and security applications in preference to
ASIC's. This is evidenced by the initiatives undertaken on the OCP
(Open Compute Project) and AT&T. Furthermore, many ASIC Network
processors' offerings have been discontinued(1) , providing many
more opportunities for FPGA-based all programmable and cost
effective platforms. We are confident that our technology will be a
successor to ASIC based NPUs for networking and security
appliances.
With our main goal to deliver complete product solutions that
will result in generating a targeted 10 times more revenue from
each use of our ENET Code technology, we developed the ACENIC FPGA
SmartNIC family to target acceleration of Networking Function
Virtualization at the telco edge, which is still an evolving
market, along with an additional networking appliance for existing
markets - including FTTH and Ethernet Access as described below
These two markets are:
-- The FTTH (fibre to the home) Broadband deployment with
XGSPON, DPU/ONU. We are currently discussing a 10G Passive Optical
Network (XGSPON) solution on a central office site. According to
Dell'Oro Group, PON has a Total Addressable Market of $7 billion by
2022 and a CAGR of almost 40%.
-- The EAD (Ethernet Active Devices) market is a further
opportunity for the Company currently under discussion, the product
offering being a UEP (Universal Edge Platform) as published on the
Company website and in the market place on 29 May 2019.(2)
Currently we are in discussions for the mass rollout of the UEP
with a major US OEM. The existing marketplace for this offering is
forecast to reach $1.47 billion in 2021, achieving a 2017-2022
compound annual growth rate (CAGR) of 8 percent.
We have addressed the existing appliance market under Current
Trading below .
Review of 2018 achievements
I am pleased to report that during the 2nd half of 2018 we
succeeded in winning existing Flow Processor FPGA Firmware and
Software business with a Tier1 U.S OEM, and signed a contract with
a military-avionic Tier1 OEM for a high capacity switch, all
integrated on Xilinx's FPGAs Commercial Off The Shelf (COTS)
devices, with the majority of the revenue from the two licensing
deals being recognised during 2019. Furthermore we delivered the
Company's ACENIC-100 FPGA Smart NIC, supporting complete router
functionality, to a Korean OEM for a Multi access Edge Computing
(MEC) platform to be hosted on low cost, low power HPE servers
designed to meet the edge compute constraints. The most important
licensing revenues come from ongoing recurrent royalties and FPGA
that the Company will continue to generate from contracts and wins
signed more than 10 years ago. However, the recurrent revenues were
badly affected during 2017 and 2018 due to difficulties experienced
by three long-standing customers in generating sales from products
developed years ago. Whilst in 2019 the revenue from two of the
three vendors has recovered and is growing, one of them has ceased
operations. In light of this the licensing deals signed with the
Tier1 OEMs represents part of the change we
anticipate developing into stable recurrent revenue from
royalties. Going forward the company intends to focus on
Tier1/Tier2 OEMs rather than the small Tier3/4 vendors we dealt
with in the past, with the goal being to build stable recurrent
revenues from technology licensing.
In conjunction with our long term plan and active projects with
major OEMs relating to acceleration of virtualized networking
applications for obtaining major market share from FPGA smart NICs
for telco cloud business, in which the market is still evolving,
our plan is to generate greater value from our existing technology
and solutions, by offering complete all programmable networking and
security platforms that we target will generate 10 times more
revenue for each use of our firmware and software technology. This
has been enabled by the following:
-- We developed and obtained application software that can run
on top of Ethernity's Flow Processor FPGA Firmware;
-- We have developed a hardware platform to serve as a Universal
Edge Platform (UEP) that will host our field proven flow processor
for general edge access deployment with a complete programmable
platform; and
-- We developed XGSPON technology to serve deployment of fiber
to the distribution point (FTdP) , cellular site aggregation and
FTTH (Fiber to The Home).
These developments will fuel major revenue streams by delivering
complete solutions while the telco cloud business is evolving.
Our ACENIC-100 FPGA SmartNIC offers unique capabilities for
telco/cloud edge market by integrating complete router
functionality on a NIC to serve as a gateway for multiple
virtualized networking appliances such as Security, VPN, Broadband
gateway and Internet of things (IoT) aggregation platforms. With
the current ongoing discussions and engagements with new potential
Tier1 customers, we are extremely positive as to the progress the
Company is making to become the leader in delivering networking and
security acceleration for various edge virtualized appliances.
Current Trading
Revenue in the year under review was bolstered mainly due to the
two new contracts signed in the fourth quarter of 2018 referred to
above along with the resultant increase from the recurrent revenue
derived from previous ENET flow processor engagement and the
licensing deal. The Company is making positive and solid progress
towards obtaining major business for its new Universal Edge
Platform proposals. With the Release of our FPGA Smart NIC
ACENIC-100, we anticipate a greater impact on, and engagement in
joint development projects with Tier1 OEMs around the ACENIC-100,
that will further fuel our growth in this area.
Furthermore, the Company anticipates concluding agreements with
two Tier1 OEMs in the FTTH Broadband deployment and EAD (Ethernet
Access Devices) existing markets respectively, with rollout and
production plans for the latter portion of 2019, and mass
deployment in 2020, along with other initiatives including in 5G
networks. This will drive the product into the market along with
our FPGA SmartNIC solutions.
The year continued with the bedding down of the infrastructures
for R&D and Sales and Marketing as detailed in our IPO plans
and the 2018 half year results, with our year to date performance
continuing to track the half year as anticipated. We believe that
both the Research and Development and Marketing infrastructures are
now positioned as we anticipated so as to allow the projected
growth.
As anticipated, the building of these teams had a direct effect
on our profitability for the 2018 financial year, in support of
management's philosophy to build the Company in 2018 so as to
achieve future growth in line with the anticipated market growth
from 2019 onwards. While we are mindful of the risks posed by the
prevailing dynamics and current delays in the macro market, we
continue to have a high level of confidence that we are the best
positioned company in our market, as evidenced by the new contracts
signed and the current discussions with new and existing
customers.
Outlook
The Company continues to focus on the development and delivery
of its SmartNIC solutions for joint development projects with Tier1
virtualization solutions, that when completed will fuel growth from
2020 onwards. In parallel with this, the Company continues to drive
business in existing markets including mobile, broadband, cable and
wireless, together with vertical markets such as the avionics and
automotive markets, with the goal of generating additional
revenues.
Revenues increased in the second half of 2018 over the same
period in 2017 due to an increase in activities around licensing
deals signed with Tier1 OEMs. This trend has continued into the
first quarter of 2019, with revenues materially surpassing the same
period of 2018.
In 2020 the Company anticipates commencing the generation of
cash flow from trading operations during the second half of the
year.
I am now significantly more positive of achieving our planned
growth objectives in existing and new market places as I see the
growth in interest in the Company's offerings and the opening of
materially significant discussions that will lead to the Company
making considered headway in 2019 and allow for multiple times
growth in 2020 as the solutions pass testing phases by the
operators and reach mass deployment.
David Levi
Chief Executive Officer
11 June 2019
Strategic and Financial Review
Ethernity Networks is a leading innovator of software-defined
network processing and security solutions on programmable hardware.
The company is currently working to accelerate commercialisation
through the launch of its SmartNIC combined with virtualized
software solutions, with the focus on Tier1 OEMs. The Company's
core technology, which is populated on programmable logic, enables
delivering data offload functionality at the pace of software
development, improves performance and reduces power consumption and
latency, therefore facilitating the deployment of virtualization of
networking functionality.
The Market
We live in an age of massive demand for data. Today's devices
and associated applications, whether Video on Demand, online
gaming, online storage for data backup, or artificial intelligence,
require high bandwidth and low latency. Whereas Network Interface
Cards (NICs) were once used exclusively for providing a means of
transferring data throughout the network, today's focus is not only
about connectivity, but also on optimizing the network's agility
and efficiency.
SmartNICs have therefore begun to replace traditional NICs as a
means of addressing the primary disadvantage of pure software-based
networking, that is, price per performance. SmartNICs provide the
same I/O functionality between the CPU and the network, while
offloading many of the CPUs most taxing data transfer functions as
a means of accelerating applications and improving both
productivity and cost-efficiency. Moreover, SmartNICs can offer
similar programmability to software, only in a hardware-based
environment.
SmartNICs are used in a wide variety of markets, ranging from
the financial services industry, where exceedingly low latency can
be the difference of millions of dollars within microseconds, to
the storage market, where remote access to arrays of solid-state
drives (SSDs) requires acceleration to deliver such storage
services to the network edge and customer premises.
Ethernity's FPGA SmartNICs are especially valuable in the field
of edge computing, which has various real-world markets . Whether
for the telecom industry's implementation of 5G services to enable
the Internet of Things (IoT) and virtual reality or for the
automotive industry's experimentation with autonomous cars, FPGA
SmartNICs are an absolute necessity to not only transfer data
throughout the network quickly and efficiently, but also to offload
functions so that CPUs can concentrate on their primary purpose -
compute. This provides the acceleration without which such
applications could not exist, and the efficiency to make them
viable revenue-generators.
FPGAs are the natural hardware solution for NFV as they are
flexible, quick to market, efficient, scalable, and come with
different size options to serve different markets and solutions.
FPGA platforms are being widely deployed in automotive, aerospace,
industrial, storage, and networking systems.
The company's FPGA-based Smart NIC delivers on the vision of
NFV: to establish open platforms that would enable the use of
commercial off-the-shelf (COTS) servers instead of proprietary
hardware platforms and delivering hardware acceleration required to
operate virtualized software architecture on COTS FPGA
platforms.
Achievements
During 2018, key operational achievements have included the
announcement of three new contracts relating to the developments
and objectives whereby the Company has moved towards being a
solutions provider. These include:
-- The Company signed a contract in October 2018 to supply its
ENET Switch and Traffic Manager firmware for a North American Tier1
telecommunications OEM. Ethernity has completed the integration of
its firmware on the equipment manufacturer's existing
fibre-to-the-home optical networking platform for advanced
broadband services with 4K video. The contract represents nearly
$0.5 million dollars in short-term revenue for Ethernity and, given
the popularity of the platform and the size of the OEM, is expected
to generate an estimated $2 million in future recurrent revenues
from royalty streams over the next 3 years, with additional royalty
streams extending thereafter. The agreement between the two
companies specifies that Ethernity's solution will be integrated
into between 5,000 to 15,000 devices annually for this specific
platform, representing about 1 million homes.
Furthermore, thanks to the success of this solution, the parties
have already engaged in discussions to apply Ethernity's ENET
firmware and software to the customer's broadband switch and router
platforms, which, if successfully concluded, would add to the
ongoing royalty stream by more than three times the present
arrangement.
-- The Company signed a contract in November 2018 to supply a
Tier1 North American aviation and defence OEM with its ENET
Switch/Router firmware and software. Ethernity will integrate its
firmware on the customer's FPGA-based avionics platform. The
contract represents $400,000 in short-term revenue with additional
future recurrent revenues from royalty streams.
-- Further to a contract with a Korean OEM signed in June 2018
that specified the final delivery of a customised solution on FPGA,
embedding Ethernity's rich networking features including
hierarchical QoS, flow classification, protocol offloading, and
routing, the Company announced on January 16, 2019 that it had
successfully completed delivery of its 100Gbps ACE-NIC100 FPGA
SmartNIC to the Korean OEM.
-- The ACE-NIC100 will be incorporated into commercial
off-the-shelf (COTS) servers that come with fewer CPU cores
compared to regular data centre servers, resulting in significant
power and cost reduction. The combination of the powerful
ACE-NIC100 with edge-optimized COTS servers deliver a
high-performance yet affordable and energy efficient platform,
ideal for network edge virtualization.
Financial Performance
As stated in our interim results to 30 June 2018, the adoption
of the new networking virtualization market in which we operate was
delayed by some 12 months, which trend continues, and our trading
results, as a consequence, reflect this delay and are in line with
expectations.
The Company continues to operate in line with its budgeted cost
base and R&D expense allocation and is forecasting to generate
positive cash flows from operating activities during 2020. Whilst
this continues to be reviewed and adjusted where appropriate,
R&D activity and related expenditure remains focused on new
product developments aligned with the market and customer
requirements.
Key financial results
US Dollar
Audited
For the Year Ended
31 December
=====================================================
2018 2017
===================================================== ================== ================
Revenues 1,123,707 1,518,661
Gross Margin 812,513 1,304,222
Gross Margin % 72.31% 85.88%
Operating (Loss) Profit (2,785,731) 152,219
Net Financing income 238,542 7,252
(Loss) Profit before tax (2,547,189) 159,471
Tax benefit - -
Net comprehensive (loss) income for the year (2,547,189) 159,471
Basic earnings per ordinary share (0.08) 0.01
Diluted earnings per ordinary share (0.08) 0.01
Weighted average number of ordinary shares for basic
earnings per share 32,526,149 25,397,245
===================================================== ================== ================
Revenue Analysis
Revenues for the twelve months ended 31 December 2018 declined
by 35% to $1.123m (2017: $1.519m). Whilst this result may seem
disappointing, given the first six months revenue of $441k which
continued the downward trend across both halves of 2017 resulting
mainly from a decline of recurrent revenue from previous
engagements, the second six months of 2018 represents a major
change in securing lucrative technology licensing deals with
Tier1's that will generate ongoing recurrent revenue in the years
to come. Along with the first contract of our ACENIC100, in the
second half of 2018, this shows a recovery in revenues compared to
the first and second six months of 2017 as well as the first six
months of 2018.
Margins
Gross margins remained above the anticipated 50% level that the
Company models its forecasts on with the 2018 gross margin being
72.31% as compared to 85.8% in 2017. As always, the gross margin
will vary according to the revenue mix as Royalty and Design Win
revenues achieve an approximate 100% gross margin before any sales
commissions are accounted for.
During the 2018 financial year, sales commissions of $76,187
(2017 $nil) were paid and charged to cost of sales. Excluding
these, the gross profit on revenues for 2018 would have been 79.1%
compared to 85.8% for 2017.
Operating Costs
Operating costs increased as planned primarily due to greater
Sales & Marketing expenses, R&D expenses and the annualised
costs related to becoming a listed company as previously
highlighted. The Company has, along with the continued planned
expansion during 2018 focussing on its SmartNIC, established the
infrastructure to enable it to achieve the goals of 2019 and
beyond.
Some of the increases in costs can be attributed, amongst other
things to;
-- An increase in the amortization charge of the Intangible
Asset of $206,660 to $322,724 (2017 $116,064)
-- Foreign exchange gains relating to translation differences at
the end of the year of $23,235 (2017 loss of $127,790)
-- The provision for a doubtful debt of $32,320 and EUR21,000
for a customer that was placed under administration during January
2019 and the outcome of which remains uncertain.
-- A further provision of $75,000 against amounts charged to a
Russian customer in 2017 that is awaiting payment from their
customer, a Russian government entity. Due to the major delay in
payment it was felt prudent to create this provision.
-- Increases in costs relating to the expanded business and
costs being fully annualised compared to 2017 as follows:
a. Listed company costs increased by $162,283
b. Independent director fees increased by $91,527
c. Marketing and Selling salary and consultants costs increased by $816,501
d. Research and Development costs after providing for
capitalisation of R&D and amortisation charges increased by
$257,711, with gross R&D staff employment costs before
capitalisation increasing by $1,836,174
e. Amortisation charges of the intangible asset increased by $206,660
Operating Loss and Net Comprehensive Loss for the Year
After taking the above into account, the Operating Profit for
the year was in line with expectations. The operating profit in
2017 of $152,219 was a result of the inclusion of the European
Union Grant received in 2017 of $203,618 as "Other Income" not
repeated in 2018 and includes in 2018 a marketing grant received
via the Israeli Ministry of Economics and Industry of $104,105.
The Net loss for the year was reduced due to gross interest
earned in 2018 on the cash management of funds of $210,340 (2017
$69,472).
In summary, other than the provisions for bad debts and
provision against the delayed payments by a customer, gross
revenues for 2018 of $1,124m (2017 $1.519m), gross margins of
$812,513 (2017 $1,304m) and the net loss of $2,547m (2017 net
income $159,471) were in line with our expectations for the
year.
Balance Sheet
The balance sheet strength of the Company remains sound with
substantial cash reserves in place to meet the investment
activities and operating requirements of the business.
The net cash utilised and cash reserves are carefully monitored
by the Board, who are satisfied that the cash resources remain
sufficient to meet the current and future requirements. Cash
utilised in operating activities for the year is $2,155,378 as
anticipated (2017 $437,249) with the cash spend being directed in
the main toward the Sales and Marketing and R&D infrastructure.
Cash reserves remained positive at $8,557,524 including financial
instruments as of 31 December 2018, (2017 $14,950,578) and in line
with forecast outcomes.
Short term borrowings of $133,497 (2017 $nil) arose due to
timing differences in relation to access to notice deposits,
requiring a 30 day facility to meet immediate cash requirements.
This was closed off at 31 January 2019 when term deposits fell
due.
The Intangible Asset on the Balance Sheet at a carrying value of
$6,869,815 (2017 $3,170,553) is a result of the Company having
adopted from 2015, the provisions of IAS38 relating to the
recognition of Development Expenses. The useful life and the
amortization method of each of the intangible assets with finite
lives are reviewed at least at each financial year end. If the
expected useful life of an asset differs from the previous
estimate, the amortization period is changed accordingly. Such
change is accounted for as a change in accounting estimate in
accordance with IAS 8. The Company undertook a comprehensive
internal modelling exercise to assess the fair value of the
Intangible Asset and based on this Management are in their view,
satisfied with the continued practice of capitalising costs in
terms of IAS38.
Other than that as discussed above, there are no items on the
Balance Sheet that warrant further discussion outside of the
disclosures made in the Annual Financial Statements.
David Levi Mark Reichenberg
Chief Executive Officer Chief Financial Officer
11 June 2019 11 June 2019
STATEMENTS OF FINANCIAL POSITION
US dollars
-------------------------
31 December
-------------------------
Notes 2018 2017
----- ------------ -----------
ASSETS
Current
Cash and cash equivalents 4 473,815 3,881,106
Other short-term financial assets 5 8,083,709 11,069,472
Trade receivables 6 642,085 513,965
Inventories 116,012 -
Other current assets 7 409,250 438,265
Current assets 9,724,871 15,902,808
Non-Current
Property and equipment 8 606,057 155,840
Deferred tax assets 24 800,000 800,000
Intangible asset 9 6,869,815 3,170,553
Non-current assets 8,275,872 4,126,393
Total assets 18,000,743 20,029,201
============ ===========
LIABILITIES AND EQUITY
Current
Short Term Borrowings 10 133,497 -
Trade payables 288,308 225,087
Other current liabilities 11 1,084,728 931,771
Warrants liability, at fair value 12 - 15,770
------------ -----------
Current liabilities 1,506,533 1,172,628
Non-Current
IIA royalty liability 13 6,578 -
Long Term Borrowings 14 - 7,522
------------ -----------
Non-current liabilities 6,578 7,522
Total liabilities 1,513,111 1,180,150
Equity 16
Share capital 8,039 8,028
Share premium 23,396,310 23,356,078
Other components of equity 760,849 615,322
Accumulated deficit (7,677,566) (5,130,377)
------------ -----------
Total equity 16,487,632 18,849,051
Total liabilities and equity 18,000,743 20,029,201
============ ===========
The accompanying notes are an integral part of the financial
statements.
STATEMENTS OF COMPREHENSIVE INCOME
US dollars
-------------------------
For the year ended
31 December
-------------------------
Notes 2018 2017
------ ----------- ------------
Revenue 18, 27 1,123,707 1,518,661
Cost of sales 311,194 214,439
----------- ------------
Gross profit 812,513 1,304,222
Research and development expenses 19 473,489 215,778
General and administrative expenses 20 1,291,175 (*) 554,645
Impairment losses of financial assets 20 132,799 (*) 37,258
Marketing expenses 21 1,804,886 556,588
Other income 22 (104,105) (212,266)
----------- ------------
Operating profit (loss) (2,785,731) 152,219
Financing costs 23 (15,450) (85,727)
Financing income 24 253,992 92,979
----------- ------------
Net comprehensive income (loss) for the
year (2,547,189) 159,471
=========== ============
Basic earnings (loss) per ordinary share 26 (0.08) 0.01
=========== ============
Diluted earnings (loss) per ordinary share 26 (0.08) 0.01
=========== ============
Weighted average number of ordinary shares
for basic earning or loss per share 32,526,149 25,397,245
=========== ============
The accompanying notes are an integral part of the financial
statements.
STATEMENTS OF CHANGES IN EQUITY
Amounts in US dollars (except number of shares)
--------------------------------------------------------------------------------------------------------------------------------
Number of shares Share Capital
---------------------------------- ----------------------------------
Other
Ordinary Preferred Ordinary Preferred Share components Accumulated Total
shares shares shares shares premium of equity deficit equity
------------ -------------------- --------------- ----------------- --------------- ----------- ------------- -----------
Balance at 1
January 2017 18,078,500 3,725,400 4,111 847 5,629,272 332,107 (5,289,848) 676,489
Conversion of
preferred
shares
into ordinary
shares 3,725,400 (3,725,400) 847 (847) - - - -
Employee
share-based
compensation - - - - 24,619 162,101 - 186,720
Net proceeds
from issuing
ordinary
shares 10,714,286 - 3,070 - 17,823,301 - - 17,826,371
Warrants
issued to
service
provider in
connection
with
issuance of
ordinary
shares - - - - (121,114) 121,114 - -
Net
comprehensive
income for
the year - - - - - - 159,471 159,471
Balance at 31
December 2017 32,518,186 - 8,028 - 23,356,078 615,322 (5,130,377) 18,849,051
Employee
share-based
compensation - - - - 36,393 145,527 - 181,920
Exercise of
employee
options 38,500 - 11 - 3,839 - - 3,850
Net
comprehensive
loss for
the year - - - - - - (2,547,189) (2,547,189)
Balance at 31
December 2018 32,556,686 - 8,039 - 23,396,310 760,849 (7,677,566) 16,487,632
============ ==================== =============== ================= =============== =========== ============= ===========
The accompanying notes are an integral part of the financial
statements.
STATEMENTS OF CASH FLOWS
US dollars
------------------------------------
For the year ended
31 December
------------------------------------
2018 2017
--------------------- -------------
Operating activities
Profit (loss) before tax (2,547,189) 159,471
Non-cash adjustments
Depreciation of property and equipment 100,918 20,171
Capital gain from sale of vehicle - (8,648)
Share-based compensation 5,031 69,178
Amortisation of intangible assets 322,724 116,064
Amortisation of liabilities (13,255) (13,792)
IPO related costs (9,514) -
Foreign exchange gains on cash balances (24,517) -
Net changes in working capital
Increase in trade receivables (128,120) (245,656)
Increase in inventories (116,012) -
Decrease (increase) in other current assets 29,015 (409,540)
Increase in trade payables 63,221 103,127
Increase (decrease) in other liabilities 162,320 (227,624)
Net cash used in operating activities (2,155,378) (437,249)
Investing activities
Decrease (Increase) of other short-term financial assets 2,985,763 (11,010,954)
Purchase of property and equipment (551,135) (126,423)
Proceeds from sale of vehicle - 28,999
Amounts carried to intangible assets (3,835,583) (1,958,997)
Participating grants in intangible assets - 95,820
Net cash used in investing activities (1,400,955) (12,971,555)
Financing activities
Proceeds from exercise of options 3,850
Repayment of IIA liability (5,300) (93,034)
Proceeds from (repayment of) short term borrowings 133,497 (128,969)
Repayment of long term borrowings (7,522) (122,613)
Repayment of shareholder loans - (527,568)
Net proceeds from issuing ordinary shares - 17,826,371
Net cash provided by financing activities 124,525 16,954,187
Net change in cash and cash equivalents (3,431,808) 3,545,383
Cash and cash equivalents, beginning of year 3,881,106 335,723
Exchange differences on cash and cash equivalents 24,517 -
Cash and cash equivalents, end of year 473,815 3,881,106
===================== =============
Supplementary information:
Interest paid during the year 813 21,918
===================== =============
Interest received during the year 197,949 69,472
===================== =============
Supplementary information on non cash activities:
Share-based compensation capitalised to intangible assets 186,403 117,542
===================== =============
The accompanying notes are an integral part of the financial
statements.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
ETHERNITY NETWORKS LTD. (hereinafter: the "Company"), was
incorporated in Israel on the 15th of December 2003 as Neracore
Ltd. The Company changed its name to ETHERNITY NETWORKS LTD. on the
10th of August 2004.
The Company develops and delivers high-end network processing
technology for Carrier Ethernet switching, including broadband
access, mobile backhaul, Carrier Ethernet demarcation and data
centres. The Company's customers are situated throughout the
world.
In June 2017 the Company completed an Initial Public Offering
("IPO") together with being admitted to trading on the AIM Stock
Exchange and issued 10,714,286 ordinary shares at a price of GBP
1.40 per share, for a total consideration of approximately
$19,444,000 (GBP 15,000,000) before underwriting and issuance
expenses. Total net proceeds from the issuance amounted to
approximately $17,800,000.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
The following accounting policies have been consistently applied
in the preparation and presentation of these financial statements
for all of the periods presented, unless otherwise stated. In 2018,
new standards and amendments became effective but they had no
material effect on the financial statements.
A. Basis of presentation of the financial statements and statement of compliance with IFRS
These financial statements have been prepared in accordance with
International Financial Reporting Standards (hereinafter - "IFRS"),
as issued by the International Accounting Standards Board
("IASB").
The financial information has been prepared on the historical
cost basis.
The Company has elected to present profit or loss items using
the function of expense method. Additional information regarding
the nature of the expenses is included in the notes to the
financial statements.
The financial statements for the year ended 31 December 2018
(including comparative amounts) were approved and authorised for
issue by the board of directors on 11 June 2019.
B. Use of significant accounting estimates and assumptions and judgements
The preparation of financial statements in conformity with IFRS
requires management to make accounting estimates and assessments
that involve use of judgment and that affect the amounts of assets
and liabilities presented in the financial statements, the
disclosure of contingent assets and liabilities at the dates of the
financial statements, the amounts of revenues and expenses during
the reporting periods and the accounting policies adopted by the
Company. Actual results could differ from those estimates.
Estimates and judgements are continually evaluated and are based
on prior experiences, various facts, external items and reasonable
assumptions in accordance with the circumstances related to each
assumption.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and in any future periods
affected.
Regarding significant judgements and estimate uncertainties, see
Note 3.
C. Functional and presentation currency
The Company prepares its financial statements on the basis of
the principal currency and economic environment in which it
operates (hereinafter - the "functional currency").
The Company's financial statements are presented in US dollars
("US$") which constitutes the functional currency of the Company
and the presentation currency of the Company.
D. Foreign currency transactions and balances
Specifically identifiable transactions denominated in foreign
currency are recorded upon initial recognition at the exchange
rates prevailing on the date of the transaction. Exchange rate
differences deriving from the settlement of monetary items, at
exchange rates that are different than those used in the initial
recording during the period, or than those reported in previous
financial statements, are recognised in the statement of
comprehensive income in the year of settlement of the monetary
item. Other profit or loss items are translated at average exchange
rates for the relevant financial year.
Assets and liabilities denominated in or linked to foreign
currency are presented on the basis of the representative rate of
exchange as of the date of the statement of financial position
(spot exchange rate as published by the Bank of Israel).
Exchange rate differentials are recognised in the financial
statements when incurred, as part of financing expenses or
financing income, as applicable.
The exchange rates as at the 31st of December, of one unit of
foreign currency to each US dollar, were:
2018 2017
New Israeli Shekel
("NIS") 0.267 0.288
EURO 1.279 1.200
Sterling 1.145 1.350
E. Cash and cash equivalents
Cash and cash equivalents include cash on hand, call deposits
and highly liquid investments, including short-term bank deposits
(with original maturity dates of up to three months from the date
of deposit), that are subject to an insignificant risk of changes
in their fair value and which do not have restrictions as to what
it may be used for.
F. Property and equipment
Property and equipment items are presented at cost, less
accumulated depreciation and net of accrued impairment losses. Cost
includes, in addition to the acquisition cost, all of the costs
that can be directly attributed to the bringing of the item to the
location and condition necessary for the item to operate in
accordance with the intentions of management.
The residual value, useful life span and depreciation method of
fixed asset items are tested at least at the end of the fiscal year
and any changes are treated as changes in accounting estimate.
Depreciation is calculated on the straight--line method, based
on the estimated useful life of the fixed asset item or of the
distinguishable component, at annual depreciation rates as
follows:
%
Computers 33
Testing equipment 10-33
Vehicles 15
Furniture and equipment 6-15
Leasehold improvements 10
Leasehold improvements are depreciated on a straight-line basis
over the shorter of the lease term (including any extension option
held by the Company and intended to be exercised) and the expected
life of the improvement.
Depreciation of an asset ceases at the earlier of the date that
the asset is classified as held for sale and the date that the
asset is derecognised. An asset is derecognised on disposal or when
no further economic benefits are expected from its use.
G. Basic and diluted earnings per share
Basic and diluted earnings per share is computed by dividing the
income for the period applicable to Ordinary Shares by the weighted
average number of shares of Ordinary Shares outstanding during the
period. Securities that may participate in dividends with the
Ordinary Shares (such as the Preferred Shares) were included in the
computation of basic earnings per share using the two class
method.
In computing diluted earnings per share, basic earnings per
share are adjusted to reflect the potential dilution that could
occur upon the exercise of options or warrants issued or granted
using the "treasury stock method" and upon the conversion of
Preferred Shares (until the first half of 2017) using the
"if-converted method", if the effect of each of such financial
instruments is dilutive.
H. Severance pay liability
The Company's liability for severance pay pursuant Israel's
Severance Pay Law is based on the last monthly salary of the
employee multiplied by the number of years of employment, as of the
date of severance.
Pursuant to section 14 of Severance Pay Law, which covers the
Company's employees, monthly deposits with insurance companies
release the Company from any future severance obligations in
respect of those employees (defined contribution). Deposits under
section 14 are recorded as an expense in the Company's statement of
comprehensive income.
I. Research and development expenses
Expenditures on the research phase of projects to develop new
products and processes are recognised as an expense as
incurred.
Development activities involve a plan or a design for the
production of new or substantially improved products and processes.
Development costs that are directly attributable to a project's
development phase are recognised as intangible assets, provided
they meet the following recognition requirements:
-- the development costs can be measured reliably
-- the project is technically and commercially feasible
-- the Company intends to and has sufficient resources to complete the project
-- the Company has the ability to use or sell the developed asset
-- the developed asset will generate probable future economic
benefits. Development costs not meeting these criteria for
capitalisation are expensed as incurred.
Directly attributable costs include employee costs incurred on
software development along with an appropriate portion of relevant
overheads and borrowing costs.
An intangible asset that was capitalized but not available for
use, is not amortised and is subject to impairment testing once a
year or more frequently if indications exist that there may be a
decline in the value of the asset until the date on which it
becomes available for use.
The amortisation of an intangible asset begins when the asset is
available for use, i.e., it is in the location and condition needed
for it to operate in the manner intended by management. The
development asset is amortised on the straight-line method, over
its estimated useful life, which is estimated to be ten years.
The useful life and the amortisation method of each of the
intangible assets with finite lives are reviewed at least at each
financial year end. If the expected useful life of an asset differs
from the previous estimate, the amortisation period is changed
accordingly. Such change is accounted for as a change in accounting
estimate in accordance with IAS 8.
J. Government grants
Government grants are recognised where there is reasonable
assurance that the grant will be received and all attached
conditions will be complied with. When the grant relates to an
expense item (such as research and development of an intangible
asset), it is recognised as 'other income' on a systematic basis
over the periods that the costs, which it is intended to
compensate, are expensed.
Where the grant relates to an asset (such as development
expenses that were recognised as an intangible asset), it is
recognised a deduction of the related asset.
Grants from the Israeli Innovation Authority of the Ministry of
Economy (hereinafter - the "IIA") in respect of research and
development projects are accounted for as forgivable loans
according to IAS 20 Accounting for Government Grants and Disclosure
of Government Assistance.
Grants received from the IIA are recognised as a liability
according to their fair value on the date of their receipt, unless
on that date it is reasonably certain that the amount received will
not be refunded. The fair value is calculated using a discount rate
that reflects a market rate of interest at the date of initial
recognition. The difference between the amount received and the
fair value on the date of receiving the grant is recognised as a
deduction from the cost of the related asset or as other income, as
applicable.
The amount of the liability is re-examined each period, and any
changes in the present value of the cash flows discounted at the
original interest rate of the grant are recognised in profit or
loss.
The difference between the amount received and the fair value on
the date of receiving the grant is recognised as a deduction of
research and development expenses.
Grants which do not include an obligation to pay royalties are
recognised as a deduction of the related asset or as other income,
as applicable (See Note 22).
K. Financial instruments
The accounting policy for financial instruments until December
31, 2017, is as follows:
Recognition, initial measurement and derecognition
Financial assets and financial liabilities are recognised when
the Company becomes a party to the contractual provisions of the
financial instrument and are measured initially at fair value
adjusted for transaction costs, except for those carried at fair
value through profit or loss which are measured initially at fair
value. Subsequent measurement of financial assets and financial
liabilities is described below.
Financial assets are derecognised when the contractual rights to
the cash flows from the financial asset expire, or when the
financial asset and substantially all the risks and rewards are
transferred. A financial liability is derecognised when it is
extinguished, discharged, cancelled or expires.
Classification and subsequent measurement of financial
assets
For the purpose of subsequent measurement financial assets are
classified into the following categories upon initial
recognition:
-- Loans and receivables
-- Financial assets at fair value through profit or loss (FVTPL)
-- Held-to-maturity (HTM) investments
-- Available-for-sale (AFS) financial assets
All financial assets except for those at FVTPL are reviewed for
impairment at least at each reporting date to identify whether
there is any objective evidence that a financial asset or a group
of financial assets is impaired. Different criteria to determine
impairment are applied for each category of financial assets, which
are described below.
All income and expenses relating to financial assets that are
recognised in the statement of comprehensive income are presented
within financing expenses or financing income (except for
impairment of trade receivables which is presented within general
and administrative expenses).
Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. After initial recognition, these are measured at amortised
cost using the effective interest method, less provision for
impairment. Discounting is omitted where the effect of discounting
is immaterial. The Company's cash and cash equivalents, trade
receivables and most other receivables fall into this category of
financial instruments. Individually significant receivables are
considered for impairment when they are past due or when other
objective evidence is received that a specific counterparty will
default. Receivables that are not considered to be individually
impaired are reviewed for impairment in groups, which are
determined by reference to the industry and region of the
counterparty and other shared credit risk characteristics. The
impairment loss estimate is then based on recent historical
counterparty default rates for each identified group.
Allowance for doubtful accounts
The allowance for doubtful accounts is determined in respect of
specific debts whose collection, in the opinion of the Company's
management, is doubtful.
Financial assets at FVTPL
Financial assets at FVTPL include financial assets that are
either classified as held for trading or that meet certain
conditions and are designated at FVTPL upon initial recognition.
All derivative financial instruments fall into this category,
except for those designated and effective as hedging instruments,
for which hedge accounting requirements apply. Assets in this
category are measured at fair value with profits or losses
recognised in the statement of comprehensive income. The fair
values of financial assets in this category are determined by
reference to active market transactions or using a valuation
technique where no active market exists.
During the year ended December 31, 2017 the Company did not have
any assets held for trading and no assets were voluntarily
classified to FVTPL category.
Classification and subsequent measurement of financial
liabilities
The Company's financial liabilities include borrowings, trade
payables, other payables, IIA royalty liability and derivative
financial instruments. Financial liabilities are measured
subsequently at amortised cost using the effective interest method
except for derivatives and financial liabilities designated at
FVTPL, which are carried subsequently at fair value with profits or
losses recognised in the statement of comprehensive income (other
than derivative financial instruments that are designated and
effective as hedging instruments). All interest-related charges
and, if applicable, changes in an instruments fair value that are
reported in the statement of comprehensive income, are included
within finance costs or finance income.
Derivative financial instruments
Derivative financial instruments (including embedded derivatives
that were separated from the host contract - see Note 12) were
accounted for at FVTPL except for derivatives designated as hedging
instruments in cash flow hedge relationships, which require a
specific accounting treatment. To qualify for hedge accounting, the
hedging relationship must meet several strict conditions with
respect to documentation, probability of occurrence of the hedged
transaction and hedge effectiveness.
The Company did not designate derivatives as hedging instruments
in the periods presented in these financial statements.
Derivatives embedded in host contracts are accounted for as
separate derivatives if their economic characteristics and risks
are not closely related to those of the host contracts and the host
contracts are not held-for- trading or designated at fair value
though profit or loss. These embedded derivatives are measured at
fair value, with changes in fair value recognised in profit or
loss. Reassessment only occurs if there is a change in the terms of
the contract that significantly modifies the cash flows that would
otherwise be required or a reclassification of a financial asset
out of the fair value through profit or loss.
During the reporting period, the entire amount of a warrant
liability (a derivative which was separated from a host contract)
was derecognised to profit or loss (see also Note 12)
The accounting policy applied commencing from 1 January 2018
1. Classification and measurement of financial assets and financial liabilities
Initial recognition and measurement
The Company initially recognizes trade receivables on the date
that they are originated. All other financial assets and financial
liabilities are initially recognized on the date on which the
Company becomes a party to the contractual provisions of the
instrument. As a rule, a financial asset or a financial liability
are initially measured at fair value with the addition, for a
financial asset or a financial liability that are not presented at
fair value through profit or loss, of transaction costs that can be
directly attributed to the acquisition or the issuance of the
financial asset or the financial liability. Trade receivables that
do not contain a significant financing component are initially
measured at the price of the related transaction.
Financial assets - subsequent classification and measurement
On initial recognition, financial assets are classified to
measurement at amortized cost.
Financial assets are not reclassified in subsequent periods,
unless, and only to the extent that the Company changes its
business model for the management of financial debt assets, in
which case the affected financial debt assets are reclassified at
the beginning of the reporting period following the change in the
business model.
A financial asset is measured at amortized cost if it meets the
two following cumulative conditions and is not designated for
measurement at fair value through profit or loss:
-- The objective of the entity's business model is to hold the
financial asset to collect the contractual cash flows; and
-- The contractual terms of the financial asset create
entitlement on specified dates to cash flows that are solely
payments of principal and interest on the principal amount
outstanding.
The Company has balances of trade and other receivables and
deposits that are held under a business model the objective of
which is collection of the contractual cash flows. The contractual
cash flows in respect of such financial assets comprise solely
payments of principal and interest that reflects consideration for
the time-value of the money and the credit risk. Accordingly, such
financial assets are measured at amortized cost.
Financial assets at amortized cost
In subsequent periods, these assets are measured at amortized
cost, using the effective interest method and net of impairment
losses. Interest income, currency exchange gains or losses and
impairment are recognized in profit or loss. Any gains or losses on
derecognition are also carried to profit or loss.
2. Financial assets at fair value through profit or loss
In subsequent periods, these assets are measured at fair value.
Net gains and losses are carried to profit or loss.
Financial liabilities - classification, subsequent measurement
and gains and losses
Financial liabilities are classified to measurement at amortized
cost or at fair value through profit or loss. Financial liabilities
at fair value through profit or loss are measured at fair value,
and any net gains and losses, including any interest expenses, are
recognized in profit or loss. Other financial liabilities are
measured at amortized cost in subsequent periods, using the
effective interest method. Interest expenses and currency exchange
gains and losses are recognized in profit or loss. Any gains or
losses on derecognition are also carried to profit or loss.
Derecognition of financial liabilities
Financial liabilities are derecognized when the contractual
obligation of the Company expires or when it is discharged or
canceled. Additionally, a significant amendment of the terms of an
existing financial liability, or an exchange of debt instruments
having substantially different terms, between an existing borrower
and lender, are accounted for as an extinguishment of the original
financial liability and the recognition of a new financial
liability at fair value.
The difference between the carrying amount of the extinguished
financial liability and the consideration paid (including any other
non-cash assets transferred or liabilities assumed), is recognized
in profit or loss. In the event of a non-material modification of
terms (or exchange of debt instruments), the new cash flows are
discounted at the original effective interest rate and the
difference between the present value of financial liability under
the new terms and the present value of the original financial
liability is recognized in profit or loss.
3. Impairment
Financial assets and contract assets
The Company creates a provision for expected credit losses in
respect of:
-- Contract assets (as defined in IFRS 15).
-- Financial assets measured at amortized cost.
The Company has elected to measure the provision for expected
credit losses in respect of trade receivables, contract assets at
an amount that is equal to the credit losses expected over the life
of the instrument.
In assessing whether the credit risk of a financial asset has
significantly increased since initial recognition and in assessing
expected credit losses, the Company takes into consideration
information that is reasonable and verifiable, relevant and
attainable at no excessive cost or effort. Such information
comprises quantitative and qualitative information, as well as an
analysis, based on the past experience of the Company and the
reported credit assessment, and contains forward-looking
information.
Measurement of expected credit losses
Expected credit losses represent a probability-weighted estimate
of credit losses. Credit losses are measured at the present value
of the difference between the cash flows to which the Company is
entitled under the contract and the cash flows that the Company
expects to receive.
Expected credit losses are discounted at the effective interest
rate of the financial asset.
Financial assets impaired by credit risk
At each reporting date, the Company assesses whether financial
assets that are measured at amortized cost have become impaired by
credit risk. A financial asset is impaired by credit risk upon the
occurrence of one or more of the events that adversely affect the
future cash flows estimated for such financial asset.
L. Share-based compensation
Share-based compensation transactions that are settled by equity
instruments that were executed with employees or others who render
similar services, are measured at the date of the grant, based on
the fair value of the granted equity instrument. This amount is
recorded as an expense in profit or loss with a corresponding
credit to equity, over the period during which the entitlement to
exercise or to receive the equity instruments vests.
For purposes of estimating the fair value of the granted equity
instruments, the Company takes into consideration conditions which
are not vesting conditions (or vesting conditions that are
performance conditions which constitute market conditions).
Non-market performance and service conditions are included in
assumptions about the number of options that are expected to vest.
The total expense is recognised over the vesting period, which is
the period over which all of the specified vesting conditions are
to be satisfied. At the end of each reporting period, an estimate
is made of the number of instruments expected to vest. Grants that
are contingent upon vesting conditions (including performance
conditions that are not market conditions) which are not ultimately
met are not recognised as an expense. A change in estimate
regarding prior periods is recognised in the statement of
comprehensive income over the vesting period.
Share-based payment transactions settled by equity instruments
executed with other service providers are measured at the date the
services were received, based on the estimated fair value of the
services or goods received, unless their value cannot be reliably
estimated. In such a case, the transaction is measured by
estimating the fair value of the granted equity instruments. This
amount is carried as an expense or is capitalized to the cost of an
asset, based on the nature of the transaction. Share based
compensation amounts related to grants that were forfeited, are
reclassified to Share Premium.
M. Fair Value Measurements
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
Fair value measurement is based on the assumption that the
transaction will take place in the asset's or the liability's
principal market, or in the absence of a principal market. In the
most advantageous market.
The fair value of an asset or a liability is measured using the
assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
Fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits by using the asset in its best use or by selling it to
another market participant that would use the asset in its best
use.
The Company uses valuation techniques that are appropriate in
the circumstances and for which sufficient data are available to
measure fair value. Maximizing the use of relevant observable
inputs and minimizing the use of unobservable inputs.
All assets and liabilities measured at fair value or for which
fair value is disclosed are categorized into levels within the fair
value hierarchy based on the lowest level input that is significant
to the entire fair value measurement:
-- Level 1 - unadjusted quoted prices are available in active
markets for identical assets or liabilities that the Company has
the ability to access as of the measurement date.
-- Level 2 - pricing inputs are other than quoted prices in
active markets that are directly observable for the asset or
liability or indirectly observable through corroboration with
observable market data.
-- Level 3 - pricing inputs are unobservable for the
non-financial asset or liability and only used when there is
little, if any, market activity for the non-financial asset or
liability at the measurement date. The inputs into the
determination of fair value require significant management judgment
or estimation. Level 3 inputs are considered as the lowest priority
within the fair value hierarchy. The valuation of the short-term
liability relating to the warrants and options issued, fell under
this category.
N. Off-set of financial instruments
Financial instruments and financial liabilities are presented in
the statements of financial position at their net value if the
Company has a legal and enforceable right of offset and the Company
intends on settling the asset and the liability on a net basis or
simultaneously.
O. Transactions with controlling shareholders
Transactions with controlling shareholders are recognised at
fair value. Any difference between the fair value and the original
terms of the transaction, represent capital contribution or
dividend, as applicable and accordingly, carried to equity.
P. Revenue recognition
The Company generates revenues mainly from sales of programmable
devices ("FPGA") that embed intellectual property ("IP") developed
by the Company, or IP developed by the Company together with
software application tools, to assist its customers to design their
own systems based on the Company IP.
The accounting policy for revenue recognition until December 31,
2017 was as follows:
Revenues were measured in accordance with the fair value of the
consideration received or receivable in respect of sales supplied
in the ordinary course of business, net of returns, rebates and
discounts.
1. Sales of goods
Revenues from programmable devices were recognised when all of
the following conditions are met:
-- The Company has transferred the significant risks and rewards
of ownership of the goods to the purchasers. Such condition is
usually met on delivery of the goods, however, when a sales
contract gives the customer the right, for a specified period after
delivery, to accept or reject goods, revenue recognition does not
occur until the earlier of customer acceptance and expiry of the
acceptance period;
-- The Company does not retain continuing managerial involvement
to the degree usually associated with ownership nor effective
control over the goods sold;
-- The amount of the revenues can be measured reliably. The
amount of the revenue is not considered as being reliably measured
until all the conditions relating to the transaction are met. The
Company based its estimates on past experience, considering the
type of customer, type of transaction and special details of each
arrangement;
-- It is probable that the economic benefits that are associated
with the transaction will flow to the Company; and
-- The costs incurred or to be incurred in respect of the transaction can be measured reliably.
2. Contracts with milestone payments
Certain contracts with major customers are structured to provide
the Company with payment upon the achievements of certain
predefined milestones which might include development of new
product offerings or new features of existing products such as
programmable devices ("design tools").
If payments under the contract are dependent upon the
achievement of certain milestones, the revenue is not recognised
until the relevant milestone has been achieved (as agreed between
the Company and the customer), provided that the contract does not
provide cancellation rights to the customer that would require the
repayment of any amounts received.
Amounts received prior to achieving a predefined milestone,
including up-front payments, are deferred and presented as deferred
revenues until the achievement of the related milestone.
Amounts received under contracts that allow the customer, for a
specified period after delivery, acceptance or cancellation rights,
are deferred and presented as deferred revenues until the earlier
of, the customer formal acceptance, or, the expiry of the
acceptance or cancellation period. As at 31 December 2017 no
amounts were required to be presented as deferred revenues.
Contract costs are recognised in the period in which they are
incurred.
3. Multiple element transactions
In certain instances, the Company enters into an agreement to
sell programmable devices together with the development of new
product offerings or new features of existing products ("design
tools").
In those cases, the Company allocates the consideration received
to the different elements and the revenues are recognised in
respect of each element separately. Accordingly, revenue allocated
to design tools elements are recognised upon achievement of
milestones as described above. Revenue allocated to programmable
devices elements are recognised upon delivery, after all of the
above criteria (under sales of goods) are met. An element
constitutes a separate accounting unit if and only if it has a
separate value to the customer. Revenue from each element is
recognised when the criteria for revenue recognition have been met
(as described above) and only to the extent of the consideration
that is not contingent upon the completion or performance of future
services in the contract.
4. Revenue from royalties
Royalty revenue is recognised on an accrual basis in accordance
with the substance of the relevant transaction with the customer.
Such revenues are recognised provided the amount of the revenues
can be measured reliably and it is considered probable that the
economic benefits that are associated with the transaction will
flow through to the Company. Royalties are received on the sales of
third parties that are based on IP developed by the Company.
Royalties are calculated from royalty reports delivered to the
Company on a quarterly basis.
A.
B. Accounting policy applied commencing from 1 January 2018
The Company recognises revenue when customer obtains control
over the promised goods or services. The revenue is measured
according to the amount of the consideration to which the Company
expects to be entitled in exchange for the goods or services
promised to the customer.
Identification of the contract
The Company treats a contract with a customer only where all of
the following conditions are fulfilled:
1. The parties to the contract have approved the contract (in
writing, orally or according to other customary business practices)
and they are committed to satisfying their obligations
thereunder;
2. The Company is able to identify the rights of each party in
relation to the goods or services that are to be transferred;
3. The Company is able to identify the payment terms for the
goods or services that are to be transferred;
4. The contract has commercial substance (i.e., the entity's
risk, timing and amount of future cash flows are expected to change
as result of the contract); and
5. It is probable that the consideration to which the Company is
entitled to in exchange for the goods or services transferred to
the customer will be collected.
Identification of performance obligations
On the contract's inception date the Company assesses the goods
or services promised in the contract with the customer and
identifies as a performance obligation any promise to transfer to
the customer one of the following:
1. Goods or services that are distinct; or
2. A series of distinct goods or services that are substantially
the same and have the same pattern of transfer to the customer.
The Company identifies goods or services promised to the
customer as being distinct when the customer can benefit from the
goods or services on their own or in conjunction with other readily
available resources and the Company's promise to transfer the goods
or services to the customer separately identifiable from other
promises in the contract. In order to examine whether a promise to
transfer goods or services is separately identifiable, the Company
examines whether it is providing a significant service of
integrating the goods or services with other goods or services
promised in the contract into one integrated outcome that is the
purpose of the contract.
Determination of the transaction price
The transaction price is the amount of the consideration to
which the Company expects to be entitled in exchange for the goods
or services promised to the customer, other than amounts collected
for third parties. The Company takes into account the effects of
all the following elements when determining the transaction price;
variable consideration, the existence of a significant financing
component, non-cash consideration, and consideration payable to the
customer.
Variable consideration
The transaction price includes fixed amounts and amounts that
may change as a result of discounts, credits, price concessions,
incentives, penalties, claims and disputes and contract
modifications where the consideration in their respect has not yet
been agreed to by the parties.
The Company includes the amount of the variable consideration,
or part of it, in the transaction price only when it is considered
highly probable that its inclusion will not result in a significant
revenue reversal in the future when the uncertainty has been
subsequently resolved. At the end of each reporting period and if
necessary, the Company revises the amount of the variable
consideration included in the transaction price.
Satisfaction of performance obligations
Revenue is recognised when the Company satisfies a performance
obligation by transferring control over promised goods or services
to the customer, as applicable.
Contract costs
Incremental costs of obtaining a contract with a customer, such
as sales fees to agents, are recognised as an asset when the
Company is likely to recover these costs. Costs to obtain a
contract that would have been incurred regardless of the contract
are recognised as an expense as incurred, unless the customer can
be billed for those costs.
Costs incurred to fulfill a contract with a customer and that
are not covered by another standard are recognised as an asset when
they: relate directly to a contract the Company can specifically
identify; they generate ore enhance resources of the Company that
will be used in satisfying performance obligations in the future;
and they are expected to be recovered. In any other case the costs
are recognised as an expense as incurred.
Capitalized costs are amortised in the statement of income on a
systematic basis that is consistent with the pattern of transfer of
the goods or services to which the asset relates.
In every reporting period, the Company examines whether the
carrying amount of the asset recognised as aforesaid exceeds the
consideration the entity expects to receive in exchange for the
goods or services to which the asset relates, less the costs
directly attributable to the provision of these goods or services
that were not recognised as expenses, and if necessary an
impairment loss is recognised in the statement of income.
Contract modification
A contract modification is a change in the scope or price (or
both) of a contract that was approved by the parties to the
contract. A contract modification can be approved in writing,
orally or be implied by customary business practices.
When a contract modification has not yet been approved by the
parties, the Company continues to recognise revenues according to
the existing contract, while disregarding the contract
modification, until the date the contract modification is approved
or the contract modification is legally enforceable.
The Company accounts for a contract modification as an
adjustment of the existing contract since the remaining goods or
services after the contract modification are not distinct and
therefore constitute a part of one performance obligation that is
partially satisfied on the goods that are expected to be returned,
instead of revenue, the Company recognises a refund liability. A
right of return asset (and corresponding adjustment to cost of
sales) is also recognised for the right to recover products from a
customer, date of the contract modification. The effect of the
modification on the transaction price and on the rate of progress
towards full satisfaction of the performance obligation is
recognised as an adjustment to revenues (increase or decrease) on
the date of the contract modification, meaning on a catch-up
basis.
Sales of goods
Revenues from sale of programmable devices are recognised at the
point in time when control of the asset is transferred to the
customer, generally on delivery of the devices.
C.
Certain contracts provide a customer with a right to return the
goods within a specified period. The Company uses the expected
value method to estimate the goods that will not be returned
because this method best predicts the amount of variable
consideration to which the Company will be entitled. The
requirements in IFRS 15 on constraining estimates of variable
consideration are applied with respect to arrangements that
provides such right of return, in order to determine the amount of
variable consideration that can be included in the transaction
price. Accordingly, the Company recognize amounts subject to right
of return only if it is highly probable that there will not be a
significant reversal of revenues if the estimate of expected
returns changes. As of December 31, 2018, there was no significant
amount of goods that were subject to right of return.
Contracts with milestone payments
Certain contracts with major customers are structured to provide
the Company with payment upon the achievements of certain
predefined milestones which might include development of new
product offerings ore new features of existing products such as
programmable devices ("design tools").
Management has determined that the performance obligation under
such arrangements is satisfied over time.
As payments under the contract are dependent upon the Company's
achievement of certain milestones, and as the payments are
generally designed to depict the Company's performance under the
arrangements, the Company measures progress toward satisfying the
performance obligation based on the results actually achieved (i.e.
the achievements of milestones) using the output method. Amounts
received (including up-front payments), which relate to milestones
that were non achieved yet, are deferred and presented as deferred
revenues.
Multiple element transactions
Some of the Company's contracts with customers contain multiple
performance obligations. For these contracts, we account for
individual performance obligations separately if they are distinct.
The transaction price is allocated to the separate performance
obligations on a relative standalone selling price basis. The
Company determine the standalone selling prices based on our
overall pricing objectives, taking into consideration market
conditions and other factors.
Revenues are then recognized for each separate performance
obligations - sales of goods or designed tools, based on the
criteria described in the above paragraph.
Revenue from royalties
D.
E. The Company is entitled to royalties based on sales by third
parties, of products which consist IP developed by the Company.
F. For arrangements that include such sales-based royalties,
including milestone payments based on the level of sales, and the
license of the IP developed by the company is deemed to be the
predominant item to which the royalties relate, the Company
recognizes revenue at the later of (i) when the performance
obligation to which some or all of the royalty has been allocated
has been satisfied (or partially satisfied), or (ii) when the
related sales occur.
G. Accordingly, revenues from royalties are recognized based on
the actual sales of products as reported to the Company on a
quarterly basis.
Q. Income taxes
Taxes on income in the statement of comprehensive income
comprise current and deferred taxes. Deferred taxes are recognised
in the statement of comprehensive income, except to the extent that
the tax arises from items which are recognised directly in other
comprehensive income or in equity. In such cases, the tax effect is
also recognised in the relevant item.
Deferred tax assets are recognised to the extent that it is
probable that the underlying tax loss or deductible temporary
difference will be utilised against future taxable income. This is
assessed based on the Company's forecast of future operating
results, adjusted for significant non-taxable income and expenses
and specific limits on the use of any unused tax loss or credit.
(See also Note 25).
Deferred tax assets are presented in the statement of financial
position as non-current assets.
R. Operating cycle
The normal operating cycle of the Company is a twelve-month
period ending in December of each year.
S. Impairment testing of other intangible assets and property and equipment
For impairment assessment purposes, assets are grouped at the
lowest levels for which there are largely independent cash inflows
(cash-generating units). As a result, some assets are tested
individually for impairment and some are tested at cash-generating
unit level.
An impairment loss is recognised for the amount by which the
asset's (or cash-generating unit's) carrying amount exceeds its
recoverable amount, which is the higher of fair value less costs of
disposal and value-in-use. To determine the value-in-use,
management estimates expected future cash flows from each asset or
cash-generating unit and determines a suitable discount rate in
order to calculate the present value of those cash flows. The data
used for impairment testing procedures are directly linked to the
Company's latest approved budget, adjusted as necessary to exclude
the effects of future reorganisations and asset enhancements.
Discount factors are determined individually for each
cash-generating unit and reflect current market assessments of the
time value of money and asset-specific risk factors.
T. Ordinary shares
Ordinary shares issued by the Company which do not meet the
definition of financial liability or financial asset, were
recognised as part of equity on the basis of the consideration
received in respect thereof, net of costs attributed directly to
the issue.
U. Equity and reserves
Share capital represents the nominal par value of shares that
have been issued.
Share premium includes any premiums received on issue of share
capital. Any transaction costs associated with the issuing of
shares are deducted from share premium, net of any related income
tax benefits.
V. Provisions, contingent assets and contingent liabilities
Provisions for legal disputes, onerous contracts or other claims
are recognised when the Company has a present legal or constructive
obligation as a result of a past event, it is probable that an
outflow of economic resources will be required and amounts can be
estimated reliably. Timing or amount of the outflow may still be
uncertain.
No liability is recognised if an outflow of economic resources
as a result of present obligations is not probable. Such situations
are disclosed as contingent liabilities unless the outflow of
resources is remote.
Provisions are measured at the estimated expenditure required to
settle the present obligation, based on the most reliable evidence
available at the reporting date, including the risks and
uncertainties associated with the present obligation. Where there
are a number of similar obligations, the likelihood that an outflow
will be required in settlement is determined by considering the
class of obligations as a whole. Provisions are discounted to their
present values, where the time value of money is material.
Any reimbursement that the Company is virtually certain to
collect from a third party with respect to the obligation is
recognised as a separate asset. However, this asset may not exceed
the amount of the related provision.
W. New and revised standards that are effective for annual
periods beginning on or after 1 January 2018
IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 'Revenue from Contracts with Customers' and the related
'Clarifications to IFRS 15 Revenue from Contracts with Customers'
(hereinafter referred to as 'IFRS 15') replace IAS 18 'Revenue',
IAS 11 'Construction Contracts', and several revenue-related
Interpretations. The new Standard has been applied retrospectively
without restatement, with the cumulative effect of initial
application recognised as an adjustment to the opening balance of
retained earnings at 1 January 2018. In accordance with the
transition guidance, IFRS 15 has only been applied to contracts
that are incomplete as at 1 January 2018.
The Standards presents a new five-step model for the recognition
of revenue from contracts with customers:
1. Identifying the contract with the customer.
2. Identifying separate performance obligations in the contract.
3. Determining the transaction price.
4. Allocating the transaction price to separate performance obligations.
5. Recognizing revenue when the performance obligations are satisfied.
The adoption of IFRS 15 did not have material impact on the
Company's revenue streams and selling contracts, the financial
reporting and disclosers and on the business processes, control and
systems. Thus, the adoption of IFRS 15 did not have material impact
on the financial statement.
Presented in Note 2.P. are the principals of the new revenue
recognition accounting policy, commencing on 1 January 2018, as
applied following the adoption of IFRS 15.
IFRS 9 'Financial Instruments'
The new standard for financial instruments (IFRS 9) replaced IAS
39 'financial Instrument: Recognition and Measurement'. It makes
major changes to the previous guidance on the classification and
measurement of financial assets and introduces an 'expected credit
loss' model for the impairment of financial assets.
IFRS 9 also contains new requirements on the application of
hedge accounting. The new
requirements look to align hedge accounting more closely with
entities' risk management activities by increasing the eligibility
of both hedged items and hedging instruments and introducing a more
principles-based approach to assessing hedge effectiveness.
The following areas identified as the most impact by the
application of IFRS9:
-- The classification and measurement of the Company's financial
assets. Management holds financial assets to hold and collect the
associated cash flows. However, management has determined that the
majority of financial assets held by Company as the adoption date
(including the Company's major investment in short term deposit)
are eligible to be accounted for at amortised cost in accordance
with the previous IFRS. Accordingly, the new guidance did not
affect the classification and measurement of these financial
assets.
-- The impairment of financial assets applying the expected
credit loss model. This applies to the Company's trade receivables
and other short term investments in debt-type assets that were
previously classified as 'Loan and Receivable'. For contract assets
that will arise from IFRS 15 and trade receivables, the Company
determined to apply a simplified model of recognizing lifetime
expected credit losses as these items do not have a significant
financing component.
The new standard also introduces expanded requirements and
changes in presentation. These are expected to change the nature
and extent of the Company's disclosures about financial instruments
in its annual financial instruments.
The Company applied IFRS 9, retrospectively from 1 January 2018,
with the practical expedients permitted under the standard.
Comparative for 2017 were not be restated.
The adoption did not have a material impact on the Company's
financial statements.
X. Standards, amendments and interpretations to existing
standards that are not yet effective and have not been adopted
early by the Company
IFRS 16 'Leases'
IFRS 16 will replace IAS 17 'Leases' and three related
interpretations. It completes the IASB's long running project to
overhaul lease accounting. in accordance with IFRS 16, Leases will
be recorded in the statement of financial position in the form of a
right-of-use asset and a lease liability to pay rental. Two
important reliefs provided by IFRS 16, are for assets of low value
and short-term leases of less than 12 months. Each lease payment is
allocated between the liability and finance expenses, whereas the
finance expenses is charged to profit or loss over the lease period
so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. The
right-of-use asset is depreciated over the shorter of the asset's
useful life and the lease term on a straight-ling basis.
The accounting for lessors will not significantly change.
In order to determine the impact of IFRS 16, the Company is
required to perform a fill review of all agreements in order to
assess whether any additional contracts will now become a lease
under IFRS 16's new definition. The Company assesses whether a
contract is, or contains, a lease based on whether the contract
conveys the right to control the use of an identified asset for a
period of time in exchange for consideration.
IFRS 16 is effective from periods beginning on or after 1
January 2019. Early adoption is permitted;
however, the Company has not elected to adopt it earlier than is
required.
Management is in the process of assessing the full impact of the
Standard. Currently, the Company:
-- has decided to make use of the practical expedient, allowing
it to not perform a full review of existing leases and to apply
IFRS 16 only to new or modified contracts;
-- believes that the most significant impact will be that the
Company will need to recognise a right of use asset and a lease
liability for the office and production buildings currently treated
as operating leases. At 31 December 2018 the future minimum lease
payments amounted to $479,488. This will mean that the nature of
the expense of the above cost will change from being an operating
lease expense to depreciation and interest expense;
The Company is planning to adopt IFRS 16 on 1 January 2019 using
the Standard's modified
retrospective approach. Under this approach the cumulative
effect of initially applying IFRS 16 is recognised as an adjustment
to equity at the date of initial application. Comparative
information is not restated.
Choosing this transitional approach, results in further policy
decisions that the Company needs to make as there are several other
transitional reliefs that can be applied. These relate to those
leases previously held as operating leases and can be applied on a
lease-by-lease basis. The Company is currently assessing the impact
of applying these other transitional reliefs.
The Company estimates the effects of the IFRS 16 application,
based on the present value calculation, as being an increase of
$444,788 for the right-of-use assets and corresponding lease
liabilities, over the entire period of all the leases including any
options to extend the leases.
The Company estimates that applying the standard is expected to
cause a decrease in lease expenses of approximately $125 thousand
and an increase in depreciation expenses and financing expenses of
a similar amount.
NOTE 3 - SIGNIFICANT MANAGEMENT JUDGEMENT IN APPLYING ACCOUNTING
POLICIES AND ESTIMATION UNCERTAINTY
When preparing the financial statements, management makes a
number of judgements, estimates and assumptions about the
recognition and measurement of assets, liabilities, income and
expenses.
Significant management judgement
-- Capitalisation of internally developed intangible assets
Distinguishing the research and development phases of a new or
substantially improved customised research and development project
and determining whether the recognition requirements for the
capitalisation of development costs are met, requires judgement.
After capitalisation, management monitors whether the recognition
requirements continue to be met and whether there are any
indicators that capitalised costs may be impaired (see Note 9).
-- Recognition of deferred tax assets
The extent to which deferred tax assets can be recognised is
based on an assessment of the probability that future taxable
income will be available against which the deductible temporary
differences and tax loss carry-forwards can be utilised. In
addition, significant judgement is required in assessing the impact
of any legal or economic limits or uncertainties in various tax
jurisdictions (see Notes 25.B. and 25.C.).
Estimation uncertainty
-- Impairment of non-financial assets
In assessing impairment of non-financial assets (primarily,
internally developed intangible assets - see Note 9), management
estimates the recoverable amount of each asset or cash generating
units based on expected future cash flows and uses an interest rate
to discount them. Estimation uncertainty relates to assumptions
about future operating results and the determination of a suitable
discount rate.
-- Useful lives of depreciable assets
Management reviews its estimate of the useful lives of
depreciable assets (including capitalized development expenses
recognised as an intangible asset) at each reporting date, based on
the expected utility of the assets. Uncertainties in these
estimates relate to technological obsolescence that may change the
utility of certain intangible assets (see Notes 8 and 9).
-- Fair value measurement of employees' options and warrants valuation
Management uses valuation techniques to determine the fair value
of financial instruments (such as employees' options and warrants)
and non-financial assets. This involves developing estimates and
assumptions consistent with how market participants would price the
instrument. Management bases its assumptions on observable data as
far as possible but this is not always available. In that case
management uses the best information available. Estimated fair
values may vary from the actual prices that would be achieved in an
arm's length transaction at the reporting date (see Notes 12 and
17).
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
US dollars
----------------------------
31 December
----------------------------
2018 2017
----------------- ---------
In Sterling 23,717 403,307
In U.S. Dollar 212,209 3,301,745
In Euro 12,260 16,626
In New Israeli Shekel 225,629 159,428
473,815 3,881,106
================= =========
NOTE 5 - OTHER SHORT-TERM FINANCIAL ASSETS
As at 31 December 2018, this consisted of one short term 12
month deposit of $8,000,000 earning an annual interest rate of
2.48%.
As at 31 December 2017, this consisted of two short term 12
month deposits of $9,000,000 and of $2,000,000 earning annual
interest rates of 1.75% and 1.04% respectively.
NOTE 6 - TRADE RECEIVABLES
Trade and other receivables consist of the following:
US dollars
----------------------------
31 December
----------------------------
2018 2017
----------------- ---------
Trade receivables 633,366 372,536
Unbilled revenue 83,719 180,114
Less: provision for expected credit losses (75,000) (38,685)
Total receivables 642,085 513,965
================= =========
All amounts are short-term. The net carrying value of these
receivables is considered a reasonable approximation of fair value.
All of the Company's trade and other receivables have been reviewed
for indicators of impairment.
NOTE 7 - OTHER CURRENT ASSETS
Other current assets consist of the following:
US dollars
-------------------------------------
31 December
-------------------------------------
2018 2017
----------------- ------------------
Prepaid Expenses 206,513 108,733
Deposits to suppliers 19,512 1,731
Government institutions 83,329 28,363
Grant receivable 99,896 299,438
Total other current assets 409,250 438,265
================= ==================
NOTE 8 - PROPERTY AND EQUIPMENT
Details of the Company's property and equipment are as
follows:
US dollars
----------------------------------------------------------------------------------------------
Testing Furniture Leasehold
equipment Computers and equipment improve-ments Total
----------------- ---------------- ------------------ ------------------- ----------------
Gross carrying
amount
Balance 1 January
2018 33,445 213,244 47,649 13,448 307,786
Additions 35,378 442,712 26,635 46,654 551,135
----------------- ---------------- ------------------ ------------------- ----------------
Balance 31
December
2018 68,823 655,712 74,284 60,102 858,921
Depreciation
Balance 1 January
2018 (22,881) (108,052) (20,853) (160) (151,946)
Depreciation (8,063) (68,928) (5,669) (18,258) (100,918)
----------------- ---------------- ------------------ ------------------- ----------------
Balance 31
December
2018 (30,944) (176,980) (26,522) (18,418) (252,864)
Carrying amount
31 December 2018 37,879 478,732 47,762 41,684 606,057
================= ================ ================== =================== ================
US dollars
-----------------------------------------------------------------------------------------------------------------
Testing Furniture Leasehold
equipment Computers and equipment Vehicles improve-ments Total
---------------- --------------- ----------------- --------------------- ------------------- ---------------
Gross
carrying
amount
Balance 1
January
2017 33,445 104,794 43,124 47,743 - 229,106
Additions - 108,450 4,525 - 13,448 126,423
Disposals - - - (47,743) - (47,743)
---------------- --------------- ----------------- --------------------- ------------------- ---------------
Balance
31
December
2017 33,445 213,244 47,649 - 13,448 307,786
Depreciation
Balance 1
January
2017 (17,678) (97,191) (16,924) (27,374) - (159,167)
Depreciation (5,203) (10,861) (3,929) (18) (160) (20,171)
Disposals - - - 27,392 - 27,392
---------------- --------------- ----------------- --------------------- ------------------- ---------------
Balance
31
December
2017 (22,881) (108,052) (20,853) - (160) (151,946)
Carrying
amount
31 December
2017 10,564 105,192 26,796 - 13,288 155,840
================ =============== ================= ===================== =================== ===============
NOTE 9 - INTANGIBLE ASSET
Details of the Company's intangible asset is as follows:
US dollars
----------------
Total
----------------
Gross carrying amount
Balance 1 January 2018 3,325,568
Additions* 4,021,986
Balance 31 December 2018 7,347,554
Amortisation
Balance 1 January 2018 155,015
Amortisation 322,724
----------------
Balance 31 December 2018 477,739
Carrying amount 31 December 2018 6,869,815
================
(*() The additions include $186,403 of share based
compensation.
US dollars
------------
Total
------------
Gross carrying amount
Balance 1 January 2017 1,344,849
Additions (*() 2,076,539
Deduction of government grant (95,820)
------------
Balance 31 December 2017 3,325,568
Amortisation
Balance 1 January 2017 38,951
Amortisation 116,064
------------
Balance 31 December 2017 155,015
Carrying amount 31 December
2017 3,170,553
============
(*() The additions include $117,542 of share based
compensation.
As described in Note 2.I. applicable development costs are
capitalised and are amortised over the period of expected benefit
from such costs, which is estimated at ten years.
NOTE 10 - SHORT- TERM BORROWINGS
Borrowings include the following financial liabilities:
Annual
% Interest US dollars
-------------
rate(1) 31 December
-------------
2018 2018 2017
----------- ------- ----
Bank borrowings (2) 4.2% 133,497 -
Total short- term borrowings 133,497 -
======= ====
(1) The loans bore variable interest of 4.2%. The above interest
rate is the weighted average rate as of 31 December 2018. The loan
was fully repaid in January 2019.
(2) The Company has an unused credit facility of 500,000 NIS (approx. $133,000).
NOTE 11 - OTHER CURRENT LIABILITIES
Other short-term liabilities consist of:
US dollars
--------------------------
31 December
--------------------------
2018 2017
----------------- -------
Salaries, wages and related costs 295,790 195,269
Provision for vacation 131,148 111,630
Current portion of IIA royalty liability
(see Note 13) 10,757 20,120
Accrued expenses and other 235,965 203,610
Deferred revenue (*) 40,000 -
Related parties (see Note 29.A.) 371,068 401,142
Total other short-term liabilities 1,084,728 931,771
================= =======
((*) ) - These deferred revenues will be recognized over 12
months starting from August 2019.
NOTE 12 - SHAREHOLDERS LOANS
Short-term liabilities to shareholders consist of:
US dollars
-------------
31 December
-------------
2018 2017
----- ------
Warrants liability, at fair value - 15,770
The CEO lent funds to the Company to finance the Company's
working capital. The loan bore 6% interest until January 2017 and
thereafter increased to 8%. The loan was fully repaid in 2017.
In November 2016, some of the shareholders advanced to the
Company short-term loans totaling $270,000 to finance the costs of
admission to the AIM exchange ("Admission"). Upon the Admission,
the Company repaid $297,000 to these shareholders in full repayment
of their short-term loans. In addition, upon the Admission on 29
June 2017, each of these above-mentioned shareholders were granted
twelve month warrants to purchase $270,000 of ordinary shares with
an exercise price equaling the price that shares were issued to the
public in connection with the admission, being GBP 1.40. The
warrants represented an embedded derivative (equity kicker) since
the economic characteristics and risks of such an equity-based
return were not closely related to the economic characteristics of
the host shareholders loan. Accordingly, upon receipt of the loan,
the Company recognised the warrants as a derivative liability at
its fair value using the following assumptions: The probability of
the admission was determined by management as a likelihood of 90%,
volatility of 41.3%, expected term of one year, interest rate of
0.79% and accordingly was valued at $43,300. The remaining
consideration received by the Company was allocated to the
shareholder loan (the host) as of 31 December 2016. The initial
fair value of the warrants was valued at $43,300 and was shown as a
separate short-term derivative liability. The balance of these
shareholder loans accordingly was initially recorded at the
amortised value of $226,700 (net of the discount of $43,300). The
difference between the amount recorded and the amount that was
expected to be repaid to the shareholders was recorded in profit
and loss over the expected period of the loan. As at 31 December
2017, the warrants had less than 6 months until expiry and as the
share price was also lower than the exercise price of the warrants,
the warrant liability was valued at a lower value, being
approximately $15,800. Concurrent with the expiration of the
warrants in 2018, the warrant liability was terminated. The
decrease in 2017 and 2018 in the fair value of this warrant
liability was recorded in profit and loss as part of finance income
and expenses.
NOTE 13 - IIA ROYALTY LIABILITY
As described in Note 2.J., the Company received research and
development grants from the Israel Innovation Authority ("IIA") of
approximately $3,050,000 and undertook to pay royalties of
approximately 3.5% of revenues derived from research and
development projects that were financed by these grants up to 100%
of the amounts received. As at 31 December 2018, the Company has
repaid approximately $500,000 of these grants, in the form of
royalties. The maximum amount of royalties that would be payable,
if the Company had unlimited revenue attracting royalty
obligations, would be approximately $2,700,000 as at 31 December
2018.
NOTE 14 - LONG-TERM BORROWINGS
Long-term liabilities consist of:
Annual
% Interest US dollars
-------------
rate(1) 31 December
----------- -------------
2017 2018 2017
----------- ----- ------
Bank borrowings 4.60% - 7,522
Total long-term borrowings - 7,522
===== ======
(1) Variable interest based on the prime interest rate.
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
A. During the years 2005 through 2012, the Company received
grants from the IIA (Israel Innovation Authority) totaling
approximately $3 million, to support the Company's various research
and development programs. The Company is required to pay royalties
to the IIA at a rate of 3.5%, of the Company revenue up to an
amount equal to the grants received, plus interest from the date of
the grant. The total amount including interest is approximately
$2.7 million. Such contingent obligation has no expiration date.
See Note 13 for more details.
B. In January 2009, the Company signed a one year lease
agreement for the usage of 470 sq. m. as its primary offices, in
the Industrial area of Lod, Israel. The lease was renewed for short
periods and in November 2011, the lease was extended until March
2016 at which time it was renewed for an additional year at a
monthly commitment of approximately $6,800. In March 2017, the
lease was again renewed for another 12 months at the same monthly
commitment.
As of December 2017, the Company committed to a three year lease
agreement and moved its primary offices to another location in the
Industrial area of Lod, Israel. At the termination of the lease,
the Company has an option to renew it for a further two years. In
addition the Company signed two other one year lease agreements for
a total of 26 parking bays, with an option to extend them for
another year. The approximate Company commitments regarding these
leases (denominated in New Israeli Shekels) are:
NIS USD
2019 543,000 145,000
2020 552,000 147,000
2021 562,000 150,000
2022 515,000 137,000
C. Effective September 2016, the Company signed a marketing
consultancy agreement for the sale of its products in North
America. The monthly fee of $5,000 is in addition to a commission
payable to the consultant for revenues generated through the
consultant. The commissions start at 20% of revenues up until
annual revenues of $1 million and thereafter the commission rate
reduces to 6% and then once $4.3 million of annual revenues have
been reached the rate reduces to 2%. The consultant also received
200,000 share options vesting over 4 years and exercisable at $2.00
per option (see Note 17). The agreement was terminated during 2018
and 150,000 of the share options were cancelled as they had not yet
vested. The consultant was paid approx. $91,000 during 2018
consisting of the monthly fee and commissions. The Company has an
obligation to pay commissions to the consultant on the relevant
revenues earned until 30 June 2019.
NOTE 16 - EQUITY
A. Details regarding share capital and number of shares at 31
December 2018 and at 31 December 2017 are:
Share capital
US dollars
-------------
31 December
-------------
2018 2017
------ -----
Ordinary shares of NIS 0.001 par value 8,039 8,028
Total share capital 8,039 8,028
====== =====
Number of shares at 31 December 2018:
Issued and
Authorized paid-in
---------- -----------
Preferred shares of NIS 0.001 par value 9,719,300 -
Ordinary shares of NIS 0.001 par value 40,280,700 32,518,186
50,000,000 32,518,186
========== ===========
Number of shares at 31 December 2017:
Issued and
Authorized paid-in
---------- -----------
Preferred shares of NIS 0.001 par value 9,719,300 -
Ordinary shares of NIS 0.001 par value 40,280,700 32,556,686
50,000,000 32,556,686
========== ===========
In the first half of 2017, prior to the IPO, the Company
effected a 10:1 share split of all its authorized and issued,
ordinary and preferred shares. The par value of the Company's
shares reduced from NIS 0.01 to NIS 0.001. In addition, the number
of all options and warrants granted prior to the share split,
increased tenfold and the exercise price reduced by 90%. All share
amounts in these financial statements have been adjusted to reflect
this 10:1 share split.
B. Description of the rights attached to the Ordinary Shares
All ordinary shares have equal rights including voting rights,
rights to dividends and to distributions upon liquidation. They
confer their holder the rights to receive notices, attend and vote
at general meetings.
C. Other components of equity include the following:
- Share premium includes any premiums received on the issue of
share capital Including costs in respect of share-based payments to
consultants for the issuance of equity instruments. Any transaction
costs associated with the issuance of shares are deducted from the
share premium, net of any related income tax benefit.
- Capital reserve includes the value of equity-settled share and
option based payments provided to employees, consultants and third
parties.
D. Description of the rights attached to the Preferred Shares
During 2005, 2006 and 2012, the Company issued Series A
Preferred Shares of NIS 0.01 par value to strategic shareholders.
The issue price of the preferred shares is $3.29 per share. Prior
to conversion of the preferred shares into ordinary shares upon the
consummation of the IPO in June 2017, the rights of the preferred
shares were:
Dividend preference
Preferred shares carry a dividend preference up to $3.29 per
share. After this amount per preferred share has been distributed,
the dividend preference ceases and the preferred shares will
participate pro rata with the ordinary shares in receipt of any
additional dividends on an as-converted basis. The $3.29 per
preferred share distributed will be paid out 80% to the preferred
shareholders and 20% to the Company founders. The dividend
preference may be waived in whole or part by a majority of the
preferred shareholders together with the mutual consent of the two
founders.
Conversion into ordinary shares
the preferred shareholders had the right to convert their shares
at any time into fully paid ordinary shares on a 1 for 1 basis. The
preferred shares automatically converted into ordinary shares upon
the consummation of the IPO. If prior to the IPO, the Company
issued shares at a price below $3.29, then the preferred shares
could have been convertible at a greater than a 1 for 1 basis
according to the anti-dilutive formula described in the Articles of
Association.
Voting rights
The preferred shares may generally vote together with the
ordinary shares of the Company (and not as a separate class) in all
shareholders meetings, with each preferred share having the number
of votes as if then converted into ordinary shares ("on an
as-converted basis").
Liquidation rights
Preferred shares carried a liquidation preference up to $3.29
per share upon actual liquidation or upon an M&A transaction.
After this amount per preferred share has been paid, the
liquidation preference was cancelled and the preferred shares would
participate in the balance of the liquidation distributions, pro
rata with the ordinary shares on an as-converted basis. The $3.29
per preferred share distributed would be paid out 80% to the
preferred shareholders and 20% to the Company founders. This
liquidation preference may be waived in whole or part by a majority
of the preferred shareholders together with the mutual consent of
the two founders. All such deemed liquid
E. IPO - Admission to the AIM exchange in London
On 29 June 2017 the Company completed an IPO together with being
admitted to trading on the AIM Stock Exchange and issued 10,714,286
ordinary shares at a price of GBP 1.40 per share, for a total
consideration of approximately $19,444,000 (GBP 15,000,000) before
underwriting and issuance expenses. Total net proceeds from the
issuance amounted to approximately $17,800,000. Concurrent with the
IPO, all the preferred shares were mandatorily converted into
ordinary shares on a 1:1 basis, as mentioned in Note 16.D. The
Company trades on the AIM Stock Exchange under the symbol
"ENET".
Immediately after the IPO the Company issued certain prior
shareholders, one year warrants to purchase up to 148,778 shares of
the Company at an exercise price of GBP 1.40 (see Note 12). These
warrants expired in June 2018. In June 2017, the Company also
issued five-year options to the IPO broker to purchase up to
162,591 shares of the Company at an exercise price of GBP 1.40 (see
Note 17.D.)
NOTE 17 - SHARE-BASED COMPENSATION
A. In 2013 the Company's Board of Directors approved a share
option plan for the grant of options without consideration, to
employees, consultants, service providers, officers and directors
of the Company. The options are exercisable into the Company's
ordinary shares of NIS 0.01 par value. The exercise price and
vesting period (generally four years) for each grantee of options,
is determined by the Company's Board of Directors and specified in
such grantee's option agreement. In accordance with Section 102 of
the Israel tax code, the Israeli resident grantees' options, are
held by a trustee. The options are not cashless (they need to be
paid for) and expire upon the expiration date determined by the
Board of Directors (generally ten years from the date of the
grant). The expiration date may be brought forward, upon the
termination of grantee's employment or services to the Company.
Options do not vest after the termination of employment or services
to the Company. Options are not entitled to dividends.
The following table summarises the salient details and values
regarding the options granted (all amounts are in US Dollars unless
otherwise indicated):
Option grant dates
----------------------------------------------------------
5 Mar 15 Mar 9 Jul 10 Jul
2017 2017 2017 2017
Number of options granted 109,000 40,000 210,000 30,000
Recipients of the options employee employee employee employee
Approximate fair value at
grant date:
Total benefit 102,369 24,690 335,982 42,637
Per option benefit 0.94 0.62 1.60 1.42
Assumptions used in computing
value:
Risk-free interest rate 2.50% 2.50% 2.39% 2.38%
Dividend yield 0.00% 0.00% 0.00% 0.00%
Expected volatility 46% 46% 40% 40%
Expected term (in years) 10 10 10 10
Expensed amount recorded
for year ended:
31 December 2017 44,105 - - -
31 December 2018 32,130 - - -
Capitalised amount recorded
for year ended:
31 December 2017 - 10,285 84,360 10,645
31 December 2018 - 7,919 134,449 17,091
The following table summarises the salient details and values
regarding the options granted (Cont.)
Option grant dates
6 Sep 24 Sep 17 Jul 17 Jul
2017 2017 2018 2018
Number of options granted 30,000 30,000 160,000 280,000
Recipients of the options employee employee employees consultants
Approximate fair value at
grant date:
Total benefit 40,957 38,389 16,632 29,106
Per option benefit 1.37 1.28
Assumptions used in computing
value:
Risk-free interest rate 2.07% 2.26% 2.85% 2.85%
Dividend yield 0.00% 0.00% 0.00% 0.00%
Expected volatility 40% 40% 40% 40%
Expected term (in years) 10 10 10 10
Expensed amount recorded
for year ended:
31 December 2017 - - - - -
31 December 2018 - - 1,515 11,075
Capitalised amount recorded
for year ended:
31 December 2017 6,831 5,422 - -
31 December 2018 18,045 4,175 4,463 -
The value of these options at 31 December 2018 which have yet to
be recorded as expenses, amount to $212,163.
B. The following table presents a summary of the status of the
option grants by the Company as of 31 December, 2018 and 2017:
Weighted
average
exercise
Number price (US$)
---------- -------------------
Year ended 31 December 2018
Balance outstanding at beginning of year 3,155,920 0.30
Granted 460,000 1.32
Exercised (38,500) 0.10
Forfeited (431,500) 0.16
Balance outstanding at end of the year 3,145,920 0.42
========== ===================
Balance exercisable at the end of the
year 2,349,670
==========
Weighted
average
exercise
Number price (US$)
--------------------- -----------
Year ended 31 December 2017
Balance outstanding at beginning of year 2,626,920 0.11
Granted 529,000 1.27
Exercised - -
Forfeited - -
Balance outstanding at end of the year 3,155,920 0.30
===================== ===========
Balance exercisable at the end of the
year 2,375,420
=====================
C. The following table summarises information about options outstanding at 31 December 2018:
Weighted Weighted
Outstanding average Weighted Exercisable average
at 31 remaining average at 31 remaining
Exercise December contractual exercise December contractual
price 2018 life (years) price (US$) 2018 life (years)
-------- --------------- ------------ ----------- ------------------ ------------
$0.10 2,236,920 4.9 0.10 2,202,420 4.8
$0.20 129,000 8.2 0.20 37,250 8.2
GBP1.05 40,000 8.2 1.28 10,000 8.2
GBP1.05 210,000 8.5 1.36 52,500 8.5
GBP1.43 30,000 8.5 1.84 7,500 8.5
GBP1.40 30,000 8.7 1.83 7,500 8.7
GBP1.40 30,000 8.7 1.89 7,500 8.7
GBP1.00 440,000 9.6 1.32 25,000 9.6
3,145,920 2,349,670
=============== ==================
The following table summarises information about options
outstanding at 31 December 2017:
Weighted Weighted
Outstanding average Weighted Exercisable average
at 31 remaining average at 31 remaining
Exercise December contractual exercise December contractual
price 2017 life (years) price (US$) 2017 life (years)
-------- --------------- ------------ ----------- --------------------- ---------------------
$0.10 2,406,920 5.7 0.10 2,320,420 5.6
$0.20 329,000 9.2 0.20 55,000 9.2
GBP1.05 40,000 9.2 1.28 - -
GBP1.05 210,000 9.5 1.36 - -
GBP1.43 30,000 9.5 1.84 - -
GBP1.41 80,000 9.6 1.84 - -
GBP1.40 30,000 9.7 1.83 - -
GBP1.40 30,000 9.7 1.89 - -
3,155,920 2,375,420
=============== =====================
The fair value of options granted to employees was determined at
of the date of each grant. The fair value of the options granted
are expensed in the profit and loss, except for those allocated to
capitalised research and development costs.
D. Options issued to the IPO broker
Upon the IPO consummation (see Note 16.E.) the Company issued
five-year options to the IPO broker to purchase up to 162,591
shares of the Company at an exercise price of GBP 1.40. These
options were valued at approximately $121,000 with the Black
Scholes option model, using the assumptions of a risk-free rate of
1.82% and volatility of 46%. The options may only be exercised
after 28 June 2018. As described in Note 2.U., costs incurred in
raising equity finance is applied as a reduction from those equity
sale proceeds and is recorded in Other Components of Equity.
NOTE 18 - REVENUE
US dollars
---------------------------
Year ended 31 December
---------------------------
2018 2017
---------------- ---------
Sales 805,647 1,236,335
Royalties 318,060 282,326
Total revenue 1,123,707 1,518,661
================ =========
NOTE 19 - RESEARCH AND DEVELOPMENT EXPENSES
US dollars
--------------------------
Year ended 31 December
--------------------------
2018 2017
----------------- -------
Employee remuneration, related costs and
subcontractors 122,004 44,126
Maintenance of software and computers 13,145 24,983
Insurance and other expenses 15,616 30,605
Amortisation 322,724 116,064
----------------- -------
Total research and development expenses 473,489 215,778
================= =======
NOTE 20 - GENERAL AND ADMINISTRATIVE EXPENSES
US dollars
---------------------------
Year ended 31 December
---------------------------
2018 2017
------------------ -------
Employee remuneration and related costs (*) 339,566 113,440
Professional fees 505,540 251,848
Rentals and maintenance 342,185 166,087
Depreciation 100,918 20,153
Travel expenses 2,966 3,117
Impairment losses on receivables 132,799 37,258
------------------ -------
Total general and administrative expenses 1,423,974 591,903
================== =======
* Including share based compensation of 33,540 44,314
================== =======
NOTE 21 - MARKETING EXPENSES
US dollars
-------------------------
Year ended 31 December
-------------------------
2018 2017
---------------- -------
Employee remuneration and related costs (*) 545,129 158,429
Marketing expenses 1,139,669 320,252
Travel expenses 120,088 77,907
---------------- -------
Total marketing expenses 1,804,886 556,588
================ =======
* Including share based compensation of (28,509) 24,864
================ =======
NOTE 22 - OTHER INCOME
As described in Note 2.J, when the grant is related to an
expense item, it is recognised as other income.
NOTE 23 - FINANCING COSTS
US dollars
---------------------------
Year ended 31 December
---------------------------
2018 2017
----------------- --------
Bank fees and interest 15,450 54,264
Interest and revaluation of embedded derivative
on shareholder loans - 31,463
Total financing costs 15,450 85,727
================= ========
NOTE 24 - FINANCING INCOME
US dollars
--------------------------------
Year ended 31 December
--------------------------------
2018 2017
--------------- ---------------
Interest and revaluation of embedded derivative
on shareholder loans 20,417 -
Interest received 197,949 69,472
Exchange rate differences 35,626 23,507
--------------- ---------------
Total financing income 253,992 92,979
=============== ===============
NOTE 25 - TAX BENEFIT
A. The Company is assessed for income tax in Israel - its
country of incorporation. The Israeli corporate tax rates for the
relevant years are:
%
2015 26.5
2016 25.0
2017 24.0
2018 23.0
2019 23.0
B. As of 31 December 2018, the Company has carry-forward losses
for Israeli income tax purposes of approximately $5 million.
According to the revised management's estimation of the Company's
future taxable profits, management continues to consider it
possible that future taxable profits would be available against the
tax losses.
C. Deferred taxes
US dollars
------------------------------------------
Year ended 31 December
------------------------------------------
Utilisation
Origination of
and reversal previously Total
recognised tax
of temporary loss Deferred tax
differences carry-forwards expense
------------ -------------- ------------
Balance at 1 January
2017 186,772 613,228 800,000
Balance at 31 December
2017 186,772 613,228 800,000
Balance at 31 December
2018 186,772 613,228 800,000
============ ============== ============
D. Theoretical tax reconciliation
For the years ended 31 December 2018 and 2017, the following
table reconciles the statutory income tax rate to the effective
income tax rate:
US dollars
------------------------
Year ended 31 December
------------------------
2018 2017
------------ ----------
Tax expense (benefit) at statutory rate 23% 24%
Tax expense (benefit) at statutory rate (585,853) (38,273)
Increase in taxes from permanent differences
in share-based compensation 44,030 44,814
Loss carryforwards - not affecting the
deferred tax asset 541,824 (83,087)
Income tax expense (benefit) 0 0
============ ==========
NOTE 26 - BASIC AND DILUTED (LOSS) / EARNINGS PER ORDINARY SHARE
A. The earnings and the weighted average number of shares used
in computing basic (loss) / earnings per ordinary share, are as
follows:
US dollars
---------------------------------------
Year ended 31 December
---------------------------------------
2018 2017
--------------------- ----------------
Profit (loss) for the year (2,547,189) 159,471
Less: Profit attributed to preferred shares - 10,702
Profit (loss) for the year attributable
to ordinary shareholders (2,547,189) 148,769
===================== ================
Number of shares
--------------------------
Year ended 31 December
--------------------------
2018 2017
-------------- ----------
Weighted average number of ordinary shares
used in the computation of basic (loss)
/ earnings per ordinary share 32,526,149 25,397,245
============== ==========
B. The earnings and the weighted average number of shares used
in computing diluted (loss) / earnings per ordinary share, are as
follows:
US dollars
---------------------------------------
Year ended 31 December
---------------------------------------
2018 2017
--------------------- ----------------
Profit (loss) for the year (2,547,189) 159,471
Less: Profit attributed to preferred shares - 10,702
Profit (loss) for the year attributable
to ordinary shareholders (2,547,189) 148,769
===================== ================
Number of shares
---------------------------
Year ended 31 December
---------------------------
2018 2017
---------- ---------------
Weighted average number of ordinary shares 32,526,149 25,397,245
Weighted average number of free shares
from share options 1,734,348 2,581,852
Weighted average number of ordinary shares
used in the computation of diluted (loss)
/ earnings per ordinary share 34,260,497 27,979,097
========== ===============
NOTE 27 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
A. Financial risk management risk
The activity of the Company exposes it to a variety of financial
risks and market risks. The Company re-assesses the financial risks
in each period and makes appropriate decisions regarding such
risks. The risks are managed by Company Management which
identifies, assesses and hedges against the risks.
-- Exposure to changes in exchange rates
The Company is exposed to risks relating to changes in the
exchange rate of the NIS and other currencies versus the U.S.
dollar (which constitutes the Company's functional currency). Most
of the revenues of the Company are expected to be denominated in US
dollars, while the substantial majority of its expenses are in
shekels (mainly payroll expenses). Therefore a change in the
exchange rates may have an impact on the results of operations of
the Company.
Currency basis of monetary balances
US dollars
-----------------------------------------------
31 December 2018
-----------------------------------------------
NIS GBP Euro US $ Total
--------- ------ ------ --------- ---------
Assets
Cash and cash equivalents 225,629 23,717 12,260 212,209 473,815
Other short-term financial
assets - - - 8,083,709 8,083,709
Trade receivables 43,085 - - 599,000 642,085
Other current assets 267,405 39,002 - 102,843 409,250
536,119 62,719 12,260 8,997,761 9,608,859
Liabilities
Short term borrowings 133,497 - - - 133,497
Trade payables 198,416 3,517 - 86,375 288,308
Other liabilities 823,971 - - 260,757 1,084,728
1,155,884 3,517 - 347,132 1,506,533
(619,765) 59,202 12,260 8,650,629 8,102,326
========= ====== ====== ========= =========
US dollars
--------------------------------------------------------------------
31 December 2017
--------------------------------------------------------------------
NIS GBP Euro US $ Total
----------- ----------------- ------------ ---------- ----------
Assets
Cash and cash equivalents 159,428 403,307 16,626 3,301,745 3,881,106
Other short-term financial
assets - - - 11,069,472 11,069,472
Trade receivables 85,114 - 32,606 396,245 513,965
Other current assets 1,731 - 299,438 - 301,169
246,273 403,307 348,670 14,767,462 15,765,712
Liabilities
Trade payables 212,789 - - 12,298 225,087
Other liabilities 911,651 - - 20,120 931,771
Warrants liability,
at fair value - - - 15,770 15,770
Long term borrowings 7,522 - - - 7,522
1,131,962 - - 48,188 1,180,150
(885,689) 403,307 348,670 14,719,274 14,585,562
=========== ================= ============ ========== ==========
-- Sensitivity to changes in exchange rates of the NIS and other currencies to the US dollar
A change in the exchange rate of the NIS and other currencies to
the USD as of the dates of the relevant statement of financial
position, at the rates set out below, which according to Management
are reasonably possible, would increase (decrease) the profit and
loss by the amounts set out below. The analysis below was performed
under the assumption that the rest of the variables remained
unchanged.
US dollars
-----------------------------------------------------------------------------
Sensitivity to changes in exchange rates
of the non US dollar currencies to the
US dollar
-----------------------------------------------------------------------------
Effect on profit Effect on profit
(loss)/equity (before (loss)/equity (before
tax) from the changes tax) from the changes
caused by the market caused by the market
factor Book value factor
--------------------------------- -------------- --------------------------
Increase at the Decrease at the
rate of 31 December rate of
--------------------------------- -------------- --------------------------
10% 5% 2018 5% 10%
--------------- ---------------- -------------- --------------- ---------
Cash and cash equivalents (26,161) (13,080) 261,606 13,080 26,161
Trade receivables (4,309) (2,154) 43,085 2,154 4,309
Other current assets (30,641) (15,320) 306,407 15,320 30,641
Short Term Borrowings 13,350 6,675 (133,497) (6,675) (13,350)
Trade payables 20,193 10,097 (201,933) (10,097) (20,193)
Other liabilities 82,397 41,199 (823,971) (41,199) (82,397)
Total 54,829 27,417 (548,303) (27,417) (54,829)
=============== ================ ============== =============== =========
US dollars
--------------------------------------------------------------------------------
Sensitivity to changes in exchange rates
of the non US dollar currencies to the
US dollar
--------------------------------------------------------------------------------
Effect on profit Effect on profit
(loss)/equity (before (loss)/equity (before
tax) from the changes tax) from the changes
caused by the market caused by the market
factor Book value factor
------------------------------ --------------- -------------------------------
Increase at the Decrease at the
rate of 31 December rate of
------------------------------ --------------- -------------------------------
10% 5% 2017 5% 10%
-------------- -------------- --------------- -------------- ---------------
Cash and cash equivalents (57,936) (28,968) 579,361 28,968 57,936
Trade receivables (11,772) (5,886) 117,720 5,886 11,772
Other current assets (30,117) (15,058) 301,169 15,058 30,117
Trade payables 21,279 10,639 (212,789) (10,639) (21,279)
Other liabilities 91,165 45,583 (911,651) (45,583) (91,165)
Long term borrowings 752 376 (7,522) (376) (752)
Total 13,371 6,686 (133,712) (6,686) (13,371)
============== ============== =============== ============== ===============
-- Credit risk
All of the cash and cash equivalents and other short-term
financial assets as of 31 December, 2018 and 2017 were deposited
with one of the major banks in Israel.
Trade receivables as of 31 December, 2018 and 2017 were from
customers in Israel, the U.S., Asia and countries of the European
Union, including a few major customers. The Company performs
ongoing reviews of the credit granted to customers and the
possibility of loss therefrom and includes an adequate allowance
for impairment losses.
-- Liquidity risk
The Company financed its activities from its operations,
Shareholders' loans and short and long-term borrowings from the
bank. Subsequent to the IPO, the Company has large cash resources
to finance and expand its operations. All the non-current
liabilities at 31 December 2017 were repaid in 2018. The short-term
borrowings at 31 December 2018 were repaid in 2019 and the trade
payables and other current liabilities are expected to be paid
within 1 year.
B. Fair value of financial instruments
General
The financial instruments of the Company include mainly trade
receivables and debit balances, credit from banking institutions
and others, trade payables and credit balances, IIA liability,
warrant liability at fair value and balances from transactions with
shareholders.
The principal methods and assumptions used in calculating the
estimated fair value of the financial instruments are as follows
(fair value for disclosure purposes):
Financial instruments included in current asset items
These instruments (trade receivables and debit balances) are of
a current nature and, therefore, the balances as of 31 December,
2018 and 2017, approximate their fair value.
Financial instruments included in current liability items
These instruments (credit from banking institutions and others,
trade payables and credit balances, suppliers and service providers
and balances from transactions with shareholders) - in view of the
current nature of such instruments, the balances as of 31 December,
2018 and 2017 approximate their fair value.
C. Capital management
The objectives of the Company's policy are to maintain its
ability to continue operating as a going concern with a goal of
providing the shareholders with a return on their investment and to
maintain a beneficial equity structure with a goal of reducing the
costs of capital. The Company may take different steps toward the
goal of preserving or adapting its equity structure, including a
return of equity to the shareholders and/or the issuance of new
shares for purposes of paying debts and for purposes of continuing
the research and development activity conducted by the Company. For
the purpose of the Company's capital management, capital includes
the issued capital, preference shares, share premium and all other
equity reserves attributable to the equity holders of the
Company.
D. Trade Receivables
IFRS 9 provides a simplified model of recognising lifetime
expected credit losses for all trade receivables as these items do
not have a significant financing component.
Management have assessed the receivables on a case by case
basis. Management have concluded based on past experience that
there is any risk in these receivables being collected. Management
have indicated a concern of the payment from one customer of which
a provision has been made for. This is not expected with the
remaining receivables and therefore no further assessment is
required.
NOTE 28 - SEGMENT REPORTING
The Company has implemented the principles of IFRS 8 ('Operating
Segments'), in respect of reporting segmented activities. In terms
of IFRS 8, the management has determined that the Company has a
single area of business, being the development and delivery of high
end network processing technology.
The Company's revenues from customers are divided into the
following geographical areas:
US dollars
---------------------------
Year ended 31 December
---------------------------
2018 2017
---------------- ---------
Asia 203,000 66,439
Europe 117,888 580,772
Israel 324,220 397,464
United States 478,600 473,986
---------------- ---------
1,123,708 1,518,661
================ =========
%
------------------------
Year ended 31 December
------------------------
2018 2017
----------- -----------
Asia 18.1% 4.4%
Europe 10.5% 38.2%
Israel 28.9% 26.2%
United States 42.6% 31.2%
----------- -----------
100.0% 100.0%
=========== ===========
Revenue from customers in the Company's domicile, Israel, as
well as its major market, the Unites States, Asia and Europe, have
been identified on the basis of the customer's geographical
locations.
The Company's revenues from major customers as a percentage of
total revenue was:
%
Year ended 31 December
-------------------------
2018 2017
------------ -----------
Customer A 28% 22%
Customer B 22% 19%
Customer C 18% 12%
Customer D 11% 10%
Customer E 10% 9%
------------ -----------
89% 72%
============ ===========
NOTE 29 - RELATED PARTIES
A. Founders
In accordance with the employment agreements of the two founders
of the Company, Mr. David Levi and Mr. Baruch Shavit, both were
entitled to an annual bonus of 5% of the Company's revenue for the
years 2012-2015, if the Company had positive cash flow from
operations. This was in addition to their salaries and share based
compensation.
The two founders of the Company were together entitled to 20% of
the dividend preference payable to preferred shareholders, as
described in Note 16.D above.
In April 2017, the employment agreement of the two founders of
the Company was amended, in terms of which each of them is entitled
to a performance bonus of 5% of the Company's annual profit before
tax. For each year. the bonus shall be capped at $250,000 each.
B. Chief Financial Officer
In March 2017 the Company appointed Mark Reichenberg as CFO of
the Company at 35% of a full time basis, at a monthly cost to the
Company of approximately $4,750. Upon admission to AIM, his time
commitment and salary doubled. Either side may terminate the
employment upon 6 months notice. Mr. Reichenberg also received
109,000 ESOP options, vesting over four years, exercisable at $0.20
per option and with an expiration date in March 2027. Mr.
Reichenberg was appointed as a director on 29 June 2017.
C. Directors' remuneration for the year ended 31 December 2018
US dollars
------------- -------------- -------
Salary Share based
Name Position and benefits compe-nsation Total
------------- -------------- -------
Graham Woolfman
(1)(3) Non Executive Chairman 50,030 - 50,030
David Levi Chief Executive Officer 206,340 - 206,340
Mark Reichenberg
(1) Chief Financial Officer 109,442 32,130 141,572
Shavit Baruch VP Research & Development 206,340 - 206,340
Neil Rafferty
(1) (3) Non Executive Director 40,024 - 40,024
Chen Saft-Feiglin
(2) (3) Non Executive Director 17,517 - 17,517
Zohar Yinon (2)
(3) Non Executive Director 19,185 - 19,185
------------- -------------- -------
648,878 32,130 681,008
============= ============== =======
Directors' remuneration for the year ended 31 December 2017
US dollars
---------------------------------------------------------
Share
Salary Annual based
Name Position and benefits bonus compe-nsation Total
------------- ----------------- -------------- -------
Graham Woolfman
(1)(3) Non Executive Chairman 20,109 - - 20,109
David Levi Chief Executive Officer 224,840 8,860 - 233,700
Mark Reichenberg
(1) Chief Financial Officer 80,879 - 44,105 124,984
Shavit Baruch VP Research & Development 224,843 8,860 - 233,703
Neil Rafferty
(1) (3) Non Executive Director 16,088 - - 16,088
Chen Saft-Feiglin
(2) (3) Non Executive Director 2,597 - - 2,597
Zohar Yinon (2)
(3) Non Executive Director 2,820 - - 2,820
------------- ----------------- -------------- -------
572,176 17,720 44,105 634,001
============= ================= ============== =======
(1) Appointed 29 June 2017.
(2) Appointed 15 November 2017.
(3) Independent director.
D. Directors' equity interests in the Company as at 31 December 2018
Shares Options
------------------------------------- ----------------------------------
Name Direct Beneficial Total Unexercised Unvested Total
holdings holdings shares vested options options
held options
----------- ----------- ----------- ------------ --------- ---------
Graham Woolfman - 10,715 10,715 - - -
David Levi 6,767,900 - 6,767,900 60,710 - 60,710
Shavit Baruch 4,500,000 - 4,500,000 60,710 - 60,710
Mark Reichenberg
(1) - - - 27,250 81,750 109,000
Neil Rafferty 7,143 - 7,143 - - -
Chen Saft-Feiglin - - - - - -
Zohar Yinon - - - - - -
11,275,043 10,715 11,285,758 148,670 81,750 230,420
----------- ----------- ----------- ------------ --------- ---------
Directors' equity interests in the Company as at 31 December
2017
Shares Options
--------------------------------------------------------- --------------------------------------------------------
Name Direct Beneficial Total Unexercised Unvested Total
holdings holdings shares vested options options
held options
------------------- ---------------- ------------------ --------------------- ----------------- --------------
Graham
Woolfman - 10,715 10,715 - - -
David Levi 6,767,900 - 6,767,900 60,710 - 60,710
Shavit Baruch 4,500,000 - 4,500,000 60,710 - 60,710
Mark
Reichenberg
(1) - - - - 109,000 109,000
Neil Rafferty 7,143 - 7,143 - - -
Chen - - - - - -
Saft-Feiglin
Zohar Yinon - - - - - -
11,275,043 10,715 11,285,758 121,420 109,000 230,420
------------------- ---------------- ------------------ --------------------- ----------------- --------------
(1) 27,250 of the unvested options vested
on 5 March 2018
NOTE 30 - Reconciliation of liabilities arising from financing activities
Long Term Borrowings Short Term Total
Borrowings
------------------------ ---------------------- ------------------------
1 January 2018 7,522 - 7,522
Cashflow
* Repayments (7,522) - (7,522)
- Proceeds - 133,497 133,497
------------------------ ---------------------- ------------------------
31 December 2018 - 133,497 133,497
------------------------ ---------------------- ------------------------
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR UAOBRKVANAAR
(END) Dow Jones Newswires
June 12, 2019 02:00 ET (06:00 GMT)
Ethernity Networks (LSE:ENET)
Historical Stock Chart
From Apr 2024 to May 2024
Ethernity Networks (LSE:ENET)
Historical Stock Chart
From May 2023 to May 2024