TIDMENET
RNS Number : 7828R
Ethernity Networks Ltd
19 June 2018
ETHERNITY NETWORKS LTD
("Ethernity" or the "Company")
Preliminary results for the year ended 31 December 2017
Introduction
Although the Company successfully achieved its Admission at the
mid-point in the year, the financial performance for 2017 did not
meet expectations in relation to achieved revenue and operating
profit for the whole year and therefore was disappointing,
particularly as an established OEM customer stopped ordering
unexpectedly due to the loss of their customer.
Financial Highlights
-- The results for the year ended 31 December 2017 did not meet
expectations for a number of reasons, some of which will
nonetheless result in long-term benefits to the Company.
-- Net income before tax was lower than expected and can be
attributable amongst other things to;
-- A significant historic customer experienced contractual
difficulty with their customer, resulting in a material decline in
revenue and gross margin of $268,000 and $142,000 respectively
-- A significant historic customer changed their business
relationship with the Company from component based business to
royalty based business resulting in a gross revenue and gross
margin decline of $630,000 and $334,000 respectively
-- the reversal of a contracted revenue originally recognised in
2017 of $225,000 that was unpaid inside of the contract terms
-- the provision for a doubtful debt of $38,685; and
-- the effects of charging Share Based Compensation costs of
$69,178 to expenses during the year
Operational Highlights
-- Company successfully achieved its Admission to AIM in June raising net cash of $17,826,371
-- The Company did not meet expectations in relation to achieved
revenue and operating profit for the year
-- Commenced a managed growth and development programme in the second half of the year:
-- Recruiting an additional 23 personnel in engineering, and
sales and marketing by year end with an additional 10 since the
year end to date, including:
-- strategically expanding the management by the two key
appointments in Marketing and Sales during Q1 2018
-- Commencement of discussions with a number of the major
telecoms operators and OEM's in the latter half of 2017, which are
ongoing. Many of these discussions have advanced significantly
having passed proof of concept and evaluation at the prospective
partner level
Graham Woolfman, Chairman of Ethernity, commented: "Whilst the
Company made strong operational progress in the year, the financial
performance of the business has been disappointing. The conversion
of sales has taken longer than expected due to our market taking
longer than we, and other market operators, anticipated. Whilst the
timing of these sales remains difficult to predict, we remain
confident of the longer term direction of the market.
"It is apparent that while 2018 will be a year of challenges to
steadily develop customer partnerships and relationships, this will
lay the groundwork for the Company to achieve its goals for 2019
onward. The Company has adequate financial resources to meet this
objective and the Board is confident of building value over the
longer term for shareholders."
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 Tel: +44 207 614 5900
Broker)
Steve Douglas / Benjamin Cryer
About Ethernity
Ethernity Networks is a technology solutions provider that
developed and delivered data processing technology used in high-end
Carrier Ethernet applications across the telecom, mobile, security
and data center markets. The Company is currently working to
accelerate commercialisation through the launch of its Smart NIC
combined with virtualised software solutions, based on its
validated data processing technology 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 Company is headquartered in Israel.
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
I am presenting our first annual report and accounts following
Admission to AIM in June 2017. Over the past 15 years Ethernity has
developed network processing technology and established itself as a
recognised provider of innovative network processing technology to
meet Telecom Equipment Manufactures demand in various markets.
The management's focus for the period since Admission to date
has been on creating and developing the S&M and R&D
infrastructure to support Ethernity's move from being a technology
and Intellectual Property (IP) provider to become provider of a
complete networking and SmartNIC solution that includes software
infrastructure that can be ported on different servers and hardware
platforms, targeting main stream tier 1 Original Equipment
Manufacturers (OEM's) and Operator markets.
Although the Company successfully achieved its Admission at the
mid-point in the year, the financial performance for 2017 did not
meet expectations in relation to achieved revenue and operating
profit for the whole year and therefore was disappointing,
particularly as an established OEM customer stopped ordering
unexpectedly due to the loss of their customer.
Revenues for 2017 were $1.52m (2016 $2.16m) with gross margins
and operating profits of $1.30m (2016 $1.15m) and $152k (2016
$339k) respectively. The Company commenced a managed investment
programme in the second half of the year utilising the proceeds
from the funds raised upon Admission, investing approximately
$1.95m (2016 $1.03m) in R&D and related expenditure, and by the
year end recruiting an additional 23 personnel in engineering, and
sales and marketing.
At the year end the Company`s cash balance available for working
capital and investment for growth was $14.9m (2016 $394,241).
The nature of the Company's contracts with customers are such
that crystallisation of revenues cannot be confirmed until a
significant period following the year end, and this has led to a
delay in publication of the Annual Report and Accounts.
Since the year end, Ethernity has continued with its investment
programme focussed on product and service areas in support of
customer relationships, developing sales and market opportunities,
and building the Company infrastructure to support enhancement
within the value chain it provides.
The funds raised from the share placing at Admission was
transformational for the business in terms of providing the finance
and resources to support the Company in building the infrastructure
to meet its medium to long term growth plans.
The Board is conscious of the uncertainties over the shorter
term time horizon in the securing of cornerstone customer orders,
and the challenge this represents for the executive management in
predicting when substantive revenues and related profits will be
earned, including for the current financial year in particular.
However, the Board is confident that market demand for the
Company`s solutions continue to be well received and will translate
to significant revenues in the years ahead.
The Company would not be able to achieve its success without the
considerable efforts of our management and staff and I thank them
for their hard work and commitment both in the last year and in the
period leading to the admission to AIM.
Outlook
It is apparent that while 2018 will be a year of challenges to
steadily develop customer partnerships and relationships, whilst
delivering the required solutions based on the established network
processing technology developed by the Company, this will lay the
groundwork for the Company to achieve its goals for 2019 onward.
The Company has adequate financial resources to meet this objective
and the Board is confident of building value over the longer term
for shareholders.
Graham Woolfman
Chairman
19 June 2018
Chief Executive's Statement
I am pleased to report that in the period since the Company`s
Admission to AIM in June 2017 we have expanded and developed our
team with a focus on supporting the transition from being a
provider of Intellectual Property (IP) to a product and services
Solutions Provider.
We commenced discussions with a number of the major telecoms
operators and Original Equipment Manufacturers (OEM's) in the
latter half of 2017, which are ongoing, regarding our solutions and
we continue to receive confirmation of their interest to utilise
our products and solutions in their networks. In recent months,
their feedback has been that the Company's offerings are unmatched
by competitors in the market place, based on the market shift to
the use of 'cloud infrastructure' at the network edge. Many of
these discussions have advanced significantly having passed proof
of concept and evaluation at the prospective partner level,
including software companies, OEM's and server "White Box"
manufactures and we strongly believe that these will lead to future
long term engagements.
At the time of Admission, we set out the following objectives to
be achieved over the short to medium term:
-- Invest in extended Research & Development capabilities
and Sales & Marketing activities to drive accelerated growth,
with a focus on up-selling products as a complete solution into
OEMs and Communication Service Providers and markets; This has
involved increasing the Company's profile by greater participation
at trade exhibitions, by becoming an active member of major open
source industry initiatives and by increasing its customer support
for Smart NIC (ACENIC)
-- Develop security and offload engines in the cyber and other
security environs; This involves developing programmable crypto
engine software for IP SEC, MAC SEC and SSL offload environments.
It will further involve the development of software in the
abstraction layer between ENET networking engines and open software
environments to allow accelerated network functions. As part of
this plan, Ethernity already integrated crypto engine into its
already rich, advanced Carrier Ethernet data path and utilised the
ENET network processing engine for delivery of a complete IPSec
solution.
-- Secure and continue to monetarise the Company's core
technology by continuing to develop IP and securing further patents
to protect any future developments by our competitors. It is likely
that future developed IP will include the development of next
generation, higher data throughput solutions to support up to
200Gbps network processing capacity based on current technology and
solutions.
-- Work with strategic partners, including software companies
and OEMs, to broaden the product or market opportunities available
to the Company.
As referred to at the time of Admission, the shift in the market
place for FPGA use in cloud appliances, driven by the key tech
companies, is a sea change in the market opportunity and
positioning of the Company.
However, the Company is dependent on the timing as to when
operators implement their plans for deployment of cloud
infrastructure for edge computing. We remain confident that even
though such delays exist we will complete formal arrangements with
prospective customers during and before the end of 2018 and that
the long term goals of the Company will still be met.
During 2017 and since the year end the Company has substantially
developed its R&D capabilities along with its local and
international Sales and Marketing teams and has secured the
services of a number of highly experienced staff. I am confident
that our expanded team, which we continue to build, can achieve
positive results in transactions and revenue.
The Company has undertaken a comprehensive marketing strategy
now that most of the key sales resources are in place. This was
further underscored by our success at the Mobile World Congress
2018, held in Barcelona earlier this year. The outcome of this has
been the start of several significant strategic relationships with
software partners to combine solutions as well as discussions with
OEMs and Server companies around their need for our solutions.
Current Trading
Revenue in the year to date has continued to follow the trends
of 2017 as the customer partnerships and relationships are
developed and the NFV/SDN market delays are resulting in it taking
longer than originally anticipated to adopt our accelerating
solution based on our FPGA based SmartNIC.
The year has started with the bedding down in the first quarter
of the infrastructures as detailed as part of our IPO plans. To the
extent that the Company raised funds at a level higher than
anticipated, this allowed us to expand our sales and marketing
operation by participating in more events, along with the
recruitment of key sales executives to support the anticipated
Company growth.
While the building of the infrastructure that was undertaken
will have a direct effect on our profitability for the 2018
financial year, this is in support of managements philosophy to
build the Company in 2018 so as to achieve the future growth in
line with the anticipated market growth from 2019 onwards.
We believe that investment in sales and marketing over the past
nine months, together with investment in our R&D capacity to
meet expected customer and market technology demands, leave us well
placed to support future growth and, while being mindful of the
risks posed by the prevailing dynamics and current delays in the
macro market environment, we have a high level of confidence that
we are the best positioned company in the market to deliver the
future market requirements and demands.
The Company is in discussions with three potential Tier 1 OEMs
at different stages of engagement for accelerating Virtual
Broadband Gateway application, with a production plan for 2019, and
mass deployment in 2020, together with other distributors and
system integrators that will push the product into the market.
Furthermore, the SmartNIC completed massive tests with two
leading White Box server companies to include the SmartNIC under
their proposals
Furthermore, the Company is in talks with OEMs to secure orders
for our next generation 100Gbps SmartNIC to be released in
September of the current year for NFV offload and Security
appliances. This coupled with the expectation of some imminent
design wins from traditional and vertical markets, the Board
remains confident about the future prospects for our business and
in achieving our growth objectives as set out for the ensuing
years
Outlook
The Company continues to focus on the development and delivery
of its SmartNIC solutions and key agreements are under discussion
for significant partnerships that will fuel growth. In parallel,
the Company continues to drive new technologies and business for
technology and IP licensing in other telecom markets, which include
mobile, broadband, cable, wireless, together with vertical markets
such as the avionics and automotive markets with the goal of
generating additional revenues to support the main focus of the
company.
Even given operator delays in the implementation of their chosen
NFV solutions to which we are or will be a provider, the blend of
the current Company offerings targeting existing markets, allows
the Company to continue generating cash flow from its operations,
thus maintaining a strong financial position. I remain extremely
confident that Ethernity is the best placed solutions provider to
meet the operator demands and that our long term goals will be met
and exceeded, delivering our shareholders with exceptional
returns.
David Levi
Chief Executive Officer
19 June 2018
Strategic and Financial Review
Ethernity Networks is a technology solutions provider that
develops and delivers data processing technology used in high-end
Carrier Ethernet applications across the telecom, mobile, security
and data center markets. The company is currently working to
accelerate commercialisation through the launch of its Smart NIC
combined with virtualised software solutions, with the focus on
Tier 1 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 virtualisation of networking functionality.
Ethernity has to date designed and delivered its data processing
technology into half a million systems in the Broadband Access,
Mobile 4G Base Station, and general Carrier Ethernet markets,
primarily to Tier 3 and 4 manufacturers. with proven technology,
and as part of the next stage of its development, the Company has
begun to intensify its focus on:
1. Tier 1 and 2 customers through the recruitment of two key
sales executives with previous industry experience within
Ethernity's competitors; and
2. Enhancing its average selling price by delivering a complete
solution involving software applications and SmartNIC based on its
existing validated technology
The Market
It is well known that the quantity of data created at a global
level is growing exponentially. Frost & Sullivan predicts
global data traffic will cross 100 ZB by 2025, around six times the
level of 2015 (where 1 Zeta byte (ZB) = 1 trillion GB). In the
context where much of the data created will be from emerging
technologies such as IoT and Autonomous Cars (supporting an
ever-increasing appetite for data-heavy processing), data must
increasingly be processed closer to the source to reduce latency -
a concept known as edge computing. The traditional model of adding
more servers to the cloud to extend performance does not work for
edge computing due to limited availability of space (real estate)
and lower power budget availability than that which was available
at the data center along with the push for lower cost capex at the
edge of the network, resulting in a need for lower cost servers and
unique and innovative offerings to serve the edge computing.
A solution clearly requires a new cloud architecture that
consumes less real estate, less power and capital. As a result,
Telcos are rapidly migrating to cloud architecture and virtualised
systems given the need to deploy scalable platforms to deal with
the massive growth of the volume of data and cope with the rapidly
changing demands on network infrastructure.
The Company ports its patent-protected ENET technology on an
FPGA based network interface card (Smart NIC) using Commercial Off
the Shelf (COTS) Field-Programmable Gate Arrays (FPGA) to deliver
All programmable Smart or intelligent network interface (SmartNIC),
providing a highly competitive alternative to existing Smart NIC
solutions based on proprietary multicore ASICs that contradicts the
network virtualisation vision being the use of COST platforms and
COTS components and elimination of hardware vendors lock ins. The
main constrain on being proprietary requires the OEMs or end user
(Communication Service Provider) to sync to the ASIC vendors own
roadmap, which sometimes results in product discontinuation as
happened with Microsemi ASICs, EZchip ASICs and other network
processing ASIC vendors, due to the need to invest more than $10m
for each fabrication of new proprietary ASIC. The 'smart' solution
improves the efficiency of data flow (hardware acceleration) and
introduces flexibility for future changes (programmability). By
utilising Ethernity's telco-grade FPGA Smart NICs, service
providers benefit from accelerated performance of a virtualised
solution with complete programmability and with the ability to use
multiple FPGA NIC solutions based on different Commercial Off the
Shelf (COTS) FPGA platforms without the need to be committed to a
single hardware vendor, as may be required in the case of other
smart NIC's based on proprietary ASIC.
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. We expect adoption to
accelerate as NFV/SDN penetration increases. Cisco's Global Cloud
Index forecast expects SDN/NFV adoption to grow from accounting for
37% of data centre traffic to 50% in 2021.
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 virtualised software architecture on COTS FPGA platforms.
The advantage of using NFV is preventing lock-in to closed
ecosystems along with the option to adapt to changing
requirements.
Achievements
In 2017 and since the year end, key operational achievements
have included:
-- The management team of the Company has been strategically
expanded by the two key appointments in Sales during Q1 2018 as
well as increasing the R&D capabilities of the Company by both
employment of human resources and entering into contractual
development alliances with development partners
-- Enhancing our ENET solution to include IPSec. The Company has
integrated a crypto engine into its already rich, advanced Carrier
Ethernet (CE) data path and utilized the ENET network processing
engine for delivery of a complete IPSec solution.
-- Integration of the field-proven ENET4840z/99 with NG G.fast
technology to improve transmission over existing copper cabling and
symmetrical Gigabit access, however G.fast deployment has been
delayed by operators due to delay in delivering the actual G.fast
technology by the major components providers.
-- The Company completed integration of its ENET flow processor
and security technology into a Customer 5G wireless access base
station, with potential revenue to flow from selling FPGA embedding
the ENET technology during 2019
-- The Company completed integration of its ENET flow processor
and security technology into a Customer SD-WAN and vCPE platform
with potential revenue to flow from selling FPGA embedding the ENET
technology this second half of 2018.
-- Successfully completed proof-of-concept of integration in
several customer environments with our All-Programmable Intelligent
NIC, which is anticipated to result in long term formal revenue
generating arrangements.
-- Demand for the Company's Smart NIC is materialising due to
the growing trends of moving the cloud to the edge of the network,
where Ethernity technology is aimed.
-- There are other significant developments and achievements
that have been realised to date, however due to applicable NDA's
and the confidentiality relating to the parties we cannot disclose
any additional information in this regard until such time as this
information becomes public knowledge.
Financial Performance
The twelve months to 31 December 2017 represents the first
full-year reporting period for the Company as a quoted company
following Admission
The results for the year ended 31 December 2017 did not meet
expectations for a number of reasons, some of which will
nonetheless result in long term benefits to the Company.
In summary, gross non-GAAP revenues for 2017 of $1.722m (2016
$2.161m), non-GAAP gross margins of $1.508m (2016 $1.154m) and the
net income before tax of $159,471 (2016 $250,821) was lower than
expected and can be attributable amongst other things to;
-- foreign exchange losses relating to translation differences at the end of the year of $127,790
-- the reversal of a contracted revenue recognised in 2017 of
$225,000 that was unpaid inside of the contract terms
-- the provision for a doubtful debt of $38,685, and
-- the effects of charging Share Based Compensation costs of $69,178 to expenses during the year
The Company discloses as non-GAAP revenue grant income received
outside of the grant terms, and the recognition of amortisation
costs as separate to operating costs, as the directors believe this
sets out the financial performance clearly.
Revenues
In considering the trading results of the Company based on the
IFRS presented Financial Statements, revenues for the twelve months
ended 31 December 2017 declined by 29.7% to $1.519 million compared
with $2.161 million for 2016, predominantly for the following
reasons:
-- A significant historic customer experienced contractual
difficulty with their customer, resulting in a material decline in
business with them during 2017 as compared to 2016 resulting in
Revenues and gross margins of $268,000 and $142,000
respectively
-- A significant historic customer changed their business
relationship with the Company from component based business to
royalty based business resulting in a gross revenue and gross
margin decline of $630,000 and $334,000 respectively. While this
impacted top line revenues materially, the gross margin percentage
achieved via royalties is significantly higher.
-- A contract with an existing 5G wireless Access OEM Customer
that uses the Company's ENET network processing and security
technology for its 5G base station, planned to embed the ENET
technology into an ASIC for a wireless end point CPE device. The
ASIC licensing contract was supposed to be signed by end of Q4 for
an amount of $750k plus Royalties, with majority of the amount
being recognised for 2017. The customer finally decided to revert
to a previous proposal from Ethernity to utilise a low cost FPGA
for this end point wireless CPE , the result of which will be
higher revenues and profits for the Company in the long term
-- A contract signed for $225,000 in December 2017 budgeted for
and recognised in preliminary revenues was subsequently reversed
from income for 2017 as the customer unexpectedly did not transfer
payment post signature in terms of the contract payment terms by
the end of Q1/18, which payment was a condition for revenue
recognition. The customer has informed the Company that they intend
to re-engage the Company and the contract again during the second
half of 2018.
-- Two additional contracts anticipated for 2017 were delayed to
2018 resulting in a loss of planned revenues of $250,000. Current
discussions on these contracts are ongoing and the intention is
that the scope of the contracts will be larger than originally
thought.
The financial performance for 2017 did not meet expectations in
relation to achieved revenue and operating profit for the whole
year and therefore was disappointing.
Margins
Whilst revenue declined in the period under review, the
comparable gross margin and net profitability on revenue for the
year increased from $1.154m to $1.304m with the respective gross
margins having increased from 53.4% to 85.9%. A further development
in the year was the increase in revenue generated from design wins
that generate approximately 100% margins.
Operating Costs
Operating costs increased primarily due to greater Sales &
Marketing expenses, R&D expenses and the additional costs
related to becoming a listed Company as was highlighted at the time
of Admission as key areas for the use of funds. We are pleased to
confirm that despite delays in recruitment, key positions in Sales
and Marketing have been filled by excellent recruits and the
building of R&D resources is now also on track. While these
lead to a decline in pretax profit for the year of 36.42%, the
Company has, along with the expansion in the first quarter of 2018,
established the infrastructure to enable it to achieve the goals of
2019 and beyond.
Key financial results
IFRS based
US Dollar
Audited
---------------------------------
For the year ended 31 December
---------------------------------
2017 2016
---------------- ---------------
Revenues 1,518,661 2,161,366
---------------- ---------------
Gross Margin 1,304,222 1,154,269
---------------- ---------------
Gross Margin % 85.88% 53.40%
---------------- ---------------
Operating Profit 152,219 338,501
---------------- ---------------
Financing costs (income) -7,252 87,680
---------------- ---------------
Profit before tax 159,471 250,821
---------------- ---------------
Tax benefit - 550,000
---------------- ---------------
Net comprehensive income for the
year 159,471 800,821
---------------- ---------------
Basic earnings per ordinary share 0.01 0.04
---------------- ---------------
Diluted earnings per ordinary share 0.01 0.03
---------------- ---------------
Weighted average number of ordinary
shares for basic earnings per share 25,397,245 18,078,500
---------------- ---------------
Management EBITDA and Non-GAAP unaudited financial
information
The directors believe it beneficial to present the financial
information on an unaudited non-GAAP basis reconciled to the IFRS
Audited Financial Statements as follows:
US Dollars
For the Year ended 31
December
2017 2016
------------ -----------
Total non-GAAP Revenue 1,722,279 2,161,366
------------ -----------
* Revenue per IFRS Income Statement 1,518,661 2,161,366
* Other Income - EU project additional Revenue 203,618 0
------------ -----------
Non-GAAP Gross Profit 1,507,840 1,154,269
Gross Profit % 87.55% 53.40%
Non-GAAP R&D Expenses 99,714 187,435
Non-GAAP G&A Expenses 527,418 304,318
Non-GAAP S&M Expenses 531,724 276,681
------------ -----------
EBITDA 348,984 385,835
----------------------------------------------------- ------------ -----------
Balance Sheet
The balance sheet strength of the Company remains sound with
substantial cash reserves in place to meet the expansion
requirements of the business.
The net cash utilised in operating activities for the year is
$437,249, however following the IPO, cash reserves have increased
from $335,723 at the end of 2016 to $14,950,578 as of 31 December
2017. Short and long term borrowings and loans have been reduced
from $786,672 to $7,522 while working capital management remains
tightly controlled.
The directors are satisfied that the cash resources are more
than sufficient to meet the long term plans of the Company.
David Levi Mark Reichenberg
Chief Executive Officer Chief Financial Officer
19 June 2018 19 June 2018
STATEMENTS OF FINANCIAL POSITION
US dollars
-------------------------
31 December
-------------------------
Notes 2017 2016
----- ----------- ------------
ASSETS
Current
Cash and cash equivalents 4 3,881,106 335,723
Other short-term financial assets 5 11,069,472 58,518
Trade receivables 6 513,965 268,309
Other current assets 438,265 28,725
Current assets 15,902,808 691,275
Non-Current
Property and equipment 8 155,840 69,939
Deferred tax assets 24 800,000 800,000
Intangible asset 9 3,170,553 1,305,898
Non-current assets 4,126,393 2,175,837
Total assets 20,029,201 2,867,112
=========== ============
LIABILITIES AND EQUITY
Current
Short Term Borrowings 10 - 160,256
Trade payables 225,087 121,960
Other current liabilities 11 931,771 1,191,291
Shareholders loans 12 - 527,568
Warrants liability, at fair value 12 15,770 43,309
----------- ------------
Current liabilities 1,172,628 2,044,384
Non-Current
OCS royalty liability 13 - 47,391
Long Term Borrowings 14 7,522 98,848
----------- ------------
Non-current liabilities 7,522 146,239
Total liabilities 1,180,150 2,190,623
Equity 16
Share capital 8,028 4,958
Share premium 23,356,078 5,629,272
Other components of equity 615,322 332,107
Accumulated deficit (5,130,377) (5,289,848)
----------- ------------
Total equity 18,849,051 676,489
Total liabilities and equity 20,029,201 2,867,112
=========== ============
The accompanying notes are an integral part of the financial
statements.
STATEMENTS OF COMPREHENSIVE INCOME
US dollars
----------------------
For the Year ended
31 December
----------------------
Notes 2017 2016
----- ---------- ----------
Revenue 18 1,518,661 2,161,366
Cost of sales 214,439 1,007,097
---------- ----------
Gross profit 1,304,222 1,154,269
Research and development expenses 19 215,778 221,873
General and administrative expenses 20 591,903 317,214
Marketing expenses 21 556,588 276,681
Other income 22 (212,266) -
---------- ----------
Operating profit 152,219 338,501
Financing costs (income) 23 (7,252) 87,680
---------- ----------
Profit before tax 159,471 250,821
Tax benefit 24 - 550,000
---------- ----------
Net comprehensive income for the year 159,471 800,821
========== ==========
Basic earnings per ordinary share 25 0.01 0.04(*)
========== ==========
Diluted earnings per ordinary share 25 0.01 0.03(*)
========== ==========
Weighted average number of ordinary shares
for basic earning per share 25,397,245 18,078,500
========== ==========
Weighted average number of ordinary shares
for Diluted earning per share 27,979,097 20,072,110
========== ==========
(*) See Note 16.A.
The accompanying notes are an integral part of the financial
statements.
STATEMENTS OF CHANGES IN EQUITY
Amounts in US dollars
----------------------------------------------------------------------------------------------------------------------------
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 2016 18,078,500 3,725,400 4,111 847 5,629,272 290,874 (6,090,669) (165,565)
Employee
share-based
compensation - - - - - 41,233 - 41,233
Net
comprehensive
income for
the year - - - - - - 800,821 800,821
Balance at 31
December 2016 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
============ ==================== =============== ================= =========== =========== ============= ===========
The accompanying notes are an integral part of the financial
statements.
STATEMENTS OF CASH FLOWS
2017 2016
------------- ------------
Operating activities
Profit before tax 159,471 800,821
Non-cash adjustments
Depreciation of property and equipment 20,171 16,796
Capital gain from sale of vehicle (8,648) -
Share-based compensation 69,178 41,233
Amortisation of intangible assets 116,064 34,438
Amortisation of liabilities (13,792) 11,706
Deferred tax - (550,000)
Net changes in working capital
Increase in trade receivables (245,656) (106,033)
Decrease in inventories - 64,147
Decrease (increase) in other current assets (409,540) 86,663
Increase (decrease) in trade payables 103,127 (284,193)
Increase (decrease) in other liabilities (227,624) 196,585
Net cash provided by (used in) operating activities (437,249) 312,163
Investing activities
Increase of other short-term financial assets (11,010,954) (58,518)
Purchase of property and equipment (126,423) (20,354)
Proceeds from sale of vehicle 28,999 -
Amounts carried to intangible assets (1,958,997) (1,033,389)
Participating grants in intangible assets 95,820 313,175
Net cash used in investing activities (12,971,555) (799,086)
Financing activities
Repayment of OCS liability (93,034) (35,670)
Proceeds from (repayment of) short term borrowings (128,969) 26,379
Proceeds from (repayment of) long term borrowings - 101,868
Repayment of long term borrowings (122,613) -
Receipt (repayment) of shareholder loans (527,568) 526,634
Proceeds allocated to warrants liability - 43,309
Net proceeds from issuing ordinary shares 17,826,371 -
Net cash provided by (used in) financing activities 16,954,187 662,520
Net change in cash and cash equivalents 3,545,383 175,597
------------- ------------
Cash and cash equivalents, beginning of year 335,723 160,126
------------- ------------
Cash and cash equivalents, end of year 3,881,106 335,723
============= ============
Supplementary information on financing activities:
Interest paid during the year 21,918 13,543
Interest received during the year 69,472 -
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 2017,
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 2017
(including comparative amounts) were approved and authorised for
issue by the board of directors on 18 June 2018.
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 recognized 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 recognized 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:
2017 2016
New Israeli Shekel
("NIS") 0.288 0.260
EURO 1.200 1.052
Sterling 1.350 1.229
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 Group 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. 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.
H. 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) are 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 using the "if-converted method", if the effect of
each of such financial instruments is dilutive.
I. 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.
I. Severance pay liability (cont.)
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.
J. 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 amortized 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 amortization 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 amortized on the straight-line method, over
its estimated useful life, which is estimated to be ten years.
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.
K. 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 not eligible for capitalization under the criteria described
in 2j above), 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 recognized as an intangible asset), it is
recognised a deduction of the related asset.
Grants from the Israeli Office of the Chief Scientist of the
Ministry of Economy (hereinafter - the "OCS") 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 OCS are recognized 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 recognized as a
deduction from the cost of the related asset or as other income as
applicable (see note 2. J. above).
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 recognized in profit or
loss.
The difference between the amount received and the fair value on
the date of receiving the grant is recognized 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).
L. Financial instruments
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
Classification and subsequent measurement of financial assets
(Cont.)
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 short term financial assets and
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.
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 reported period the Company did not have any assets
held for trading no derivative financial assets 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, OCS 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) are
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.
M. 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 recognized 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 recognized as an expense. A change in estimate
regarding prior periods is recognized 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.
N. 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, falls under
this category.
O. 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.
P. Transactions with controlling shareholders
Transactions with controlling shareholders are recognized 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.
Q. 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.
Revenues are 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.
Sales of goods
Revenues from programmable devices are recognized 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 bases 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.
Contracts with milestone payments
Certain contracts with major customers are structured to provide
the Company with payment upon the achievement 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.
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 sale 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.
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.
R. Income taxes
Taxes on income in the statement of comprehensive income
comprise current and deferred taxes. Current or 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.
Calculation of current tax is based on tax rates and tax laws
that have been enacted or substantively enacted by the end of the
reporting period. Deferred income taxes are calculated using the
liability method in respect of temporary differences between
amounts included in the financial statements and amounts taken into
consideration for tax purpose.
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.
Deferred tax assets are presented in the statement of financial
position as non-current assets.
S. Operating cycle
The normal operating cycle of the Company is a twelve month
period ending in December of each year.
T. 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.
Impairment losses for cash-generating units is charged pro rata
to the other assets in the cash-generating unit. All assets are
subsequently reassessed for indications that an impairment loss
previously recognised may no longer exist. An impairment loss is
reversed if the asset's or cash-generating unit's recoverable
amount exceeds its carrying amount. As of December 31, 2017 and
2016 no impairment was recorded.
U. Ordinary shares
Ordinary shares issued by the Company which do not meet the
definition of financial liability or financial asset, were
recognized as part of equity on the basis of the consideration
received in respect thereof, net of costs attributed directly to
the issue.
V. 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.
W. 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 recognized 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
recognized as a separate asset. However, this asset may not exceed
the amount of the related provision.
X. New and revised standards that are effective for annual
periods beginning on or after 1 January 2017
The Company has not adopted any new standards or amendments that
have a significant impact on the Company's results or financial
position.
Y. Standards, amendments and interpretations to existing
standards that are not yet effective and have not been adopted
early by the Company
At the date of authorisation of these financial statements,
certain new standards, and amendments to existing standards have
been published by the IASB that are not yet effective and have not
been adopted early by the Company. Information on those expected to
be relevant to the Company's financial statements is provided
below.
Management anticipates that all relevant pronouncements will be
adopted in the Company's accounting policies for the first period
beginning after the effective date of the pronouncement. New
standards, interpretations and amendments not either adopted or
listed below are not expected to have a material impact on the
Company's financial statements.
IFRS 9 'Financial Instruments'
The new Standard for financial instruments (IFRS 9) replaces IAS
39 'Financial Instruments: 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.
Management has identified the following areas that are expected
to be most impacted by the application of IFRS 9:
-- The classification and measurement of the Company's financial
assets - Management holds most financial assets to hold and collect
the associated cash flows and is currently assessing the underlying
types of cash flows to classify financial assets correctly.
Management expects that the majority of financial assets held by
the Company will be eligible to be accounted for at amortised cost
as in accordance with the current IFRS. Accordingly, the Company
does not expect the new guidance to affect the classification and
measurement of these financial assets.
-- The impairment of financial assets applying the expected
credit loss model - This will apply to the Company's trade
receivables and other short term investments in debt-type assets
currently classified as 'Loans and Receivables. For contract assets
that will arise from IFRS 15 and trade receivables, the Company
considers to apply a simplified model of recognising lifetime
expected credit losses as these items do not have a significant
financing component.
The new standard also introduces expanded disclosure
requirements and changes in presentation. These are expected to
change the nature and extent of the Company's disclosures about its
financial instruments particularly in the year of the adoption of
the new standard.
The Company will apply the new rules retrospectively from 1
January 2018, with the practical expedients permitted under the
standard. Comparatives for 2017 will not be restated.
IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 presents new requirements for the recognition of
revenue, replacing IAS 18 'Revenue', IAS 11 'Construction
Contracts', and several revenue-related interpretations. The new
standard establishes a control-based revenue recognition model and
provides additional guidance in many areas not covered in detail
under existing IFRSs, including how to account for arrangements
with multiple performance obligations, variable pricing, customer
refund rights, supplier repurchase options, and other common
complexities.
IFRS 15 is effective for annual reporting periods beginning on
or after 1 January 2018. Management intends to adopt the Standard
retrospectively, recognising the cumulative effect of initially
applying this Standard as an adjustment to the opening balance of
retained earnings on the initial date of application. Under this
method, IFRS 15 will only be applied to contracts that are
incomplete as at 1 January 2018.
The Company intends to adopt IFRS 15 as of January 1, 2018. The
Company evaluated the impact of IFRS 15 on its revenue streams and
selling contracts, if any, and on its financial reporting and
disclosures and on the business processes, controls and systems.
Based on such evaluation, management believes that the adoption of
IFRS 15 will not have a significant impact on its consolidated
financial statements.
IFRS 16 'Leases'
IFRS 16 will replace IAS 17 and three related Interpretations.
It completes the IASB's long-running project to overhaul lease
accounting. 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 rentals. The only exceptions are short-term and low-value
leases. The accounting for lessors will not significantly
change.
IFRS 16 is effective for annual reporting periods beginning on
or after 1 January 2019. At this stage, the Company does not intend
to adopt the standard before its effective date. Management is yet
to fully assess the impact of the Standard and therefore is unable
to provide quantified information. However, in order to determine
the impact, the following actions will have to be completed before
the standard will become effective:
-- performing a full review of all agreements to assess whether
any additional contracts will become lease contracts under IFRS
16's new definition of a lease.
-- deciding which transitional provision to adopt; either full
retrospective application or partial retrospective application
(which means comparatives do not need to be restated).
-- Deciding which of the practical expedients to adopt.
-- assessing current disclosures with respect to for current lease agreements (see Note 15.C).
-- determining which optional accounting simplifications are
available and whether to apply them.
-- considering the IT system requirements.
-- assessing the additional disclosures that might be required.
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. In addition, an
intangible asset that was capitalised but not available for use is
required to be tested for impairment once a year
(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 24.B. and 24.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
recognized 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 9 and 10).
-- 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 under share
based compensation 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
--------------------
2017 2016
--------- ---------
In Sterling 403,307 226,687
In U.S. Dollar 3,301,745 1,350
In Euro 16,626 71,876
In New Israeli Shekel 159,428 35,810
3,881,106 335,723
========= =========
NOTE 5 - OTHER SHORT-TERM FINANCIAL ASSETS
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
------------------
2017 2016
--------- -------
Trade receivables 372,536 222,339
Unbilled revenue 180,114 45,970
Less: provision for doubtful accounts (38,685) -
Total receivables 513,965 268,309
========= =======
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
The balance as at 31 December 2017 includes an amount of
approximately $300,000 receivable as a grant from the European
Union.
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 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
================== =============== ================= ===================== =================== ===============
US dollars
----------------------------------------------------------
Testing Furniture
equipment Computers and equipment Vehicles Total
---------- --------- -------------- -------- ---------
Gross carrying
amount
Balance 1 January
2016 18,386 99,875 42,748 47,743 208,752
Additions 15,059 4,919 376 - 20,354
---------- --------- -------------- -------- ---------
Balance 31 December
2016 33,445 104,794 43,124 47,743 229,106
Depreciation
Balance 1 January
2016 (17,124) (91,954) (13,080) (20,213) (142,371)
Depreciation (554) (5,237) (3,844) (7,161) (16,796)
---------- --------- -------------- -------- ---------
Balance 31 December
2016 (17,678) (97,191) (16,924) (27,374) (159,167)
Carrying amount
31 December 2016 15,767 7,603 26,200 20,369 69,939
========== ========= ============== ======== =========
NOTE 9 - INTANGIBLE ASSET
Details of the Company's intangible asset is as follows:
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
Amortization
Balance 1 January 2017 38,951
Amortization 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.
US dollars
----------
Total
----------
Gross carrying amount
Balance 1 January 2016 624,635
Additions 1,033,389
Deduction of government grant (313,175)
----------
Balance 31 December 2016 1,344,849
Amortization
Balance 1 January 2016 4,513
Amortization 34,438
----------
Balance 31 December 2016 38,951
Carrying amount 31 December 2016 1,305,898
==========
As described in Note 2.J. 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
-------------
2016 2017 2016
----------- ---- -------
Bank borrowings (2) 5.6% - 128,969
Current maturities of long-term liabilities
(see Note 14) - 31,287
Total short- term borrowings - 160,256
==== =======
(1) The loans bore variable interest of 5.6%. The above interest
rate is the weighted average rate as of 31 December 2016.
(2) The Company has an unused credit facility of 500,000 NIS (approx. $145,000).
NOTE 11 - OTHER CURRENT LIABILITIES
Other short-term liabilities consist of:
US dollars
------------------
31 December
------------------
2017 2016
------- ---------
Salaries, wages and related costs 195,269 181,972
Provision for vacation 111,630 126,762
Current portion of OCS royalty liability
(see Note 13) 20,120 52,016
Accrued expenses and other 203,610 89,289
Related parties (see Note 28.A) 401,142 741,252
Total other short-term liabilities 931,771 1,191,291
======= =========
NOTE 12 - SHAREHOLDERS LOANS
Short-term liabilities to shareholders consist of:
US dollars
-------------
31 December
-------------
2017 2016
---- -------
Shareholder loans (1) (2) - 527,568
==== =======
(1) 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.
(2) 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 represent an embedded derivative (equity kicker) since the
economic characteristics and risks of such an equity-based return
are 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 were accordingly initially recorded at the
amortized value of $226,700 (net of the discount of $43,300). The
difference between the amount recorded and the amount expected to
be repaid to the shareholders is 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 lower than the exercise price of the warrants, the warrant
liability was valued at a lower value, being approximately $15,800.
The change in the fair value of this warrant liability was included
as part of finance expenses in 2017.
NOTE 13 - OCS ROYALTY LIABILITY
US dollars
-------------------------------
31 December
-------------------------------
2017 2016
--------------------- --------
Balance at 1 January 99,407 123,371
Royalties paid (93,034) (35,670)
Amounts recorded in profit or loss 13,747 11,706
--------------------- --------
Balance at 31 December 20,120 99,407
Less: short-term component included in Other
Liabilities (20,120) (52,016)
Long-term royalty liability - 47,391
===================== ========
As described in Note 2.K., the Company received research and
development grants from the Office of the Chief Scientist in Israel
("OCS") 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. The amounts shown in the statement of
financial position are management's best estimate of the long-term
liabilities from royalties that will be payable on OCS funded
technologies before such technologies are discontinued by the end
of 2018. The short-term portion of such royalty liability is
included in Other Short-Term Liabilities. This royalty liability
has been amortised at a 7.9% interest rate, with the financing
component recorded in Finance costs. As at 31 December 2017, the
Company has repaid approximately $490,000 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 at 31 December
2017.
NOTE 14 - LONG-TERM BORROWINGS
Long-term liabilities consist of:
Annual
% Interest US dollars
----------- --------------------- -----------
rate(1) 31 December
----------- --------------------- -----------
2017 2017 2016
----------- --------------------- -----------
Bank borrowings (1) 4.60% 7,522 130,135
Current maturities - (31,287)
Total long-term borrowings 7,522 98,848
===================== ===========
(1) The balance at 31 December 2016 is primarily comprised of a
loan received in 2016 from the Fund for Medium-Sized Businesses,
through a bank, amounting to $120,376, of which 75% is guaranteed
by the State of Israel. The loan bore interest of 4.3%. The loan
was repayable (principal and interest) in 60 monthly instalments
ending in February 2021. During 2017 this loan was fully repaid and
the lien on a bank deposit was subsequently removed (See Note
5).
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
A. During the years 2005 through 2012, the Company received
grants from the OCS (Israeli Office of the Chief Scientist)
totaling approximately $3 million, to support the Company's various
research and development programs. The Company is required to pay
royalties to the OCS 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 2011 the Company granted to the bank, an unlimited lien on
trade receivables from a specific customer. The amounts receivable
from this customer at 31 December were:
US dollars
------------
2017 2016
---- ------
- 67,083
==== ======
C. 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
2018 619,000 179,000
2019 543,000 157,000
2020 505,000 146,000
D. 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
20,000 stock options vesting over 4 years and exercisable at $2.00
per option (see Note 17.A). The agreement may be terminated by
either side on 30 days' notice.
NOTE 16 - EQUITY
A. Details regarding share capital and number of shares at 31
December 2017 and at 31 December 2016 are:
Share capital
US dollars
-------------
31 December
-------------
2017 2016
------ -----
Preferred shares of NIS 0.001 par value - 847
Ordinary shares of NIS 0.001 par value 8,028 4,111
Total share capital 8,028 4,958
====== =====
Number of shares at 31 December 2016:
Issued and
Authorized paid-in
---------- ------------
Preferred shares of NIS 0.001 par value 9,719,300 3,725,400
Ordinary shares of NIS 0.001 par value 40,280,700 18,078,500
50,000,000 21,803,900
========== ============
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 32,518,186
50,000,000 32,518,186
========== ============
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. 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-based payments provided to employees 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
Preferred shareholders could 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 carry a liquidation preference up to $3.29 per
share upon actual liquidation or upon a M&A transaction. After
this amount per preferred share has been paid, the liquidation
preference is cancelled and the preferred shares will 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 will 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 liquidation events are subject to the
approval of the Board of Directors of the Company.
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). At the
same time, 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, 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
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. 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 to employees (all amounts are in US
Dollars unless otherwise indicated):
1 Oct 15 Oct 5 Mar 15 Mar
2016 2016 2017 2017
Number of options granted 20,000 200,000 109,000 40,000
Recipients of the options employee consultant employee employee
Approximate fair value at
grant date:
Total benefit 5,894 54,392 102,369 24,690
Per option benefit 0.29 0.27 0.94 0.62
Assumptions used in computing
value:
Risk-free interest rate 1.39% 1.54% 2.50% 2.50%
Dividend yield 0.00% 0.00% 0.00% 0.00%
Expected volatility 44% 44% 46% 46%
Expected term (in years) 2 2 10 10
Expensed amount recorded
for year ended:
31 December 2016 3,263 29,833 - -
31 December 2017 209 1,641 44,105 -
Capitalised amount recorded
for year ended:
31 December 2017 - - - 11,295
Option grant dates
---------------------------------------------------------------------------------------------
9 Jul 10 Jul 8 Aug 6 Sep 24 Sep
2017 2017 2017 2017 2017
Number of options
granted 210,000 30,000 80,000 30,000 30,000
Recipients of the
options employee employee employee employee employee
Approximate fair
value at grant date:
Total benefit 335,982 42,637 111,498 40,957 38,389
Per option benefit 1.60 1.42 1.39 1.37 1.28
Assumptions used
in computing value:
Risk-free interest
rate 2.39% 2.38% 2.29% 2.07% 2.26%
Dividend yield 0.00% 0.00% 0.00% 0.00% 0.00%
Expected volatility 40% 40% 40% 40% 40%
Expected term (in
years) 10 10 10 10 10
Expensed amount
recorded for year
ended:
31 December 2017 - - 23,223 - -
Capitalised amount
recorded for year
ended:
31 December 2017 84,360 10,645 - 6,831 5,422
The value of these options at 31 December 2017 which have yet to
be recorded as expenses, amount to $538,951.
A. The following table presents a summary of the status of the
option grants by the Company as of 31 December, 2017 and 2016:
Weighted
average
exercise
Number price (US$)
--------------------- -----------
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
=====================
Weighted
average
exercise
Number price (US$)
--------- -----------
Year ended 31 December 2016
Balance outstanding at beginning of year 2,446,920 0.10
Granted 220,000 0.20
Exercised - -
Forfeited (40,000) 0.10
Balance outstanding at end of the year 2,626,920 0.11
========= ===========
Balance exercisable at the end of the
year 2,268,420
=========
C. The following table summarizes information about options outstanding at 31 December 2017:
Weighted Weighted
Outstanding average Weighted Exercisable average
at 31 remaining average at 31 remaining
Exercise December contractual exercise December contractual
life price life
price 2017 (years) (US$) 2017 (years)
-------- --------------- ----------- -------- --------------------- ---------------------
$0.10 2,406,920 5.7 0.10 2,320,420 5.6
$0.20 329,000 9.2 0.20 55,000 9.2
GBP1.05 40,000 9.2 1.28 - -
GBP1.05 210,000 9.5 1.36 - -
GBP1.43 30,000 9.5 1.84 - -
GBP1.41 80,000 9.6 1.84 - -
GBP1.40 30,000 9.7 1.83 - -
GBP1.40 30,000 9.7 1.89 - -
3,155,920 2,375,420
=============== =====================
The following table summarizes information about options
outstanding at 31 December 2016:
Weighted Weighted
Outstanding average Weighted Exercisable average
at 31 remaining average at 31 remaining
Exercise December contractual exercise December contractual
price 2016 life (years) price (US$) 2016 life (years)
-------- -------------- ------------ ----------- --------------------- ---------------------
$0.10 2,406,920 6.7 0.10 2,268,420 6.6
$0.20 220,000 9.8 0.20 - -
2,626,920 2,268,420
============== =====================
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
------------------------
2017 2016
----------- -----------
Sales 1,236,335 1,883,095
Royalties 282,326 278,271
Total revenue 1,518,661 2,161,366
=========== ===========
NOTE 19 - RESEARCH AND DEVELOPMENT EXPENSES
US dollars
------------------------
Year ended 31 December
------------------------
2017 2016
----------- -----------
Employee remuneration, related costs and
subcontractors (*) 44,126 106,762
Maintenance of software and computers 24,983 66,005
Insurance and other expenses 30,605 14,668
Amortization 116,064 34,438
----------- -----------
Total research and development expenses 215,778 221,873
=========== ===========
* Including share based compensation of - 8,137
=========== ===========
NOTE 20 - GENERAL AND ADMINISTRATIVE EXPENSES
US dollars
------------------------
Year ended 31 December
------------------------
2017 2016
----------- -----------
Employee remuneration and related costs (*) 113,440 104,475
Professional fees 251,848 61,212
Rentals and maintenance 166,087 140,003
Depreciation 20,153 9,633
Travel expenses 3,117 1,891
Doubtful debts 37,258 -
----------- -----------
Total general and administrative expenses 591,903 317,214
=========== ===========
* Including share based compensation of 44,314 3,263
=========== ===========
NOTE 21 - MARKETING EXPENSES
US dollars
------- ------------
Year ended
31 December
------- ------------
2017 2016
------- ------------
Employee remuneration and related costs (*) 158,429 143,770
Marketing expenses 320,252 102,054
Travel expenses 77,907 30,857
------- ------------
Total marketing expenses 556,588 276,681
======= ============
* Including share based compensation of 24,864 29,833
======= ============
NOTE 22 - OTHER INCOME
As described in Note 2.K, when the grant is related to an
expense item, it is recognised as other income. An amount of
US$203,618 relating to the grant has been included in Other Income
for the year ended 31 December 2017.
NOTE 23 - FINANCING COSTS (INCOME)
US dollars
------------------------
Year ended 31 December
------------------------
2017 2016
------------ ----------
Bank fees and interest 54,264 56,159
Interest and revaluation of embedded derivative
on shareholder loans 31,463 16,428
Interest received (69,472) -
Exchange rate differences (23,507) 15,093
------------ ----------
Total financing costs (income) (7,252) 87,680
============ ==========
NOTE 24 - 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
B. As of 31 December 2017, 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 if
possible that future taxable profits would be available against
which the tax losses can be recovered and therefore the related
deferred tax assets can be realised.
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
2016 195,134 54,866 250,000
Additions (8,362) 558,362 550,000
------------ -------------- ------------
Balance at 31 December
2016 186,772 613,228 800,000
Balance at 31 December
2017 186,772 613,228 800,000
============ ============== ============
NOTE 25 - BASIC AND DILUTED EARNINGS PER ORDINARY SHARE
A. The earnings and the weighted average number of shares used
in computing basic earnings per ordinary share, are as follows:
US dollars
-------------------------
Year ended 31 December
-------------------------
2017 2016
---------------- -------
Profit for the year 159,471 800,821
Less: Profit attributed to preferred shares 10,702 136,828
Profit for the year attributable to ordinary
shareholders 148,769 663,993
================ =======
Number of shares
------------------------
Year ended 31 December
------------------------
2017 2016
----------- -----------
Weighted average number of ordinary shares
used in the computation of basic earnings
per ordinary share 25,397,245 18,078,500
=========== ===========
B. The earnings and the weighted average number of shares used
in computing diluted earnings per ordinary share, are as
follows:
US dollars
-------------------------
Year ended 31 December
-------------------------
2017 2016
---------------- -------
Profit for the year 159,471 800,821
Less: Profit attributed to preferred shares 10,702 136,828
Profit for the year attributable to ordinary
shareholders 148,769 663,993
================ =======
Number of shares
---------------------------
Year ended 31 December
---------------------------
2017 2016
--------------- ----------
Weighted average number of ordinary shares 25,397,245 18,078,500
Weighted average number of free shares
from share options 2,581,852 1,993,610
Weighted average number of ordinary shares
used in the computation of diluted earnings
per ordinary share 27,979,097 20,072,110
=============== ==========
NOTE 26 - 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 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
=========== ================= ============ ========== ==========
US dollars
---------------------------------------------------------
31 December 2016
---------------------------------------------------------
NIS GBP Euro US $ Total
------------ -------- ------- ---------- ------------
Assets
Cash and cash equivalents 35,810 226,687 71,876 1,350 335,723
Other short-term financial
assets 58,518 - - - 58,518
Trade receivables 67,083 - 22,180 179,046 268,309
Other current assets 6,326 - - - 6,326
167,737 226,687 94,056 180,396 668,876
Liabilities
Short term borrowings 150,215 - - 10,041 160,256
Trade payables 121,960 - - - 121,960
Other liabilities 1,139,275 - - 52,016 1,191,291
Shareholders loans 292,463 - - 235,105 527,568
Warrants liability,
at fair value - - - 43,309 43,309
OCS royalty liability - - - 47,391 47,391
Long term borrowings 98,848 - - - 98,848
1,802,761 - - 387,862 2,190,623
(1,635,024) 226,687 94,056 (207,466) (1,521,747)
============ ======== ======= ========== ============
-- 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% 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)
============== ============== =============== ============== ===============
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% 2016 5% 10%
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents (33,437) (16,719) 334,373 16,719 33,437
Other short-term
financial assets (5,852) (2,926) 58,518 2,926 5,852
Trade receivables (8,926) (4,463) 89,263 4,463 8,926
Other current assets (633) (316) 6,326 316 633
Borrowings 15,022 7,511 (150,215) (7,511) (15,022)
Trade payables 12,196 6,098 (121,960) (6,098) (12,196)
Other liabilities 113,928 56,964 (1,139,275) (56,964) (113,928)
Shareholders loans 29,246 14,623 (292,463) (14,623) (29,246)
Long term borrowings 9,885 4,942 (98,848) (4,942) (9,885)
Total 131,429 65,714 (1,314,281) (65,714) (131,429)
=========== =========== ============ =========== ===========
-- Credit risk
All of the cash and cash equivalents and other short-term
financial assets as of 31 December 2017 are deposited with one of
the major banks in Israel.
Trade receivables as of 31 December 2017 are 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 specific
accounts whose collection is doubtful.
-- 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 in June 2017, the Company has large
cash resources to finance and expand its operations.
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, OCS 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:
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,
2017 and 2016 approximate 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,
2017 and 2016 approximate 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.
NOTE 27 - SEGMENT REPORTING
The Company has implemented the principles of IFRS 8, 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
------------------------
2017 2016
----------- -----------
Asia 66,439 423,015
Europe 580,772 404,218
Israel 397,464 1,124,133
United States 473,987 210,000
----------- -----------
1,518,662 2,161,366
=========== ===========
%
------------------------
Year ended 31 December
------------------------
2017 2016
----------- -----------
Asia 4.4% 19.6%
Europe 38.2% 18.7%
Israel 26.2% 52.0%
United States 31.2% 9.7%
----------- -----------
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
-------------------------
2017 2016
------------ -----------
Customer A 22% 44%
Customer B 19% 0%
Customer C 12% 0%
Customer D 10% 0%
Customer E 9% 19%
------------ -----------
72% 63%
============ ===========
NOTE 28 - 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 are
entitled to an annual bonus of 5% of the Company's revenue for the
years 2012-2015, if the Company has positive cash flow from
operations. This is 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 30 days' 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 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 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
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 FKFDPKBKBPAD
(END) Dow Jones Newswires
June 19, 2018 02:00 ET (06:00 GMT)
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